Acco 643 Lecture Notes

Part III

INCOME FROM BUSINESS AND PROPERTY:

GENERAL CONCEPTS AND RULES

BUSINESS INCOME V. PROPERTY INCOME

• Carrying on a business requires time, effort and work while property income does
not;

• Property income is more a return on equity or passive income;

⇒interest income ⇒dividend income

⇒rental income ⇒royalty income

• However, if sufficient time and effort is expended in earning the income, such
receipts might constitute income from a business.

• For example, if a taxpayer manages office or apartment buildings, the rents may
constitute income from a business.

• Income derived from leasing real properties (building) is normally considered

income from specified investment business (unless it requires throughout the
year more than 5 full-time employees);

• Income from leasing equipment is considered active business income.

• Important to distinguish since taxation of business income is different from the

taxation of property income, especially for corporations;

• For individuals, RRSP contribution limits not based on property income (except
for rental income).

BUSINESS INCOME V. CAPITAL GAINS

• The determination of whether a profit or loss is on account of income or capital is

a question of fact.

• The principal tests applied by the Courts in capital gains cases are known as
"badges of trade".

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BADGES OF TRADE [1991 UFE]

• None of the factors listed below are determinative by themselves. Often two or
more factors will be combined to arrive at a conclusion.

1. Taxpayer's intent (primary and secondary) at the time of the acquisition;

2. Feasibility of taxpayer's intention(s);
3. Nature of business or profession of taxpayer (stock broker, real estate
developer or agent);
4. Relationship to the taxpayer's business;
5. Detention period;
6. Was the purchase offer solicited or not;
7. Use of borrowed funds;
8. Number and frequency of transactions;
9. Nature of assets involved (speculative or not, and in the case of shares, is there
a reasonable expectation of dividends;

• Capital gain v. income - effect of characterization

• individual

- inclusion rate
- capital gains deduction
- availability of reserves

• corporation

- inclusion rate
- tax rate (active business v. property income)
[Note that an adventure in the nature of trade is considered an active business
for the purposes of small business deduction]

- Capital Dividend Account (CDA)

[If dividends have been paid from the CDA account and the gain is
recharacterized as business income there will probably be an overpayment of
the CDA which results in a penalty of 60% of the excess [Section 184]. An
election can however be made to treat the excess as a separate dividend;[See
1991 UFE, Paper III, Question 3 – R.M. Manufacturing ]

- Effect on RDTOH;
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Part III

- Availability of reserves.

CAPITAL GAINS RESERVE

40(1)(a)(iii)

•Lesser of:

(1) reasonable reserve based on amount not due until after end of
taxation year
(2) 1/5 of gain x (4 minus # of preceding years)

COMPUTATION OF BUSINESS INCOME AND PROPERTY INCOME

• The rules for determining income from a business and property are contained in
subdivision b, beginning at section 9.

• Section 9 provides that a taxpayer's income for a taxation year from a business or
property "is the taxpayer's profit from that business or property for the year".

• The term "profit" is not defined in the Income Tax Act. However, the Courts have
held that:
1. Profit for tax purposes is a question of law for the courts and is not determined
solely in accordance with generally accepted accounting principles (GAAP).
2. In ascertaining profit, the goal is to obtain an accurate picture of the T/P’s
profit.
3. In ascertaining profit, the T/P is free to adopt any method not inconsistent
with:
a) the provisions of the ITA;
b) established case law principles or rules of law;
c) well-accepted business principles.
4. Well-accepted business principles (including but not limited to GAAP) are not
rules of law but interpretive aids.

• For the above reason, the accounting income must be reconciled with income
from a business or property, the latter being computed using a different method.
Consequently, reconciling adjustments of the accounting profit are required on
Schedule 1 of the T2.

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Part III

INVENTORY

Valuation

Lower of cost and FMV, or

All at FMV

INCOME INCLUSIONS

12(1)(a) amounts received

Reserve 20(1)(m) for goods & services to be delivered after

year end
12(1)(b) amounts receivable

Reserve 20(1)(l) for doubtful debts

20(1)(n) for amount not due until later year
20(1)(p) for bad debts

Interest [Paragraph 12(1)(c)]

• Interest received (or receivable) must be included in income.

• Individuals may use the cash method to report interest income (subject to 12(4) –
investment contracts, which calls for annual reporting based on the anniversary
date of the contract).

• Corporations must use the accrual method of accounting in accordance with

GAAP.

• Note that income from the short-term investment of temporary cash surpluses and
interest on trade receivables may be treated as incidental business income.

• In order to limit the deferral of taxes, Ss 12(4) states that interest income must be
reported annually on "investment contracts" on each anniversary day of the
investment.

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Example - interest income

Investco Inc. A Canadian corporation with an October 31 year end, acquired a $10,000 term
deposit on April 1, 2004. This deposit is for one year and bears interest at 5%. The interest is
payable at the maturity of the deposit.

Tax Consequences

2004

Per Ss 12(3), Investco Inc. must include in its 2003 income the interest accrued from April 1,
2004 to October 31, 2004.

$10,000 x 5% x 214/365 = $ 293

2005

Per Ss 12(3), Investco Inc. must include in its 2005 income the interest accrued from
November 1, 2004 to March 31, 2005.

$10,000 x 5% x 151/365 = $ 207

The total interest declared in 2004 and 2005 ($293 + $207 =$500) corresponds to the interest
received on March 31, 2005 but it has been included in income on an accrual basis instead of on
a cash basis, as prescribed by Ss 12(3).
Assume the same fact above except that Ann Riches acquires the term deposit.

Tax Consequences

• Ann does not have to report any income in 2004 as 12(4) does not apply since the T/D
matured on its maturity date as provided in Ss 12(11) of the ITA.
• Ann must include in her 2005 income the total amount of interest received on 31-03-2005.
Assume the facts above except that the term deposit is for two years and the interest in
compounded annually. The total amount of interest received on March 31, 2006 is $1,025.

Tax Consequences

Ss 12(4) applies; Ann will have to include in her income for 2005 the interest accrued from
April 1, 2004 to March 31, 2005. Since the term deposit matures on its anniversary date in 2006,
Ss 12(4) does not apply in 2006. Therefore, Ann must include in her income for 2006 the interest
received in the year less the amount declared in 2005, as provided in 12(1)(c).

2005
$10,000 x 5% x 365/365 $500
2006
Amount received $1,025
Less: Amount declared in 2005 (500) $525

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Reserve for doubtful debts [Paragraph 12(1)(d)]

• Any amount claimed as a reserve for doubtful debts (allowance for doubtful
accounts) under paragraph 20(1)(l) in the preceding year must be added back to
income in the following year.

Reserve for certain goods and services [Paragraph 12(1)(e)]

• Amounts claimed as reserves under paragraphs 20(1)(m), (m.l) or (n) in the

preceding year must be added back into income in the following year.

Bad debts recovered [Paragraph 12(1)(i)]

• Amounts received in the year in respect of bad debts deducted from income in a
previous year must be included into income.

Dividends from corporations resident in Canada [Paragraph 12(1)(j)]

• Requires the inclusion in income of dividends received from a corporation

resident in Canada;
• Subsection 82(1) stipulates that taxable dividends received in the year from
Canadian corporations must be included in income, and that where the taxpayer is
an individual, an additional fraction of 1/4 must also be added to income.

• The term "taxable dividends" is not restricted to dividends from private

corporations, but applies to taxable dividends from all Canadian resident
corporations.

• Subsection 248(1) defines "dividend" to include a stock dividend.

Dividends from corporations not resident in Canada [Paragraph 12(1)(k)]

• Requires the inclusion in income of dividends received from a corporation not

resident in Canada without grossing-up the amount.

Income from Partnerships and Trusts [Paragraphs 12(1)(l), 12(1)(m)]

• Requires the inclusion in income of the taxpayer's share of the income (from both
business and property) of any partnership and/or trust of which he or she is a
member.

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Inventory adjustment [Paragraph 12(1)(r)]

• Paragraph 12(1)(r) requires a taxpayer to include in income an amount in respect

of allowances for depreciation, obsolescence or depletion included in the cost of
inventory.
• Any amounts added back to income under this provision may be deducted from
income under paragraph 20(1)(ii) in the following year.

Payment as Inducement or reimbursement [Paragraph 12(1)(x)]

• requires that various inducement payments received in the course of earning

income from a business or property be included in income, except to the extent
that they serve to reduce the cost or capital cost of the related property.

• occurs when commercial landlords offer significant inducements to new business

tenants so they enter into lease for the commercial premises;

• Different forms: rent-free or rent reduction, lump sum payment, agreement to pay
part of the leasehold improvements;

• Broad enough to encompass amounts received as a grant, subsidy, forgivable

loan, deduction from tax, allowance etc.

Recaptured depreciation [Section 13]

• The rules for determining the amount of a recapture are described in Chapter 5 of
B&L.

Shareholder Benefits - 15(1)

 Benefit conferred on a shareholder or a person in contemplation of the person

becoming a shareholder by a corporation;

 The following transactions do not give rise to shareholder benefits (but could
result in a deemed dividend):

1. a PUC reduction, redemption, cancellation or acquisition by the corporation

of its shares
2. the payment of a dividend or stock dividend

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3. conferring on all owners of common shares an identical right to acquire

additional shares
4. a conversion of contributed surplus under 84(1)(c.3)

 The amount or value of the benefit [except to the extent it is deemed by section
84 to be a dividend] shall be included in the shareholder’s income.

Taxable Benefits

 Shareholder benefits can be conferred in a multitude of ways. For example:

• A transfer of property by a Shareholder to the corporation at a

price in excess of its fair market value;
• A sale of property by a corporation to its shareholder at a price
less than fair market value;
• Corporation paying for a holiday trip for its shareholder;
• Funds embezzled by a shareholder
• Excessive expense claims reimbursed to a Shareholder
• Supply of services to a Shareholder without fair payment; or
• Forgiveness of a debt owed by a Shareholder to the corporation

Other Effects: •GST benefit under 15(1.4)

•Denial of the expense to the company

•Full cost base in property received by the shareholder for

capital purposes but not for CCA purposes.

Shareholder Loans - 15(2)

 The shareholder loan rules are stringent and intended to discourage corporations
from using loans as an indirect means of conferring untaxed economic
advantages on shareholders.

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 Corporate income paid out as salary or dividends is taxable as income. Long-

term loans are an indirect way of withdrawing corporate funds and, therefore,
are subject to tax.
 The rules apply to loans and any other form of indebtedness.
 An individual who is indebted, in his or her capacity as a shareholder, to a
corporation is generally taxable on the amount of the indebtedness.
 A "connected shareholder" is also taxable on the same basis.

 A corresponding deduction is available upon repayment of the loan or

indebtedness by the shareholder to the corporation (20(1)(j)).
 In the simplest case, the principal sum of a loan by a corporation to its
shareholder is included in income in the year in which the loan is made.

General Exceptions:

1. indebtedness between non-resident persons (15(2.2))

2. loan made in the ordinary course of money-lending business and, at

the time the loan arose, bona fide arrangements were made for
repayment within a reasonable time (15(2.3)). [By a lending
institution in the ordinary course of its business]

SPECIFIC EXCEPTIONS:

1. Subsection 15(2.4)

(a) loan made to an individual shareholder who is an employee other than

a specified employee

(b) loan made to an individual shareholder who is an employee, or to the

spouse, to buy a dwelling for the individual’s habitation

(c) loan made to an employee of the corporation or a related corporation

to buy previously non issued fully paid shares of the corporation or
the related corporation and to be held for the employee’s own benefit

(d) loan made to an employee to buy a motor vehicle to be used in

performance of duties of employment

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and, where at the time the loan was made

(e) it is reasonable to conclude that the employee or spouse received the

loan or became indebted because of employment and not shareholding
(f) bona fide arrangements were made for repayment within a reasonable
time.

Connected with a shareholder

Person not dealing at arm’s length with the shareholder

Specified Employee 248(1)

An employee of the company who:

 is a specified (≥ 10%) shareholder, or

 does not deal at arm’s length with the company.

2. Subsection 15(2.6)

Loan was repaid within one year after the end of the taxation year of the
lender in which the loan was made and it was not part of a series of loans
and repayments.

Imputed Interest on Loans

• A shareholder may be taxable on the interest imputed on a loan. Three factors

determine the taxability of imputed interest:
1. The relationship between the borrower and the lending corporation;
2. The rate of interest payable on the loan; and
3. The prescribed rate of interest at the time when the loan was taken out
or the indebtedness was incurred.
• In the simplest case, a shareholder of a corporation who, in his or her capacity
as a shareholder, obtains a low-interest loan from the corporation is taxable on
the benefit from the loan.
• The value of the benefit is the difference between the shareholder's actual
interest cost and the prescribed rate of interest at that time.

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• The prescribed rate of interest is determined quarterly, based on the average

interest rate for 90-day treasury bills during the first month of the preceding
quarter.
• A shareholder is not taxable on imputed interest on indebtedness if the principal
sum of the debt is included in income.

DEDUCTIONS

Unreasonable Expenses

Section 67 No deduction shall be made except to the extent that it was reasonable
in the circumstances

General Rules of Deductibility

18(1)(a) Not deductible unless incurred to earn income from business or

property
i.e., not for capital gains, employment income, personal expenses

18(1)(b) Not deductible if capital in nature except:

CCA/CECA 20(1)(a), (b)

Interest expense 20(1)(c), (d)
Financing expenses 20(1)(e), (e.1)
Landscaping 20(1)(aa)
Investment counsel 20(1)(bb)
Expenses of representation 20(1)(cc)
Utility service connection 20(1)(ee)

18(1)(c) Not deductible if incurred to earn exempt income except:

 portion of life insurance premium

related to financing 20(1)(e.2)

18(1)(e) Not deductible if a reserve or contingent liability except:

doubtful debts 20(1)(l)
deferred revenue 20(1)(m)
proceeds not due 20(1)(n)
bad debts 20(1)(p)

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Acco 643 Lecture Notes
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Modifications on deductibility:
Expenses for food 67.1 (50%)
Interest on car loan 67.2 ⇒ $300/month
Lease cost of car 67.3 ⇒ $800/month
Illegal payments 67.5

69(1) Inadequate consideration

Non-arm’s length transactions
Gifts or bequests

Expenses Specifically Disallowed:

18(1)(h) personal or living expenses

18(1)(l) use of recreational facilities & club dues
18(1)(n) political contributions
18(1)(p) expenses of a personal services business
18(1)(r) automobile allowances paid (52¢ first 5,000 KM/46¢ after 5,000KM)
18(1)(t) amounts paid or payable under this Act
18(2) interest & property taxes related to land
18(3.1) costs related to construction/renovation of building or ownership of
land
18(9) limitation re prepaid expenses

Work space in home [18(12)] UFE 1994, 1998

• This subsection effectively denies to self-employed individual, in computing

income from a business for a taxation year, the deduction of expenses related to
maintaining an office or other work space in the taxpayer's residence except when
the work space is either:

1. the taxpayer's principal place of business, or

2. used exclusively and on a regular and continuing basis for the purpose of
earning business income.

• As explained in Interpretation Bulletin IT-514, an individual who carries on a

business in a work space at home and has met the test in either 1 or 2 above will
be able to deduct only the expenses related to the work space, but only up to the
amount of the taxpayer's income from that business for the year.

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• The non-deductible portion may be carried forward to apply against income from
that business for the immediately following year.

• Such expenses cannot create a loss for tax purposes.

• Expenses related to the work space include:

• the prorated portion of rent

• capital cost allowance (CCA)
• property insurance
• property taxes
• mortgage interest
• operating cost such as heating and lighting

• Must prorate these expenses on a reasonable basis (square meters used over total
square meters)

• Since telephone expenses and consumed supplies relate to the business but not to
the work space, they are not subject to the restriction in Ss 18(12).

19, 19.1 advertising expenses

 ALLOWABLE DEDUCTIONS IN COMPUTING INCOME

Specific expenses deductibles

Capital cost allowance [Paragraph 20(1)(a)]

• – see Chapter 5 - B&L.

Amortization of cumulative eligible capital [Para. 20(1)(b)]

• On the balance remaining in the pool of non amortized "goodwill and nothings" –
see Chapter 5 - B&L.

Interest paid or payable in the year [Para. 20(1)(c)]

• Where the borrowings were used to produce income or to acquire property to

produce such income. - ≠ Deductible if loan used to buy home, chalet, car.
- Deductible if loan used to buy rental property, shares.

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• To be deductible, the interest paid or payable will be deductible only if there is a

legal obligation to pay the interest.

Compound interest : interest on interest [Para. 20(1)(d)]

• allowable only if the original amount meets the test in paragraph 20(1)(c).

Expense of issuing shares or borrowing money [Para. 20(1)(e)]

Expenses incurred in the year or preceding year in the course of:

 Issuing shares
 Issuing units in a unit trust
 Issuing partnership interests
 Borrowing money used to earn income from business or
property

Expenses include:

 Sales, agent or dealer fees incurred in the course of issuance,

sale or borrowing
 Legal and accounting fees
 Printing costs
 Registrar or transfer agent fees
 Filing fees
 Commitment fees
 Mortgage application, appraisal, guarantee, brokerage or
finder’s fees
 Promoter’s fees

Deductibility

 Deductible at 20% per year, straight line

 Prorate deduction if short fiscal year
 Remaining balance deductible if debt settled or extinguished
and not part of a series

Premiums on life insurance used as collateral [20(1)(e.2)]

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• Permits a deduction in respect of life insurance premiums where the policy has
been assigned as collateral but only if:

1. the assignment is required by the lender,

2. the lender is a "restricted financial institution"

3. the interest payable on the money borrowed would be deductible in computing

the taxpayer's income.

Discount on certain bonds, debentures, notes, mortgages [Para. 20(1)(f)]

• The issuer may deduct an amount paid in the year.

Share transfer and other fees [Para. 20(1)(g)]

• Fees incurred by a corporation in respect of services of a transfer agent or share

registrar, including fees for disbursing dividends, listing fees paid to a stock
exchange, and the costs of printing and issuing financial reports to shareholders.

Repayment of loan by shareholder [20(1)(j)]

• The repayment of an amount which a taxpayer has included in income under Ss

15(2) is deductible.

Reserve for doubtful debts [Para. 20(1)(l)]

• Deduction of a reasonable amount as an allowance in respect of doubtful accounts

[IT-442R].

• must be added back to income under paragraph 12(1)(d) in the following.

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Reserves in respect of certain goods and services [Para. 20(1)(m)]

• Permits a deduction where amounts have been included in business income

(under 12(1)(a)) but certain goods and services have to be delivered in a future
taxation year.

Manufacturer's warranty reserve [Para. 20(1)(m.1)].

• Permits a manufacturer to deduct prepaid insurance premiums paid to insure

against risks under extended warranties sold to customers.

• The reserve is limited to the lesser of:

1. the consideration received for the extended warranty, and

2. the premium paid to a Canadian insurer to insure the risk.

and must relate to goods or services that it is reasonably anticipated will be

delivered or rendered after the end of the year. The effect is to claim the insurance
premium immediately, rather than to allocate part of it to future periods (as with
other prepaid expenses).

Reserve for unpaid amounts [Para. 20(1)(n)]

• amount has been included in income

• the amount or part thereof is not due:

(1) if other than land,

 2 years from date of sale, and
 after end of taxation year

(2) if land, Reserve:

 after end of taxation year
Amount receivable x Profit on
• reasonable reserve based on profit sale
Total proceeds
20(8)
• 20(1)(n) reserve not available if sale occurred > 36 months before the
end of the year.

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Bad debts [Para. 20(1)(p)]

• Permits deduction of write-off where amounts owing are established to have

become bad (not merely doubtful) in the year.

Employer's contribution to registered pension plan [Para. 20(1)(q)]

• As permitted by 147.2(1) - see B&L

Cancellation of lease -[Para. 20(1)(z), 20(1)(z.1)]

• Payment by owner of property to lessee to cancel lease – see comments in B&L.

Landscaping of grounds [Para. 20(1)(aa)] – see B&L

Expenses of representation [Para. 20(1)(cc) – see B&L
Investigation of site [Para. 20(1)(dd) – see B&L
Utilities service connection [Para. 20(1)(ee) – see B&L

• The foregoing list is an abbreviated summary of some of the business-related

deductions in subsection 20(1). Remember: they are all exceptions to the general
rules for computing income from a business for tax purposes.

LIMITATIONS ON DEDUCTIONS--SECTION 20

Convention expenses [SS 20(10)]

• Limits the deduction of convention expenses–not more than two conventions per
year held by a business or professional organization and held at a location
consistent with the territorial scope of the organization.

• A corporation which has diversified business interests and many employees may
take the limit of two conventions per year to apply to each such interest.

Terminal losses [Ss 20(16)]

• Terminal losses (deduction of the balance of the undepreciated capital cost of a

class of depreciable property when no assets remain in the class) are discussed in
B&L.

• Note that subsection 20(16.1) denies terminal loss treatment for certain passenger
vehicles that cost in excess of $30,000.
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Capitalizing interest [Section 21]

• Sometimes, a taxpayer may prefer not to write off interest expense against current
operations. Because the deduction of interest may create a loss that cannot be used
within the time limits allowed for carryover of losses, a taxpayer may prefer to
treat interest charges as part of the cost of the asset and then write off the total cost
of the asset when it begins to produce income.

Unpaid Amounts [Subsection 78(1)]

 Subsection 78(1) deals with deductible outlays or expenses arising out of

non-arm's length transactions.

Unpaid Remuneration [Subsection 78(4)]

• The time limit in this case is only 180 days after the end of the employer's
taxation year in which the expense was incurred. Note that this is not exactly six
months.

• Any remuneration, such as a bonus, accrued but not paid within 180 days
following the end of the employer's taxation year, is considered not to have been
incurred as an expense until it is actually paid. Accordingly, the amount will be
added back to income for the year of accrual and will be deductible only in the
taxation year in which it is paid.

Reasonable expenses

• Section 67 provides a general limitation on the amount of expenses that may be

deducted « the expense must be reasonable.

Entertainment expenses [Section 67.1]

• Subsection 67.1(1) provides that only 50% of entertainment expenses can be

deducted;

• The 50% rule applies to entertainment expenses, namely:

• Cost of meals and beverages in restaurant

• Cost of tickets to attend sporting, recreation and entertainment events;

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• Cost of rental of recreation or sporting events and equipment.

• Ss. 67.1(2) provides for a number of exceptions including:

• Hotels, restaurants and airlines providing food, beverages, and entertainment

in return for compensation from their customers.

• The expense incurred is invoiced to the client, in which case the client will be
subject to the 50% restriction.

• The expense is incurred for the general benefit of all employees of a person at
a particular place of business of the person.

Interest on money borrowed to buy automobile [67.2]

• maximum allowed is $300 per month

Limitation re cost of leasing automobile [67.3]

• the deduction for lease payments is the least of

• actual lease cost

• $800 per month

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ELIMINATION OF DEFERRAL OF TAX ON BUSINESS INCOME

General rules
• Requires a December 31 fiscal year-end for unincorporated businesses

 For fiscal periods beginning after 1994

 Of a business carried on in Canada by:

 An individual
 A professional corporation that is a member of a partnership
carrying on a practice of:

Accountant Medical doctor

Dentist Veterinarian
Lawyer Chiropractor

 Partnership of which a member is

∗ An individual
∗ A professional corporation
∗ Another affected partnership

• S.249.1(4) provides that no change in the time when a fiscal period ends may be
made without the concurrence of the Minister

 May apply where a corporation acquires a business carried on

by an individual and the corporation requests that the fiscal period of
the business be changed to correspond to its own taxation year.

Alternative Method:

• Available, on a business-by-business basis to:

 Individuals
 Partnerships, all of the members of which are individuals
 But not partnerships that are members of other partnerships

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• Eligible individuals who elect to retain their non-December year-end for a

business (including individuals who are members of an eligible partnership
that has so elected) are required to adjust their income from the business to a
calendar year basis

 Business income based on the off-calendar year fiscal period is

increased by:

 The fraction of that income represented by the number of days

in the stub period after the off-calendar year-end to the number of
days in the fiscal period.

 In the subsequent year the fractional amount is subtracted from

the business income of the next off-calendar year-end and a new
fractional amount is added.

∗ The result is an inclusion of 12 months of business

income for the calendar-year period.

Example

 Janice started up a new business on October 1st, 2002. She has selected September 30 as her
fiscal year-end. The income for tax purposes for the first 2 years of operation is as follows:

30-09-2003 $80,000
30-09-2004 $100,000

Janice's income inclusion for 2003 and 2004 is as follows:

2003
Income to 30-09-2003 $80,000
Stub period income 3/12 x 80,000 20,000 $100,000

2004
Income to 30-09-2004 $100,000
Stub period income 3/12 x 100,000 25,000
Less
Stub period income – 2003 (20,000) $105,000

An option exists to deem a year-end (Dec. 31, 2002) in the first year of operation in order for
Janice to avoid being taxed on 15 months of income in 2003. Janice would therefore be taxed on
3/12 x 80,000 = $20,000 in 2002, and this amount of income would be deducted in 2003 leaving
$80,000 income taxed in her hands in 2003.

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Acco 643 Lecture Notes
Part III

Extended Reporting Period

• Financial statements for a fiscal year must be prepared earlier relative to the
filing deadline for the tax return of some individuals

 Where an individual carries on a business in a year

 The date on which the individual is required to file a return for 1995
and subsequent years will be June 15 of the following year

• Notwithstanding the extended filing deadline, the tax for the year is still be
payable by April 30

 Interest on refunds continues to be calculated from 45 days after

April 30 (which is June 14)

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Acco 643 Lecture Notes
Part III

ALLOWABLE BUSINESS INVESTMENT LOSS

 A capital loss that receives special treatment

 Capital Loss 39(1)(b)

• 50% deducted against TCG’s only

• if undeducted in the year, then becomes net capital loss.

 Business Investment Loss 39(1)(c)

• 50% deducted against any source of income

• if undeducted in the year then becomes a non-capital loss
• if undeducted as a non-capital loss in the carry-over period (-3, 7 or 10
or 20) then becomes a net capital loss.

 Disallowed Portion 39(9)

• cannot deduct ABIL to the extent the CGD has sheltered previous TCG;
• The disallowed portion x 50% becomes an ACL.

 Definition

BIL are capital losses which occur on the disposition of either shares or debt
of a small business corporation. A small business corporation is:

• Is a CCPC all or substantially all (90%) of the FMV of its assets are:

a) Used to carry on an active business in Canada,

b) Shares or debt of connected small business corporation,
c) A combination of a) and b).

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