COMM 405, Notes PDF

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COMM 405 – Taxation and Business and Decisions:

Wednesday, September 5, 2018 Flat taxes: Do not impose different rates, same rate for everyone. Examples are : Sales tax, property tax, GST Progressive tax system: Uses a marginal tax rate system, the more you make the more you have to pay. Tax planning; when arranging affairs so you get the best out of the taxes and your return from it.

Chapter 3: Sources of Canadian tax law: 1. Statue law a. Federal tax system b. Separate provincial income tax act 2. Common law 3. International tax conventions who are non-residents:

Key concept questions – chapter 3, number 1: a) Paula is a part-year resident. She is resident in Canada from January or November and nonresident for the remainder of the year b) AI is aresident of Canada, although he is out of the country on a temporary work assignment for the current year, his residential ties remain in Canada. c) Kimberely is deemed to be a resident for the current taxation year, although she is not ordinarly resient in Canada, she sojourned in Canada for more than 182 days in total in this year. d) 102864 Considered a full year resident as they were incorporated in Canada, it doesn’t matter where they operate e) Navy is considered a non-resident as they are not incorporated here, but they will have Canadian tax on the canadian income they have earned within Canada/

Monday, September 10, 2018 Part time resident means you either moved into Canada newly or you moved away Withholding tax – income that is made in Canada but is paid to a non-resident What is taxable income? 

The act provides a framework to help determine o Income from each category of income o Deduction from income in each category

For individuals the other deductions between net income and taxable income is the unused losses of other years Capital gain will be talked about after the midterm For corporations, charitable donations are deductions while for individuals it’s a tax credit Dividends from one corporation to another are only taxed once not twice Problem 3-1: John day and carole knight, john decided to be a proprietor while carole decided she will incorporate. So now we have three entities, john day, carole knight, and carole knight corporation Both have same employment income = $40,000 Interest income from the investment portfolio, it’s personal cause it said each has their own portfolio investment = $15,000 Business loss for operation = on john it goes on him individually while for Carole knight the loss goe son the corporation. Net income for tax for john= 35,000 @ 40%= 14,000 | leftover = 21,000 Carole knight= 55,000 @40%= 22,000 | leftover= 33,000

Corporation= (20,000) When the corporation makes a profit, the loss can be carried forward until it’s 20 years Problem 3-4: 3(a) employment - 30,000 Business income – company A – 10,000 Property income – interest income 5,000 Other income – pension income – 12,000 3(b) capital gains Tax Capital gains (15,000) Allowable capital loss (20,000)  5000 allowance of capital loss that could be carried forward to future years, applied against a taxable capital gain 3(c) other deductions - alimony payments ( 3,000) 3(d) losses – company B loss (3,000) Allowable business investment loss (2,000) NI for tax 49,000

Why not put the income and loss together? Cause you don’t want them to be grouped together and use all of it and not be able to carry it forward for the next year Allowable business in investment in loss – is allowed for private corporations in Canada, when you make an investment in a corporation here and the money is lost, this will allow you some protection, the reason this is there is to provide some incentive to the small business owners. Know the filing returns on chapter 3, slide 26 as it might pop on the exam By making insallmsntss that make you able to pay the taxes easir KCQ 3-7 Filing due dates for each return: 1. A corporation for its year ending November 30, 20x6 - File it 6 months after it, May 31st. 2. An individual for the year 20x6. The individual carried on business in 20X6 – June 15th. Cause they carried out a business. 3. An unmarried individual living alone for the year 20X6. The individual did not carry on a business. – April 30th, cause they didn’t carry out a business. 4. An individual for the year 20X6. The individual died on February 21, 20X7 – August 21st, but cause they died, it’s 6 months later from the date of death.

KCQ-8

State the filling deadline and when balance owing is due: 1. Tax return is due April 30th along with any amount owing 2. the filing date will be June 15th, as she has a business of her own. Has to pay the amount of April 15th. So have to estimate, the better option is to pay a little bit too much rather than a little 3. Ron has to file the same time as Mary as he is her spouse and she owns a business. 4. Zeta has to file is 6 months after death, which is May 20.

Wednesday, September 12, 2018 TOP HAT QUESTIONS: A partnership is a form of business organization, but there are only three taxable entities in canda 1. Individuals 2. Trusts 3. Corporations A resident of Canada is taxed on their income anywhere in the world

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Chapter 4: income from employment Employment: may provide services to another party as a independent contractor   

Not subject to same direction or control Paid in the form of a fee It would fall underthe deductions available for the business income as

Four things to define the employment 1. Control – who determines what is done, where, when and how? 2. Ownership of tools – who owns the tools? Employer provide tools and pays for repairs. Contractor provide tools and pays for repairs. 3. Chance of profit and loss test – employer takes the risk and reward while contractor bears it all 4. Integration test – is an integral part of the business is probably an employee. If they are an accessory, they are probably an independent contractor Employment income – four fundamental rules 1. 2. 3. 4.

I.

All formal compensation income, with exceptions, are taxable when received All benefits, with exceptions, are taxable when received All allowances with exceptions are taxable All deductions are disallowed a. Unless they are specifically allowed in the act b. Cash basis

Deferred bonuses – Are included in employee’s taxable income when cash received, not when earned However, there exists and anti avoidance rule for the employer For an employer to be able to deduct a deffered bonus on accrual basis, must be paid within 180 days. II.

Employee benefits Taxable benefits – assume that all benefits are taxable Common forms      

Rent-free or low rernt housing Gifts in cash or in kind Group term life insurance policies Holiday trips, prizes, and incentive awards in reconginiton of job performance Interest-free or low-interest loans ‘ Club dues when membership in the club provides little or no advantage to the employer’s business.

Non-cash gifts: When employers Key concept questions – question 3: Golf shirt with the employer logo – non-cash gift, it’s a small item so doesn’t even need to be mentioned. CRA considers nominal of 75$ or 10% of the market value Birthday gift (monetary restraint gift certificate) $75– it’s a cash like gift, it will be taxed Reward for performance (holiday weekend) $400– because it’s based on actual job performance, this means it will be taxable for this year 10- year anniversary award (golf club, last one was 5 years before) $275– long service/ anniversary award, so non-taxable as it’s less than 500 Wedding gift (cutlery)$300- non-taxable as it’s non-cash and it’s made for a special reason Innovation and excellence(tickets to concert) $250 – it will be considered non-cash one, non-taxable Holiday season gift (artwork) 150 - it’s a non-cash gift As the total of them exceeded $500, then the last 200 will be taxable. (300+250+150) Automobiles: To the extent that an automobile is for personal use, a taxable benefit results Standyby charge – how much of the actual cost of the vehicle should be a taxable benefit for the employee Operating charge

As long as it was available, it will be taxed for this time. It’s not about the use but the availability of it. Employer owns the automobile =

original cost of the automobile × 2% ×number of months available .

***CHEAT SHEET, ONE PAGE HANDWRITTEN If the employer leased automvile ----write the equation here

cost of auto× 2 % × ofpersonalkm ( ¿ of month available ) ׿ 1667× 12 months

Monday, September 17, 2018 Employee loans: If you get an interest free or a lower interest rate from the employer the equation for the taxable benefit os the prescribed – the actual rate you got Home purchase or repay existing home loan: If you borrow money to buy a home or pay off a mortgage, the prescribed rate changes quarterly, we use the prescribed rate at the time of the loans Moving expenses are non-taxable; the employee includes them as a deduction in their own income *****look at the stock options after class in the sheet she provided and in the book**** Key concept question no.6: Year 1: option made available when FMV $22, option price $12 The third category is only available to Canadian Private corporate corporations not to public ones, and since she belonges to public one. Yr2: FMW $40/Sh ×100 = 4000 Option price is $12/sh×100= 1200 Difference is 4000-1200= 2800 All of that gets put into her taxable income in year 2 Then year 6 she sells them @ $66/sh ×100= 6,600 Cost base = FMV @ exercise 4000 Capital gains = 6,600-4,000 = 2,600 × 0.5 = 1300 Those 1300 are taxable Question 7:

if it was CCPC; the 2800 will be deferred till year 6 as she held on to them for 2 years, she will have stock option deduction option. Of 2800×0.5= 1400

non-taxable and tax- deferred benefits: RPP: registered pension plan If the employer is making contributions to your health insurance on your behalf then those are nontaxable If you pay the premium after your tax deducted income the benefits you get are included as tax-free ones Key concept question. 4-2: Mike’s income:   

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It will be non-taxable now; however, taxable when he withdraws The premium is taxable to mike, because life insurance is non-taxable The premium is not a benefit, does not have to pay anything for it; however, if he does get sick, cause the employer paid for the insurance, the income to him will be taxable. Check with the answers – as I have missed that one For immediate family members, the daughter is dependent on her so it would be non-taxable The fitness membership is taxable for the $900 Bus pass is taxable, as it’s considered personal time when you’re going to work.

Allowances:

Wednesday, September 19, 2018 You always record revenue when it’s earned as an accounting rule However, for CRA they don’t care when a person earns the money, they care about when they actually receive the money. Problem 3: chapter 4; Salary Income Less tax – 40% Total Personal Expenses Net Cash

Charles 50,000 50,000 @40%= 20,000 30,000 29,000 1,000

Calculate cathy’s taxable income =  Salary 39,000  Life insurance Premium 1,000

Cathy 39,000 18,000 21,000 18,000 3,000

 Standby charge on the lease vehicle

2 2 monthly lease × × of months available=6000 × =4000 3 3  Low interest loan 1000 o Employment income = 45,000 @40%= 18,000

Non-taxable for Cathy:  Private health insurance 1,000

The premium that’s paid by the employer, you have to pay taxes on it. However, if you’re paying it from your taxable income then this will be non-taxable as you already paid taxes on it. Part b: to be equal this is the equation:

3,000 + 29,000=

32,000 =53,334 1−0.4

Don’t mix up between the standby charge and the limitations to vehicle cost, as this is where you’re using your own vehicle in the transportation. Problem 5, chapter 4: For the interest-free loan: it’s a

taxable benefit=( prescribed rate – rate paid )×150,000

Reimburse 75% of moving costs. – non-taxable 1. Director fees are taxable as it’s employment income and she has to pay for the world-wide income Spouse traveling with her – taxable benefit 2. For the automobile she’s provided from her business, that she will not use for business at all. Standby charge -

2 2 lease payment × × ¿ of months available=850 × ×12 =6800 3 3

that’s the amount of money she has to pay tax on. Operating cost benefit- 20,000 personal kms× 0.26 per km =5200 Total amount of the money that is taxable is $12,000 3. The Premium for the life insurance group benefit is taxable, private health car o,rewqwere premium – non-taxable 4. Deferred profit share plan Tax-deferred – no tax now, however, taxed when withdrawn 5. The annual bonus will be taxable on the year she receives it – 75% portion + interest on the 25% that is held back.

25% held back when the amount is actually paid out. 6. Monthly allowance $800 is taxable as it doesn’t fall under any of the exceptions of making it non-taxable. Travel cost for the conference; non-taxable as it’s for employment reasons. 7. Stock option: Two options FMV Price 12, exervise price 12= employment income 0 If FMV in two years 14, price 12= employment income 2, stock deduction ½= 1 8. The club membership is taxable, due to the fact that there is no benefit for the employer. It’s all for personal use and enjoyment

Monday, September 24, 2018 QUIZ REMARKS: When spending on their own expenses when travel, meals and entertainment are only 50% deductible when they are made The only thing she can take it her heat, water, and maintenance- if a person other than a sales person then you can claim that amount from the employment income If an employee has been assigned an office in a company yet they have an office in their home and they never done any business from it or met any clients in it, they can’t deduct any thing from it.

Chapter 5: Business Income: In this chapter the most important thing to consider is to remember which hat is it, whether an employee or an employer Any operation in which you undertake in which you are expecting to earn a profit It doesn’t matter whether it’s your primary one or not, or hwo big is itt, if you’re in it to make income then you have to consider it for tax purposes. Property, if it’s bought for the long-term investment in the business then when you decide to sell it at the end, then you have to pay on it Chapter 5: key concept questions: Question one: a) It will be counted as a business income, as he purchased it for the purpose of making the rental property b) For martha it will be business income as the intent was to make a profit- adventure and trade Problem one :

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For X: he constructed a business, made a profit of 8000- it’s a capital income, therefore only ½ of this is taxable. For Y: did nothing with the land and let it set for years unused. Divided it for 3 pieces and sold each for 4000. It would be business income, as it doesn’t seem to have keeping this land for long time. For Z: he rented out the land for years, only sold it cause he got a good offer. It could be argued both ways, as we could assume that his intention was to hold it for a long time, we don’t know what exactly which is. Or could be done with the business as he used it for the years that it was left and made use of the profit

Machines: you can’t deduct the whole amount of thee machine for one year Reserve test : it’s basically an estimate for the cost and what you’re getting out of it. Insurance proceeds: For destroyed property when the insurance pays you the money, the proceeds are treated as if you have sold If it’s just damaged, then the proceeds treated as taxable income up tp cost of repairs made. Recreational favilitiy and the club dues, none of the expenses related to the maintenance or renewal are allowed unless that’s the nature of the business. – also denies all the membership fees or dues in a club Political contributions: the parties are getting contributions, when business pays out such money, they are not tax deductible from your business income; however, it’s given a tax credit. Advertising expenses: it’s the cost of doing business; however, if the person is advertising through a foreign one with the target market being Canadians, then the tax is not deductible. However all the Canadian media channels expenses are indeed deductible Allowance for an automobile: Expenses cannot exceed the business income for th year; however, it could be carried forward indefinitely You can have a meeting and get food for all employees, the money used will be all deductible if it’s done for less than 6 times per year. After that it comes to the 50% rule Stock based compensations: When having a stock option, then the accounting thing is to debit compensation expense. This is not allowed for tax purposes, as this will be paid later, so nothing is deductible from it. Unpaid remurnation: Not deductible unless paid within

180 days from business use.

Wednesday, September 26, 2018 Quiz questions: A taxpayer would prefer it as capital gain which is taxed at 50%, rather thatn a business income which is taxed at a whole

If you’re trading land back and forth then you’re in business and it’s no longer considered a capital gain There are no circumstances under which a taxpayer can deduct more than 50% of the cost of the meals and enternainment – False. It has to be for everyone and be 6 or less times a year A self employed individual who is leigible to use space in his hoe for an office cannot deduct CCA on the property – False. They’re self employed, so they get extra things, they can deduct property tax and CCA for the space theyre using Due to incorporation costs: as you have to pay several things and start it, you’re allowed up to 3,000 per incoroportation to be deducted. Reserves for delayed payments; like when companies sell something now and get the payment a while later, the income is cut out as a reserve until the amount is actually paid Example: X sold some merchandise, for $100,000. The profit is $40,000. Received Payment $10,000. $90,000 Payable in 5 years Profit Loss reserve

20x1 40,000 36,000

90 40,000 × 100 Profit recognized

4,000

Practice – key concept questions 2:

20x2

20x3 36,000: since CRA only allows 3 years. 36,000

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Only 3,000 dollars – representation fees are when I am presented with someone. That cost will be accounted for the cost of the shares. The CRA says it’s finance costs and could be deducted over the period of 5 years. $5000 this year. Issuance costs Landscaping fees – deductible on cash basis when paid Late fees, penalty – penalties are not tax deductible. Permitted as a deduction. Interest on office equipment. You can either add it to the cost of the asset which drives the price of the asset, which will be depreciated over the time. Or expense if used to earn income SR&ED – scientific research and experimental development: Assuming it was done in Canada. Deducted in full in the year incurred or carry forward indefinitely to a future year. The stock-based compensation expense, there;s no money; hence, it’s not considered a taxable deduction.

Problem 5, chapter 5: 1. Financing expenses – “finder’s fee” permitted as a deduction, equally over five years. 2. It’s not deductible. Listed as the denied list, unless you’re in the business, it’s hard for the CRA to determine whether it’s actually for the business purposes. 3. Penalties , it’s the cost of doing business. Income earning test. Unlike the CRA penalties which are not deductible. Take care of the difference between each of them. 4. Brokers fees for buying shares. Those costs will be added to the cost of the shares. They’re not deductible. They’re part of the ...