Income from Business Sec 9-37.3 Lesson 3 Income from Business Sec 9-37.3

Definition of Business 248(1) Includes a profession, calling,trade,manufacture or undertaking of any kind whatever except for 18(2) an adventure or concern in the nature of trade but does not include an office or employment

Adventure in Nature of Trade Constitutes a business if 1) taxpayer deals with property the same way that a dealer of such property would deal 2)Nature and Quantity of property excludes the possibility that it’s sales was the realization of an investment 3) Taxpayers intention

Reasonable expectation of Profit Usually applicable to part time business Where individuals will often pursue a hobby business for personal enjoyment Expenses each year exceed revenues and the losses are applied against other sources of income CRA reviews areas like money invested and time spent in the business

Business Income versus Employment Income Control test Integration and organization test I.e. is the individual an integral part of the business Economic test risk of profit/loss Specific results test(corporation has contracted with the individual for a specific result

Business Income versus Capital gain Length of time Asset held Frequency of transaction Nature of transaction Expertise of the individual Taxpayers intent

Accounting Income to Net Business Income for Tax purposes Inclusions Section 9 ,profit from the business Section 10,Inventory valuation Section 11, Proprietorships Section 12-17 Income inclusions, all amounts receivable Deductions Section 18,19, 19.1 Non deductible expenses Section 20 Deductions specifically permitted

Section 9 9(1) Taxpayers income for a taxation year from a business is his profit No definition of profit 9(3) excludes capital gains as income from business.

Specific Inclusions 12(1)(a) Services to be rendered in future 12(1)(b) any amounts receivable for services rendered 12(1)(d)(e) reserves-bad debts and warranties Note reserves can be claimed under 20(1) for doubtful accounts and for amounts not due until later 12(1)(f) Insurance proceeds-depreciable property

Specific Inclusions 12(1)(g) payments based on production or use 12(1)(i) Bad debts recovered 12(1)(c)(j)(k) Interest ,dividends 12(1)(l) Partnership income 12(1)(x) inducement payments, reimbursements

Limitations of deductions Sec 18 must be laid out to earn income 18(1)(b) expenditure of a capital nature(asset has an enduring benefit) 18(1)h personal living expenses 18(1)(L) limitation re club dues 18(1)N Political contributions 18(12) restrictions on office in home Can’t be used to create loss

Limitations of deductions 18(1)(r) restricted per km charge for 2014 54 cents first 5000 48 cents there after If allowance included income no limitation on deduction

Deductions allowed 20(1)a Capital Cost allowance 20(1)b cumulative eligible capital 20(1) (c) (d) interest 20 (1) (e) financing expenses 20(1)(e2) premiums on life insurance policy used as collateral 20(1)I-P reserves 20(16) terminal loss 20(10) conventions limit of 2 Read page 4241 in book for all

Continued SECTION 22-25 , rules that apply if the business ceases to exist Section 26-37 ,Special situations that may apply The four principle sections 9,12,18 and 20

Section 67 reasonableness 67.1 limits meals and promotion to 50% 67.2 CCA to 30,000 67.2(1) interest to 300 a month

Converting Accounting Income to net income for tax Starting point net income per f/s (GAAP) Add income excluded from Accounting income Income inclusions section 12-17 Disallowed reserves Non deductible expenses Disallowed deductions section 18/19 Unreasonable amounts section 67

Converting Accounting Income to net income for tax Less expenses specifically allowed section 20 Add or deduct capital gain or losses NET INCOME FROM A BUSINESS FOR TAX PURPOSES