Canadian Tax Filing Deadlines, Installments, and Calculation Methods | Quizlet

What are the filing deadlines for individuals and corporations and what are the implications of not filing by the deadline?

Individuals must file on a calendar year basis and returns are due for most individuals on April 30th / Returns for self employed individuals (self proprietors earning business income) are due on June 15th / Corporations must file within 6 months of the fiscal year-end (which can be chosen by the taxpayer and once selected can't be changed without CRA's permission) / Note that taxes owing must be paid within 2 months (3 months for CCPC with less than $500K of income) of year-end or interest will be begin to apply / Corporations with taxes owning above a certain limit have to pay installments throughout the year / Penalty for not filing by the deadline is 5% of the unpaid tax plus 1% of the unpaid tax for each full month the return is late (penalty can be doubled for repeat offenders)

When are installments required and how are the calculated?

Individuals and Corporations with more than $3,000 in taxes owing are required to pay installments for the following tax year. For example, an individual with more than $3,000 of taxes owing in 2025 would be required to make installment payments in 2026. / Installments are paid quarterly for individuals and monthly for corporations / The taxpayer has 3 options for calculating the amount of the installment payments: / The prior year method, which is based on ¼ (for individuals) or 1/12 (for corporations) of the prior year taxes owing / The current year method, which is based on the estimated taxes payable for the year the installments are being made. Note that if the taxpayer's estimate is incorrect and they underpay, CRA will charge instalment interest at prescribed rates. / Second prior year method, where the first two instalments are based on the second prior year and the remaining installments are calculated to "catch up" to the prior year balance payable.

What are the basic steps in a taxes payable calculation?

Net income for tax purposes* (NIFTP): Employment income including taxable benefits (individuals only) Business and property income (or loss) Capital gain/loss Other income Division C deductions: Loss carry forwards Other deductions (See other Q&As on specific deductions for individuals and corporations) Taxable income (NIFTP less division C deductions) Taxes payable (Taxable income multiplied by applicable rate) Tax credits (See other Q&As on specific credits for individuals and corporations) Net Taxes Payable (Taxes payable less tax credits) *Note the for corporations you will usually start with net income for accounting purposes and make various adjustments to arrive at net income for tax purposes (the starting point above). See Q&A on common differences between income for accounting vs. tax purposes

What is meant by tax integration and how is it achieved?

Integration is the term used to describe the principle that earning a particular type of income should result in the same overall taxes payable regardless of the organizational form or legal structure of the business (e.g., individual, corporation, partnership) / For example, business income earned in a corporation and then paid to an individual through a dividend should result in the same total taxes paid (corporate level + personal level) as if the income had been earned by the individual directly / Examples of mechanisms used to achieve integrate are the dividend gross up and tax credit and the small business deduction

What is GAAR (General Anti-Avoidance Rule) and when does it apply?

Purpose is to prevent overly aggressive tax planning / Can deny the tax benefit resulting from tax planning transaction if all the following conditions are met: / The transaction (or series of transactions) resulted in a benefit / Transaction was undertaken mainly for the benefit of the tax benefit and not for other non-tax purposes / The transaction results in a misuse of a section of the Act or and abuse of the Act as a whole

What is the definition of a related person for tax purposes (where person can refer to an individual, trust or corporation)?

Individual connected by blood relationship (immediate family), marriage, or adoption / Aunts, uncles, nieces, nephews, cousins are not related for tax purposes / A corporation and the person (or related group of persons) that controls the corporation / Any two corporations that are controlled by the same person (or group of related persons) / If two corporations that wouldn't otherwise be related are both related to a third corporation, they are also deemed to be related to each other

Related party transactions must be recorded at fair market value for tax purposes. What are the implications if CRA determines the transaction not to be at fair value?

Double taxation will result if CRA subsequently reassess the fair value of the transaction / CRA will force the seller to recognize the gain as if the transaction took place at fair value but: / the related party who acquired the property will acquire it at the actual transfer amount (which was less than fair value) resulting in less CCA and/or them being taxed on the appreciation when the sell it / Therefore, both the seller and purchaser will pay tax on the same appreciation / Note that the amount that can be added to the UCC of the class by the purchaser is limited to the capital cost immediately before the transaction plus the taxable portion of the gain triggered

What is a superficial loss and when does it apply?

Applies to deny the loss when a taxpayer sells property at a loss in certain situations / Denied loss may be either a terminal loss (depreciable property) or capital loss / Taxpayers who dispose of an asset and they or an affiliated person buy back an identical asset within 30 days are not allowed to claim the loss / Taxpayers who dispose of an asset at a loss to an affiliated person are not allowed to claim the loss (terminal loss and capital loss are both denied)

What is the definition of an affiliated person?

Spouse / A corporation and the person (or group of affiliated persons) that controls the corporation (the person's spouse or spouses of the group of affiliated persons are also affiliated with the corporation) / Any two corporations where the person (or affiliated group of persons) that controls one corporation is affiliated with the person (or affiliated group of persons) that controls the other corporation

What happens to a loss that is denied as a result of the superficial loss rules?

Depends on whether the denied loss is a terminal loss or capital loss and on whether the taxpayer is an individual or corporation / Denied terminal losses of all taxpayers can be kept in the CCA account and depreciation can continue to be taken until the asset is sold to a non-affiliated person (this is an exception to the rule that you have to own an asset to claim CCA on it) / Denied capital losses of individuals (not corporations) are added to the ACB of the asset now owned by the affiliated purchaser (so they will pay less tax on eventual disposition) / Denied capital losses of corporations, partnerships and trusts are not added to the ACB of the purchaser but instead remain with the taxpayer but can be used when the asset is eventually sold to a non-affiliated purchaser

What is Alternative Minimum Tax (AMT) and how is it calculated?

AMT is directed at individuals with a high level of income/wealth who take advantage of tax shelters and other "tax preference" items to substantially reduce or eliminate the amount of tax paid / A $177,882 exemption is allowed in calculating AMT, after which a flat rate of 20.5% is applied to the remaining net adjusted taxable income / The resulting Tax Payable is reduced by some (not all) of the individual's regular tax credits to arrive at a minimum tax / The taxpayer must pay the greater of the regular Tax Payable and the AMT

What are tax treaties and when do they apply?

Tax treaties are agreements between countries outlining which country has the right to tax which sources of income / They apply (and should be consulted) when taxpayers are resident in more than one country / Intent is to avoid taxpayers paying tax in multiple countries on the same income

What are foreign tax credits (FTCs)?

Since Canadian residents are required to include their worldwide income in their net income for tax purposes, a foreign tax credit can be claimed for any foreign taxes already paid on foreign income / Generally, the credit is equal to the lesser of the actual foreign taxes paid and the amount of Canadian tax that would be payable on that income

How are non-monetary transactions treated for tax purposes?

Non-monetary transactions are treated in the same way as monetary transactions / The taxpayers is considered to have paid/received the fair market value of the goods/services / For example, if a taxpayer sells an asset in exchange for assets worth $1,000, he will be taxed in the same way as if $1,000 in cash had been received

What are the carry forward/back periods for tax losses?

Non-capital losses can be carried back 3 taxation years and carried forward 20 taxation and can be used to offset any type of income (including employment income and capital gains) / Net capital losses are allowable capital losses (1/2 of the capital loss) and can be carried back 3 taxation years and carried forward indefinitely to be used against taxable capital gains only

How are partnerships taxed?

The partnership computes it net income for tax purposes as if it were a taxpayer / If the partnership owns assets, the partnership claims the CCA which reduces its NIFTP (partners must agree on amount of CCA to claim since deduction is discretionary) / If the partnership conducts SR&ED, it deducts the SR&ED expenses in computing its NIFTP and can allocate any ITCs to the partners / Each partner includes their share of the partnership income in their personal income (note that the partners can also be corporations or other partnerships) / Income "flows" to the partners regardless of whether it is actually paid out / In the event of a loss, each partner can claim the amount of loss allocated to them, which can be used to offset other income / Interest paid on amounts borrowed to invest in the partnership are deductible by the partner

What are the implications of a change from a partnership to a corporation?

Section 85 election can be filed to transfer the partnership's assets into the corporation on a tax-free basis (as long as share consideration is received in exchange for the assets transferred) / Election has to be made jointly by all partners within the specified time limit (or late penalties will apply) / The ACB of the shares received is the same as the ACB of the partnership interest exchanged / Partnership ACB is equal to original investment less drawings plus any taxable income allocated to partners since inception of the partnership / Losses will no longer be allocated to each partner and be used to offset other income. Now any losses can only be carried forward by the corporation / Donations are not allocated to individual partners so only the corporation can deduct them and only up to a specified maximum (see related Q&A) / Dividends received by the partnership would have been allocated to each partner and dividend tax credits would have been claimed. Dividends received by the corporation are taxed in the corporation as applicable (see related Q&A) / Partnership was not required to make installments however corporation will have to make monthly installments based on prior year income / For partnership amount of CCA to be claimed has to be agreed upon by each partner (could be based on partner's tax objectives). A corporation determines that amount of CCA to be taken.

How are joint arrangements defined for tax purposes and how are they taxed?

A joint venture for tax purposes is an unincorporated joint arrangement (if a joint arrangement is incorporated, the corporation would be a separate taxable entity subject to all of the other corporate tax rules) / The difference between a partnership and a joint venture for tax purposes is generally that a partnership lasts indefinitely whereas a joint venture is formed for specific project or purpose / Since the joint venture is not a separate legal or taxable entity: / Income or loss is reported by each member of the JV based on their ownership percentage / Each member of the JV continues to own any contributed assets and to claim CCA on those assets

What is the definition of a Canadian Controlled Private Corporation (CCPC)?

A private corporation incorporated in Canada that is not controlled by: a) Non-residents of Canada b) Public corporations c) Some combination of a) and b)

What is the definition of a small business corporation (SBC)?

Canadian Controlled Private Corporation (CCPC) with 90% or more of the FMV of its assets: a) Used principally (more than 50%) in an active business carried on primarily (more than 50%) in Canada b) Invested in shares or debt of a connected SBC c) Some combination of a) and b)

What are the three tests that must be met in order for shares to be QSBC (Qualified Small Business Corporation) shares?

Small Business Corporation (SBC) test / At the time of the sale must be an SBC i.e., CCPC with 90% of the FMV of assets used principally (50%) in active business carried on primarily (50%) in Canada / Holding period test / Shares were owned by the shareholder or a related party for the entire 24- month period preceding the sale / Basic asset test / For the 24 months preceding the sale at least 50% of the FMV of assets are used in an active business carried on in Canada

How are taxes payable calculated on the sale of shares by an individual?

Proceeds of disposition XXX less: ACB of shares (XXX) Capital gain XXX Taxable capital gain @ 50% XXX Allowable Capital gains exemption** (division C deduction) (XXX) Taxable income XXX Tax rate XX% Taxes Payable XXX **Lesser of the taxable capital gain on the sale of the QSBC shares and the remaining capital gains exemption. Remaining exemption = $1,250,000*** - exemption previously claimed - ABIL previously claimed - CNIL ***$1,250,000 is the capital gains exemption for 2025

What is an allowable business investment loss (ABIL)?

½ of the loss on disposition of shares or debt of a small business corporation (SBC) / Can be deducted against any source of income (whereas if it were treated as a normal capital loss it would only be deductible against capital gains) / Can be carried back 3 years or forward 10 years (if not used in that period it becomes an allowable capital loss) / ABIL is reduced by the amount of any taxable capital gains exemption used in the past (note that the taxable capital gains exemption is ½ of the CG exemption i.e., max of $625,000 for 2025)

What is a cumulative net investment loss (CNIL)?

Sum of any deductions claimed from property income and any property losses in excess of property income

What is paid up capital (PUC) and when is it relevant?

Computed at the corporate level (unlike ACB that is computed at the shareholder level) / Represents an amount that can be recovered tax-free / When a company issues shares of its stock to a shareholder the consideration paid for the shares is usually the PUC (and the share capital for accounting purposes) / Paid up capital can be received tax-free when: / Shares of the corporation are redeemed / There is a wind-up of the corporation / As part of a PUC reduction / If a taxpayer sells their shares PUC is not affected or relevant as ACB is used to calculate the gain/loss

What is the capital dividend account (CDA) and how does it work?

Only private corporations have a CDA / CDA is to ensure that tax-free items earned in a corporation remain tax free when paid out of the corporation / A dividend paid out of the CDA is tax-free to the shareholder (an election must be filed to pay a capital dividend) / Examples of tax-free items (would be added to the CDA): / Non-taxable portion of capital gains in excess of capital losses / Capital dividends received / Non-taxable portion of gains on disposition of Eligible Capital Property / Tax-free life insurance proceeds received

What are the ways that an asset disposal (including a deemed disposition) can be triggered?

An Asset Disposal can be triggered by the following: / Selling the asset / Change in use of the asset (ex. you stop living in your home and start renting it out, the asset has changed to a property income generating property) / Change in ownership of Asset (ex. Mother gifting an asset to her child. Mother deemed to dispose of at FMV triggering gain/loss) / Death (generally assets are deemed disposed of at FMV upon death - see specifics in death of a taxpayer section)

What are the factors to consider when determining whether a gain or loss is earned on account of income or capital?

Treatment depends on the taxpayer's primary and secondary intentions in regards to the disposed asset / If the taxpayer intended to resell it at a profit like inventory it would be treated as income / If the taxpayer intended to earn income from using/owing the asset as a capital asset it would be treated as a capital gain / Factors to consider in determining the taxpayer's intention: / The nature of the asset (is it typically a capital asset or inventory)? / Whether it is a type of asset that the taxpayer normally sells as part of their business activities / The taxpayer's behavior / It is possible for the taxpayer to have the intention to use the asset as a capital asset but also have the secondary intention to sell the asset at a gain if the original intention can't e fulfilled. This would result in the transaction being considered on account of income

What criteria must be met in order for a newly acquired property to be classified as a replacement property?

The property was acquired by the taxpayer to replace the former property / The property acquired will be used in the same or similar business as the former property by the taxpayer or a related person / If the former property was taxable Canadian property, the new property must also be taxable Canadian property

What are the special rules for replacement property?

Replacement property rules allow taxpayers to defer recapture and capital gains on disposition if: / The disposition is involuntary (e.g., fire, expropriation of land) and the property is replaced within two years after the year-end of disposition / A business is voluntarily relocating land and building, and property is replaced within 1 year after the year-end of disposition / In order to defer the entire gain, the new property must cost at least as much as the proceeds from the old property- every dollar not spent = $1 capital gain / The amount of the deferred recapture/capital gain on the old property is deducted from UCC/ACB of new property respectively

When can a capital gains reserve be claimed and how is it calculated?

If some or all of the proceeds are not received in the year of sale the taxpayer can claim a reserve equal to the lesser of: / [Proceeds yet to be received / Total proceeds] x Capital gain; and / 4/5 of the capital gain in year 1; 3/5 of the capital gain in year 2; 2/5 of the capital gain in year 3 and 1/5 of the capital gain in year 4 (at least 1/5 of the capital gain must be included in income in each year over a 5-year period)

When assets such as land and building are sold together, how are the proceeds allocated for tax purposes?

Normally proceeds would be allocated based on fair values / A special rule applies to the disposition of real property (land and building) / There cannot be a terminal loss on the building if there is a capital gain on the land (otherwise taxpayers would have an incentive to allocate more proceeds to the land since the capital gain is only 50% taxable whereas the terminal loss on the building is 100% deductible). / If the original allocation of proceeds (as per the sale agreement) produces a capital gain on the land and terminal loss on the building, the proceeds must be reallocated from the land to the building / The amount of proceeds to be reallocated to the land is essentially the lesser of the gain on the land and the terminal loss on the building / A terminal loss on the building may still result after the reallocation only to the extent that the terminal loss on the building was greater than the gain on the sale of the land

What is the identical property rule for calculating capital gains?

The calculation of a capital gain or loss is normally done on a property-by- property basis / There are special rules for calculating the ACB of properties where a group of "identical properties" is owned (for example a block of a particular class of shares of a corporation) / The ACB of each identical property is to be calculated on a weighted-average cost basis

What are the special rules regarding CCA on rental properties (see corporate tax section for other Q&A's on CCA)?

Each rental property costing more that $50K must be put in a separate CCA class (a terminal loss or capture will therefore result after each property is sold) / CCA cannot be claimed if it creates or increases a loss from all rental properties i.e., CCA is restricted to the total amount of rental income (before CCA) from all rental properties owned by the taxpayer

What are the tax implications if a taxpayer changes the use of an asset from personal to income earning or vise versa e.g. they start renting out a portion of their house that was previously for personal use?

There is a deemed disposition at fair market value at the time of the change in use (prorated for the affected portion of the asset such as when only one room in a house is to be rented) / The new ACB of the asset that has changed uses is the lesser of: / The FMV at the time of the change in use / The original ACB plus the taxable portion of the gain on the deemed disposition

What expenses (other than CCA) are deductible in computing rental income for tax purposes?

Any reasonable expenses incurred in operating the property including: / Insurance / property taxes / mortgage interest / Utilities / Repairs (may need to consider whether they are capital in nature) / Advertising for tenants / Interest on funds borrowed to make a down payment on the property / If only a portion of the building is being rented the above expenses would be prorated in proportion to square footage / Note that CRA can deny a loss on a rental property if they determine that there is no reasonable expectation of making a profit from the investment e.g., after several consecutive years of losses

What are the factors/criteria to be considered in determining whether an individual is an employee or contractor?

Economic Reality/Entrepreneur Test / The nature of the relationship between the person doing the work and the person that work is being done for. This test considers three sub tests: / Control - who is determining how the work is getting done and what is to be done? / Ownership of Tools - who is incurring cost for supplies to complete work? Does taxpayer doing the work provide and use their own tools to complete the work or does the person paying for the work provide the tools/supplies? / Chance of Profit/Risk of Loss - is the taxpayer doing the work responsible for covering own operating costs/cost overruns? Will person doing work receive a fixed amount despite what happens during work, or is there a risk of a higher or lower amount being earned if certain things happen as work progresses? Integration/Organization Test / Is this person doing the work economically dependent on the organization they are doing the work for? / How much of the person's income is dependent on work from this organization? / Does the person doing the work have available to them the benefits that employees or the organization have available to them? Specific Result Test / Is there a specific end deliverable that the person doing the work has agreed to provide or are they provide more ongoing type services? 76

What are the implications of being treated as an employee vs. an independent contractor?

If employed income will be employment income / If self-employed income will be considered business income which is usually preferable because: / More deductions are available (see Q&A on deductions from business income) / No source deductions (quarterly installments must be made instead) / Employer is not responsible for payroll taxes (CPP, EI, EHT, Workers Compensation) / If considered self employed, the contractor may have to collect and remit HST / If CRA reassesses and concludes the individual is an employee, penalties and interest will apply on payroll tax remittances that should gave been made

Who is required to register for GST/HST?

Both corporations and individuals carrying on business are required to collect HST unless they considered a small supplier and are therefore exempt from collecting HST / A business is NOT a small supplier if sales exceed $30,000 in the current calendar quarter, or in the total of the last four (or fewer) consecutive calendar quarters / If the $30,000 threshold is exceeded in a single quarter, the effective date of registration (date that the business must start charging HST) is the day of the sale that caused the threshold to be exceeded / If the $30,000 is exceeded over the previous 4 (or fewer) consecutive calendar quarters, the effective date of registration is no later than the first day of the month after the month that the business stopped being a small supplier. For example, if sales were $8,000 in each calendar quarter of 2025, the business would have stopped being a small supplier in January 2026 (since the previous 4 quarters exceed $30,000) and the effective registration date would be no later than February 1, 2026. / It is possible to register sooner (before the $30,000 threshold is met). An advantage of registering for HST is that any HST paid by the business, for example on the purchase of supplies, can be refunded. These are called input tax credits.

What is the required frequency of filing HST returns?

The required frequency of HST filing depends on revenue / Annually if revenue is less than $1.5M / Quarterly if revenue is between $1.5 and $6M / Monthly if revenue is greater than $6M / Annual filers must file and pay balance owing within three months after the fiscal year end / Quarterly and monthly filers must file and pay balance owing within one month after the end of the reporting period. There is an exception for individuals with a December 31st year-end for whom the return must be filed by June 15th, but payment made by April 30th. / Annual filers are required to pay quarterly instalments if net HST owing in the previous year was more than $3,000

How is HST payable calculated?

Difference between the total HST charged to customers and the input tax credits (ITC) on purchases / To calculate HST collected: / Add to revenue any items not included in revenue per financial statements but on which HST was collected (e.g., proceeds from sale of fixed assets) / Deduct from revenue any items on which HST was not collected (e.g., interest revenue or sales of HST exempt items) / To calculate ITC's: / Deduct from expenses any items on which HST was not paid (e.g., salaries, amortization) / Deduct from expenses any items ineligible for ITCs (see next Q&A) / Add to expenses any items on which HST was paid that were not expensed for financial reporting purposes such (e.g., fixed asset purchases)

Which sales are exempt from HST, and which purchases are not eligible for an Input Tax Credit (ITC)?

Some sales are exempt from HST including financial services, medical services, prescription drugs, basic groceries, education / Generally, any HST paid (including on the purchase of capital assets) is eligible for an ITC but there are some exceptions including: / Only 50% of HST paid on meals and entertainment can be claimed / No HST paid on fees for recreational or sporting facilities can be claimed / The HST paid on luxury vehicles is subject to the same limits as for expense deductibility i.e., ITC is limited to HST paid on a maximum $38,000 purchase price or $1,100 per month lease cost

What are the general rules (where no specific rule exists) for determination of business income including deductibility of expenses?

Generally, business and property income (profit) is calculated on an accrual basis and as a general rule (where no other specific rule applies) expenditures are deductible if they are incurred in order to earn income / In an exam situation if you can't remember the specific rule think about: / Whether the expenditure was incurred in order to earn income / Whether it is a current expenditure or a capital expenditure (will provide benefit for more than one year) / It is reasonable in the circumstances / Current expenditures incurred to earn income are usually deductible in the current year and capital expenditures are usually deductible over time (see Q&As on CCA) / Expenses that are not reasonable under the circumstances are not deductible e.g., unreasonable salary

What is the basic structure of a corporate tax payable calculation?

Calculation Steps: Net income per F/S ______ Add/subtract Accounting/Tax differences Income for Tax Purposes ______ Subtract Division C deductions Taxable income ______ Multiple by Tax rate Taxes Payable ______

Division C deductions are deducted from Income for Tax Purposes to arrive at Taxable Income. What are the most common Division C deductions?

Taxable Canadian Dividends / Charitable Donations / Loss Carryforwards

What are some common differences between net income for financial accounting purposes and net income for tax purposes?

Amortization / Reserves and contingencies (warranties, lawsuits, severance etc.) / Gains and losses on sale of assets / Meals and Entertainment / Write-down of assets / Employee vehicle costs / Interest and penalties on tax assessments / Related party transactions / Stock Options / Club membership dues / Donations (political and charitable) / Unreasonable expenses and personal expenses including travel / Conventions / Accrued bonus still unpaid 180 days after year-end / Financing costs / Leasehold inducements / SR&ED / Life insurance premiums

What is included in the cost of tangible capital assets for tax purposes?

All costs incurred to acquire the asset including taxes, transportation, legal fees etc. (similar to accounting rules) are included in the cost of the asset / "Soft" costs incurred during construction of a building including interest, property taxes and insurance are included in the cost of the asset (not deducted in the year incurred) / Subsequent expenditures that extend the life or enhance the usefulness of the asset (betterments) are added to the cost/UCC balance / Repairs and maintenance, landscaping, and disability modifications are not included in the cost of the asset but are expensed as incurred for tax purposes

How is CCA calculated on capital and intangible assets and where can I find the CCA rates?

Taxpayers can claim Capital Cost Allowance (CCA) on capital and intangible assets used to earn business or property income (and employment income in the specific case of employee autos) / CCA can be claimed up to a maximum based on the asset class CCA rate which is in Schedule II of regulations (taxpayer can claim less than the maximum although usually beneficial to claim maximum even when in a loss position because it increases the loss that can be carried back/forward) / CCA = rate*ending UCC balance / Most classes are subject to the half-net rule i.e. only ½ of the normal CCA can be claimed in the year of purchase / Only ½ of the net additions (additions - disposals) is added to the UCC balance to calculate that year's CCA (if disposals > additions the half net rule doesn't apply to that class) / Half net rule does not apply to non-arm's length transactions if the seller held the asset for more than 364 days / CCA begins when the asset is ready for use 100

What is the Accelerated Investment Incentive and how does it work?

Property acquired after November 20, 2018, and made available for use between 2024 and 2027 qualifies for the Accelerated Investment Incentive (AII): / For property that would typically be subject to the half-year rule: The CCA for the first year is limited to twice the usual first-year CCA deduction (which is calculated by multiplying the addition by the CCA rate and then by 50%, with the enhanced deduction being double that - i.e., the addition x the CCA rate x 100%). Essentially, the end result of the AII is that the half-year rule is suspended. / For property that would not typically be subject to the half-year rule: The CCA for the first year is limited to 1.25 times the usual first-year CCA deduction - i.e., the addition x the CCA rate x 1.25. / Remember, the enhanced first-year allowance can only be claimed in the tax year the property is first made available for use 102

How are the recapture, terminal loss and capital gain calculated when depreciable capital asset is disposed of?

If an asset is disposed of it is removed from the UCC of the CCA asset class (the lesser of original cost and proceeds of disposition is subtracted from the UCC) / If the resulting UCC balance is negative the negative amount is brought into income as recapture / If the resulting UCC balance is positive but no assets remain in the CCA asset class, then the positive balance can be claimed as a terminal loss (if assets remain in the class there cannot be a terminal loss) / Terminal loss can be deducted against business or property income / If the proceeds of disposition are greater than the original cost, the excess of proceeds over original cost will be a capital gain / There cannot be a capital loss on depreciable property What are the common CCA class numbers and descriptions*? *Note that rates for common classes (but not the descriptions) can be found in the information attached to the back of the exam, so it is helpful to know the descriptions of the common class numbers. Class # Description Class #1 Buildings acquired after 1987 Class #3 Buildings acquired before 1988 Class #8 Most furniture, equipment and tools costing $500 or more Class #10 Automobiles Class #10.1 Each employee vehicle costing more than $38K + tax is put in a separate class 10.1 (Only $38K + tax can be added for each vehicle and there is no recapture or terminal loss on class 10.1) Class #12 Software and tools costing less than $500 Class #13 Leasehold improvements Class #14 Certain intangible assets such as patents, franchises and licenses with a limited life Class 14.1 Other intangible assets Class #43 Manufacturing and processing equipment Class #44 Patents acquired after April 26, 1993 Class #45 Computer hardware and system software 106

How are leases treated for tax purposes?

Leases are always treated as operating for tax purposes (they are never capitalized) i.e., only the lease payments actually made during the year are deductible for tax purposes / When calculating net income for tax purposes if the lease was treated as capital for accounting purposes you will need to add back any interest/amortization expense recognized in the financial statements and deduct the actual lease payments

How are financing costs including legal, accounting, investment banking and other expenses related to borrowing money or issuing shares treated for tax purposes?

Deductible on a straight-line basis over 5 years

How are stock options (including those granted to employees) treated for tax purposes by the corporation issuing the stock option?

Stock option expense is never deductible for tax purposes because it does not result in a cash outflow / Any expense recognized for accounting purposes must be added back for tax purposes

How are decreases in the value of assets (write- downs or write-offs) treated for tax purposes?

Generally, assets must continue to be amortized at the appropriate CCA rate for tax purposes even if they have been written down or written off for accounting purposes / Any additional write-downs recorded for accounting purposes should be added back in calculating income for tax purposes

How are reserves and contingencies such as warranties and lawsuits treated for tax purposes?

Deductions for reserves generally are not permitted except for those that are specifically allowed / Expenses related to warranties or lawsuits are only deductible in the year that they are actually paid

Which reserves are specifically allowed for tax purposes?

Allowance for bad debts / Allowance for estimated returns / Unearned revenue / Allowance for inventory obsolescence / The accounting and tax treatments for the above items will typically be the same

How is the cost of providing vehicles to employees treated (by the corporation) for tax purposes?

There is a maximum amount per employee vehicle that is deductible by the corporation for tax purposes / $1,100+HST/month for lease / $38,000+HST for purchased vehicle (this in the limit on the capital cost on which CCA can be taken)* / Excess amount is not deductible for tax purposes unless it is included in the employee's income *A special incentive for zero emission vehicles allows for a 75% CCA deduction in the first year up to $61,000+HST for vehicles purchased in 2025

What are the rules for deductibility of meals and entertainment and club membership dues?

Meals and entertainment are generally 50% deductible / Exception for a special event where all employees can attend (e.g., a staff party) which is 100% deductible (maximum of 6 such events in a year) / Membership fees, club dues and maintenance fees related to the use of a yacht, golf course, camp, lodge, or a recreational or sporting facility are not deductible for tax purposes

How are donations (political and charitable) by a corporation treated for tax purposes?

Charitable donations are deductible in the computation of taxable income (division C deduction) / Limited to 75% of corporation's net income for tax purposes (any excess can be carried forward 5 years) / If property other than cash is donated the deduction is equal to the fair market value of the property / Will result in a disposition that may give rise to a capital gains and/or recapture / There is an exception for public company shares (gain is deemed to be zero) / Political contributions can receive a tax credit (provincial contributions are only eligible for a provincial credit but not a federal credit)

What are the rules with respect to deductibility of convention expenses?

Deduction for convention expenses is limited to 2 per year and must be held at a location consistent with the territorial scope of the organization (could be some room for judgement here to argue both sides) / Meals and entertainment component is only 50% deductible

How are interest, penalties and legal fees related to tax assessments treated for tax purposes?

Interest, penalties and interest on penalties are not deductible for tax purposes and therefore must be added back in calculating income for tax purposes / Legal fees related to an objection or appeal of a CRA assessment are deductible

What costs are considered to be Scientific Research and Experimental Development (SR&ED)?

SR&ED includes basic research, applied research and experimental development in the fields of science or technology / SR&ED does not include capital expenditures, market research or sales promotion, quality control, or routine testing of materials, devices, products, or processes.

How are SR&ED expenditures treated for tax purposes?

SR&ED expenditures are initially added back in calculating income for tax purposes and added to pool of costs that can be deducted in the current or future years (i.e., it becomes a discretionary deduction). This is advantageous for companies in a loss position as they can save the deduction for future years when income is positive. / For companies with positive income that choose to deduct the full amount of SR&ED expenses in year incurred, the result is an add back and then a deduction (and in and out) on the schedule 1 / SR&ED expenditures are also eligible for an investment tax credit (ITC) (See next Q&A for details) / The amount of any ITC received is then deducted from the SR&ED pool in the following year. If this results in a negative balance, it is included in income

What are the SR&ED Investment Tax Credit (ITC) rates for CCPC and Non-CCPC?

All corporations are eligible for a non-refundable credit of 15% / CCPCs are also eligible for an additional refundable credit of 20% up to a $3M* limit (35% credit in total) / Any ITC received will reduce the amount of the expenditure that can be deducted from income *limit must be shared with associated corporations and is reduced when income is over certain thresholds

What are the rules regarding deductibility of accrued salaries and bonuses?

Accrued salary or bonus must be paid within 180 days after the year-end in order for it to be deductible in the year it was accrued / If it is not paid with 180 days, it will not be deductible until the year it is actually paid

Associated companies have to share the small business deduction limit and the SR&ED expenditure limit. What is the definition of an associated corporation?

One of the companies directly or indirectly controls the other / Example of indirect control is owning a company that controls another company (all three companies would be associated) e.g., A controls B and B controls C means that A indirectly controls C / Both companies are controlled directly or indirectly by the same person or group of persons (note that the group of persons does not have to be related) / Each company is controlled directly or indirectly by a person, the persons are related, and one of the persons owns more than 25% of both corporations (cross ownership test)

What is the definition of a connected corporation?

Two companies are connected if one company controls the other or if one company owns more than 10% of the other company based on either voting rights or fair market value

What is the small business deduction and what corporations are eligible for it?

Applies to Canadian Active Business Income earned by a CCPC / Annual limit of $500K / Must be shared amongst associated corporations / If taxable capital employed in Canada (together with associated corporations) is over $10M there is a reduction of the SBD up to taxable capital of $50M after which point, there is no SBD (from $10M to $50M the SBD reduces to zero on a straight-line basis)

What is the definition of active business income and active business assets?

Active business assets are assets that are used to earn active business income / Active business income is any business income except for income from a Specified Investment Business or Personal Services Business

What is a Specified Investment Business (SIB) and Personal Services Business (PSB)?

An SIB is a business that does not have more than 5 full time employees and whose principal purpose is to earn income from property / A PSB is a business that does not have more than 5 full-time employees and provides services that meet the following tests: / The services are provided by a person that is a specified shareholder (together with related persons owns 10% or more of the corporation) / That person, if the corporation did not exist would be considered an employee (see question on employee vs. contractor factors) / Having 5 full-time employees plus some part-time employees counts as having more than 5 full-time employees

How are dividends received by corporations taxed?

Taxable dividends received from Canadian corporations are allowed as a division C deduction when computing taxable income / Taxable dividends are generally all dividends except capital dividends (addressed in another Q&A)

When is a corporation resident in Canada for tax purposes?

A corporation is resident in Canada if: / It was incorporated in Canada / It was not incorporated in Canada, but the central management and control of the corporation takes place in Canada

What are the implications of losing CCPC status, for example if a CCPC goes public or is acquired by a public or foreign corporation?

No longer eligible for small business deduction / No longer eligible for capital gains exemption / Loss of the CDA (capital dividend account) - any balances remaining at the date of acquisition would be lost and therefore should be paid out prior to the acquisition (this is a good planning point) / Loss of RDTOH account - any balances remaining at acquisition will be lost therefore a dividend should be declared prior to the acquisition large enough to use up the remaining balance (good planning point)

What are refundable taxes?

Additional taxes on investment/property income that apply to private corporations only / Meant to increase the tax cost of earning investment income in a corporation and are partially refunded when the corporation pays a taxable dividend (dividend other than a capital dividend) to its shareholders / Additional Refundable tax (ART) (CCPC's only) / Refundable Part I tax (CCPC's only) / Refundable part IV tax (All private corporations)

What is the refundable dividend tax on hand (RDTOH) account and how does it work?

30.67% of the aggregate investment income of a CCPC is refundable / All refundable taxes are added to the RDTOH account to keep track of the refundable taxes paid / RDTOH account can be carried forward indefinitely / When the corporation pays a taxable dividend it will get a dividend refund, which reduces the RDTOH balance, equal to the lesser of 1/3 of the taxable dividend and the balance in the RDTOH account

How are dividends received by individuals from Canadian corporations taxed?

Dividends received from public corporations or from the income of a CCPC that was not subject to the small business deduction and is not investment income are called "eligible dividends" / Eligible dividends are "grossed up" by 1.38 (the dividend is multiplied by 1.38 and that amount is included in income) and a federal tax credit of 6/11 of the gross up (or 20.727% of the actual dividend) is allowed (provincial credit is expected to be approximately 5/11 of gross up so that the total of both provincial and federal credits is equal to the gross up) / Note that a tax credit is a dollar-for-dollar reduction of the tax liability e.g., a tax credit of $1 reduced taxes payable by $1 (as opposed to a reduction of taxable income where the actual tax savings is dependent on the tax rate) / Dividends received from CCPCs from income subject to the small business deduction or form investment income are called "non-eligible dividends" / Non-eligible dividends are grossed up by 1.15 and a federal tax credit of 9/13 of the gross up (or / 384% of the actual dividend) is allowed / Note that the tax gross up and credit procedure applies only when an individual (not a corporation) receives the dividend AND the dividend is received from a Canadian resident corporation (dividends received by individuals from non-resident corporations are fully taxed)

How are shareholder loans treated for tax purposes?

The principal amount of the loan will be included in the shareholders income in the year the loan is made unless: / Loan is repaid within one year from the end of the company's fiscal year in which the debt arose as long as it is not part of a series of loans and repayments / For example, if a Corporation has December 31 year end a loan made on January 1, 2025, would have to be repaid by December 31, 2026. / It is one of the exceptions (see next question) / There will be an imputed interest benefit on loans not included in income (if the loan is included in income there is no imputed interest benefit)

What are the exceptions to the general shareholder loan rules for a shareholder that is also an employee?

The loan principal does NOT have to be included in income if all three of the following are met: / Loan was made to shareholder by virtue of employment and not shareholding (consider whether other employees of a similar rank would be eligible for similar loans) / The loan was made to an employee that is not a specified shareholder OR if loan is made to a specified shareholder (together with related persons owns at least 10% of shares or is not at arms length with employer) it must be to acquire: / A house to live in / Unissued stock of the company or a related company / Motor vehicle for employment use / Bona fide repayment arrangements made for payment within a reasonable timeframe *Note that if the loan principal is NOT included in income by virtue of the exceptions, imputed interest will apply

How are low-interest or interest-free employee loans treated (when the employee is not a shareholder)?

Taxable benefit that can be provided by an employer to an employee / Benefit is the interest savings calculated based on the CRA quarterly prescribed rate prorated for the number of days the loan was outstanding (imputed interest) / Prescribed rates can be found in the Tax Information at the back of the exam paper / Any interest benefit included in income is deemed to be interest paid and so may be deductible if it was incurred to earn income e.g., to purchase investments (same rules as for interest actually paid)

How is the imputed interest benefit calculated on a shareholder loan or an employee low- interest or interest-free loan?

Interest benefit is calculated using the difference between the quarterly prescribed rates (provided to you in the exam) and the rate actually paid, prorated for the number of days the loan was outstanding in each quarter / Total days in each quarter are: / 90 days in Q1 (91 if a leap year) / 91 days in Q2 / 92 days in Q3 and Q4 / Special rules if the purpose of the low interest loan is to allow the employee to purchase a dwelling / Lower of the calculation above and the calculation using the prescribed rate in effect when the loan was received (this is reset every five years)

What is personal use property (PUP) and what are the special rules relating to dispositions of PUP?

PUP is property used for personal reasons (as opposed to earning income) / Capital losses on PUP are denied / Capital gains (which are rare on PUP) are taxable / On dispositions of personal property both proceeds of disposition and the ACB are deemed to be the greater of actual proceeds/ACB and $1,000

What is Listed Personal Property (LPP) and what are the special rules relating to dispositions of LPP?

LPP is specific types (a subset) of PUP / Use the acronym Coin JARS to remember the qualifying assets: / Coins / Jewelry / works of Art / Rare books or manuscripts/folios / Stamps / Often a question will use the term "antique" to trick you into thinking that it is LPP, but only the items listed above qualify as LPP / Since LPP is a subset of PUP the $1,000 minimum ACB and Proceeds rules also apply / The only difference from other PUP, is that you can have a capital loss on LPP, but the capital loss can only be used to offset LPP capital gains

How are gifts between taxpayers treated for tax purposes?

Taxpayer giving the gift is deemed to have received proceeds equal to fair market value and the taxpayer receiving the gift is deemed to have acquired the property at fair market value / Since most gifting occurs between related parties, also see the Q&A on related party rules and the implication of not reporting the transaction at FMV (double taxation)

Individual taxpayers are provided an exemption from tax on the sale of their principal residence. When a taxpayer owns more than one residence at a time, how should they apply the exemption and how would the taxable capital gain be calculated?

The taxpayer can shelter the entire capital gain arising from the sale of a personal residence if you designate it as your principal residence for the years in question using the principal residence gain exemption / A property qualifies as a principal residence if the taxpayer, their current or former spouse or common-law partner, or any of their children lived in it at some time during the year (does not have to be a full-time residence) / The taxpayer can only designate one principal residence per taxation year / If two residences are owned within the same taxation years, the taxpayer will want to designate as many years as possible to the residence with the higher per year gain (you will need to calculate the gain per year on each residence) / The calculation gives 1 "free" year (see below) so the maximum number of years that needs to be allocated to any one property to shelter the entire gain is the number of years it was owned minus 1 / The amount of the gain that is exempted from tax is calculated as: 1 + # of years designated * Capital Gain # of years property was owned

What is the election on disposition of Canadian Securities and what is the purpose?

Purpose of the election is to avoid having to determine whether the securities were bought for the purpose of earning income (dividends) or resale / Taxpayers (including corporations and trusts) can elect to have all Canadian securities that they own deemed to be capital property which means that disposition will result in capital gains (50% taxable) as opposed to business income / Once this election is made, it cannot be revoked, and it applies to all future dispositions of Canadian securities by the taxpayer. / The downside is that if a taxpayer experiences a loss on the disposition of securities, it must be treated as a capital loss (50% deductible)

What are the tax implications to the employee of having an employer provided automobile?

Two taxable benefits are calculated in relation to employer provided vehicles: standby charge and operating cost benefit (if the employer also pays for the operating costs of the car) / Standby charge is equal to: / 2% x the cost of the automobile x the number of months in the year that the automobile is available to the employee (if the employer owns the automobile) OR / 2/3 x lease payments (if the employer leases the automobile) / Note: for the standby charge you use the actual cost of the automobile (even if it costs more than $38,000) but for CCA purposes the maximum amount that can be added to UCC is $38,000 plus applicable sales tax on $38,000 / If the automobile is used more than 50% for business use, you can reduce the standby charge to: (Personal use km's / 20,004) x Standby charge / If the employer also pays for the operating costs of the car (e.g. gas and maintenance) then there will also be an operating cost benefit equal to 34 cents x personal use kilometres driven in the year. / If the employee used the car for more than 50% business use, then the employee can elect to use ½ of the standby charge as their operating benefit / Note: driving to and from work is considered personal use of an automobile (and not business use) *All rates are for 2025* 180

What are the tax implications to an individual who receives a "automobile allowance" to cover the cost of a vehicle (rather than the employer providing them with a vehicle)?

If the allowance is "reasonable" it is not taxable to the employee and the employee would not deduct the expenses that are covered by the allowance / An automobile allowance is considered reasonable if it is $0.72 for the first 5,000 KM and $0.66 for each additional KM driven for employment duties (2025 rates) / If the allowance is not considered reasonable it is included in the employee's income and the employee may deduct eligible motor vehicle expenses paid during the year prorated for the business use percentage of KM driven (the employee must maintain a log of business vs. personal use KM) / Deductible expenses include fuel, insurance, maintenance and repairs, license and registration fees, capital cost allowance (CCA), lease payments, and interest. / Lease costs are limited to $1,100 plus GST/HST per month / Monthly interest on an automobile loans is limited to $350 / The ceiling for capital cost (on which CCA can be calculated) for an owned vehicle is $38,000 plus GST/HST

How are stock options taxed from the employee's perspective (for both CCPC shares and Non-CCPC shares)?

CCPC Non-CCPC Grant No taxable benefit No taxable benefit Date Exercise No taxable benefit Employment income inclusion = FMV of Date shares at exercise date - Exercise price Division C deduction = 50% of employment inclusion (if options are granted not in the money i.e., if strike price is more than or equal to market price at time options granted) Sale of Employment income inclusion = FMV of shares at Capital gain or loss = Proceeds - ACB Shares exercise date - Exercise price Division C deduction = 50% of employment ACB = Exercise price + income inclusion inclusion (if options are granted not in the money i.e., if strike price is more than or equal to market price at time options granted) OR if the shares were held for at least 2 years after exercise of the option Capital gain or loss = Proceeds - ACB ACB = Exercise price + income inclusion 184

Under what conditions are moving expenses deductible and how are moving allowances/reimbursements treated?

In order to deduct the moving expenses, they must be incurred in respect of an eligible relocation which is generally defined as: / Moving 40 km closer to new work location or post-secondary learning institution / Moving expenses can only be deducted against income from the new work location in the year of the move and can be carried forward to the next year / If the taxpayer is being reimbursed by their new/old employer for moving expenses, they cannot then deduct those moving costs, unless the reimbursement is included in their income on their tax return / Allowances must be included in income and any eligible expenses can be deducted

Which specific moving expenses are deductible?

- Travel costs of family to new residence - Costs to move and store household items (i.e., furniture, clothes) - Meals and accommodations near old or new residence for up to 15 days - Lease cancellation costs of old residence - Selling costs of old residence (advertising, legal fees, commission, mortgage penalty) - Cost to maintain old home while vacant after the move (maximum $5,000) - Costs to buy a new home only if a previous home was sold as a result of the move - Cost of revising legal documents for address change - Can use a simplified method that allows a flat rate deduction based on the number of meals and KM travelled (benefit is no receipts required) - $23/meal up to max of $69/day - $0.545 - $0.715 cents per KM depending on province

What are the conditions that must be met in order for employees or self-employed individuals to deduct home office expenses and how are home office allowances treated?

Employed (deduction from employment Self-employed (deduction from business income) income) Conditions Home office is either: Home office is either: / the place where the individual • the place where the individual principally principally performs their work duties performs their business duties OR OR / used exclusively for business purposes and / used exclusively for work purposes and used regularly to meet customers/clients of the the employee must regularly meet business customers or others there Limit • Deduction cannot exceed employment • Deduction cannot business income earned income earned from the job that made from the business that made use of the home use of the home office office Carryforward • Can be carried forward into a future • Can be carried forward into a future year as year as long as there is sufficient long as there is sufficient business income employment income Allowance • Included in taxpayer's income (eligible expenses can be deducted)

Which expenses relating to a home office can be deducted if the conditions (see previous Q&A) are met?

Non-commission Commissioned sales Self-employed employee employee Rent Utilities Maintenance Minor repairs Property taxes Insurance Mortgage interest CCA *Expenses that relate to the entire home are prorated based on square footage

Other than motor vehicle and home office, what other deductions are available from employment income?

Professional or union dues / Contributions to a Registered Pension Plan / Cost of tools in excess of $1,471 for a tradesperson (limited to $1,000/year) / Salary paid to an assistant / Supplies used directly in employment / Rent paid for an office / Reasonable selling expenses for commissioned salespeople (limited to commission income) / Attendant care and other disability support expenses incurred to allow a disabled person to work or attend school (disability support deduction)

What are the rules regarding deductibility of childcare expenses?

Childcare expenses are deductible if they are incurred to earn income or to allow the parent to attend secondary or post-secondary education / Includes daycare, boarding school, camp and babysitting (receipts are required) / Lower income parent must claim the childcare expenses (unless the lower income spouse is in school, jail or infirm) / Limitations on deductibility of childcare expenses: / Maximum for camp or boarding school of $200/week per child 6 and under or $125/week per child 7 to 16 / Total childcare expense cannot exceed the lesser of: / The actual amount spent / $5,000*# of children aged 7 to 16 + $8,000*# of children under age 7 / 2/3 of earned income (employment income including taxable benefits and business income)

How are child support and spousal support payments treated for tax purposes (by the payer and payee)?

Spousal support payments are included in the income of the recipient and deductible to the payer / Child support payment are not deductible to the payer and are not taxable to the recipient

What employee benefits/gifts will not be considered taxable benefits?

Overtime meals up to $23/meal / Frequent flyer miles earned while travelling for business purposes / Non-cash gifts up to $500/year that are not related to performance (performance related gifts of any amount are taxable) / Note that gift cards are considered "near cash" and are taxable unless: / It comes with money already on it and can only be used to purchase goods or services from a single retailer or a group of retailers identified on the card, and / The terms and conditions of the gift card clearly state that amounts loaded to the card cannot be converted into cash, and / A log is kept to record gift card information containing all of the following: Name of the employee, date the gift card was provided to the employee, reason for providing the gift card, type of gift card, amount of the gift card, name of the retailer

What other types of payments are not taxable to an individual?

Capital dividends (see Q&A on capital dividends) / Social assistance e.g., welfare payments / Life insurance proceeds received as a result of someone's death / Strike pay / Lottery winnings / Disability payments if the employer did not pay any of the premiums / Payouts from a private health insurance plan / Withdrawals from a TFSA

What are some methods of income splitting with a spouse or children?

Employing spouse and children / Must be reasonable in light of services / Consider whether spouse and children have skills that would allow them to provide services / Increasing lower income spouse's investments / Higher income spouse should pay household expenses to allow lower income spouse to purchase investments / Transferring of capital property to children / no attribution on subsequent capital gains / Issuing shares to lower income spouse and paying dividends / the Tax on Split Income (TOSI) rules must be considered (see subsequent Q&A) to ensure that one of the exceptions applies

The Tax on Split Income (TOSI) rules limit the ability for high-income owners of private corporations to divert income to family members (minor or non- minor) with lower personal tax rates. What types of income are subject to the TOSI rules?

TOSI rules apply to the following types of income derived from a related business: / Dividends / Capital gains / Interest income / Shareholder loan inclusions (either principal or interest benefit)

The Tax on Split Income (TOSI) rules result in income from related businesses being taxed at the highest marginal tax rate. What are the most common exceptions to the TOSI rules for adult family members?

Non-service business / Business is not a professional corporation (owned by a doctor, lawyer, engineer, accountant) and derives at least 90% of its income by selling anything other than services / Family member receiving the dividends is at least 25 years of age and owns at least 10% of the shares of the corporation. Family member works in the business / The family member worked in the business for at least 20 hours per week continuously in the current tax year or for at least 20 hours per week for 5 prior years (does not have to be consecutive years) / The amount of the dividend paid is reasonable based on the work performed Family member invests in the business / Family member receiving dividends is at least 25 years of age and has invested in the corporation / Dividend is reasonable based on the financial investment that they make. The reasonability of dividends paid is determined by looking at factors such as the amount of the financial investment made, and the risk assumed