Tax Unit 1

Tax Unit 1 Inadequate consideration ITA 69 If you transact not at FMV, bad things happen = double tax Non-arm's length transactions Transactions between related parties by blood, marriage, common-law, or adoption. Does not include cousins, nieces, nephews, uncle roger, and aunts. Brainpower Read More Spousal rollover - capital property transfers to your spouse or common law partner without triggering any tax -transaction will transfer at cost - can opt out - if spousal rollover applies, inadequate consideration doesn't apply Medical expenses 12 month period ending in the current year Small business deduction SBD 19% lesser of: Net active business income (income - expenses) taxable income annual business limited ($500,000) less allocations to associated companies GRR applies to CCPC over $500k and non-CCPC Appealing Notice of Assessment - -Call CRA -File notice of objection within 90 days that the assessment is mailed or within 1 year of the due date of the return - Tax court of Canada - within 90 days of the notice of objection or if the CRA hasn't responded yet -Federal court of appeal - 30 days bring it it within 30 days Sandra operates Sleepy as a proprietorship. Which of the following would be fully deductible in calculating Sleepy's net income for tax purposes? Question options: a) The salary of $75,000 paid this year to Sandra's husband for 20 hours per week of general office work and bookkeeping services b) The $1,000 contribution made to the Liberal Party of Canada on behalf of Sandra's business c) The $2,500 of membership fees paid this year to the local tennis club where Sandra meets existing and potential clients d) The additional $1,500 of interest costs incurred this year when Sandra refinanced the mortgage on her home to provide funds to purchase office equipment and furniture for use in the business d) The additional $1,500 of interest costs incurred this year when Sandra refinanced the mortgage on her home to provide funds to purchase office equipment and furniture for use in the business Answer a) is incorrect. ITA 67 only allows deduction of expenditures that are considered reasonable in the circumstances. Given Sandra's husband's limited involvement in the business (that is, working only 50% of typical full-time hours), $75,000 is likely to be considered an excessive salary for general office work and bookkeeping services. Answer d) is correct. Interest paid on borrowed funds is deductible against business income, provided the borrowed money was used to earn business income. It does not matter that the source of the funds was through a refinancing of the mortgage on Sandra's home because Sandra can directly tie the use of the borrowed money to the acquisition of assets (office furniture and equipment) used in her business. A corporation sold all of its Class 50 assets for $80,000. If the original cost and the undepreciated capital cost (UCC) balance of the assets were $150,000 and $100,000, respectively, immediately before the disposition, the tax consequence of the disposition would be: Question options: a) Recapture of $20,000 b) Terminal loss of $20,000 c) Capital loss of $70,000 d) A CCA claim of $55,000 and recapture of $35,000 Hide question 6 feedback Answer b) is correct. In the year the assets are sold, the proceeds of disposal up to the original cost of the assets are a credit to UCC. A terminal loss arises if the credit to UCC results in a positive balance in the class and there are no remaining assets in the class. In this case, after deducting the proceeds of disposal up to original cost, there is a $20,000 positive amount remaining in the class [($100,000 - $80,000) = $20,000] and all Class 50 assets have been sold. As both conditions have been met, a terminal loss of $20,000 may be claimed. In the current year, Tommy sold a depreciable asset to his son for fair market value of $100,000. Tommy's capital cost for the asset was $160,000 and the UCC of the class was $80,000. Tommy's son did not claim any CCA on the asset in the current year. In the following year, Tommy's son sold the asset to an arm's length third party for $125,000. Which of the following is a tax implication of these transactions? Question options: a) The deemed capital cost to Tommy's son is $80,000. b) The deemed capital cost to Tommy's son is $100,000. c) When Tommy's son sells the asset to the arm's length third party, he will be taxed on recapture of $25,000. d) When Tommy's son sells the asset to the arm's length third party, he will be taxed on a taxable capital gain of $12,500. Answer c) is correct. When Tommy sold the depreciable asset to his son, it was a non-arm's length transaction. In a non-arm's length transaction where the selling price of a depreciable asset is less than the original cost of the asset and greater than the UCC of the asset, the purchaser assumes the capital cost of the vendor for the purposes of determining future capital ga