ACCT226 Final Review

Review based on Canadian Tax Principles 2011-2012 Edition by Byrd & Chen
1

Chapter 1 I ntroduction to Federal Taxation in Canada

The Canadian Tax System and Liability for Tax
Income Tax A tax on the income of taxable entities.
It is governed by the Federal I ncome Tax Act (ITA).
Federal I ncome Tax
ITA 2(1) Income tax is levied on all Canadian residents regardless of citizenship.
ITA 2(3) Income tax is levied on employment and business incomes earned by non-residents in
Canada as well as gains and losses incurred by the non-resident on disposition of a taxable
Canadian property.
I nternational tax treaties override ITA when there is a conflict.
The Canadian Federal Income Tax System uses a progressive rate
Each province can ONLY levy tax on income earned in the provinceand income of persons
living in the province at the last day of the taxation year.
Taxable Entities Individuals (human beings)
Corporations
Trusts
All three types of taxable entities are referred to as person, and they are required to file income
tax returns.
Income tax returns for individuals, corporations, and trusts are called T1, T2, and T3 respectively.
Net I ncome for Tax Purposes
There are 4 types of income included in the Net Income for Tax Purposes
1. Employment Income (Loss) please refer to chapter 3 review
2. Business Income (Loss) please refer to chapter 6 review
3. Property Income (Loss) please refer to chapter 7 review
4. Taxable Capital Gain vs. Allowable Capital Loss please refer to chapter 8 review
Note: Taxable Capital Gains = Capital Gains
Allowable Capital Losses = Capital Losses

The calculation for the Net Income for Tax Purposes is as following

2

Note: $0 is written as Nil.
Income Under ITA 3(a):
Employment Income $E
Business Income B
Income From Property P $XXX
Income Under ITA 3(b):
Taxable Capital Gains $G
Allowable Capital Losses (L) $YYY
1

Balance From ITA 3(a) And (b) $ZZZ

Subdivision e Deductions (eee)
Balance Under ITA 3(c) $CCC
3
Deduction Under ITA 3(d):
Employment Loss ($e)
Business Loss (b)
Property Loss (p) ($xxx)
Net Income for Tax Purpose (Division B Income) $BBB
3

1
where $YYY = $G - $L. If $YYY is negative, then it is treated as $0 for further calculations.
2
where $CCC = $ZZZ - $eee
3
If $BBB is negative, then treat it as $0, and write Nil.
Note: The negativeamount of I TA 3(b) can be carried forward as allowable capital losses,
which are deductible against the taxable capital gains in any future taxation year.
The excess of $xxx over $CCC can be carried forward as I TA 3(d) deductions
against I TA 3(c) amount in any of the next 20 taxation years.
Please refer to Exercises One-6, One-7, One-8 on page 26 and Self Study Problems One-5,
One-6 on pages 31 and 32 for further reference.


Chapter 20 I nternational I ssues in Canada

Residency
A full year resident is an individual who lives in Canada for the year or has significant
residential ties with Canada.
The individual will be taxed on his worldwide income for the full year.
Factors Indicating Significant Residential Ties
1. The individual has a spouse or common-law partner who stays in Canada while the
individual is abroad and had been living with the individual prior to his or her
departure from Canada.
2. The individual has dependent(s) that remain(s) in Canada while he or she is abroad.
3. The individual has a home in Canada that isnt rented out to an arms length party
while the individual is abroad.
A part year resident is an individual who becomes a Canadian resident or stops being a
Canadian resident during the taxation year.
For an individual who became a resident sometimes during the year, he or she will be
taxed on all sources of income earned starting on the date when they become a
Canadian resident.
For an individual who stops being a resident during the year, he or she will be taxed
on all sources of income earned prior to the latest of the following dates:
The date the individual depart from Canada,
The date the last of the individuals spouse/common-law partner and other
dependants leave Canada, and
The date the individual becomes a resident of their new country.
A deemed resident is an individual who lacks significant residential ties with Canada, but is
taxed like a full year resident who does NOT reside in any particular Canadian province.
Please refer to paragraph 20-23 on page 944 for the list of deemed residents of Canada.
A non-resident is an individual who is neither a full year resident, nor a part year resident, nor a
deemed resident.
Non-residents are only taxed on employment and business income earned in Canada,
and gains and losses on the disposition of Taxable Canadian Property.

3

Chapter 3 I ncome and Loss from an Office or
Employment

Definition of Employment I ncome
Employment Income
ITA 5(1) Employment income includes salary, wages, and non-monetary benefits, such as
gifts, received by the taxpayer in the year.
Employment I nclusions =Taxable Monetary Rewards +Taxable Benefits
Employment Income = Employment Inclusions Employment Deductions
Employment incomes are reported on a cash basis, NOT on an accrual basis.
Employee vs. Self-employed
An individual doing work for an organization is either an employeeor an independent
contractor.
Employees earn employment income while independent contractors earn business income.
Key Distinctions between Employees and Independent Contractors
Factors Employee I ndependent Contractor
Intent Contract of Service Contract for Service
Control The employer controls the method
in which a task is done.
The payer has little control over
the how a task is completed
Ownership of Tools
and Equipment
The employer supplies the tools and
equipments required for tasks.
The contractor supplies tools
and equipments required to tasks.
Ability to
Subcontract or Hire
Assistance
The payer has control over whether
or not an assistant may be hired and
the assistants qualifications.
The payer has no control over
the assistant hired by the
independent contractor.
Financial Risk The employer is responsible for the
financial risk associated with the
work done.
The contractor is responsible for
the financial risk associated with
the work done.
Responsibility for
Investment and
Management
Not involved in the management of
the employing business nor sharing
in the ownership of the business
responsible for the task.
Active in managing the business
that is responsible for the task.
Opportunity for
Profit
The employer receives all the
profits on the tasks performed.
A contractor receives all the
profits on the task performed.


4

Employment I ncome I nclusions
Wages and salaries must be included in employment income.
ITA 6(1)(a) Any benefit given to an individual by his employer in relation to his
employment position, with the exception of certain items, must be included in income.
For the list of exceptions, please refer to paragraph 3-44 on page 78 of the textbook.
I nclusions - Tuition Fees
Situations under which educational costs are paid by the employer
1. Specific Employer-Related Training Courses related to the employers work.
2. General Employment-Related Training General business related courses.
3. Personal I nterest Training Courses not related to the employers business.
Employer-paid personal interest training is a taxable benefit.
1. The amount paid by the employer is added to the employees employment income.
2. The employee can claim a related tuition fee tax credit.
I nclusions - Gifts
Non-arms Length Employees are employees who are relatives of the proprietor of their
employing business or a shareholder of their employing private corporation.
For a non-arms length employee and their related persons, value of all gifts are
added to employment income.
Non-cash gifts and non-cash awards
An arms length employee
annual total gift value in excess of $500 is taxable
Non-cash long service/anniversary award
The employee must have performed at least 5 years of service for the employer.
For each employee, there must be a minimum interval of 5 years between two
consecutive long service awards.
The employee must be an arms length employee
Total award value in excess of $500 is taxable
The two amounts cannot be used to offset amounts in each other.
Items of immaterial or nominal values, such as coffee, tea, and T-shirts with employer logos, will
be treated as having a value of $0 for tax purposes.

5

Cash and near-cash gifts (ex. gift certificates) are included in employment income.
Performance related rewards are included in employment income.
Please refer to Exercise Three-2 on page 80 as an example.
Taxable Benefit on Employer Provided Automobile
If an employer provides an employee with an automobile, it would lead to 2 taxable benefits.
ITA 6(1)(e) Standby Charge
Step 1: Full Standby Charge
Employer Owned Vehicle
Full Standby Charge = [(2%) (Cost of Car) (Months Available)]
Cost of Car is the amount paid (includes GST/HST/PST).
Months Available = (Number of days for which the employee has possession of the
car key 30)
Note: The number of months available is rounded to the nearest whole number,
with 0.5 rounding down.
Employer Leased Vehicle
Full Standby Charge = [(
) (Lease Payment for the Year) (

)]
Lease Payments for the Year equals the total lease payments for the year including
GST/HST/PST less the portion of the payment that goes to cover insurance.
Months Available = (Number of days for which the employee has possession of the
car key 30)
Months Leased = (Number of Days the employers lease payments covers 30)

Step 2: Percentage of Non- Employment Related Usage

Employment Usage =

Employment Kilometers = Total Kilometer this Year Personal Kilometers this Year

6

Step 3: Standby Charge

If Employment Usage 50%, then Standby Charge =Full Standby Charge.
If Employment Usage > 50% and the employee is required by the employer to use the
automobile in his employment duties, then:
Standby Charge= Full Standby Charge [(

]
Non-Employment Kilometers = Total Kilometers - Total Employment Kilometers
Note: The Non-Employment Kilometers can NOT exceed the denominator!
The Months Available is the same as the one used to calculate the full standby charge.

ITA 6(1)(k) Operating Cost Benefit
Step 4: Operating Cost Benefit
If the Employment Usage 50%, then:
Operating Cost Benefit =$0.24*(Personal Use Kilometers)
If the Employment Usage > 50%, then:
Operating Cost Benefit =(
)*(Standby Charge)
Step 5: Total Taxable Benefits
Total Taxable Benefit =Standby Charge +Operating Cost Benefit
Please refer to Exercise Three-7, Exercise Three-6, and Self Study Problem Three-3 on pages
90, 91, and 116 for further reference.
Stock Option Benefits
Stock options Options that allow, but do not require, the employee to purchase a specific
number of shares at a stated exercise priceduring a specified period.
Three key dates are involved in the stock option process:
I ssue Date Exercise Date Disposition Date

I ssue Date The date when the options are given to the employees.

7

Exercise Date The date when the option is exercised by the employee to purchase the stocks
at the price stated on the option.
Disposition Date The date when some or all of the shares acquired at exercise price are sold.
Step 1: Public Corporation vs. Private Corporation
Determine if the company is a public corporation or a private corporation.
ITA7 (1)(a) Public Corporation

Market Price Market Value Market Value
Exercise Price Exercise Price Adjusted Cost Base
Step 2: On I ssue Date
There is no tax consequence on issue date.
Step 3: On Exercise Date
The amount calculated below is included in the employment income in the year of exercise.
Fair Market Value of Shares Acquired [(number of shares)*(market price)] $XXX
1

Cost of Shares [(number of shares)*(exercise price)] (XXX
2
)
ITA 7(1)(a) Employment Income Inclusion
= Increase in Net Income for Tax Purposes XXX
3

I TA 110(1)(d) Deduction [(1/2)($XXX
3
)] (XXX
4
)
Increase In Taxable Income XXX
5

$XXX
1
is calculated using the market price on the exercise date.
$XXX
4
is only availableif the exercise price market priceon the issue date.
Step 4: On Disposition Date
The amount calculated below is included in the employment income in the year of
disposition.
Proceeds of Disposition [(number of shares)*(disposition datemarket price)] $XXX
6

Adjusted Cost Base [(number of shares)*(market price on exercise date)] (XXX
1
)
Capital Gain $XXX
7

Inclusion Rate
Taxable Capital Gain $XXX
8

Please refer to Exercise Three-14 on page 105 of the textbook for more details.
ITA7 (1)(a) Canadian Controlled Private Corporation (CCPC)

8


Market Price Market Value Market Value
Exercise Price Exercise Price Adjusted Cost Base
Step 2: On I ssue Date
There is no tax consequence on issue date.
Step 3: On Exercise Date
There is no tax consequence on the exercise date.
Step 4: On Disposition Date
The amount calculated below is included in the employment income in the year of
disposition.
Fair Market Value of Shares Acquired [(number of shares)*(market price)] $XXX
1

Cost of Shares [(number of shares)*(exercise price)] (XXX
2
)
ITA 7(1)(a) Employment Income Inclusion
= Increase in Net Income for Tax Purposes XXX
3

I TA 110(1)(d) Deduction [(1/2)($XXX
3
)] (XXX
4
)
Increase In Taxable Income XXX
5

$XXX
1
is calculated using the market price on the exercise date.
$XXX
4
is only availableif the exercise price market price on the issue dateor the shares
are held for at least 2 years after their acquisition.
The amount calculated below is included in the taxable capital in the year of disposition.
Proceeds of Disposition [(number of shares)*(disposition datemarket price)] $XXX
6

Adjusted Cost Base [(number of shares)*(market price on exercise date)] (XXX
1
)
Capital Gain $XXX
7

Inclusion Rate
Taxable Capital Gain $XXX
8

Please refer to Exercise Three-15 on page 106 of the textbook for more details.

Chapter 4 and 11 Tax Payable and Tax Credits for
I ndividuals

Calculation of Tax Payable

2011 Income brackets and their marginal rates

Taxable Income Exceeding: Marginal Federal Tax Rate
$0 15%
$41,544 22%
$83,088 26%
$128,800 29%

Example: For an individual with an income of $90,000, his total federal tax would be calculated
as following:

Taxable Income In Excess
Of
Marginal Federal Tax Rate
on the Bracket
Amount of Tax
$41,544 15% $6,231.60
$41,544 22% $9,139.68
$6,912 26% $1,791.12

Hence, the total federal tax payable on the $90,000 would be $17,162.4.
Surtax Additional tax charged on the regular tax payable.
Ontario charges surtax on the portion of Ontario Tax Payable in excess of $5,219.
Ontario charges 56% surtax and Prince Edward Island charges 10% surtax.
An individual has to pay provincial tax on all his income other than business incometo the
province in which he resides on the last day of the taxation year.
A Canadian resident who is not a resident of a particular province will not have to pay any
provincial taxes, but is charged an additional surtax of 48% on federal tax payable.

Example: A Canadian official working at a Canadian embassy abroad.
Please refer to Exercise Four-2 on page 136 of the textbook for more details.


Personal Tax Credits
Tax Credit Base A calculated amount to which the minimum federal tax rate, unless
otherwise specified, is applied to determine a tax credit amount.
Example: A tax credit with a tax credit base of $10,527 will have an amount equal to 1579.05
[0.15*($10,527)].
The tax credits will directly reduce tax payable.
Please refer to page ix to xi of the textbook for a detailed list of the tax credits.


Chapter 5 Capital Cost Allowances and Cumulative
Eligible Capital

Key Terms
Capital Asset An asset that is capable of producing income and is held to generate income.
The same type of asset may be classified as inventory or capital asset
depending on the business.

Capital Cost Allowance (CCA) Equivalent to depreciation expense for tax purposes.
Only capital assets are given Capital Cost Allowance.
CCA calculation is done for each separate class of assets.

Undepreciated Capital Cost (UCC) The balance consists of the total of the original costs of
all the assets ever added to the class less all the CCA
ever deducted from income.

Capital Cost of Asset The acquisition cost of a capital asset.
The capital cost of a property purchased with foreign currency will
be converted to Canadian dollars using the exchange rateon the
date of acquisition.

Additions to Capital Cost
The following adjustments are done to the amount paid for a capital asset to arrive at the
capital cost:
1. ITA 21(1) A taxpayer can chooseto add the interest on the funds borrowed to
acquire the depreciable property to the capital cost of the acquired property.
Note: the corresponding interest would NOT be deductible as expense.
2. ITA 13(7.1) Capital cost of an asset is reduced by amounts received or receivable
from the government.
3. ITA 248 (16) Capital cost of an asset is reduced by amount of refundable
GST/PST/HST.
Available for Use Rule A Property is only eligible for CCA deductions starting at the earliest
of the following times:
The year when the non-building property is first used by the taxpayer for earning
income.
The year when 90% or moreof the building is used for its intended purpose.

The second taxation year after the year of acquisition.
The year in which accounting depreciation is first recorded on the property
(public companies only).
The year when the required certificate or license is obtained for the transport
equipment.
ITR 1102 Land is specifically excluded from depreciable properties.
When a real property is purchased, must proportionate the total cost between the building
component and the land component.
Depreciable assets are assigned to different classes, and CCA is calculated on a class basis.
CCA rate differs based on the class in which an asset belongs.
When a specific type of asset is reclassified into a different CCA class, the change will apply
only to the relevant assets acquired after the specified date.
Please refer to page 216 to 217 of the textbook for a detailed list of the various classes of assets.

Separate Classes
Assets that belong to the same CCA class are usually assigned to the same balance and
depreciated as a group. The following are a few exceptions:
1. Same type of assets owned by different unincorporated businesses cannot be grouped
together into a single class, even when the businesses are owned by the same individual.
2. Rental properties acquired after 1971 at a cost of $50,000 or more must each be given its
own separate CCA class.
3. Passenger vehicles acquired at a cost higher than $30,000 must each be given its own
separate CCA class.
4. Non-residential buildings and assets that quickly becomes technologically outdated are
each allowed to be given its own separate CCA class.
Calculation of Capital Cost Allowance
Declining Balance Class The CCA for the class is determined by applying a specified rate is
to the class end of the period UCC balance.
Straight-line Class The CCA for the class is determined by applying a specified rate to the
total capital cost of the assets in the class.
Rental Property Restrictions The total CCA claimed on rental properties cannot exceed the
amount of net rental income prior to CCA deductions.

Half-Year (First Year) Rule For applicable classes, every year, the CCA calculation is based
on the ending UCC balance after a deduction of of any
excess of additions for acquisitions over deductions for
disposition.
Exception: Property transferred in non-arms length transactions where prior to transfer,
the property was owned for more than at least 1 year.
Certain CCA classes as shown in the Commonly Used CCA Class section.

Short Fiscal Period A taxation year with less than 365 days.

Short Fiscal Period Rule The CCA deduction, after applying the half year ruleif applicable,
will be multiplied by the number of days the business is in
operation and divided by 365.
Exceptions are class 14 assets and CCA deductions against
property income.

Commonly Used CCA Classes
Class 1 Buildings acquired after 1987
4% Declining Balance.
Rental building costs more than $50,000 must be allocated to a separate class 1.
Buildings acquired after March 18, 2007, allocated to its own separate class 1, and
is 90% or more used for manufacturing and processing 10%
declining balance
is 90% or more used for non-residential purposes but not 90% or
more manufacturing 6% declining balance

Class 3 Buildings acquired before 1988
Rental building costs more than $50,000 must be allocated to a separate class 1.

Class 8 Various Machinery, Equipment, and Furniture
Includes machines, equipments, structures, and furniture that are NOT specifically
included in another class.
Individual photocopiers, electronic communications equipments, and software that
belong in this class and have a capital cost of $1,000 or more can be allocated to a
separate Class 8.

Please refer to Exercise Five-12 on page 209 of the textbook for more details.


Class 10 Vehicles
Includes most vehicles except for passenger vehicles with cost in excess of
$30,000.

Class 10.1 Luxury Vehicles
Passenger vehicles with cost in excess of $30,000.
Each vehicle must be allocated to a separate 10.1 class.
The amount of addition is limited to $30,000.
In year of retirement, of the normal CCA ratecan be deducted.
No recapture or terminal losses can be recognized.

Class 12 Computer Software and Small Assets
Class 12 medical or dental instruments and tools costing less than $500, uniforms,
and chinaware are NOT subjected to half-year rule.

Class 13 Leasehold Improvements
Straight-line.
Maximum CCA =

Note: Lease Term = number of full 12 month periods from beginning of
the taxation year in which the improvement is made
until the termination of the lease. Limited to 40 years.

Class 14 Limited Life Intangibles
Straight-line over legal life.
Includes all limited life intangibles except for patents.
For year of acquisition and the year of disposition,
Maximum CCA = CCA * (

)
Half year rule and short fiscal period NOT applicable.

Class 29 and 43 Manufacturing and Processing Assets
Acquired before March 19, 2007 are included in Class 43 30% Declining
Balance.
Acquired on March 19, 2007 and after are included in Class 29 50% Straight-
line, half-year rule is applicable.

Class 44 Patents
25% declining balance rate.
Can choose to put these assets in Class 14.


Class 45, 50, and 52 Computer Hardware and System Software
Please refer to page 199 of the textbook for more information.
Class 52 is exempted from the half-year rule.

Example: In its first year of operations, a business purchased a $60,000 Class 8 asset 30 days
before the end of the taxation year. At the end of the taxation year, this is the only asset in the
Class 8 balance. If the business had operated for 50 days in this taxation year and there is no
other transaction involving Class 8, what is the maximum Capital Cost Allowance on Class 8?

Maximum CCA = [(1/2)(0.2)($60,000)]*(50/365) = $821.91

Half-Year Rule Short Fiscal Period Rule (using days of operation)
Please refer to Exercises Five-2, Five-3, Five-4, Five-5, and Five-6 on page 201 of the
textbook for more details.
If only partial CCA deduction can be claimed due to insufficient related income, the full CCA on
the class with the lowest rates should be taken beforegoing towards the classes with higher CCA
rates.
Disposition of Depreciable Assets
Upon disposition of an asset, the amount to be deducted from the UCC balance is the lesser of:
The capital cost of the individual asset,
The proceeds of disposition for the asset.
Dispositions with Tax Consequences
1. At the end of the taxation year, the CCA class has a negative balance.
Note: For any asset required to be allocated into its own separate class, a negative
balance at any timeduring the taxation year will result in recapture.
Recapture of CCA = Absolute Value of the Negative Amount in the Balance
Recapture will be fully added to income, and the beginning balance for the related CCA
will be set to Nil for the next taxation year.
2. Proceeds of Disposition > Capital Cost of the Asset
TaxableCapital Gain = (
)*(Proceeds of Disposition Capital Cost of the Asset)


Note: The deduction from the CCA balance is the capital cost.
A recapture could also occur alongside the capital gain.

3. At the end of the year, the CCA class has a positive balance but no asset in the class.
Terminal Loss = Amount of the Positive Balance
Note: For employee owned automobiles and aircrafts, terminal loss is $0.
Terminal loss will be fully deductible against any other income, and the CCA balance
will be set to Nil for the beginning of next year.
For CCA classes where the Half-year Rule and Short Fiscal Period Rule applies.
1. Without terminal loss or recapture
Beginning UCC Balance for Current Year $XXX
1

Add: Acquisitions During the Year $XXX
2

Deduct: Dispositions During the Year Lesser of:
Capital Cost - $xxx
Proceeds of Disposition -$xxx (XXX
3
) XXX
4

Deduct: Net Additions (XXX
5
)
Base Amount for CCA Claim XXX
6

Deduct: Current Year CCA (XXX
7
)
Add: Net Additions XXX
8

Beginning UCC Balance for Next Year XXX
9

XXX
4

= $XXX
2

$XXX
3
. Put Nil if the number is negative.
XXX
3
= lesser of capital cost and proceeds of disposition
XXX
5
=
XXX

XXX
7
= CCA rate for the class * XXX
6
* (days of business operation this year/ 365).
2. With Recapture
1

Add: Acquisitions During the Year $XXX
2

Capital Cost - $xxx
3
) XXX
4

Deduct: Net Additions N/A
1

Negative Ending Balance (XXX
8
)
Recapture of CCA XXX
8

Beginning UCC Balance for Next Year Nil

1
There is no net additions to be deducted because when there is a recapture, the net additions
in the year must be negative. The deduction is only done when the net addition is positive.
XXX
8
= the amount of recapture of CCA added to income and the UCC balance.

3. With Terminal Loss
1

Add: Acquisitions During the Year Nil
1

Capital Cost - $xxx
3
) (XXX
3
)
Positive Ending Balance XXX
9

Terminal Loss (XXX
9)

Beginning UCC Balance for Next Year Nil
1
There cannot be additions to the class in the year or else there will still be at least one asset in
the class at the end of the year and a terminal loss cannot be recognized.
(XXX
9
)

= the amount of terminal loss recognized and can be deducted from the balance.
Cumulative Eligible Capital (CEC)
Eligible Capital Expenditure An intangible capital property that doesnt belong to a CCA
class but its cost is not deductible for tax purposes.
For the list of items to be included in CEC and the list of items to be excluded from CEC,
please refer to paragraph 5-79 and 5-80 on page 210 of the textbook.
Cumulative Eligible Capital A class for all the eligible capital expenditure of a business.
Every year, the CEC balance is increased by of all eligible
capital expenditures that year and reduced by of the proceeds
of disposition (i.e. the original cost doesnt matter), to arrive at
the Base Amount for CEC amount.
CEC amount can only be deducted against business income.
ITA 20(1)(b) The maximum CEC amount for a taxation year is calculated by multiplying the
ending CEC balanceby 7%.
The half-year rule does not apply, but the short fiscal period rule applies.


Scenario 1: Positive Balance with No Assets at the end of the Taxation Year
No terminal loss can be claimed for the CEC balance as the 7% CEC amount is applicable for as
long as there is a balance in the class, regardless of whether or not there are any actual assets in
the class.
Scenario 2: Negative Balance at the end of the Taxation Year
Recapture on CEC = total CEC deductions up to date
Capital Gain = Absolute value of the negative balance - Total CEC deductions
TaxableCapital Gain =
* Capital Gain
Please refer to Exercises Five-13 on page 213 of the textbook for further reference.
ITA 14(1.01) For eligible capital expenditures with a determinable cost, other that goodwill, a
choice can be made to deduct only
of the capital cost of the individual

disposition from the CEC balance, and treat the differencebetween the full
proceeds of disposition and the full capital cost as capital gain.
Please refer to Exercises Five-14 on page 214 of the textbook for further reference.


Chapter 6: I ncome or Loss from a Business

Overview and Classification of Business I ncome
ITA 248(1) Business is anything involving an adventure or concern in the nature of trade,
which is indicated by the factors listed below.
1. For frequently repeated activities, if the activities are capable of producing profit.
2. For singletransactions, if any of the following conditions is met:
1. The taxpayers original intention was to sell the asset.
2. The taxpayer uses the asset for same way as a businessperson would
use the asset.
3. The asset can only produce income through sales.
ITA 12(1)(b) Business income is effectively calculated on an accrual basis.
Revenue Generated by Properties
The classification of the revenue generated by a property depends on how the property is used.
1. Used in business and not for sale (ex. a factory for a manufacturing company, a
bookshelf in a bookstore, and a computer in a bank).
While the property is held, business income/loss is generated.
Upon disposition:
The non-depreciable property leads to capital gain/loss.
The depreciable property leads to terminal loss (business loss),
recapture (business income), or a recapture (business income) and
capital gain.
2. Used as inventory for resale.
Upon disposition, business income/loss is generated.
3. A property that requires little effort on the part of the owner to produces income (ex.
stocks and Canada Savings Bonds).
While the property is held, property income/loss is generated.
Upon disposition:
The non-depreciable property leads to capital gain/loss.
The depreciable property leads to terminal loss (business loss),
recapture (business income), or a recapture (business income) and
capital gain.

4. A property acquired by an individual for personal use (ex. personal cell phone)
Upon disposition capital gain is produced (with a few exceptions).
5. A real property that is not used to produce income.
Upon disposition capital gain is produced (with a few exceptions).

Business Income vs. Capital Gain Classification
Income Classification Advantages Disadvantages
Business Income Business losses are fully
deductible against all forms
of income.
Business incomes are fully
taxable.
Can only be carried forward
for next 20 years.
Capital Gain Capital gains are only 50%
taxable.
Allowable capital Losses can
be carried forward forever.
Capital losses are only 50%
deductible.
Allowable capital losses can
only be applied against
taxable capital gains.

Business Related Reserves
Reserves A group of specific items deductible from the income of a particular tax year, but
must be added back to the subsequent years income.
ITA 20(1)(l) Reserve for Doubtful Debts
Reserve for doubtful debts is to take into account the portion of revenue that may be
uncollectible in the future (i.e. bad debt expense).

1. ITA 20(1)(l) A reserve amounting to the anticipated bad debt expense can be
applied as a deduction against the current years business income.
2. ITA 20(1)(p) The actual write-offs incurred in the current year may be deducted
from current income.
3. ITA 20(1)(d) The previous years reserve for doubtful debt must be added to
current years business income.

Add: Previous Year Reserve for Tax Purposes $XXX
Deduct:
Current Year Actual Write-Offs ($XXX)
Current Year Reserve for Tax Purposes (XXX) (XXX)
Current Year Net Deduction For Tax Purposes (XXX)

Please refer to Exercise Six-3 on page 238 for more details.
ITA 20(1)(m) Reserve for Undelivered Goods and Services
1. Prepayments for future goods or service to be delivered are included in the current years
business income.
2. A reserve for undelivered goods and services is given as deduction against the current
years business income for the portion of the goods and services that have not yet been
delivered in the current year.
3. Previous years reserve for undelivered goods and services must be added back to the
current years business income.

Example: During the taxation year 2011, Cheerful Renovations has received $100,000 in cash,
out of which, $30,000 are for services to be delivered in 2012. What is the amount of
the I TA 20(1)(m) reserve deductible in 2011?
A $30,000 reserve can be deducted against her 2011 business income, but must be
added to her 2012 business income.
ITA 20(1)(n) Reserve for Unpaid Amounts
Reserve for unpaid amount is used to delay the recognition of revenues that are already earned
but are to be received over a long time.
Conditions
With the exception of real property, at least some part of the proceeds will NOT
be received until 2 years or more after the date of sale.
The purchaser is neither a corporation controlled by the seller nor a partnership
in which the seller has a majority interest.
Constrain
No reserve can be deducted in the current year for sales that took place more
than 36 months (i.e. 3 years) before the end of the current year.
Example: On October 5, 2010, PD Corporation sold a porcelain artifact to Allen for $500,000.
The buyer will pay the full $500,000 of proceeds in five $100,000 annual installments starting on
November 30, 2010.The cost of the vase to PD Corporation was $300,000.
The gross profit from the sale will be $200,000.

The profit is distributed in the same proportion as the the revenue.
As some of the proceeds will be received after October 2012 (two years from the
sales date), the reserve is allowed.
The reserve for the each year equals the percentage of the profit that has not been
received by the end of the year.
2010 Reserve = (0.80)*($200,000) = $160,000
2011 Reserve = (0.60)*($200,000) = $120,000
2012 Reserve = (0.40)*($200,000) = $80,000
2013 Reserve = Nil because the end of 2013 is after October 5, 2013, which is
exactly 36 months after the date of sale.
Income from 2010 sale for 2011 can be calculated as shown below.
Add: 2010 Reserve for Tax Purposes $160,000
Deduct:
2011 Reserve for Unpaid Amount (120,000)
Current Year Income From Sale 40,000

Add: 2012 Reserve for Tax Purposes $80,000
Deduct:
2013 Reserve for Unpaid Amount Nil
Current Year Income From Sale 80,000

Add: 2013 Reserve for Tax Purposes Nil
Deduct:
2014 Reserve for Unpaid Amount Nil
Current Year Income From Sale Nil



Chapter 7 I ncome from Property

Definition of I ncome from Property
Property Income A return that is earned by simply owning a property, and requires little or
no effort on the part of the owner in the earning process.
ITA 9(3) Capital gains are NOT included in property income.
A deduction equal to the amount of foreign taxes on property income in excess of 15% is
available to individuals.
I nterest Deductions
ITA 20(1)(c) Only interests related to the generation of property or business income are
deductible against the relevant income.
Direct Use Rule The deductibility of interest depends on the direct useof the related capital.
Example: A businessperson takes $100,000 cash out of his business to purchase a
personal residence. Then, he immediately fills in the cash shortfall in his business by
borrowing $100,000 from the bank at 5% per year.
The economic reality of the loan is to help purchase the businesspersons personal
residence. However, since the interest is legally attributed to the bank loan that is
directly used to invest in the business, the 5% interest is fully deductible against
business income.
Exceptions to Direct Use Rule (please refer to paragraph 7-23 on page 292)
1. Filling the Hole
2. Interest-Free Loans
Current Use Rule The interest on a loan is deductible for as long as the loan is for property
or business income producing purposes.
Exceptions to Current Use Rule:
1. Disappearing Source Rule If the loan is invested in a business or
property income producing property that is sold for less than the debt,
then the interest on the debt will continue to be deductible.
ITA 20(1)(c) The amount of imputed interest included in an individuals employment income as
a result of an employer-provided loan is deductibleagainst the business or property income
generated by the usage of the loan.

I nterest I ncome
ITA 12(4) For individuals, interest is accrued on each anniversary dateof an investment
contract (debt securities).
The anniversary date is based on the calendar date that is immediately before the date of issue,
and repeats every year starting in the year immediately after the year of issue and ending on the
year of maturity.
Example: For a 3 year debt issued on January 31, 2011, the anniversary dates will be January 30,
2012, January 30, 2013, and January 30, 2014.
1. At each anniversary date, the individual recognizes interest income equal to:
Total interest accrued since issuance Total interest previously included in income
2. At each payment date, the individual recognizes interest income equal to:

Total interest received to date Total interest accrued up to most recent anniversary date

3. For each taxation year, interest incometo be included equal to:
Amount recognized on anniversary date+ amount recognized on payment date
Please refer to Exercise Seven-3 on page 298 as an example.
Rental I ncome
Rental revenues are included in income on an accrual basis.
Expenses related to the earning of the rents are all deductible against the rental revenues.
Example: Utilities, maintenance, agent fees, property taxes, and related insurances.
Capital Cost Allowance on rental property can also be deducted on the building component of
the real property.
Special Rules regarding CCA on rental properties
1. No pro rata adjustments required for a short fiscal period for individuals.
2. Each rental property acquired after 1971 at a cost of $50,000 or higher must be put
in its own separate CCA class.
3. The total amount of CCA plus terminal loss claimed on all rental properties each year
cannot exceed the total rental income (including recapture) from all the rental
properties before CCA deductions.

Note: When claiming less than the maximum allowable CCA, the classes
with the lowest rates should be deducted first.
The Rental Income can be calculated with the following method:
Gross Rents $xxx
Recapture of CCA on Rental Properties xxx
Terminal Loss of CCA on Rental Properties (xxx)
Rental Expenses other than CCA (xxx)
Rental Income before CCA $xxx
CCA (xxx)
Net Rental Income $xxx

Please refer to paragraph 7-66 and 7-67 for the various CCA classes relevant to rental income.
Dividend I ncome
Dividend incomes received by individuals are paid out of the after-tax income of corporations.
Eligible Dividends Dividends from corporations that are taxed at a combined tax rate
between 27 and 33 percent.
Dividends from publicly traded companies often qualify.

Non-eligible Dividends Dividends received that arent eligible dividends.

Tax Treatment of Dividends
1. Both eligible and non-eligible dividends must be grossed up by a specified percentage
to reflect the amount of pre-tax corporate income required to produce the after-tax
dividends paid.
2. The grossed up amount of dividends will be added to the recipients property income.
3. Both a federal dividend tax credit (non-refundable) and a provincial dividend tax credit
will be provided for the recipient to reduce his or her tax payable.
Calculation for Total Tax Payable on Dividends Received
The Variables
X is the amount of dividends received.
Y is the combined federal and provincial tax rate in %.
Z is the % of the Gross UP given as provincial dividend tax credit.
T is the increase in total tax payable due to the dividends received.

Non-EligibleDividends Received $X
Add: Gross UP At 25% 0.25*X
Taxable Dividends 1.25*X
Combined Federal/Provincial Tax Rate Y%
Tax Before Dividend Tax Credit 0.0Y*1.25*X
Less: Federal Dividend Tax Credit 2/3*Gross UP
Provincial Dividend Tax Credit 0.0Z*Gross UP
Total Tax Payable $T


EligibleDividends Received $X
Add: Gross UP At 41% 0.41*X
Taxable Dividends 1.41*X
Combined Federal/Provincial Tax Rate Y%
Tax Before Dividend Tax Credit 0.0Y*1.41*X
Less: Federal Dividend Tax Credit 13/23*Gross UP
Provincial Dividend Tax Credit 0.0Z *Gross UP
Total Tax Payable $T



Chapter 8 Capital Gains and Capital Losses

Key Definitions
Capital Asset An asset used to generate income and not is intended for sale.
Capital Gains/Losses Gains or losses resulting from the disposition of capital assets.
ITA 39(4) A taxpayer can choose to have all its Canadian securities treated as capital asset.
Once chosen, all future gains or losses on the dispositions of Canadian
securities by the taxpayer will be treated as capital gain or loss.
Not available to non-residents and taxable entities that engages in the business
of money lending and securities trading.
ITA 54 and ITA 13(21) Proceeds of Disposition
The price at which a property is sold.
Compensation (ex. proceeds from insurances) for property damage or loss.
ITA 69 For non-arms length transfers, the proceeds of disposition for tax purposes is the
higher of the actual proceeds and the fair market value of the relevant assets.
Determining the Adjusted Cost Base

ITA 54 The adjusted cost base (ACB) of an asset is:
The capital cost of the asset, if the asset is a depreciable property of the
taxpayer.
The cost, with a few adjustments specified in ITA 53, of the property to
the taxpayer, if the asset is not a depreciable property.
ITA 53 Adjustments to the cost required to arrive at ACB
1. Government Grants and Assistance provided must be deducted from the cost.
2. Superficial Losses

30 days before 30 days after

Date of Disposition

If a taxpayer or his spouse/common-law partner obtains a property within 30
days before or after the disposition date of an identical property by one of the
two taxpayers, any loss on the disposition date will not be deductible, and will
be added to the cost the newly obtained identical property.
3. Property taxes paid for vacant land and any interest related to the vacant land
are added to the cost.
4. Refundable GST/HST/PST amounts are deducted from the cost.
ITA 42 The full amount of the proceeds of disposition must be recognized regardless of whether
or not the proceeds include payment for a warranty on the asset sold. However, subsequent costs
associated with the warranty obligation are treated as capital losses in the year when they occur.
Please refer to Exercises Eight-1, Eight-2, and Eight-4 on pages 339 and 342 of the textbook
for more details.
ITA 40(3) At any point in a taxation year, if the adjusted cost base of an asset becomes negative,
then the amount of the negative balance will be treated as a capital gain for the taxation year and
the adjusted cost base immediately will be adjusted to Nil.
Exception: partnership interests where the taxpayer is NOT a limited partner or
inactive partner.
Calculating the Capital Cain or Loss
Capital Gain/Loss = Proceeds of Disposition Adjusted Cost Base Expenses of Disposition
Taxable capital gain = Inclusion rate * Capital Gain
Allowable capital loss = Inclusion rate * Capital Loss
Note: Allowable capital loss can only be deducted again Taxable Capital Gain.
The inclusion rate used depends on the period when the capital gain/loss occurred.
Period Inclusion Rate
1972 through 1987 1/2
1988 and 1989 2/3
1990 through February 27, 2000 3/4
February 28, 2000 through October 17, 2000 2/3
October 18, 2000 to Present 1/2
The chart is taken from page 336 of Byrd and Chens Canadian Tax Principles.


Proceeds of Disposition $XXX
1

Less The Aggregate of:
Adjusted Cost Base ($XXX
2
)
Expense of Disposition (XXX
3
) (XXX
4
)
Capital Gain (Loss) $XXX
5

Inclusion Rate
1
1/2
(Allowable) Taxable Capital Gain (Loss) $XXX
6

If $XXX
5
is negative, then $XXX
6
will be negative too, leading to an allowable capital
loss, which can only be deducted against taxable capital gain.
1
For dates before October 18, 2000, refer to the inclusion rate list for the appropriate rate.
I dentical Properties
ITA 47 For a group of identical properties owned by the same taxpayer, the adjusted cost base
for the assets being disposed of is the average cost of the entire group at the date of sale
Example: The following is a list of the transactions carried out by a taxpayer involving his
common shares of Evergreen Incorporated, a Canadian public company.
Date Number of Shares
Purchased (Sold)
Cost (Proceeds) Per
Share
Total Cost
(Proceeds)
Jan. 1995 2000 $8 $16,000
Feb. 1998 4000 16 64,000
May 2000 (1000) (10) (10,000)
Nov. 2002 6000 10 60,000
Apr. 2011 (2000) (15) (30,000)

For the May 2000 Disposition:
Per unit adjusted cost base =

Proceeds of Disposition [(1,000)*($10)] $10,000
Adjusted Cost Base [(1,000)*($13.33)] (13,330)
Capital Loss (3,330)
May 2000 Inclusion Rate 2/3
Allowable Capital Loss ($2220)

For the April 2011 Disposition:
Per unit ACB =

Proceeds of Disposition [(2,000)*($15)] $30,000
Adjusted Cost Base [(2,000)*($11.52)] (23,040)
Capital Gain 6,960
Current Inclusion Rate 1/2
Taxable Capital Gain $3,480

The disposition of a part of a property would require a proportionate allocation of the adjusted
cost base of the whole property as the adjusted cost base for the partial disposition.
Please refer to Exercises Eight-1 and Eight-2 on page 339 of the textbook for more details.
Capital Gain Reserve
When a portion of the proceeds from the sale of a capital asset is not receivable in the current
year, a reserve can be deducted from the total gain.
ITA 40(1)(a)(iii) Reserve (i.e. Capital Gains Reserve)
The current years capital gain reservewill be deducted from the current years total
capital gain (not taxable capital gain), and added to subsequent years total capital gain.
Note that any interests charged by the seller on the unpaid portion of the proceeds are NOT
included in the reserve calculations.
Capital Gain Reserve = Lesser of A and B
A = [Total Gain]*[

B = [20% of Total Gain]*[
Where X = number of taxation year ends since disposition excluding the
current taxation year end.
Example: Mr. Smith sold a property with an adjusted cost base of $260,000 for total proceeds of
$1,000,000 in 2011. The total proceeds are paid in 6 separate installments of
$300,000 in 2011, $100,000 in 2012, $400,000 in 2013, $100,000 in 2014, $50,000
in 2015, and $50,000 in 2016. Determine the Taxable Capital Gain to be included in
income for each of the 6 years because of the 2011 sale.
Step 1: The total capital gain = $1,000,000 - $260,000 = $740,000
Step 2: Taxable Capital Gain for each of the 6 years.
Total Capital Gain $740,000
Deduct: Capital Gain Reserve for 2011
Lesser of

[$740,000*(700,000/1,000,000)] ($518,000)
[$740,000*(0.2)*(4-0)] (592,000) (518,000)
Amount to be Included in 2011 Capital Gain 222,000
Inclusion Rate 1/2
Taxable Capital Gain to be included for 2011 $111,000

Add: Capital Gain Reserve for 2011 518,000
Lesser of

[$740,000*(600,000/1,000,000)] ($444,000)
[(0.2)*($740,000)*(4-1)] (444,000) (444,000)
Amount to be included in 2012 Capital Gain $74,000
Inclusion Rate
Taxable Capital Gain to be included in 2012 $37,000

Lesser of

[$740,000*(200,000/1,000,000)] ($148,000)
[(0.2)*($740,000)*(4-2)] (296,000) (148,000)
Inclusion Rate

Lesser of

[$740,000*(100,000/1,000,000)] ($74,000)
[(0.2)*($740,000)*(4-3)] (148,000) (74,000)
Inclusion Rate

Lesser of

[$740,000*($50,000/1,000,000)] ($37,000)
[(0.2)*($740,000)*(4-4)] (0) (0)
Inclusion Rate

Add: Capital Gain Reserve for 2014 $0
Lesser of

[$740,000*(0/1,000,000)] ($0)

[0] (0) ($0)
Amount to be included in 2015 Capital Gain $0
Inclusion Rate
Taxable Capital Gain to be included in 2015 $0

Please refer to Exercises Eight-1 and Eight-2 on page 339 of the textbook for more details.
Bad Debts on Sales of Capital Property
If an amount receivable resulting from the disposition of a capital property turns out to be
uncollectible, the amount uncollectible can be recognized as a capital loss in the year when it
becomes uncollectible.
If subsequently, some of the bad debt is recovered, the recovered amount would be considered a
capital gain in the year of recovery.
Note: allowable capital loss arising from bad debt can only be deducted against any taxable
capital gain in the year when the bad debt is recognized.
Example: Mr. Elgin sold a capital property with an adjusted cost base of $125,000 for $300,000
in 2010. The proceeds consist of $160,000 of cash and a note payable for $140,000 due in 2012.
In 2012, the purchaser defaulted on the note payable. In 2013, Mr. Elgin recovered $40,000 of
the note payable. What is the affect on the taxable income of 2010, 2011, and 2012 respectively?
In 2010, Taxable Capital Gain =
*($300,000-$125,000) = $87,500.
In 2011, there is no tax consequence.
In 2012, Allowable Capital Loss =
*($140,000) = $70,000.
In 2013, Taxable Capital Gain =
*($40,000) = $20,000.
Please refer to Exercise Eight-6 on page 345 of the textbook for more details.
Special Rule for Sales of Real Property
The special rule applies when the proceeds of disposition for a building sold as a part of a real
property is less than the UCC for the buildings class, given that the building is the last asset in
its class.
Only applies to the seller, not the purchaser.


ITA 13(21.1)(a) Special Rule
Step 1: Calculate the Two Amounts
The Fair Market Value of the land and building $XXX
1
The lesser of:
The Adjusted Cost Base of the Land $XXX
2

The Fair Market Value of the Land XXX
3
($XXX
4
)
Amount ($XXX
5
)

The Greater of:
The Fair Market Value of the Building $YYY
1

The lesser of:
The Cost of the Building $YYY
2

The UCC of the Building YYY
3
$YYY
4

Amount ($YYY
5
)

$XXX
4
is the lesser of $XXX
2
and $XXX
3.

$XXX
5
= $XXX
1
- $XXX
4
.
$YYY
4
is the lesser of $YYY
2
and $YYY
3.
$YYY
5
is the greater of $YYY
1
and $YYY
4
.
Step 2 Allocate the Total Proceeds
The proceeds for the building would be the lower of $YYY
5
and $XXX
5
.
The remainder of the proceeds will be allocated to the land portion of the real estate.
Please refer to Exercise Eight-7 on page 346 of the textbook for more details.


Chapter 9 Capital Gains and Capital Losses

Key Definitions
Subdivision d Inclusions that do not belong to any of the four income categories.
Subdivision e Deductions that do not belong to any of the four income categories
Many, but not all, of the items in the two subdivisions are related
Other I ncome Subdivision d I nclusions
Examples: Pension amount received from Registered Pension Plans (RPP), Canada Pension Plan
(CPP), the Old Age Security ACT (OAS), and similar provincial pension plans.
Retiring Allowances
ITA 56(1)(a)(ii) Retiring allowances are amounts received by the taxpayer, including potential
damages awarded by court, upon or after the retirement from a employment.
1. Regarding the loss of an office or employment of a taxpayer, including the
amount of damages awarded by the judgement of a competent tribunal.
The total amount of the retiring allowance must be included in income.
The amount of retiring allowance that is awarded for to pre-1996 services and is transferred to a
RPP or a Registered Retirement Savings Plan (RRSP) within 60 days of the year end of the
reception is deductible against the total retiring allowance inclusion.
Deferred Income Plans
Deferred I ncome Plans Plans that require the taxpayer to contribute in the current period and
receive certain benefits in the future.
Examples: Registered Retirement Income Funds (RRIFs) and RRSPs.
Payments from these deferred income plans are all subdivision d incomes that do not fall into
any of the other income categories.
The following amount must be included in subdivision d income.
1. Actual amounts removed from a RRSP
2. A specified amount when a scheduled RRSP repayment is missed.
3. Actual amounts removed from a DPSP.

4. The minimum withdrawal amount from RRI Fs must be included in income
regardless of whether the withdrawal actually took place.
5. The amount of withdrawal from RRI Fs beyond the minimumwithdrawal amount.
Scholarships, bursaries, grants, and prizes are 100% exempt from income inclusion given that
they are received in relation to an elementary, secondary or post-secondary education that
qualifies for the education tax credit.
Research Grant to be I ncluded = Grant amount Unreimbursed Research Related Expenses
Universal Child Care Benefits (UCCB)
A family receives $100 per month for each child under the age of 6.
The amount received under UCCB are not ignored for the purpose of calculating income tested
benefits, Old Age Security amount, Employment Insurance amounts, and child care expense.
Two Parents Family
For couples, one of the two taxpayers must meet all the conditions listed below.
1. The individual lives with the child.
2. The individual is the primary caretaker of the child.
3. The individual is a Canadian resident.
The spouse with the lower Income for Tax Purposes must add the amount received to income.
Single Parent Family
For single parent, the taxpayer must meet all the conditions listed above.
The amount received can be included in the income of any one of the individual listed below.
1. The single parent.
2. A dependant for whom the parent could claimthe eligible dependant tax credit.
3. The child for whom the amount is received.
Other Deductions Subdivision e Deductions
Moving Expense
ITA 62(1) Moving expenses related to an eligible relocation can be deducted by the taxpayer.
Relocation is considered eligible when all of thefollowing conditions are met.
1. The new location must be:
Around the taxpayers new workplace,

Around where the employee will be carrying out business, or
Around where the taxpayer will be attending a post-secondary institution.
2. The old location must be:
Around where the taxpayer used to work,
Where the employee lived while unemployed, or
Around where the individual was attending a post-secondary institution.
3. Both the old and new location of the residence must be in Canada.
4. The new residence must be at least 40 kilometers closer to the new work location
than the old residence.
Note: The distance is measured using the routes that would normally be
traveled by an individual rather than the shortest distance between two
routes.
The actual moving expenses are deductible against income received in the new work location in
any year after the move.
Reimbursements paid by the employer to fully or partially cover the expense of the move will
reduce the deductible moving expense.
Allowances paid by employer to cover the move will NOT affect the deductible moving expense,
but must be included in the income of the employee.
ITA 62(3) Deductible moving expenses for eligible relocations include all the costs listed on
paragraph 9-41 of page 407 of the textbook.
If an employer reimburses an employee for a loss on the sale of the old residence, the resultant
taxable benefit will only be * (reimbursement - $15,000).
I ncome Attribution
ITA 74.1(1) and (2) Income Attribution Rule
Income earned by properties that have been transferred (through a sale or as a gift) or
loaned may be added back to the income of the transferrer of the property, provided that
the transferee is a spouse, a common-law partner, a non-arms length individual who is
under the age of 18, or nieces and nephews that are under the age of 18.
Applicability of Attribution Rule by Type of Income
Business Income No amount is taxable to transferrer.

Property I ncome Relevant amounts earned by spouse and related minors are taxable
to the transferrer.
Capital Gains Relevant amounts earned by spouse (with exceptions) are taxable to the
transferrer.
I ncome Subject to Tax on Split Income No amount is taxable to transferrer.
Exceptions to the Attribution Rule
1. Transfer through sale
The spousepaid the fair market valuefor the property and any resulting gain or
loss is included in income at the time of transfer.
The minor gave consideration equal to the fair market of the valueof the assets
transferred.
2. Transfer through loan
The spousepaid interest that is equal to at least the prescribed interest rate.


Chapter 10 Retirement Savings and Other Special
I ncome Arrangements

Registered Retirement Savings Plans (RRSP)
ITA 146 An RRSP is a trust with an individual as the beneficiary and a financial institution (see
the list below) acting as the administrator.
Up to a limited amount of contributions to the plan is deductible.
The income earned by the plan is not taxable, but withdrawals from the plan are fully included as
income in the year of withdrawal.
Types of Registered Retirement Savings Plans
1. Managed RRSP Investment decisions made by administering financial institution.
2. Self-Administered RRSP Investment decisions made by the taxpayer.
An individual can own multiple separate RRSPs.
Interest paid on funds borrowed to finance RRSP contributions is not deductible.
Registered Retirement Savings Plans Deduction Limit
RRSP Deduction Limit The maximumdeductible RRSP contribution in a given year.
Note: The RRSP Deduction Limit does NOT limit the amount of yearly contribution.
Unused RRSP Deduction Room The sum of the RRSP Deduction Limits from all the years
prior to the current year less the sum of all the RRSP
deductions ever claimed prior to this year.
RRSP Dollar Amount Changes every year, and is $22,450 for the year 2011.
Earned I ncome Please refer to page 463 of the textbook for the list of inclusions and
deductions used to determine earned income as specified by ITA 146(1).
Pension Adjustments RPP benefits earned by the employee and RPP and DPSP contributions
made by or on the employees behalf.


Past Service Pension Adjustments The total amount of additional pension adjustment that
would have been included had the changein the defined
benefit plan been in effect since the start.
Please refer to paragraph 10-66 on page 467 of the
textbook.
Pension Adjustment Reversals (PARS) The amount of previously recognized PAs that
corresponds to pension plan benefits lost due to
leaving the job before the benefits are vested.
ITA 146(1) Calculating the RRSP Deduction Limit
RRSP Deduction Limit =A +B +R C
A is the unused RRSP deduction roomat the end of the previous taxation year.
B = G E, where
B cannot be zero,
G = lesser of:
0.18 * earned income for the previous taxation year
RRSP dollar limit for the current year,
E = Previous taxation years PAs for the + Current years prescribed amount
C is the taxpayers current years net past service pension adjustment.
R is the taxpayers current years pension adjustment reversal.
Please refer to Exercise Ten-7 on page 469 of the textbook for more details.

Reference
Byrd, C., and I. Chen. Byrd & Chens Canadian Tax Principles. Toronto: Pearson Prentice Hall
Publishing.

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