Professional Documents
Culture Documents
Chapter 7
Interest As A Deduction
Concepts
All Deductible
None Deductible
Canadian Approach
What Is Interest?
Interest As A Deduction
Non-Deductible Amounts
On RRSP or TFSA Loans
On Personal Property Loans
On Late Income Tax Payments
An investment financed with debt is sold for proceeds that are less
than the debt
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Economics
Discount is an addition to interest cost (pay back more than
what you received)
Premium is a reduction in interest cost (pay back less than
what you received)
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Discount Issuer
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Premium - Issuer
Money lenders
Premium taken into income immediately
Other taxpayers
Premium is a non-taxable receipt
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$101,000
Cash
Bond Investment
Revenue
$100,000
1,000
$ 1,000
100,000
$101,000
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At Maturity
Investor: The extra $20,000 received is a capital gain (taxable amount
equals $10,000).
Issuer: The extra $20,000 paid is a deduction.
ITA 20(1)(f) - Fully deductible if:
- Issue price not less than 97% of face value, and
- Effective yield does not exceed 4/3 of stated yield.
Otherwise: An allowable capital loss (1/2 deductible)
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Interest As An Inclusion
Corporations
ITA 12(3) Requires Full Accrual
Generally The Same As GAAP
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Interest As An Inclusion
Individuals
ITA 12(1)(c) Allows Use Of Cash Basis, Receivable Basis, Or
Full Accrual
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Example
Example: Purchase debt obligation for $1,000. At maturity after
five years it pays $1,762 (effective yield = 12 Percent).
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Payments Based On
Production Or Use
Rents
Royalties
Can Be Earned Income For RRSP Purposes Only If Writer,
Composer, Inventor, etc.
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Rental Income
General Rules
Rents Included On An Accrual Basis
Deductions
Interest
Property Taxes
Maintenance
Management Fees
CCA (Restricted)
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$14,400
($3,000)
( 8,100)
( 1,800) ( 12,900)
$ 1,500
( 2,400)
Nil
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Special Rules
Separate Class For Each Rental Property With A Cost Greater
Than $50,000
CCA Cannot Be Used To Increase Or Create A Rental Loss
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Individual With
Income Source
Corporation
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Non-Eligible Dividends
25 percent gross up
Federal credit equals 2/3 of gross up
Same as 13-1/3 percent of taxable dividends
Same as 16-2/3 percent of dividends received
Provincial credits = 5% to 40% of gross up
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Eligible Dividends
2011
Gross up = 41 percent of dividends received
Federal credit = 13/23 of gross up
2012 and subsequent
Gross up = 38 percent of dividends received
Federal credit = 6/11 of gross up
Provincial credits = 23% to 44% of gross up
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$10,000
Taxes At 20 Percent
( 2,000)
$ 8,000
Dividends Paid
Gross Up (25%)
$ 8,000
2,000
Taxable Dividends
$10,000
$ 4,500
( 2,000)
$ 2,500
$ 5,500
$ 5,500
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$10,000
( 2,754)
$ 7,246
Dividends Paid
Gross Up (38%)
$ 7,246
2,754
Taxable Dividends
$10,000
$ 4,500
( 2,754)
$ 1,746
$ 5,500
$ 5,500
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Investment Returns
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Income Trusts
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Income Trusts
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Income Trusts
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Stock Dividends
Treated exactly like cash dividends for tax purposes
Treatment discourages use by public companies
Amount of dividend added to adjusted cost base of shares
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Capital Dividends
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Non-Business Income
Include 100 percent in net income
Will receive a credit against tax payable for amounts withheld
Credit maximum is 15 percent for individuals
Excess a deduction
No carry over
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Business Income
Include 100 Percent In Net Income
Will Receive Credit Against Canadian Tax Payable For
Foreign Taxes Withheld (No Limit)
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