Question
Introduction of Chapter 7 CHAPTER 7 - Income from Property Income from property is derived as return of an invested capital, the following are included
Introduction of Chapter 7
CHAPTER 7 - Income from Property
Income from property is derived as return of an invested capital, the following are included in this category: rents, interest, dividends, and royalties earned from the right to use property. Please note that income from a property does not include any capital gains, the next chapter deals with capital gains and losses.
Categories of Income from Property and its Basic Concept
INTEREST INCOME (pages 301-310)
Paragraph (c) of this ITA 12(1) provided that income from interests is included in business and property income. It stated as follows: "Interest ... any amount received or receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing the taxpayers income) as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayers income for a preceding taxation year."
On the other hand, Oxford dictionarys basic description of interest is money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt. Basically, interest expense can also be deducted from ones personal income when the money being lent is also a money borrowed from someone or from other sources.
Interest deductibility are summarized in your reference book pages 302-303, it states the following:
In order to be considered interest for tax purposes, IT Folio S3-F6-C1 indicates that the amount has to satisfy three criteria:
It must be calculated on a day-to-day accrual basis.
It must be calculated on a principal sum or the right to a principal sum.
It must be compensation for the use of the principal sum or the right to the principal sum.
ROYALTIES (page 311) - any amount received by the taxpayer in the year that was dependent on the use of or production from property, example of which is an amount received by individual from the oil and gas production in ones property by the oil and gas company or joint venturer.
RENTAL INCOME (pages 311-314) payment made to the landlord for the use of property or land.
With respect to the recognition methods to be used for rental income, the CRAs Guide, Rental Income (T4036) provides the following guidance:
In most cases, an individual calculates his rental income using the accrual method. With this method, he:
include rents in income for the year in which they are due, whether or not you receive them in that year; and
deduct your expenses in the year you incur them, no matter when you pay them.
Allowable rental expenses against rental income include the following: utilities (such as heat, electricity, and water), repairs, maintenance, interest, insurance, property taxes, management fees, fees to rental agents for locating tenants. and capital cost allowance (CCA). However, the amount of deductible CCA is limited to net rental income before the CCA amount.
Do Exercise Seven-5.
DIVIDENDS from taxable Canadian Corporations (pages 315-322) - a sum of money paid by a company to its shareholders out of companys profits or its reserves.
The dividend received by individual from a corporation are grossed up, meaning it is increased by the amount of corporate taxes paid by the corporation before distributing those dividends. The individual taxpayer, however, is eligible to claim the dividend tax credit (taxes paid by the corporation) as credits to taxpayer's personal tax.
Read the Example of Eligible Dividends on page 319.
Income derived from a mutual funds such as dividends, Canadian interest income, capital gains foreign income and capital distribution (pages 327-329). Mutual funds are organized to provide this investment income to an individual by direct investments in stocks, bonds and other types of investment property.
Foreign source income (pages 330-331) these are income derived from an investment in foreign sources. In general, Canadian residents are required to report 100% of these income from foreign sources however, foreign taxes paid on the foreign income are also being reported as taxes paid.
Shareholder benefits (page 332) these incomes are payments made to shareholder of the company the is directly related to the investment in the corporation, as such should be reported as an income to the shareholder, example of which are personal use of company vehicle, repairs or major improvement in shareholders personal residence and interest free loan to shareholder.
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