1996-12-20
T4002(E) Rev. 96 (VERIFIED AND PAGED)
BUSINESS AND PROFESSIONAL INCOME
PAGE 2
BEFORE YOU START
IS THIS GUIDE FOR YOU?
Use this guide if you are a self-employed businessperson (which
includes a self-employed commission salesperson) or a professional. It
will help you calculate the business or professional income you will
report on your 1996 income tax return. Forms and publications
In the middle of this guide you will find two copies of Form T2124,
Statement of Business Activities, and Form T2032, Statement of
Professional Activities. The forms are provided to help you calculate
your income and expenses for income tax purposes. We encourage you to
use these forms. However, you do not have to use them since we will
continue to accept other types of financial statements.
You have to complete a separate form for each business or professional
activity you operate. Interpretation Bulletin IT-206, Separate
Businesses, has more details.
Throughout the guide, we also refer to other forms and publications. If
you need more copies of Form T2124, Form T2032, or any other forms or
publications, contact your tax services office. If you have access,
many of our publications are available at our address
http//www.rc.gc.ca/ on the Internet.
This guide uses plain language to explain the most common tax
situations. For most tax matters, please contact the General Enquiries
Section of your Revenue Canada tax services office. If, after reading
this guide, you need more information about businesses or professional
activities, please contact the Business Enquiries Section of your tax
services office. You can find the address and telephone numbers listed
under "Revenue Canada" in the Government of Canada section of the
telephone book.
New Terminology
Human Resources Development Canada is implementing legislative changes
to the Unemployment Insurance program. As a result "Unemployment
Insurance" (UI) is now called "Employment Insurance" (EI).
Blind or visually-impaired persons can get this publication in braille
and large print, and on audio cassette and computer diskette. To order,
please call 1-800-267-1267 weekdays between 8:15 a.m. and
5:00 p.m. (Eastern Time).
La version française de cette publication est intitulée Revenus
d'entreprise ou de profession libérale.
PAGE 3
TABLE OF CONTENTS
Page
CHAPTER 1 - GENERAL INFORMATION. . . . . . . . . . . . . . . . .4
Business and business income . . . . . . . . . . . . . . . . . .4
How do you report your business income?. . . . . . . . . . . . .4
Business records . . . . . . . . . . . . . . . . . . . . . . . .4
Instalment payments. . . . . . . . . . . . . . . . . . . . . . .6
Dates to remember. . . . . . . . . . . . . . . . . . . . . . . .7
What is a partnership? . . . . . . . . . . . . . . . . . . . . .7
Partnerships that have to file a partnership
information return . . . . . . . . . . . . . . . . . . .8
Partnerships that do not have to file a
partnership information return. . . . . . . . . . . . . .8
CHAPTER 2 -INCOME FROM BUSINESS OR PROFESSIONAL ACTIVITIES . . .9
Sole proprietorships . . . . . . . . . . . . . . . . . . . . . .9
Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . .9
Identification area on Forms T2032 and T2124 . . . . . . . . . .9
Do you have a tax shelter? . . . . . . . . . . . . . . . . . . .9
Form T2124, Statement of Business Activities . . . . . . . . . 10
Form T2032, Statement of Professional Activities . . . . . . . 12
CHAPTER 3 - EXPENSES . . . . . . . . . . . . . . . . . . . . . 13
CHAPTER 4 - CAPITAL COST ALLOWANCE (CCA) . . . . . . . . . . . 23
What is capital cost allowance?. . . . . . . . . . . . . . . . 23
How much CCA can you claim?. . . . . . . . . . . . . . . . . . 23
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 23
How do you make your claim?. . . . . . . . . . . . . . . . . . .
Column 1 - Class number. . . . . . . . . . . . . . . . . . 24
Column 2 - Undepreciated capital cost (UCC)
at the start of the year. . . . . . . . . . . . 25
Column 3 - Cost of additions in the year . . . . . . . . . 25
Column 4 - Proceeds of dispositions in the year. . . . . . 26
Column 5 - UCC after additions and dispositions. . . . . . 26
Column 6- Adjustment for current year additions. . . . . . 27
Column 7 - Base amount for capital cost allowance (CCA). . 27
Column 8 - Rate (%) . . . . . . . . . . . . . . . . . . . 27
Column 9 - CCA for the year. . . . . . . . . . . . . . . . 27
Column 10 - UCC at the end of the year . . . . . . . . . . 27
Classes of depreciable property. . . . . . . . . . . . . . . . 27
Special situations . . . . . . . . . . . . . . . . . . . . . . 29
CCA Classes. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Summary of Chapters 2 to 4 - Completed Form T2124. . . . . . . 36
CHAPTER 5 - ELIGIBLE CAPITAL EXPENDITURES. . . . . . . . . . . 38
What is an eligible capital expenditure? . . . . . . . . . . . 38
What is an annual allowance? . . . . . . . . . . . . . . . . . 38
What is a cumulative eligible capital (CEC) account? . . . . . 38
How to calculate your annual allowance . . . . . . . . . . . . 38
Did you own eligible capital property at the end
of February 22, 1994 . . . . . . . . . . . . . . . . . . . 39
Sole proprietor. . . . . . . . . . . . . . . . . . . . . . . . 39
Sale of eligible capital property in a 1996 fiscal
period . . . . . . . . . . . . . . . . . . . . . . . . 39
Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . 41
Sale of eligible capital property in a 1996 fiscal
period . . . . . . . . . . . . . . . . . . . . . . . . 41
CHAPTER 6 - INVESTMENT TAX CREDIT. . . . . . . . . . . . . . . 42
What is an investment tax credit?. . . . . . . . . . . . . . . 42
What is a refundable investment tax credit?. . . . . . . . . . 43
How to calculate your 1996 investment tax credit . . . . . . . 43
How to claim your 1996 credit. . . . . . . . . . . . . . . . . 44
Refund of investment tax credit. . . . . . . . . . . . . . . . 44
Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . 44
APPENDIX - INDUSTRY CODES. . . . . . . . . . . . . . . . . . . 45
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
PAGE 4
CHAPTER 1 - GENERAL INFORMATION
This chapter has general information for all businesses (including
self-employed commission sales) and professional activities. It also
provides information specifically of interest to partnerships.
BUSINESS AND BUSINESS INCOME
A business is an activity that you conduct for profit or with a
reasonable expectation of profit. A business includes:
- a profession;
- a calling;
- a trade;
- a manufacture;
- an undertaking of any kind; and
- an adventure or concern in the nature of trade (for more details,
read Interpretation Bulletin IT-459, Adventure or Concern in the
Nature of Trade).
Therefore, business income includes income from any activity you
conduct for profit or with a reasonable expectation of profit. For
example, income from a service business is business income. Note that
you do not include employment income as business income.
You were asking...?
Q. When does a business start? Can I deduct the costs I incur before
and during the start of a business?
A. We look at each case on its own merits. Generally, we consider that
a business starts whenever you begin some significant activity
that is a regular part of the business, or that is necessary to get
the business going.
For example, suppose you decide to start a merchandising business and
you buy enough goods for resale to start the business. At this point,
we would consider that the business has started. You can usually deduct
expenses you have incurred to date to earn the business income. You
could still deduct the expenses even if, despite all your efforts, the
business wound up. On the other hand, assume you review several
different business prospects in the hope of going into a business of
some kind. In this case, we would not consider that the business has
begun, and you could not deduct any of the costs you incur.
If you would like more details about the start of a business, see
Interpretation Bulletin IT-364, Commencement of Business Operations.
HOW DO YOU REPORT YOUR BUSINESS INCOME?
FISCAL PERIOD
You report your business income on a fiscal period basis. A fiscal
period is the time covered from the day your business starts its
business year, to the day your business ends its business year. For an
existing business, the fiscal period is usually 12 months. A fiscal
period cannot be longer than 12 months. However, it can be shorter than
12 months in some cases, such as when a new business starts or when a
business stops.
For taxation years ending after 1994, self-employed individuals are
generally required to use a December 31 year end. If you are an
eligible individual, you may be able to use an alternative method of
reporting your business income which allows you to keep a fiscal
period that does not end on December 31. If you have a fiscal year end
that is not December 31, you will need the publication called
Reconciliation of Business Income for Tax Purposes in order to
calculate the amount of business income to report on your 1996 income
tax return. The publication includes Form T1139, Reconciliation of
Business Income for Tax Purposes and is available from your tax
services office or tax centre.
If you filed Form T1139 with your 1995 income tax return, you have to
file Form T1139 again this year.
ACCRUAL METHOD
In most cases, as a self-employed person, you report business income by
using the accrual method of accounting. With this method, you:
- report your income in the fiscal period you earn it, regardless of
when you receive the income; and
- deduct expenses in the fiscal period you incur them, whether you
paid them in that period or not. Incur usually means you either
paid or will have to pay the expense.
As we said earlier, income from professional activities is business
income. Therefore you report it using the accrual method. Chapter 2
has more details about professionals.
CASH METHOD
If you are a self-employed commission sales agent, you can use the cash
method of reporting your income and expenses, as long as it accurately
shows your income for the year. Under this method, you:
- report income in the year you receive it; and
- deduct expenses in the year you pay them.
BUSINESS RECORDS
You have to keep records of all your transactions to support your
income and expense claims. Therefore, your records should be complete
and organized.
There are other benefits to keeping careful records:
- When you earn income from many places, good records help you
identify the source of the income. Unless you keep proper records,
you may not be able to prove that some income is not from your
business, or that it is not taxable.
- Keeping good records will remind you of expenses you can deduct
when it comes time to do your income tax return.
- Good records will keep you better informed about the past and
present financial position of your business.
- Good records can help you budget, spot trends in your business, and
get help from banks and other lenders.
PAGE 5
- Good records can prevent problems you may run into if we audit your
income tax returns.
INCOME RECORDS
Keep track of the gross income your business earns. Gross income is
your total income before you deduct the cost of goods sold and
expenses. Your income records should show the date, the amount, and the
source of the income. Record the income whether you received cash,
property, or services.
Support all income entries with original documents. Original documents
include sales invoices, cash register tapes, receipts, patient cards,
fee statements, contracts, and so on. These documents will depend on
the type of business you run.
Here is an example of how to record your income.
--------------------------------------------------------------------
Sales Journal - Month of June
----------------------------------------------------------------------
Date Particular Cash Credit Sales Total GST PST Payment on
sales* sales* returns* sales* (7%) (7%) account
(1) (2) (3) (4) (5) (6) (7)
----------------------------------------------------------------------
1 June 1 Daily
sales 146.00 27.00 173.00 12.11 12.11 10.00
2 June 2 Daily
sales 167.00 36.25 26.00 177.25 12.41 12.41
3 June 3 Daily
sales 155.02 19.95 10.00 164.96 11.55 11.55 32.40
4 June 4 Daily
sales 147.00 29.95 176.95 12.39 12.39
5
6
7
8
9
----------------------------------------------------------------------
* Does not include PST/GST
On June 1, you examine the sales invoices and cash register tapes. You
find that you had cash sales of $146.00 and sales on account of
$27.00. In the sales journal, you record the cash sales in column 1,
and the credit sales in column 2. Since there were no merchandise
returns on June 1, leave column 3 blank. Column 4 then shows the total
of your cash sales plus credit sales minus any merchandise returned
for the day. In column 5 and 6 show the total of the goods and services
tax (GST) and provincial sales tax (PST) you charged on your sales.
In column 7, keep track of any cash received on previous credit sales.
Don't include the amount in the daily sales figure, since you would
have included it in the sales figure on the day the sale took place.
EXPENSE RECORDS
Always get receipts or other vouchers when you buy something for your
business. When you buy merchandise or services, the receipts have to
show:
- the date of the purchase;
- the name and address of the seller or supplier;
- the name and address of the purchaser; and
- a full description of the goods or services.
Here is an example of how to record your expenses.
PAGE 6
EXPENSE JOURNAL - MONTH OF JUNE
----------------------------------------------------------------------
Date Part. Cheque Bank GST Purchases Legal Adv. Fees Repair Cap.
No. acc't items
----------------------------------------------------------------------
June 1 XYZ
Radio 407 374.50 24.50 350.00
June 1 Smith
Hardware 408 27.47 1.80 25.67
June 2 City of
Ottawa 409 160.50 10.50 150.00
June 3 Andy's
Accounting 410 267.50 17.50 250.00
June 5 Wholesale
Supply 411 1871.58 122.44 1749.14
June 5 Ed's Used
Cars 412 1605.00 105.00 1500.00
----------------------------------------------------------------------
YOU WERE ASKING...?
Q. What should I do if there is no description on a receipt?
A. When you buy something, make sure the seller describes the item.
Sometimes however, there is no description on the receipt, like
with a cash register tape. In this case, you should write what the
item is on the receipt or in your expense journal.
Q. What should I do if a supplier does not give me a receipt?
A. When you buy something, make sure you request a receipt. Sometimes
however, suppliers may not provide receipts. In this case, write
the information in your records. Show the name and address of the
supplier, the date you made the payment, the amount you paid, and
the details of the transaction.
Keep a record of the properties you bought and sold. This record should
show who sold you the property, the cost, and the date you bought it.
This information will help you calculate your claim for capital cost
allowance, and other amounts.
If you sell or trade a property, show the date you sold or traded it,
and the amount of the payment or credit from the sale or trade-in.
YOUR RECORD BOOKS
Keep a record of your daily income and expenses. We do not issue record
books or suggest any type of book or set of books. There are many
record books and bookkeeping systems available. For example, you can
use a book that has columns and separate pages for income and
expenses.
Keep your books, along with your duplicate deposit slips, bank
statements, and cancelled cheques. Keep separate records for each
business you run. If you want to keep computerized records, make sure
they are clear and easy to read.
Note
Do not send your records with your income tax return. However, you
must keep them in case we ask to see them.
If you do not keep the necessary information and you do not have any
other proof, we may have to determine your income using other methods.
We may also reduce the expenses you deducted.
TIME LIMITS
Depending on the situation, keep your records for the following lengths
of time:
- If you file your return on time, keep your records for a minimum of
six years after the end of the taxation year to which they relate.
- If you file your return late, keep your records for six years after
the date you file that return.
- If you file an objection or an appeal, keep your records until
either the issue is settled and the time for filing any further
appeal expires, or the six-year period mentioned above has
expired, whichever is later. If you want to destroy your records
before the minimum six-year period is over, you must first get
written permission from the Director of your tax services office.
To do this, either use Form T137, Request for Destruction of Books
and Records, or prepare your own written request. Information
Circular 78-10, Books and Records Retention/Destruction and its
Special Release have more details.
INSTALMENT PAYMENTS
As a self-employed person, you may have to make instalment payments for
1997. Your 1997 instalment payments are due on March 15, June 15,
September 15, and December 15. If you have to pay by instalments, we
will send you a notice telling you how much to pay.
PAGE 7
You may have to pay a penalty and interest if you do not pay your
instalment payments on time, or if you do not pay the full instalment
amounts you owe.
For more information, see the pamphlet called Paying Your Income Tax by
Instalments. If you would like to calculate your instalment payments,
get Form T1033-WS, Instalment Payment Calculation Worksheet. You can
get the pamphlet and the worksheet from your tax services office.
DATES TO REMEMBER
FEBRUARY 28, 1997 - If you have employees, file your 1996 T4 Summary
and T4A Summary returns. Also, give your employees their copies of the
T4 Supplementary and T4A Supplementary slips.
MARCH 15, 1997 - Make your first 1997 instalment payment.
MARCH 31, 1997 - Most partnerships will file a partnership information
return, (PIR) by March 31, 1997. However, there are exceptions. See
the Guide for the Partnership Information Return, and Information
Circular 89-5, Partnership Information Return and its Special Release.
APRIL 30, 1997 - Pay any balance owing. File your 1996 income tax
return if the expenditures of the business are primarily the cost or
capital cost of tax shelter investments.
JUNE 15, 1997 - Make your second 1997 instalment payment. File your
1996 income tax return if you have self-employment income, or if you
are the spouse of someone who does, unless the expenditures of the
business are primarily the cost or capital cost of tax shelter
investments. Remember in every case to pay any balance owing by April
30, 1997, to avoid interest charges.
SEPTEMBER 15, 1997 - Make your third 1997 instalment payment.
DECEMBER 15, 1997 - Make your fourth 1997 instalment payment.
NOTE
You can file your annual GST and income tax returns at the same
time by completing Form T1124, GST and Income Tax Reconciliation
Form. You can also make one remittance for both taxes or offset a
credit for one tax against a debit for the other. However, if you
have a balance owing for 1996, your payment is due on or before
April 30, 1997. Arrears interest, which we calculate separately on
the GST and income tax owing, will accrue on any balance
outstanding after April 30, 1997, until you pay the amount in
full.
WHAT IS A PARTNERSHIP?
A partnership is usually the relationship between persons who conduct a
business in common with the belief they will make a profit. You can
have a partnership without a written agreement. Therefore, to determine
if you are a partner, determine the type and extent of your
involvement in the business. Please refer to the laws of your province
to help you decide if you are a partner in a certain business.
When you form, change, or dissolve a partnership, consider:
- whether or not the relationship is a partnership;
- the special rules about capital gains or losses and the recapture
of capital cost allowance (CCA) that apply when you give properties
to a partnership;
- the special rules that apply when you dissolve a partnership; and
- the special rules that apply when you sell or dispose of your
interest in a partnership.
If you need more details, contact the Business Enquiries Section of
your tax services office. You can find the numbers listed under
"Revenue Canada" in the Government of Canada section of the telephone
book.
REPORTING PARTNERSHIP INCOME
A partnership does not pay income tax on its income, and it does not
file an income tax return. Instead, each partner files an income tax
return to report his or her share of the partnership's net income or
loss. This requirement remains, whether the share of income was
received in cash, or as a credit to a capital account in the
partnership.
GOODS AND SERVICES TAX (GST) REBATE
If you are a member of a partnership and you claim expenses on your
return, you may be able to get a GST rebate for any GST you paid on
the expenses.
The GST rebate is available to you as long as you meet both of these
conditions:
- you are a member of a GST-registered partnership; and
- on your income tax return, you deduct expenses incurred to earn
partnership income for which the partnership did not repay you.
We base the rebate on the amount of the expenses subject to GST that
you deduct on your income tax return. Examples of expenses subject to
GST are vehicle costs, meals, and entertainment. You can also get a GST
rebate for capital cost allowance (CCA) you claim on certain types of
property (e.g., if you claim CCA for a vehicle you bought to earn
partnership income, and you paid GST when you bought the vehicle). Use
the chart called "Other amounts deductible from your share of net
partnership income (loss)" on page 2 of Form T2032 or Form T2124 to
claim expenses for which the partnership did not reimburse you, and any
other deductible amounts. For more information, see page 21.
For more details about the GST rebate, get Form GST 370, Employee and
Partner GST Rebate, from your tax services office.
PARTNERSHIP LOSSES
A partnership can have a loss. Calculate the loss as though the
partnership were a separate person. However, apply the loss carryover
rules to each partner, and not to
PAGE 8
the partnership. For example, when you complete your own income tax
return, combine your share of the partnership non-capital losses with
any other non-capital losses you have in the year. Then, apply this
amount against your income using the usual loss carryover rules.
Contact your tax services office for details about these rules.
Interpretation Bulletins IT-90, What is a Partnership?, and IT-138,
Computation and Flow-Through of Partnership Income, have more details
about partnerships.
PARTNERSHIPS THAT HAVE TO FILE A PARTNERSHIP INFORMATION RETURN
A partnership that has six or more members throughout the whole fiscal
period has to file a partnership information return (PIR). A
partnership that has five members or less throughout the whole fiscal
period, and one or more of its members is another partnership, also
has to file a PIR.
If you are a member of a partnership that has to file a PIR you should
get two copies of the T5013 Supplementary, Statement of Partnership
Income, from the partnership. If you do not receive this form, contact
the person who prepares the forms for the partnership.
On your income tax return, report the gross partnership income and your
share of the net partnership income or loss. You will get these
amounts from your T5013 Supplementary slip. Attach copy 2 of your T5013
Supplementary slip to your income tax return. Do not attach the
partnership's income and expense statement.
You may need to adjust your share of the net partnership income or loss
shown on your T5013 Supplementary slip. Do this to deduct any business
expenses you incur for which the partnership did not repay you, and any
other deductible amounts. If this is your situation, read the section
called "Other amounts deductible from your share of net partnership
income (loss)" on page 21. You may also have expenses related to the
business use of your home. See page 21 for more information.
The Guide for the Partnership Information Return has more details about
the PIR. Information Circular 89-5, Partnership Information Return and
its Special Release also have more information.
PARTNERSHIPS THAT DO NOT HAVE TO FILE A PARTNERSHIP INFORMATION RETURN
Partnerships with five members or less throughout the whole fiscal
period, and with no member who is another partnership, do not have to
file a PIR. Read Information Circular 89-5, Partnership Information
Return, and its Special Release, for information about partnerships
that do not have to file a PIR. You can also read the Guide for the
Partnership Information Return
If you are a member of a partnership that does not have to file a PIR,
when you calculate the partnership's income and expenses, use the same
rules you would for a proprietorship. Calculate the partnership's
income and expenses as if the partnership were a separate person. Some
rules for capital cost allowance and eligible capital expenditures on
partnership-owned property are different. We explain these rules
below.
CAPITAL COST ALLOWANCE (CCA)
A partnership can own depreciable property and claim CCA on it. As an
individual partner, you cannot claim CCA on property the partnership
owns.
From the capital cost of depreciable property, subtract any investment
tax credit allocated to the individual partners. We consider this
allocation to be made at the end of the partnership's fiscal period.
You also reduce capital cost by any type of government assistance. See
Chapter 4 for more details about CCA and the adjustments to capital
cost.
Any capital gain or recapture from the sale of property the partnership
owns is income of the partnership. Also, any capital or terminal loss
from the sale of partnership-owned property is the loss of the
partnership. See Chapter 4 for more details about capital gains and
losses, and recapture and terminal losses.
ELIGIBLE CAPITAL EXPENDITURES
A partnership can own eligible capital property and deduct an annual
allowance. Any income from the sale of eligible capital property the
partnership owns is income of the partnership. See Chapter 5 for more
details about eligible capital expenditures.
LIMITED PARTNERSHIP
A limited partnership is a partnership which gives its limited partners
responsibilities that are similar to those given to shareholders of a
corporation. A limited partner's liability as a member of the
partnership is limited, as opposed to general partners.
The following amounts can flow out (be passed on) to limited partners:
- investment tax credits, except those for research and development
that cannot flow out;
- business losses; and
- property losses.
As a limited partner, you can claim these credits and losses (except
losses from farming) only to the extent your investment in the
partnership is at risk. This is your at-risk amount.
In most cases, if you are the first-time buyer of a limited partnership
interest, your at-risk amount for any year is the total of the
following:
- the adjusted cost base (ACB) of your interest in the limited
partnership at the end of the year;
plus
- your share of any partnership income;
minus
- certain amounts you owe to the limited partnership, plus any
guarantee or indemnity the limited partnership gave to you against
the loss of your investment in the partnership.
PAGE 9
You have to reduce your at-risk amount because the amount you owe to
the partnership is not yet at risk in the partnership.
If you are a buyer of a limited partnership interest on the secondary
market, your ACB of the partnership interest is the lower of:
- your cost; or
- the ACB of the selling limited partner, as long as it is not less
than zero.
Note
Interests in some limited partnerships that existed on or before
February 25, 1986, may be exempt from these rules if they meet certain
conditions. For more information on limited partnerships, contact your
tax services office.
CHAPTER 2 - INCOME FROM BUSINESS OR PROFESSIONAL ACTIVITIES
SOLE PROPRIETORSHIPS
If you are a sole proprietor, complete all the applicable areas and
lines on Form T2032 or T2124.
PARTNERSHIPS
The details of your business or professional activities that you have
to give us depend on the type of partnership you are in. If you are a
member of a partnership that has to file a partnership information
return, complete Form T2124 or Form T2032 as follows:
- Complete the identification area.
- Enter your share of the partnership income shown in box 18 of the
T5013 Supplementary, Statement of Partnership Income, on line 8237
"Net income (loss) before adjustments."
- Complete the "Other amounts deductible from your share of net
partnership income (loss)" chart to claim any expenses for which
the partnership did not reimburse you, and any other deductible
amounts. See page 21 for more information. Complete the
"Calculation of business-use-of-home expenses" chart if applicable.
See page 21 for more information.
- Enter your share of the net income or loss from the business on
line 8243 "Your net income (loss)." If you did not make any
adjustments to the amount in box 18 of your T5013 Supplementary
slip, the amount you enter on line 8243 will be the same as the
amount you entered on line 8237.
If you are a member of a partnership that does not have to file a PIR,
complete Form T2124, Statement of Business Activities, or Form T2032,
Statement of Professional Activities, as follows:
- Complete the identification area.
- Report the business income for all partners.
- Report the business portion of expenses for all partners.
- Complete the "Other amounts deductible from your share of net
partnership income (loss)" chart to claim any expenses for which
the partnership did not reimburse you, and any other deductible
amounts. See page 21 for more information. Complete the
"Calculation of business-use-of-home expenses" chart if applicable.
See page 21 for more information.
- Complete the "Details of other partners" chart.
To see if your partnership has to file a PIR read the section called
"What is a partnership?" on page 7. We explain later in this chapter,
as well as in Chapter 3, how to complete each of the lines on Form
T2124 or Form T2032.
IDENTIFICATION AREA ON FORMS T2032 AND T2124
Complete all the lines that apply to your business or professional
activities. Most of the information required is self-explanatory.
Indicate the period your business year covered, which is your fiscal
period. See page 4 for an explanation of fiscal period.
Enter the industry code that corresponds to your business from the
appendix on page 45 of this guide. If more than one code describes
your business, or if you have more than one activity in your business,
use the code that most closely describes your main business activity.
For example, you might operate a bookstore. However, the store might
also sell postage stamps. You would still use industry code 6511 (for
books and stationery) and not 4841 (for postal services).
If you did not prepare your Form T2032 or T2124, enter the name and
address of the person or the firm that prepared it for you.
If you have a 15-digit Business Number, enter it in the appropriate
area.
If your business or professional activities are a partnership, identify
your percentage of the partnership, and enter the partnership
identification number if applicable.
DO YOU HAVE A TAX SHELTER?
If you have a tax shelter, enter its number on the appropriate line. A
tax shelter is any property (including a right to income, as per
proposed changes) that you expect will result, based on statements or
representations made, in losses or other deductible amounts in the
first four years after you acquire it. These losses or amounts would be
equal to or more than the cost of your interest in the property (minus
prescribed benefits). The cost of your interest in the property has to
be reduced by prescribed benefits you or a person with whom you do not
deal at arm's length will receive or enjoy. Prescribed benefits include
tax credits, revenue guarantees,
PAGE 10
contingent liabilities, limited-recourse debt, and rights of exchange
or conversion. We define a non-arm's-length transaction on page 24.
Tax shelters do not include flow-through shares or prescribed property.
Prescribed property means property that is a registered pension plan,
a registered retirement savings plan, a deferred profit-sharing plan, a
registered retirement income fund, or a registered education savings
plan. If you want more details, see Information Circular 89-4, Tax
Shelter Reporting.
If you invested in a tax shelter after August 31, 1989, and before
1991, you have to provide your tax shelter identification number to
make a claim on your 1996 return. If you acquired a tax shelter after
1990 and are claiming a deduction for 1996, you have to file Form
T5004, Statement of Tax Shelter Loss or Deduction, with your tax
return. The identification number is for administrative purposes only,
and does not confirm that an investor is entitled to claim any tax
benefits associated with a tax shelter. Regardless of when you
acquired a particular tax shelter, if this is the first year you are
making a claim for it, include a copy of a T5003 Supplementary,
Statement of Tax Shelter Information, with your income tax return.
FORM T2124, STATEMENT OF BUSINESS ACTIVITIES
This section explains how to complete the area called "Income" on Form
T2124, Statement of Business Activities.
SALES, COMMISSIONS, OR FEES
Your sales include all sales, whether you receive or will receive
money, something the same as money (such as credit units possessing a
notional monetary value), or something from bartering. Bartering occurs
when two people agree to exchange goods or services without using
money. Interpretation Bulletin IT-490, Barter Transactions, has more
details.
You might usually deduct the goods and services tax (GST), provincial
sales tax (PST), or returns and allowances directly from sales at the
time they take place. If you do this, you can show your net sales
(after GST, PST, and returns and allowances) on the first line of Form
T2124. Otherwise, show the GST, PST, and returns and allowances
separately on the appropriate lines of the form. If you used the quick
method option to calculate your GST, remember to deduct only 5% of your
gross sales.
If you are a self-employed commission salesperson, enter the
commissions you received on this line.
LINE 8123 - NET SALES, COMMISSIONS, OR FEES
Enter your net sales, commissions, and fees after deducting any goods
and services tax (GST), provincial sales taxes (PST), and any returns,
allowances, and discounts, if these have been included in your sales.
RESERVES DEDUCTED LAST YEAR
Include in your 1996 income any reserves you deducted for 1995. See
"Allowable reserves" on page 20 for more details.
OTHER INCOME
Show income you received from any other sources separately on the
"Other income" line on Form T2124. Some examples of other income you
would report on this line are:
- a recovery of an amount you wrote off as a bad debt in a previous
year;
- the value of vacation trips or other prizes awarded to you because
of your business activities;
- payments for land you leased for petroleum or natural gas
exploration. For more information, see Interpretation Bulletin
IT-200, Surface Rentals and Farming Operations, or contact the
Business Enquiries Section of your tax services office. You can
find the numbers under "Revenue Canada" in the Government of
Canada section of your telephone book; and
- grants, subsidies, incentives, or assistance you received from a
government, a government agency, or a non-government agency.
Interpretation Bulletin IT-273, Government Assistance - General
Comments (after January 18, 1981) and its Special Release have
more information.
Note
Subtract any rebate, grant, or assistance you receive from the
applicable expense. Enter the net figure on the appropriate line of
this form. If the rebate, grant, or assistance is for a
depreciable asset, subtract the amount you received from the
asset's capital cost. This will affect the amount of capital cost
allowance (CCA) you can claim for that asset. See Chapter 4 for
information about CCA. If the asset qualifies for the investment
tax credit, this reduction to the capital cost will also affect
your claim. See Chapter 6 for details. If you cannot apply the
rebate, grant, or assistance you received to reduce a particular
expense, or to reduce an asset's capital cost, include the total
as other income. Under proposed changes, this amount must be
included in income to the extent that it was not used to reduce
the cost of a property or the amount of an outlay or expense.
LINE 8124 - GROSS INCOME
Enter your gross income, which is your net sales (line 8123) plus any
reserves deducted last year, and any other income.
CALCULATION OF COST OF GOODS SOLD
Complete this area of Form T2124 if your business buys goods for resale
or makes goods for sale. Claim the cost of the goods you buy or make
for sale in the fiscal period you sell them. To calculate your cost of
goods sold, you need to know the following:
- the value of your inventory at the start of your fiscal period;
PAGE 11
- the value of your inventory at the end of your fiscal period; and
- the cost of your purchases (net of discounts) for the fiscal
period.
LINE 8200 - OPENING INVENTORY AND LINE 8203 - CLOSING INVENTORY
Enter your opening and closing inventory on the appropriate lines.
These amounts must include raw materials, goods in process, and
finished goods. The way you value your inventory is important when you
determine your income. For income tax purposes, we accept the
following two methods:
- Value your entire inventory at its fair market value. Use either
the price you would pay to replace an item, or the amount you would
receive if you sold an item. Once you have chosen one method for
valuing your inventory, you have to use that method consistently.
- Value individual items in your inventory at either their fair
market value, or their cost, whichever is less. Cost is the price
you incur for an item. Cost also includes any expenses you incur
to bring the item to the business location, and to put it in a
condition so that you can use it in the business. When you cannot
easily tell one item from another, you can value the items as a
group.
See page 24 for the meaning of fair market value.
If this is your first year of reporting business income, you can choose
either method to value your inventory. In your first year of business,
you will not have an amount to enter on line 8200. If this is not your
first year of business, continue to use the same method you used in
past years. The value of your inventory at the start of a fiscal period
has to be the same as the value of your inventory at the end of the
preceding fiscal period.
Do an actual stock count at the end of each fiscal period, unless you
use a perpetual inventory system. Under this system, you do periodic
stock counts and keep a written record of each count. Remember to keep
your inventory records with your other books and records.
See Interpretation Bulletin IT-473, Inventory Valuation, and its
Special Release, for more information about valuing inventory.
----------------------------------------------------------------------
Under proposed changes, businesses that are adventures or concerns in
the nature of trade must value their inventory at the cost to the
taxpayer. Generally, these rules apply to taxation years that end after
December 20, 1995. For more information, contact your tax services
office.
----------------------------------------------------------------------
INVENTORY VALUE OF AN ARTISTIC ENDEAVOUR
An artistic endeavour occurs when you are in the business of creating
paintings, prints, etchings, drawings, sculptures, or similar works of
art. An artistic endeavour does not include reproducing works of art.
When you calculate your income from an artistic endeavour, you can
choose to value your ending inventory at nil. To do this, show your
ending inventory as "nil" on line 8203. Your choice stays in effect for
each following year, unless we allow you to change it.
See Interpretation Bulletin IT-504, Visual Artists and Writers, for
more information.
GIFTS OF INVENTORY BY AN ARTIST
If you donate a work of art you create, you may not have to report a
profit for income tax purposes on your donation. To benefit from this
tax treatment, your gift must fall within the definition of total
cultural gifts.
A cultural gift is art:
- you give to an institution or public body that is named under the
Cultural Property Export and Import Act; and
- the Department of Canadian Heritage has determined meets certain
criteria set out in the Cultural Property Export and Import Act.
If your gift is a cultural gift, we consider you to have disposed of it
at its cost amount to you as long as:
- it is part of a total cultural gift;
- it is a work of art you created; and
- you included it in your inventory.
You will be able to get a donation tax credit based on the fair market
value of your gift. The Department of Canadian Heritage will decide
the fair market value of your gift.
The following example shows how this legislation works.
EXAMPLE
Mike is an artist who creates a sculpture that cost him $8,000 in
materials. He includes it in his inventory at that amount. In 1996,
Mike donates the sculpture to the National Gallery, an institution
named under the Cultural Property Export and Import Act.
The Department of Canadian Heritage decides the sculpture is a total
cultural gift and has a fair market value of $32,000. The effect on
Mike's income is as follows:
Proceeds of disposition $ 8,000
Cost amount $ 8,000
-------
Amount Mike will include in his income $ 0
=======
We will base Mike's donation tax credit on the gift having a fair
market value of $32,000.
LINE 8201 - PURCHASES DURING THE YEAR (NET OF RETURNS, ALLOWANCES, AND
DISCOUNTS)
The cost of goods you buy to resell, or to use in manufacturing other
goods, includes costs such as delivery, freight, or express charges.
The amount to enter on line 8201 is your net purchases during the year
(your total purchases, minus any discounts you received).
Sometimes, you might use goods you bought for the business for personal
use. When this happens, you have to subtract the cost of these goods
from your total purchases for the year. Do this before you enter the
amount of the purchases on line 8201 of Form T2124.
PAGE 12
LINE 8202 - SUBCONTRACTS
Enter, on line 8202, all the costs of hiring outside help to perform
special tasks related to the goods you sell.
LINE 8245 - DIRECT WAGE COSTS
Include the remuneration you paid to employees who work directly in the
manufacture of your goods. Do not include on line 8245:
- indirect wages (see line 8223);
- a salary paid to yourself or a partner (see the section called
"Details of equity" on page 22); and
- cash withdrawals you may have made from the business (see the
section called "Details of equity" on page 22).
For more information on salaries and wages, see line 8223 in Chapter 3.
LINE 8125 - GROSS PROFIT
Enter your gross profit, which is your gross income (line 8124) minus
your cost of goods sold.
FORM T2032, STATEMENT OF PROFESSIONAL ACTIVITIES
This section explains how to complete the area called "Income" on Form
T2032, Statement of Professional Activities.
As mentioned in Chapter 1, professional activities are business
activities. Usually, you calculate your income from professional
activities using the same rules as for a business.
However, there are some aspects of professional activities that are
different from those of other types of businesses. Some of these
differences are discussed in this section.
PROFESSIONAL FEES
Your professional income includes all fees, whether you receive or will
receive money, something the same as money (such as credit units
possessing a notional monetary value) or something from bartering.
Bartering occurs when two people agree to exchange goods or services
without using money. See Interpretation Bulletin IT-490, Barter
Transactions, for more information. As a professional, your income
generally includes the value of your work-in-progress (WIP) at the end
of your 1996 fiscal period minus your WIP at the end of the previous
fiscal period. WIP is goods or services that you have not yet completed
at the end of your fiscal period.
Your professional fees for the current year are the total of:
- all amounts you receive during the year for professional services,
whether you provide the services during the current year or after
your current year end;
plus
- all amounts receivable at the end of the current year for
professional services you provided during the current year;
minus
- all amounts receivable at your previous year end.
Note
You might usually deduct the goods and services tax (GST) and
provincial sales tax (PST) directly from your professional fees at
the time you earn them. If you do this, you can show your net
professional fees (after GST and PST) on the first line of Form
T2032. Otherwise, show the GST and PST separately on the
appropriate line of Form T2032. If you used the quick method
option to calculate your GST, remember to deduct only 5% of your
gross sales.
ELECTION TO EXCLUDE YOUR WIP
You can choose to exclude your WIP when you calculate your income if
you are one of the following types of professionals:
- an accountant;
- a dentist;
- a lawyer (including a notary in Quebec);
- a medical doctor;
- a chiropractor; or
- a veterinarian.
If you did not choose to exclude your WIP in any previous year, you can
do so in 1996. You do not need a special form to do this. Attach a
letter to your return telling us that you want to exclude your WIP.
You can also use Form T2032 to exclude your WIP by doing the following:
- on the "Work-in-progress, end of the year" line, write the amount
you included as "Work-in-progress, end of year" in your
professional fees.
- on the "Work-in-progress, beginning of the year" line, write the
amount of your WIP at the beginning of the year.
Make this election when you file the original return to which it
relates. We will not accept an election you file with an amended
return.
For partnerships, an authorized partner must choose for all partners
that the partnership wants to exclude its WIP.
The choice to exclude WIP stays in effect for each following year,
unless we allow you to change it.
Interpretation Bulletin IT-457, Election by Professionals to Exclude
Work in Progress From Income, has more information about excluding
work in progress.
LINE 8123 - ADJUSTED PROFESSIONAL FEES
Enter your net fees plus your work-in-progress for the beginning of the
year if you excluded it at the end of last year, minus any GST and PST
included in your sales, and your work-in-progress at the end of the
year if you elect to exclude it.
PAGE 13
RESERVES DEDUCTED LAST YEAR
Include in your 1996 income any reserves you deducted for 1995. See
"Allowable reserves" on page 20 for more details.
OTHER INCOME
Show income from any other sources separately on the "Other income"
line on Form T2032. Some examples of other income you would report on
this line are:
- a recovery of an amount you wrote off as a bad debt in a previous
year;
- the value of vacation trips or other prizes awarded to you because
of your professional activities; and
- grants, subsidies, incentives, or assistance you received from a
government, a government agency, or a non-government agency.
Interpretation Bulletin IT-273, Government Assistance - General
Comments (after January 18, 1981) and its Special Release have
more information.
LINE 8124 - GROSS INCOME
Enter your gross income. This amount includes your adjusted
professional fees (line 8123) plus your work-in-progress at the end of
the year, any reserves deducted last year, and any other income.
The following example summarizes this chapter. Since the rules for
calculating business and professional income are similar, our example
focuses on a business.
----------------------------------------------------------------------
EXAMPLE
Cathy is the sole proprietor of a fashion boutique that has a December
31 fiscal year end. She rents the premises where the store is located.
Cathy entered the following in her sales journals for 1996:
Total sales (excluding PST or GST) $ 189,000
Returned items $ 1,000
Inventory at the beginning of 1996 $ 36,500
Inventory at the end of 1996 $ 30,000
Purchases (including freight, etc.) $ 88,000
Cathy completes the "Income" and "Cost of goods sold" sections of Form
T2124 as shown on the following page.
(SEE PRINTED COPY FOR FORM T2124(E)
CHAPTER 3 - EXPENSES
This chapter discusses the more common expenses you incur to earn
income from your business (including self-employed commission sales)
or professional activities. Incur means that either you paid or will
have to pay the expense. If, after reading this chapter, you still
have questions about which expenses you can deduct, contact your tax
services office.
As a rule, you can deduct any reasonable expense you incur to earn
business income. The expenses you can deduct include any goods and
services tax (GST) you incur on these expenses. However, since you
cannot deduct personal expenses, enter only the business portion of
expenses on the form.
In addition, you cannot claim expenses you incur to buy capital
property. Chapter 4 of this guide and Interpretation Bulletin IT-128,
Capital Cost Allowance - Depreciable Property, contain more
information.
Note
When you claim the GST you paid on your business expenses as an
input tax credit, reduce the amounts of the business expenses you
show on Form T2124 or Form T2032 by the amount of the input tax
credit. Do this when the GST for which you are claiming the input
tax credit was paid or became payable. Similarly, subtract any
other rebate, grant, or assistance from the
PAGE 14
expense to which it applies. Enter the net figure on the proper
line. Any such assistance you claim for the purchase of depreciable
property used in your business will affect your claim for capital
cost allowance. If you cannot apply the rebate, grant, or
assistance you received to reduce a particular expense, or to
reduce an asset's capital cost, include the total as "Other income"
on Form T2032 or Form T2124. See "Grants, subsidies, or other
incentives or inducements" on page 30.
ENTER BUSINESS PORTION ONLY, means that any of the following are not
included as part of your expenses:
- salary or wages (including drawings) paid to self, partner(s), or
both;
- cost of saleable goods or services that you, your family, or your
partners and their families used (including items such as food,
home maintenance, or business properties);
- donations to charities and political contributions;
- interest and penalties you paid on your income tax;
- life-insurance premiums;
- fines and penalties; and
- the portion of any expenses that can be attributed to non-business
use of business property.
PREPAID EXPENSES
A prepaid expense is an expense you pay for ahead of time. Under the
accrual method of accounting, claim any expense you prepay in the year
or years in which you receive the related benefit. For example, suppose
your fiscal year end is December 31, 1996. On June 30, 1996, you
prepay the rent on your business store for a full year (July 1, 1996,
to June 30, 1997). You can only deduct one-half of this rent as an
expense in 1996. You deduct the other half as an expense in 1997.
For more information, see Interpretation Bulletin IT-417, Prepaid
Expenses and Deferred Charges.
LINE 8204 - ADVERTISING
You can deduct expenses for advertising, including ads in Canadian
newspapers and on Canadian television and radio stations. You can also
include on this line any amount you paid as a finder's fee.
However, you cannot deduct expenses for advertising directed mainly to
a Canadian market when you advertise:
- with a foreign broadcaster; or
- in an issue of a non-Canadian newspaper or periodical.
This second restriction does not apply to ads in a special issue of a
newspaper that is published twice a year or less, and is devoted to
news or features mainly about Canada.
LINE 8205 - BAD DEBTS
You can deduct an amount for a bad debt if you:
- determine that an account receivable is a bad debt in the year; and
- had already included the receivable in income.
See Interpretation Bulletin IT-442, Bad Debts and Reserves for Doubtful
Debts, for more information.
BUSINESS TAX, FEES, LICENCES, DUES, MEMBERSHIPS, AND SUBSCRIPTIONS
You can deduct any annual licence fees and business taxes you incur to
run your business. You can also deduct annual dues or fees to keep
your membership in a trade or commercial association. You cannot deduct
club membership dues (including initiation fees) if the main purpose
of the club is dining, recreation, or sporting activities.
LINE 8211 - DELIVERY, FREIGHT, AND EXPRESS
You can deduct the cost of delivery, freight, and express incurred in
the year that relates to your business.
LINE 8212 - FUEL COSTS
You can deduct the cost of fuel (including gasoline, diesel, and
propane), motor oil, and lubricants used in your business. For
information about claiming the fuel used in your motor vehicle, see the
section called "Line 8218 - Motor vehicle expenses" on page 15.
LINE 8213 - INSURANCE
You can deduct all ordinary commercial insurance premiums you incur on
any buildings, machinery, and equipment you use in your business. For
more information about claiming your motor vehicle insurance costs, see
the section called "Line 8218 - Motor vehicle expenses" on page 15.
In most cases, you cannot deduct your life insurance premiums.
LINE 8214 - INTEREST
You can deduct the interest you incur on money you borrow to run your
business. However, some limits can apply.
There is a limit on the interest you can deduct on money you borrow to
buy a passenger vehicle. See "Line 8218 - Motor vehicle expenses" on
page 15.
There is also a limit on the amount of interest you can deduct for
vacant land. Usually, you can deduct interest only up to the amount of
income that remains after you deduct all other expenses. You cannot use
any remaining amounts of interest to create or increase a loss. You
also cannot deduct interest from other sources of income. If you need
more details, contact your tax services office.
You can deduct the fee you pay to reduce the interest rate on your
loan. You can also deduct any penalty or bonus a financial institution
charges you to pay off your loan before it is due. Treat the fee,
penalty, or bonus as prepaid interest (see "Prepaid expenses" on this
page) and deduct it over the remaining original term of your loan. For
example, if the term of your loan is five years, and in the third year
you pay a fee to reduce your interest rate, treat this fee as a prepaid
expense, and deduct it over the remaining term of the loan.
PAGE 15
You can deduct certain fees you incur when you get a loan to buy or
improve your business property. These fees include:
- application, appraisal, processing, and insurance fees;
- loan guarantee fees;
- loan brokerage and finder's fees; and
- legal fees related to financing.
You deduct these fees over a period of five years. Deduct 20% in 1996,
and 20% in each of the four following years. The 20% limit is reduced
proportionally for short fiscal periods. However, if you repay the loan
before the end of the five-year period, you can deduct the remaining
financing fees at that time. The number of years for which you can
deduct these fees is not related to the term of your loan.
If you incur standby charges, guarantee fees, service fees, or any
other similar fees, you may be able to deduct them in full for the
year you incur them. To do so, they have to relate only to that year.
For more information, see Interpretation Bulletin IT-341, Expenses of
Issuing or Selling Shares, Units in a Trust, Interests in a Partnership
or Syndicate, and Expenses of Borrowing Money.
You may be able to deduct interest expenses for a property that you
used for business purposes, even if you have stopped using the
property for such purposes because you are no longer in business. These
expenses were not deductible as business expenses before 1994. For
more information, contact your tax services office.
You can deduct interest you paid on a loan made against an insurance
policy, as long as the insurer did not add the interest you paid to
the adjusted cost base of the insurance policy. To claim the interest
you paid for 1996, have the insurer verify the interest before May 1,
1997, on Form T2210, Verification of Policy Loan Interest by the
Insurer.
You can choose to capitalize interest on money you borrow:
- to buy depreciable property;
- to buy a resource property; or
- for exploration and development.
When you choose to capitalize interest, add the interest to the cost of
the property or exploration and development costs instead of deducting
the interest as an expense. See Interpretation Bulletin IT-121,
Election to Capitalize Cost of Borrowed Money, for more information
about capitalizing interest.
LINE 8215 - MAINTENANCE AND REPAIRS
You can deduct the cost of labour and materials for any minor repairs
or maintenance done to property you use to earn income. However, you
cannot deduct the value of your own labour.
You cannot deduct costs you incur for repairs that are capital in
nature. However, you may be able to claim capital cost allowance
(CCA). For more information about CCA, see Chapter 4.
LINE 8216 - MANAGEMENT AND ADMINISTRATION FEES
You can deduct management and administration fees incurred to operate
your business, including bank charges. Do not include on this line
employees' salaries, property taxes, or rents paid. Instead, you can
claim these amounts elsewhere on the appropriate form.
LINE 8217 - MEALS AND ENTERTAINMENT
The maximum portion you can claim for business meals, beverages, and
entertainment expenses is 50% of either the amount you incur, or an
amount that is reasonable in the circumstances, whichever is less.
These limits also apply to the cost of your meals when you travel or go
to a convention, conference, or similar event. However, special rules
can affect your claim for meals in these cases. For more details, see
"Line 8224 - Travel" on page 19, and "Convention expenses" on page 20.
These limits do not apply if:
- your regular business is to provide food, beverages, or
entertainment to customers for compensation (for example, a
restaurant, hotel, or motel);
- you bill your client or customer for the meal and entertainment
costs, and you show these costs on the bill;
- you include the amount of the meal and entertainment expenses in an
employee's income, or would include them if the employee did not
work at a remote work location;
- you incur meal and entertainment expenses to provide a Christmas
party or similar event, and you invite all your employees from a
particular location; or
- the meal and entertainment expenses you incur are for a fund-
raising event that was mainly for the benefit of a registered
charity.
Entertainment expenses include tickets and entrance fees to an
entertainment or sporting event, gratuities, cover charges, and room
rentals such as for hospitality suites.
See Interpretation Bulletin IT-518, Food, Beverages, and Entertainment
Expenses, for more information.
LINE 8218 - MOTOR VEHICLE EXPENSES
You can deduct expenses you incur to run a motor vehicle you use to
earn business income.
KEEPING RECORDS
You can deduct motor vehicle expenses only when they are reasonable and
you have receipts to support them. To get the full benefit of your
claim for each vehicle, keep a record of the total kilometres you drove
and the kilometres you drove to earn business income. For each
business trip, list the date, destination, purpose, and the number of
kilometres you drove. Be sure to record the oedometer reading of each
vehicle at the start and end of the fiscal period.
If you change motor vehicles during the fiscal period, record the dates
of the changes and the oedometer reading at the time you buy, sell, or
trade the vehicle.
PAGE 16
WHAT TYPE OF VEHICLE DO YOU OWN?
The kind of vehicle you own can affect the expenses you deduct. For
income tax purposes, there are three types of vehicles:
- motor vehicles;
- automobiles; and
- passenger vehicles.
If you own or lease a passenger vehicle, there can be a limit on the
amounts you can deduct for capital cost allowance (CCA), interest, and
leasing costs.
We explain the CCA limits on page 28, the interest limits on page 17,
and the leasing costs on page 18.
MOTOR VEHICLE - This is an automotive vehicle designed or adapted for
use on highways and streets. Motor vehicles do not include a trolley
bus or a vehicle designed or adapted to be operated exclusively on
rails.
AUTOMOBILE - This is a motor vehicle designed or adapted primarily to
carry people on highways and streets. It seats a driver and no more
than eight passengers.
An automobile does not include:
- an ambulance
- a motor vehicle you acquire to use more than 50% as a taxi, a bus
used in the business of transporting passengers, or a hearse in a
funeral business;
- a motor vehicle you bought to sell, rent, or lease in a motor
vehicle sales, rental, or leasing business;
- a motor vehicle (except a hearse) you bought to use in a funeral
business to transport passengers;
- a van, pick-up truck, or similar vehicle that seats no more than
the driver and two passengers which, in the taxation year you
bought it, you used it more than 50% to transport goods or
equipment to earn income; and
- a van, pick-up truck, or similar vehicle that, in the taxation year
you bought it, you used 90% or more to transport goods, equipment,
or passengers to earn income.
PASSENGER VEHICLE - This is an automobile you bought after June 17,
1987. A passenger vehicle is also an automobile that you leased under
a lease agreement you entered into, extended, or renewed after June 17,
1987.
An automobile you bought or leased under the terms of a written
agreement you entered into before June 18, 1987, is not a passenger
vehicle.
Most cars, station wagons, vans, and some pick-up trucks are passenger
vehicles. They are subject to the limits for capital cost allowance,
interest, and leasing.
To help you determine what type of vehicle you have, see the chart on
page 17. The chart does not cover every situation, but it does provide
some of the main definitions.
The chart is for a vehicle you buy or lease after June 17, 1987, that
you use to earn business income.
DEDUCTIBLE EXPENSES
The types of expenses you can claim on line 8218 include:
- licence and registration fees;
- fuel costs;
- insurance;
- interest;
- maintenance and repairs; and
- leasing costs.
You can also claim capital cost allowance (CCA), but you enter this
amount on line 8207. See Chapter 4 for information about CCA.
BUSINESS USE OF A MOTOR VEHICLE
If you use a motor vehicle for business and for personal use, you can
deduct only the portion of the expenses that you incur to earn income.
To support the amount you can deduct, keep a record of both the total
kilometres you drove, and the kilometres you drove to earn income.
----------------------------------------------------------------------
Example
Danielle owns a hardware store that has a December 31 year end. She has
a van that she uses for the business. Danielle noted the following for
1996:
Kilometres driven to earn business income 27,000
Total kilometres driven 30,000
Expenses:
Licence and registration fees $100
Gas and oil $2,400
Insurance $1,900
Interest $800
Maintenance and repairs $200
Total expenses for the van $5,400
Danielle calculates the expenses she can deduct for her van for 1996 as
follows:
27,000 (business kilometres) x $5,400 = $4,860
---------------------------
30,000 (total kilometres)
Therefore, the deductible business portion of Danielle's van expenses
is $4,860. Danielle can claim this amount on line 8218 of Form T2124.
----------------------------------------------------------------------
JOINT OWNERSHIP
If you and another person own or lease a passenger vehicle, the limits
on capital cost allowance, interest, and leasing still apply. As a
joint owner, the total amount you and any other owner(s) deduct cannot
be more than the amount that one person owning or leasing the vehicle
could deduct.
MORE THAN ONE VEHICLE
If you used more than one motor vehicle for your business, keep a
separate record that shows the total and business kilometres you
drove, and the cost to run and maintain each vehicle. Calculate each
vehicle's expenses separately.
For more details on motor vehicle expenses, see Interpretation Bulletin
IT-521, Motor Vehicle Expenses Claimed by Self-Employed Individuals.
PAGE 17
----------------------------------------------------------------------
VEHICLE DEFINITIONS
----------------------------------------------------------------------
Type of vehicle Seating Business use in year Vehicle
(includes driver) bought or leased definition
----------------------------------------------------------------------
Coupe, sedan, station
wagon, sports, or
luxury car 1 to 9 1% to 100% passenger
Pick-up truck used to
transport goods or
equipment 1 to 3 more than 50% motor
Pick-up truck
(other than above) 1 to 3 1% to 100% passenger
Pick-up truck with
extended cab used to
transport goods,
equipment, or
passengers 4 to 9 90% or more motor
Pick-up truck with
extended cab (other
than above) 4 to 9 1% to 100% passenger
Sport-utility used to
transport goods,
equipment, or
passengers 4 to 9 90% or more motor
Sport-utility (other
than above) 4 to 9 1% to 100% passenger
Van or Minivan used
to transport goods
or equipment 1 to 3 more than 50% motor
Van or Minivan
(other than above) 1 to 3 1% to 100% passenger
Van or Minivan used
to transport goods,
equipment, or
passengers 4 to 9 90% or more motor
Van or Minivan
(other than above) 4 to 9 1% to 100% passenger
----------------------------------------------------------------------
INTEREST
You can deduct interest on money you borrow to buy a motor vehicle,
automobile, or passenger vehicle you use to earn income. Include the
interest as an expense when you calculate your allowable motor vehicle
expenses.
When you use a passenger vehicle to earn income, there is a limit on
the amount of interest you can deduct. Complete the following chart to
calculate the amount of interest you can deduct.
----------------------------------------------------------------------
Available interest expense for passenger vehicles
Total interest payable (accrual
method) or paid (cash method)
in the fiscal period $ _______ A
$ 10.00 x the number of days in the
------ fiscal period for which interest
was payable (accrual method) or
paid (cash method) $ _______ B
Available interest expense: amount A or B,
whichever is less $ _______
----------------------------------------------------------------------
----------------------------------------------------------------------
Example
On May 1, 1996, Cathy bought a car that she uses to earn business
income. Cathy's fiscal year ends on December 31. The car is a
passenger vehicle. Cathy borrowed money to buy her car, and the
interest payable in 1996 was $1,500. Her available interest expense is
whichever of the following amounts is less:
- the total interest payable in 1996 of $1,500; or
- $10 x 245 days = $2,450.
Therefore, Cathy can claim an interest expense of $1,500.
Cathy also recorded the following information for 1996:
Kilometres driven to earn business income 25,000
Total kilometres driven 30,000
Expenses:
Licence and registration fees $ 70
Gasoline and oil $ 1,330
Insurance $ 750
Interest expense $ 1,500
Repairs and maintenance $ 100
Total car expenses $ 3,750
Cathy calculates the expenses she can deduct for her car for 1996 as
follows:
25,000 (business kilometres) x $3,750 = $3,125
---------------------------
30,000 (total kilometres)
----------------------------------------------------------------------
PAGE 18
LEASING COSTS
You can deduct amounts you incur to lease a motor vehicle you use to
earn income. Include these amounts on line 8218.
When you use a passenger vehicle to earn income, there is a limit on
the amount of the leasing costs you can deduct. To calculate your
eligible leasing costs, complete the chart called "Eligible leasing
costs for passenger vehicles" on this page.
The lease agreement for your passenger vehicle may include items such
as insurance, maintenance, and taxes. In this case, include them as
part of the lease charges on line 1 when you complete the chart.
Note
Most leases do not include items such as insurance, maintenance,
and taxes. You have to pay these amounts separately. Therefore,
list these expenses separately when you calculate your allowable
motor vehicle expenses. Do not include them on line 1 when you
complete the chart.
----------------------------------------------------------------------
ELIGIBLE LEASING COSTS FOR PASSENGER VEHICLES
Total lease Charges incurred in your
1996 fiscal period for the vehicle $ ________ 1
Total lease payments deducted before your
1996 fiscal period for the vehicle $ ________ 2
Total number of days the vehicle was leased in your
1996 and previous fiscal periodS _______ 3
Manufacturer's list price $ _______ 4
The amount on line 4 or ($28,235 + GST and PST on $28,235)
whichever is more $_______ x 85% = $ _______ 5
(($650 + GST and PST on $650) x line 3) - line 2 $ _______ 6
---------------------------------------
30
(($24,000 + GST and PST on $24,000) x line 1) $ _______ 7
----------------------------------
line 5
Eligible leasing cost: line 6 or line 7, whichever is less $ _______
----------------------------------------------------------------------
The following example will show you how to calculate your eligible
leasing costs.
----------------------------------------------------------------------
EXAMPLE
Amy owns a toy store. Her business has a December 31 fiscal year end.
On February 1, 1996, she started leasing a car that is a passenger
vehicle. The PST rate for her province is 8%. Amy entered the following
for 1996:
Monthly lease payment $ 500
Lease payments for 1996 $ 5,500
Manufacturer's suggested list price $ 29,000
Number of days in 1996 she leased the car 334
GST and PST on $24,000 $ 3,600
GST and PST on $28,235 $ 4,235
GST and PST on $650 $ 98
Total lease charges incurred in Amy's
1996 fiscal period for the vehicle $ 5,500 1
Total lease payments deducted in
fiscal periods before 1996 for the vehicle $ 0 2
Total number of days the vehicle was
leased in 1996 and previous fiscal periods 334 3
Manufacturer's list price $ 29,000 4
The amount on line 4 or $32,470
($28,235 + $4,235) whichever is more =
($32,470 x 85%) $ 27,600 5
($748 x 334) / 30 $ 8,328 6
($27,600 x $5,500) / $27,600 $ 5,500 7
Amy's eligible leasing cost is either line 6 or 7, whichever amount is
less. In this case, her allowable claim is $5,500.
----------------------------------------------------------------------
REPAYMENTS AND IMPUTED INTEREST
When you lease a passenger vehicle, you may have a repayment owing to
you, or you may have imputed interest. If this is your situation, you
will not be able to use the chart. Instead, contact your tax services
office for help on how to claim lease costs.
Imputed interest is interest that would be owing to you if interest
were paid on money deposited to lease a passenger vehicle. You
calculate imputed interest for leasing costs on a passenger vehicle
only if all of the following apply:
- one or more deposits were made for the leased passenger vehicle;
- the deposit is, or the deposits are, refundable; and
- the total of the deposits is more than $1,000.
For more information, see Interpretation Bulletin IT-521, Motor Vehicle
Expenses Claimed by Self-Employed Individuals.
LINE 8219 - OFFICE EXPENSES
You can deduct the cost of office expenses. These include small items
such as pens, pencils, paper clips, stationery, and stamps. Office
expenses do not include items such as calculators, filing cabinets,
chairs, and desks. These are capital items. See Chapter 4 for more
information.
LINE 8252 - SUPPLIES
If not allowed for elsewhere, you can deduct the cost of items consumed
indirectly to provide the business' goods or services (e.g., drugs and
medication used in a veterinary operation, or scripts required for an
actor to portray a role).
PAGE 19
LINE 8220 - LEGAL, ACCOUNTING, AND OTHER PROFESSIONAL FEES
Deduct the fees you incurred for external professional advice or
services, including consulting fees.
You can deduct accounting and legal fees you incur to get advice and
help in maintaining your books and records. You can also deduct fees
you incur for preparing and filing your income tax and GST returns.
You can also deduct accounting or legal fees you paid to have an
objection or appeal prepared against an assessment for income tax,
Canada Pension Plan or Quebec Pension Plan contributions, or Employment
Insurance premiums. However, these are not business expenses. You have
to reduce your claim by the amount of any award you get to cover your
costs. Enter the difference on line 232 of your income tax return. If
you received a reimbursement in 1996 for the types of fees which you
deducted in a previous year, report the amount you received on line
130 of your return.
You cannot deduct legal and other fees you incur to buy a capital
property. Instead, add these fees to the cost of the property. See
Chapter 4 for more details about capital property.
See Interpretation Bulletin IT-99, Legal and Accounting Fees, for more
details.
LINE 8221 - PROPERTY TAXES
You can deduct property taxes you incurred for property used in your
business. For example, you can deduct property taxes for the land and
building where your business is situated.
LINE 8222 - RENT
You can deduct rent incurred for property used in your business. For
example, you can deduct rent for the land and building where your
business is situated.
LINE 8223 - SALARIES, WAGES, AND BENEFITS
You can deduct gross salaries you pay to employees. Do not include on
this line salaries and wages described on line 8245, "Direct wage
costs," or line 8202, "Subcontracts," or salaries and drawings of the
owner(s) of the business. For more information, see the section called
"Details of equity" on page 22.
Do not deduct on any line any salaries or withdrawals payable to
yourself or a partner.
As the employer, you can deduct your portion of Canada Pension Plan or
Quebec Pension Plan (CPP or QPP) contributions, Employment Insurance
(EI) premiums, and Workers' Compensation amounts.
You can also deduct any premiums you pay on behalf of an employee for a
sickness, accident, disability, or income insurance plan.
You can deduct the salary you pay to your child, as long as you meet
all these conditions:
- you pay the salary;
- the work your child does is necessary for earning business or
professional income; and
- the salary is reasonable when you consider your child's age, and
the amount you pay is what you would pay someone else.
Keep documents to support the salary you pay your child. If you pay
your child by cheque, keep the cancelled cheque. If you pay cash, have
the child sign a receipt.
Instead of cash, you may pay your child with a product from your
business. When you do this, claim the value of the product as an
expense. You also add to your gross sales an amount equal to the value
of the product. Your child has to include the value of the product in
his or her income.
You can also deduct the salary you pay to your spouse. When you pay
your spouse a salary, use the same rules that apply to paying your
child.
Report the salaries you pay to your children and spouse on T4
Supplementary slips, the same as you would for other employees.
However, you cannot claim as an expense the value of board and lodging
you give to your dependent children and spouse.
LINE 8224 - TRAVEL
You can deduct travel expenses you incur to earn income. Travel
expenses include public transportation fares, hotel accommodations,
and meals.
In most cases, the 50% limit applies to the cost of meals, beverages,
and entertainment when you travel. We discuss this limit in the
section called "Line 8217 - Meals and entertainment" on page 15.
The 50% limit also applies to the cost of food and beverages served,
and entertainment enjoyed when you travel on an airplane, train, or
bus, when the ticket price does not include such amounts.
LINE 8225 - TELEPHONE AND UTILITIES
You can deduct expenses for telephone and utilities, such as gas, oil,
electricity, and water, if you incurred the expenses to earn income.
OTHER EXPENSES
There are expenses you can incur to earn income, other than those
listed on Forms T2032 and T2124. We cover some of them in the
following sections. Enter, on this line, the total of "Other expenses"
you incurred to earn income, as long as you did not include them on a
previous line. You do not have to list these expenses on the form.
DISABILITY-RELATED MODIFICATIONS
You can deduct outlays and expenses you incur for eligible disability-
related modifications made to a building in the year you paid them,
instead of having to add them to the capital cost of your building.
Eligible disability-related modifications include changes you make to
accommodate wheelchairs, such as:
- installing hand-activated power door openers;
- installing interior and exterior ramps; and
PAGE 20
- modifying a bathroom, elevator or doorway.
You can also deduct expenses paid to install or acquire the following
disability-related devices and equipment:
- elevator car-position indicators (such as braille panels and audio
indicators);
- visual fire-alarm indicators;
- telephone devices to help people who are hearing-impaired; and
- listening devices for group meetings.
In addition, you may be able to deduct expenses for disability-specific
computer software and hardware attachments.
COMPUTER AND OTHER EQUIPMENT LEASING COSTS
If you lease computers, cellular telephones, fax machines, and other
equipment, you can deduct the percentage of the lease costs that
reasonably relates to earning your business income. You can also deduct
the percentage of airtime expenses for a cellular telephone that
reasonably relates to earning your business income.
If you buy a computer, cellular telephone, fax machine, or other such
equipment, you cannot deduct their cost. You can deduct capital cost
allowance and interest you paid on money you borrowed to buy this
equipment that reasonably relates to earning your business income. For
more information on capital cost allowance, read chapter 4.
LEASING COSTS
Deduct the lease payments you incurred in the year for property used in
your business. If you lease a passenger vehicle, see "Line 8218 -
Motor vehicle expenses" on page 15.
If you entered a lease agreement after April 26, 1989, you can choose
to treat your lease payments as combined payments of principal and
interest. However, you and the person you are leasing from have to
agree to treat the payments this way. In this case, we consider that
you:
- bought the property rather than leased it; and
- borrowed an amount equal to the fair market value of the leased
property.
You can deduct the interest part of the payment as an expense. You can
also claim capital cost allowance (CCA) on the property.
You can make this choice as long as the property qualifies and the
total fair market value (FMV) of all the property subject to the lease
is more than $25,000. Digging equipment that you lease with a FMV of
$35,000 is property that qualifies. However, office furniture and
automobiles often do not qualify.
To treat your lease this way, file one of these forms with your return
for the year you make the lease agreement:
- Form T2145, Election in Respect of the Leasing of Property; or
- Form T2146, Election in Respect of Assigned Leases or Subleased
Property.
If you and the person you are leasing from have agreed to this kind of
lease arrangement and you need these forms, or for more details,
contact your tax services office.
SMALL TOOLS
If a tool cost under $200, deduct its full cost. If it cost you $200 or
more, add the cost to Class 8 on your CCA schedule. See Chapter 4 for
details.
CONVENTION EXPENSES
You can deduct the cost of going to a maximum of two conventions a
year. The conventions have to:
- relate to your business; and
- be held by a business or professional organization within the
geographical limits of where the sponsor of the convention usually
does business.
This second limit may not apply if an organization from another country
sponsors the convention, and if the convention relates to your
business.
Sometimes, convention fees include the cost of food, beverages, or
entertainment. However, the convention organizer may not show these
amounts separately on your bill. For each day the organizer provides
food, beverages, or entertainment, subtract $50 from the total
convention fee.
You can deduct this daily $50 amount as a meal and entertainment
expense. However, the 50% limit applies to the daily $50 amount. We
discuss the 50% limit in the section called "Line 8217 - Meals and
entertainment" on page 15.
----------------------------------------------------------------------
EXAMPLE
Cathy went to a two-day convention in May 1996 that cost her $600. The
organizer did not indicate what part of the $600 fee was for food and
entertainment. Her convention expense is $500 ($600 - ($50 x 2)). Cathy
could also claim a meal and entertainment expense of $50 ($50 x 2 x
50%).
----------------------------------------------------------------------
Food, beverages, or entertainment at a convention does not include
incidental items such as coffee and doughnuts available at meetings or
receptions at the convention.
Interpretation Bulletin IT-131, Convention Expenses, has more details.
ALLOWABLE RESERVES
You can deduct an amount for a reserve, contingent account, or a
sinking fund as long as the Income Tax Act allows it. The amount you
deduct has to be reasonable. You can find details about allowable
reserves in the following publications:
- Interpretation Bulletin IT-154, Special Reserves;
- Interpretation Bulletin IT-215, Reserves, Contingent Accounts and
Sinking Funds, and its Special Release;
- Interpretation Bulletin IT-321, Insurance Agents and Brokers -
Unearned Commissions;
- Interpretation Bulletin IT-442, Bad Debts and Reserve for Doubtful
Debts;
PAGE 21
- the income tax guide called Capital Gains; and
- the income tax guide called Preparing Returns for Deceased Persons.
For more information on allowable reserves, contact your tax services
office.
LINE 8207 - CAPITAL COST ALLOWANCE
If you use a property you own, such as a building, motor vehicle, or
equipment in your business, you might be able to claim capital cost
allowance (CCA). Enter, on this line, the amount you calculated in Area
A of Form T2124 or Form T2032. For information on how to complete Area
A, see Chapter 4.
LINE 8246 - ALLOWANCE ON ELIGIBLE CAPITAL PROPERTY
If you buy a property, such as goodwill or a franchise for your
business, you might be able to claim an annual allowance. See Chapter
5 for more information.
LINE 8237 - NET INCOME (LOSS) BEFORE ADJUSTMENTS
Enter on this line the gross income minus the deductible expenses. If
you are a member of a partnership, this amount is the net business
income of all partners.
On line e of Form T2032, or line h of Form T2124, show your share of
line 8237. This is the amount left after you subtract the amounts the
other partners are responsible for reporting as specified in the
partnership agreement. In the chart called "Details of other partners"
on Form T2124 or Form T2032, show the full names and addresses of the
other partners, as well as a breakdown of their shares of the income
and their percentages of the partnership.
OTHER AMOUNTS DEDUCTIBLE FROM YOUR SHARE OF NET PARTNERSHIP INCOME
(LOSS)
Enter the total of any extra expenses you incurred to earn your share
of the partnership income (loss), such as the business portion of
allowable motor vehicle expenses. These expenses must not have been
claimed anywhere else on the form. Claim these amounts only if the
partnership did not repay you for them. The limits discussed earlier in
this chapter also apply to these expenses.
You can use the chart on Form T2124 or Form T2032 to list the other
amounts you can deduct from your share of the partnership's net income
or loss.
You can also use the chart to claim the business income reduction, if
you are a member of a partnership that has sold an eligible capital
property, and you have made an election for 1994 regarding the $100,000
capital gains deduction on your interest in the partnership. For more
information, see Chapter 5.
LINE 8235 - BUSINESS-USE-OF-HOME EXPENSES
You can deduct expenses for the business use of a work space in your
home, as long as you meet one of these conditions:
- it is your principal place of business; or
- you use the space only to earn your business income, and you use it
on a regular and ongoing basis to meet your clients, customers, or
patients.
You can deduct a portion of your maintenance costs, such as heating,
home insurance, electricity, and cleaning materials. You can also
deduct a portion of your property taxes, mortgage interest, and capital
cost allowance (CCA). To calculate the portion you can deduct, use a
reasonable basis, such as the area of the work space divided by the
total area.
The capital gain and recapture rules will apply if you deduct CCA on
the business-use part of your home and you later sell your home. See
Chapter 4 for more information about these rules.
If you rent your home, you can deduct the portion of the rent and any
expenses you incur that relate to the work space.
The amount you can deduct for business-use-of-home expenses cannot be
more than your net income from the business before you deduct these
expenses. In other words, you cannot use these expenses to increase or
create a business loss.
You can deduct whichever of the following amounts is less:
- any amount you carry forward from 1995, plus the business-use-of-
home expenses you incur in 1996; or n the amount on line j of Form
T2124 or line g of Form T2032. In your next fiscal period, you can
use any expense you could not deduct in 1996, as long as you meet
one of the two previous conditions. You also use the same rules.
You can use the chart "Calculation of business-use-of-home expenses" on
Form T2124 or Form T2032 to calculate your allowable claim for
business-use-of-home expenses.
To see how to calculate your business-use-of-home expenses, read the
example below.
----------------------------------------------------------------------
EXAMPLE
Bill runs a hairstyling business and salon out of his home. His
business has a December 31 fiscal year end. Bill recorded the following
for 1996:
Total house area (square metres) 180
Area for business use only (square metres) 18
Area for personal use (square metres) 162
Net business income (loss) after adjustments $ 7,100
Business-use-of-home expenses carried forward
from 1995 $ 150
PAGE 22
Bill's home expenses for 1996:
Heat $ 1,200
Electricity $ 1,000
Insurance $ 650
Maintenance $ 350
Mortgage interest $ 8,000
Property taxes $ 1,800
Water $ 300
Bill completes the appropriate sections of Form T2032 as follows:
(SEE PRINTED COPY FOR FORM T2032(E)
Interpretation Bulletin IT-514, Work Space in Home Expenses, has more
details about these expenses.
RESERVE FOR 1971 ACCOUNTS RECEIVABLE (FORM T2032 ONLY)
If you have operated the same professional business since 1971, you may
be claiming a reserve for your accounts receivable at the end of 1971.
You must add your 1995 reserve amount to your 1996 income. You can
claim a new reserve for 1996. Use the chart on page 2 of your Form
T2032 to calculate the amount to include on line i of the form.
For more information, see Interpretation Bulletins IT-135, "Investment
Interest" in a Professional Business, and IT-353, Partnership Interest
- Some Adjustments to Cost Base.
LINE 8243 - YOUR NET INCOME (LOSS)
On the relevant lines of your income tax return, enter your total gross
(from line 8124 on your Form T2124 or Form T2032) and total net (from
line 8243 on your Form T2124 or Form T2032) business or professional
income or loss. Include the total of income or losses from all the
businesses or professional activities you are in.
If you have a business or professional loss that is more than all your
other sources of income, you may have a non-capital loss for the year.
To apply this loss against income from previous years, complete and
attach a copy of Form T1A, Request for Loss Carryback, to your return.
For more details about loss carrybacks, read Interpretation Bulletin
IT-232, Non-Capital Losses, Net Capital Losses, Restricted Farm
Losses, Farm Losses and Limited Partnership Losses - Their Composition
and Deductibility in Computing Taxable Income, or contact your tax
services office.
DETAILS OF OTHER PARTNERS
If you are a member of a partnership that does not have to file a
partnership information return (PIR), (see Chapter 1 for these
requirements) complete the chart called "Details of other partners" on
your Form T2124 or Form T2032.
If you are a member of a partnership that has to file a PIR, you do not
have to complete this chart.
DETAILS OF EQUITY (CHART ON PAGE 2 OF FORMS T2032 AND T2124)
If you are a member of a partnership that has to file a PIR, do not
complete this section.
LINE 8313 - TOTAL BUSINESS LIABILITIES
A liability is a debt or obligation of a business. Total business
liabilities is the total of all amounts your business or professional
activity owes at the end of its fiscal period. This includes accounts
payable; notes payable; taxes payable; unpaid salaries; wages, and
benefits; interest payable; deferred or unearned revenues; loans
payable; mortgages payable; or any other outstanding balance related
to the business.
LINE 8400 - DRAWINGS IN 1996
A drawing is any withdrawal of cash (including salaries), other assets,
or services of a business by the proprietor or partners. This includes
such transactions by the proprietor or partners (or family members) as
withdrawing cash for non-business use, and using business assets or
services for personal use. Include the cost or value of personal use of
business assets or services in your drawings for the year.
LINE 8401 - CAPITAL CONTRIBUTIONS IN 1996
A capital contribution is an addition you made to the business of cash
or other assets during its fiscal period. This includes adding
personal funds to the business account,
PAGE 23
paying business debts with personal funds, and transferring personal
assets to the business.
CHAPTER 4 - CAPITAL COST ALLOWANCE (CCA)
WHAT IS CAPITAL COST ALLOWANCE?
You might acquire a depreciable property, such as a building,
furniture, or equipment, to use in your business or professional
activities. You cannot deduct the cost of the property when you
calculate your net business or professional income for the year.
However, since these properties wear out or become obsolete over time,
you can deduct their cost over a period of several years. The
deduction for this is called capital cost allowance (CCA).
HOW MUCH CCA CAN YOU CLAIM?
The amount of CCA you can claim depends on the type of property you
own, and the date you acquired it. You group the depreciable property
you own into classes. A specific rate of CCA generally applies to each
class. We explain the most common classes of property in the section
called "Classes of depreciable property," on page 27. We list most of
the classes and their rates in the section called "CCA classes" on
page 35.
Base your CCA claim on your fiscal period ending in 1996, and not the
calendar year.
There are a few other things you should know about CCA:
- For the most part, use the declining balance method to calculate
your CCA. This means that you claim CCA on the capital cost of the
property minus the CCA you claimed in previous years, if any. The
remaining balance declines over the years as you claim CCA.
----------------------------------------------------------------------
EXAMPLE
Last year, Nick bought a building for $60,000 to use in his business.
On his return for last year, he claimed CCA of $1,200 on the building.
This year, Nick bases his CCA claim on the remaining balance of $58,800
($60,000 - $1,200).
----------------------------------------------------------------------
- You do not have to claim the maximum amount of CCA in any given
year. You can claim any amount you like, from zero to the maximum
allowed for the year. For example, if you do not have to pay income
tax for the year, you may not want to claim CCA. Claiming CCA
reduces the amount of CCA available to you for future years.
- In the year you acquire a property, you can usually claim CCA only
on one-half of your net additions to a class. We explain this 50%
rule under the heading "Column 6 - Adjustment for current year
additions" on page 26. The available-for-use rules discussed later
in this chapter may also affect the amount of CCA you can claim.
- You cannot claim CCA on most land or on living things such as
trees, shrubs, or animals. However, you can claim CCA on timber
limits, cutting rights, and wood assets. For more details, read
Interpretation Bulletins IT-481, Timber Resource Property and
Timber Limits, and IT-501, Capital Cost Allowance - Logging Assets
and its Special Release.
- If you claim CCA, and you later dispose of the property, you may
have to add an amount to your income as a recapture of CCA.
Alternatively, you may be able to deduct an additional amount from
your income as a terminal loss. For more information, see the
section called "Column 5 - UCC after additions and dispositions" on
page 26.
- If you receive income from a quarry, sand, or gravel pit, or a
woodlot, you can claim a type of allowance known as a depletion
allowance. For more details about quarries, pits, and woodlots,
read Interpretation Bulletins IT-373, Farm Woodlots and Tree Farms
and its Special Release, and IT-492, Capital Cost Allowance -
Industrial Mineral Mines.
- If you are a member of a partnership that provides you with a T5013
Supplementary, Statement of Partnership Income, you cannot
personally claim CCA. The T5013 supplementary slip you receive will
have already allocated to you a share of the partnership's CCA on
the property.
YOU WERE ASKING...?
Q. How do I calculate my CCA claim if I start a business and my first
fiscal period is from June 1, 1996, to December 31, 1996?
A. If your fiscal period is less than 365 days, you have to prorate
your CCA claim. Calculate your CCA using the rules we discuss in
this chapter. However, base your CCA claim on the number of days in
your fiscal period compared to 365 days.
In your case, your fiscal period is 214 days. Suppose you calculate
your CCA to be $3,500. The amount of CCA you can claim is $2,052
($3,500 x 214/365).
DEFINITIONS
To calculate your CCA claim, you will need to know the meaning of the
following terms:
AVAILABLE-FOR-USE
You can usually claim CCA on a property only when it becomes available
for use.
Property other than a building usually becomes available for use on the
earlier of:
- the date you first use it to earn income;
- the second taxation year after the year you acquire the property;
- the time immediately before the disposition of the property; and
- the time the property is delivered or made available to the
taxpayer and is capable of producing a saleable product or service.
A building usually becomes available for use on the earlier of:
- the date that you begin using 90% or more of the building in your
business;
PAGE 24
- the second taxation year after the year you acquire the building;
and
- the time immediately before the disposition of the property.
A building that you are constructing, renovating, or altering usually
becomes available for use on the earlier of:
- the date you complete the construction, renovation, or alteration;
- the date you begin using 90% or more of the building in your
business;
- the second taxation year after the year you acquire the property;
and
- the time immediately before the disposition of the property.
CAPITAL COST
This is the amount on which you first claim CCA. The capital cost of a
property is usually the total of:
- the purchase price (not including the cost of land, which is
usually not depreciable - see the section called "Land" on page
25);
- the part of your legal, accounting, engineering, installation, and
other fees that relates to the purchase or construction of the
property (not including the part that applies to land);
- the cost of any additions or improvements you made to the property
after you acquired it, if you did not claim these costs as a
current expense (such as modifications to accommodate disabled
persons); and
- for a building, soft costs (such as interest, legal and accounting
fees, and property taxes) related to the period you are
constructing, renovating, or altering the building, if these
expenses have not been deducted as current expenses.
DEPRECIABLE PROPERTY
This is any property on which you can claim CCA. You usually group
depreciable properties into classes. For example, diggers, drills, and
tools that cost $200 or more belong to class 8. You have to base your
CCA claim on a rate assigned to each class of property.
We explain the most common classes of property in the section called
"Classes of depreciable property," on page 27. We list most of the
classes and their rates in the section called "CCA classes" on page 35.
To determine the rate for depreciable property not listed, contact
your tax services office.
FAIR MARKET VALUE (FMV)
FMV is generally the highest dollar value that you can get for your
property in an open and unrestricted market between an informed and
willing buyer and an informed and willing seller who are dealing at
arm's length with each other.
NON-ARM'S-LENGTH TRANSACTION
A non-arm's-length transaction includes a transaction between people
who are related, such as members of a family. An example of a non-
arm's-length transaction would be the sale of property between a
husband and wife, or a parent and child. For more details on non-
arm's-length transactions, see Interpretation Bulletin IT-419R, Meaning
of Arm's Length.
PROCEEDS OF DISPOSITION
The proceeds of disposition are generally the sale price of a property.
For more details about proceeds of disposition, read Interpretation
Bulletins IT-220, Capital Cost Allowance - Proceeds of Disposition of
Depreciable Property and its Special Release, and IT-285, Capital Cost
Allowance - General Comments.
UNDEPRECIATED CAPITAL COST (UCC)
The UCC is the amount remaining after you deduct CCA from the capital
cost of a depreciable property. Each year the CCA you claim reduces
the UCC of the property.
HOW DO YOU MAKE YOUR CLAIM?
Use Area A on page 3 of your Form T2124 or Form T2032 to calculate your
1996 deduction for CCA, and any recaptured CCA and terminal losses.
For 1996, you can get information to help you complete Area A from
other areas of Form T2124 or Form T2032 and from your Form T2032 and
Form T2124 filed for 1995.
If you acquired or disposed of any buildings or equipment during the
fiscal period, you should complete as required, Areas B, C, D, or E
before completing Area A.
You will find explanations on how to complete Areas B and C in the
section called "Column 3 - Cost of additions in the year" on page 25.
You will find explanations on how to complete Areas D and E in the
section called "Column 4 - Proceeds of dispositions in the year" on
page 25.
NOTE
Completing the above-noted charts will help you calculate your CCA
claim for 1996. Even if you are not claiming a deduction for CCA
for 1996, complete the appropriate charts to show any additions and
dispositions during the year.
COLUMN 1 - CLASS NUMBER
Enter the class numbers of your properties in this column. If this is
the first year you are claiming CCA, read the section called "Column 3
- Cost of additions in the year" before completing column 1. If you
claimed CCA last year, you can get the class numbers of your
properties from last year's form.
We discuss the more common types of depreciable properties in the
section called "Classes of depreciable property" on page 27, and list
most of the classes and their rates in the section called "CCA classes"
on page 35. To determine the rate for depreciable property not listed,
contact your tax services office.
PAGE 25
COLUMN 2 - UNDEPRECIATED CAPITAL COST (UCC) AT THE START OF THE YEAR
If this is the first year you are claiming CCA, skip column 2, and go
to column 3. Otherwise, enter in column 2 the UCC for each class at
the end of last year. These amounts were included in column 10.
From your UCC at the start of 1996, subtract any investment tax credit
you claimed or were refunded in 1995. Also subtract any 1995
investment tax credit you carried back to a year before 1995.
You may have received a GST input tax credit in 1996 for a passenger
vehicle you use less than 90% for your business. In this case,
subtract the amount of the credit from your beginning UCC.
NOTE
In 1996, you may be claiming, carrying back, or getting a refund of
an investment tax credit. If you still have depreciable property
in the class, you have to adjust the UCC of the class to which the
property belongs in 1997. To do this, subtract the amount of the
credit from the UCC at the beginning of 1997. When there is no
property left in the class, report the amount of the investment tax
credit as income in 1997.
COLUMN 3 - COST OF ADDITIONS IN THE YEAR
If you acquire or make improvements to depreciable property in the
year, we consider them to be additions to the class in which the
property belongs. You should:
- complete Areas B and C of your Form T2124 or Form T2032, as
explained below; and
- enter, in column 3 of Area A for each class, the figure from column
5 of each class in Areas B and C.
If a chart asks for the personal portion of a property, this refers to
the part that you use personally, separate from the part you use for
business. For example, if you use 25% of the building you live in for
business, your personal portion is the other 75%.
Do not include the value of your own labour in the cost of a property
you build or improve. Include in the capital cost of the property the
cost of surveying or valuing a property you acquire. Remember that a
property usually has to be available for use before you can claim CCA.
See the definition of available-for-use on page 23.
If you received insurance proceeds to reimburse you for the loss or
destruction of depreciable property, enter the amount you spent to
replace the property in Column 3 of Area A, and also in Area B or C,
whichever applies. Include the amount of insurance proceeds as deemed
proceeds of disposition in Column 4 of Area A, and in Area D or E,
whichever applies.
If you replaced a lost or destroyed property within a year of the loss,
special rules for replacement property may apply to you. See
Interpretation Bulletin IT-259, Exchanges of Property and its Special
Release, and IT-491, Former Business Property and it Special Release.
To find out if any of these special situations apply in your case when
you acquire property, you should refer to the sections in "Personal
use of property" on page 29,
"Non-arm's-length transactions," "Changing from personal to business
use," and "Grants, subsidies, and other incentives or inducements" all
on page 30.
AREA B - DETAILS OF EQUIPMENT ADDITIONS IN THE YEAR
List in this chart the details of all equipment (including motor
vehicles) you acquired or improved in 1996. Group the equipment into
the applicable classes, and put each class on a separate line. You will
find information about classes on page 27.
Equipment includes appliances (such as a laundry press) and maintenance
equipment (such as a paint sprayer) you acquire to use in your
business or professional activities.
Enter on line 8304 the total business portion of the cost of the
equipment. You will find information about capital cost on page 24.
AREA C - DETAILS OF BUILDING ADDITIONS IN THE YEAR
List in this chart the details of all buildings you acquired or
improved in 1996. Group the buildings into the applicable classes, and
put each class on a separate line. You will find information about
classes on page 27.
Enter on line 8306 the total business portion of the cost of the
buildings. The cost includes the actual purchase price of the building,
plus any related expenses that you should add to the capital cost of
the building, such as legal fees, land transfer taxes, and mortgage
fees. You will find information about capital cost on page 24.
LAND
Most land is not depreciable property. Therefore, you cannot usually
claim CCA on its cost. If you acquire a property that includes both
land and a building, enter in column 3 of Area C only the cost that
relates to the building. To calculate the building's capital cost, you
have to split any fees that relate to the purchase of the property
between the land and the building. Related fees may include legal and
accounting fees.
Calculate the part of the related fees you can include in the capital
cost of the building as follows:
legal, the part of the fees
building value x accounting, = you can include in
------------------
total purchase or other the building's cost
price fees
You do not have to split a fee if it relates specifically to the land
or the building. In this case, you would add the amount of the fee to
the cost to which it relates, either the land or the building.
AREA F - DETAILS OF LAND ADDITIONS AND DISPOSITIONS IN THE YEAR
Enter the total cost of acquiring land in 1996 on line 8302. The cost
includes the actual purchase price of the land, plus any related
expenses that you should add to the capital cost of the land, such as
legal fees, land transfer taxes, and mortgage fees.
Usually, you cannot claim CCA on land. Do not enter this amount in
column 3 of Area A.
PAGE 26
COLUMN 4 - PROCEEDS OF DISPOSITIONS IN THE YEAR
Enter the details of your 1996 dispositions on your Form T2124 or Form
T2032, as explained below.
If you disposed of a depreciable property during the fiscal period,
enter in column 3 of the appropriate dispositions chart one of the
following amounts, whichever is less:
- your proceeds of disposition, minus any related expenses; or
- the capital cost of the property.
Your proceeds of disposition are usually the amounts you receive, or
that we consider you to have received, when you dispose of your
property. This could include compensation you receive for property that
someone destroys, expropriates, steals, or damages. Special rules may
apply if you dispose of a building for less than both its undepreciated
capital cost and for less than your capital cost. If this is the case,
see "Special rules for disposing of a building in the year" on page 32
for details.
NOTE
If A chart asks for the personal portion of a property, this refers
to the part that you use personally, separate from the part you use
for business. For example, if you use 25% of the building you live
in for business, your personal portion is the other 75%.
Enter, in column 4 of Area A for each class, the figure from column 5
of each class in Areas D and E.
If you sell a property for more than it cost, you will have a capital
gain. You may be able to postpone or defer adding a capital gain or
recapture to income. See the sections called "Capital gains," on page
31, and "Replacement property" on page 33 for more information.
AREA D - DETAILS OF EQUIPMENT DISPOSITIONS IN THE YEAR
List in this chart the details of all equipment (including motor
vehicles) you disposed of in your 1996 fiscal period. Group the
equipment into the applicable classes, and put each class on a separate
line. You will find information about classes on page 27.
Enter on line 8305 the total business portion of the proceeds of
disposition of the equipment. You will find information about proceeds
of disposition on this page.
If all of the proceeds of disposition for the equipment are not
received in the year you dispose of the equipment, see Interpretation
Bulletin IT-236, Reserves - Disposition of Capital Property.
AREA E - DETAILS OF BUILDING DISPOSITIONS IN THE YEAR
List in this chart the details of all buildings you disposed of in your
1996 fiscal period. Group the buildings into the applicable classes,
and put each class on a separate line. You will find information about
classes on page 27.
Enter on line 8307 the total business portion of the proceeds of
disposition of the buildings. You will find information about proceeds
of disposition on this page.
If all of the proceeds of disposition for a building are not received
in the year you dispose of the building, see Interpretation Bulletin
IT-236, Reserves - Disposition of Capital Property.
AREA F - DETAILS OF LAND ADDITIONS AND DISPOSITIONS IN THE YEAR
Enter the total of all amounts you received or will receive for
disposing of land in the period on line 8303.
COLUMN 5 - UCC AFTER ADDITIONS AND DISPOSITIONS
Add the amount in column 2 to the amount in column 3. Then subtract the
amount in column 4 from this total. Enter the result in column 5.
You cannot claim CCA when the amount in column 5 is:
- negative (see "Recapture of CCA" below); or
- positive, and you do not have any property left in that class at
the end of your 1996 fiscal period (see "Terminal loss" on this
page).
In either case, enter "0" in column 10.
NOTE
Completing the above-noted charts will help you calculate your CCA
claim for your 1996 fiscal period. Even if you are not claiming a
deduction for CCA for your 1996 fiscal period, complete the
appropriate charts to show any additions or dispositions during
the period. If you need more details, get Interpretation Bulletin
IT-220, Capital Cost Allowance - Proceeds of Disposition of
Depreciable Property, and its Special Release.
RECAPTURE OF CCA
If the amount in column 5 is negative, you have a recapture of CCA.
Enter your recapture on the line "Other income" of your Form T2032 or
Form T2124. A recapture of CCA can happen if the proceeds from the sale
of depreciable property are more than the total of:
- the UCC of the class at the beginning of the period; and
- the capital cost of any new additions during the period.
TERMINAL LOSS
If the amount in column 5 is positive, and you no longer own any
property in that class, you have a terminal loss. More precisely, you
have a terminal loss when, at the end of a fiscal period, you have no
more property in the class but still have an amount which you have not
deducted as CCA. You can subtract this terminal loss from your gross
business or professional income in the year you disposed of the
property. Enter your terminal loss on the line "Other expenses" of Form
T2032 or Form T2124.
For more information on recapture of CCA and terminal loss, see
Interpretation Bulletin IT-478, Capital Cost Allowance - Recapture and
Terminal Loss.
NOTE
The rules for recapture and terminal loss do not apply to passenger
vehicles in class 10.1. However, see the comments in the section
called, "Column 7 - Base amount for capital cost allowance" to
calculate your CCA claim.
(SEE PRINTED COPY FOR FORMS T1A, T2124 AND T2032)
PAGE 27
COLUMN 6 - ADJUSTMENT FOR CURRENT YEAR ADDITIONS
In the year you acquire or make additions to a property, you can
usually claim CCA on only one-half of your net additions (the amount
in column 3 minus the amount in column 4). We call this the 50% rule.
Calculate your CCA claim only on the net adjusted amount. Do not reduce
the cost of the additions in column 3, or the CCA rate in column 8.
For example, if you acquired a property in your 1996 fiscal period for
$30,000, you would base your CCA claim on $15,000 ($30,000 x 50%).
If you acquired and disposed of depreciable property of the same class
in your 1996 fiscal period, the calculation in column 6 restricts your
CCA claim. Calculate the CCA you can claim as follows:
- determine which of the following amounts is less:
- the proceeds of disposition of your property, minus any related
costs or expenses; or
- the capital cost;
- subtract the above amount from the capital cost of your addition;
and
- in column 6, enter 50% of the result. If the result is negative,
enter "0."
In some cases, you do not make an adjustment in column 6. For example,
in a non-arm's-length transaction, you may buy property that the
seller continuously owned for at least 364 days before the end of your
1996 fiscal period.
Also, some properties are not subject to the 50% rule. Some examples
are those in classes 13, 14, 23, 24, 27, 29, and 34, as well as some
of those in class 12, such as small tools that cost less than $200.
The 50% rule does not apply when the available-for-use rules discussed
on page 23 deny a CCA claim until the second taxation year after you
acquired a property.
If you need more details on the 50% rule, see Interpretation Bulletin
IT-285, Capital Cost Allowance - General Comments, and its Special
Release.
COLUMN 7 - BASE AMOUNT FOR CAPITAL COST ALLOWANCE (CCA)
Base your CCA claim on this amount.
For a class 10.1 vehicle you disposed of in your 1996 fiscal period,
you may be able to claim 50% of the CCA that would be allowed if you
still owned the vehicle at the end of the year. This is known as the
half-year rule on sale.
You can use the half-year rule on sale if, at the end of your 1995
fiscal period, you owned the class 10.1 vehicle you disposed of in
1996. If this applies to you, enter 50% of the amount in column 2 in
column 7.
COLUMN 8 - RATE (%)
In this column, enter the % for each class of property in Area A. For
detailed information on certain kinds of property, see "Classes of
depreciable property" on this page. For a more complete list of rates,
see the section called "CCA classes" on page 35.
COLUMN 9 - CCA FOR THE YEAR
In column 9, enter the CCA you choose to deduct for 1996. The CCA you
can deduct cannot be more than the amount you get when you multiply
the amount in column 7 by the rate in column 8. You can deduct any
amount up to the maximum.
If this is your first year of business, you may have to prorate your
CCA claim. See "You were asking ...?" on page 23.
Add up all the amounts in column 9 for all your classes of depreciable
property. Enter the total on line 8207, "Capital cost allowance," on
Form T2032 or Form T2124. See the section called "Personal use of
property" on page 29 to find out how to calculate your CCA claim if
you are using the property both for business and personal use.
COLUMN 10 - UCC AT THE END OF THE YEAR
This is the undepreciated capital cost (UCC) at the end of your 1996
fiscal period. This is the amount you will enter in column 2 when you
calculate your CCA claim next year.
Enter "0" in column 10 if you have a terminal loss or a recapture of
CCA. There will not be an amount in column 10 for a class 10.1
passenger vehicle you dispose of in the year.
CLASSES OF DEPRECIABLE PROPERTY
In this part, we discuss the more common types of depreciable
properties. We list most of the classes and their rates in the section
called "CCA classes" on page 35. To determine the rate for depreciable
property not listed, contact your tax services office.
BUILDINGS
A building may belong to class 1, 3, or 6, depending on what the
building is made of and the date you acquired it. You also include in
these classes the parts that make up the building, such as:
- electric wiring;
- lighting fixtures;
- plumbing;
- sprinkler systems;
- heating equipment;
- air-conditioning equipment (other than window units);
- elevators; and
- escalators.
NOTE
Most land is not depreciable property. Therefore, when you acquire
property, only include the cost that relates to the building in
Areas C and A. Enter on line 8302 of your Form T2124 or Form T2032
the cost of all land additions in 1996. See the sections called
"Area F - Details of land additions and dispositions in the year"
on
PAGE 28
page 25, and "Column 3 - Cost of additions in the year" on page 25
for more details.
CLASS 1 (4%)
Class 1 includes most buildings acquired after 1987, unless they
specifically belong in another class. Class 1 also includes the cost of
certain additions or alterations you made after 1987 to a class 3
building. See "Class 3 (5%)" for more information.
CLASS 3 (5%)
Most buildings acquired before 1988 were added to class 3 or class 6.
If you acquired a building before 1990 that does not fall into class
6, you can include it in class 3 if one of the following applies:
- you acquired the building under the terms of a written agreement
entered into before June 18, 1987; or
- the building was under construction by you or on your behalf on
June 18, 1987.
Do not transfer property you previously included in class 3 to class 1.
However, there is a limit to how much you can include in class 3 for
the cost of any additions or alterations made after 1987 to a class 3
building. This limit is whichever of the following two amounts is
less:
- $500,000; or
- 25% of the building's capital cost (including the cost of additions
or alterations to the building included in class 3, class 6, or
class 20 on December 31, 1987).
Include the cost of any additions or alterations over this limit in
class 1.
CLASS 6 (10%)
Include a building in class 6 if you acquired it before 1988, and it is
made of frame, log, stucco on frame, galvanized iron, or corrugated
iron. If you acquired the building after 1987, it has to be made of
frame, log, stucco on frame, galvanized iron, or any corrugated metal.
In addition, one of the following conditions has to apply:
- the building is used for farming or fishing; or
- the building has no footings or other base supports below ground
level. If either of the above conditions applies, you also add the
full cost of all additions and alterations to the building to class
6.
If neither of the above conditions applies, include the building in
class 6 if:
- you acquired the building before 1979;
- you entered into an agreement before 1979 to acquire the building,
and footings or other base supports of the building were started
before 1979; or
- you started construction of the building before 1979 (or it was
started under the terms of a written agreement you entered into
before 1979) and footings or other base supports of the building
were started before 1979.
For additions or alterations to such a building:
- Add to class 6:
- all additions made before 1979; and
- only the first $100,000 of additions or alterations made after
1978.
- Add to class 3:
- the part of the cost of all additions or alterations above
$100,000 made after 1978 and before 1988; and
- the part of the cost of additions or alterations above $100,000
made after 1987, but only up to $500,000 or 25% of the cost of
the building.
- Add to class 1 any additions or alterations above these limits.
If you need more information, see Interpretation Bulletin IT-79,
Capital Cost Allowance - Buildings or Other Structures.
OTHER PROPERTY - CLASS 8 (20%)
Class 8 includes property that is not included in any other class. For
example, furniture, appliances, fixtures, machinery, and equipment you
use in your business are all in this class.
ELECTRONIC OFFICE EQUIPMENT - CLASS 8 (20%) AND CLASS 10 (30%)
Certain types of computer equipment and office communication and
electronic equipment can become obsolete before you can fully deduct
their cost for income tax purposes. This includes photocopiers and fax
machines. You can elect to include, in a separate prescribed class,
one or more properties acquired after April 26, 1993, that would
otherwise be included in class 8 or class 10. This new class doesn't
change the specified rate. However, it ensures that any part of the
cost of the equipment that has not been deducted as CCA will be fully
deductible as a terminal loss on the disposition of all the property in
that class. For more information on terminal losses, see the section
called "Column 5 - UCC after additions and dispositions" on page 26.
This election will only apply to properties that cost $1,000 or more.
To make an election to put property in a separate prescribed class, let
us know by attaching a letter to your return for the taxation year in
which you acquired the property.
NOTE
You might still own the property at the beginning of the fifth
taxation year following the taxation year in which the property
became available for use. If so, you will have to transfer the UCC
of each separate class from the separate prescribed class to the
general class in which it would otherwise belong. For more
details, contact your tax services office.
PASSENGER VEHICLES - CLASS 10.1 (30%)
Your passenger vehicle can belong to either class 10 or class 10.1. We
define a passenger vehicle on page 15. Include your passenger vehicle
in class 10 unless it meets a class 10.1 condition. List each class
10.1 vehicle separately.
PAGE 29
Include your passenger vehicle in class 10.1 if it meets one of these
conditions:
- you bought it before September 1, 1989, and it cost more than
$20,000; or
- you bought it after August 31, 1989, and it cost more than $24,000.
If a passenger vehicle you bought before September 1, 1989, cost more
than $20,000, we consider the capital cost of that vehicle to be
$20,000. If a passenger vehicle you bought after August 31, 1989, but
before 1991, cost more than $24,000, we consider the capital cost of
that vehicle to be $24,000. If a passenger vehicle you bought after
1990 cost more than $24,000, we consider the capital cost of that
vehicle to be $24,000, plus the related goods and services tax (GST)
and provincial sales tax (PST).
The $20,000 and $24,000 amounts are the capital cost limits for a
passenger vehicle. However, since January 1, 1991, to determine the
class to which your passenger vehicle belongs, you have to use the cost
of the vehicle before you add the GST and PST.
----------------------------------------------------------------------
EXAMPLE
Erin owns a sporting goods retail business. On June 21, 1996, she
bought two passenger vehicles to use in her business. The PST rate for
her province is 8%. Erin noted these details for 1996:
Cost GST PST Total
Vehicle 1 $25,000 $1,750 $2,000 $28,750
Vehicle 2 $23,000 $1,610 $1,840 $26,450
Erin puts Vehicle 1 in class 10.1, since she bought it after August 31,
1989, and it cost her more than $24,000. Before Erin enters an amount
in column 3 of Area B, she has to calculate the GST and PST on $24,000.
She does this as follows:
- GST at 7% of $24,000 = $1,680; and
- PST at 8% of $24,000 = $1,920.
Therefore, Erin's capital cost is $27,600 ($24,000 + $1,680 + $1,920).
She enters this amount in column 3 of Area B.
Erin puts Vehicle 2 into class 10, since she bought it after August 31,
1989, and it did not cost her more than $24,000.
Erin's capital cost is $26,450 ($23,000 + $1,610 + $1,840). She enters
this amount in column 3 of Area B.
----------------------------------------------------------------------
NOTE
The rate for the GST is 7% for the whole country. However, we have
used a provincial sales tax (PST) rate of 8% for the purposes of
this example only. In your case, use the appropriate rate for your
province.
SPECIAL RATES FOR CERTAIN EQUIPMENT - CLASSES 24 AND 27
If you buy certain equipment that stops, reduces, or eliminates air or
water pollution, it may qualify for an accelerated rate of CCA.
For this equipment to qualify for the accelerated CCA rate, it must
meet certain conditions. It has to be new, and the Minister of the
Environment has to accept it as equipment you use solely to stop,
reduce, or eliminate pollution. For more details, contact:
Manager, ACCA Program
Environment Canada
Ottawa ON K1A 1C8
Telephone: (819) 997-2057
The accelerated CCA rate incentive will not apply to equipment acquired
after 1998.
For more details on the special CCA rates, see Interpretation Bulletin
IT-336, Capital Cost Allowance - Pollution Control Property.
SPECIAL SITUATIONS
PERSONAL USE OF PROPERTY
If you buy property for both business and personal use, there are two
ways to show the business portion of the property in Area B or Area C:
- If your business use stays the same from year to year, enter in
Area B or Area C the total cost of the property in Column 3, the
personal portion in Column 4, and the business portion in Column 5.
Enter the amount from Column 5 in Column 3 of Area A to calculate
the CCA you can claim.
- If your business use changes from year to year, enter in Area B or
Area C the total cost of the property in Column 3 and Column 5,
and enter "0" in Column 4. Enter the amount from Column 5 in Column
3 of Area A to calculate the CCA you can claim. When you claim
CCA, you will have to calculate the allowable portion you can claim
for business use.
----------------------------------------------------------------------
EXAMPLE
Nadir owns a financial consulting business. He bought a car in 1996
that he uses both for personal and for business use. The car cost
$20,000, including all charges and taxes. Therefore, he includes the
car in class 10. His business use varies from year to year. He
calculates his CCA on the car for 1996 as follows:
He enters $20,000 in Column 3 and Column 5 of Area B. Nadir also enters
$20,000 in Column 3 of Area A. By completing the other columns in the
chart, he calculates a CCA claim of $3,000. Because Nadir used his car
partly for personal use, he calculates his CCA claim as follows:
12,000 (business kilometres) x $3,000 = $2,000
----------------------------
18,000 (total kilometres)
Nadir enters $2,000 on line 8207, "Capital cost allowance," on his Form
T2124.
----------------------------------------------------------------------
NOTE
The capital cost limits on a Class 10.1 vehicle (a passenger
vehicle) still apply when you split the capital cost between
business and personal use. See the section called "Passenger
vehicles - Class 10.1 (30%)" on page 28 for more details.
PAGE 30
CHANGING FROM PERSONAL TO BUSINESS USE
If you bought a property for personal use and then started using it in
your business in your 1996 fiscal period, there is a change in use.
You need to determine the capital cost for business purposes.
If the fair market value (FMV) of a depreciable property is less than
its original cost when you change its use, the amount you put in
column 3 of Area B or C is the FMV of the property (excluding the land
value if the property is land and a building). If the FMV is more than
the original cost of the property (excluding the land value if the
property is land and a building) when you change its use, use the
following chart to determine the amount to enter in column 3 of Area B
or C.
NOTE
We consider that you acquire the land for an amount equal to its
FMV when you change its use. Include this amount on line 8302,
"Total cost of all land additions in the year," in area F.
----------------------------------------------------------------------
CAPITAL COST CALCULATION
Actual cost of the property $ _______ 1
FMV of the property $ _______ 2
Amount on line 1 _______ 3
Line 2 minus line 3 (if
negative, enter "0") $ _______ 4
Enter any capital gains
deduction claimed for
the amount on line 4*
$ _______ x 4/3 _______ 5
Line 4 minus line 5 (if
negative, enter "0") $ _______ x 3/4 $ _______ 6
Your capital cost is line 1 plus line 6 $ _______ 7
* Enter the amount that relates to the depreciable property only.
----------------------------------------------------------------------
GRANTS, SUBSIDIES, OR OTHER INCENTIVES OR INDUCEMENTS
You may get a grant or subsidy from a government or a government agency
to buy depreciable property. When this happens, subtract the amount of
the grant from the property's capital cost. Do this before you enter
the capital cost in column 3 of Area B or C.
See Interpretation Bulletin IT-273, Government Assistance - General
Comments (after January 18, 1981), and its Special Release, for more
details about government assistance.
You may have incurred the GST on some of the depreciable property you
acquired for your business. If so, you may have also received an input
tax credit from Revenue Canada.
The input tax credit is government assistance. Therefore, subtract it
from the property's capital cost. Do this before you enter the capital
cost in column 3 of Area B or Area C, whichever applies. If you receive
an input tax credit for a passenger vehicle you use in your business,
use one of these methods:
- For a passenger vehicle you use 90% or more for your business,
subtract the amount of the credit from the vehicle's cost before
you enter its capital cost in column 3 of Area C.
- For a passenger vehicle you use less than 90% for your business, do
not make an adjustment in 1996. In 1997, subtract the amount of
the credit from your beginning UCC.
You may get an incentive from a non-government agency to buy
depreciable property. If this happens, you can either include the
amount in income, or subtract the amount from the capital cost of the
property.
NON-ARM'S-LENGTH TRANSACTIONS
When you acquire property in a non-arm's-length transaction, there are
special rules to follow to determine the property's cost. These
special rules will not apply if you get the property because of
someone's death.
You can acquire depreciable property in a non-arm's-length transaction
from an individual resident in Canada, a partnership with at least one
member who is an individual resident in Canada, or a partnership with
at least one member that is another partnership. If you pay more for
the property than the seller paid for the same property, calculate the
cost as follows:
PAGE 31
----------------------------------------------------------------------
CAPITAL COST CALCULATION
The seller's cost or capital cost $ _______ 1
The greater of the
fair market value
of the property or
the seller's proceeds
of disposition $ _______ 2
Amount from line 1 $ _______ 3
Line 2 minus line 3
(if negative,
enter "0") $ _______ 4
Enter any capital gains
deduction claimed
for the amount
on line 4
$ _______ x 4/3 $ _______ 5
Line 4 minus line 5
(if negative,
enter "0") $ _______ x 3/4 $ _______ 6
Capital cost (line 1 plus line 6) $ _______ 7
Enter this amount in column 3 of either Area B or Area C, whichever
applies. Do not include the cost of the related land, which you have
to include on line 8302, "Total cost of all land additions in the
year," in Area F.
----------------------------------------------------------------------
You can also buy depreciable property in a non-arm's-length transaction
from an individual who is not resident in Canada, or a partnership
with no members who are individuals resident in Canada, or no members
that are other partnerships. If you pay more for a property than the
seller paid for it, calculate the capital cost as follows:
----------------------------------------------------------------------
CAPITAL COST CALCULATION
The seller's cost or capital cost $_______ 1
The greater of the fair market
value of the property, or the
seller's proceeds of disposition $ _______ 2
Amount from line 1 $ _______ 3
Line 2 minus line 3 (if negative,
enter "0") $ _______ x 3/4 $ _______ 4
Capital cost (line 1 plus line 4) $ _______ 5
Enter this amount in column 3 of either Area B or Area C, whichever
applies. Do not include the cost of the related land, which you have
to include on line 8302, "Total cost of all land additions in the
year," in Area F.
----------------------------------------------------------------------
If you buy depreciable property in a non-arm's-length transaction and
pay less for it than the seller paid, your capital cost is the same
amount as the seller paid. We consider you to have deducted as CCA the
difference between what you paid and what the seller paid.
----------------------------------------------------------------------
EXAMPLE
Rachel bought a pickup truck from her father, Marcus, in her 1996
fiscal period for $4,000. Marcus paid $10,000 for the truck in 1987.
Since the amount Rachel paid is less than the amount Marcus paid, we
consider Rachel's cost to be $10,000. We also consider that Rachel has
deducted CCA of $6,000 in the past ($10,000 - $4,000).
Rachel completes the CCA chart as follows:
- in Area B, she enters $10,000 in column 3, "Total cost."
- in Area A, she enters $4,000 in column 3, "Cost of additions in the
year," as the addition for her 1996 fiscal period.
----------------------------------------------------------------------
There is a limit on the cost of a passenger vehicle you buy in a non-
arm's-length transaction. The cost is whichever of the following three
amounts is less:
- the FMV at the time you buy it;
- $24,000 plus any GST and PST you would pay on $24,000, if you buy
it after 1990; or
- the seller's cost amount of the vehicle at the time you buy it.
The cost amount can vary, depending on what the seller used the vehicle
for before you bought it. If the seller used the vehicle to earn
income, the cost amount will be the UCC of the vehicle at the time you
buy it. If the seller did not use the vehicle to earn income, the cost
amount will usually be the original cost of the vehicle.
For more details on non-arm's-length transactions, see Interpretation
Bulletin IT-405, Inadequate Considerations - Acquisitions and
Dispositions, and IT-419R, Meaning of Arm's Length.
CAPITAL GAINS
If you sell a property for more than it cost, you may have a capital
gain. List the dispositions of all your properties on Schedule 3,
Capital Gains (or Losses) in 1996. You can get this schedule in the
General Income Tax Guide and returns package. See the income tax guide
called Capital Gains for details on how to calculate your taxable
capital gain.
You may be a member of a partnership that provides you with a T5013
Supplementary, Statement of Partnership Income. If the partnership has
a capital gain, the partnership will allocate part of that gain to you.
The gain will show on the partnership's financial statements, or on
your T5013 supplementary slip.
NOTE
You cannot have a capital loss when you sell depreciable property.
However, you may have a terminal loss. See the heading "Column 5 -
UCC after additions and dispositions" on page 26, for an
explanation of terminal losses.
PAGE 32
SPECIAL RULES FOR DISPOSING OF A BUILDING IN THE YEAR
If you disposed of a building in the year, special rules may apply that
make the proceeds of disposition an amount other than the actual
proceeds of disposition. This happens when you meet both of the
following conditions:
- you disposed of the building for an amount less than both its cost
amount, as calculated below, and its capital cost to you; and
- you, or a person with whom you do not deal at arm's length*, owned
the land where the building is located, or the land next to it
that was necessary for the building's use.
* See the definition of non-arm's-length transaction on page 24.
Calculate the cost amount as follows:
- if the building was the only property in the class, the cost amount
is the undepreciated capital cost (UCC) of the class before you
disposed of the building;
- if there is more than one property in the same class, you have to
calculate the cost amount of each building as follows:
capital cost of the building x UCC of the class = cost amount
----------------------------
capital cost of all of the building
property in the class
not previously
disposed of
NOTE
Under proposed changes, where any property in the class of the
building was acquired at non-arm's-length, was previously used for
a purpose other than gaining or producing income or the portion of
a property used for gaining or producing income has changed, the
capital cost of such property has to be recalculated to determine
the cost amount of the property. For more information contact your
tax services office.
If you disposed of a building under these conditions, and you or a
person with whom you do not deal at arm's length disposed of the land
in the same year, calculate your deemed proceeds of disposition as
shown in Calculation A below.
If you, or a person with whom you do not deal at arm's length, did not
dispose of the land in the same year as the building, calculate your
deemed proceeds of disposition as shown in Calculation B.
----------------------------------------------------------------------
CALCULATION A
LAND AND BUILDING SOLD IN THE SAME YEAR
FMV of the building at the time you disposed of it $ _______ 1
FMV of the land immediately before you disposed of it $ _______ 2
Line 1 plus line 2 $ _______ 3
Seller's adjusted cost base of the land $ _______ 4
Total capital gains (without reserves) from any
disposition of the land (such as a change
in use) in the three-year period before you
disposed of the building, (by either you or a
person not dealing at arm's length with you, to
you or to another person not dealing
at arm's length with you) $ _______ 5
Line 4 minus line 5 (if negative,
enter "0") $ _______ 6
Line 2 or line 6, whichever amount is less $ _______ 7
Line 3 minus line 7 (if negative, enter "0") $ _______ 8
Cost amount of the building immediately
before you disposed of it $ _______ 9
Capital cost of the building
immediately before you disposed of it $ _______ 10
Line 9 or line 10, whichever
amount is less $ _______ 11
Line 1 or line 11, whichever amount is more $ _______ 12
DEEMED PROCEEDS OF DISPOSITION FOR THE BUILDING
Line 8 or line 12, whichever amount is less (enter
this amount in column 3 of Area E and in
column 4 of Area A) $ _______ 13
DEEMED PROCEEDS OF DISPOSITION FOR THE LAND
Proceeds of disposition of the land and building $ _______ 14
Amount from line 13 $ _______ 15
Line 14 minus line 15 (include this amount
on line 8303 of Area F) $ _______ 16
If you have a terminal loss on the building, include it on the line
"Other expenses" on either your Form T2032 or Form T2124.
----------------------------------------------------------------------
PAGE 33
----------------------------------------------------------------------
CALCULATION B
LAND AND BUILDING SOLD IN DIFFERENT YEARS
Cost amount of the building immediately before
you disposed of it $ _______ 1
FMV of the building immediately
before you disposed of it $ _______ 2
Line 1 or line 2, whichever amount is more $ _______ 3
Actual proceeds of disposition, if any $ _______ 4
Line 3 minus line 4 $ _______ 5
Line 5 $ _______ x 1/4 $ _______ 6
Amount from line 4 $ _______ 7
DEEMED PROCEEDS OF DISPOSITION FOR THE BUILDING
Line 6 plus line 7 (enter this amount in
column 3 of Area E and in column 4 of Area A) $ _______ 8
If you have a terminal loss on the building, include it on the line
"Other expenses" on either your Form T2032 or Form T2124.
----------------------------------------------------------------------
Ordinarily, you can deduct 100% of a terminal loss, but only 75% of a
capital loss. Calculation B ensures that you use the same percentage
to calculate a terminal loss on a building as you use to calculate a
capital loss on land. As a result of this calculation, you add 25% of
the amount on line 5 to the actual proceeds of disposition from the
building (see the section called "Terminal loss" on page 26).
REPLACEMENT PROPERTY
In a few cases, you can postpone or defer adding a capital gain or
recapture to income. Under proposed changes, this happens to the
extent that the proceeds of disposition of the former property are
reinvested by you in a replacement property within a certain period of
time and it is reasonable to conclude that the property was acquired by
you to replace the former property or it was acquired and used by you
or a person related to you for the same or similar use to which you or
the person related to you put the former property. For example, you
may sell a property and replace it with a similar one, someone may
expropriate your property, or you may transfer property to a
corporation, a partnership, or your child. For more details, read
Interpretation Bulletin IT-259, Exchanges of Property, and its Special
Release, and Interpretation Bulletin IT-491, Former Business Property,
and its Special Release.
You can also defer a capital gain or recapture when you transfer
property to a corporation or partnership. For more details, see:
- Information Circular 76-19, Transfer of Property to a Corporation
Under Section 85;
- Interpretation Bulletin IT-291, Transfer of Property to a
Corporation Under Subsection 85(1);
- Interpretation Bulletin IT-378, Winding-up of a Partnership; and
- Interpretation Bulletin IT-413, Election by Members of a
Partnership Under Subsection 97(2). The following example
summarizes the CCA chapter.
----------------------------------------------------------------------
EXAMPLE
When Cathy bought her new car in May 1996, it cost $16,000 including
all charges and taxes. Therefore, she includes the car in class 10.
She was allowed a $1,000 credit when she traded in her old car (which
was also in class 10). Her UCC on the old car at the start of 1996 was
$1,000.
Cathy has a desk, calculator, filing cabinets, and shelves in her
store. These are class 8 depreciable properties. The UCC of these
properties at the start of 1996 is $5,000. She did not buy any class 8
properties in 1996.
Cathy knows that her personal use of the car will vary each year.
Therefore, she completes Form T2124 as follows:
PAGE 34
(SEE PRINTED COPY FOR FORM T2124(E)
Since Cathy used the car partly for personal use, she calculates the
amount to include on line 8207 for her car as follows:
25,000 (business-use kilometres) x $2,550 = $2,125
--------------------------------
30,000 (total kilometres)
The most that Cathy can claim for CCA for 1996 is $2,125 for her car
and $1,000 for the class 8 properties. She wants to claim the most CCA
allowed to her in 1996. She enters $3,125 on line 8207 on Form T2124.
----------------------------------------------------------------------
PAGE 35
----------------------------------------------------------------------
CCA CLASSES
----------------------------------------------------------------------
The following is a list of commonly used assets in a business. For more
details, contact your tax services office.
----------------------------------------------------------------------
CLASS RATE (%) DESCRIPTION
----------------------------------------------------------------------
1 4 Most buildings you bought after 1987, including
components such as wiring, plumbing, heating, and
cooling systems.
3 5 Most buildings, including components, that you
bought after 1978 and before 1988. However, you
may have to include part of the cost of additions
made after 1987 in class 1. For more details, see
Interpretation Bulletin IT-79, Capital Cost
Allowance - Buildings or Other Structures.
6 10 Frame, log, stucco on frame, galvanized iron, or
corrugated metal buildings that do not have any
footings below the ground. Class 6 also includes
fences and greenhouses.
7 15 Canoes, rowboats, and most other vessels and their
motors, furniture, and fittings. For more details,
see Interpretation Bulletin IT-267, Capital Cost
Allowance - Vessels.
CLASS RATE (%) DESCRIPTION
8 20 Property that you did not include in any other
class. Some examples are fixtures, furniture,
machinery, photocopiers, refrigeration equipment,
telephones, and tools costing $200 or more. Class 8
also includes outdoor advertising signs you bought
after 1987.
9 25 Aircraft, including furniture or equipment attached
to the aircraft, and spare parts.
10 30 Automobiles, except those you use as a taxi or in a
daily rental business, including vans, trucks,
tractors, wagons, and trailers. You also put
general-purpose electronic data-processing
equipment (commonly called computer hardware) and
systems software in class 10.
CLASS RATE (%) DESCRIPTION
10.1 30 A passenger vehicle. See page 28 for the capital
cost limits.
12 100 China, cutlery, kitchen utensils that cost under
$200, linen, uniforms, dies, jigs, moulds, cutting
or shaping parts of a machine, tools and medical
or dental instruments that cost under $200,
computer software (except systems software), and
video cassettes bought after February 15, 1984,
that you rent and do not expect to rent to any one
person for more than seven days in a 30-day period.
13 Leasehold interest - You can claim CCA on a
leasehold interest, but the maximum rate depends on
the type of leasehold interest and the terms of the
lease.
14 Patents, franchises, concessions, or licences for a
limited period. Your CCA is whichever of the
following amounts is less:
- capital cost of the property spread out over
the life of the property; or
- UCC of the property of that class at the end of
the taxation year.
CLASS RATE (%) DESCRIPTION
16 40 Taxis, vehicles you use in a daily car-rental
business, coin-operated video games or pinball
machines acquired after February 15, 1984, and
freight trucks acquired after December 6, 1991,
that are rated higher than 11,788 kilograms.
17 8 Roads, parking lots, sidewalks, airplane runways,
storage areas, or similar surface construction.
22 50 Most power-operated, movable equipment you bought
before 1988 that you use for excavating, moving,
placing, or compacting earth, rock, concrete, or
asphalt.
38 30 Most power-operated, movable equipment you bought
after 1987 and use for excavating, moving,
placing, or compacting earth, rock, concrete, or
asphalt.
NOTE
You can choose to keep an outdoor advertising sign, and any property
you would usually include in class 38 in a separate class. To do this,
attach a letter to your return for the year you bought the property. In
the letter, list the properties you are including in a separate class.
----------------------------------------------------------------------
PAGE 36
----------------------------------------------------------------------
SUMMARY OF CHAPTERS 2 TO 4 - COMPLETED FORM T2124
In this section, we summarize our discussion about income, expenses,
and capital cost allowance, by showing you what the completed Form
T2124 would look like for Cathy's business, and recapping the
information we have so far.
Total sales (does not include PST or GST) $ 189,000
Returned items $ 1,000
Inventory at the beginning of her 1996 fiscal period $ 36,500
Inventory at the end of her 1996 fiscal period $ 30,000
Purchases (including freight, etc.) $ 88,000
Meals and entertainment expenses $ 50
Motor vehicle expenses $ 3,125
Convention expenses $ 500
Capital cost allowance $ 3,125
Cathy also entered these expenses in her expense journals:
Accounting fees $ 750
Advertising $ 2,800
Business tax $ 550
Business insurance $ 1,600
Interest on business loan $ 5,300
Maintenance $ 800
Rent of store $ 10,800
Utilities on store $ 3,500
Salaries (full and part-time help) $ 19,000
Office supplies $ 2,700
Travelling (except car) $ 350
----------------------------------------------------------------------
PAGE 37
----------------------------------------------------------------------
Therefore, the calculation of Cathy's net business income on her Form
T2124 would look like this:
(SEE PRINTED COPY FOR FORM T2124(E)
----------------------------------------------------------------------
PAGE 38
CHAPTER 5 - ELIGIBLE CAPITAL EXPENDITURES
WHAT IS AN ELIGIBLE CAPITAL EXPENDITURE?
You may buy property that does not physically exist, but gives you a
lasting economic benefit. Some examples are goodwill, and franchises,
concessions, or licenses for an unlimited period. We call this kind of
property eligible capital property. The price you pay to buy this type
of property is an eligible capital expenditure.
Note that we do not consider franchises, concessions, or licenses with
a limited period to be eligible capital properties, but as depreciable
properties. See Chapter 4 for details about depreciable properties. If
you need more information, you can contact the Business Enquiries
Section of your tax services office. You can find the address and
telephone numbers listed under "Revenue Canada" in the Government of
Canada section of the telephone book.
WHAT IS AN ANNUAL ALLOWANCE?
You cannot deduct the full cost of an eligible capital expenditure,
since it is a capital cost and gives you a lasting economic benefit.
However, you can deduct part of its cost each year. We call the amount
you can deduct your annual allowance.
WHAT IS A CUMULATIVE ELIGIBLE CAPITAL (CEC) ACCOUNT?
This is the bookkeeping record you establish to determine your annual
allowance. You also use your CEC account to keep track of the property
that you buy and sell. We call the property in your CEC account your
eligible capital property. You base your annual allowance on the
balance in your account at the end of your fiscal period. Keep a
separate account for each business.
HOW TO CALCULATE YOUR ANNUAL ALLOWANCE
CEC ACCOUNT
Calculate the balance in your CEC account at the end of your 1996
fiscal period as follows:
----------------------------------------------------------------------
Balance in the account at the start
of your 1996 fiscal period _______ 1
Eligible capital expenditures you made
or incurred in your 1996 fiscal
period _______ x 3/4 _______ 2
Line 1 plus line 2 _______ 3
All the amounts you received or are
entitled to receive from the sale
of eligible capital property in
your 1996 fiscal period _______ 4
All the amounts that became
receivable in your 1996 fiscal
period from the sale of
eligible capital properties
before June 18, 1987 _______ 5
Line 4 plus line 5 _______ 6 x 3/4 _______ 7
CEC account balance (line 3 minus line 7) _______ 8
Annual allowance - 7% x line 8 _______ 9
----------------------------------------------------------------------
NOTE
For taxation years ending after February 22, 1994, an eligible
capital expenditure is reduced by the amount of any assistance
received or receivable from a government for the expenditure. Also,
an amount forgiven (or entitled to be forgiven) on government debt
reduces your CEC account. For more information on forgiveness of
debt, contact your tax services office.
You can deduct an annual allowance as long as there is a positive
balance (line 8) in your CEC account at the end of your 1996 fiscal
period. You do not have to claim the full amount of the maximum annual
allowance for a given year. You can deduct any amount you wish, up to
the maximum allowable of 7%.
If there is a negative balance in your CEC account, see the sections
called "Sole proprietor - Sale of eligible capital property in a 1996
fiscal period" on page 39, and "Partnership - Sale of eligible capital
property in a 1996 fiscal period" on page 41.
The following is an example of how to calculate the maximum annual
allowance and the account balance.
----------------------------------------------------------------------
EXAMPLE
Larry started a business on January 1, 1996. Larry's business has a
December 31 year end. During 1996, he bought a franchise for $16,000.
He calculates his maximum annual allowance of $840 for 1996 as follows:
PAGE 39
Larry's CEC account
Balance at the start of
Larry's 1996 fiscal period $ 0 1
Larry's eligible capital expenditure:
franchise cost for the
1996 fiscal period $ 16,000 x 3/4 12,000 2
Line 1 plus line 2 $ 12,000 3
Larry has not sold any eligible capital
property during the 1996 fiscal period.
Therefore, he will not have any
amounts on lines 4 to 8.
Larry's maximum annual allowance on
eligible capital property is 7% x line 3 $ 840 9
Balance at the end of 1996 (line 3 minus line 9) $ 11,160
----------------------------------------------------------------------
DID YOU OWN ELIGIBLE CAPITAL PROPERTY AT THE END OF FEBRUARY 22,1994
The $75,000 capital gains deduction is no longer available for
dispositions of eligible capital property after February 22, 1994.
However, if you owned this type of property at the end of the day on
February 22, 1994, and you have not used all of your $75,000 capital
gains deduction, there is a special election that may be available to
you.
This election allows you to report an accrued capital gain on your
income tax return and claim a capital gains deduction, even though you
did not actually sell your eligible capital property. To make this
election, you have to complete and file Form T664, Election to Report
a Capital Gain on Property Owned at the End of February 22, 1994.
In most cases, this election was available only for the 1994 taxation
year and you had to file it by April 30, 1995. If you did not file an
election by April 30, 1995, and you want to file one for the 1994
taxation year, we will accept a late election up to April 30, 1997.
You have to estimate and pay a penalty at the time you file your
election.
If you sold eligible capital property after February 22, 1994, and
realized a capital gain, you can file this election to report the
capital gain accrued up to February 22, 1994. You can then claim a
capital gains deduction on your 1994 return.
For information on how to calculate the penalty, see the Capital Gains
Election Package. The package includes Form T664. If you want to make
a late election, do not submit an amended 1994 income tax return.
Instead, complete and submit Form T664, together with your payment of
the estimated penalty to the Enquiries and Adjustments Section at your
tax centre. Please note that a member of a partnership can't make an
election for eligible capital property the partnership owns.
ELECTION AVAILABLE FOR THE 1995 TAXATION YEAR
The election described above was available for the 1995 taxation year
if you owned eligible capital property at the end of the day on
February 22, 1994, and your business fiscal year, including February
22, 1994, ended in 1995. Generally, you had to file this election by
June 15, 1996. If you did not file an election by June 15, 1996, and
you want to file one for the 1995 taxation year, we will accept a
late-filed Form T664 up to June 15, 1998. When you file Form T664, you
will have to estimate and pay a penalty. For information about filing
the election and calculating the penalty, see the Capital Gains
Election Package.
HOW THE CAPITAL GAINS ELECTION WORKS FOR A BUSINESS
The capital gains election lets you report a capital gain on your
income tax return, and take advantage of the unused portion of your
$75,000 capital gains deduction even though you have not actually sold
your property.
You cannot make the election on only one eligible capital property. You
have to make the election on all eligible capital property of the
business you operated at the end of the day on February 22, 1994, if
your 1994 or 1995 fiscal period includes this date.
When you make the capital gains election, you will have to report a
taxable capital gain on your income tax return as if you had disposed
of all of the eligible capital property of the business on February 22,
1994, for an amount you designate in the election. This amount becomes
your designated proceeds of disposition. Your designated proceeds of
disposition should not be more than the fair market value of the
property at the end of the day on February 22, 1994. This taxable
capital gain calculation will also take into account all of the
eligible capital property of the business sold earlier in the fiscal
period.
If you had more than one business at the end of the day on February 22,
1994, and your 1994 or 1995 fiscal period includes this date, you may
be able to elect for any one or more of the businesses you operated.
However, you have to make a separate election for each business.
It is important that you know your taxable capital gains limit for the
election. To calculate this amount, see the section called
"Calculating your taxable capital gains limit for the election" in
Chapter 2 of the Capital Gains Election Package.
If you have sold eligible capital property, see the section called
"Sole proprietor - Sale of eligible capital property in a 1996 fiscal
period" below. If you are a member of a partnership that has sold
eligible capital property, see the section called "Partnership - Sale
of eligible capital property in a 1996 fiscal period" on page 41.
SOLE PROPRIETOR
SALE OF ELIGIBLE CAPITAL PROPERTY IN A 1996 FISCAL PERIOD
When you sell eligible capital property, you have to subtract part of
the proceeds of disposition from your CEC account.
You have to do this calculation if you sold eligible capital property:
- in your 1996 fiscal period; or
PAGE 40
- before June 18, 1987, and the proceeds of disposition become due to
you in your 1996 fiscal period.
For 1996, the amount you have to subtract is 3/4 of the total of these
amounts:
- the proceeds of disposition of all the eligible capital property
you sell in your 1996 fiscal period; and
- the amount of any proceeds that become due to you in your 1996
fiscal period from eligible capital property you sold before June
18, 1987.
There may be a negative amount in your CEC account after you subtract
the required amount. In this case, you will have to include the
negative amount in your business income.
----------------------------------------------------------------------
EXAMPLE
Carol started her business on January 1, 1990, with a December 31 year
end. In 1990, Carol bought a client list for $10,000. Carol sold her
business on September 1, 1996. She sold her client list for $15,000 and
she does not have any other eligible capital property in her business.
She deducted annual allowances each year as follows:
1990 $ 525
1991 488
1992 454
1993 422
1994 393
1995 365
-------
Total $ 2,647
=======
The amount included in Carol's business income on the line "Other
income" of Form T2124 is the total of A and B:
Calculation of amount A:
The lesser of i) or ii):
i) Excess amount calculated as follows:
Proceeds of disposition: $15,000
$15,000 x 3/4 11,250
Plus: total annual allowances deducted 2,647
-------
$ 13,897
Minus: 3/4 eligible capital expenditures
$10,000 x 3/4 $ 7,500
Excess amount $ 6,397 i
ii) Total annual allowances deducted $ 2,647 ii
The lesser of i) or ii) $ 2,647 A
Calculation of amount B:
Excess amount 6,397
Minus: total annual
deductions taken 2,647 $ 3,750 B
Line A plus line B $ 6,397
=======
The amount to be included in Carol's business income on the line "Other
income" is $6,397.
----------------------------------------------------------------------
SALE OF ELIGIBLE CAPITAL PROPERTY FOR WHICH YOU FILED A FORM T664,
ELECTION TO REPORT A CAPITAL GAIN ON PROPERTY OWNED AT THE END OF
FEBRUARY 22, 1994
If you filed Form T664 for eligible capital property of your business,
your cumulative eligible capital account does not change. Rather, the
taxable capital gains on which you make the election create an exempt
gains balance for your business. The exempt gains balance reduces your
business income from the disposition of eligible capital property
(other than the recapture of annual allowances deducted in previous
years).
----------------------------------------------------------------------
EXAMPLE
Rick has operated a computer equipment business since February 1, 1989.
The business has a January 31 year end. Rick paid $10,000 for a client
list when he started the business. He has no other eligible capital
property. Rick sells his business on September 1, 1995. He sells his
client list for $15,000. He made the election for the 1995 fiscal
period to claim a capital gains deduction on the gain accrued up to
February 22, 1994. The designated proceeds of disposition are $14,000,
which is the fair market value of the client list at the end of the
day on February 22, 1994. In previous years, Rick claimed the following
amounts as annual allowances on eligible capital property and has
calculated his exempt gains balance for the 1995 fiscal period as
follows :
1989 $ 525
1990 488
1991 454
1992 422
1993 393
1994 365
1995 0
-------
Total $ 2,647
FIRST STEP
ELECTION CALCULATION - EXEMPT GAINS BALANCE
Balance in Rick's CEC account at the
beginning of his 1996 fiscal period $ 4,853 1
Election - Designated proceeds
of disposition on
February 22, 1994 : $14,000
$14,000 x 3/4 $ 10,500 2
Line 1 minus line 2 ( $ 5,647) 3
Negative account in balance $ 5,647 4
Minus: total annual allowances
deducted from 1989 to 1994 $ 2,647 5
Line 4 minus line 5 - Exempt gains
balance $ 3,000 6
The amount of $3,000 is the exempt gains balance. It equals the taxable
capital gain on the client list accrued to February 22, 1994, on which
Rick made the election. This amount will reduce any business income
(other than the recapture of annual allowances deducted in previous
years) when he sells his client list. Rick entered 4/3 of this amount
(4/3 x $3,000 = $4,000) for 1995, in column 5 of Chart B of his Form
T664, Election to Report a Capital Gain on Property
PAGE 41
Owned at the End of February 22, 1994. Rick entered the $14,000
designated proceeds of disposition in column 2 of Chart B on the same
form.
NOTE
If the designated proceeds of disposition are more than the fair
market value of the property, this will reduce the exempt gains
balance. Reducing the exempt gains balance will increase the amount
of business income. For more information, contact the Business
Enquiries Section of your tax services office.
SECOND STEP
Calculation of amount to include in business income - Sale of client
list on September 1, 1995 Rick calculates the amount to include in his
business income on the line called "Other income" on Form T2124, as the
total of amounts A and B:
CALCULATION OF AMOUNT A:
The lesser of i) or ii):
i) Excess amount calculated as follows:
Actual proceeds of disposition: $15,000 $15,000 x 3/4 $11,250
Plus: total annual allowances deducted 2,647
-------
Subtotal 13,897
Minus: 3/4 of eligible capital expenditures
$10,000 x 3/4 7,500
-------
Excess amount $6,397 ii
ii) Total annual allowances deducted $2,647 ii
The lesser of i) or ii) 2,647 A
Calculation of amount B:
Excess amount $6,397
Minus: total annual
allowances deducted 2,647
---------
Subtotal 3,750
Minus: exempt gains balance 3,000 750 B
-------- --------
The total of lines A and B $3,397
=======
Rick would include $3,397 in his business income on the line "Other
income." For more information about this election, get the Capital
Gains Election Package. You will find copies of Form T664 in this
publication.
----------------------------------------------------------------------
REPLACEMENT PROPERTY
If you sell eligible capital property and replace it with another one,
you can postpone all or part of any gain on the sale. Under proposed
changes, this happens to the extent that the proceeds of disposition of
the former property are reinvested by you in a replacement property
within a certain period of time and it is reasonable to conclude that
the property was acquired by you to replace the former property or it
was acquired and used by you or a person related to you for the same or
similar use to which you or the person related to you put the former
property. To do this, you have to replace the property no later than
one year after the end of the taxation year in which you sell the
original property. For more details, see Interpretation Bulletin
IT-259, Exchanges of Property, and its Special Release.
For more information about eligible capital expenditures, see
Interpretation Bulletins IT-123, Transactions Involving Eligible
Capital Property (after 1987), IT-143, Meaning of Eligible Capital
Expenditure, and its Special Release, or contact your tax services
office.
PARTNERSHIP
SALE OF ELIGIBLE CAPITAL PROPERTY IN A 1996 FISCAL PERIOD
When the partnership sells eligible capital property, it has to
subtract part of the proceeds of disposition from its CEC account.
The partnership has to do this calculation if it sold eligible capital
property:
- in its 1996 fiscal period; or
- before June 18, 1987, and the proceeds of disposition become due in
its 1996 fiscal period.
For 1996, the amount the partnership has to subtract is 3/4 of the
total of these amounts:
- the proceeds of disposition of all the eligible capital property
the partnership sells in its 1996 fiscal period. The total proceeds
of disposition must be included even if the partnership will not
receive the entire amount in 1996; and
- the amount of any proceeds that become due in its 1996 fiscal
period, from eligible capital property it sold before June 18,
1987.
There may be a negative amount in the partnership's CEC account after
it subtracts the required amount. In this case, it will have to
include in its business income the negative balance in its CEC account.
However, if you have made the capital gains election as a member of the
partnership on your 1994 income tax return for your partnership
interest, you will have reported the capital gain accrued to February
22, 1994. In this case, the adjusted cost base of your partnership
interest has not changed as a result of the election. Rather, you have
created a special account called your exempt capital gains balance.
You will be able to use this account to reduce your share of business
income of the partnership from the sale of eligible capital property
(other than the recapture of annual allowances deducted in previous
years).
You have to include the business income that results from the
sale of the eligible capital property on the line "Other income" on
your Form T2124 or Form T2032. You will then reduce your share of the
partnership income by claiming a business income reduction in the
chart called "Other amounts deductible from your share of net
partnership income (loss)" on your Form T2032 or Form T2124. To
calculate your exempt capital gains balance and your business income
reduction, see Chapter 4 of the income tax guide called Capital Gains.
PAGE 42
----------------------------------------------------------------------
EXAMPLE
You and your partner have operated a telephone sales business since
January 1, 1990. Your partnership agreement states that you and your
partner will share the business profits equally. The business has a
December 31 year end. You and your partner paid a total of $10,000 for
a client list when you started the business. The business has no other
eligible capital property. You and your partner sell the business on
September 1, 1996. The proceeds of disposition of the client list are
$15,000. As a member of the partnership, you decide to make the
capital gains election in 1994 on your partnership interest. In
previous years, the partnership claimed $2,647 as annual allowances on
eligible capital property.
FIRST STEP
CALCULATION OF AMOUNT TO INCLUDE IN BUSINESS INCOME - SALE OF CLIENT
LIST ON SEPTEMBER 1, 1996
The amount to include in the partnership's business income, on the line
called "Other income" on Form T2124, is the total of amounts A and B:
CALCULATION OF AMOUNT A:
The lesser of i) or ii)
i) Excess amount calculated as follows:
Actual proceeds of disposition: $15,000
$15,000 x 3/4 $11,250
Plus: total annual allowances deducted 2,647
-------
Subtotal 13,897
Minus: 3/4 Eligible capital expenditures
$10,000 x 3/4 7,500
Excess amount $6,397 ii
ii) Total annual allowances deducted $2,647 ii
The lesser of i) or ii) $2,647 A
CALCULATION OF AMOUNT B:
Excess amount $ 6,397
Minus: Total annual
allowances deducted 2,647
--------
Subtotal $3,750 B
-------
The total of lines A and B $6,397
=======
SECOND STEP
CALCULATING YOUR SHARE OF PARTNERSHIP INCOME FROM THE SALE OF THE
CLIENT LIST (NOT INCLUDING THE RECAPTURE OF ANNUAL ALLOWANCES
DEDUCTED)
Excess amount as calculated above $6,397 1
Total annual allowances deducted 2,647 2
-------
Line 1 minus line 2 3,750 3
1/2 x line 3 $1,875
=======
The amount of $1,875 represents your share of the business income
(other than the recapture of annual allowances deducted in previous
years) from the sale of eligible capital property. You must enter this
amount on line 10 of chart 1 in Chapter 4 of the income tax guide
called Capital Gains. This chart will help you calculate your business
income reduction for 1996 as well as your exempt capital gains balance
available for 1997. To make sure you complete the chart correctly, you
should read Chapter 4 in the income tax guide called Capital Gains.
Once you have calculated your business income reduction on line 11 of
this chart, you can enter this amount in the chart called "Other
amounts deductible from your share of net partnership income (loss)" on
your Form T2124.
If you did not make the capital gains election for 1994 as a member of
the partnership, the amount to include on the line called "Other
income" according to this example is $6,397. In this case, you could
not use the calculation of the second step and the calculations in the
Capital Gains income tax guide for the business income reduction.
----------------------------------------------------------------------
NOTE
You can make a late capital gains election concerning your interest
in a partnership. Usually, you would have made the election by
April 30, 1995, on your 1994 income tax return. If you did not make
the election for 1994 on your 1994 income tax return, you can
still do so until April 30, 1997. However, you would have to pay a
penalty at the time you make the election.
REPLACEMENT PROPERTY
If the partnership sells eligible capital property and replaces it with
another one, the partnership can postpone all or part of any gain on
the sale. Under proposed changes, this happens to the extent that the
proceeds of disposition of the former property are reinvested by the
partnership in a replacement property within a certain period of time
and it is reasonable to conclude that the property was acquired by the
partnership to replace the former property or it was acquired and used
by the partnership or a person related to the partnership for the same
or similar use to which the partnership or the person related to the
partnership put the former property. To do this, the partnership has
to replace the property no later than one year after the end of the tax
year in which it sells the original property. For more details, see
Interpretation Bulletin IT-259, Exchanges of Property, and its Special
Release.
For more information about eligible capital expenditures, see
Interpretation Bulletins IT-123, Transactions Involving Eligible
Capital Property (after 1987), and IT-143, Meaning of Eligible Capital
Expenditure, and its Special Release, or contact your tax services
office.
CHAPTER 6 - INVESTMENT TAX CREDIT
WHAT IS AN INVESTMENT TAX CREDIT?
The investment tax credit lets you subtract, from the taxes you owe,
part of the cost of some types of property you acquired or
expenditures you incurred. You may be able to claim this tax credit if
you bought qualifying property or incurred qualified expenditures in
1996. You may also be able to claim the credit if you have unused
investment tax credits from years before 1996.
PAGE 43
In 1994, we eliminated the annual limit on investment tax credit
claims. This allows you to fully claim your investment tax credits
against your federal tax and federal individual surtax payable - unless
Alternative Minimum Tax applies. This change applies to current-year
investment tax credits, as well as those you previously earned but have
not yet claimed. Investment tax credits being carried back to a year
before 1994 will still be subject to the previous annual limit.
The specified percentages you use to calculate your investment tax
credits are as follows:
- The rate for qualified expenditures for scientific research and
experimental development to be carried out in the Atlantic
provinces or the Gaspé Peninsula is 20%. Expenditures incurred
according to a written agreement entered into before February 22,
1994, will qualify for a 30% rate.
- The rate for qualified property used in the Atlantic provinces, the
Gaspé Peninsula, or a prescribed offshore region is 10% for
property acquired after 1994. Qualified property you acquired
according to a written purchase agreement you entered into before
February 22, 1994, under construction by you or on your behalf on
that date, or machinery or equipment that is a fixed and integral
part of property under construction by you or on your behalf on
that date will qualify for a 15% rate.
- There is no longer a 30% rate for certified property. However,
certified property you acquired according to a written purchase
agreement entered into before February 22, 1994, under construction
by you or on your behalf on that date, or machinery or equipment
that is a fixed and integral part of property under construction by
you or on your behalf on that date, will still qualify for the
certified property investment tax credit.
WHAT IS A REFUNDABLE INVESTMENT TAX CREDIT?
PROPERTY PURCHASED, OR EXPENDITURES MADE, IN 1996
You may be able to claim a refundable investment tax credit if, in
1996, you:
- purchased qualified property;
- purchased certain certified property; or
- made a qualified expenditure.
In all cases, the property you bought has to be new and available for
use. For the definition of available-for-use, see page 23.
QUALIFIED PROPERTY
This includes some types of new buildings, machinery, and equipment
which are prescribed in section 4600 of the Income Tax Regulations.
You must acquire the property and use it for designated purposes in
specific areas.
We cannot list all the properties that qualify in this guide. To
determine if your property qualifies, contact your tax services office.
Designated purposes include activities such as logging, storing grain,
producing industrial minerals, manufacturing or processing goods for
sale or lease, farming, and fishing. For a list of other designated
purposes, contact your tax services office.
The specific areas are Newfoundland, Prince Edward Island, Nova Scotia,
New Brunswick, the Gaspé Peninsula, or a prescribed offshore region in
the area off the east coast of Canada that we consider part of Canada.
CERTIFIED PROPERTY
This is a particular type of qualified property. To determine if your
property qualifies, contact your tax services office.
To qualify, you have to acquire the property for use in a prescribed
area. You will find a list of these areas in Information Circular
78-4, Investment Tax Credit Rates, and its Special Release.
The property must be part of a facility approved under the Regional
Development Incentives Act. A facility means the structures,
machinery, and equipment that make up the necessary parts of a
manufacturing or processing operation. There are some limits for
resource-based industries.
QUALIFIED EXPENDITURE
To be a qualified expenditure, the amount has to be for scientific
research and experimental development. For more details, see
Information Circular 86-4, Scientific Research and Experimental
Development.
PROPERTY PURCHASED, OR EXPENDITURES MADE, BEFORE 1996
You may have purchased property, or made expenditures, before 1996 that
are eligible for the credit. However, you may not have used all the
credit in the year you earned it, or in the three previous years. In
this case, you may be able to apply any unused credit in 1996. To do
this, complete Part A of Form T2038 (IND.), Investment Tax Credit
(Individuals) 1996 and Subsequent Years.
HOW TO CALCULATE YOUR 1996 INVESTMENT TAX CREDIT
Base the investment tax credit on a percentage of the investment cost
(the cost of the property or expenditure). The specified percentage
you use to calculate the credit is on Form T2038 (IND.).
If you are a member of a partnership, you should only include your
portion of the partnership's investment or expenditure.
In some cases, you may have to either decrease or increase your
investment cost. You have to decrease your investment cost by the
amount of any reimbursement, inducement, and government or non-
government assistance that can reasonably be considered to relate to
the property or expenditure. If you repay any of this assistance, add
the repayment to the investment cost. Calculate the credit for any
repayment using the same percentage you used for the original
investment cost.
PAGE 44
Determine your credit at the end of the calendar year. However, the
fiscal year end of your business may differ from the end of the
calendar year. In this case, include any credit you earn on the
property you buy in the part of the calendar year that is after your
fiscal year end. For example, suppose your fiscal period ends on June
30, 1996, and you buy property that is eligible for a credit in
November 1996. You can claim a credit for the property you bought in
November when you file your 1996 income tax return.
HOW TO CLAIM YOUR 1996 CREDIT
You can use the credit you earn in 1996 to reduce your federal tax and
surtax for the year, for a previous year, or for a future year.
CURRENT-YEAR CLAIM
To calculate your claim to reduce your federal tax for 1996, complete
Section I of Form T2038 (IND.). If a partnership or trust made the
investments, enter only your share. Enter the amount of your credit on
line 412 of your income tax return.
To calculate your claim to reduce your federal individual surtax for
1996, complete Section II of the form. Enter the amount of your credit
on line 518 of Schedule 1 with your income tax return.
CARRY BACK TO PREVIOUS YEARS
You can carry back the credit you earn in 1996 for up to three years
and use it to reduce your federal tax and surtax in those years. To do
this, complete Part B of Form T2038 (IND.).
CARRY FORWARD TO FUTURE YEARS
You can carry forward, for up to 10 years, a credit you earn in 1996
that you did not use to reduce taxes in 1996 or in a previous year.
However, you lose any credits you do not use within 10 years of earning
them.
REFUND OF INVESTMENT TAX CREDIT
If you do not use all of your investment tax credit to reduce your
taxes in the year or in the three previous years, we may refund up to
40% of your unused credit to you in cash. You can only claim this
refund in the year you buy property or make an expenditure that
qualifies for the credit, unless the available-for-use rules, or other
rules deeming that you made the expenditures in a subsequent year,
apply.
To calculate your refund, complete Part B of Form T2038 (IND.). If a
partnership or trust made the investments, enter only your share of
the amount. Enter this amount on line 454 of your income tax return.
ADJUSTMENTS
The amount of the credit you claim or that we refund to you in 1996
will reduce the capital cost of the property. Any 1996 credit you
carry back to a previous year will also reduce the capital cost of the
property. Make this adjustment in 1997. This adjustment will reduce
the amount of capital cost allowance you can claim for the property. It
will also affect your capital gain when you sell the property.
You might have claimed a credit or received a refund for 1996 for a
property that you have already sold. In addition, you might still have
other property in the same class. If so, you have to reduce the
undepreciated capital cost of the class for 1997 by the amount of the
credit you claimed or received as a refund. If, after the disposition
you do not have any property left in the same class, include in your
1997 income the amount of the credit you claimed or received as a
refund.
You have to reduce your scientific research and experimental
development (SR&ED) pool by the amount you claim in 1996 as an
investment tax credit for SR&ED. Make this adjustment in 1997.
PAGE 45
APPENDIX - INDUSTRY CODES
PROFESSIONS
Architect - 7751
Chartered or certified accountant - 7731
Dentist - 8653
Engineer - 7752
Lawyer or notary - 7761
Management consultant - 7771
Psychologist - 8671
Physician, general practice - 8651
Surgeon or specialist - 8652
Veterinarian - 0211
Other accounting or bookkeeping services - 7739
Other health practitioner - 8660
Other scientific or technical services - 7759
Other social service practitioner - 8670
RETAIL SALES OR SERVICES
Accommodation, food, or beverage services
Catering - 9214
Hotel, motel, lodge, or campground - 9100
Licensed restaurant - 9211
Take-out food - 9213
Tavern, bar, or nightclub - 9221
Unlicensed restaurant (including drive-ins) - 9212
AGRICULTURAL OR ANIMAL SERVICES
Animal specialty or livestock services - 0210
Crop services - 0220
Other agricultural services - 0230
AUTOMOTIVE
Automobile sales - 6310
Auto painting or body repairs - 6352
Auto parts or accessories stores - 6340
Garage (general auto repairs) - 6351
Muffler, glass, transmission, or other repairs - 6350
Recreational vehicle sales - 6320
Service station (oil and gas only) - 6331
Service station (with repairs or a restaurant) - 6339
Other auto services - 6390
BUSINESS SERVICES
Advertising - 7740
Computer or related services - 7720
Employment agency - 7710
Management consultant - 7771
Other business services - 7790
COMMUNICATIONS OR UTILITIES
Courier services - 4842
Postal services - 4841
Telecommunications - 4810
Other utilities - 4900
DIRECT SALES
Cosmetics - 6922
Food or beverage - 6924
Household goods - 6923
Other direct sales - 6929
ENTERTAINMENT OR RECREATION
Commercial spectator sport or club - 9640
Entertainment or stage company - 9630
Film or video services - 9610
Film presenter - 9620
Gambling operation - 9661
Recreational facilities - 9650
Other amusements or recreation - 9690
FINANCE, INSURANCE, OR REAL ESTATE
Farm rentals - 7591
Financial services - 7400
Insurance agency - 7612
Owner-operated properties (other than farm
rentals) - 7510
Real estate agency - 7613
FOOD OR BEVERAGE STORES
Baked goods - 6013
Beer, wine, or liquor - 6020
Candy or nuts - 6014
Fruits or vegetables - 6015
Groceries - 6012
Meat - 6016
Supermarket - 6011
Other food - 6019
HEALTH OR SOCIAL SERVICES
Child care services - 8641
Educational services - 8500
Health or social services (other than child care) - 8600
HOUSEHOLD GOODS STORES
Appliances, TV, radio, or stereo repairs - 6223
Appliances, TV, radio, or stereo sales - 6220
Furniture refinishing or repairing - 6213
Household accessories - 6230
Household furniture or appliances - 6210
PERSONAL OR HOUSEHOLD SERVICES
Barber or beauty shop - 9710
Funeral services - 9730
Home maintenance services - 9741
Laundry, carpet, or dry cleaning - 9720
Other personal or household services - 9790
TRANSPORTATION OR STORAGE
Air, rail, or water transport industry - 4500
Public transit - 4570
School busing - 4573
Taxi - 4581
Storage or warehousing - 4700
Transport via pipeline - 4600
Truck transport - 4560
Other transportation industry - 4589
Other transportation services - 4590
OTHER RETAIL STORES
Books or stationery - 6511
Cameras or photographic supplies - 6571
Flowers or lawn and garden supplies - 6520
General merchandise - 6410
Hardware, glass, paint, or wallpaper - 6530
PAGE 46
Other retail stores (continued)
Jewelry or watch sales or repairs - 6560
Musical instruments or records - 6550
Prescription drugs or patent medicines - 6030
Shoes, clothing, fabric, or yarn - 6100
Sporting goods or bicycles - 6540
Toys, hobbies, novelties, or souvenirs - 6580
Vending machine operations - 6911
Other merchandise - 6590
OTHER
Artist - 9993
Athlete or promoter - 9642
Business, religious, or social organization - 9800
Commission sales, own account - 9992
Janitorial services - 9953
Machine or equipment rental or leasing - 9910
Miscellaneous building or dwelling services - 9950
Photography - 9931
Travel services - 9960
Vehicle rental or leasing - 9920
Writer - 9995
Other repairs - 9940
Other services - 9990
OTHER ACTIVITIES
Construction
Acoustical work - 4273
Asphalt paving - 4216
Buildings (including development) - 4000
Construction project management - 4411
Electrical installation - 4261
Excavating or grading - 4214
Fence installation - 4217
Finish carpentry - 4274
Glass or glazing - 4233
Hardwood flooring installation - 4277
Heating, air conditioning, or other duct or
sheet metal work - 4240
Home renovations - 4013
Industrial construction (other than buildings) - 4100
Insulation - 4234
Masonry - 4231
Mechanical specialty work - 4250
Painting or decorating - 4275
Plastering or drywalling - 4272
Plumbing - 4241
Resilient flooring or carpet installation - 4278
Shingling - 4235
Siding installation - 4232
Structural or related work - 4220
Terrazzo or tile work - 4276
Other exterior close-in work - 4230
Other interior or finishing work - 4270
Other site work - 4210
Other trade work - 4290
Other construction services - 4499
MANUFACTURING
Beverages - 1100
Chemicals or chemical products - 3700
Clothing - 2400
Electrical or electronic products - 3300
Fabricated textile products - 1900
Food - 1000
Furniture or fixtures - 2600
Leather or leather products - 1700
Non-electrical machines - 3100
Non-metallic mineral products - 3500
Paper products - 2700
Plastic - 1600
Primary metal - 2900
Primary textiles - 1800
Printing or publishing - 2800
Refined petroleum and coal products - 3600
Rubber - 1500
Tobacco - 1200
Transportation equipment - 3200
Wood products - 2500
Other fabricated metal products - 3000
Other - 3900
NATURAL RESOURCE INDUSTRIES
Fishing services - 0321
Forestry services - 0510
Logging - 0410
Mineral, petroleum, or natural gas extraction
services - 0900
Mining - 0600
Petroleum or natural gas extraction - 0700
Quarry or sand pit - 0800
Trapping - 0330
WHOLESALING
Apparel and dry goods - 5300
Beverages, drugs, and tobacco - 5200
Farm products - 5000
Food - 5210
Furniture, appliances, and accessories - 5400
Household building materials and supplies - 5600
Machinery, equipment, and related supplies - 5700
Petroleum products - 5100
Vehicles, parts, and accessories - 5500
Other products - 5900
PAGE 47
INDEX
PAGE
Accounting fees. . . . . . . . . . . . . . . . . . . . . . . . 19
Accrual method . . . . . . . . . . . . . . . . . . . . . . . . .4
Advertising expenses . . . . . . . . . . . . . . . . . . . . . 14
Allowance on eligible capital property . . . . . . . . . . . . 21
Automobile, defined. . . . . . . . . . . . . . . . . . . . . . 16
Available-for-use, defined . . . . . . . . . . . . . . . . . . 23
Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . 14
Business, defined. . . . . . . . . . . . . . . . . . . . . . . .4
Business income reporting. . . . . . . . . . . . . . . . . . . .4
Business liabilities . . . . . . . . . . . . . . . . . . . . . 22
Business records . . . . . . . . . . . . . . . . . . . . . . . .4
Business tax, fees, licences, dues . . . . . . . . . . . . . . 14
Business-use-of-home expenses. . . . . . . . . . . . . . . . . 21
Capital contributions in 1996. . . . . . . . . . . . . . . . . 22
Capital cost allowance (CCA)
Adjustment for current-year additions. . . . . . . . . . . 27
Base amount. . . . . . . . . . . . . . . . . . . . . . . . 27
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . 27
Classes . . . . . . . . . . . . . . . . . . . . . . . . . 35
Class number . . . . . . . . . . . . . . . . . . . . . . . 24
Classes of depreciable property. . . . . . . . . . . . . . 27
Cost of additions. . . . . . . . . . . . . . . . . . . . . 25
Electronic office equipment. . . . . . . . . . . . . . . . 28
50% rule . . . . . . . . . . . . . . . . . . . . . . . . . 27
Grants and subsidies . . . . . . . . . . . . . . . . . . . 30
Other property . . . . . . . . . . . . . . . . . . . . . . 28
Passenger vehicles . . . . . . . . . . . . . . . . . . . . 28
Personal use of property . . . . . . . . . . . . . . . . . 29
Proceeds of dispositions . . . . . . . . . . . . . . . . . 26
Rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . 27
Recapture. . . . . . . . . . . . . . . . . . . . . . . . . 26
Replacement property . . . . . . . . . . . . . . . . . . . 33
Terminal loss. . . . . . . . . . . . . . . . . . . . . . . 26
Undepreciated capital cost (UCC) after
additions and dispositions . . . . . . . . . . . . . . 26
UCC at the end of the year . . . . . . . . . . . . . . . . 27
UCC at the start of the year . . . . . . . . . . . . . . . 25
Capital cost allowance, deduction. . . . . . . . . . . . . . . 21
Capital cost, defined. . . . . . . . . . . . . . . . . . . . . 24
Capital gains. . . . . . . . . . . . . . . . . . . . . . . . . 31
Cash method . . . . . . . . . . . . . . . . . . . . . . . . . .4
Changing from personal to business use . . . . . . . . . . . . 30
Commission income. . . . . . . . . . . . . . . . . . . . . . . 10
Computers and other equipment leasing costs. . . . . . . . . . 20
Convention expenses. . . . . . . . . . . . . . . . . . . . . . 20
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . 10
Cumulative eligible capital (CEC) account. . . . . . . . . . . 38
Annual allowance calculation . . . . . . . . . . . . . . . 38
Dates to remember. . . . . . . . . . . . . . . . . . . . . . . .7
Delivery, freight, and express . . . . . . . . . . . . . . . . 14
Depreciable property, defined. . . . . . . . . . . . . . . . . 24
Details of equity. . . . . . . . . . . . . . . . . . . . . . . 22
Direct wage costs (cost of goods sold) . . . . . . . . . . . . 12
Drawings in 1996 . . . . . . . . . . . . . . . . . . . . . . . 22
Eligible capital expenditure . . . . . . . . . . . . . . . . . 38
Eligible capital property
Did you own eligible capital property at the
end of February 22, 1994 . . . . . . . . . . . . . . . 39
Sale . . . . . . . . . . . . . . . . . . . . . 39, 40, 41
Fair market value (FMV), defined . . . . . . . . . . . . . . . 24
Fiscal period, defined . . . . . . . . . . . . . . . . . . . . .4
Fuel costs . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Gifts of inventory by an artist. . . . . . . . . . . . . . . . 11
Goods and services tax rebate. . . . . . . . . . . . . . . . . .7
Gross income . . . . . . . . . . . . . . . . . . . . . . . .10,13
Identification area. . . . . . . . . . . . . . . . . . . . . . .9
Income from a business . . . . . . . . . . . . . . . . . . . . .4
Income from a profession . . . . . . . . . . . . . . . . . . . 12
Income, other. . . . . . . . . . . . . . . . . . . . . . . .10,13
Industry codes . . . . . . . . . . . . . . . . . . . . . . . . 45
Instalment payments. . . . . . . . . . . . . . . . . . . . . . .6
Insurance expenses . . . . . . . . . . . . . . . . . . . . . . 14
Interest expenses. . . . . . . . . . . . . . . . . . . . . . . 14
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment tax credit
Adjustments. . . . . . . . . . . . . . . . . . . . . . . . 44
Carry back to previous years . . . . . . . . . . . . . . . 44
Carry forward to future years. . . . . . . . . . . . . . . 44
Certified property . . . . . . . . . . . . . . . . . . . . 43
Current-year claim . . . . . . . . . . . . . . . . . . . . 44
How to calculate . . . . . . . . . . . . . . . . . . . . . 43
Property purchased, or expenditures made,
before 1996. . . . . . . . . . . . . . . . . . . . . . 43
Property purchased, or expenditures made, in 1996. . . . . 43
Qualified expenditure. . . . . . . . . . . . . . . . . . . 43
Qualified property . . . . . . . . . . . . . . . . . . . . 43
Refundable . . . . . . . . . . . . . . . . . . . . . . . . 43
Land . . . . . . . . . . . . . . . . . . . . . . . . . 25
Leasing costs. . . . . . . . . . . . . . . . . . . . . . . . . 18
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . 19
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 22
Maintenance and repairs. . . . . . . . . . . . . . . . . . . . 15
Management and administration fees . . . . . . . . . . . . . . 15
Meals and entertainment. . . . . . . . . . . . . . . . . . . . 15
Membership fees . . . . . . . . . . . . . . . . . . . . . . . 14
Motor vehicle, defined . . . . . . . . . . . . . . . . . . . . 16
Motor vehicle expenses . . . . . . . . . . . . . . . . . . . . 15
Business use . . . . . . . . . . . . . . . . . . . . . . . 16
Joint ownership. . . . . . . . . . . . . . . . . . . . . . 16
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . 22
Net income (loss) before adjustments . . . . . . . . . . . . . 21
Non-arm's-length transaction
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 24
Acquiring property . . . . . . . . . . . . . . . . . . . . . . 30
Office expenses. . . . . . . . . . . . . . . . . . . . . . . . 18
Other amounts deductible from your share of
net partnership income (loss). . . . . . . . . . . . . . . 21
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 19
PAGE 48
Partnerships
Defined . . . . . . . . . . . . . . . . . . . . . . . . . .7
Partnership information return (PIR) . . . . . . . . . . . . . .8
Passenger vehicle
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 16
Interest expense . . . . . . . . . . . . . . . . . . . . . 17
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 14
Proceeds of disposition, defined . . . . . . . . . . . . . . . 24
Professional fees paid . . . . . . . . . . . . . . . . . . . . 19
Professional fees received . . . . . . . . . . . . . . . . . . 12
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . 19
Proprietorships, requirements. . . . . . . . . . . . . . . . . .9
Publications . . . . . . . . . . . . . . . . . . . . . . . . . .2
Records . . . . . . . . . . . . . . . . . . . . . . . . . .4
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 19
Reserve for 1971 accounts receivable . . . . . . . . . . . . . 22
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . 20
Salaries, wages, and benefits paid . . . . . . . . . . . . . . 19
Small tools . . . . . . . . . . . . . . . . . . . . . . . . . 20
Subcontracts . . . . . . . . . . . . . . . . . . . . . . . . . 12
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . 18
Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . 30
Tax shelters . . . . . . . . . . . . . . . . . . . . . . . . . .9
Telephone expenses . . . . . . . . . . . . . . . . . . . . . . 19
Travel expenses. . . . . . . . . . . . . . . . . . . . . . . . 19
Undepreciated capital cost (UCC)
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 24
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . 19
Vehicles, more than one. . . . . . . . . . . . . . . . . . . . 16
Work-in-progress . . . . . . . . . . . . . . . . . . . . . . . 12
YOUR OPINION COUNTS!
We review our income tax guides and pamphlets each year. If you have
any comments or suggestions to help us improve our publications, we'd
like to hear from you!
Please send your comments to:
Client Services Directorate
Revenue Canada
400 Cumberland Street
Ottawa ON K1A 0L8
T4002 Business and Professional Income - Supplementary Income Tax Guide
Last printed on 1996-12-20.
This document is also available in the following formats:
400296et.exe: self extracting DOS archive 400296et.tar.Z: compressed tar archive
and the individual constituent parts:
400296e.txt: ascii text 400296e.txt.asc: cannot open, No such file or directory readme.txt: ascii text
Last updated on 1997-03-06 by webmaster@rc.gc.ca.
Copyright © 1995-1997 Minister of National Revenue