227 Income Or Loss From A Business Overview Net Income For Tax Purposes Where We Are At 6-1. InChapter 1, w and procedures associated Income Tax Act, this subject is covered in Part |, Division B. This Divi Of Income, contains 11 Subdivisions, with the first three deal income. They are as follows: Income Or Loss From An Office Or Employment nb Income Or Loss From A Business Or Property Subdivision c Taxable Capital Gains And Allowable Capital Losses 6-2. At this point, we have provided fairly comprehensive coverage of the first of these sions. In Chapter 3, we discussed in detail the inclusions and deductions that go into the calculation of employment income or loss. 6-3. _ While we could have followed the discussion of employment income with coverage of the other components of Net Income For Tax Purposes, we chose to devote Chapter 4 to an introduction to Taxable Income and Tax Payable for individuals. While most texts leave this subject until the end of their coverage of all components of Net Income For Tax Purposes, we provided this introduction so that we could include comprehensive problems at an early stage in the text. \dicated that much of this volume would be devoted to the concepts ith determining Net Income For Tax Purposes. In terms of the n, titled Computation 1g with specific types of 6-4. Again in contrast to some other texts, we introduced CCA calculations in Chapter 5, prior to our coverage of business income. As you are now aware, this is a very technical subject which involves what is often one of the most important deductions in the determina- tion of business income. It was included prior to our coverage of business income in order to facilitate the presentation of complete examples of the determination of busine: Where We Are Going 6-5. Chapters 6, 7, and 8 will provide coverage of the remaining specific types of income that go into the determination of Net Income For Tax Purposes. While business income and property income are dealt with in a single Subdivision of the Income Tax Act, these two types of income are subject to somewhat different rules. In addition, in some circumstances, they228 Chapter 6 Overview are subject to significantly different rates of tax. Given this, we will deal with Subdivision b in two separate Chapters. This Chapter 6 will cover business income, with Chapter 7 dealing with property income. 6-6. The final major component of Net Income For Tax Purposes, taxable capital gains and allowable capital losses, will be dealt with in Chapter 8. Classification Of Income A Net Determination 6-7. We have then, four basic types of income: + employment income; + business income; + property income; and + capital gains. 6-8. Each of these basictypes is determined on anet basis. Thatis, each amount that isto be included in Net Income For Tax Purposes is based on a specific group of inclusions that will usually be reduced by a specific group of deductions. 6-9. In general, the deductions applicable to one type of income cannot be deducted againstthe inclusionsin a differenttype. However, ifa loss is created in a particular year by an excess of deductions over inclusions, that loss can generally be applied against other types of income. The exception to this is a current year net capital loss. While such losses can be carried back or forward to other taxation years, they cannot be applied against other types of income that have been recognized during the current year. Applicable Taxpayers 6-10. Employment income is unique in that only individuals can earn this type of income. In contrast, business income, property income, and capital gains can be recognized by all taxpayers. This would include individuals, corporations, and trusts. Classification And The Use Of Property 6-11. Business income, property income, and capital gains generally involve the use of property. Further, itis usually the manner in which the property is being used that determines the classification of the resulting income. Because of this, it is important to understand the use of this term in the Income Tax Act. 6-12. Property is defined very broadly in ITA 248(1) as “property of any kind whatever whether real or personal or corporeal or incorporeal”. This would include both depreciable and non-depreciable property. In terms of the manner in which it will be used, income classi- fication will require four different categories of property use: Property Acquired For Use In A Business These are assets acquired to be used in a business. Examples would be factory and store buildings, the land underlying such build- ings, furniture and fixtures in a retail store, and equipment used in manufacturing. While these assets are held, the income produced will be classified as business income. If the taxpayer disposes of such assets, classification of the income that is produced will depend on the type of asset. Non-Depreciable Capital Assets A disposition will result in a capital gain or a capital loss. Depreciable Capital Assets A disposition will result in recapture, a capital gain and recapture, or a terminal loss (capital losses cannot arise on depreciable assets). As noted in Chapter 5, both recapture and terminal losses are components of business income. Property Acquired And Held As An Investment These assets are acquired to be held while they produce income. They are distinguished from business assets in that theyIncome Or Loss From A Business Overview Figure 6 - 1 Classification Of Income Income Use Of Property While Held Income At Dispo: Used In Business Depreciable Business Income Capital Gain, Recapture, Or Terminal Loss Non-Depreciable Business Income Capital Gain (Loss) Acquired As Investment Depreciable Property Income Capital Gain, Recapture, Or Terminal Loss Non-Depreciable Property Income Capital Gain (Loss) Acquired For Resale Generally None Business Income (Loss) Acquired For Personal Use None Capital Gain (In General, Losses Are Not Deductible) produce income with little or no effort on the part of the acquirer. Examples would be holdings of debt securities, holdings of equity securities, and ownership of rental proper- ties. While they are held, these investment assets produce property income. As was the case with assets acquired for use in a business, the classification of income that results from a disposition of such assets will depend on whether the asset is depreciable or non-depreciable. Non-Depreciable Assets A disposition will result in a capital gain or a capital loss. Depreciable Assets A disposition will result in recapture, a capital gain and recap- ture, or a terminal loss. As noted in Chapter 5, both recapture and terminal losses are components of business income. Property Acquired For Resale AtA Profit These assets are acquired with the objective of reselling them at a profit. Examples would be the typical inventory balances that are held by most businesses. Any gain or loss that arises on their disposition will be treated as a business income or loss, not as a capital gain or loss. In most cases, such assets will not produce income while they are held. Ifthey do, it would be classified as business or prop- erty income, Property Acquired By Individuals For Personal Use These are assets acquired by indi- viduals for personal use. Examples would be personal use automobiles, personal use boats, and real property that is not held to produce income. While these assets are held they do not produce income. However, if they are sold at a value in excess of their adjusted cost base, the excess will be subject to tax as a capital gain. Alternatively, if they are sold for less than their adjusted cost base, the resulting loss will generally not be deductible (see the discussion of personal use property in Chapter 8). 6-13. As you can see, this categorization of the various ways a property can be used serves to outline how the various types of income are classified. These results are summarized in Figure 6-1. Areas Of Controversy 6-14. In many situations, classification presents no problems. + An individual being paid an hourly rate on the General Motors assembly line is clearly earning employment income. 229