Name: Shivani J

Student id: 301140555

Definition of Business Income

The Income Tax Act defines a business as a "profession, calling, trade, manufacture, or
undertaking of any kind whatsoever, except for the purposes of S. 18(2)(c) (limit on
certain interest and property taxes), S. 54.2 (certain shares deemed to be capital
property), S. 95(1) (definitions relating to foreign affiliates), and S. 110.6(14)(f), (certain
shares issued after June 18, 1988), an adventure or concern in the nature of trade, but
it does not include an office or employment.

Reporting of Business Income

The Income Tax Act distinguishes five types of taxable income: employment income,
rental income, business income, capital gains, and 'other' kinds of income, all of which
are detailed in the Act.
Business income and revenue from property, unlike job income, capital gains, and other
types of income, begin with the concept of profit, which is not defined. As a result,
determining business revenue begins with the assessment of an economic concept -
the profit generated by the business. There are, however, a slew of special rules that
can alter the business's initial measure of economic income.

Revenue
Businesses must use a modified form of accrual accounting to account for revenue. A
taxpayer must include both amounts receivable (earned but not received) and amounts
received but not earned when calculating company income. A reserve may be allocated
to counterbalance the inclusion of a sum received but not generated in business
income.
Inventories
A company may make or purchase things in one year but not sell them until the
following year. The net income from operations would not accurately reflect the real
income from operations in the year if the business included all sales in income and
deducted all purchases or manufacturing costs in that year. If more things are created
or acquired than are sold, some of the costs are attributed to inventory growth rather
than the cost of generating the reported revenue.
As a result, businesses with inventories must compute the cost of products sold.
Deductible Expenditures
Unlike deductions for employment income, the Income Tax Act is silent on the types of
deductions that can be claimed when calculating company income. Reasonable
expenditures are legal if they have a revenue-earning objective and are not personal in
nature, as the determination of profit is the beginning point in determining business
income. Specific constraints that apply to either category of expenditure or expenditures
of a defined character frequently override this general principle.
In addition, the Income Tax Act contains basic override criteria for claiming deductions
related to a business, which are as follows:
• "No deduction shall be taken in respect of an outlay or expense
• "No deduction must be allowed in computing a taxpayer's income from a business or
property except to the extent that the outlay or expense was undertaken or incurred by
the taxpayer for the purpose of acquiring or producing revenue from the business or
property."
Any expense that is reasonable in the circumstances and incurred for the purpose of
earning business income is deductible, unless it is specifically restricted or forbidden.

Non- Deductible Expenditures

The Income Tax Act of Canada specifically disallows certain expenses.
Capital Expenditures: An investment in an asset with a long useful life is not
deductible. Similarly, expenditures related to the acquisition (such as legal fees) are
included in the asset's cost and are not tax deductible when paid.
Pre-paid Expenses: Expenses for a period that does not fall within the current fiscal
year may not be deducted in the year in which they are paid, but must be allocated to
the year to which they apply. Property insurance premiums paid during the year, for
example, are only deductible to the extent that the coverage they pay for is for the
current fiscal year.
Personal Expenses: Expenses that are solely for the owner's personal use are not
deductible. Those with a personal-use component are not allowed.
Fines and Penalties: Prior to March 2004, certain fines and penalties in Canada were
tax deductible if they were incurred to generate revenue for the business. Fines and
penalties imposed by law after March 2004 cannot be deducted.
Restricted Expenses
Certain expenses are tax deductible, but the amount that a Canadian taxpayer can
claim is limited in some way.
Passenger Vehicles: The capital cost allowance (CCA) deductible for the cost of
certain 'passenger vehicles' is capped at a particular amount every year. The amount
used to determine the fraction of the vehicle's cost for CCA reasons is likewise
restricted, as is interest paid on a loan to acquire the vehicle, the cost of leasing the
vehicle, and the amount used to calculate the portion of the vehicle's cost for CCA
purposes.
Meals and Entertainment: In practically all cases involving the purchase of meals or
entertainment outlays, the amount that can be deducted (if the outlay is made to gain
business income) is restricted to 50% of the real cost.
Expenses for Attending Conventions: Self-employed taxpayers may deduct the
expense of attending up to two conventions each year. As previously stated, any food
charges linked with the convention are limited. Furthermore, convention expenses are
only deductible if they are relevant to the taxpayer's business and are held in a location
that is fairly consistent with the organization's geographical extent.
Home Workspace Expenses: If a taxpayer's business is run out of his or her home, a
portion of the costs of running the home may be deducted (see Mixed-use Expenses).
The deduction for home workspace costs is, however, restricted to the year's net
company income. Expenses for a home office may not be deducted in order to create or
enhance a business loss.

Expenses for Multiple Purposes

Mixed-use expenses are defined as expenditures that have both a business and a
personal component. The general guideline is that the expense must be divided into a
business-use component and a personal-use component in a reasonable manner.
Home Workspace Expenses: If a portion of the taxpayer's home is used to run a
business, a portion of the cost of managing the home may be deducted. The costs are
usually prorated based on the square footage of the residence used for business
activities. In some circumstances, a time-based pro-ration may be more appropriate.
Owner-operated Vehicles: When a taxpayer uses his or her own vehicle for both
business and personal purposes, the cost of operating the vehicle must be divided by
the number of kilometers driven for each reason.