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24.2.2 Types Of Income

Learn about the four types of income and how they are taxed under Canadian tax laws. Detailed insights on Employment Income, Business Income, Income from Property, and Capital Gains/Losses.

Overview

Learn about the four types of income and how they are taxed under Canadian tax laws. This chapter will guide you through Employment Income, Business Income, Income from Property, and Capital Gains/Losses.

Employment Income

Employment income includes wages, salary, and benefits. It is taxed on a gross receipt basis, meaning deduction of costs incurred in earning this type of income for tax purposes is limited. However, several employment-related expenses can be deducted, such as:

  • Pension contributions
  • Union dues
  • Childcare expenses

Key Definitions

  • Gross Receipt Basis: The method of taxation where gross income is taxed without deducting the expenses incurred to earn it.

Business Income

Business income is any income earned from producing and selling goods or rendering services. This includes self-employment income. Unlike employment income, business income is taxed on a net-income basis, allowing the deduction of business-related expenses such as:

  • Rent or mortgage
  • Employee payroll
  • Cost of supplies and equipment

Note: Taxation of business income is beyond the scope of this course.

Key Definitions

  • Net-Income Basis: A taxation method where net income (gross income minus expenses) is taxed.

Income from Property

Income from property includes interest income, dividends, and royalties, derived from assets purchased for investment purposes. Notable examples include stocks, bonds, and mutual funds.

Note: Income from rental properties falls under this category but isn’t covered in this course.

Key Examples

  • Interest Income: Income earned on savings accounts, bonds, etc.
  • Dividends: Share of profits paid to shareholders of a corporation.
  • Royalties: Payments made to the owner of a particular asset for the right to use that asset.

Capital Gains and Losses

A capital gain or loss arises when property is sold. Any increase in value over the purchase price is a capital gain, while any decrease is a capital loss. Capital gains are taxed only when the property is sold.

Formula for Capital Gains

$$Capital Gain = Sale Price - Selling Expenses - Adjusted Cost Base$$

  • Sale Price: The price at which the property is sold.
  • Selling Expenses: Costs incurred to facilitate the sale (like commission fees).
  • Adjusted Cost Base (ACB): Comprised of the purchase price plus commission expenses at the time of purchase.

Frequently Asked Questions (FAQs)

What expenses can be deducted from employment income?

You can deduct pension contributions, union dues, and childcare expenses from your employment income.

How are business incomes taxed?

Business incomes are taxed on a net-income basis, where all the costs incurred to earn the income can be deducted.

What constitutes income from property?

Income from property includes interest income, dividends, and royalties. This income is typically derived from investments like stocks, bonds, and mutual funds.

How are capital gains calculated?

Capital gains are calculated as the sale price minus selling expenses and the adjusted cost base (ACB).

Key Takeaways

  • Employment income is taxed on a gross receipt basis and has limited allowable deductions.
  • Business income is taxed on a net-income basis, allowing full deductions for business-related expenses.
  • Income from property includes interest, dividends, and royalties derived from investment assets.
  • Capital gains or losses happen when property is sold, and are taxed only in the year the sale occurs.

Glossary

  • Gross Receipt Basis: Taxation method taxing gross income without deductions.
  • Net-Income Basis: Tax on net income, allowing expense deductions.
  • Capital Gain: Increase in property value over its purchase price, taxed upon sale.
  • Adjusted Cost Base (ACB): Initial purchase cost plus any additional expenses such as purchase commissions.

By understanding the various types of income and their respective tax treatments under Canadian laws, you can better navigate your financial and investment landscape with a strategic approach. Write and maintain financial records meticulously to ensure compliance and optimize your tax liabilities efficiently.


📚✨ CSC Exam Bank ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## Which of the following types of income includes wages, salary, and benefits? - [ ] Business income - [x] Employment income - [ ] Income from property - [ ] Capital gains > **Explanation:** Employment income refers to income derived from wages, salaries, and benefits. It is taxed on a gross receipt basis, where few deductions are allowed. ## Which type of income is taxed on a net-income basis, allowing the deduction of costs incurred to earn the income? - [x] Business income - [ ] Employment income - [ ] Income from property - [ ] Capital gains > **Explanation:** Business income is taxed on a net-income basis, allowing all deductible business-related expenses such as rent, payroll, and supplies. ## What type of income includes interest income, dividends, and royalties? - [ ] Employment income - [ ] Business income - [x] Income from property - [ ] Capital gains > **Explanation:** Income from property includes interest income, dividends, and royalties derived from investment assets. ## When is a capital gain taxed? - [ ] Annually based on market value - [ ] Quarterly when value increases - [ ] Monthly as value changes - [x] Upon sale of the property > **Explanation:** A capital gain is taxed only after the property has been sold in the year it is sold. Tax is not paid yearly as the property gains value. ## What defines a capital gain? - [ ] The value decrease over time - [x] The increase in value over the purchase price upon sale - [ ] Regular income from rent - [ ] Interest income from bonds > **Explanation:** A capital gain occurs when a taxpayer sells property, and its selling price exceeds the purchase price, minus selling expenses. ## What is typically included in the adjusted cost base for calculating capital gains? - [ ] Dividends and interest earned - [ ] Property taxes - [x] Purchase price plus commission expenses - [ ] Annual maintenance costs > **Explanation:** The adjusted cost base typically includes the purchase price of the property plus any commission expenses incurred at the time of purchase. ## What expenses can be deducted from employment income in Canada? - [x] Pension contributions, union dues, and childcare expenses - [ ] Business-related rent and payroll - [ ] Mortgage payments - [ ] Equipment and supplies > **Explanation:** Taxpayers can deduct pension contributions, union dues, and childcare expenses from employment income for tax purposes. ## What type of income does self-employment income fall under? - [ ] Employment income - [x] Business income - [ ] Income from property - [ ] Capital gains > **Explanation:** Self-employment income is considered business income and is taxed accordingly. ## What happens when a property sells for less than its adjusted cost base? - [ ] Capital gain - [ ] Business loss - [ ] Dividend income - [x] Capital loss > **Explanation:** A capital loss occurs when the property sells for less than its adjusted cost base. ## What is not covered in the discussion of the tax treatment of business income? - [ ] Deduction of business expenses - [x] Taxation details in the course - [ ] Generating income from services - [ ] Treatment of self-employment income > **Explanation:** The specifics of how business income is taxed are not covered in this course.

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Tuesday, July 23, 2024