Income from Property (Property Income)

Income from Property (Property Income)

What is property income?

  • Income from investments, where little or no effort is needed to generate the income (also called passive income)
  • Examples of property income:
    • Rent
    • Interest
    • Dividend
    • Royalties
  • Capital gains are not considered property income
  • Note that a person who is in the business of earning these passive income (such as a property management company), would treat these as business income rather than property income

Rules specific to property income

  1. When property income is being earned, you cannot use CCA to create or increase a “property loss”
    • For example, a person may earn rent revenues; this person cannot use the CCA on the building being rented out to create or increase a rental loss
  2. No requirement to prorate CCA on depreciable capital assets for shortened tax years
  3. For corporations property income (with the exception of dividends from taxable Canadian corporations), are not eligible for the small business deduction. They are taxed as aggregate investment income at a rate of 34.67% federal with a refundable portion of 26.67% (see corporate tax notes)
  4. For individuals property income is subject to attribution rules (see attribution notes)

Interest Income: Individuals and Corporations (TCC)

Both individuals and corporations MUST use the accrual basis when reporting interest income; however, the accrual method used for corporations differs from individuals

  • Corporations – must accrue the interest income earned up to the end of yearend
  • Individuals – only report interest income every anniversary date on an accrual basis, and report this interest income in the taxation year that every anniversary date falls.
    • The anniversary date = one year less one-day
    • i.e. June 26, 2011 to June 25, 2012

The following example will help you understand this concept:

Corporation: Suppose on January 23, 2013, ABC incorporated invests in a $100,000 bond with 10% interest payable annually. Suppose the yearend is December 31.

Interest income for 2013 = 100,000*10%*(342/365) = $9,370

Note how even though, no cash was received, this corporation still needed to accrue interest income

Individual: Suppose on January 23, 2013, Mr. Smith invests $100,000 bond with 10% interest payable annually.
  • Individuals also need to accrue; but unlike a corporation which needs to accrue to the year end, an individual only needs to accrue and report income only in the taxation year where the anniversary date falls.
  • Therefore, since the anniversary date will be January 22, 2014 and Smith received no interest income in cash, Mr. smith does not need to report any interest income for 2013.
  • Interest income reported in 2013 = $NIL
  • Smith will report $100,000*10%*365/365 = $10,000 in his 2014 personal tax return (since the anniversary date, January 22, 2014, falls in the 2014 tax year)

Dividend Income: Individuals and Corporations

Individuals
  • Two things happen when individuals get dividends:
    • When individuals get dividend income they need to gross up their dividends and include this amount in property income
    • Individuals also get a Dividend Tax Credit to lower taxes payable
  • The government taxes dividends like this because they want to achieve integration:
    • Integration: how does it work?
      • Suppose you have Mr. Smith who is a sole proprietor and sells shoes. He earns $100,000 in business income.
      • Suppose Mr. Jones, is the owner of a corporation Jones Co. that sells shoes. Jones Co. earns $100,000 in business income
      • With the dividend gross-up and dividend tax credit, CRA’s goal is such that the taxes Mr. Smith pays on his business income = the total taxes paid by Jones Co. +  the taxes paid by Mr. Jones on dividends from Jones Co.
      • Therefore, integration is there to set a level playing field between people who choose to incorporate and people who choose not to.
      • Since dividends are paid after tax, the gross-up serves the purpose of getting the dividends to a before-tax amount; and the dividend tax credit theoretically is the taxes that the corporation already paid.
  • Eligible vs. non-eligible dividends and capital dividends:
    • Eligible dividends = dividends paid by public Canadian companies, CCPC’s who paid dividends from active business income taxed at the general rate (not the small business rate)
      • In short, in the paying corporation is a CCPC; this is dividends paid out of the General Rate Income Pool (GRIP) – see corporate tax notes
      • Eligible dividends get taxed at a more favourable rate at the personal tax level – 30% (in the highest tax bracket) for 2012 in Ontario
    • Non-Eligible Dividends = all other dividends (except for capital dividends)
      • Non-eligible dividends are taxed at higher rates; approx. 33% (in the highest tax bracket) for 2012 in Ontario
    • Capital Dividends = dividends that are paid out of the capital dividend account (generally the accumulated non taxed portion of net capital gains and ECP gains)– see notes corporate taxes notes
      • These are tax-free for the recipient
Summary of Gross up and Dividend Tax Credit: 2012 taxation year
 Gross UpGrossed Up Dividend (div + GU)Federal Dividend Tax Credit
Eligible Dividends38%138%6/11 x gross up
Non-Eligible Dividends16% (2018)15% (2019)116%115%8/11 x gross up (2018)9/13 x gross up (2019)

Foreign Corporation Dividends:

  • If individuals receive dividends from foreign (non-Canadian resident) corporations, then the gross up and dividend tax rule does not apply
  • Its treated just like interest income
  • Two things happen when individuals get dividends:
    • When individuals get dividend income they need to gross up their dividends and include this amount in property income
    • Individuals also get a Dividend Tax Credit to lower taxes payable
  • The government taxes dividends like this because they want to achieve integration:
    • Integration: how does it work?
      • Suppose you have Mr. Smith who is a sole proprietor and sells shoes. He earns $100,000 in business income.
      • Suppose Mr. Jones, is the owner of a corporation Jones Co. that sells shoes. Jones Co. earns $100,000 in business income
      • With the dividend gross-up and dividend tax credit, CRA’s goal is such that the taxes Mr. Smith pays on his business income = the total taxes paid by Jones Co. +  the taxes paid by Mr. Jones on dividends from Jones Co.
      • Therefore, integration is there to set a level playing field between people who choose to incorporate and people who choose not to.
      • Since dividends are paid after tax, the gross-up serves the purpose of getting the dividends to a before-tax amount; and the dividend tax credit theoretically is the taxes that the corporation already paid.
  • Eligible vs. non-eligible dividends and capital dividends:
    • Eligible dividends = dividends paid by public Canadian companies, CCPC’s who paid dividends from active business income taxed at the general rate (not the small business rate)
      • In short, in the paying corporation is a CCPC; this is dividends paid out of the General Rate Income Pool (GRIP) – see corporate tax notes
      • Eligible dividends get taxed at a more favourable rate at the personal tax level – 30% (in the highest tax bracket) for 2012 in Ontario
    • Non-Eligible Dividends = all other dividends (except for capital dividends)
      • Non-eligible dividends are taxed at higher rates; approx. 33% (in the highest tax bracket) for 2012 in Ontario
    • Capital Dividends = dividends that are paid out of the capital dividend account (generally the accumulated non taxed portion of net capital gains and ECP gains)– see notes corporate taxes notes
      • These are tax-free for the recipient
Corporations
  • If a corporation receives dividends from a Canadian taxable corporation; the dividend is included in division B income and deducted under division C in arriving at taxable income
    • Therefore, dividends from Canadian taxable corporations are not part of taxable income and not taxed
    • This is done to avoid double taxation
  • No gross-up or dividend rules for corporations; just a simple division c deduction
  • However, if a corporation receives dividends from foreign corporations, the dividend is treated just like interest and it is taxed!
Rental Income

Special Rules for CCA:

  • Each rental building that costs $50,000 or more needs to be placed in a separate CCA class for calculating CCA deduction, CCA recapture, and terminal loss
    • This is done because CRA knows that buildings generally appreciate in value; and by having it in a separate class, you will likely have a CCA recapture when you sell the building
  • You cannot create or increase a rental loss with CCA; however, you can claim CCA of one building against income generated by another building

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