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CPAstore - EY's Guide to Preparing 2011 Personal Tax Returns

What's new for 2011?

Filing tips for 2011 personal tax returns

Chapter 1 – The T1 return – Getting started

Chapter 2 – Total income

Overview

Amounts not taxed

Amounts exempt by statute

Social assistance payments

Damages for personal injury or death

Amounts related to military service or wartime

Expense allowances, travel allowances, and volunteer service payments

Annotations

Employment income

Line 101 – Employment income

Exemptions from employment income

Employment-related benefits and allowances

Automobiles

Employee's own vehicle – Automobile allowance provided by employer

Employee's own vehicle – No allowance provided by employer

Employer-provided automobile – Standby charge

Employer-provided automobile – Operating expense benefit

Board and lodging

Employment at a special (temporary) work site or remote location

Low-interest or interest-free loans

Home purchase loans

Housing subsidies other than housing loans

Security option benefits

Security options granted by a non-CCPC

Security options granted by a CCPC

Change in the corporation's status

An employee should develop an exercise-and-sales strategy for security options that considers cash-flow needs, tax consequences, and investment risk, including the risk that the employee may not use a loss suffered on selling the securities to reduce tax paid on his or her net security option benefit.

Special relief for tax deferral elections

Cashout of security options

Moving expense reimbursements

General rule

Housing loss

Salary deferral arrangements

Tax consequences

Employment expenses

Reporting

Non-residents

Canadian-source employment income

Annotations

Line 104 – Other employment income

Net research grants

Eligible expenditures

Research assistants

Capital expenditures

Personal and living expenses

Travel costs

Documentation

Foreign employment income

Determination of foreign-source employment income

Employer reimbursement of temporary living costs

GST/HST and QST rebates

Non-residents

Annotations

Investment income

Line 120 – Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations

What's new for 2011?

Eligible dividends

Gross-up amount

Integration mechanism

Documentation

Acceptable notification

Split income

Dividends received by a spouse or common-law partner

Carrying charges and interest

Non-Residents

Annotations

Line 121 – Interest and other investment income

Foreign-source investment income

Offshore investment fund property and foreign investment entities

Interest income – Accrual rules

Mutual funds

Segregated fund investments

Income trusts and real estate investment trusts

Earnings on life insurance policies

Split income

Carrying charges and interest

Documentation

Non-residents

Annotations

Line 122 – Net partnership income: limited or non-active partners only

Tax shelters

Carrying charges and interest

Non-residents

Annotations

Capital gains (Line 127)

What's new for 2011?

Overview

Capital gains, losses, and property

Historical perspective

Transitional rules

Capital gain and capital loss

Capital property

Income versus capital determination

Exclusions from capital gain and capital loss

Inclusions in capital gain and capital loss

Capital gains and losses in respect of foreign currency

Disposition of Canadian securities

Deduction from business investment loss

Recovery of bad debts related to dispositions of eligible capital property

Repayment of government and other financial assistance

Taxable capital gains and allowable capital losses

Dispositions

Specific inclusions

Specific exclusions

Transfers of property that do not result in a change in beneficial ownership

Transfers of property between trusts

Certain payments in respect of a capital interest in a trust

Transfers of property for securing a debt or loan

Transfers of property to a trust to effect payment under a debt or loan

Partitions of jointly owned property

Date of disposition

Deemed dispositions

Death

Immigration

Emigration

Bad debt

Shares of a bankrupt corporation

Dispositions subject to warranty, covenant, or other contingent obligation

Proposed rules for restrictive covenants

When a small business corporation becomes public

Granting of an option

Gifts of capital property to charities

Change in use

Deemed gain – Negative adjusted cost base

Destruction, loss, or expropriation of property

Changes in terms of securities

Debt securities

Equity securities

Computation of capital gains and losses

Proceeds of disposition

General definition

Specific exclusions from proceeds of disposition

Gifts, inadequate consideration, and excessive consideration

Distribution by a personal trust

Adjusted cost base

General definition

Property on hand – December 31, 1971

Valuation dates and V-day values

Neutral or tax-free zone

Laid-down costs

Incidental or additional costs

Cost of property for which 1994 capital gains exemption election was made

Cost of certain properties

Adjustments in determining ACB

Additions and deductions to ACB of non-depreciable property

General additions

Additions relating to shares of a corporation

General deductions

Deductions relating to shares of a corporation

ACB of an interest in a partnership

ACB of identical properties

General rule

Bonds, debentures, bills, notes, or similar obligations

Property before and after valuation day

Costs of disposition

Capital gains and losses – Special rules

Personal-use property

Definition

General rules

Rules applicable to part dispositions

Sets

Debts

Listed personal property

Net gain and listed personal property losses

Ceasing to be resident in Canada

Depreciable property

Dispositions – Land and building

Eligible capital property

Election to report a capital gain

Farm or fishing property

Foreign property

Security option shares or units – Identical property

Security options – Special relief for tax deferral elections

Charitable gifts of capital property

Publicly listed securities

Flow-through shares

Options to acquire property

Exercising an option

Extension or renewal of an option

Sale of option to third party

Principal residence

Wins and losses on lotteries

Election on disposition of Canadian securities

Tax on split income

Loss denials and limitations

Lottery losses or gains

Superficial loss

Superficial loss defined

Identical properties

Exceptions to the superficial loss rules

Allocation of disallowed loss

Pro rata denial of loss

Loss on share redemption

Loss on shares where dividends were received

Loss on shares held by an individual

Loss on shares held by an individual's estate

Excluded dividends

Loss on personal-use property

Loss on transfer to a deferred income plan

Loss on transfer of debt to a related person

Loss on debt settlement

Loss on the disposition of debt for non-income-producing purposes

Principal residence exemption

Principal residence defined

Land as part of the principal residence

Ownership

Ordinarily inhabited

Designation by an individual

Capital gains reduction – Principal residence exemption

Pre-1982 properties and alternative calculation

Reduction for previously claimed capital gains exemption

Change in use

Residential to rental

Rental to residential

Partial changes in use

Disposition of part of a principal residence

Farm property

Principal residence exemption for a non-resident

Capital gains exemption

Overview

Calculating entitlement to the capital gains exemption

Qualified property

Qualified small business corporation shares

Small business corporation test

Holding-period test

Active business asset test and stacking rules

Special rules – Identical shares

Small business corporations going public

Purification techniques

Qualified farm property

Qualified fishing property

Transferring qualified farm or fishing property to a child

Capital gains deduction – Limitation of claim

Unused lifetime exemption limit

Annual gains limit

Cumulative gains limit

Cumulative net investment loss

Allowable business investment loss

Alternative minimum tax

Failure to report gain

General anti-avoidance rules

Corporate reorganizations

Gain attributable to insufficient dividends

Capital gains deferrals

Capital gains deferral for investment in small business

Overview

Capital gains deferral – General rule

Qualifying disposition

Eligible small business corporation shares

Active business corporation

Excluded corporations

Eligible reinvestment

Calculating the capital gains deferral

Adjusted cost base reduction

Replacement property rules

Involuntary dispositions

Voluntary dispositions

Replacement property

Deferring the gain

Election

Capital gains reserves

Overview

Where the reserve is not available

Promissory notes

Reserves on foreign property

Reserve for a gift of a non-qualifying security

Earnout arrangements

Convertible property

Convertible securities

Convertible debt

Transfer of farm or fishing property to a child or grandchild

Used principally in the business of farming or fishing

Deferral

Transfer of farm or fishing property to a parent

Property transferred between spouses or common-law partners

Rollovers and corporate reorganizations

Transfer of capital property to a corporation or partnership

Share-for-share exchange

Amalgamation

Non-residents

Tax payable by non-residents

Dispositions of taxable Canadian property

Taxable Canadian property defined

Real or immovable property situated in Canada

Property used in carrying on a business in Canada

Shares of a corporation

Interests in a partnership

Interests in a trust

Interests and options

Other taxable Canadian property

Compliance requirements

Section 116 filing requirement

Obligations of the non-resident vendor

Obligations of the purchaser

Application for clearance certificate for other property

Gifts of property by a non-resident person

Processing time

Penalties for not filing

Quebec clearance certificate

Requirement to file a Canadian T1 return

Treaty relief

Dispositions of treaty-protected property after 2008

Dispositions of treaty-protected property before 2009

Annotations

Rental income (Line 126)

Income from a business or income from property?

Extent of additional services provided

Management and supervision of rental properties

Incidental business

Rental operations owned by a partnership

Reporting

Calculation of gross rental income

Accrual or cash method?

Rents received in advance

Payment of rent in kind

Other related income

Rental expenses

Current versus capital expenditures

Capital expenses

Landscaping costs

Alterations to rental property to assist a disabled person

Devices and equipment to assist a disabled person

Current expenses

Advertising

Insurance

Interest and financing fees

Legal, accounting, and other professional fees

Management and administration fees

Motor vehicle expenses

Office expenses

Property taxes

Repairs and maintenance

Salaries, wages, and benefits

Travel

Utilities

Other expenses

Landscaping costs

Undeveloped land

Lease cancellation payments

Leasehold inducements

Condominiums and condominium fees

Non-deductible expenses

Capital cost allowance

Purpose

Reporting

CCA rules and restrictions

Rental building costing $50,000 or more

Changing from personal to rental use

Grants, subsidies, and other incentives or inducements

Non-arm's length transactions

Selling the rental property

Replacement property

Rental losses

Special situations

Principal residence

Renting below fair market value

Farmland rental by individuals

Surface rental by farmers

Non-residents

Election to file a section 216 return

Section 216 return and reduced withholding under Part XIII

Comparative table

Federal surtax and provincial tax

Rental property outside Canada

Annotations

Business and professional income (Lines 135–143)

Overview

Taxation of business and professional income

Classification of income by source

Business income versus property income

What is a business?

What is a property?

Distinguishing between business and property income

Business income (self-employment income) versus employment income

1. Control test

2. Integration test

3. Economic reality test

Control

Ownership of tools

Chance of profit

Risk of loss

4. Specified results test

Wiebe Door test

Evidence of relationship

Specific income tax consequences arising from the classification

Deductible expenses

Business income versus capital gain

What is profit?

Timing of deduction

Timing of income recognition

Accrual basis or cash basis?

Business income – Inclusions

Gross sales and professional fees

Amounts received

Election to transfer customer deposit to purchaser under asset sale

Amounts receivable

Work in progress

Other income

Payments based on production or use

Damages for breach of contract

Damages for loss of business income

Insurance proceeds expended

Inducement payments, reimbursements, and other amounts

Types of reimbursements, inducements, and similar amounts

Timing of receipt

Restrictive covenants

Investment tax credits

Gain on settlement of debt

Provisions or reserves from previous years

Income in special situations

Sales made with a right of return

Construction contract income

Accounting treatment of contract revenue

Tax treatment of contract revenue

Progress method of revenue recognition

Fixed-total-price contracts

Cost of goods sold

Meaning of inventory

Inventory valuation methods

What is cost?

Overhead allocation

Depreciation in inventory

What is fair market value?

Change in inventory valuation method

Inventory valuation for adventures in the nature of trade

Parts or supplies

Inventory obsolescence reserves

Artists

Work in progress of a professional

Non-residents

Business income – Deductions

Deductibility of an expense

General limitations

1. The expense must be incurred to earn business income

2. The expense must not be on capital account

3. The expense cannot be a personal or living expense

4. The expense must be reasonable in the circumstances

5. The expense cannot be part of a transaction to which GAAR applies

Specific limitations

Payments under different acts

Political contributions

Prepaid expenses

Recreational facilities and club dues

Recreational property and facilities

Club dues

Expenses deductible on Form T2125

Advertising expenses

Newspapers

Periodicals

Broadcasting

Meals and entertainment

Exceptions

Conferences and conventions

Amounts included in air, train, or bus fares

Entertainment expenses at golf clubs

Long-haul truck drivers

Bad debts

Assessing collectibility

Interest

Interest paid or payable

Reasonable rate of interest

Funds used

Reasonable expectation of income

Mortgage interest and home offices

Motor vehicle expenses

Definitions of passenger vehicle and automobile

Deductible motor vehicle expenses

Maximum capital cost allowance on purchased vehicles

Maximum deduction for leased vehicles

Interest expense

Mileage allowances

Capital cost allowance

Eligible capital expenses

Other expenses

Conventions

Disability-related modifications to buildings

Disability-related equipment

Landscaping

Site investigation

Utilities service connection

Reserves

Reserves for goods or services to be provided after year-end

Warranty reserves

Food, drink, or transportation reserves

Prepaid rent reserves

Returnable container reserves

Reserves for amounts due from the sale of property

Doubtful debt reserves

Workspace at home

Limitation

Carryforward of expenses

Business losses

Selection of business year-end

Taxation of farming and fishing income

Non-residents

Carrying on business in Canada

Non-resident actors

Annotations

Capital cost allowance and eligible capital property

What's new for 2011?

Overview

Purpose

Application

Current versus capital expenditures

CRA's administrative guidelines

Asset capitalization threshold

Summary

Capital cost allowance (CCA) system

Mechanics

Eligible depreciable property

Listed in a class

Ownership

Property held by a partnership

Available for use

Buildings

Other properties (including leaseholds)

Election for long-term projects

Non-arm's length transfers

Anti-avoidance rule

Exceptions

Costs otherwise deductible

Specifically disallowed depreciable property

Calculation of CCA

Formulae

Declining-balance classes

Other classes

Additional allowances

General restrictions

Half-year rule

Exceptions to the half-year rule – Excluded assets

Exceptions to the half-year rule – Non-arm's length transactions

Short taxation years

Separate classes for similar properties

Capital cost

Meaning of capital cost

Special rules

Apportionment of cost

Cost incurred in foreign currency

Property manufactured or produced for own use

Deemed capital cost and adjustments to capital cost

Property with a dual purpose

Change in use of assets

Business property converted into non-business use

Non-business-use property converted into business-use property

Election not to apply the change-in-use rules

Property with change in relative use

Property with a change in use from one income-producing purpose to another

Non-arm's length transfers

Where vendor is a Canadian-resident individual or partnership

Where vendor is a corporation or non-resident

Potential recapture

Passenger vehicles

Grant, subsidy, credit, inducement, or other assistance

Government assistance

Investment tax credit

Debt forgiveness

GST/HST credits and rebates on depreciable property

QST credits on depreciable property

Other inducements or reimbursements

Townsite costs related to a mine and payments for other prescribed property

Trade-ins

Gift or bequest

Building under construction, renovation, or alteration

Undepreciated capital cost

Meaning of undepreciated capital cost

Cumulative account

Resulting UCC balance

Disposition

Meaning of disposition

Meaning of proceeds of disposition

Involuntary dispositions – Time of disposition and receipt of proceeds

Recapture and terminal loss

Recapture

Temporary negative UCC balance

Replacement property rules

Recapture deferral calculation

Limited-period franchises, concessions, or licences

Terminal loss

Depreciable property of a discontinued business

Passenger vehicles costing more than the prescribed amount

Former business property of another person

Transfer of depreciable property from one class to another

Disposition of depreciable and non-depreciable property

Disposal of land and building in the same year

Cost amount

Disposal of land and building in different years

Suspended loss rules

Affiliated persons

Application of rules to transferor

Triggering events

Application of rules to transferee

Excluded dispositions

Bad debts arising from dispositions of depreciable property

Specific CCA restrictions

Luxury automobiles

Operation of the CCA restriction

Definition of passenger vehicle

Separate classes, recapture, and terminal loss

Transfer of vehicle to non-arm's length parties

Joint ownership arrangements

Rental properties

Operation of the CCA restriction

Definition of rental property

Expanded definition of rent

Leasing properties

Operation of the CCA restriction

Definition of leasing property

Expanded definition of rent

Separate class required

Specified leasing properties

Definition of specified leasing property

Expanded definition of rent

Separate class required

Operation of the CCA restriction

Available-for-use rule

Anti-avoidance rules

Special rules

Acquisitions of specified leasing property

Other rules

Computer tax-shelter properties

Definition of computer tax-shelter property

Operation of the CCA restriction

Separate class required

Specified energy properties

Definition of specified energy property

Exception – Non-arm's length acquisitions

Exception – Replacement property

Operation of the CCA restriction

Separate class required

Special CCA rules for lessees

Election to capitalize leased property

Application of rules

Acquisition of leased property

Lease-option agreements

CCA classes

Non-arm's length transfers

Separate classes

General rule – Separate businesses

Separate class rules

Rental property costing less than $50,000

Rental property costing $50,000 or more

Multiple-unit residential buildings

Limited-period franchise, concession, or licence

Other assets

Separate class elections

Outdoor advertising sign

Rapidly depreciating electronic equipment

Manufacturing or processing property

Class 43.1 and 43.2 M&P property

Non-residential buildings

Transfers between classes

Calculation

Elections

Election to include properties in Class 1

Election to include properties in Class 2, Class 4, or Class 17

Election to include properties in Class 8

Election to include properties in Class 37

Election to make certain transfers – Acquisitions made before or after May 26, 1976

Election to make certain transfers – General rule

Election to include properties in Class 1, Class 3, or Class 6

Election not to include properties in Class 44

Election to include properties in Class 35

Five-year rule for Class 8 or Class 43 separate class elections

Misclassified properties

Eligible capital property

Eligible capital expenditures

Mechanics of the CEC deduction

Meaning of CEC

Definition of adjustment time

Taxation year of an individual

Gain on sale of eligible capital property

Bad debts arising from dispositions of eligible capital property

Specific rules

Elections for capital gains treatment

Reasons for filing the election

Where the election is not available

Farm or fishing property

How to file the election

Deemed taxable capital gain on farm and fishing property

Non-arm's length acquisitions of eligible capital property

General limitation

Limitation where capital gains deduction claimed by transferor

Government assistance for eligible capital property

Replacement property rules

Ceasing to carry on business

Deduction of remaining CEC

Rollover of remaining CEC

Rollover of eligible capital property on death of an individual

Annotations

Scholarships, fellowships, bursaries, prizes, and artists' project grants (Line 130)

Overview

Awards

Award versus employment income

Scholarships provided to employees' dependants

Fellowships versus research grants

Post-graduate educational fellowships

Post-doctoral fellowships

Art production grants

Prizes

Prescribed prizes

Scholarship exemption

Limitations of scholarship exemption

Exemption amount

Restriction for part-time courses

Reporting

Non-residents

Annotations

Pension and other income

Line 113 – Old age security (OAS) pension

Non-residents

Annotations

Line 114 – CPP or QPP benefits

Non-residents

Annotations

Line 115 – Other pensions or superannuation

What's new for 2011?

Superannuation or pension benefits

RPPs

RRIFs and annuities

RRIF and variable benefit money purchase RPP holders – One-time relief (for 2008)

Saskatchewan pension plan

Individuals must include on Line 115 Saskatchewan pension plan (SPP) payments reported in Box 16 of Form T4A.

Foreign Pensions

US IRAs and Roth IRAs

US social security

Non-residents

Annotations

Line 116 – Elected split-pension amount

Benefits of pension splitting

Annotations

Line 117 – Universal child care benefit

What's new for 2011?

Eligibility for UCCB

Eligible individual

Eligible child

UCCB amount

Inclusion in income – Who must report the UCCB?

Two-parent families

Single-parent families

Repayment of UCCB

UCCB amounts for previous years

Exclusion of UCCB from the calculation of certain income bases

Attribution rules

Administration

Non-residents

Annotations

Line 119 – Employment insurance and other benefits

What's new for 2011?

Lump-sum payment

Quebec parental insurance plan

Extension of EI special benefits to self-employed individuals

Opting in to the program

Non-residents

Annotations

Line 125 – Registered disability savings plan income

What's new for 2011?

Contributions

RDSP payments

Specified disability savings plan

Review of RDSP program

Non-residents

Annotations

Line 128 – Support payments received

Child support amount

Tax treatment

Support amount

Allowance

Periodic basis

Tax treatment

Non-residents

Annotations

Line 129 – RRSP income

What's new for 2011?

Additional amounts included on Line 129

Spousal or common-law partner RRSP

Home buyers' plan and lifelong learning plan

Non-residents

Annotations

Line 130 – Other income

Retiring allowances

Retirement compensation arrangements

Apprenticeship incentive grants

Scholarships, fellowships, and bursaries

Death benefits

Registered education savings plan payments

Educational assistance payments

Accumulated income payments

Registered disability savings plan payments

Tax-free savings account payments

Lump-sum payments received in lieu of health or dental coverage

Non-residents

Annotations

Lines 144 to 147 – Other benefits (workers' compensation, social assistance, net federal supplements)

Non-residents

Annotations

Chapter 3 – Net income deductions

Chapter 4 – Taxable income

Chapter 5 – Federal non-refundable tax credits

Chapter 6 – Federal tax payable or refundable

Chapter 7 – Provincial and territorial tax

Chapter 8 – Quebec provincial income tax

Chapter 9 – Special situations and tax planning

Chapter 10 – Taxation of immigrants, emigrants, and non-residents

Chapter 11 – Administration

Appendices


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