Property Income
Chapter 7
Income From Property
Income From Property
The General Concept
• Little Or No Effort Required
• Some Limitation on Expenses
• Includes Interest, Rent, Dividends, and Royalties
• Does Not Include Capital Gains
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Sources of property income
• Investment-type property (e.g., shares of corporations with potential to
generate dividends);
• Rental properties to provide rental income;
• Property that generates interest income (e.g., loans to others, bonds,
savings accounts at financial institutions);
• Patents or rights to use one’s property (royalty income); and
• Returns in the form of interest & dividends from ownership of mutual
fund units.
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Interest Income
What Is Interest?
• Calculated On A Day-To-Day Accrual Basis
• Calculated On A Principal Sum
• Compensation For The Use Of That Principal Sum
Examples:
Bank Account, Term Deposits, GIC, Mortgage, Bonds etc.
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Interest Income
Individuals
• ITA 12(1)(c) Any amount Received, or Receivable on account of interest.
Accrual Rules - ITA 12(4)
• Interest must be accrued on each anniversary date of the debt
• Anniversary date is the day before the day in which the debt obligation
was issued (not purchased) & every successive one-year interval
measured from that day
Example: If an investment is issued on April 1, you would be required to
report the interest on that investment each year on it’s Anniversary Date =
March 31
Interest Income
ITA 12(4) requires you to report Interest Income on the
Accrual Method on the anniversary date.
When Interest Income is actually received on the debt
obligation ITA 12(c) will require that the actual interest
received must be reported as income.
At this time you can deduct from the interest actually received
any amount that you have already reported in a prior year
based on the accrual method required in ITA 12(4).
Example
A bond is issued on January 1, 2021 and you purchase it on
that date. It is a 3 year bond for $1,000 that accrues interest
of 5% annually to be paid at maturity.
2021 - Interest accrued on December 31 = $50 – Reported
2022 – Interest accrued on December 31 = $50 - Reported
2023 – Interest paid on December 31 = $150 - $100 = $50
Reported
Accrued Interest at Transfer
If you purchase a bond and part of the purchase cost include a portion of
the accrued interest owning on the bond, then you may deduct this portion
from the actual interest payment when received. The Anniversary Date is
the date of issue not the date you purchased the bond.
Example: A Jan 1st $1000 bond paying 10% interest with semi-annual
payments of $50 each June 30 and Dec 31. You purchase this bond on
Oct 1 and pay $1025 of which $25 relates to the interest earned on the
bond from July 1 to Sept 30.
On Dec 31 you receive an Interest Payment of $50 which would be
required to be reported as income, however you can deduct the $25 paid
thereby reporting only $25.00.
The seller of the bond on Oct 1 would report as Interest Income the $25
received on the sale of the bond.
Interest As A Deduction
ITA 20(1)(c) – interest is deductible if the borrowed money has been
used for the purpose of earning income from a business or property,
other than exempt income.
Interest – Not Deductible
• Interest owning on Income Tax Assessments
• Interest on a loan to purchase RRSP & TFSA
• Pre-Paid Interest
• Interest on a loan used to produce Capital Gains only. (Purchase of
Common Shares is OK)
• Interest on personal loans
Other Related Investment Fees
Investment Council Fees - Deductible:
• Fees for advice on buying and selling of investment
• Fees paid to manage your investment account
Brokerage Fees – Not Deductible:
Are not deductible against property income but are treated as a cost
incurred to purchase or dispose of a capital property and therefore are
added or deducted from the capital gain or loss incurred on the sale.
Investment Fees - Not Deductible
• Safety Deposit Box fees
• Subscription to financial magazines, periodicals or newspaper in print
or on-line.
Homework
Exercise 7 – 4 page 382
Exercise 7 – 5 page 384
Hand Out Question 1
Hand Out Question 2
Chapter 7 – Read paragraphs 7-1 to 7-27,
7-62 to 7-68 and 7-74 to 7-77
THE END