doing business in canada - Davies Ward Phillips & Vineberg LLP

GENERAL RULESDetermination of IncomeIn very general terms, income for purposes of the Tax Act means income from business or property, incomefrom office or employment and taxable capital gains.Income from business or property is generally equivalent to the profit from the business or property calculatedin accordance with "well accepted principles of business (or accounting) practice" or "well accepted principles ofcommercial trading", adjusted as required by specific rules in the Tax Act.Income also includes one-half of the capital gain (referred to as the taxable capital gain) realized on a dispositionof capital property, subject to reduction by allowable capital losses. The amount of the capital gain generallyequals the proceeds of disposition less the sum of the "adjusted cost base" of the property under the Tax Act(roughly the cost of acquisition) and any costs of disposition. If capital cost allowance (tax depreciation) hasbeen taken in respect of the capital asset, part of the proceeds may be ordinary income (a recapture of thecapital cost allowance previously claimed).Employment income includes wages, bonuses and taxable employment benefits. Remuneration paid to directorsconstitutes income from employment. Deductions from employment income are very limited.Employers are required to make regular "source deductions" for income tax and social security contributionsfrom employees' income (including taxable benefits) and remit the amount to CRA on behalf of the employees.Directors of corporations may be personally liable if a corporate employer fails to make or remit sourcedeductions. Employers may also be required to pay provincial payroll taxes.The remainder of this section summarizes some key rules relevant to the computation of income for Canadiantax purposes and the taxation of common business entities.LossesCanadian rules do not permit formal loss consolidation or other relief within a corporate group; however, thereare established techniques that have been accepted by CRA within acceptable limits for shifting losses betweenmembers of the same corporate group. The March 4, 2010 federal budget announced that the federalgovernment will explore whether a formal system of loss transfers within corporate groups or consolidatedreporting would be appropriate.Non-capital losses of a taxpayer from business or property can generally be carried back three years or forward20 years to reduce taxable income of the taxpayer. Losses incurred prior to 2006 are subject to more restrictivecarry forwards.Net capital losses may be carried back three years or forward indefinitely, but generally can be applied onlyagainst taxable capital gains.Various anti-avoidance rules may apply to limit the availability of losses, including those that may be utilizedafter an acquisition of control of a corporation.Interest Expense and Other Financing CostsSubject to proposed loss limitation rules, reasonable interest expense on funds borrowed or indebtednessincurred to acquire property for the purpose of earning income from business or property is deductible on anaccrual or cash basis (depending upon the method regularly followed by the taxpayer).Non-interest costs, including commissions and fees, incurred to borrow money or incur debt for an incomeearningpurpose or to issue treasury shares are generally deductible on a straight-line basis over five years.Tax Considerations 83