Difference Between Capital And Income Expenditures Essay

Difference Between Capital And Income Expenditures Essay

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The Tax Courts of Canada have developed three specific tests in distinguishing the difference between capital and income expenditures. With these tests that they use they also have specific considerations they assess in determining the expenditures are capital and the CRA also has specific criteria assisting them to determine the difference. Firstly, the three tests used consist of recurring expense test, Enduring benefit or asset test, and underlying purpose or rationale test (Ansari, 2016). The recurring expense test is a test used to determine whether there is a one time payment made or periodic payments made on an expenditure, just because an expense is made “once and for all”, does not mean it is capital in nature, Para 75 (Rio Tinto Alcan Inc v. The Queen, 2013). Recurring capital expenditures that provide a continual benefit to the business are purchasing new machines for the business, while current expenditures provides benefits that are used up in within one year such as severance payments (Rio Tinto Alcan Inc v. The Queen, 2013). The enduring benefit or asset test determines if the expenditure has a long lasting or surviving benefit, it should be treated as a capital expenditure, Para 76 (Rio Tinto Alcan Inc v. The Queen, 2013). The underlying purpose or rationale test determines if the expense is incurred relating to the income earning process then it is likely to be income, while expenses incurred as a part of the implementation of transactions results in an acquisition of a capital asset, or taxpayers’ business then it considered a capital expenditure, Para 77 (Rio Tinto Alcan Inc v. The Queen, 2013). The Tax Courts of Canada conducts these tests to determine if legal, investment banking, and other fees in respect of...

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...pital is income generated from investing and financing activities of a business whereas Income is generated from operating activities of a business. Capital is long term and lasts longer than one period or operating cycle and income is short term it is usually used up within one period or operating cycle. Capital is reflected in the balance sheet as an asset which includes property, plant, and equipment. Capital is not recurring, meaning that equipment need to be bought every year, it is bought once and maintained until its value diminishes to the residual value. Income is on the income statement and it is recurring meaning that it is calculated periodically or every year. Both Income and capital are needed for growth and survival of a business, a company cannot generate income without capital and capital cannot be bought without income (Accounting-Management, 2015).

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