Factors That Are Allowed For The Purpose Of Gaining And Producing Income

Factors That Are Allowed For The Purpose Of Gaining And Producing Income

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There are deductions that are allowed for the purpose of gaining and producing income. Section 20 of the Income Tax Act states that there are permitted deductions of outlays and expenses. Some of the permitted deductions of expenses include financing activities other than interest under paragraph 20(1)(e), Annual fees under paragraph 20(1)(e.1), and Insurance premiums under 20(1)(e.2). However, penalties, bonuses and rate-reduction payments were initially under paragraph 20(1)(c), subsection 18(9.1) was introduced to deem such payment to be interest, if paid after 1984. The amounts related to penalties, bonuses and rate-reduction payments can be deducted only if the amount is reasonable and if the amount is paid or payable within the course of one period (CRA, 2015). Additionally, if an outlay or expense does not pass the tests of deductibility in section 18 and 19 then the lists in section 20 of exceptions of general rules should be checked to see if the outlay passes the test. If an outlay or expense passes the tests of deductibility in section 20 then the amount may be deducted from income otherwise it is not deductible for the purpose of gaining or producing income (Beam et al., 2016). In addition to the permitted deductions, if interest is earned on a loan that was used for gaining or producing income it is deductible due to the fact that the loan helped to gain income for the business (Beam et al., 2016). Nonetheless, if the loan did not help gain or produce income then the interest amount incurred on the loan would not be deductible as the loan was not a benefit the business. Property acquired to gain or produce income is deductible under paragraph 20(1)(e), if and only if the capital property is used to produce income (Bea...


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...pose of gaining or producing income and the expenses incurred for stolen inventory cannot be deducted because the inventory did not gain or produce income for the business. Additionally, according to section 67 deductions cannot be made in respect to an outlay or expense if the amount is not reasonable (“Hammill v. The Queen,” 2004). The expenses incurred by the taxpayer for the meals and entertainment of a client the taxpayer is limited to deducting fifty percent of the meals for the calculation of business income for tax purposes but the amount must be added back in current years net income. Overall, the Income Tax Act allows the deduction of specific outlays and expenditures for reasonable amounts, and there are reserves for specific outlays and expenses, given that they need to be added back to income on the subsequent or current year depending on the expenditure.

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