I’ve acquired a client with a corporation that earns a 100% of its income from an investment portfolio. It’s total net income after deducting management and accounting fees is investment income and is therefore reported on Schedule 7.
The corporation’s year end does not coincide with a calendar year, nor does it coincide with a calendar quarter (Aug 31st). This makes it difficult to confirm the types of income to report without having all of the tax slips to verify that dividend income reported on portfolio statement was indeed designated as dividend and interest as interest on T-slips when T2 filing deadline is Feb 28th and some of the slips haven’t even been issued by this date.
I usually get to reconcile income types reported on the quarterly portfolio reports to annual T-slips in the subsequent fiscal year. One thing that has been fairly consistent is the reporting of capital gains on portfolio statements and T Slips when I do my calendar year reconciliation so that gives me comfort when I am reporting capital gains.
Because of the timing differences, prior accountants designated and reported income on GIFI S125 according the portfolio report (which is being provided by the management company for the fiscal year period), but adjusted interest / dividends reported on schedule 3 and 7 according to prior year’s T slips. For example, YE2023 T2 would have reported actual designated dividends and interest based on 2022 T slips. I followed this practice to stay consistent.
This year however, I have income for tax purposes exceeding adjusted AII income reported on S7 and the software is calculating small business deduction as a result. Has anyone ran into this issue and how have you dealt with it?
Schedule 7 income is reported gross, without any deductions. How would you even distribute expenses? Schedule 7 income will always be greater than taxable income. Revenue is all investment income. No SBD will result. The SBD applies only to active business income. It is entirely possible to have both. You could hold an investment portfolio and run a hot dog stand outside the Superstore.
Aside from current year issues…suggest to client to simply apply to cra to change year ends to match or yearly or quarterly you will have many many reconciliations to do
Prorating or combing thru all transactions may be the best bet in this year…you will catch up next period when year end changed.
Rachel Parlee
(506) 874-3093
Schedule 7 income is reported gross, without any deductions.
I that were true, why does S7 Line 062 say “minus related expenses”?
What I normally do is average the expenses over the different types of income and then plug the expenses [other than dividends] on the line “Other property Loss”
This way I get the proper Active business income.
I agree with Rachel - if your client is receptive… We have had a lot of investment companies change their year end to the calendar year as ultimately it saves them accounting costs.
The entire business’s income is derived from portfolio investments. There is no other income.