Business and Investment Income: General

• Author: Vern Krishna
• Pages: 81-92

CHAPTER

5

BUSINESS

AND

INVESTMENT

INCOME:

GENERAL

A.

INTRODUCTION

ITA,

ss. 9, 12, 18, & 20

The

Income

Tax Act

requires that income

from

each source

be

separately

calculated

and

aggregated according

to the

rules applicable

to the

par-

ticular

source.

The Act

distinguishes among income

from

business, cap-

ital

gains,

and

investment income. Each

of

these sources

of

income

is

subject

to

different

rules

and tax

rates. Since each source

of

income

is

subject

to

different

rules, classification

of

income

by

source

is

always

the

first

step

in the

determination

of a

taxpayer's liability

for

income tax.

In

chapter

4 we

looked

at

income

from

an

office

or

employment.

In

this

chapter

we

look

at the

nature

of

business

and

investment income.

Although subdivision

b of

Division

B

(Part

I) of the Act

contains

rules that apply

to

both

business

and

investment income,

the two

sources

are

actually quite

different.

To be

sure, many

of the

rules apply

to

both types

of

income. There are, however, important

differences

between

the

two,

and the

distinction between them

can be

critical

to

taxpayers.

The Act

generally restricts

its

incentive provisions

to

busi-

ness income because

such

income involves

a

greater degree

of

economic

activity

and, where appropriately used, generates employment.

In

con-

trast,

investment income

is

more passive.

The Act

does

not

provide

any

special incentives

for

passive income. Indeed,

as we

shall

see

later

in

chapter

13,

there

are

special rules applicable

to

corporations that some-

times penalize investment income earned

by

private corporations.

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