RSM 424 H1S

Canadian Income Tax II L0101

Session 1

11 January 2012
Agenda
Introduction and administrative matters
Corporations An introduction
Chapter 11
I. Relationship between the Corporation and
Its Shareholders
II. Determination of Taxable Income
III. Calculation of Corporate Tax
IV. The Integration of Corporate and Individual
Taxation

I. Relationship between the
corporation and its shareholders
An incorporated Company is an artificial person
separate from owner(s)
Recognized by law as an entity
has the power to act in its own right and to enter into
enforceable legal agreements
A corporation
can buy, own, sell and lease property
can borrow funds for its own use as well as loan funds to
others

II. Tax impact of shareholder and
corporate relationships
1. The primary relationship
2. The secondary relationships

The primary relationship
Shareholder contributes cash or other
property in exchange for shares
Shareholders realize a return on investment
through dividends or through a capital gain
when they sell their shares at a profit

The secondary relationships
Secondary relationships
creditor
supplier
employee
customer
lessor
Tax consequences and cash flows between the
parties are different from those in the primary
relationship

Primary and secondary relationships
Difference between the two relationships centres on
the tax treatment of income flows:
Primary relationship
dividends paid by the corporation are not deductible,
but are taxable to the recipient
Secondary relationships
payments such as salaries, interest, and rents are
deductible and taxable to the recipient

II. Determination of Taxable Income
The taxable income of a corporation is:

Net income for tax purposes - special deductions

Donations to charitable organizations
Net capital losses
Non-capital losses
Dividends from taxable Canadian corporations
Dividends from foreign affiliates

Loss carry-overs
ITA 111(1)(a) same as with individuals
Net capital losses
Can be carried back three years and forward indefinitely
Used only against taxable capital gains
Non-capital losses
Can be carried back three years and forward twenty years
Used against any other source of income

Dividends from other Canadian
corporations
Dividends received included as property income for
net income for tax purposes
Dividends are deducted from taxable income if:
received from a taxable Canadian corporations ITA
89(1)(i), 112(1), or
foreign affiliate corporations ITA 113, 95(1)(d)
A Canadian corporation must have at least a 10% equity interest in
the foreign corporation

Dividends from other Canadian
corporations
Result is dividends flow tax-free
Private corporations may be subject to a
temporary tax (Chapter 13)
Removes the second level of tax until
dividends are received by individuals