CH 15

Chapter 15
Taxable Income And Tax

Payable For Corporations
Computation Of Net
Income – Schedule 1
 Accounting Net Income
 Additions
 Deductions
 Net Income For Tax

Purposes
© 2007, Clarence Byrd Inc. 2

Additions
 1. Amortization,
Depreciation, and
Depletion
 2. Recapture Of CCA
 3. Reserves Deducted In
Prior Years
 4. Losses On Dispositions Of
Capital © 2007, Clarence Byrd Inc. 3
Additions - Continued
 5. R&D (Accounting
Amounts)
 6. Warranty Costs
(Accounting
Amounts)
 7. Debt Discount
Amortization
 8. Foreign Taxes Paid

(Accounting Amounts)
 9. Excess Of Taxable
Capital Gains Over
Allowable Capital
Losses
 10. Income Tax Expense
 11. Interest And Penalties

On Income Tax
Assessments
 12. Automobile Costs

(Non- Deductible)
 13. 50% Of Business Meals
 14. Club Dues And Cost Of

Recreational Facilities
 15. Non-Deductible
Accounting Reserves
 16. Political Contributions

 17. Charitable Donations
 18. Asset Impairment

Write- Downs

Deductions
 1. CCA
 2. CEC
 3. Terminal Losses
 4. Deductible Reserves

Deductions
 5. Gains On Dispositions Of
Capital Assets (Accounting
Amounts)
 6. Deductible R & D Costs
 7. Deductible Warranty Costs
 8. Debt Premium Amortization

Deductions - Continued
 9. Foreign Non-Business Tax
Deduction – ITA 20(12)
 10. Allowable Business

Investment Losses

Corporate Taxable
Income
 Deductions Not Available
To Corporations
 Lifetime Capital Gains
Deduction
 Employee Stock Option
Deduction
 Home Relocation Loan
Deduction
 Northern Residents
Deductions
 Social Assistance And
Corporate Taxable
Income
 Deductions Available To
Corporations
 Losses (Same as for
individuals)
 Charitable Donations (A
deduction rather than a
credit)
 Dividends (Unique to
corporations)

Dividends - The Problem
Corporate Tax Rate = 40%
AALtd.
Ltd. B Ltd. C Ltd.
$1,000 $600 $360

Dividends From Untaxed
Income
 Corporation Taxed At 20% On
$100
 Individual Pays $24 [(30%)($100
- $20)]
 Total = $44 = ($20 + $24)
 Corporation Not Taxed

 Individual Pays $30
[(30%)($100)]
 Total = $30 < $44 When
Corporation Taxed
Dividends On Preferred
Shares
 Debt At 10%
 Cost Of Capital If Corporation Taxed =
6%
 Cost Of Capital If Corporation Not Taxed
= 10%
 Preferred Shares At 8%
 Redeemable/Retractable Preferred
 Accounting may treat as debt

Stop Loss Rules
 The Scenario  Anti-Avoidance:
 Acquire At $10 On Loss Disallowed
June 30 Unless:
 Receive $1  Own 365 Days; And
Dividend On July 1  Corporation Owns
 Sell At $9 On July 2 No More Than 5%
for loss of $1 Of Payor

Acquisition Of Control
- The Problem
Profit Loss
Company Company
Acquisition
Loss Transferred To Profit Company

Meaning Of
 Control: Ownership of
shares that carry the
right to elect a majority
of the board of
directors.
 Common Scenario: One
person acquires shares
from a different arm’s
length person.

Meaning Of
 Can also occur through redemption of

shares
 A owns 60 percent – B owns 40 percent –
If all of A’s shares were redeemed, B
would have acquired control.

Deemed Year End - ITA
249(4)
 Example: Dec. 31 year
end,
acquisition on June 30,
2007
 Deemed New Year

End June 30, 2007
 Keep Old Year End
 Allowed To Establish
New Year End
Deemed Year End - ITA
249(4)
 Usual Year End
Procedures
 File Return
 Value Inventories
 Short Fiscal Period
 CCA Calculations
 Annual Business Limit
 Counts Towards Loss
Expiry
 Net Capital Losses
And Allowable
Business
Investment Losses
– ITA 111(4)(a) &
(b)
 Unused Carry
Forwards Die
 New Losses Cannot

Be Carried Back© 2007, Clarence Byrd Inc. 22
 Non-Capital Losses -
111(5)
 Can Be Carried Forward
 Subject To Restrictions
 Must Carry On Business In
Which Losses Occurred
 Reasonable Expectation Of
Profit
 Can Only Be Applied
Against Income Generated
By The Same Or A Similar
Line Of Business

Accrued Losses
 Inventories
 Normal Year End
Procedures
 Accounts
Receivable -
111(5.3)
 Maximum Write-Off
Required

Accrued Losses
 Depreciable Property
 Asset Cost =
$100,000
 UCC = $ 60,000
 FMV = $ 50,000
 ITA 111(5.1)
 Write Down To $50,000
 The $10,000 Is
Deemed CCA
Accrued Losses
 Eligible Capital Property
- 111(5.2)
 CEC > 3/4 FMV
 Write Down
 ITA 20(1)(b) Deduction

Accrued Losses
 Non-Depreciable Property
- 111(4)(c) & (d)
 ACB > FMV
 Write Down
 Capital Loss (Will disappear

if not used at deemed year
end.)

ITA 111(4)(e) Election
 General Rule
 Can elect between ACB and FMV
 FMV > ACB: Creates Capital Gain

 May also create recapture (Can’t avoid if
you want the capital gain.)

 Case 1
 Capital Cost = $ 50,000
 FMV = 100,000
 UCC = 20,000
 Elect $100,000
 Capital Gain
$ 50,000
 Recapture
30,000
 New Cap. Cost © 2007, Clarence Byrd Inc. 29
 Case 2
 ACB = $ 50,000
 FMV = 30,000
 UCC = 20,000
 Elect $30,000
 Capital Gain
$ Nil
 Recapture
10,000
 New ACB © 2007, Clarence Byrd Inc. 30
 Case 3
 ACB = $ 50,000
 FMV = 5,000
 UCC = 20,000
 Write down to $5,000 is

required by 111(5.1)
 The $15,000 is deemed
CCA

Profits In The Loss
Business
During 2007, Loss Leader experiences an overall Net Loss

of $150,000, with all of the loss arising in their shoe
division. Their hat division broke even for the year. In
2008, the shoe division broke even, while the hat division
showed a profit of $200,000.
• No Acquisition in 2007: 2008 Income = $50,000
• Acquisition in 2007: 2008 Income = $200,000

Non-Capital Loss Carry
Overs
 Example
 Business Losses ($60,000)
 Dividends Received 10,000
 Bond Interest 5,000
 ABIL ( 3,000)
 Taxable Capital Gains 15,000
 Allowable Capital Losses( 7,000)
 Total ($40,000)

ITA 3 Rules
3(a) Non-Capital $15,000
3(b) Net Capital 8,000
3(c) Sum $23,000
3(d) Non-Capital ( 63,000)
Net Income Nil
Net Capital Loss Carry Over Of $8,000

Available
Alternatives
 No Net Capital Loss

Deduction
 Net Capital Loss
Deduction Of $8,000

Alternative 1 - Non-Capital
Loss With No Net Capital
Deduction
Part E:
 Business Loss $60,000
 ABIL 3,000
 Dividends 10,000 $73,000
Part F:
 ITA 3(c) ( 23,000)
Non-Capital Loss $50,000

Alternative 2 - Non-Capital
Loss With Net Capital
Deduction Of $8,000
Part E:
 Business Loss $60,000
 ABIL 3,000
 Dividends 10,000
 Net Capital Loss 8,000 $81,000
Part F:
 ITA 3(c) ( 23,000)
Non-Capital Loss $58,000

Ordering Of Taxable Income
Deductions
 Timing
 Oldest must be used
before others of same
type
 No other restrictions on
order
 Type
 Restricted By Income
Type
 Restricted By Time
Geographical Allocation
 Permanent Establishments – ITR
400(2)
 Fixed Place Of Business
 Stock Of Inventories, Land,
Equipment
 Activity: Permanent
Establishments
 Gross Revenues
 Salaries And Wages
 Procedures
 A Simple Average
 No Weighting © 2007, Clarence Byrd Inc. 39
Gross Revenues
Province Amount Percent
Alberta $250,000 25.0
Manitoba 400,000 40.0
Ontario 350,000 35.0
Totals $1,000,000 100.0

Salaries And Wages
Province Amount Percent
Alberta $100,000 20.0
Manitoba 200,000 40.0
Ontario 200,000 40.0
Totals $500,000 100.0

Allocation To Provinces
Province Average Taxable Amount
Percent Income Allocated
Alberta 22.5 $100,000 $ 22,500
Manitoba 40.0 100,000 40,000
Ontario 37.5 100,000 37,500
Total $100,000

Federal Tax Payable
 Basic Rate - ITA 123(1)
 38% Of Taxable Income
 Federal Tax Abatement -

ITA 124(1)
 10% Of Taxable Income Earned
In A Province
 Surtax - ITA 123.2

 Use 4% Of 28% Of Taxable
Income
 Repealed as of 2008
 General Rate Reduction
 7% Of Full Rate Taxable Income
Provincial Corporate
Rates
 General (%)  Small Business (%)
 Alberta 10.0  Alberta 3.00
 British Col. 12.00  British Col. 4.50
 Nova Scotia 16.00  Nova Scotia 5.00
 Ontario 14.00  Ontario 5.50
 Quebec 9.90  Quebec 8.50

Tax Payable With
$100,000 Taxable Income
Basic At 38% Of $100,000 $38,000
Abatement At 10% Of $100,000
( 10,000)
Surtax At 4% Of $28,000 1,120
GRR At 7% Of $100,000 ( 7,000)
Total Federal Tax $22,120
Provincial At 15% Of $100,00015,000
Total (Rate = 37.12%) $37,120
Objectives Of Corporate
Taxation
 1. Avoid Double Taxation
 Corporation Gets Dividend
Deduction
 Individual Gets Gross Up And
Credit
 2. Prevent Avoidance Through
Corporation
 Corporation: Prevent Capital
Gains From Becoming Dividends
 Individual: Prevent Dividends
From Becoming Capital Gains
 3. Providing Incentives
 Small Business Deduction
 M&P, ITCs, SR&ED
Small Business
Deduction (SBD)
 Objectives
 Relief To Small
Business
 Encourage Active
Business Income
 Provide For The
Accumulation Of
Capital In A New
Business

Basic Concepts
 Canadian Controlled
Private Corporation (CCPC)
 Active Business Income
 Annual Business Limit
 2007 and subsequent -
$400,000
 Associated Companies
 Must share the $400,000
limit
SBD Example With
$100,000 Of Taxable
Income
Federal Tax At 38% $38,000
Federal Tax Abatement ( 10,000)
Tax Before Surtax $28,000
Federal Surtax 1,120
Tax Before SBD $29,120
SBD At 16% ( 16,000)
Federal Tax $13,120
Provincial Tax At 5% 5,000
Total Tax Payable $18,120

Property Income
 The Problem
 Interest and rent may
involved an active
business
 The Solution
 Specified Investment
Business does not get SBD
 Excludes businesses with
5 or more full time
employees
 Incidental Property
Income
 Treated As Active
Related Individuals -
251(2)(a)
Individual

Other Definitions
 Related Corporations
 One Corporation - ITA 251(2)(b)
 Two Corporations - ITA 251(2)(c)
 Control - 256(1.2)(c)
 More Than 50% FMV - All Shares
 More Than 50% FMV - Voting Shares
 Group – 256(1.2)(a)
 Specified Class - 256(1.1)
Other Definitions
 Deeming Rules
 ITA 256(1.2)(d) – Holding Companies
 Shareholder of holding company is deemed to own
held shares.
 ITA 256(1.3)
 Children under 18
 ITA 256(1.4)
 Options to own
 Right to force redemption or cancellation
 ITA 256(2)
 A associated with B
 C associated with B
 A and C have deemed association
Association Rules
ITA 256(1)(a) one of the corporations controlled, directly or

indirectly in any manner whatever, the other;
More than 50%

Company A Company B

Association Rules
ITA 256(1)(b) both of the corporations were controlled directly or

indirectly in any manner whatever, by the same person or group of
persons;
Ms. Smith
More than 50% More than 50%
Company A Company B

Association Rules
ITA 256(1)(c) each of the corporations was controlled, directly or indirectly in any
manner whatever, by a person and the person who so controlled one of the
corporations was related to the person who so controlled the other, and either of
those persons owned, in respect of each corporation, not less than 25% of the issued
shares of any class, other than a specified class, of the capital stock thereof;
Mrs. Smith Mr. Smith
Not less than 25%

Company A Company B

Association Rules
ITA 256(1)(d) one of the corporations was controlled, directly or indirectly in any
manner whatever, by a person and that person was related to each member of a
group of persons that so controlled the other corporation, and that person owned, in
respect of the other corporation, not less than 25% of the issued shares of any class,
other than a specified class, of the capital stock thereof;
Mrs. Goh
Mr. Goh Mr. Goh’s Brother
Not less than 25%

Company A Company B

Association Rules
ITA 256(1)(e) each of the corporations was controlled, directly or indirectly in any
manner whatever, by a related group and each of the members of one of the related
groups was related to all of the members of the other related group, and one or more
person who were members of both related groups, either alone or together, owned in
respect of each corporation, not less than 25% of the issued shares of any class,
other than a specified class of the capital stock thereof;
Mr. Brown Mr. Fortin
Mrs. Brown Mrs. Fortin
40%
Company A Company B

Calculating The SBD
 ITA 125(1) Specifies The
Deduction As
16% Of The Least Of:
 Net Canadian Active Business
Income
 Taxable Income, Less:
 10/3 Times The Foreign Non-
Business Income Tax Credit
Without Consideration Of The ART
Or The GRR; And
 3 Times The Foreign Business
Income Tax Credit Without
Consideration Of The GRR
 The Annual Business Limit
($400,000), Less Any Portion
Allocated To Associated
Elimination Of SBD For
Large Corporations
 Reduction = (A)(B/$11,250), where

 A Is The Corporation’s Annual Business
Limit
 B is .225% Of The Excess Of Taxable
Capital Employed In Canada (TCEC) over
$10,000,000
 When TCEC = $10,000,000: no
reduction
 When TCEC = $15,000,000: reduction =
100%
Elimination Of SBD For
Large Corporations
 Taxable Capital Employed In Canada
GAAP determined debt and equity capital of the

corporation, less debt and equity investments in
other corporations. When not all of the
corporation’s Taxable Income is allocated to a
province, the resulting amount is multiplied by
the same percentage that is applied to the
abatement in order to determine the portion of
the total capital that is employed in Canada.

Personal Services
Corporations
 The Problem
 Individual establishes a
corporation to provide
employee type services
 The Solution
 Personal services
corporations are not
eligible for the SBD
 Can only deduct salaries
and other expenses that
would be available to an
employee
Management Companies
 Objective
 Organized to provide
services to an
unincorporated business
(usually a professional
practice)
 Eligible for small business
deduction provided markup
is reasonable (15%)

Professional
Corporations
 Several provinces now
permit professionals
(e.g., accountants) to
incorporate
 This has reduced the
need for management
companies
 In general, eligible for
the SBD

Manufacturing And
Processing Profits
Deduction
 General Rules
 Tax Credit
 Only On M&P Income
 A 7% Reduction In Tax
Payable
 Does not get 7 percent
general rate reduction.
 Only beneficial at
provincial level and for
CCA classes
M&P Deduction –
Example
Tax At 38% ($100,000) $38,000
Abatement At 10% ( 10,000)
GRR Nil
Net After Abatement $28,000
Surtax At 4% 1,120
M & P At 7% ( 7,000)
Net Federal Tax $22,120
Provincial At 15% 15,000
Effective Total Tax 37,120

Calculation - ITA 125.1(1)
 Tax Credit = 7% of the
lesser of:
 M & P Profits (ITR), Less
Amounts Eligible For The
SBD
 Taxable Income, Less
 SBD Amount
 3 Times The Foreign Business
Income Tax Credit
 Aggregate Investment Income
Under 129(4) – Interest +
Taxable Capital Gains +Rents –
Net Capital Losses Deducted
(No Dividends) © 2007, Clarence Byrd Inc. 68
M&P Deduction
 Eligibility
 10 Percent Of Gross
Revenues From
M&P Activities
 Meaning Of M & P
 ITA 125.1(3) -
Definition
 ITA 125.1(3) -
Excluded Activities
 See Also IT-145R

M&P Formula
[ Adjusted Active
Business Income
] ( 100 / 75 M & P Labour Costs) + ( 100/85 M & P Capital Costs)
( Total Labour Costs) + ( Total ABI Capital Costs)
All Items Defined In ITR5200

General Rate Reduction
 2007: 7% of full rate
taxable income
 7.5% for 2008
 8.0% for 2009
 9.0% for 2010
 9.5% for 2011 and
subsequent

Application TO CCPCs
 Taxable Income Reduced By:
 Income Eligible For The SBD
 100/16 Of The Small Business Deduction
 Income Eligible For The M&P Deduction
 100/7 Of The M&P Deduction
 Aggregate Investment Income Under ITA
129(4)

Application TO Non-
CCPCs
 Taxable Income Reduced By:
 Income Eligible For The M&P
Deduction
 100/7 Of The M&P Deduction

Foreign Tax Credits
 Basic Concepts
 Gross pre-withholding
amounts included in
income
 Tax credit for

withholding
 Withholding rate
established by treaty

Non-Business (Property)
FTC
 Lesser Of:
 Actual Foreign Non-Business Income Tax
Paid
 And An Amount Determined By:
 Foreign
NonBusiness Income
 ( TaxOtherwise )
Payable
 Adjusted
DivisionB Income

FTC
 Adjusted Division B  Tax Otherwise
Income Payable
 Net Income, Less  Basic + Surtax,
 Net Capital Loss Less
Carry Overs  Abatement
Deducted  ITA 123.3 (ART)
111(1)(b)  ITA 123.4 (GRR)
 Dividends
Deducted

FTC
 If actual withholding exceeds
limit:
 No Carry Forward
 Excess Can Be Deducted
Under ITA 20(12)

Business FTC
 Least Of
 Actual Foreign Business Income Tax Paid
 An Amount Determined By:
 Foreign BusinessIncome 
 ( TaxOtherwise )
Payable
 Adjusted
DivisionB Income
 Tax Otherwise Payable, Less Non-

Business FTC

Business FTC
 Adjusted Division B  Tax Otherwise
Income Payable
 Net Income, Less  Basic + Surtax,
 Net Capital Loss Less
Carry Overs  No Abatement
Deducted  ITA 123.3 (ART)
111(1)(b)  ITA 123.4 (GRR)
 Dividends

Business FTC
 Additional Rules
For Unused
Amounts
 Carry Back 3 Years
 Carry Forward 10
Years
 Only Applies To
Incorporated
Foreign Income

Investment Tax Credits
 Credit Vs. Deduction
 Value Of Credit = 100%
 Value Of Deduction = [(100%)(t)]

 Current Expenditures
 Credit Deducted From Expenditures
 Lose Deduction
 Used In Current Period (Generally)
 One Year Delay For SR&ED

 Capital Expenditures
 Credit Deducted From Capital Cost In
The Following Period
 Lose CCA

Eligible Property
 Eligible Assets
 Qualified Property
 Qualified SR&ED
 Salaries of an
eligible apprentice
 Costs of creating
child care spaces

Rates
 Qualified Property - 10%
 SR&ED (CCPC)
 $2 Million At 35%
 Excess At 20%
 SR&ED (Non-CCPC)
 20%
 Apprentice Salaries
 10% On Maximum of $2,000
 Child Care Spaces
 Lesser of $10,000 and 25 percent of the
costs for each space

Refundability
 General Rules
 No Tax Payable
 Can’t Use Credits
 Government Writes Cheque To The
Business

Refundability
 Current SR&ED
 100 Percent On Current
Amounts That Qualify For
The Extra 15%
 40 Percent On Other
Current SR&ED
 Other (Including SR&ED
Capital Expenditures
 40 Percent For CCPCs and
Individuals
 No Upper Limit
Carry Overs
 Back Three Years
 Forward Twenty
Years
 Must Take All Other

Credits For The
Year And Reduce
Tax Payable To Nil


CH 15

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

CH 15

Загружено:

Авторское право:

Доступные форматы

Chapter 15

Taxable Income And Tax

 Net Income For Tax

© 2007, Clarence Byrd Inc. 2

 8. Foreign Taxes Paid

 10. Income Tax Expense

 11. Interest And Penalties

 12. Automobile Costs

 14. Club Dues And Cost Of

 16. Political Contributions

© 2007, Clarence Byrd Inc. 6

 18. Asset Impairment

© 2007, Clarence Byrd Inc. 7

© 2007, Clarence Byrd Inc. 8

 6. Deductible R & D Costs

 7. Deductible Warranty Costs

 8. Debt Premium Amortization

© 2007, Clarence Byrd Inc. 9

 10. Allowable Business

© 2007, Clarence Byrd Inc. 10

© 2007, Clarence Byrd Inc. 12

Corporate Tax Rate = 40%

$1,000 $600 $360

© 2007, Clarence Byrd Inc. 13

 Corporation Not Taxed

© 2007, Clarence Byrd Inc. 15

© 2007, Clarence Byrd Inc. 16

Loss Transferred To Profit Company

© 2007, Clarence Byrd Inc. 17

© 2007, Clarence Byrd Inc. 18

 Can also occur through redemption of

© 2007, Clarence Byrd Inc. 19

 Deemed New Year

 Keep Old Year End

 New Losses Cannot

© 2007, Clarence Byrd Inc. 23

© 2007, Clarence Byrd Inc. 24

 ITA 20(1)(b) Deduction

© 2007, Clarence Byrd Inc. 26

 Capital Loss (Will disappear

© 2007, Clarence Byrd Inc. 27

 Can elect between ACB and FMV

 FMV > ACB: Creates Capital Gain

© 2007, Clarence Byrd Inc. 28

 Write down to $5,000 is

© 2007, Clarence Byrd Inc. 31

During 2007, Loss Leader experiences an overall Net Loss

© 2007, Clarence Byrd Inc. 32

© 2007, Clarence Byrd Inc. 33

Net Capital Loss Carry Over Of $8,000

 No Net Capital Loss

© 2007, Clarence Byrd Inc. 35

© 2007, Clarence Byrd Inc. 36

© 2007, Clarence Byrd Inc. 37

© 2007, Clarence Byrd Inc. 40

© 2007, Clarence Byrd Inc. 41

Manitoba 40.0 100,000 40,000

Ontario 37.5 100,000 37,500

© 2007, Clarence Byrd Inc. 42

 Federal Tax Abatement -

 Surtax - ITA 123.2

© 2007, Clarence Byrd Inc. 44

© 2007, Clarence Byrd Inc. 47