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Chapter 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. Additions. 1. Income And Other Taxes 2. Amortization Expense 3. Accounting Loss on Capital Asset Disposals

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Chapter 15

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  1. Chapter 15 Taxable Income And Tax Payable For Corporations

  2. Computation Of Net Income – Schedule 1 • Accounting Net Income • Additions • Deductions • Net Income For Tax Purposes © 2006, C. Byrd Inc.

  3. Additions • 1. Income And Other Taxes • 2. Amortization Expense • 3. Accounting Loss on Capital Asset Disposals • 4. Net Taxable Capital Gains © 2006, C. Byrd Inc.

  4. Additions • 5. Recapture of CCA • 6. Charitable Donations • 7. Political Donations • 8. Interest/Penalties - Income Taxes © 2006, C. Byrd Inc.

  5. Additions - Continued • 9. R & D - Accounting Expense • 10. Club Dues And Fees • 11. Meals And Entertainment (Non-Deductible) • 12. Automobile Costs (Non-Deductible) © 2006, C. Byrd Inc.

  6. Additions - Continued • 13. Tax Reserves Deducted Last Year • 14. Accounting Reserves Not Deductible • 15. Accounting Resource Deductions • 16. Bond Discount Amortization © 2006, C. Byrd Inc.

  7. Deductions • 1. Accounting Gains On Disposals • 2. Terminal Losses • 3. CCA • 4. CEC © 2006, C. Byrd Inc.

  8. Deductions • 5. ABIL • 6. R & D (Tax) • 7. Interest Capitalized (Accounting) © 2006, C. Byrd Inc.

  9. Deductions - Continued • 8. Tax Reserves For Current Year • 9. Tax Resource Deductions • 10. Bond Premium Amortization Net Income For Tax Purposes © 2006, C. Byrd Inc.

  10. Deductions Not Available To Corporations • Lifetime Capital Gains Deduction • Employee Stock Option Deduction • Home Relocation Loan Deduction • Northern Residents Deductions • Social Assistance And Workers’ Compensation © 2006, C. Byrd Inc.

  11. Dividends - The Problem Corporate Tax Rate = 40% A Ltd. A Ltd. B Ltd. C Ltd. $1,000 $600 $360 © 2006, C. Byrd Inc.

  12. 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 © 2006, C. Byrd Inc.

  13. Dividends On Preferred Shares • Debt At 10% • Cost Of Capital If Corporation Taxed • Cost Of Capital If Corporation Not Taxed • Preferred Shares At 8% • Redeemable/Retractable Preferred © 2006, C. Byrd Inc.

  14. The Scenario Acquire At $10 On June 30 Receive $1 Dividend On July 1 Sell At $9 On July 2 The Solution: Loss Disallowed Unless: Own 365 Days; And Corporation Owns No More Than 5% Of Payor Stop Loss Rules © 2006, C. Byrd Inc.

  15. Acquisition Of Control - The Problem Profit Company Loss Company Acquisition © 2006, C. Byrd Inc.

  16. Meaning Of Acquisition Of Control • Not Equal To “Change In Control” • Acquisition Of 50% • Owner Of 100% Sells 30% To A and 30 % To B © 2006, C. Byrd Inc.

  17. Deemed Year End - ITA 249(4) • Example: 31/12 year end, acquisition on 30/6/2005 • Deemed New Year End 30/6/2005 • Keep Old Year End • Allowed To Establish New Year End © 2006, C. Byrd Inc.

  18. Usual Year End Procedures File Return Value Inventories Short Fiscal Period CCA Calculations Annual Business Limit Counts Towards Loss Expiry Deemed Year End - ITA 249(4) © 2006, C. Byrd Inc.

  19. Acquisition Of Control • Net Capital Losses And Allowable Business Investment Losses – ITA 111(4)(a) & (b) • Existing Carry Overs Die • New Losses Cannot Be Carried Back © 2006, C. Byrd Inc.

  20. Acquisition Of Control • 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 © 2006, C. Byrd Inc.

  21. Accrued Losses • Inventories • Normal Year End Procedures • Accounts Receivable - 111(5.3) • Maximum Write-Off Required © 2006, C. Byrd Inc.

  22. Accrued Losses • Depreciable Property • Asset Cost = $100,000 • UCC = $ 60,000 • FMV = $ 50,000 • ITA 111(5.1) • Write Down To $50,000 • Difference Is Deemed CCA © 2006, C. Byrd Inc.

  23. Accrued Losses • Eligible Capital Property - 111(5.2) • CEC > 3/4 FMV • Write Down • ITA 20(1)(b) Deduction © 2006, C. Byrd Inc.

  24. Accrued Losses • Non-Depreciable Property - 111(4)(c) & (d) • ACB > FMV • Write Down • Capital Loss (Will Disappear) © 2006, C. Byrd Inc.

  25. 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) © 2006, C. Byrd Inc.

  26. ITA 111(4)(e) Election • Case 1 • ACB = $ 50,000 • FMV = 100,000 • UCC = 20,000 • Elect $100,000 • Capital Gain $ 50,000 • Recapture 30,000 • New ACB 100,000 • New UCC 75,000 © 2006, C. Byrd Inc.

  27. ITA 111(4)(e) Election • Case 2 • ACB = $ 50,000 • FMV = 30,000 • UCC = 20,000 • Elect $30,000 • Capital Gain $ Nil • Recapture 10,000 • New ACB 30,000 • New UCC 30,000 © 2006, C. Byrd Inc.

  28. ITA 111(4)(e) Election • Case 3 • ACB = $ 50,000 • FMV = 10,000 • UCC = 20,000 • Write down to $10,000 is required by 111(5.1) © 2006, C. Byrd Inc.

  29. Profits In The Loss Business • During 2004, 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 2005, the shoe division broke even, while the hat division showed a profit of $200,000. • 2005 - No Acquisition: $50,000 • 2005 - Acquisition: $200,000 © 2006, C. Byrd Inc.

  30. Loss Carry Overs • Non-Capital Loss - ITA 111(8)(b) • 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) © 2006, C. Byrd Inc.

  31. 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 © 2006, C. Byrd Inc.

  32. No Net Capital Loss Deduction Net Capital Loss Deduction Of $8,000 Alternatives © 2006, C. Byrd Inc.

  33. 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 © 2006, C. Byrd Inc.

  34. 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 © 2006, C. Byrd Inc.

  35. Ordering Of Deductions • Timing • Oldest Must Be Used Before Others Of Same Type • Type • Restricted By Income Type • Restricted By Time © 2006, C. Byrd Inc.

  36. 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 © 2006, C. Byrd Inc.

  37. Gross Revenues © 2006, C. Byrd Inc.

  38. Salaries And Wages © 2006, C. Byrd Inc.

  39. Allocation To Provinces © 2006, C. Byrd Inc.

  40. 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 • General Rate Reduction • 7% Of “Full Rate Taxable Income” For 2004 And Subsequent Years © 2006, C. Byrd Inc.

  41. General (%) Alberta 11.50 British Col. 12.00 Nova Scotia 16.00 Ontario 14.00 Quebec 9.90 Small Business (%) Alberta 3.00 British Col. 4.50 Nova Scotia 5.00 Ontario 5.50 Quebec 8.50 Provincial Rates © 2006, C. Byrd Inc.

  42. 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 $100,000 15,000 • Total $37,120 © 2006, C. Byrd Inc.

  43. 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 © 2006, C. Byrd Inc.

  44. Large Corporations Tax • Eliminated as of January 1, 2006. • Good riddance – A very unfair type of tax! © 2006, C. Byrd Inc.

  45. Small Business Deduction (SBD) • Objectives • Relief To Small Business • Encourage Active Business Income • Provide For The Accumulation Of Capital In A New Business © 2006, C. Byrd Inc.

  46. Basic Concepts • Canadian Controlled Private Corporation (CCPC) • Active Business Income • Annual Business Limit • 2006 - $300,000 • 2007 - $400,000 • Associated Companies SBD © 2006, C. Byrd Inc.

  47. 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 7% 7,000 Total Tax Payable $20,120 © 2006, C. Byrd Inc.

  48. Property Income • The Problem • Specified Investment Business • See ITA 125(7) • Incidental Property Income • Treated As Active Business Income © 2006, C. Byrd Inc.

  49. Personal Services Corporations • The Problem • Personal Services Corporations • See ITA 125(7) © 2006, C. Byrd Inc.

  50. Management Companies • The Problem © 2006, C. Byrd Inc.

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