12-13S
SOLUTION
(Past Problem exam question: 45 minutes)
Net income for income tax purposes
Less: Charitable donations (Note 1)
Dividends from taxable Canadian corporations
($29,000 + $38,000 + $9,000)
Non-capital losses
Net capital losses (limited to net taxable capital gains)
Taxable income
$471,000
$ 97,500
76,000
46,700
6,000
226,200
$244,800
Summary of taxes payable
Part I Tax Payable (Note 2)
Part IV Tax Payable (Note 6)
Dividend Refund (Note 8)
Net Federal Tax Payable
$ 37,353
9,300
(13,300)
$ 33,353
Notes:
1.
Charitable donations:
Charitable donations are limited to 75% of net income, i.e., $353,250. Unused
charitable donations can be carried forward and claimed in any of the five subsequent
taxation years. Therefore, the $97,500 donations from 2010 should be claimed.
2.
Part I tax on taxable income:
Taxable income
$244,800
Tax @ 38%
Federal Tax Abatement
Small Business Deduction (Note 3)
Manufacturing and Processing Profits Deduction (Note 5)
Tax reduction (Note 12)
Additional Refundable Tax (Note 9)
Part I Tax Payable
$ 93,024
(24,480)
(41,616)
Nil
Nil
Nil
$ 26,928
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Problem 12-13S (Cont.)
3.
Small Business Deduction (SBD):
17% of the least of:
(a) active business income (Note 4)
(b) taxable income (no foreign tax credits)
(c) business limit ($500,000 - $70,000)
4.
$346,000
244,800
430,000
Active business income (ABI):
Manufacturing income
Retailing income
Bank interest
Treasury bill interest
Interest from Retail Ltd., ssec. 129(6),
(deducted in computing ABI of associated corporation)
Interest on accounts receivable
Recapture
Rental of excess warehouse space
5.
$ 41,616
$230,000
30,000
6,000
7,000
35,000
14,000
13,000
11,000
$346,000
Manufacturing and Processing (M&P) Deduction :
11.5% the lesser of:
(a) Canadian M&P profits
Minus the least of the three amounts
used in calculating the SBD
$135,000
(b)
$ 244,800
Taxable income
minus:
- least of the three amounts used
in calculating the SBD
- aggregate investment income (Note of 9)
230,000
Nil
(244,800)
(43,000)
Nil
Lesser (a) and (b):
Nil
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Problem 12-13S (Cont.)
6.
3,000
Part IV Tax Payable :
Dividends from non-connected corporations:
- sundry taxable Canadian corporations $9,000
$
Dividends from connected corporations:
- Bag Inc. (13% Dividend refund of Nil)
- Retail Ltd. (70% Dividend refund $9,000)
0
6,300
Part IV Tax
7.
$ 9,300
Refundable Dividend Tax On Hand ("RDTOH"):
RDTOH at December 31, 2010
Dividend refund for 2010
$ 19,000
(15,000)
4,000
Nil
9,300
$ 13,300
Refundable portion of Part I Tax (Note 10)
Part IV tax payable (Note 6)
8.
Dividend Refund - 2011:
Lesser of:
(a) Taxable dividends paid (50,000 )
(b) RDTOH
9.
$ 16,667
13,300
$ 13,300
Additional Refundable Tax (ART)
6% lesser of:
1. AII = $43,000
2. Taxable income - SBD amount = $244,800 - 244,800 = $ Nil
ART = 6% $14,800 =
Aggregate Investment Income (AII)
Net TCG for the year
less: net capital losses claimed
Property income (Cdn. and foreign)
- Interest on LT bonds
- Interest on loan to Bag Inc.
- Rental income
- Dividends
less: dividends deducted under
Division C
less: losses from property
$ Nil
$
6,000
6,000
$
Nil
$ 17,000
19,000
7,000
76,000
(76,000)
$ 43,000
$ 43,000
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Problem 12-13S (Cont.)
10.
Refundable Portion of Part I Tax
Least of:
1. 26% AII = 26% $43,000
Less: NBFTC - 9% FII =
$ 11,467
Nil
$ 11,467
2. 26% (TI - SBD amount - 25/9
NBFTC - 3 BFTC) = 26%
($244,800 - 244,800 - Nil - Nil)
$
3. Part I tax = $26,928
$ 26,928
Nil
Least amount = Nil
11.
Non-capital losses could also be used to reduce Part IV taxes and this would have
reduced overall 2011 taxes payable. However, Part IV taxes are refundable so the
company will generally prefer to apply the non-capital losses to reduce taxable income.
12. Tax reduction
taxable income
less: 100/11.5 M & P profit deduction
100/17 small business deduction
All
$244,800
Nil
244,800
43,000
287,800
Net
$
Nil
11.5% of Nil
$
Nil
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