ACTG 4720 Exam Notes - Integration for Investment Income...

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Integration for Investment Income Corporation Interest/Rent etc. $100 Part 1 Tax (Theoretical Rate) 46.67 53.33 Add: Refundable tax – 26.67 % x AII (A portion of initial Part I tax is refunded when taxable dividends are paid by corp) 26.67 Available for Distribution 80 Corporate Tax (46.67 – 26.67) 20 Shareholder (Individual) Dividend Received 80 Gross-up (18%) 14.4 Taxable Amount 94.4 Tax (46% - assumed ) 43.4 DTC (assumed equal to gross-up) 14.4 Net Tax 29 Total Tax Corporation (net of refund) 20 Shareholder (Individual) 29 Total 49 Tax if same income is earned directly by individual: $100 x 46% = $46 Generally, integration does not work for investment income (because corporate tax rate is higher than 15.3%) (1) Basic Rate 38 Abatement (10) ART 6 2/3 Provincial 12 46 2/3 The Taxation of Corporations Net Income For Tax Purposes XXX Special Reductions: Donations to charitable organizations x Net capital losses x Non capital losses x Dividends from taxable Canadian corporation x Dividends from foreign affiliates x (xx)
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Taxable Income xx Investment Income Earned by a CCPC Purpose - Encourage early distribution of earnings to the shareholder Refundable Tax - Developed to provide a corporation with a refund of a portion of the initial tax paid on investment income, when dividends are ultimately paid Theory - Tax on investment income is reduced to an effective tax rate of 20%. Therefore, the dividend tax credit allows the shareholder credit for that 20% of tax paid by corporation. Therefore, integration Shareholder Loans 15(2) If want to maximize 2016 RRSP Contribution, need salary of $140,944 Ensure basic deductions and personal tax credits fully utilized Holding Companies An extension of integration Deferral of tax on dividends Estate planning (QSBCS) Capital gains deduction to a maximum of $406,800 (½ * $813,600) of taxable capital gains (TCG) A QSBCS share is at any time (determination time) a share that meets the following tests:
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SBC Test –point in time - Owned by individual, or spouse, and is a CCPC and uses all or substantially all (90%) of the FMV of assets in active business carried primarily (50%) in Canada Holding Period Test – throughout 24 months preceding The Basic Asset Test (50% test) During the 24 months shares of CCPC for which >50% of FMV of its assets were use primarily in active business carried on primarily in Canada by the corp. or by related corp. Attribution Through a Corporation Condition : If one of the main purposes of the transfer or loan may reasonably be considered to reduce the income of the transferor and to benefit a designated person Designated Person: Designated person = a specified shareholder (>10% of any class) Not at arms length with transferor Niece or nephew Result : Transferor deemed to receive as interest of: Outstanding amount (or transferred property) × Prescribed Rate Less: Interest received by the transferor All grossed-up taxable divided received by transferor on shares received as consideration for transfer Dividends received by designated person Exceptions: Designated person is
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