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Unformatted text preview: Corporate Tax Calculation Chapter 11
By James B. MacNeill Deductions from Income Charitable donations Loss Carryovers Inter-company Dividends Deduction of Taxable Dividends Taxable Canadian Corporations Taxable Subsidiary Corporations Nonresident Corporations Certain Foreign Affiliates Section 112 Purpose To prevent double Taxation Part of concept of Integration Other Problems with Integration Dividends out of untaxed Retained Earnings Dividends on Preferred Shares used as an after tax financing Vehicle Dividends Paid on Shares Subsequently Sold Rules found in 112(3)and (4) Capital losses are reduced Conditions Shares owned less than 365 days prior to disposition Or corporation owned more than 5% of issued shares of class on which dividend received Charitable Donations Deduction not a tax credit Limited to 75% of net income Carry forward of five years Non Capital Losses Defined at 111(8) Aggregate of: Business losses Property losses ABILS Net Capital Losses deducted Dividends deducted under 112 Application of NonCapital Losses Back three years Forward ten years (for taxation years after March 22, 2004) Can change permissive deductions i.e., CCA, CEC, and Scientific Research Expenditures Allowable Business Investment Losses Known as ABILS In respect of shares or debt of a small business corporation (248) To the extent that an ABIL is not claimed in the current year to offset income it is carried forward as a non capital loss Net Capital Losses Defined at 111(8) Net of capital losses over capital gains Application of Net Capital Losses Back three years Forward indefinitely Only applied against capital gains Converted to the appropriate inclusion rate Restrictions and Ordering of Deductions Streaming restriction Number of years of carry forward Acquisition of Control Potential restriction of carrying forward of losses Rules found in 111(4),(5),(5.1),(5.2), and (5.3) Rules to restrict tax loss trading Loss Utilization Strategies Profitable Assets sold to Loss Company Use of intercompany transactions i.e., interest, rents, and management fees What is Acquisition of Control? De Jure control i.e., more than 50% of the votes necessary to elect the Board of Directors CCRA also looks to "groups" that act in concert Deemed YearEnd Immediately before acquisition of control File tax returns for this period Items Accrued in the Deemed YearEnd Inventory Losses Losses on Accounts Receivable Depreciable Property Eligible Capital Property Other Capital Property Elective Capital Gains and Recapture Designed to permit a deemed disposition to offset any expiry of losses attributable to the deemed year end Designation under 111(4)(e) See page 554 in text Computation of Taxable Income and Tax after General Reductions for Corporations General Objectives
1) 2) 3) Integration Concept Surplus Stripping Tax Incentive Integration Concept Corporation vs. Shareholder Dividend Gross-up and Tax Credit Attempt to Reduce Double Taxation Surplus Stripping Conversion of Dividends to Capital Gains Anti-Avoidance Provisions 55(2), 84.1, 110.6, 245, and 246 Tax Incentive Small Business Deduction M&P Hypothetical Tax Rates
Basic Federal Tax Federal Tax Abatement Federal Surtax Federal Tax Reduction for 2005 Provincial Tax (assumed) Effective Corporate Tax 38% (10%) 28% 1.12 29.12% 7% 24.12% 13% 35.12% Corporation Classification Public Corporation - 89(1) Private Corporation - Not a Public Company Canadian Controlled Private Corporation - 125(7) Federal Tax Abatement Found at Section 124 10% of Taxable Income Earned in a Province Provides Room for Provincial Corporate Taxes Income Earned in a Province Found in Part IV of Regulations Must be Attributable to a Permanent Establishment Regulation 402 Fixed Place of Business (i.e., Factory, Warehouse, etc.) Permanent Establishment
Includes Situations Where Agent of Corporation Has: 1) Authority to Contract his Employer 2) Stock of Inventory to Fill Orders Table Income Earned in a Province Based on a Pro-Ration of Salaries and Sales See Pages 575-576 for Example Tax on Large Corporations Part I.3 of the Canadian Tax Act Minimum Tax 0.200% of Capital Excess of Being Phased Out Income $50 million See Pages 575-576 for an Example Manufacturing and Processing Available to All Corporations Manufacturing in Canada 7% Reduction Eligibility M&P Revenue must Exceed 10% Gross Revenue Involves the Creation of Something, Forming of Something Processing Implies Starting with a Raw Material Case Law - Nova Scotia Sand and Gravel Ltd. - Mother's Pizza or Formula for Determining M&P
MP = ML + MC X ADJUBI L+C -----------------------------ADJUBI Taxable Income Less Canadian and Foreign Investment Income MC and C Cost of Capital Cost of Manufacturing Capital Includes Depreciable Property 10% of Gross Cost is Applicable Rental Costs are Included Receiving and Storing of Raw Materials are Eligible Purchasing and Storing of Finished Goods are Not 100 Gross-Up Used 85 ML and L Salaries and Wages 100 Gross-Up Used 75 Foreign Tax Deduction Found at Section 126 Credit for Underlying Foreign To the Extent Canada Would Tax Tax Non-Business Income Tax Deduction Lesser of: a) Foreign Tax Paid b) Foreign NBI X TOP Division B Income Business Income Tax Deduction Three-Year Carry Back, SevenYear Carry Forward Least of: 1) Foreign Tax Paid 2) Foreign Business Income X TOP Division B Income 3) TOP Less Non-Business Tax Deductions Investment Tax Credit Incentive for Specific Investment Found at Sub-Section 127(5) Generally Applies to SR&ED Tax Credit Rates
Property Atlantic & Gasp Rest of Canada 0% Qualified Property 10% SR&ED 20% 20% Qualified Property Must be New (i.e., Never Used) See Regulation 4600 Generally Prescribed Machinery and Equipment Reduction in Capital Cost [13(7.1)(e)] SR&ED Must Meet Section 37 Requirements Can Include Capital Purchase Amount of Claim Reduces SR&ED Pool Corporate Tax Calculation Chapter 11
By James B. MacNeill ...
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- Summer '08