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Unformatted text preview: Integration Chapter 12
By James B. MacNeill Integration Avoids Double Taxation Treats Corporation as a Conduit Objectives Indifferently Treats an Investment through a Corporation and a Partnership Depends on the Corporation Paying Tax and the Shareholder Receiving Distributions, Paying Tax but Receiving Credit for the Underlying Corporate Tax Also Depends on the Corporation Paying the Same Amount of Tax as an Individual to Avoid a Deferral Gross-Up and Tax Credits
Theoretical Taxation of Dividends to Individuals that Demonstrates Perfect Integration Corporation Corporate Income Corporate Tax, including Provincial Tax (Theoretical rate, i.e., 20%) After-Tax Earnings Available for Dividends Individual Shareholder Dividend Gross-up (Theoretically Equal to Corporate Tax or of the Dividend) Taxable Income (Theoretically Equal to Pre-Tax Corporation Income ) Personal Tax, Including Provincial Tax (Assumed Rate of 34%) Dividend Tax Credit, Including Effect of Provincial Tax (Theoretically Equal to Corporate Tax/Gross-Up) Net Tax $ 800 200 $1,000 $ 340 (200) $ 140 $1,000 (200) $ 800 Small Business Deductions
Tax Rates Applicable to Taxable Income Eligible for Small Business Deduction Federal Tax Rate [ssec. 123(1)] Federal Abatement for Provincial Tax [ssec. 124(1) Net Federal Tax After Federal Abatement Federal Surtax @ 4% of Above Net Federal Tax Small Business Deduction [ssec. 125(1) Total Federal Tax Provincial Tax (Hypothetical) on Income Qualifying for Small Business Deduction Effective Total Tax 38.00% (10.00) 28.00% 1.12 (16.00) 13.12% 5.00 18.12% Canadian Controlled Private Corporations CCPC Found at Subsection 125 (7) To Qualify for SBD, Must be a CCPC Throughout the Year Corporation Private Corporation that is a Canadian Small Business Deduction Found at Subsection 125(1) 16% of the Least of: 1) Active Business Income 2) Taxable Income Less Foreign Source Income 3) 300,000 Business Limit What is an Active Business? Any Business Other Than a Specified Investment Business and a Personal Service Business Trade Includes an Adventure in the Nature of What is a Specified Investment Business? Found at Subsection 125(7) A Business where the Principal Purpose is to Derive Income From Property Interest, Dividends, Rents and Royalties Unless it Employs More than Five Full Time Employees Personal Service Business Found at Subsection 125(7) Business of Providing Services Where: Person Who Provides Services is a Specified Shareholder Incorporated Employee would Reasonably be Regarded as an Officer of the Entity to Which the Services are Provided Exceptions to PSB Five FullTime Employees Services Are Provided to an Associated Company Implication of Being a PSB All Deductions Are Denied Other Than Salary Paid to Individual Performing the Services Allowed to Deduct Employment Expenses Found at Subsection 18(1)(p) Associated Corporations Must Allocate $300,000 Small Business Limit Found at Section 256 Depends Upon Definition of Related Persons at Section 251 See Examples on Page 620 Concept of Control Interpretation of Control is Based on Legal Interpretation More Than 50% of Voting Shares Extended Meaning of Control Found at Subsection 256(1.2) Related Groups Control Ownership of Shares No Indirect Ownership Army Navy Case Association with Third Corporation Found at Subsection 256(2) Two Corporations That Would Not Otherwise Be Associated but Each are Associated With a Third Corporation Basic Association Rules Found at Subsection 256(1)(a) One Corporation Controls the Other Basic Association Rules Found at Subsection 256(1)(b) Both Corporations are Controlled by the Same Related Group Basic Association Rules Found at Subsection 256(1)(c) Each Corporation is Controlled by a Person Each Person is Related to Each Other Either Person Owns Not Less Than 25% of the Shares of Any Class of Shares Other Than a Specified Share Basic Association Rules Found at Subsection 256(1)(d) One of the Corporations Must Be Controlled by a Person The Person Is Related to Each Member of a Group That Controls the Other Corporation Issued Shares of Any Class of Shares Other Than a Specified Class That Person Owns at Least 25% of the Basic Association Rules Found at Subsection 256(1)(e) Each Corporation Is Controlled by a Related Group Each Member of One Group Must Be Related to All the Members of the Other Related Groups The 25% Rule Also Prevails Shares of a Specified Class Found at Subsection 256(1.1) Shares Are Neither Convertible or Exchangeable Shares Are NonVoting Fixed Rate Dividend That Does Not Exceed Prescribed Rate Redeemable at Their PaidIn Amounts Manufacturing and Processing No M + P on Income Eligible for SBD Investment Tax Credit An Additional ITC is Available to CCPC's Restricted to $2,000,000 of Qualifying Expenditures Limit Allocated to Associated Companies Limit Also Reduced by $10 for Every Dollar of TI in Excess of $300,000 Refundable ITC's 40% of the ITC's That Are Based on Capital Expenditures Current Expenditures 40% of the ITC's That Are Based on Business Income and Integration See Pages 635636 for Examples Income from Investments
Theoretical Corporate Tax Rates for Perfect Integration on Investment Income Eligible for a Dividend Refund and the First $300,000 of Active Business Income of a Canadian-Controlled Private Corporation Investment Active Business Income Income Federal Tax Rate (Theoretical) Abatement for Provincial Tax Net Federal Tax Small Business Deduction Refund of Tax Paid on Investment Income on the Payment of Dividends Net Federal Tax after Dividend Refund and Small Business Deduction Provincial Tax (Theoretical) Effective Total Tax 40% (10) 30% ___ (20) 10% 10% 20% 40% (10) 30% (16) ___ 14% 6% 20% Portfolio Dividends Dividends Subject to Part IV of 33 1/3% Applies to Dividends From Non Connected Corporations Refundable Taxes Found at Subsection 123.3 6 2/3 % X the Lesser of: a) Aggregate Investment Income Subsection 129(4) b) Taxable Income Minus Small Business Deduction RDTOH Memo Account that Accumulates all Part IV Tax and Refundable Part I $1 for Every $3 of Dividends Paid Amounts are Refundable at the Rate of Integration Chapter 12
By James B. MacNeill ...
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- Summer '08