Lecture 1.docx - Lecture 1(Chapter 11 Corporations Homework...

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Lecture 1 (Chapter 11) – Corporations Homework: P 11-8, P 11-9, RQ 8, 9, & 15, KCQ 1-8 - Register for the new Connect site Relationship between the corporation and its shareholder Corporation Defined - An incorporated company is an artificial person who is separated from owner(s) - Recognized by law as an entity o Has the power to act in its own right and to enter into enforceable legal agreements - A corporation o Can buy, own, sell, and lease property o Can borrow funds for its own use and loan funds to others Tax impact of shareholder/corporate relationships - The corporation and its fundamental relationships - Tax treatment is different for primary & secondary relationships The Primary Relationship - Shareholder contributes cash or other property in exchange for shares - Shareholder realizes a return on investment through: o Dividends , or o Capital gain when the shares are sold at a profit The Secondary Relationships - Secondary relationships o Creditor o Supplier o Employee o Customer (sell goods/services to customers) o Lessor (attain lease from lessor) - Tax consequences and cash flows between the parties are different from those in the primary relationship Primary and secondary relationships - Difference between the two relationships centres on the tax treatment of income flows: o Primary relationship: Dividends paid by the corporation are not deductible (not costs of doing business), but are taxable to the recipient (shareholder) o Secondary relationships: Payments such as salaries, interest, and rents are deductible (for corporation) and taxable to the recipient (shareholder) For banks interest received from the corporation are taxable & interest paid by the corporation is deductible Determination of taxable income - Net income for tax purposes – aggregating formula (except there is no employment income, RRSP expenses, etc), framework is the same
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- The taxable income for a corporation is: o Net income for tax purposes o Less: special deductions (see list below) - Division C (Special) deductions: o Donations to charitable organizations – ITA 110.1(1) Limited to 75% of net income, excess is carried forward for up to 5 years ITA 110.1 (1) Deduction for [charitable] gifts by corporation 0.75A, where A is net income for tax purposes ITA 111(1) Losses deductible (a) non-capital losses – carry forward for 20 years (b) net capital losses – carried forward indefinitely and backward 3 years o Non-capital losses – ITA 111(1)(a) – limited to taxable income o Net capital losses – ITA 111(1)(b) Limited to net taxable capital gains o Dividends from taxable Canadian corporations – ITA 112(1) Ex. Company B is related to company A, and company A has a shareholder Company B is profitable, therefore it has to pay corporate tax (first tax) Company B has to pay dividends to company A (company A will deduct dividend), and then company A pays dividend to the shareholder
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  • Fall '13
  • Corporation, Taxation in the United States

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