14%20Other%20Issues%20in%20Corporate%20Taxation0

14%20Other%20Issues%20in%20Corporate%20Taxation0 - Chapter...

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Chapter 14 – Other Issues in Corporate Taxation
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What to expect in this Chapter • What happens when the control over a corporation changes – This affects a number of areas, in particular loss carry forwards, and creates a deemed year end • Discussion of the definition of related parties and the association rules – Influences sharing of the small business deduction • Discussion of Investment Tax Credits – Relates to mainly Scientific Research expenditures • Determining tax basis shareholders’ equity – Surprise! It’s not the same as under GAAP • Distributions of corporate surplus – Different types of dividends and their taxation
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Acquisition of Control Rules • These rules are relevant for companies that have accumulated large amounts of net or non capital loss carry forwards here there is little chance the company will – Where there is little chance the company will be able to utilize the losses before they expire. – These companies may be takeover targets to another profitable company that may plan to use the losses to reduce the tax they will have to pay.
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Acquisition of Control Rules • For situations where control has been acquired by a person or group of persons, the applicable rules are in ITA 111(4) to (5.5) • A change in control can occur in two ways – Most commonly – a majority shareholder sells shares to an arm’s length person – Also – when shares are redeemed the person controlling the corporation may change • For example if one shareholder owns 51% and the other 49% and the 51% shareholder redeems all their shares, then control has shifted to the other shareholder.
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Acquisition of Control Rules • Effect of a change in control: – The corporation has a deemed year end the day before the change in control • This can create a short fiscal period up to the change in control. • The corporation is then permitted to decide on a new year end, and it is possible this will result in another short year, but this is not necessary. – This extra short year is important because • It reduces the number of years available to use loss carryforwards by 1. • It affects CCA claims, the annual business limit for small business deduction and year end procedures for reserves
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Acquisition of Control Rules • Restrictions on use of charitable donation carry forwards: – Section 110.1(1.2) places two restrictions on the deduction of these donations: • They cannot be carried forward after the acquisition of control • No deduction is available on a gift made after the change in control if the gifted property was acquired prior to the change in control in anticipation of the change in control. – Example: an individual wants to donate some property she owns, but cannot personally use the tax credit. She transfers the property to a corporation she controls, knowing that she will soon sell the corporation, and expecting the corporation to make the donation and take the deduction. The donation credit would not be available to the corporation after it was sold.
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This note was uploaded on 01/31/2011 for the course MOS 4462 taught by Professor Ann during the Fall '10 term at UWO.

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14%20Other%20Issues%20in%20Corporate%20Taxation0 - Chapter...

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