13%20Taxation%20of%20Corporate%20Investment%20Income0

13%20Taxation%20of%20Corporate%20Investment%20Income0 -...

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Chapter 13 – Taxation of Corporate Investment Income
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Integration • The integration process has to deal with two different scenarios, each requiring a different approach to integration: – Large public corporations: shares are widely held and publicly traded, management is separate from ownership, income allocation and distribution decisions do not involve shareholders personal financial considerations. – Smaller private corporations: shares held by an individual or small group of related individuals; tax planning decisions may involve the corporation as well as the shareholders personal tax situation.
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Dividend Gross up and tax credits • Please ensure you have a thorough understanding of the dividend gross up and tax credit process discussed in Chapter 7 before continuing with this material ecall that there are two types of dividends: • Recall that there are two types of dividends: – Eligible dividends – qualify for enhanced 44% gross up and tax credit (federal) of 10/17 of gross up. • A corporation must declare a dividend to be eligible, otherwise it is non-eligible – Non-Eligible dividends – 25% gross up and dividend tax credit (federal) equal to 2/3 of gross up
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Dividend Gross up and tax credits • Eligible Dividends – Who can declare an eligible dividend? • Public companies, on income that has not benefited from the small business deduction CPC’s with income that is not eligible for the small business • CCPC’s with income that is not eligible for the small business deduction – It is necessary for companies to keep track of income that has benefitted from the small business deduction, and that which has not, in order to determine if a dividend can be declared as eligible. • This will be discussed in detail at the end of this chapter
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Integration and Business Income • The goal of integration: to ensure that if an individual chooses to channel income through a corporation, the after tax cash available to the individual will be the same as if the income had been earned personally. • Integration only works perfectly in a world where: – The combined federal and provincial tax rate on income which can be paid out as eligible dividends is 30.56% (actual rates higher) – The combined federal and provincial tax rate on income which can be paid out as non-eligible dividends is 20% (actual rates lower) – The combined federal and provincial dividend tax credits must equal the gross up. • In the following situations additional tax will result from using a corporation: – When the actual tax rate exceeds the rates noted above – When the federal and provincial dividend tax credits are less than the gross up Complete Exercise 13-1 and 2 on pg. 607
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Taxes on Investment Income • Investment income is taxed differently from business income in a corporation, which changes the workings of integration • Here we are discussing a very specific type of come called “aggregate investment income” income called “aggregate investment income”
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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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13%20Taxation%20of%20Corporate%20Investment%20Income0 -...

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