12%20-%20Taxable%20Income%20and%20Tax%20Payable%20for%20Corporations

12%20-%20Taxable%20Income%20and%20Tax%20Payable%20for%20Corporations

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Chapter 12 – Taxable Income and Tax Payable for Corporations
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Computation of Net Income • Accounting financial statements are prepared according to GAAP. • Adjustments are made as required by the income tax act, in order to determine NIFTP • We have discussed these adjustments in the past, they are for things like accounting amortization and CCA, see chart on page 558
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NIFTP to Taxable Income • The deductions from NIFTP that are available to Corporations are some what different from those available to individuals: – Charitable donations are a deduction for corporations, subject to a limit of 75% of NIFTP, and a 5 year carry forward for unused donations. – Dividends are not grossed up when received by corporations, and in fact are deductible from NIFTP if they are received from a Taxable Canadian Corporation (they were already taxed in the hands of the payor corporation). – Losses are deductible, basically in the same way as for individuals, except if the corporation has been subject to a change in control (covered in MOS4462) Complete Exercise Twelve-1 on pg. 558 and Self Study Problem Twelve-1 on pg. 589
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NIFTP to Taxable Income Net Income (Loss) for tax purposes Less: Charitable Donations (75% NIFTP, 5 yr c/fwd) Dividends from taxable Canadian corporations Loss carry overs from subsequent or prior taxation years. EQUALS Taxable Income (Loss)
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Dividends • Dividends are deductible if received from a taxable Canadian Corporation (not necessarily one that is paying tax though) • This avoids double taxation of corporate income in a simple corporate structure, but in multi-level corporate structures, it could be avoiding many more layers of tax on the same income. Complete Exercise Twelve-2 on pg. 561 - 562 and Self-Study Problem Twelve-2 on pg. 589 -590
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Stop Loss Rules Often the payment of a dividend will result in a decrease in the value of the related shares. This fact could be taken advantage of by corporations deducting the dividend and then selling the shares to obtain a capital loss Accordingly: any loss resulting from a disposition of shares by a corporation must be reduced by the amount of dividends received that are eligible for deduction. – UNLESS: shares owned for more than 365 days before the disposition AND the corporation (and related persons) owned 5% (or less) of the shares of the corporation paying the dividend at the time the dividend was paid. Complete Exercise Twelve – 3 on page 562
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Foreign Source Dividends • These are included in income on a gross basis, before the deduction of any foreign income taxes • A foreign tax credit will be received for the foreign taxes withheld at source (discussed later)
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Non-Capital Loss Carry Over • The rules are generally the same for all taxpayers, but there is one problem that arises due to dividend deductibility. • Example:
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12%20-%20Taxable%20Income%20and%20Tax%20Payable%20for%20Corporations

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