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3520-9- updated 2009-jfth

3520-9- updated 2009-jfth - 3520-9 Last updated on 1-8 1...

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3520-9: Last updated on 9/18/09 1-8 1 Lecture 9: Taxable Income and Tax for Corporations Corporations are taxed as separate entities & are taxpayers [see definitions of taxpayer & person in ITA 248 (1)] Corporations file T2 returns (individuals file T1 returns) & include their financial statements with their tax returns 1.1 Recommended Exercises Exercise 11-1 [Review of Net Income] Exercise 11-2 [Taxable Income] Exercise 13-4 [Associated Companies] Exercise 12-1 [Integration (Non-Eligible Dividends)] Exercise 12-2 [Integration (Eligible Dividends)] Exercise 11-7, 15-1 [Active Business Income] 2 Three Main Types of Corporations There are three main types of corporations Public corporations resident in Canada, listed on a designated Canadian stock exchange (all Canadian exchanges are designated) [ITA 89] Private corporations [ITA 89(1)] = not public Canadian controlled private corporations (CCPCs) [ITA 89(1)] = a special type of private corporation = a private corporation that is not controlled by public companies or non-residents [ITA 89] Income earned by a CCPC is eligible for special tax treatment Canadian active business income is eligible for the Small Business Deduction Investment income is eligible for other special treatment that results in lower tax rates Research & development tax incentives are more generous 3 Computation of Net Income Corporations use financial statement income to calculate Division B income (also called net income for tax purposes) See Fig. 11-1 Exercise 11-1 reviews some important items see CTP 11-1 to 11-4 4 Computation of Taxable Income Division B income minus Division C deductions = Taxable income The 3 major Division C deductions for corporations earning income in Canada are:
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3520-9: Last updated on 9/18/09 2-8 Charitable donations [ITA 110.1(1)] Dividends from taxable Canadian corporations [ITA 112] Loss carryovers [ITA 111] See Fig. 11-2 see CTP 11-5 to 11-9 4.1 Charitable Donations ITA 110.1(1): limited to 75% of net income The rules are the same as for individuals except that donations by a corporation are eligible for a taxable income (division C) deduction rather than a tax credit This is because corporations are subject to a flat tax rate rather than progressive tax rates All unclaimed donations can be carried forward 5 years 4.2 Dividends from Taxable Canadian Corporations ITA 112 This deduction means that dividends between Canadian corporations are essentially tax-free and this prevents double taxation see CTP 11-10 to 11-12 4.3 Loss Carryovers ITA 111: the rules are the same as for individuals the two most important carryovers are Non capital losses carry back 3 years, carry forward 20 years Net capital losses carry back 3 years, carry forward indefinitely. Can only be used to offset taxable capital gains see CTP 10-24 to 10-30 5 Federal Tax Payable The following table sets out the general corporate tax rate for business income in
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