Chapter7 - McGill Faculty of Engineering MIME 310...

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Unformatted text preview: McGill Faculty of Engineering MIME 310 Engineering Economy 1 • Introduction • Types of taxes • Tax bases • Depreciation for tax purposes • The Canadian Capital Cost Allowance system • Carry forward/backward provision Capital Gains/Losses • Tax Factors ¡ Operating costs ¡ Capital expenditures • Treatment of salvage values in the Canadian system Determination of an after-tax cash flow distribution Tax advantage of integrated companies Outline Section 1: Section 2: Section 3: Section 4: Section 5: Section 6: Chapter 7 – Taxation “ There are two things certain in life – death and taxes ”, Benjamin Franklin McGill Faculty of Engineering MIME 310 Engineering Economy 2 New Simplified Tax Form 1040 EZ 2 DO TAX FORM 1. How much money did you make last year? $ _________ 2. Send it to us. N.B. Please make cheque payable to Revenue Canada. McGill Faculty of Engineering MIME 310 Engineering Economy 3 Introduction • Project evaluation techniques described in the previous chapter essentially remain the same; the elements that change are the cash flows: they are reduced by the tax liabilities. • Taxation is complex and subject to frequent changes Section 1: Introduction • The objectives of this chapter are: ¡ Describe the major elements of taxation ¡ Show some particularities of the Canadian tax system ¡ Show how taxation affects projects and project evaluation ¡ Illustrate how taxation effects can be accounted for in simple cases McGill Faculty of Engineering MIME 310 Engineering Economy 4 • Taxation is an integral part of project evaluation, i.e. an added cost of doing business • The effect on operating expenses versus capital expenditures is not the same because of their different tax treatment (expensing versus depreciating). Thus, the preferred alternative on a before-tax basis is not necessarily the same on an after-tax basis. Section 1: Introduction McGill Faculty of Engineering MIME 310 Engineering Economy 5 Types of Taxes • Sales and property tax • Duties on imports, excise taxes on gasoline, cigarettes and “booze” • Personal income taxes • Business taxes – corporate income taxes Tax Basis • Value of transaction/property or quantity purchased • Salary and investment income • Profit, i.e. [Revenues - Costs] • Profitability, i.e. [Revenues - Costs - Cost of Capital] Section 1: Introduction McGill Faculty of Engineering MIME 310 Engineering Economy 6 Federal Excise Tax Provincial Fuel Tax Provincial Sales Tax Goods and Services Tax Overall Tax Rate 9.43 / 25.00 = 37.7 % Ultramar gets 62.3 % of $25!!! If gasoline price decreases by 5 ¢/l, i.e. to 100.4 ¢/l, FET: 25.00 / 1.004 (0.10) = 2.49 PFT: 25.00 / 1.004 (0.16) = 3.98 PST: 1.52 GST: 1.74 Overall Tax Rate: 9.73 / 25.00 = 38.9 % Ultramar gets 61.1 % of $25!!! McGill Faculty of Engineering MIME 310 Engineering Economy 7 Taxes Levied on Revenues (Royalty based taxation) Revenue- Operating Expenses- Taxes = Net Income (after-tax)- Capital Expenditures = Cash Flow Fixed or progressive rate Section 1: Introduction McGill...
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Chapter7 - McGill Faculty of Engineering MIME 310...

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