Tax - CCPC - Corporate Taxa+on An Overview of...

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Unformatted text preview: Corporate Taxa+on An Overview of Advanced Tax Treatment Intro to Corp Taxa,on Chapter 12: Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Chapter 13: CCPCs Chapter 14: Mul+ple Corpora+ons and their Reorganiza+on Intro to Corp Taxa,on I.  Corporate Capitaliza,on – Debt or Equity II.  Transferring Assets to a Corpora,on III.  Corporate Distribu,ons to Shareholders I.  II.  III.  IV.  V.  VI.  VII.  Defini,on and Basic Principles Taxa,on of Income Earned by a CCPC Benefits of Incorpora,on Dividend Policy Loans to Shareholders Limita,on of the Small Business Deduc,on Overall Tax Calcula,on for a CCPC I.  II.  Corporate Reorganiza,ons Holding Corpora,ons and Intercorporate Investments Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons •  must have a capital base for the purposes of acquiring assets and conduc+ng business. •  Capital base contributed can be in the form of debt (shareholder loan) or equity (addi+onal share capital). •  Shareholder’s perspec+ve, –  debt and equity are capital property for tax purposes, and –  yield a return on investment in the form of interest or dividends. •  Debt and equity are subject to capital gains treatment. Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Debt ROI Shareholder loans may bear some rate of interest or be interest ­free. Interest paid by the corpora+on is deduc+ble for tax purposes. ROC Capital contributed in form of debt can be returned with rela+ve ease and without tax consequences. Loss of Investment Equity Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Loss of investment –  A loss incurred on shareholder debt is a capital loss, •  only one ­half is deduc+ble for tax purposes. –  Loan is to a small business corpora+on, •  the capital loss becomes a business investment loss •  one ­half of the loss can be offset against all other sources –  A loss on a loan is recognized for tax purposes in the year in which it is established to be uncollec+ble. Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Debt ROI Equity ROI Shareholder loans may bear some rate of interest or be interest ­free. Interest paid by the corpora+on is deduc+ble for tax purposes. ROC Share capital provides a return in form of dividends. Dividends are not deduc+ble by the corpora+on and are taxable to the individual shareholder. ROC Capital contributed in form of debt can be 1.  Sale of Shares to Other Shareholders returned with rela+ve ease and without tax consequences. 2.  Sale of Shares Back to the Corpora+on Loss of Investment Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Tax consequences when a redemp,on occurs are as follows: 1.  ITA 84(3)  ­ Redemp+on price > exceeds the paid ­up capital (PUC) = Deemed Dividend 2.  ITA 54  ­ For Capital Gains (loss) purposes:  ­ Shares deemed to be sold at = to the PUC of the shares. Reduc,on of Paid ­up Capital (“PUC”):   PUC can be return without redeeming shares. The tax treatment varies: Public corpora+on ­ ITA 84(4.1), 53(2)(a):     return of capital considered a taxable dividend for the en+re payment. Private corpora,on can return capital with no tax consequences provided some condi,ons are met (ITA 84(4)) Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Debt ROI Equity ROI Shareholder loans may bear some rate of interest or be interest ­free. Interest paid by the corpora+on is deduc+ble for tax purposes. ROC Share capital provides a return in form of dividends. Dividends are not deduc+ble by the corpora+on and are taxable to the individual shareholder. ROC Capital contributed in form of debt can be 1.  Sale of Shares to Other Shareholders returned with rela+ve ease and without tax consequences. 2.  Sale of Shares Back to the Corpora+on Loss of Investment Loss of Investment Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Loss of investment –  A loss on a share capital investment is normally a capital loss, •  of which one ­half is recognized for tax purposes. –  ITA 50(1)  ­ Share capital loss is recognized only in the year in which: •  the shares are disposed of, or •  Corpora+on becomes legally bankrupt, or •  Corpora+on is insolvent and has ceased opera+ons. Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons II) Transferring Assets to a Corpora+on •  Transfer of assets cons+tutes a sale and disposi+on. •  Fair Value > purchase price = tax implica+ons. •  Exis+ng or proposed shareholder can transfer an asset at: –  FMV or –  at an elected value, •  normally equal to the asset’s cost for tax purposes. (i.e. tax value)  ­  ­ called a “rollover” (ITA 85(1)) –  Shareholders personal taxable income is rolled over to the corpora+on but not eliminated –  Ex) Capital Property (depreciable and non), Inventory, ECP and Resource Property Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons III) Corporate Distribu,ons to Shareholders •  Corporate distribu+ons consist of either accumulated profits or the return of capital. Stock dividends –  Involve the issuing of addi+onal shares in lieu of a cash. Corpora+on no tax or cash implica+ons. Shareholder normal taxable dividend. Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Distribu,ons Other than Cash –  A corpora+on can pay a dividend by transferring ownership of corporate assets to the shareholder (“dividend in kind”) –  Corpora+on: Asset Value > tax cost, –  Disposal = FMV results in taxable income. –  Shareholder: Taxable dividend = FMV of the asset received (ITA 52(2)). Organiza+on, Capital Structure, and Income Distribu+ons of Corpora+ons Wind ­up of a Corpora,on -  A corpora+on can end its existence by: -  disposing of all its assets, -  mee+ng its debt obliga+ons, and -  distribu+ng all its earnings and capital to the shareholders. -  Corpora+on deemed to sell assets at FMV (ITA 84 (2)) Sec+on 85 •  Provides an abrac+ve basis for the transfer of property to the (new) corpora+on –  Example: Mrs. X has an unincorporated business that is using assets with a FMV of $572,000. The tax values for these assets total $225,000. Mrs.X would like to transfer these assets to a corpora+on and con+nue her opera+ons in that legal form The Canadian ­Controlled Private Corpora+on •  ITA 125(7)(b), 89(1)(f)  ­ A private corpora,on that is not controlled by: –  a public corpora+on or –  a non ­resident of Canada. •  CCPCs are dis,nguished in three basic ways: –  rates of tax, –  double taxa+on, and –  secondary rela+onships. The Canadian ­Controlled Private Corpora+on Taxa,on of Income Earned by a CCPC •  Net income for tax purposes must be allocated into five areas before taxes can be computed: 1.  Ac+ve business income (ITA 125(7)(a)) 2.  Specified investment business income (ITA 125(7) (e)) 3.  Capital gains 4.  Personal services business income 5.  Dividends The Canadian ­Controlled Private Corpora+on The Canadian ­Controlled Private Corpora+on Taxa,on of Income Earned by a CCPC •  Net income for tax purposes must be allocated into five areas before taxes can be computed: 1.  Ac+ve business income (ITA 125(7)(a)) 2.  Specified investment business income (ITA 125(7) (e)) 3.  Capital gains (ITA 83(2), 89(1)(b)) 4.  Personal services business income 5.  Dividends The Canadian ­Controlled Private Corpora+on: Dividends •  Non ­connected if: Includes dividends from public corporations •  Non ­Connected Dividends received are taxed at 33 1/3% (Part IV tax – [ITA 186(1)]) of actual dividends received but this tax is fully refundable upon the payment of dividends [ITA 129(1),(3)]. The Canadian ­Controlled Private Corpora+on: Dividends •  Connected if: Includes dividends from public corporations •  Connected Dividends not subject to Part IV tax ­ ITA 186(1), unless •  Paying corpora+on receives a refund of its Part IV tax, –  Receiving Corpora+on pays Part IV tax equal to its % of refund. The Canadian ­Controlled Private Corpora+on •  The major benefits of incorpora,ng are: 1.  Tax deferral (Access to SBD on ABI) 2.  Employment benefits 3.  Flexibility in family ownership 4.  Stabiliza+on of annual income The Canadian ­Controlled Private Corpora+on -  Primary disadvantage relates to the u,liza,on of losses: -  Losses are locked within the corpora+on -  cannot be offset against income earned by the shareholder, -  Opportunity to use losses to generate cash flow through reduced taxes on other income is restricted. The Canadian ­Controlled Private Corpora+on Dividend Policy •  Distribu,ons – Dividends versus Salary: –  A CCPC managed by its shareholder can distribute income by salary or dividends. -  The op+mum combina+on and the +ming of the payments depends on: -  nature of the corporate income as well as -  both personal and corporate income levels. -  Difficult to establish a single policy. Mul+ple Corpora+ons and their Reorganiza+on •  Loans to Shareholders ...
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This note was uploaded on 12/28/2011 for the course TAX 101 taught by Professor Mcgregor during the Fall '07 term at Wisc La Crosse.

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