Tax - CCPC II

Tax - CCPC II - 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 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. The Canadian ­Controlled Private Corpora+on Loans to Shareholders [ITA 15(2) ­(2.4)]  ­ Permi]ed to loan funds to shareholders provided: -  Shareholder is also an employee and -  loan is advanced due to the employment rela,onship, for the following purposes: 1.  To assist acquiring a personal residence. 2.  To acquire treasury shares in the corpora+on. 3.  To acquire an automobile to be used in performing employment du+es. The Canadian ­Controlled Private Corpora+on Limita,on of SBD Associated Corpora,ons -  Two or more corpora+ons must share the SBD of $500,000 income limit. -  Owners can allocate this limit in any propor+on desired [ITA 256 (2.1)]. -  Defini+on of associa+on is complex [ITA 256(1) ­(9)[. -  ITA 256(2.1)  ­ CRA can deem corpora+ons to be associated -  when it may reasonably be considered that one of the main reasons for the separate existence of those corpora+ons is to reduce tax. The Canadian ­Controlled Private Corpora+on The Canadian ­Controlled Private Corpora+on Mul+ple Corpora+ons and their Reorganiza+on Corporate Reorganiza,on •  Current tax policy provides that when a reorganiza+on occurs, –  may elect a form of transac+on that does not result in the FMV disposi+on of assets. •  This elec+on defers the taxes related to the disposi+on. Asset Transfers Assets or business segment Corp B Corp A Cash or Note Payable etc. •  simplest form of reorganiza+on •  does not involve the restructuring of the corpora+ons •  permiged to transfer either all of its ac+vi+es or only a specified part of its ac+vi+es. •  involves an actual sale of property. Involves complete merging of assets, liabilities and shareholdings of two or more corporation Shareholders A Shareholders B New AB Corp Old Corp A Old Corp B Reorganiza+on Procedures and Case Analysis 1.  Define the problem in the exis+ng structure •  Define the desired objec+ve 2.  Choose and test one of the reorganiza+on techniques 3.  Determine whether immediate and future tax implica+ons sa+sfies the problem. •  Are any new problems created? 4.  Choose another method if problems is not solved to sa+sfac+on. Holding Corpora+ons and Intercorporate Investments •  An individual who owns shares in one or more business corpora+ons can choose to interpose a corpora+on between himself/herself and the opera+ng corpora+ons. •  The interposed corpora+on is referred to as a “holding corpora+on.” Dividend Reinvestment •  Primary benefit of establishing a holding corpora+on is that it permits the shareholder to receive dividends from the opera+ng company, free of tax, for reinvestment. ...
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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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