chapter 15 taxable income and tax payable for corporations

Chapter 15Chapter 15

Taxable Income And Tax Taxable Income And Tax Payable For CorporationsPayable For Corporations

2© 2007, Clarence Byrd Inc.

Computation Of Net Computation Of Net Income – Schedule 1Income – Schedule 1

Accounting Net IncomeAccounting Net Income

AdditionsAdditions

DeductionsDeductions

Net Income For Tax Net Income For Tax PurposesPurposes


AdditionsAdditions

1.1. Amortization, Depreciation, Amortization, Depreciation, and and DepletionDepletion

2.2. Recapture Of CCARecapture Of CCA

3.3. Reserves Deducted In Prior Reserves Deducted In Prior YearsYears

4. Losses On Dispositions Of 4. Losses On Dispositions Of Capital Capital

Assets (Accounting Assets (Accounting Amounts)Amounts)


Additions - ContinuedAdditions - Continued

5.5. R&D (Accounting R&D (Accounting Amounts)Amounts)

6. Warranty Costs 6. Warranty Costs (Accounting (Accounting

Amounts)Amounts)

7.7. Debt Discount Debt Discount AmortizationAmortization

8.8. Foreign Taxes Paid Foreign Taxes Paid (Accounting Amounts)(Accounting Amounts)


Additions - ContinuedAdditions - Continued 9.9. Excess Of Taxable Excess Of Taxable

Capital Capital Gains Over Gains Over Allowable Allowable Capital Capital LossesLosses

10. Income Tax Expense10. Income Tax Expense

11.11. Interest And Penalties Interest And Penalties On On Income Tax Income Tax AssessmentsAssessments

12.12. Automobile Costs Automobile Costs (Non-(Non- Deductible)Deductible)



13.13. 50% Of Business 50% Of Business MealsMeals

14.14. Club Dues And Cost Club Dues And Cost Of Of Recreational FacilitiesRecreational Facilities

15.15. Non-Deductible Non-Deductible Accounting ReservesAccounting Reserves

16. Political Contributions16. Political Contributions



17.17. Charitable DonationsCharitable Donations

18.18. Asset Impairment Asset Impairment Write-Write- DownsDowns



1.1. CCA CCA

2.2. CECCEC

3.3. Terminal LossesTerminal Losses

4.4. Deductible ReservesDeductible Reserves



5.5. Gains On Dispositions Of Gains On Dispositions Of Capital Capital Assets (Accounting Assets (Accounting Amounts)Amounts)

6.6. Deductible R & D CostsDeductible R & D Costs

7.7. Deductible Warranty CostsDeductible Warranty Costs

8.8. Debt Premium Debt Premium AmortizationAmortization


Deductions - ContinuedDeductions - Continued 9. Foreign Non-Business Tax 9. Foreign Non-Business Tax

Deduction – ITA 20(12)Deduction – ITA 20(12)

10. Allowable Business 10. Allowable Business Investment Investment LossesLosses


Corporate Taxable Corporate Taxable IncomeIncome

Deductions Not Available To Deductions Not Available To CorporationsCorporations Lifetime Capital Gains Lifetime Capital Gains

DeductionDeduction

Employee Stock Option Employee Stock Option DeductionDeduction

Home Relocation Loan Home Relocation Loan DeductionDeduction

Northern Residents DeductionsNorthern Residents Deductions

Social Assistance And Workers’ Social Assistance And Workers’ CompensationCompensation


Corporate Taxable Corporate Taxable IncomeIncome

Deductions Available To Deductions Available To CorporationsCorporations Losses (Same as for Losses (Same as for

individuals)individuals)

Charitable Donations (A Charitable Donations (A deduction rather than a deduction rather than a credit)credit)

Dividends (Unique to Dividends (Unique to corporations)corporations)


Dividends - The ProblemDividends - The Problem

A Ltd.A Ltd. B Ltd. C Ltd.

$1,000 $600 $360

Corporate Tax Rate = 40%


Dividends From Untaxed Dividends From Untaxed IncomeIncome

Corporation Taxed At 20% On Corporation Taxed At 20% On $100$100 Individual Pays $24 [(30%)Individual Pays $24 [(30%)

($100 - $20)]($100 - $20)] Total = $44 = ($20 + $24)Total = $44 = ($20 + $24)

Corporation Not TaxedCorporation Not Taxed Individual Pays $30 [(30%)Individual Pays $30 [(30%)

($100)]($100)] Total = $30 < $44 When Total = $30 < $44 When

Corporation TaxedCorporation Taxed


Dividends On Preferred Dividends On Preferred SharesShares

Debt At 10%Debt At 10% Cost Of Capital If Corporation Taxed = Cost Of Capital If Corporation Taxed =

6%6% Cost Of Capital If Corporation Not Cost Of Capital If Corporation Not

Taxed = 10%Taxed = 10% Preferred Shares At 8%Preferred Shares At 8% Redeemable/Retractable PreferredRedeemable/Retractable Preferred

Accounting may treat as debtAccounting may treat as debt


Stop Loss RulesStop Loss Rules

The ScenarioThe Scenario Acquire At $10 On Acquire At $10 On

June 30June 30 Receive $1 Receive $1

Dividend On July 1Dividend On July 1 Sell At $9 On July 2 Sell At $9 On July 2

for loss of $1for loss of $1

Anti-Avoidance: Anti-Avoidance: Loss Disallowed Loss Disallowed Unless:Unless: Own 365 Days; AndOwn 365 Days; And Corporation Owns Corporation Owns

No More Than 5% No More Than 5% Of PayorOf Payor


Acquisition Of Control Acquisition Of Control - The Problem- The Problem

Profit

Company

Loss

Company

Acquisition

Loss Transferred To Profit Company


Meaning Of Meaning Of Acquisition Of ControlAcquisition Of Control

Control: Ownership of Control: Ownership of shares that carry the shares that carry the right to elect a majority right to elect a majority of the board of of the board of directors.directors.

Common Scenario: One Common Scenario: One person acquires shares person acquires shares from a different arm’s from a different arm’s length person.length person.


Meaning Of Meaning Of Acquisition Of ControlAcquisition Of Control

Can also occur through redemption of Can also occur through redemption of sharesshares A owns 60 percent – B owns 40 percent – A owns 60 percent – B owns 40 percent –

If all of A’s shares were redeemed, B If all of A’s shares were redeemed, B would have acquired control.would have acquired control.


Deemed Year End - ITA Deemed Year End - ITA 249(4)249(4)

Example: Dec. 31 year Example: Dec. 31 year end, end, acquisition on June 30, acquisition on June 30, 20072007

Deemed New Year Deemed New Year End June 30, 2007End June 30, 2007

Keep Old Year EndKeep Old Year End

Allowed To Establish Allowed To Establish New Year EndNew Year End


Deemed Year End - ITA Deemed Year End - ITA 249(4)249(4)

Usual Year End Usual Year End ProceduresProcedures File ReturnFile Return

Value InventoriesValue Inventories

Short Fiscal PeriodShort Fiscal Period CCA CalculationsCCA Calculations

Annual Business LimitAnnual Business Limit

Counts Towards Loss Counts Towards Loss ExpiryExpiry


Acquisition Of ControlAcquisition Of Control

Net Capital Losses Net Capital Losses And Allowable And Allowable Business Business Investment Losses – Investment Losses – ITA 111(4)(a) & (b)ITA 111(4)(a) & (b)

Unused Carry Unused Carry Forwards DieForwards Die

New Losses Cannot New Losses Cannot Be Carried BackBe Carried Back


Acquisition Of ControlAcquisition Of Control

Non-Capital Losses - Non-Capital Losses - 111(5)111(5) Can Be Carried ForwardCan Be Carried Forward Subject To RestrictionsSubject To Restrictions

Must Carry On Business In Must Carry On Business In Which Losses OccurredWhich Losses Occurred

Reasonable Expectation Of Reasonable Expectation Of ProfitProfit

Can Only Be Applied Can Only Be Applied Against Income Generated Against Income Generated By The Same Or A Similar By The Same Or A Similar Line Of BusinessLine Of Business


Accrued LossesAccrued Losses

InventoriesInventories Normal Year End Normal Year End

ProceduresProcedures

Accounts Accounts Receivable - Receivable - 111(5.3)111(5.3) Maximum Write-Off Maximum Write-Off

RequiredRequired



Depreciable PropertyDepreciable Property Asset Cost = $100,000Asset Cost = $100,000

UCC = $ 60,000UCC = $ 60,000

FMV = $ 50,000FMV = $ 50,000

ITA 111(5.1)ITA 111(5.1) Write Down To $50,000Write Down To $50,000

The $10,000 Is Deemed The $10,000 Is Deemed

CCACCA



Eligible Capital Eligible Capital Property - 111(5.2)Property - 111(5.2)

CEC > 3/4 FMVCEC > 3/4 FMV

Write DownWrite Down

ITA 20(1)(b) DeductionITA 20(1)(b) Deduction



Non-Depreciable Non-Depreciable Property - 111(4)(c) & (d)Property - 111(4)(c) & (d)

ACB > FMVACB > FMV

Write DownWrite Down

Capital Loss (Will Capital Loss (Will disappear if not used at disappear if not used at deemed year end.)deemed year end.)


ITA 111(4)(e) ElectionITA 111(4)(e) Election

General RuleGeneral Rule

Can elect between ACB and FMVCan elect between ACB and FMV

FMV > ACB: Creates Capital GainFMV > ACB: Creates Capital Gain

May also create recapture (Can’t avoid May also create recapture (Can’t avoid if you want the capital gain.)if you want the capital gain.)


ITA 111(4)(e) ElectionITA 111(4)(e) Election Case 1Case 1

Capital Cost = $ 50,000Capital Cost = $ 50,000 FMV = 100,000FMV = 100,000 UCC = 20,000UCC = 20,000

Elect $100,000Elect $100,000 Capital Gain Capital Gain $ 50,000$ 50,000 Recapture Recapture 30,00030,000 New Cap. CostNew Cap. Cost 100,000100,000 New UCCNew UCC 75,00075,000

[$50,000 + (1/2)($100,000 - $50,000)][$50,000 + (1/2)($100,000 - $50,000)]


ITA 111(4)(e) ElectionITA 111(4)(e) Election Case 2Case 2

ACB = $ 50,000ACB = $ 50,000 FMV = 30,000FMV = 30,000 UCC = 20,000UCC = 20,000

Elect $30,000Elect $30,000 Capital Gain Capital Gain

$ Nil $ Nil Recapture Recapture

10,00010,000 New ACBNew ACB

30,00030,000 New UCCNew UCC

30,00030,000


ITA 111(4)(e) ElectionITA 111(4)(e) Election

Case 3Case 3 ACB = $ 50,000ACB = $ 50,000 FMV = 5,000FMV = 5,000 UCC = 20,000UCC = 20,000

Write down to $5,000 is Write down to $5,000 is required by 111(5.1)required by 111(5.1) The $15,000 is deemed The $15,000 is deemed

CCACCA


Profits In The Loss Profits In The Loss BusinessBusiness

During 2007, Loss Leader experiences an overall Net Loss of $150,000, with all of the loss arising in their shoe division. Their hat division broke even for the year. In 2008, the shoe division broke even, while the hat division showed a profit of $200,000.

• No Acquisition in 2007: 2008 Income = $50,000

• Acquisition in 2007: 2008 Income = $200,000


Non-Capital Loss Carry Non-Capital Loss Carry OversOvers

ExampleExample Business LossesBusiness Losses ($60,000)($60,000) Dividends ReceivedDividends Received 10,000 10,000 Bond InterestBond Interest 5,000 5,000 ABILABIL ( 3,000)( 3,000) Taxable Capital GainsTaxable Capital Gains 15,000 15,000 Allowable Capital LossesAllowable Capital Losses ( 7,000)( 7,000) TotalTotal ($40,000)($40,000)


ITA 3 RulesITA 3 Rules

3(a) Non-Capital3(a) Non-Capital $15,000 $15,000

3(b) Net Capital3(b) Net Capital 8,000 8,000

3(c) Sum3(c) Sum $23,000$23,000

3(d) Non-Capital3(d) Non-Capital ( 63,000)( 63,000)

Net IncomeNet Income Nil Nil

Net Capital Loss Carry Over Of $8,000 Net Capital Loss Carry Over Of $8,000 AvailableAvailable


AlternativesAlternatives

No Net Capital Loss No Net Capital Loss DeductionDeduction

Net Capital Loss Net Capital Loss Deduction Of $8,000Deduction Of $8,000


Alternative 1 - Non-Capital Alternative 1 - Non-Capital Loss With No Net Capital Loss With No Net Capital

DeductionDeductionPart E:Part E:

Business LossBusiness Loss $60,000$60,000 ABILABIL 3,0003,000 DividendsDividends 10,00010,000

$73,000 $73,000

Part F:Part F: ITA 3(c)ITA 3(c)

( 23,000)( 23,000)

Non-Capital LossNon-Capital Loss $50,000 $50,000


Part E:Part E: Business LossBusiness Loss $60,000$60,000 ABILABIL 3,0003,000 DividendsDividends 10,00010,000 Net Capital LossNet Capital Loss 8,0008,000 $81,000 $81,000

Part F:Part F: ITA 3(c)ITA 3(c) ( 23,000)( 23,000)

Non-Capital LossNon-Capital Loss $58,000 $58,000

Alternative 2 - Non-Capital Alternative 2 - Non-Capital Loss With Net Capital Loss With Net Capital Deduction Of $8,000Deduction Of $8,000


Ordering Of Taxable Ordering Of Taxable Income DeductionsIncome Deductions

TimingTiming Oldest must be used Oldest must be used

before others of same before others of same typetype

No other restrictions on No other restrictions on orderorder

TypeType

Restricted By Income Restricted By Income TypeType

Restricted By TimeRestricted By Time


Geographical AllocationGeographical Allocation Permanent Establishments – ITR Permanent Establishments – ITR

400(2)400(2) Fixed Place Of BusinessFixed Place Of Business Stock Of Inventories, Land, EquipmentStock Of Inventories, Land, Equipment

Activity: Permanent Activity: Permanent EstablishmentsEstablishments Gross RevenuesGross Revenues Salaries And WagesSalaries And Wages

ProceduresProcedures A Simple AverageA Simple Average No WeightingNo Weighting


Gross RevenuesGross Revenues

Province Amount Percent

Alberta $250,000 25.0

Manitoba 400,000 40.0

Ontario 350,000 35.0

Totals $1,000,000 100.0


Salaries And WagesSalaries And Wages

Province Amount Percent

Alberta $100,000 20.0

Manitoba 200,000 40.0

Ontario 200,000 40.0

Totals $500,000 100.0


Allocation To ProvincesAllocation To Provinces

Province AveragePercent

TaxableIncome

AmountAllocated

Alberta 22.5 $100,000 $ 22,500

Manitoba 40.0 100,000 40,000

Ontario 37.5 100,000 37,500

Total $100,000


Federal Tax PayableFederal Tax Payable Basic Rate - ITA 123(1)Basic Rate - ITA 123(1)

38% Of Taxable Income38% Of Taxable Income

Federal Tax Abatement - Federal Tax Abatement - ITA 124(1)ITA 124(1) 10% Of Taxable Income Earned 10% Of Taxable Income Earned

In A ProvinceIn A Province

Surtax - ITA 123.2Surtax - ITA 123.2 Use 4% Of 28% Of Taxable Use 4% Of 28% Of Taxable

IncomeIncome Repealed as of 2008Repealed as of 2008

General Rate ReductionGeneral Rate Reduction 7% Of Full Rate Taxable Income7% Of Full Rate Taxable Income


Provincial Corporate Provincial Corporate RatesRates

General (%)General (%) AlbertaAlberta 10.010.0 British Col.British Col. 12.0012.00 Nova ScotiaNova Scotia 16.0016.00 OntarioOntario 14.0014.00 QuebecQuebec 9.909.90

Small Business (%)Small Business (%) AlbertaAlberta 3.003.00 British Col.British Col. 4.504.50 Nova ScotiaNova Scotia 5.005.00 OntarioOntario 5.505.50 QuebecQuebec 8.508.50


Tax Payable With Tax Payable With $100,000 Taxable Income$100,000 Taxable Income

Basic At 38% Of $100,000Basic At 38% Of $100,000 $38,000 $38,000

Abatement At 10% Of $100,000 Abatement At 10% Of $100,000 ( 10,000)( 10,000)

Surtax At 4% Of $28,000Surtax At 4% Of $28,000 1,1201,120

GRR At 7% Of $100,000 GRR At 7% Of $100,000 ( 7,000)( 7,000)

Total Federal TaxTotal Federal Tax $22,120 $22,120

Provincial At 15% Of $100,000Provincial At 15% Of $100,00015,000 15,000

Total (Rate = 37.12%)Total (Rate = 37.12%) $37,120 $37,120


Objectives Of Corporate Objectives Of Corporate TaxationTaxation

1. Avoid Double Taxation1. Avoid Double Taxation Corporation Gets Dividend Corporation Gets Dividend

DeductionDeduction Individual Gets Gross Up And Individual Gets Gross Up And

CreditCredit 2. Prevent Avoidance Through 2. Prevent Avoidance Through

CorporationCorporation Corporation: Prevent Capital Corporation: Prevent Capital

Gains From Becoming DividendsGains From Becoming Dividends Individual: Prevent Dividends Individual: Prevent Dividends

From Becoming Capital GainsFrom Becoming Capital Gains 3. Providing Incentives3. Providing Incentives

Small Business DeductionSmall Business Deduction M&P, ITCs, SR&EDM&P, ITCs, SR&ED


Small Business Small Business Deduction (SBD)Deduction (SBD)

ObjectivesObjectives Relief To Small Relief To Small

BusinessBusiness Encourage Active Encourage Active

Business IncomeBusiness Income Provide For The Provide For The

Accumulation Of Accumulation Of Capital In A New Capital In A New BusinessBusiness


Basic ConceptsBasic Concepts

Canadian Controlled Private Canadian Controlled Private Corporation (CCPC)Corporation (CCPC)

Active Business IncomeActive Business Income Annual Business LimitAnnual Business Limit

2007 and subsequent - 2007 and subsequent - $400,000$400,000

Associated CompaniesAssociated Companies Must share the $400,000 limitMust share the $400,000 limit


SBD Example With SBD Example With $100,000 Of Taxable $100,000 Of Taxable

IncomeIncomeFederal Tax At 38%Federal Tax At 38% $38,000 $38,000 Federal Tax AbatementFederal Tax Abatement ( 10,000)( 10,000)Tax Before SurtaxTax Before Surtax $28,000 $28,000 Federal SurtaxFederal Surtax 1,120 1,120 Tax Before SBDTax Before SBD $29,120 $29,120 SBD At 16%SBD At 16% ( 16,000)( 16,000)Federal TaxFederal Tax $13,120 $13,120 Provincial Tax At 5%Provincial Tax At 5% 5,000 5,000

Total Tax PayableTotal Tax Payable $18,120$18,120


Property IncomeProperty Income The ProblemThe Problem

Interest and rent may Interest and rent may involved an active businessinvolved an active business

The SolutionThe Solution Specified Investment Specified Investment

Business does not get SBDBusiness does not get SBD Excludes businesses with 5 Excludes businesses with 5

or more full time employeesor more full time employees Incidental Property Incidental Property

IncomeIncome Treated As Active Business Treated As Active Business

IncomeIncome


Related Individuals - Related Individuals - 251(2)(a)251(2)(a)

Individual


Related CorporationsRelated Corporations One Corporation - ITA 251(2)(b)One Corporation - ITA 251(2)(b) Two Corporations - ITA 251(2)(c)Two Corporations - ITA 251(2)(c)

Control - 256(1.2)(c)Control - 256(1.2)(c) More Than 50% FMV - All SharesMore Than 50% FMV - All Shares More Than 50% FMV - Voting SharesMore Than 50% FMV - Voting Shares

Group – 256(1.2)(a)Group – 256(1.2)(a) Specified Class - 256(1.1)Specified Class - 256(1.1)

Other DefinitionsOther Definitions


Deeming RulesDeeming Rules ITA 256(1.2)(d) – Holding CompaniesITA 256(1.2)(d) – Holding Companies

Shareholder of holding company is deemed to own Shareholder of holding company is deemed to own held shares.held shares.

ITA 256(1.3)ITA 256(1.3) Children under 18Children under 18

ITA 256(1.4)ITA 256(1.4) Options to ownOptions to own Right to force redemption or cancellationRight to force redemption or cancellation

ITA 256(2)ITA 256(2) A associated with BA associated with B C associated with BC associated with B A and C have deemed associationA and C have deemed association

Other DefinitionsOther Definitions


Association RulesAssociation Rules

ITA 256(1)(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other;

Company A Company B

More than 50%



ITA 256(1)(b) both of the corporations were controlled directly or indirectly in any manner whatever, by the same person or group of persons;

Company A Company B

More than 50%

Ms. Smith

More than 50%



ITA 256(1)(c) each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof;

Company A Company B

More than 50% More than 50%

Mrs. Smith Mr. Smith

Not less than 25%



ITA 256(1)(d) one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof;

Company A Company B


Mr. GohMrs. Goh

Mr. Goh’s Brother

Not less than 25%



ITA 256(1)(e) each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more person who were members of both related groups, either alone or together, owned in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class of the capital stock thereof;

Company A Company B


Mr. BrownMrs. Brown

Mr. FortinMrs. Fortin

40%


Calculating The SBDCalculating The SBD ITA 125(1) Specifies The ITA 125(1) Specifies The

Deduction As Deduction As 16% Of The Least Of:16% Of The Least Of: Net Canadian Active Business IncomeNet Canadian Active Business Income Taxable Income, Less:Taxable Income, Less:

10/3 Times The Foreign Non-Business 10/3 Times The Foreign Non-Business Income Tax Credit Without Income Tax Credit Without Consideration Of The ART Or The Consideration Of The ART Or The GRR; AndGRR; And

3 Times The Foreign Business Income 3 Times The Foreign Business Income Tax Credit Without Consideration Of Tax Credit Without Consideration Of The GRRThe GRR

The Annual Business Limit The Annual Business Limit ($400,000), Less Any Portion ($400,000), Less Any Portion Allocated To Associated Corporations.Allocated To Associated Corporations.


Elimination Of SBD For Elimination Of SBD For Large CorporationsLarge Corporations

Reduction = (A)(B/$11,250), whereReduction = (A)(B/$11,250), where A Is The Corporation’s Annual Business A Is The Corporation’s Annual Business

LimitLimit B is .225% Of The Excess Of Taxable B is .225% Of The Excess Of Taxable

Capital Employed In Canada (TCEC) over Capital Employed In Canada (TCEC) over $10,000,000$10,000,000

When TCEC = $10,000,000: no reductionWhen TCEC = $10,000,000: no reduction When TCEC = $15,000,000: reduction = When TCEC = $15,000,000: reduction =

100%100%


Elimination Of SBD For Elimination Of SBD For Large CorporationsLarge Corporations

Taxable Capital Employed In CanadaTaxable Capital Employed In Canada

GAAP determined debt and equity capital of the GAAP determined debt and equity capital of the corporation, less debt and equity investments in corporation, less debt and equity investments in other corporations. When not all of the other corporations. When not all of the corporation’s Taxable Income is allocated to a corporation’s Taxable Income is allocated to a province, the resulting amount is multiplied by province, the resulting amount is multiplied by the same percentage that is applied to the the same percentage that is applied to the abatement in order to determine the portion of abatement in order to determine the portion of the total capital that is employed in Canada.the total capital that is employed in Canada.


Personal Services Personal Services CorporationsCorporations

The ProblemThe Problem Individual establishes a Individual establishes a

corporation to provide corporation to provide employee type servicesemployee type services

The SolutionThe Solution Personal services Personal services

corporations are not eligible corporations are not eligible for the SBDfor the SBD

Can only deduct salaries and Can only deduct salaries and other expenses that would other expenses that would be available to an employeebe available to an employee


Management CompaniesManagement Companies

ObjectiveObjective Organized to provide Organized to provide

services to an services to an unincorporated business unincorporated business (usually a professional (usually a professional practice)practice)

Eligible for small business Eligible for small business deduction provided deduction provided markup is reasonable markup is reasonable (15%) (15%)


Professional Professional CorporationsCorporations

Several provinces now Several provinces now permit professionals permit professionals (e.g., accountants) to (e.g., accountants) to incorporateincorporate

This has reduced the This has reduced the need for management need for management companiescompanies

In general, eligible for In general, eligible for the SBDthe SBD


Manufacturing And Manufacturing And Processing Profits Processing Profits

DeductionDeduction General RulesGeneral Rules

Tax CreditTax Credit

Only On M&P IncomeOnly On M&P Income

A 7% Reduction In Tax A 7% Reduction In Tax PayablePayable

Does not get 7 percent Does not get 7 percent general rate reduction.general rate reduction.

Only beneficial at Only beneficial at provincial level and for provincial level and for CCA classesCCA classes


M&P Deduction – M&P Deduction – ExampleExample

Tax At 38% ($100,000)

$38,000 Abatement At 10%

( 10,000)GRR

NilNet After Abatement

$28,000 Surtax At 4%

1,120 M & P At 7%

( 7,000)Net Federal Tax

$22,120 Provincial At 15%

15,000 Effective Total Tax

37,120


Calculation - ITA Calculation - ITA 125.1(1)125.1(1)

Tax Credit = 7% of the Tax Credit = 7% of the lesser of:lesser of: M & P Profits (ITR), Less M & P Profits (ITR), Less

Amounts Eligible For The SBDAmounts Eligible For The SBD Taxable Income, LessTaxable Income, Less

SBD AmountSBD Amount 3 Times The Foreign Business 3 Times The Foreign Business

Income Tax CreditIncome Tax Credit Aggregate Investment Income Aggregate Investment Income

Under 129(4) – Interest + Under 129(4) – Interest + Taxable Capital Gains +Rents – Taxable Capital Gains +Rents – Net Capital Losses Deducted (No Net Capital Losses Deducted (No Dividends)Dividends)


M&P DeductionM&P Deduction

EligibilityEligibility 10 Percent Of 10 Percent Of

Gross Revenues Gross Revenues From M&P From M&P ActivitiesActivities

Meaning Of M & PMeaning Of M & P ITA 125.1(3) - ITA 125.1(3) -

DefinitionDefinition ITA 125.1(3) - ITA 125.1(3) -

Excluded ActivitiesExcluded Activities See Also IT-145RSee Also IT-145R


M&P FormulaM&P Formula

[ ] ( ) ( )( ) ( )Costs Capital ABI Total+CostsLabour Total

Costs Capital P&M 100/85+Costs Labour P&M 75/100

Income Business

Active Adjusted

All Items Defined In ITR5200


General Rate ReductionGeneral Rate Reduction

2007: 7% of full rate 2007: 7% of full rate taxable incometaxable income 7.5% for 20087.5% for 2008

8.0% for 20098.0% for 2009

9.0% for 20109.0% for 2010

9.5% for 2011 and 9.5% for 2011 and subsequentsubsequent


Application TO CCPCsApplication TO CCPCs

Taxable Income Reduced By:Taxable Income Reduced By: Income Eligible For The SBDIncome Eligible For The SBD

100/16 Of The Small Business Deduction100/16 Of The Small Business Deduction Income Eligible For The M&P Income Eligible For The M&P

DeductionDeduction 100/7 Of The M&P Deduction100/7 Of The M&P Deduction

Aggregate Investment Income Under Aggregate Investment Income Under ITA 129(4)ITA 129(4)


Application TO Non-Application TO Non-CCPCsCCPCs

Taxable Income Reduced By:Taxable Income Reduced By: Income Eligible For The M&P Income Eligible For The M&P

DeductionDeduction 100/7 Of The M&P Deduction100/7 Of The M&P Deduction


Foreign Tax CreditsForeign Tax Credits

Basic ConceptsBasic Concepts

Gross pre-withholding Gross pre-withholding amounts included in amounts included in incomeincome

Tax credit for Tax credit for withholdingwithholding

Withholding rate Withholding rate established by treatyestablished by treaty


Non-Business (Property) Non-Business (Property) FTCFTC

Lesser Of:Lesser Of: Actual Foreign Non-Business Income Tax Actual Foreign Non-Business Income Tax

PaidPaid And An Amount Determined By:And An Amount Determined By:

Payable Otherwise TaxIncome B Division AdjustedIncome Business Non Foreign



Adjusted Division Adjusted Division B IncomeB Income Net Income, LessNet Income, Less

Net Capital Loss Net Capital Loss Carry Overs Carry Overs Deducted 111(1)Deducted 111(1)(b)(b)

Dividends Dividends DeductedDeducted

Tax Otherwise Tax Otherwise PayablePayable Basic + Surtax, Basic + Surtax,

LessLess AbatementAbatement ITA 123.3 (ART)ITA 123.3 (ART) ITA 123.4 (GRR)ITA 123.4 (GRR)


If actual withholding exceeds If actual withholding exceeds limit:limit: No Carry ForwardNo Carry Forward Excess Can Be DeductedExcess Can Be Deducted

Under ITA 20(12)Under ITA 20(12)



Business FTCBusiness FTC Least OfLeast Of

Actual Foreign Business Income Tax PaidActual Foreign Business Income Tax Paid An Amount Determined By:An Amount Determined By:

Payable Otherwise TaxIncome B Division Adjusted

Income Business Foreign

Tax Otherwise Payable, Less Non-Business FTC Tax Otherwise Payable, Less Non-Business FTC


Business FTCBusiness FTC

Adjusted Division Adjusted Division B IncomeB Income Net Income, LessNet Income, Less

Net Capital Loss Net Capital Loss Carry Overs Carry Overs Deducted 111(1)Deducted 111(1)(b)(b)

DividendsDividends

Tax Otherwise Tax Otherwise PayablePayable Basic + Surtax, Basic + Surtax,

LessLess No AbatementNo Abatement ITA 123.3 (ART)ITA 123.3 (ART) ITA 123.4 (GRR)ITA 123.4 (GRR)


Business FTCBusiness FTC

Additional Rules Additional Rules For Unused For Unused AmountsAmounts Carry Back 3 YearsCarry Back 3 Years Carry Forward 10 Carry Forward 10

YearsYears Only Applies To Only Applies To

Incorporated Incorporated Foreign IncomeForeign Income


Investment Tax CreditsInvestment Tax Credits

Credit Vs. DeductionCredit Vs. Deduction Value Of Credit = 100%Value Of Credit = 100% Value Of Deduction = [(100%)(t)]Value Of Deduction = [(100%)(t)]



Current ExpendituresCurrent Expenditures Credit Deducted From ExpendituresCredit Deducted From Expenditures Lose DeductionLose Deduction Used In Current Period (Generally)Used In Current Period (Generally) One Year Delay For SR&EDOne Year Delay For SR&ED



Capital ExpendituresCapital Expenditures Credit Deducted From Capital Cost In Credit Deducted From Capital Cost In

The Following PeriodThe Following Period Lose CCALose CCA


Eligible PropertyEligible Property

Eligible AssetsEligible Assets Qualified PropertyQualified Property Qualified SR&EDQualified SR&ED Salaries of an Salaries of an

eligible apprenticeeligible apprentice Costs of creating Costs of creating

child care spaceschild care spaces


RatesRates Qualified Property - 10%Qualified Property - 10% SR&ED (CCPC)SR&ED (CCPC)

$2 Million At 35%$2 Million At 35% Excess At 20%Excess At 20%

SR&ED (Non-CCPC)SR&ED (Non-CCPC) 20%20%

Apprentice SalariesApprentice Salaries 10% On Maximum of $2,00010% On Maximum of $2,000

Child Care SpacesChild Care Spaces Lesser of $10,000 and 25 percent of the Lesser of $10,000 and 25 percent of the

costs for each spacecosts for each space


RefundabilityRefundability

General RulesGeneral Rules No Tax PayableNo Tax Payable Can’t Use CreditsCan’t Use Credits Government Writes Cheque To The Government Writes Cheque To The

BusinessBusiness


RefundabilityRefundability

Current SR&EDCurrent SR&ED 100 Percent On Current 100 Percent On Current

Amounts That Qualify For Amounts That Qualify For The Extra 15%The Extra 15%

40 Percent On Other 40 Percent On Other Current SR&EDCurrent SR&ED

Other (Including SR&ED Other (Including SR&ED Capital ExpendituresCapital Expenditures 40 Percent For CCPCs and 40 Percent For CCPCs and

IndividualsIndividuals No Upper Limit No Upper Limit


Carry OversCarry Overs

Back Three YearsBack Three Years

Forward Twenty Forward Twenty YearsYears

Must Take All Must Take All Other Credits For Other Credits For The Year And The Year And Reduce Tax Reduce Tax Payable To NilPayable To Nil

chapter 15 taxable income and tax payable for corporations

Documents

clarence byrd

rd accounting amounts

corporations slide

income tax assessments

income tax expense

tax purposes slide

allowable capital losses

tax purposes net income