Chapter 16Chapter 16

Integration, Refundable Integration, Refundable Taxes, And Special Incentives Taxes, And Special Incentives

For CorporationsFor Corporations

2© 2006, C. Byrd Inc.

IntegrationIntegration

Corporation

I get the same after tax amount by either route!!!

3© 2006, C. Byrd Inc.

Dividend Gross Up And Tax Dividend Gross Up And Tax CreditCredit

Eligible DividendsEligible Dividends 45 Percent Gross 45 Percent Gross

UPUP 11/18 Of Gross Up 11/18 Of Gross Up

Tax CreditTax Credit Non-Eligible Non-Eligible

DividendsDividends 25 Percent Gross 25 Percent Gross

UPUP 2/3 Of Gross Up 2/3 Of Gross Up

Tax CreditTax Credit

4© 2006, C. Byrd Inc.

If you haven’t covered this material recently – Review the dividend gross up and tax credit procedures in Chapter 9.

5© 2006, C. Byrd Inc.

Integration AssumptionsIntegration Assumptions

Combined Combined Federal/Provincial Federal/Provincial Corporate Tax RatesCorporate Tax Rates Eligible Dividends = 31 %Eligible Dividends = 31 % Non-Eligible Dividends = 20%Non-Eligible Dividends = 20%

Provincial Dividend Tax Provincial Dividend Tax CreditCredit Eligible Dividends = 7/18Eligible Dividends = 7/18 Non-Eligible Dividends = 1/3Non-Eligible Dividends = 1/3

6© 2006, C. Byrd Inc.

Tax Basis Shareholders’ Tax Basis Shareholders’ EquityEquity

Paid Up Capital Paid Up Capital (PUC)(PUC) Based On Legal Based On Legal

Stated CapitalStated Capital ITA 89(1)ITA 89(1) Similar To Similar To

Contributed Capital Contributed Capital in Accountingin Accounting

7© 2006, C. Byrd Inc.

Tax Basis Shareholders’ Tax Basis Shareholders’ EquityEquity

Retained EarningsRetained Earnings Pre-1972 Capital Surplus Pre-1972 Capital Surplus

On HandOn Hand Capital Gains Accrued Before Capital Gains Accrued Before

19721972 Realized After 1972Realized After 1972

Surplus NothingsSurplus Nothings Capital Dividend AccountCapital Dividend Account Post-1971 Undistributed Post-1971 Undistributed

SurplusSurplus Treatment Of RDTOHTreatment Of RDTOH

8© 2006, C. Byrd Inc.

Paid Up CapitalPaid Up Capital

ImportanceImportance An Investment Of After Tax An Investment Of After Tax

FundsFunds Can Be Distributed Tax FreeCan Be Distributed Tax Free Note: PUC ACBNote: PUC ACB

DefinedDefined Legal Capital (As Per Legal Capital (As Per

Corporate Law)Corporate Law) Limited Number Of Limited Number Of

AdjustmentsAdjustments

9© 2006, C. Byrd Inc.

Paid Up CapitalPaid Up Capital

Example: J & J issues 1,000 shares of stock on January 1, 2005 for $10,000 ($10 Per Share) and an additional 3,000 shares on December 31, 2006 for $60,000 ($20 Per Share).

1/1/05: PUC = ACB = $10 Per Share

31/12/05: PUC = $70,000 ÷ 4,000 = $17.50 Per Share

-Individual buying on December 31, 2006

PUC = $17.50

ACB = $20.00

10© 2006, C. Byrd Inc.

Pre-1972 CSOHPre-1972 CSOH

DefinedDefined Capital Gains, Net Of Any Capital LossCapital Gains, Net Of Any Capital Loss Accruing Before V-DayAccruing Before V-Day Can Only Be Distributed As Part Of A Can Only Be Distributed As Part Of A

Section 88(2) Wind UpSection 88(2) Wind Up

11© 2006, C. Byrd Inc.

Pre-1972 CSOHPre-1972 CSOH

Gains: Lesser Of POD And V Day, Less Cost

POD V Day Cost Add

$200 $125 $100 $25

$200 $300 $100 $100

$100 $50 $75 Nil

12© 2006, C. Byrd Inc.

Pre-1972 CSOHPre-1972 CSOH

Losses Cost, Less Greater Of POD And V Day POD V Day Cost Deduct

$50 $80 $100 $20

$50 $20 $100 $50

$50 $100 $75 Nil

13© 2006, C. Byrd Inc.

Capital Dividend AccountCapital Dividend Account

General IdeaGeneral Idea

Like RDTOH - A Like RDTOH - A

Tracking MechanismTracking Mechanism

Private Companies OnlyPrivate Companies Only

With election, balance With election, balance

can be distributed tax can be distributed tax

freefree

14© 2006, C. Byrd Inc.

Capital Dividend AccountCapital Dividend Account

ComponentsComponents Untaxed Portion Of Net Untaxed Portion Of Net

Capital GainsCapital Gains Capital Dividends ReceivedCapital Dividends Received Untaxed Portion Of CEC Untaxed Portion Of CEC

GainsGains Untaxed Life Insurance Untaxed Life Insurance

ProceedsProceeds Reduced By Capital Reduced By Capital

Dividends PaidDividends Paid

15© 2006, C. Byrd Inc.

Use Of Corporate Use Of Corporate SurplusSurplus

Cash DividendsCash Dividends Reduces Post-1971 Reduces Post-1971

Undistributed SurplusUndistributed Surplus Subject To Gross Up Subject To Gross Up

And Tax Credit And Tax Credit ProceduresProcedures

Not Deductible To The Not Deductible To The CorporationCorporation

16© 2006, C. Byrd Inc.

Use Of Corporate Use Of Corporate SurplusSurplus

Stock DividendsStock DividendsCommon Stock (100,000 Shares) $1,000,000

Retained Earnings 4,000,000

Total Shareholders’ Equity $5,000,000

A 10 percent stock dividend is declared (FMV = $70)

Transfer To PUC - [(100,000)(10%)($70)] = $700,000

17© 2006, C. Byrd Inc.

Use Of Corporate Use Of Corporate SurplusSurplus

Stock DividendsStock DividendsCommon Stock (110,000 Shares) $1,700,000

Retained Earnings 3,300,000

Total Shareholders’ Equity $5,000,000

Holder of 100 shares at $60 gets 10 new shares at $70

Taxable Dividend = $700

ACB = ($6,000 + $700)/110 = $60.90

18© 2006, C. Byrd Inc.

Dividends In KindDividends In Kind

Example: Distribute An Investment With A Cost Of $1 Million And A FMV Of $1.5 Million.

Recipient: Taxable Dividend Of $1.5 Million

Payor: Disposition At $1.5 Million, Capital Gain Of $500,000

19© 2006, C. Byrd Inc.

ITA 84(1) Deemed ITA 84(1) Deemed DividendDividend

General IdeaGeneral Idea PUC Increase In Excess Of PUC Increase In Excess Of

Net Asset Increase Net Asset Increase Creates Added Tax Free Creates Added Tax Free

DistributionDistribution ITA 53(1)(b) - Addition To ITA 53(1)(b) - Addition To

ACB Of SharesACB Of Shares

ExceptionsExceptions Stock DividendsStock Dividends Shifts Between ClassesShifts Between Classes Conversion Of Contributed Conversion Of Contributed

SurplusSurplus

20© 2006, C. Byrd Inc.

ITA 84(2) Deemed ITA 84(2) Deemed DividendsDividends

With winding-up under ITA 88(2):With winding-up under ITA 88(2): ITA 84(2) Deemed Dividend Equals The Excess ITA 84(2) Deemed Dividend Equals The Excess

Of The Amount Distributed Over PUCOf The Amount Distributed Over PUC

21© 2006, C. Byrd Inc.

Components Of 84(2) Components Of 84(2) DividendDividend

ITA 88(2)(b)ITA 88(2)(b) Indicates That ITA 84(2) Indicates That ITA 84(2)

Deemed Dividend Is Made Deemed Dividend Is Made Up Of:Up Of:

Capital Dividend (If Capital Dividend (If Elected)Elected)

Distribution Of Pre-1972 Distribution Of Pre-1972 CSOH [Deemed Not To Be CSOH [Deemed Not To Be A Dividend By 88(2)(b)(ii)]A Dividend By 88(2)(b)(ii)]

Residual Is A Taxable Residual Is A Taxable DividendDividend

22© 2006, C. Byrd Inc.

ITA 83(2) Capital ITA 83(2) Capital DividendDividend

All Dividends Are Taxed If No All Dividends Are Taxed If No ElectionElection

Election (Form T2054) Allows Election (Form T2054) Allows Any Dividend To Be Treated Any Dividend To Be Treated As A Capital Dividend (If As A Capital Dividend (If Balance Available In Capital Balance Available In Capital Dividend Account)Dividend Account) Penalty For Excess ElectionPenalty For Excess Election Does Not Reduce ACB Of SharesDoes Not Reduce ACB Of Shares Does Not Reduce PUC Of SharesDoes Not Reduce PUC Of Shares

23© 2006, C. Byrd Inc.

ITA 84(3) Deemed ITA 84(3) Deemed DividendDividend

On Redemption, Acquisition On Redemption, Acquisition By Corporation, Or By Corporation, Or Cancellation Of SharesCancellation Of Shares

General Idea: If Payment To General Idea: If Payment To Shareholder Exceeds PUC, Shareholder Exceeds PUC, The Excess Is A Deemed The Excess Is A Deemed DividendDividend

If Payment Exceeds ACB, The If Payment Exceeds ACB, The Excess Is A Capital GainExcess Is A Capital Gain

Remove ITA 84(3) Deemed Remove ITA 84(3) Deemed Dividend From POD under ITA Dividend From POD under ITA 5454

24© 2006, C. Byrd Inc.

ITA 84(3) ExampleITA 84(3) Example

Mr. Jones owns all 5,000 shares of L&L Ltd. The shares have a PUC of $75,000 and his ACB is $40,000. One-half of the shares are redeemed for $55,000

Redemption Price  $55,000

PUC ( 37,500)

ITA 84(3) Deemed Dividend  $17,500

25© 2006, C. Byrd Inc.

ITA 84(3) Example ITA 84(3) Example (Cont)(Cont)

Redemption Price  $55,000

84(3) Dividend (  17,500)

POD $37,500

ACB ( 20,000)

Capital Gain $17,500

26© 2006, C. Byrd Inc.

ITA 84(4) Deemed DividendITA 84(4) Deemed Dividend

A Liquidating Dividend A Liquidating Dividend Involving a PUC Involving a PUC ReductionReduction

If Amount Distributed If Amount Distributed Exceeds PUC, The Excess Exceeds PUC, The Excess Is A Deemed DividendIs A Deemed Dividend

27© 2006, C. Byrd Inc.

ITA 84(4) ExampleITA 84(4) Example

Company distributes $80 per share. The shares have a PUC Of $60 Per Share.

•ITA 84(4) Deemed Dividend Of $20 Per Share

•PUC Down By $60 To Nil

•ACB Down By $60

28© 2006, C. Byrd Inc.

ITA 84(4.1) ExampleITA 84(4.1) Example

•If Public Company

•Entire distribution is treated as deemed dividend

•Exception if there is a redemption, acquisition, or cancellation of shares

29© 2006, C. Byrd Inc.

ITA 129(4) - Aggregate ITA 129(4) - Aggregate Investment Income DefinedInvestment Income Defined

Includes:Includes: Net Taxable Capital Gains For The Year, Net Taxable Capital Gains For The Year,

Reduced By Any Net Capital Loss Carry Reduced By Any Net Capital Loss Carry Overs DeductedOvers Deducted

InterestInterest RentsRents RoyaltiesRoyalties

Excludes:Excludes: Dividends Deductible In Computing Dividends Deductible In Computing

Taxable IncomeTaxable Income

30© 2006, C. Byrd Inc.

Additional Refundable Tax Additional Refundable Tax On Investment Income On Investment Income

(ART)(ART)

Amount Payable Is 6-2/3% Of Amount Payable Is 6-2/3% Of Lesser Of:Lesser Of: The Corporation’s Aggregate The Corporation’s Aggregate

Investment IncomeInvestment Income The Amount, If Any, By Which The Amount, If Any, By Which

The Corporation’s Taxable The Corporation’s Taxable Income Exceeds The Amount Income Exceeds The Amount Eligible For The Small Business Eligible For The Small Business DeductionDeduction

31© 2006, C. Byrd Inc.

Refundable Part I TaxRefundable Part I TaxThe ProblemThe Problem

Excessive Tax Rates On Flow Through Excessive Tax Rates On Flow Through Of A CCPC’s Investment IncomeOf A CCPC’s Investment Income With ART, Taxed At Federal Rate Of Just With ART, Taxed At Federal Rate Of Just

Under 36% [(38% - 10%)(104%) + 6-Under 36% [(38% - 10%)(104%) + 6-2/3%].2/3%].

Add Provincial Rates Of 11.5% To 17%Add Provincial Rates Of 11.5% To 17% Total Tax Rate Varies Between 47% And Total Tax Rate Varies Between 47% And

53%53%

32© 2006, C. Byrd Inc.

Refundable Part I TaxRefundable Part I TaxThe ProblemThe Problem

$100,000 Of Investment

Income

Individual

Shareholder

33© 2006, C. Byrd Inc.

Refundable Part I TaxRefundable Part I TaxThe SolutionThe Solution

When Corporation When Corporation Distributes Its Distributes Its After Tax Income After Tax Income As Dividends, Part As Dividends, Part Of Tax Is RefundedOf Tax Is Refunded

Refund Equal To Refund Equal To $1 For Each $3 Of $1 For Each $3 Of Dividends PaidDividends Paid

34© 2006, C. Byrd Inc.

Example – Part I RefundExample – Part I Refund

Corporate IncomeCorporate Income $100,000$100,000

Taxes At 46-2/3%Taxes At 46-2/3% 46,66746,667

Balance Before Balance Before RefundRefund

$53,333$53,333

RefundRefund 26,66726,667

Maximum DividendMaximum Dividend $ 80,000$ 80,000

$26,667 = [(1/3)($80,000)]$26,667 = [(1/3)($80,000)]

35© 2006, C. Byrd Inc.

Refundable Part IV TaxRefundable Part IV TaxThe ProblemThe Problem

$100,000 Investment

Income

36© 2006, C. Byrd Inc.

Refundable Part IV Tax:Refundable Part IV Tax:Liability ForLiability For

Private CorporationsPrivate Corporations Subject CorporationSubject Corporation

A Corporation (Other Than A A Corporation (Other Than A Private Corporation) Resident In Private Corporation) Resident In Canada And Controlled By Or For Canada And Controlled By Or For The Benefit Of An Individual Or The Benefit Of An Individual Or Related GroupRelated Group

For The Purposes Of Part IV Tax, For The Purposes Of Part IV Tax, Treated As A Private CorporationTreated As A Private Corporation

37© 2006, C. Byrd Inc.

Refundable Part IV TaxRefundable Part IV TaxAssessment And RefundAssessment And Refund

Assessed At A Rate Assessed At A Rate Of 33-1/3%Of 33-1/3%

Refunded At A Refunded At A Rate Of $1 For Rate Of $1 For Each $3 Of Each $3 Of Dividends PaidDividends Paid

38© 2006, C. Byrd Inc.

Part IV Refundable TaxPart IV Refundable TaxWhere AppliedWhere Applied

Dividend Is Received From An Dividend Is Received From An Unconnected Company Unconnected Company (Portfolio Dividend)(Portfolio Dividend)

Dividend Is Received From A Dividend Is Received From A Connected Company, And The Connected Company, And The Company Paying The Company Paying The Dividend Received A Refund Dividend Received A Refund As The Result Of The PaymentAs The Result Of The Payment

39© 2006, C. Byrd Inc.

Part IV Refundable TaxPart IV Refundable Tax

Connected CorporationsConnected Corporations Control (> 50%), orControl (> 50%), or Greater Than:Greater Than:

10% Of Voting, And10% Of Voting, And 10% FMV Of All10% FMV Of All

40© 2006, C. Byrd Inc.

Part IV Refundable TaxPart IV Refundable Tax

Reduce Part IV With Non-Reduce Part IV With Non-Capital LossesCapital Losses

However, Uses A Potential However, Uses A Potential Permanent Reduction In Permanent Reduction In Taxes To Reduce Tax Payable Taxes To Reduce Tax Payable That Would Ultimately Be That Would Ultimately Be RefundedRefunded

41© 2006, C. Byrd Inc.

Keeping Score:Keeping Score:Refundable Dividend Tax Refundable Dividend Tax

On HandOn Hand ComponentsComponents

Opening BalanceOpening Balance Refundable Part I Refundable Part I

TaxTax Part IV TaxPart IV Tax Dividend RefundDividend Refund Closing BalanceClosing Balance

42© 2006, C. Byrd Inc.

Refundable Portion Of Refundable Portion Of Part I TaxPart I Tax

RDTOH Definition Limits To The Least RDTOH Definition Limits To The Least Of:Of:

ITA 129(3)(a)(i) – Investment Income LimitITA 129(3)(a)(i) – Investment Income Limit

ITA 129(3)(a)(ii) – Taxable Income LimitITA 129(3)(a)(ii) – Taxable Income Limit

ITA 129(3)(a)(iii) – Tax Payable LimitITA 129(3)(a)(iii) – Tax Payable Limit

43© 2006, C. Byrd Inc.

ITA 129 (3)(a)(i)ITA 129 (3)(a)(i)

Determined By Formula A-B, Determined By Formula A-B, WhereWhere

A Is 26-2/3% Of Aggregate A Is 26-2/3% Of Aggregate Investment IncomeInvestment Income

B Is The Amount, If Any, By B Is The Amount, If Any, By Which The Non-Business FTC Which The Non-Business FTC Exceeds 9-1/3% Of Foreign Exceeds 9-1/3% Of Foreign Income Income

44© 2006, C. Byrd Inc.

ITA 129(3)(a)(ii)ITA 129(3)(a)(ii)

26-2/3% Of The Amount, If 26-2/3% Of The Amount, If Any, By Which Taxable Any, By Which Taxable Income Exceeds The Total Income Exceeds The Total Of:Of:

Amount Eligible For The Small Amount Eligible For The Small Business DeductionBusiness Deduction

25/9 Of Non-Business FTC25/9 Of Non-Business FTC

3 Times Business FTC3 Times Business FTC

45© 2006, C. Byrd Inc.

ITA 129(3)(a)(iii)ITA 129(3)(a)(iii)

Tax Payable Under Tax Payable Under Part I Determined Part I Determined Without Corporate Without Corporate SurtaxSurtax

46© 2006, C. Byrd Inc.

Dividend RefundDividend Refund

Equal To The Lesser Of:Equal To The Lesser Of:

Balance In RDTOH Account Balance In RDTOH Account At The Year EndAt The Year End

1/3 Of All Dividends Paid 1/3 Of All Dividends Paid During The YearDuring The Year

47© 2006, C. Byrd Inc.

Example Basic DataExample Basic Data

Fortune Ltd. is a Fortune Ltd. is a Canadian controlled Canadian controlled private corporation. private corporation. Based on the formula in Based on the formula in ITR 402, 90 percent of ITR 402, 90 percent of the Company’s income is the Company’s income is earned in a province. earned in a province. The following information The following information is available for the year is available for the year ending December 31, ending December 31, 2006:2006:

48© 2006, C. Byrd Inc.

Basic DataBasic Data

Canadian Source Investment Income Canadian Source Investment Income (Includes $25,000 In Taxable Capital Gains)(Includes $25,000 In Taxable Capital Gains) $100,000 $100,000

Gross Foreign Investment Income (15 Percent Withheld)Gross Foreign Investment Income (15 Percent Withheld) 20,000 20,000

Gross Foreign Business Income (15 Percent Withheld)Gross Foreign Business Income (15 Percent Withheld) 10,000 10,000

Active Business Income (No Associated Companies)Active Business Income (No Associated Companies) 150,000 150,000 Portfolio Dividends Received Portfolio Dividends Received 30,000 30,000 Net Income For Tax PurposesNet Income For Tax Purposes $310,000 $310,000 Portfolio Dividends Portfolio Dividends ( 30,000)( 30,000)Net Capital Loss From Preceding Year Deducted Net Capital Loss From Preceding Year Deducted

( 15,000)( 15,000)Taxable IncomeTaxable Income $265,000$265,000

49© 2006, C. Byrd Inc.

Basic DataBasic Data

RDTOH - December 31, 2005RDTOH - December 31, 2005$110,000 $110,000

Dividend Refund For 2005Dividend Refund For 2005 20,000 20,000

Taxable Dividends Paid During 2006Taxable Dividends Paid During 2006 40,000 40,000

Aggregate investment income for Aggregate investment income for Fortune Ltd. is equal to $105,000 Fortune Ltd. is equal to $105,000 ($100,000 + $20,000 - $15,000).($100,000 + $20,000 - $15,000).

50© 2006, C. Byrd Inc.

Part I Tax PayablePart I Tax PayableBase Amount Of Part I Tax [(38%)($265,000)]Base Amount Of Part I Tax [(38%)($265,000)] $100,700 $100,700 Surtax [(4%)(28%)($265,000)]Surtax [(4%)(28%)($265,000)] 2,968 2,968 ART: Equal To The Lesser Of:ART: Equal To The Lesser Of:

[(6-2/3%)($265,000 - $150,000)] = $7,667[(6-2/3%)($265,000 - $150,000)] = $7,667[(6-2/3%)($100,000 + $20,000 - $15,000)] = $7,000[(6-2/3%)($100,000 + $20,000 - $15,000)] = $7,000 7,000 7,000

Federal Tax Abatement [(10%)(90%)($265,000)]Federal Tax Abatement [(10%)(90%)($265,000)]( 23,850)( 23,850)

Foreign Non-Business Tax CreditForeign Non-Business Tax Credit ( 3,000)( 3,000)Foreign Business Tax Credit Foreign Business Tax Credit ( 1,500)( 1,500)

51© 2006, C. Byrd Inc.

Small Business Small Business DeductionDeduction

The small business deduction would be equal to 16 percent of the The small business deduction would be equal to 16 percent of the least of:least of:

1.1. Active Business IncomeActive Business Income $150,000 $150,000

2.2. Taxable IncomeTaxable Income $265,000 $265,000 Deduct:Deduct:

[(10/3)($3,000 Non-Business FTC)][(10/3)($3,000 Non-Business FTC)]( 10,000)( 10,000)

[(3)($1,500 Business FTC)][(3)($1,500 Business FTC)] ( 4,500)( 4,500)Total Total $250,500$250,500

3.3. Annual Business LimitAnnual Business Limit $300,000 $300,000

The least of these figures is $150,000, providing for a small The least of these figures is $150,000, providing for a small business deduction of $24,000 [(16%)($150,000)].business deduction of $24,000 [(16%)($150,000)].

52© 2006, C. Byrd Inc.

Part I Tax PayablePart I Tax PayableBase Amount Of Part I Tax [(38%)($265,000)]Base Amount Of Part I Tax [(38%)($265,000)]

$100,700 $100,700 Surtax [(4%)(28%)($265,000)]Surtax [(4%)(28%)($265,000)]

2,968 2,968 ART: Equal To The Lesser Of:ART: Equal To The Lesser Of:

[(6-2/3%)($265,000 - $150,000)] = $7,667[(6-2/3%)($265,000 - $150,000)] = $7,667[(6-2/3%)($100,000 + $20,000 - $15,000)] = $7,000[(6-2/3%)($100,000 + $20,000 - $15,000)] = $7,000

7,000 7,000 Federal Tax Abatement [(10%)(90%)($265,000)]Federal Tax Abatement [(10%)(90%)($265,000)]

( 23,850)( 23,850)Foreign Non-Business Tax CreditForeign Non-Business Tax Credit ( 3,000)( 3,000)Foreign Business Tax Credit Foreign Business Tax Credit

( 1,500)( 1,500)Small Business DeductionSmall Business Deduction

( 24,000)( 24,000)

53© 2006, C. Byrd Inc.

General Rate ReductionGeneral Rate Reduction

The general rate reduction under ITA 123.4(2) would The general rate reduction under ITA 123.4(2) would be calculated as follows:be calculated as follows:

Taxable IncomeTaxable Income $265,000 $265,000 Amount Eligible For SBD Amount Eligible For SBD ( 150,000)( 150,000)Aggregate Investment Income Aggregate Investment Income

($100,000 + $20,000 - $15,000)($100,000 + $20,000 - $15,000)( 105,000)( 105,000)

Full Rate Taxable IncomeFull Rate Taxable Income $ 10,000 $ 10,000 RateRate 7% 7% ITA 123.4(2) ReductionITA 123.4(2) Reduction $ 700 $ 700

54© 2006, C. Byrd Inc.

Part I Tax PayablePart I Tax PayableBase Amount Of Part I Tax [(38%)($265,000)]Base Amount Of Part I Tax [(38%)($265,000)]

$100,700 $100,700 Surtax [(4%)(28%)($265,000)]Surtax [(4%)(28%)($265,000)] 2,968 2,968 ART: Equal To The Lesser Of:ART: Equal To The Lesser Of:

[(6-2/3%)($265,000 - $150,000)] = $7,667[(6-2/3%)($265,000 - $150,000)] = $7,667[(6-2/3%)($100,000 + $20,000 - $15,000)] = $7,000[(6-2/3%)($100,000 + $20,000 - $15,000)] = $7,000 7,000 7,000

Federal Tax Abatement [(10%)(90%)($265,000)]Federal Tax Abatement [(10%)(90%)($265,000)]( 23,850)( 23,850)

Foreign Non-Business Tax CreditForeign Non-Business Tax Credit ( 3,000)( 3,000)Foreign Business Tax Credit Foreign Business Tax Credit ( 1,500)( 1,500)Small Business DeductionSmall Business Deduction ( 24,000)( 24,000)General Rate Reduction For CCPCsGeneral Rate Reduction For CCPCs

( 700)( 700)Part I Tax Payable Part I Tax Payable $ 57,618 $ 57,618

55© 2006, C. Byrd Inc.

Part I RefundablePart I Refundable

26-2/3% Of Aggregate Investment Income26-2/3% Of Aggregate Investment Income

[(26-2/3%)($105,000)][(26-2/3%)($105,000)] $28,000 $28,000

Deduct Excess Of:Deduct Excess Of:

Foreign Non-Business Tax CreditForeign Non-Business Tax Credit $3,000 $3,000

Over 9-1/3% Of Foreign InvestmentOver 9-1/3% Of Foreign Investment

Income [(9-1/3%)($20,000)]Income [(9-1/3%)($20,000)] ( 1,867)( 1,867) ( 1,133)( 1,133)

ITA 129(3)(a)(i)ITA 129(3)(a)(i) $26,867$26,867

56© 2006, C. Byrd Inc.

Part I RefundablePart I Refundable

Taxable IncomeTaxable Income$265,000 $265,000

Deduct: Deduct: Amount Eligible For SBDAmount Eligible For SBD ($150,000) ($150,000)[(25/9)($3,000 Non-Business FTC)] ( 8,333)[(25/9)($3,000 Non-Business FTC)] ( 8,333)[(3)($1,500 Business FTC)][(3)($1,500 Business FTC)] ( 4,500)( 4,500)

( 162,833)( 162,833)TotalTotal

$102,167 $102,167 RateRate 26-2/3%26-2/3% ITA 129(3)(a)(ii)ITA 129(3)(a)(ii) $ $

27,24527,245

57© 2006, C. Byrd Inc.

Part I RefundablePart I Refundable

ITA 129(3)(a)(iii) Adjusted Part I ITA 129(3)(a)(iii) Adjusted Part I

Tax Payable ($57,618 - $2,968)Tax Payable ($57,618 - $2,968)$ 54,650 $ 54,650

The refundable portion of Part I tax is The refundable portion of Part I tax is equal to $26,867, which is the least of the equal to $26,867, which is the least of the preceding three amountspreceding three amounts

58© 2006, C. Byrd Inc.

RDTOH BalanceRDTOH Balance The Part IV tax would be $10,000, one-third of the The Part IV tax would be $10,000, one-third of the

$30,000 in portfolio dividends received. Given $30,000 in portfolio dividends received. Given this, the balance in the RDTOH account at the end this, the balance in the RDTOH account at the end of the year is as follows:of the year is as follows:

RDTOH - End Of Preceding YearRDTOH - End Of Preceding Year $110,000 $110,000 Deduct: Dividend Refund For Deduct: Dividend Refund For

The Preceding YearThe Preceding Year ( 20,000)( 20,000) $ 90,000$ 90,000Refundable Portion Of Part I Tax Refundable Portion Of Part I Tax $ 26,867 $ 26,867 Part IV Tax Payable Part IV Tax Payable [([(33-1/3%)($30,000)]33-1/3%)($30,000)] 10,000 10,000 36,867 36,867

RDTOH - December 31, 2006RDTOH - December 31, 2006$126,867$126,867

59© 2006, C. Byrd Inc.

Dividend RefundDividend Refund

The dividend refund for the year would The dividend refund for the year would be $13,333, the lesser of:be $13,333, the lesser of: One-Third Of Taxable DividendsOne-Third Of Taxable Dividends

Paid ($40,000 ÷ 3) Paid ($40,000 ÷ 3) $13,333 $13,333

RDTOH BalanceRDTOH BalanceDecember 31, 2006December 31, 2006$126,867$126,867

60© 2006, C. Byrd Inc.

Federal Tax PayableFederal Tax Payable

Using the preceding information, the total Using the preceding information, the total federal Tax Payable for Fortune Ltd. is federal Tax Payable for Fortune Ltd. is calculated as follows:calculated as follows:

Part I Tax PayablePart I Tax Payable$57,618 $57,618

Part IV Tax PayablePart IV Tax Payable 10,000 10,000

Dividend RefundDividend Refund ( 13,333)( 13,333)

Federal Tax PayableFederal Tax Payable $54,285$54,285

61© 2006, C. Byrd Inc.

Eligible DividendsEligible DividendsEligible DividendsEligible Dividends

Any dividend that is Any dividend that is designated as such.designated as such.

Qualifies for enhanced 45 Qualifies for enhanced 45 percent gross up.percent gross up.

Receives dividend tax Receives dividend tax credit of 11/18 of the gross credit of 11/18 of the gross up.up.

Reduces maximum rate on Reduces maximum rate on dividends to about 20 dividends to about 20 percent.percent.

62© 2006, C. Byrd Inc.

Tax On Excessive Tax On Excessive ElectionElection

For CCPC – A designation that exceeds For CCPC – A designation that exceeds General Rate Income Pool (GRIP).General Rate Income Pool (GRIP).

For Public Company – A designation For Public Company – A designation that leaves a positive Low Rate Income that leaves a positive Low Rate Income Pool (LRIP).Pool (LRIP).

Excess taxed at 20 percent.Excess taxed at 20 percent. If artificial manipulation – Tax at 30 If artificial manipulation – Tax at 30

percent on the entire dividend (not just percent on the entire dividend (not just excess)excess)

63© 2006, C. Byrd Inc.

Basic ApproachBasic Approach

CCPCsCCPCs Income eligible for Income eligible for

SBDSBD Investment income Investment income

eligible for refundeligible for refund Assume most Assume most

dividends are non-dividends are non-eligibleeligible

Exceptions in GRIPExceptions in GRIP

Public CompaniesPublic Companies Most income taxed Most income taxed

at general ratesat general rates Assume most Assume most

dividends are dividends are eligibleeligible

Exceptions in LRIPExceptions in LRIP

64© 2006, C. Byrd Inc.

CCPCs and their GRIPCCPCs and their GRIP

GRIP = C + [(68%)(D – E – F)] + G + H + IGRIP = C + [(68%)(D – E – F)] + G + H + I

C = GRIP at end of preceding yearC = GRIP at end of preceding year

D = Taxable Income for the yearD = Taxable Income for the year

E = Amount eligible for SBD for the yearE = Amount eligible for SBD for the year

F = Aggregate investment income for the yearF = Aggregate investment income for the year

G = Eligible dividends received during the yearG = Eligible dividends received during the year

H = Adjustments for amalgamations and wind H = Adjustments for amalgamations and wind upsups

I = Eligible dividends paid in the preceding yearI = Eligible dividends paid in the preceding year

65© 2006, C. Byrd Inc.

Designation By CCPCDesignation By CCPC

To the extent of the To the extent of the GRIP balance:GRIP balance:

Dividends can be Dividends can be designated as eligible.designated as eligible.

66© 2006, C. Byrd Inc.

Non-CCPCs and their Non-CCPCs and their LRIPLRIP

LRIP = (A + B + C + D + F) – (G + H)LRIP = (A + B + C + D + F) – (G + H)

A = LRIP at end of preceding yearA = LRIP at end of preceding yearB = Non-eligible dividends received for the yearB = Non-eligible dividends received for the yearC = Additions for corporate reorganizationsC = Additions for corporate reorganizationsD = Adjustment if CCPC in some preceding yearD = Adjustment if CCPC in some preceding yearE = Adjustment if credit union in some preceding yearE = Adjustment if credit union in some preceding yearF = Adjustment if investment company in some F = Adjustment if investment company in some preceding yearpreceding yearG = Non-eligible dividends paid during the yearG = Non-eligible dividends paid during the yearH = Excess election during yearH = Excess election during year

67© 2006, C. Byrd Inc.

Non-Eligible Dividends: Non-Eligible Dividends: Non-CCPCNon-CCPC

Dividend paid when Dividend paid when there is a positive LRIP there is a positive LRIP balance:balance:

Should be non-eligible.Should be non-eligible.

If designated – will be If designated – will be subject to tax on excess subject to tax on excess designation.designation.

68© 2006, C. Byrd Inc.