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
3© 2007, Clarence Byrd Inc.
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)
4© 2007, Clarence Byrd Inc.
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)
5© 2007, Clarence Byrd Inc.
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)
6© 2007, Clarence Byrd Inc.
Additions - ContinuedAdditions - Continued
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
7© 2007, Clarence Byrd Inc.
Additions - ContinuedAdditions - Continued
17.17. Charitable DonationsCharitable Donations
18.18. Asset Impairment Asset Impairment Write-Write- DownsDowns
8© 2007, Clarence Byrd Inc.
DeductionsDeductions
1.1. CCA CCA
2.2. CECCEC
3.3. Terminal LossesTerminal Losses
4.4. Deductible ReservesDeductible Reserves
9© 2007, Clarence Byrd Inc.
DeductionsDeductions
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
10© 2007, Clarence Byrd Inc.
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
11© 2007, Clarence Byrd Inc.
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
12© 2007, Clarence Byrd Inc.
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)
13© 2007, Clarence Byrd Inc.
Dividends - The ProblemDividends - The Problem
A Ltd.A Ltd. B Ltd. C Ltd.
$1,000 $600 $360
Corporate Tax Rate = 40%
14© 2007, Clarence Byrd Inc.
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
15© 2007, Clarence Byrd Inc.
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
16© 2007, Clarence Byrd Inc.
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
17© 2007, Clarence Byrd Inc.
Acquisition Of Control Acquisition Of Control - The Problem- The Problem
Profit
Company
Loss
Company
Acquisition
Loss Transferred To Profit Company
18© 2007, Clarence Byrd Inc.
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.
19© 2007, Clarence Byrd Inc.
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.
20© 2007, Clarence Byrd Inc.
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
21© 2007, Clarence Byrd Inc.
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
22© 2007, Clarence Byrd Inc.
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
23© 2007, Clarence Byrd Inc.
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
24© 2007, Clarence Byrd Inc.
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
25© 2007, Clarence Byrd Inc.
Accrued LossesAccrued Losses
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
26© 2007, Clarence Byrd Inc.
Accrued LossesAccrued Losses
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
27© 2007, Clarence Byrd Inc.
Accrued LossesAccrued Losses
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.)
28© 2007, Clarence Byrd Inc.
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.)
29© 2007, Clarence Byrd Inc.
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)]
30© 2007, Clarence Byrd Inc.
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
31© 2007, Clarence Byrd Inc.
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
32© 2007, Clarence Byrd Inc.
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
33© 2007, Clarence Byrd Inc.
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)
34© 2007, Clarence Byrd Inc.
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
35© 2007, Clarence Byrd Inc.
AlternativesAlternatives
No Net Capital Loss No Net Capital Loss DeductionDeduction
Net Capital Loss Net Capital Loss Deduction Of $8,000Deduction Of $8,000
36© 2007, Clarence Byrd Inc.
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
37© 2007, Clarence Byrd Inc.
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
38© 2007, Clarence Byrd Inc.
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
39© 2007, Clarence Byrd Inc.
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
40© 2007, Clarence Byrd Inc.
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
41© 2007, Clarence Byrd Inc.
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
42© 2007, Clarence Byrd Inc.
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
43© 2007, Clarence Byrd Inc.
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
44© 2007, Clarence Byrd Inc.
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
45© 2007, Clarence Byrd Inc.
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
46© 2007, Clarence Byrd Inc.
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
47© 2007, Clarence Byrd Inc.
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
48© 2007, Clarence Byrd Inc.
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
49© 2007, Clarence Byrd Inc.
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
50© 2007, Clarence Byrd Inc.
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
51© 2007, Clarence Byrd Inc.
52© 2007, Clarence Byrd Inc.
Related Individuals - Related Individuals - 251(2)(a)251(2)(a)
Individual
53© 2007, Clarence Byrd Inc.
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
54© 2007, Clarence Byrd Inc.
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
55© 2007, Clarence Byrd Inc.
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%
56© 2007, Clarence Byrd Inc.
Association RulesAssociation Rules
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%
57© 2007, Clarence Byrd Inc.
Association RulesAssociation Rules
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%
58© 2007, Clarence Byrd Inc.
Association RulesAssociation Rules
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
More than 50% More than 50%
Mr. GohMrs. Goh
Mr. Goh’s Brother
Not less than 25%
59© 2007, Clarence Byrd Inc.
Association RulesAssociation Rules
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
More than 50% More than 50%
Mr. BrownMrs. Brown
Mr. FortinMrs. Fortin
40%
60© 2007, Clarence Byrd Inc.
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.
61© 2007, Clarence Byrd Inc.
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%
62© 2007, Clarence Byrd Inc.
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.
63© 2007, Clarence Byrd Inc.
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
64© 2007, Clarence Byrd Inc.
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%)
65© 2007, Clarence Byrd Inc.
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
66© 2007, Clarence Byrd Inc.
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
67© 2007, Clarence Byrd Inc.
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
68© 2007, Clarence Byrd Inc.
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)
69© 2007, Clarence Byrd Inc.
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
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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
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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
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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)
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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
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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
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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
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Non-Business (Property) Non-Business (Property) FTCFTC
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)
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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)
Non-Business (Property) Non-Business (Property) FTCFTC
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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
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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)
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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
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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)]
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Investment Tax CreditsInvestment Tax Credits
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
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Investment Tax CreditsInvestment Tax Credits
Capital ExpendituresCapital Expenditures Credit Deducted From Capital Cost In Credit Deducted From Capital Cost In
The Following PeriodThe Following Period Lose CCALose CCA
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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
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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
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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
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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
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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
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