Transcript Computation of Taxable Income and Tax After General

1
Required texts
• Introduction to Federal Income Taxation in
Canada – 32nd Edition
• Ernst & Young Annotated Tax Act 8th
Edition
• Various CRA documents
• Various Supreme Court readings
2
Calendar
• Assignment 1 due February 7
• Assignment 2 due March 13
• Midterm exam February 14
3
Grading
•
•
•
•
•
•
Assignment 1: 10%
Assignment 2: 10%
Pop quizzes (x2): 10%
Midterm exam: 20%
Group presentation: 20%
Final exam: 30%
4
Computation of Taxable Income
and Tax After General
Reductions for Corporations
5
• No one likes taxes, and it’s a bit of a sport to
complain about how ridiculously high and
complex taxes are.
• Albert Einstein said of his tax return, “This is
too difficult for a mathematician. It takes a
philosopher.”
• If you are filing for a business in Canada, you
would be wrong. Actually, our business taxes
are relatively very low and the ease of filing is
among the best in the world.
6
Part 1
COMPUTATION OF TAXABLE
INCOME
7
Topics
• Computation of taxable income for a
corporation
– Taxable dividends
– Charitable donations
– Loss carryovers
– Acquisition of control
• Basic computations
• Tax deductions and credits
8
Overview
• Several deductions are available (Division B
Part I)
– Charitable donations
– Loss carryovers
– Intercompany dividends
• Tax is computed under Part I Division E
Subdivisions b and c
• M&P deduction
• Foreign tax credit
• Investment tax credit
9
Overview
• Aggregating formula
still applies
• Use of GAAP
– Some exceptions ie
amortization
– Corporation cannot
earn employment
income
– Very few items of
OTHER pertain to
corporations
Aggregating income
Sources of
income
Employment
$XXX
Business &
property
XXX
Capital gains &
losses
XXX
Other income
XXX
Other deductions
(XXX)
DIV B INCOME
$XXX
DIV C DED
(XXX)
Taxable income
$XXX
10
Deduction of taxable
dividends
• Certain dividends are deductible
– Taxable Canadian corporations
– Taxable subsidiary corporations resident in
Canada
– Non-resident corporations carrying on
business in Canada and therefore taxable in
Canada
– Foreign affiliates which have been
appropriately taxed in a foreign jurisdiction
which has a tax treaty with Canada
11
Purpose
• Eliminate double taxation
• Integration
– Dividend deduction is second building block
– Individuals gross-up and receive tax credit
– Corporations deduct
– Ideally to be indifferent
• Integration occurs where
– 20% tax rate for CCCP
– 29% for Canadian-resident corporations
12
Application
• Chain of three taxable
corporations:
• A owns 100% of B
which owns 100% of
C
• Tax rate is 35% and
shareholders taxed at
40%
• 45% gross up
Shareholders
Corporation
A
Corporation
B
Corporation
C
13
Without gross up
Person
Income
Tax
Dividend
C Ltd
1,000
350
650
B Ltd
650
228
422
A Ltd
422
148
274
386
42
(274 x DTC
1.41) 12.5%
232
Cash
received
Shareholder
of A Ltd
• Without the gross up
and deductions, a
total of $766 in tax is
paid on a $1,000
dividend
14
With gross up
Person
C Ltd
Income
Tax Dividend
1,000 350
650
B Ltd
650
0
650
A Ltd
650
0
650
Shareholder
of A Ltd
650
85
565
Dividend received
650
Gross up (1.41 x
650)
267
Grossed up div
917
Tax @ 40%
367
DTC
@(16.5%+12.5%) x
917
Net tax on S/H
(266)
101
15
Other dividend items
• Dividends paid from untaxed income
– Where accounting income is higher than taxable
income
• After tax financing
– Corporation with losses may not want debt financing
so pref shares are issued and dividends paid are not
taxed
• Dividends paid where shares sold subsequently
for a loss
– Dividends received and shares sold CL claimed
– Stop loss rules:
• Corporation owned shares for less than 365 days
• Corporation owned more than 5% of the issued shares of any
class
16
Charitable donations
• Individuals receive a non-refundable tax
credit
• Corporations are permitted a deduction
– Limited to 75% of the corporation’s net
income for tax purposes
– Unused donations can be carried forward five
years
17
Loss carryovers
• Rules for individuals
and corporations are
the same
Back
Net CL
Forward
3
Indefinite
- 3/23/04
3
7
- 12/31/05
3
10
1/1/06 +
3
20
Non CL
18
Non capital losses
Aggregate of
Losses from business
$XXX
Losses from property
XXX
ABIL
XXX
NCL prior year
XXX
Dividends deductible
under 112
XXX
$XXX
19
Non capital losses
Less aggregate of amounts under
par 3(c)
Income from business
$XXX
Income from property
(including 112
dividends)
XXX
Income from other
sources (56-59)
XXX
TCG other than LPP
XXX
Taxable net gains from
LPP
XXX
$XXX
20
Non capital losses
Less other items
Allowable CL other
than LPP
$XXX
Other deductions (6066)
XXX
Less farm loss
XXX
Non-capital loss
$XXX
21
Outcome
• The preceding definition is designed to
offset the current year losses from various
sources against current year income from
other sources
22
Example problem
• Operations of Bigloss
are shown to the right
• 2010 taxable income
was $40,000
• Compute the non
capital loss for 2010
and determine the
amount that can be
carried back to 2009
2010 operations
Business losses
Sec 112 dividends
Bond interest
(60,000)
10,000
5,000
ABIL
(3,000)
Taxable CG
15,000
Allowable CL
(7,000)
(40,000)
23
Solution part 1
• Before calculating the
non capital loss, we
need to review the
construction of
section 3 income
3(a)
3(b)
Business
NIL
Dividend
10,000
Interest
5,000
Net taxable
CG
Taxable
CG
15,000
Allow CL
(7,000)
3(c)
No sub e
3(d)
Business
loss
ABIL
Net
income
15,000
8,000
23,000
60,000
3,000
(63,000)
NIL
24
Solution part 1
• Before calculating the
non capital loss, we
need to review the
construction of
section 3 income
Non capital loss arising in 2010
Business
loss
60,000
ABIL
3,000
Dividends
10,000
73,000
Less Par
3(c)
Bond
interest
5,000
Dividends
10,000
Taxable
CG
15,000
Allow CL
(7,000)
15,000
8,000
50,000
25
Solution part2
• Total carryback as
follows
Lesser of
Non capital losses
50,000
Taxable income
40,000
26
Summary of rules
Type
Income applied
Back
Forward
Dividends
Any type
*
*
Donations
Any type
0
5
Net CL
Net taxable CG
3
Indefinitely
Non CL
Any type
3
7/10/20**
Restricted farm
losses
Farm income
3
10/20***
Farm losses
Any type
3
10/20***
*No carryover rules on dividends although they impact the calculation of
balances
**10 for tax years ending after 3/22/04 and 20 after 2005
***20 for years after 2005
27
Discussion problem
28
Walkthrough – 3a
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
29
Walkthrough – 3b and 3c
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
30
Walkthrough – 3d and 3e
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
31
Walkthrough – interco dividends
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
32
Walkthrough – charitable donations
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
33
Walkthrough – net cap loss
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
34
Walkthrough – non cap loss
Par. 3(a)
Income from business
Income from property
Par. 3(b)
Taxable capital gains
Allowable capital losses
Par. 3(c)
Par. 3(d)
Par. 3(e)
Sec. 112
Sec. 110.1
ABIL
Business loss
Income from Division B
Inter-company dividends
Charitable donations:(2)
Carryover
Current
Par. 111(1)(b)
Net capital losses(3)
Par. 111(1)(a)
Taxable income
Non-capital losses(4)
2007
$54,000
42,500
$96,500
11,000
(2,000)
2008
$32,000
22,500
$54,500
2,500
(2,500)(1)
2009
Nil
$18,000
$18,000
5,000
(3,500)
2010
$62,500
10,500
$73,000
9,000
Nil
$105,500
(3,750)
n/a
$101,750
(42,500)
$59,250
$54,500
n/a
n/a
$ 54,500
(22,500)
$32,000
$19,500
n/a
(75,000)
Nil
—
Nil
$82,000
n/a
n/a
$82,000
(10,500)
$71,500
n/a
(23,000)
$36,250
(9,000)
$27,250
(27,250)
Nil
—
(9,000)
$23,000
—
$23,000
(23,000)
Nil
—
—
Nil
(1,500)
Nil
—
Nil
(3,000)
(13,000)
$55,500
(500)
$55,000
(24,750)
$30,250
35
Acquisition of control
• When control acquired by another person
or group of persons, carryforwards and
carrybacks are restricted
– Net capital losses, losses from property and
ABIL that are unutilized at time of change
expire
• 50% or more must be acquired
36
Loss utilization strategies
• A Co has positive cash flow, B Co is loss.
– A buys B and restructures so that income is
generated in B
• Assets are transferred to B through rollover
provisions (discussed another day)
– A buys B and sets up intercompany
transactions (ie rent, management fees etc) to
create expenses in A and generate revenue in
B
• Need contracts – also include interest on
intercompany loans, commission contracts
37
Deemed year end
• Acquired corporation has a year end deemed to
occur immediately before the change in control
–
–
–
–
–
Filing requirements, loss carryovers, etc
May result in short tax year
Accrued or unrealized losses on inventory
Accrued or unrealized losses on accounts receivable
Accrued or unrealized losses on depreciable capital
property
– Accrued or unrealized losses on eligible capital
property
– Accrued or unrealized losses on non-depreciable
property
• Can elect for capital gains and recapture
38
The election
• Permitted for deemed disposition of
depreciable property or non depreciable
property for which there are capital gains or
recapture accrued
• Can designate an amount to trigger the gains
or recapture
– Designated amount is restricted to the lesser of
• FMV of the property
• Greater of
– ACB of the property
– Designated amount
• Forces an amount between FMV and ACB
39
Other expiries
• Charitable donation carryforwards
• ABILs
40
Deductibility after acquisition
• Requirement that the loss business be
carried on with a reasonable expectation
of profit
– The business that generated the losses must
be carried on throughout the year, AND
– The particular business must be carried on
for-profit or with a reasonable expectation of
profit
• Requirement that non-capital losses must
be applied only against income from the
same or similar products or services
41
Summary and application
• Net capital losses, ABILs, property losses
and unused charitable donations expire
• Accrued losses are deemed to be realized
• The streaming principle, which matches
losses from a business to income from a
similar business increases the likelihood
that noncapital losses and farm losses will
not be deductible within their respective
periods
42
Discussion 1
• Wonder Inc has a tax
return (see right) and
earned business
income of $1,000 per
month computed in
accordance with ITA.
On April 1, 2011, an
unrelated person
acquired 51% control.
• What are the tax
implications?
Balance
Year
Net capital
loss
8,000
2005
Non capital
loss
10,000
2006
43
Discussion 2
• On May 1, 2011 an
unrelated person
acquired 60% of the
voting shares of
Novell Inc. Which of
the losses must be
recognized by Novell
Inc for the deemed
year end?
Cost
UCC/CEC
FMV
Inventory
10,000
N/A
8,000
A/R
20,000
N/A
15,000
Equipment
30,000
28,000
12,000
Mktbl
securities
40,000
N/A
10,000
ECP
50,000
36,000
42,000
44
Solution
Cost
UCC/CEC
FMV
Recognized
Notes
Inventory
10,000
N/A
8,000
2,000 LCM
A/R
20,000
N/A
15,000
5,000 AFDA
Equipment
30,000
28,000
12,000
Mktbl
securities
40,000
N/A
10,000
ECP
50,000
36,000
42,000
TOTAL
16,000 Reduction
treated as
CCA
Deemed
capital loss in
deemed year
end (30,000 x
½)
4,500 ¾ x 42,000
27,500
45
Computation of tax for all
corporations
Part 2
46
Objective of provisions
• Alleviation of multiple taxation
• Prevent avoidance of tax through the use of a
corporation
– Dividend stripping
– Capital gains stripping
• Create tax incentives to certain types of
corporations
– Small business deduction
– Manufacturing and processing profits deduction
– SR&ED
47
Types of corporations
• Private corporations
• Canadian Controlled Private Corporation
• Public corporation
48
Canadian Corporations
Resident in Canada
CCPC
•Subsection 125(7)
•Private company
•Not controlled by a nonresident or a public
company
Private
•Subsection 89(1)
•Not controlled by a public company
Public
•Subsection 89(1)
•Publicly listed shares
49
General rates for
corporations
• General federal rate
– Subject to modification depending on the type of
corporation
– Basic rate is 38%
– Tax reduction of 10% for provincial rates
• Effect of provincial rates
– Each province has their own rates (2.5% to 16%)
• Effect of corporation type
– Will vary the rate between 22.0% to 35.5%
• General rate reduction
– 11.5%
50
Summary of rates
2008
Basic
Abatement
GRR
2009
2010
2011
2012
38.00
38.00
38.00
38.00
38.00
(10.00)
(10.00)
(10.00)
(10.oo)
(10.00)
(8.50)
(9.00)
(10.00)
(11.50)
(13.00)
19.50
19.00
18.00
16.50
15.00
51
Hypothetical tax rates
Basic federal rate
38.00%
Federal abatement for provincial tax
(10.00)
Net federal tax
28.00%
Federal tax reduction for 2011
(11.50)
Net federal tax
16.50%
Provincial tax (assumed)
Effective total tax
13.00
29.50%
52
Example
53
Example
54
How to do it – step 1
Income under Division B:
Operating profits
Dividends from taxable Canadian corporations
Canadian investment income (i.e., interest income)
Foreign investment income ($61,000 + $10,000)
$500,000
85,000
52,500
71,000
$708,500
• Determine the Division B income before
donations
55
How to do it – step 2
Income under Division B:
Operating profits
Dividends from taxable Canadian corporations
Canadian investment income (i.e., interest income)
Foreign investment income ($61,000 + $10,000)
Add:
Division B income
donations
$500,000
85,000
52,500
71,000
$708,500
9,755
$718,255
• Now add in donations – remember the
restriction on donations…
56
How to do it – step 3
Income under Division B:
Operating profits
Dividends from taxable Canadian corporations
Canadian investment income (i.e., interest income)
Foreign investment income ($61,000 + $10,000)
Add:
donations
Division B income
Less:
Division C deductions:
Taxable dividends deductible under sec. 112
Donations (max. 75% of $718,255 = $538,691)
Non-capital losses
Taxable income
$500,000
85,000
52,500
71,000
$708,500
9,755
$718,255
$85,000
9,755
255,545
(350,300)
$367,955
• Deductions as required – ie dividends,
donations, and capital losses (if any)
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How to do it
Taxable income
Federal tax (38% of $367,955)
Federal abatement (10% of $367,955)
Federal tax after abatement
Less:
M&P profits deduction
Foreign non-business tax credit(1)
Tax rate reduction(2)
Federal tax before investment tax credit
Investment tax credit (10% of $250,000)
Part I federal tax payable
New Brunswick tax @ 13% of $367,955
Total tax liability
$367,955
$139,823
(36,796)
$103,027
$36,796
10,000
Nil
(46,796)
$56,231
(25,000)
$31,231
47,834
$79,065
• Calculate the taxes
• A lot simpler than personal!
• Note M&P rather than SBD – calculated
first – info given in problem
58
How to do it
Income under Division B:
Operating profits
Dividends from taxable Canadian corporations
Canadian investment income (i.e., interest income)
Foreign investment income ($61,000 + $10,000)
Add:
donations
Division B income
Less:
Division C deductions:
Taxable dividends deductible under sec. 112
Donations (max. 75% of $718,255 = $538,691)
Non-capital losses
Taxable income
Federal tax (38% of $367,955)
Federal abatement (10% of $367,955)
Federal tax after abatement
Less:
M&P profits deduction
Foreign non-business tax credit(1)
Tax rate reduction(2)
Federal tax before investment tax credit
Investment tax credit (10% of $250,000)
Part I federal tax payable
New Brunswick tax @ 13% of $367,955
Total tax liability
$500,000
85,000
52,500
71,000
$708,500
9,755
$718,255
$85,000
9,755
255,545
$36,796
10,000
Nil
(350,300)
$367,955
$139,823
(36,796)
$103,027
(46,796)
$56,231
(25,000)
$31,231
47,834
$79,065
59
Two things to note
Foreign non-business tax credit(1)
10,000
(1)Foreign non-business tax credit
Lesser of:
(i) Amount paid
(ii)
$71,000
 $103,027
$718,255  $85,000
$10,000
$11,551
60
Two things to note
Tax rate reduction(2)
Nil
(46,796)
(2) Tax reduction
Taxable income
$367,955
Less: M&P profits
(367,955)
Net
Nil
• There is no additional deduction available
– all income is M&P
61
Applicable income tax
regulations
• Part IV defines prescribed method for
income earned in a province
• Aggregate income earned in each
province
62
Permanent establishment
• Fixed place of business that includes:
•
•
•
•
•
•
•
Office
Mine or oil well
Farm
Timber land
Factory
Workshop
Warehouse
• Or a place where an employee or agent:
• Has authority to contract for his or her employer or
principal, or
• Who has a stock of merchandise owned by his or her
employer or principal from which he or she regularly
fills orders which he or she receives
63
Permanent establishment
• Business dealings through a commission
agent, broker or other independent agent,
or maintenance of an office solely for the
purchase of merchandise does not mean
that there is a permanent establishment
• Use of substantial equipment or machinery
constitutes permanent establishment
• Ownership of land
64
Permanent establishment
• MNR v Panther Oil and Grease
Manufacturing Co of Canada Ltd:
• Taxpayer had a factory in Ontario and maintained a
sizable sales force throughout Canada under direction
of sales managers who operated under division
managers. Most orders filled from Ontario. Quebec
division manager maintained office in home.
• It was held that the organization of the sales force in
Quebec constituted a branch in the office and district
managers constituted agencies of the company.
• Stock of merchandise from which orders were filled
qualified as a permanent establishment.
65
Discussion
• Taxpayer corporation had head office in Ontario
• Manufactured electrical appliances sold exclusively to
wholesalers throughout the country.
• Employed a sales representative and junior salesmen
– Sales rep had no authority to accept orders – sent to office
– Quebec rep maintained office in home although no
agreement to do so. Company provided him with
stationery, literature, price sheets etc and samples of
product. Office used for training and for taking orders
• Maintained stock of appliances for 6 months in rented
warehouse space in Montreal and filled Quebec orders
from this stock.
• Is there a permanent establishment?
66
Discussion
• Need to look at definition:
• Must carry on business etc where authority to
contract or has stock of merchandise.
• Did sales rep have authority to accept orders?
• Orders were filled from head office in Ontario
• Did company meet Regulation that refers to use of
substantial machinery and equipment?
• Did company have fixed place of business?
– Office was not an office of the company
• Did facility have a warehouse?
67
Discussion
• Based on the facts, the company does not
have a permanent establishment in
Quebec
68
Taxable income earned in a
province or territory
• Determine if permanent establishment
applies
• Portion of income is attributed to that
province
– Based on salaries and gross revenues in a
particular province
• Taxpayer must first determine gross revenue
for the year attributable
• Aggregate of salaries and wages paid in the
year to employees in a particular jurisdiction
69
Example
• Barry and the Wild
Bunch Limited has a
head office in Ottawa
and permanent
establishments in New
Brunswick, Quebec,
and the United States.
• Taxable income is
$325,000
• What is taxable income
attributed to each
jurisdiction and
calculate the
abatement
Gross
revenue
Salaries
and
wages
780,000
130,000
New
Brunswick
2,340,000
520,000
Quebec
2,600,000
585,000
390,000
65,000
6,110,000
1,300,000
130,000
0
6,240,000
1,300,000
Ontario
US
TOTAL
Dividends
not attrib.
GROSS
70
Example
First, compute the proportion of
taxable income to each province as
follows
Gross revenue
Salaries
$
%
$
%
average
ON
780,000
12.8
130,000
10.0
11.4
NB
2,340,000
38.3
520,000
40.0
39.2
QC
2,600,000
42.6
585,000
45.0
43.8
Sub
5,720,000
93.7
1,235,000
95.0
94.4
390,000
6.3
65,000
5.0
6,110,000
100.0
1,300,000
100.0
US
total
71
Example
Second, allocate the taxable
income to each province
%
$
Allocated
ON
11.4
325,000
37,050
NB
39.2
325,000
127,400
QC
43.8
325,000
142,350
Total
306,800
72
Example
Third, calculate the abatement
ON
%
$
Allocated
10.0
306,800
30,680
73
Tax deductions/credits
• Manufacturing and Processing Profits
deduction
• Foreign Tax deduction
• Federal Political Tax Credit
• Investment Tax Credit
• ITC for Apprenticeship Expenditures
• ITC for Child Care Spaces
74
Investment tax credit
• Introduced in 1975 as a temporary
measure to stimulate new investment in
Canada
– Now comprised of SRED, apprenticeship job
training and child care spaces
• Application of specified percentage
• Refer to additional reading online
75
Computation
• Use of specified
percentages
• Cost reduced by
government
assistance received
Atlantic
provinces
and
Gaspe
Balance of
Canada
10%
0%
Qualified SRED
20
20
Apprenticeship
10
10
Child care
25
25
Qualified
property
76
Qualified Scientific
Research expenditure
• SRED are very generously treated.
– Potential 100% writeoff of equipment
– 20% ITC available
– Additional provincial incentives for SRED
• Qualified SRED
– New property, current expenditures, capital
expenditures
– Excludes buildings and leasehold interests as
well as rental for buildings
77
ITC for Apprenticeship
expenses
• Encourage employers to hire new
employees in eligible trades
• Non-refundable tax credit of 10% of
salaries and wages paid in the first 24
months
• Profit sharing, bonuses, benefits and stock
options are excluded
• Maximum claim of $2,000 per employee
78
ITC for child care expenses
• For taxpayers other than child care providers
• Available for businesses that create child care for
their employees
• Lesser of
• $10,000
• 25% of taxpayers eligible expenses in respect of the child
care space
• Specified child care start up costs:
• Cost of depreciable property excluding vehicles or property
attached to a residence
• Landscaping to create outdoor play area
• Initial fees for licencing etc
• Architectural fees for designing the facility
• Children’s educational material
79
•
•
•
•
•
To be continued
Next class (January 24):
Problem 3
Problem 6
Problem 9
80