Commerce 619 - Pearson Education Canada
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Transcript Commerce 619 - Pearson Education Canada
Chapter 15
Taxable Income And Tax Payable For
Corporations
Computation Of Net Income –
Schedule 1
Accounting Net Income
Additions
Deductions
Net Income For Tax Purposes
© 2007, Clarence Byrd Inc.
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Additions
1. Amortization, Depreciation, and
Depletion
2. Recapture Of CCA
3. Reserves Deducted In Prior Years
4. Losses On Dispositions Of Capital
Assets (Accounting Amounts)
© 2007, Clarence Byrd Inc.
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Additions - Continued
5. R&D (Accounting Amounts)
6. Warranty Costs (Accounting
Amounts)
7. Debt Discount Amortization
8. Foreign Taxes Paid
(Accounting Amounts)
© 2007, Clarence Byrd Inc.
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Additions - Continued
9.
Excess Of Taxable Capital
Gains Over Allowable
Capital Losses
10. Income Tax Expense
11. Interest And Penalties On
Income Tax Assessments
12. Automobile Costs (NonDeductible)
© 2007, Clarence Byrd Inc.
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Additions - Continued
13. 50% Of Business Meals
14. Club Dues And Cost Of
Recreational Facilities
15. Non-Deductible Accounting
Reserves
16. Political Contributions
© 2007, Clarence Byrd Inc.
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Additions - Continued
17. Charitable Donations
18. Asset Impairment WriteDowns
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Deductions
1.
CCA
2. CEC
3. Terminal Losses
4. Deductible Reserves
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Deductions
5. Gains On Dispositions Of Capital
Assets (Accounting Amounts)
6. Deductible R & D Costs
7. Deductible Warranty Costs
8. Debt Premium Amortization
© 2007, Clarence Byrd Inc.
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Deductions - Continued
9. Foreign Non-Business Tax
Deduction – ITA 20(12)
10. Allowable Business Investment
Losses
© 2007, Clarence Byrd Inc.
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Corporate Taxable Income
Deductions Not Available To
Corporations
Lifetime Capital Gains Deduction
Employee Stock Option Deduction
Home Relocation Loan Deduction
Northern Residents Deductions
Social Assistance And Workers’
Compensation
© 2007, Clarence Byrd Inc.
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Corporate Taxable Income
Deductions Available To
Corporations
Losses (Same as for individuals)
Charitable Donations (A
deduction rather than a credit)
Dividends (Unique to
corporations)
© 2007, Clarence Byrd Inc.
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Dividends - The Problem
Corporate Tax Rate = 40%
AALtd.
Ltd.
$1,000
B Ltd.
C Ltd.
$600
$360
© 2007, Clarence Byrd Inc.
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Dividends From Untaxed Income
Corporation Taxed At 20% On $100
Individual Pays $24 [(30%)($100 - $20)]
Total = $44 = ($20 + $24)
Corporation Not Taxed
Individual Pays $30 [(30%)($100)]
Total = $30 < $44 When Corporation
Taxed
© 2007, Clarence Byrd Inc.
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Dividends On Preferred Shares
Debt At 10%
Cost Of Capital If Corporation Taxed = 6%
Cost Of Capital If Corporation Not Taxed = 10%
Preferred Shares At 8%
Redeemable/Retractable Preferred
Accounting may treat as debt
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Stop Loss Rules
The Scenario
Acquire At $10 On June
30
Receive $1 Dividend On
July 1
Sell At $9 On July 2 for
loss of $1
Anti-Avoidance: Loss
Disallowed Unless:
© 2007, Clarence Byrd Inc.
Own 365 Days; And
Corporation Owns No
More Than 5% Of Payor
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Acquisition Of Control
- The Problem
Profit
Loss
Company
Company
Acquisition
Loss Transferred To Profit Company
© 2007, Clarence Byrd Inc.
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Meaning Of
Acquisition Of Control
Control: Ownership of shares
that carry the right to elect a
majority of the board of
directors.
Common Scenario: One
person acquires shares from a
different arm’s length person.
© 2007, Clarence Byrd Inc.
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Meaning Of
Acquisition Of Control
Can also occur through redemption of shares
A owns 60 percent – B owns 40 percent – If all of A’s
shares were redeemed, B would have acquired control.
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Deemed Year End - ITA 249(4)
Example: Dec. 31 year end,
acquisition on June 30, 2007
Deemed New Year End
June 30, 2007
Keep Old Year End
Allowed To Establish New
Year End
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Deemed Year End - ITA 249(4)
Usual Year End Procedures
File Return
Value Inventories
Short Fiscal Period
CCA Calculations
Annual Business Limit
Counts Towards Loss Expiry
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Acquisition Of Control
Net Capital Losses And
Allowable Business
Investment Losses – ITA
111(4)(a) & (b)
Unused Carry Forwards
Die
New Losses Cannot Be
Carried Back
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Acquisition Of Control
Non-Capital Losses - 111(5)
Can Be Carried Forward
Subject To Restrictions
Must Carry On Business In Which
Losses Occurred
Reasonable Expectation Of Profit
Can Only Be Applied Against
Income Generated By The Same Or
A Similar Line Of Business
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Accrued Losses
Inventories
Normal Year End
Procedures
Accounts Receivable 111(5.3)
Maximum Write-Off
Required
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Accrued Losses
Depreciable Property
Asset Cost = $100,000
UCC
= $ 60,000
FMV
= $ 50,000
ITA 111(5.1)
Write Down To $50,000
The $10,000 Is Deemed CCA
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Accrued Losses
Eligible Capital Property 111(5.2)
CEC > 3/4 FMV
Write Down
ITA 20(1)(b) Deduction
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Accrued Losses
Non-Depreciable Property 111(4)(c) & (d)
ACB > FMV
Write Down
Capital Loss (Will disappear if not
used at deemed year end.)
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ITA 111(4)(e) Election
General Rule
Can elect between ACB and FMV
FMV > ACB: Creates Capital Gain
May also create recapture (Can’t avoid if you want
the capital gain.)
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ITA 111(4)(e) Election
Case 1
Capital Cost = $ 50,000
FMV = 100,000
UCC = 20,000
Elect $100,000
Capital Gain
Recapture
New Cap. Cost
New UCC
$ 50,000
30,000
100,000
75,000
[$50,000 + (1/2)($100,000 - $50,000)]
© 2007, Clarence Byrd Inc.
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ITA 111(4)(e) Election
Case 2
ACB = $ 50,000
FMV = 30,000
UCC = 20,000
Elect $30,000
Capital Gain
Recapture
New ACB
New UCC
$ Nil
10,000
30,000
30,000
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ITA 111(4)(e) Election
Case 3
ACB = $ 50,000
FMV = 5,000
UCC = 20,000
Write down to $5,000 is
required by 111(5.1)
The $15,000 is deemed CCA
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Profits In The Loss Business
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
© 2007, Clarence Byrd Inc.
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Non-Capital Loss Carry Overs
Example
Business Losses
Dividends Received
Bond Interest
ABIL
Taxable Capital Gains
Allowable Capital Losses
Total
© 2007, Clarence Byrd Inc.
($60,000)
10,000
5,000
( 3,000)
15,000
( 7,000)
($40,000)
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ITA 3 Rules
3(a) Non-Capital
3(b) Net Capital
3(c) Sum
3(d) Non-Capital
Net Income
$15,000
8,000
$23,000
( 63,000)
Nil
Net Capital Loss Carry Over Of $8,000 Available
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Alternatives
No Net Capital Loss Deduction
Net Capital Loss Deduction Of
$8,000
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Alternative 1 - Non-Capital Loss
With No Net Capital Deduction
Part E:
Business Loss
ABIL
Dividends
$60,000
3,000
10,000
$73,000
Part F:
ITA 3(c)
( 23,000)
Non-Capital Loss
$50,000
© 2007, Clarence Byrd Inc.
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Alternative 2 - Non-Capital Loss With
Net Capital Deduction Of $8,000
Part E:
Business Loss
ABIL
Dividends
Net Capital Loss
$60,000
3,000
10,000
8,000
$81,000
Part F:
ITA 3(c)
( 23,000)
Non-Capital Loss
$58,000
© 2007, Clarence Byrd Inc.
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Ordering Of Taxable Income
Deductions
Timing
Oldest must be used before
others of same type
No other restrictions on order
Type
Restricted By Income Type
Restricted By Time
© 2007, Clarence Byrd Inc.
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Geographical Allocation
Permanent Establishments – ITR 400(2)
Activity: Permanent Establishments
Fixed Place Of Business
Stock Of Inventories, Land, Equipment
Gross Revenues
Salaries And Wages
Procedures
A Simple Average
No Weighting
© 2007, Clarence Byrd Inc.
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Gross Revenues
P ro v in c e
A m ount
P e rc e n t
$ 2 5 0 ,0 0 0
2 5 .0
M a n ito b a
4 0 0 ,0 0 0
4 0 .0
O n ta rio
3 5 0 ,0 0 0
3 5 .0
$ 1 ,0 0 0 ,0 0 0
1 0 0 .0
A lb e rta
T o ta ls
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Salaries And Wages
Province
Amount
Percent
$100,000
20.0
Manitoba
200,000
40.0
Ontario
200,000
40.0
$500,000
100.0
Alberta
Totals
© 2007, Clarence Byrd Inc.
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Allocation To Provinces
P ro v in c e
A v e ra g e T a x a b le
P e rc e n t
In c o m e
A m ount
A llo c a te d
A lb e rta
2 2 .5 $ 1 0 0 ,0 0 0
M a n ito b a
4 0 .0
1 0 0 ,0 0 0
4 0 ,0 0 0
O n ta rio
3 7 .5
1 0 0 ,0 0 0
3 7 ,5 0 0
T o ta l
$ 2 2 ,5 0 0
$ 1 0 0 ,0 0 0
© 2007, Clarence Byrd Inc.
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Federal Tax Payable
Basic Rate - ITA 123(1)
Federal Tax Abatement - ITA
124(1)
10% Of Taxable Income Earned In A
Province
Surtax - ITA 123.2
38% Of Taxable Income
Use 4% Of 28% Of Taxable Income
Repealed as of 2008
General Rate Reduction
7% Of Full Rate Taxable Income
© 2007, Clarence Byrd Inc.
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Provincial Corporate Rates
General (%)
Alberta
British Col.
Nova Scotia
Ontario
Quebec
10.0
12.00
16.00
14.00
9.90
Small Business (%)
© 2007, Clarence Byrd Inc.
Alberta
British Col.
Nova Scotia
Ontario
Quebec
3.00
4.50
5.00
5.50
8.50
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Tax Payable With
$100,000 Taxable Income
Basic At 38% Of $100,000
Abatement At 10% Of $100,000
Surtax At 4% Of $28,000
GRR At 7% Of $100,000
Total Federal Tax
Provincial At 15% Of $100,000
Total (Rate = 37.12%)
© 2007, Clarence Byrd Inc.
$38,000
( 10,000)
1,120
( 7,000)
$22,120
15,000
$37,120
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Objectives Of Corporate
Taxation
1. Avoid Double Taxation
2. Prevent Avoidance Through
Corporation
Corporation Gets Dividend Deduction
Individual Gets Gross Up And Credit
Corporation: Prevent Capital Gains From
Becoming Dividends
Individual: Prevent Dividends From
Becoming Capital Gains
3. Providing Incentives
Small Business Deduction
M&P, ITCs, SR&ED
© 2007, Clarence Byrd Inc.
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Small Business Deduction (SBD)
Objectives
© 2007, Clarence Byrd Inc.
Relief To Small Business
Encourage Active
Business Income
Provide For The
Accumulation Of Capital
In A New Business
47
Basic Concepts
Canadian Controlled Private
Corporation (CCPC)
Active Business Income
Annual Business Limit
2007 and subsequent - $400,000
Associated Companies
Must share the $400,000 limit
© 2007, Clarence Byrd Inc.
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SBD Example With $100,000 Of
Taxable Income
Federal Tax At 38%
Federal Tax Abatement
Tax Before Surtax
Federal Surtax
Tax Before SBD
SBD At 16%
Federal Tax
Provincial Tax At 5%
Total Tax Payable
© 2007, Clarence Byrd Inc.
$38,000
( 10,000)
$28,000
1,120
$29,120
( 16,000)
$13,120
5,000
$18,120
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Property Income
The Problem
The Solution
Interest and rent may involved an
active business
Specified Investment Business
does not get SBD
Excludes businesses with 5 or
more full time employees
Incidental Property Income
Treated As Active Business
Income
© 2007, Clarence Byrd Inc.
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© 2007, Clarence Byrd Inc.
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Related Individuals - 251(2)(a)
Individual
© 2007, Clarence Byrd Inc.
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Other Definitions
Related Corporations
One Corporation - ITA 251(2)(b)
Two Corporations - ITA 251(2)(c)
Control - 256(1.2)(c)
More Than 50% FMV - All Shares
More Than 50% FMV - Voting Shares
Group – 256(1.2)(a)
Specified Class - 256(1.1)
© 2007, Clarence Byrd Inc.
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Other Definitions
Deeming Rules
ITA 256(1.2)(d) – Holding Companies
ITA 256(1.3)
Children under 18
ITA 256(1.4)
Shareholder of holding company is deemed to own held shares.
Options to own
Right to force redemption or cancellation
ITA 256(2)
A associated with B
C associated with B
A and C have deemed association
© 2007, Clarence Byrd Inc.
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Association Rules
ITA 256(1)(a) one of the corporations controlled, directly or
indirectly in any manner whatever, the other;
More than 50%
Company A
Company B
© 2007, Clarence Byrd Inc.
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Association 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;
Ms. Smith
More than 50%
More than 50%
Company A
Company B
© 2007, Clarence Byrd Inc.
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Association 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;
Mrs. Smith
Mr. Smith
More than 50%
More than 50%
Not less than 25%
Company A
Company B
© 2007, Clarence Byrd Inc.
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Association 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;
Mrs. Goh
Mr. Goh’s Brother
Mr. Goh
More than 50%
More than 50%
Not less than 25%
Company A
Company B
© 2007, Clarence Byrd Inc.
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Association 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;
Mr. Fortin
Mrs. Fortin
Mr. Brown
Mrs. Brown
More than 50%
More than 50%
40%
Company A
Company B
© 2007, Clarence Byrd Inc.
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Calculating The SBD
ITA 125(1) Specifies The Deduction As
16% Of The Least Of:
Net Canadian Active Business Income
Taxable Income, Less:
10/3 Times The Foreign Non-Business
Income Tax Credit Without Consideration
Of The ART Or The GRR; And
3 Times The Foreign Business Income Tax
Credit Without Consideration Of The GRR
The Annual Business Limit ($400,000), Less
Any Portion Allocated To Associated
Corporations.
© 2007, Clarence Byrd Inc.
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Elimination Of SBD For Large
Corporations
Reduction = (A)(B/$11,250), where
A Is The Corporation’s Annual Business Limit
B is .225% Of The Excess Of Taxable Capital
Employed In Canada (TCEC) over $10,000,000
When TCEC = $10,000,000: no reduction
When TCEC = $15,000,000: reduction = 100%
© 2007, Clarence Byrd Inc.
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Elimination Of SBD For Large
Corporations
Taxable Capital Employed In Canada
GAAP determined debt and equity capital of the corporation,
less debt and equity investments in other corporations. When
not all of the corporation’s Taxable Income is allocated to a
province, the resulting amount is multiplied by the same
percentage that is applied to the abatement in order to determine
the portion of the total capital that is employed in Canada.
© 2007, Clarence Byrd Inc.
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Personal Services Corporations
The Problem
Individual establishes a corporation
to provide employee type services
The Solution
Personal services corporations are
not eligible for the SBD
Can only deduct salaries and other
expenses that would be available to
an employee
© 2007, Clarence Byrd Inc.
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Management Companies
Objective
Organized to provide services to an
unincorporated business (usually a
professional practice)
Eligible for small business
deduction provided markup is
reasonable (15%)
© 2007, Clarence Byrd Inc.
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Professional Corporations
Several provinces now permit
professionals (e.g., accountants)
to incorporate
This has reduced the need for
management companies
In general, eligible for the SBD
© 2007, Clarence Byrd Inc.
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Manufacturing And Processing
Profits Deduction
General Rules
Tax Credit
Only On M&P Income
A 7% Reduction In Tax Payable
Does not get 7 percent general
rate reduction.
Only beneficial at provincial
level and for CCA classes
© 2007, Clarence Byrd Inc.
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M&P Deduction – Example
Tax At 38% ($100,000)
Abatement At 10%
GRR
Net After Abatement
Surtax At 4%
M & P At 7%
Net Federal Tax
Provincial At 15%
Effective Total Tax
© 2007, Clarence Byrd Inc.
$38,000
( 10,000)
Nil
$28,000
1,120
( 7,000)
$22,120
15,000
37,120
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Calculation - ITA 125.1(1)
Tax Credit = 7% of the lesser of:
M & P Profits (ITR), Less Amounts
Eligible For The SBD
Taxable Income, Less
SBD Amount
3 Times The Foreign Business Income
Tax Credit
Aggregate Investment Income Under
129(4) – Interest + Taxable Capital
Gains +Rents – Net Capital Losses
Deducted (No Dividends)
© 2007, Clarence Byrd Inc.
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M&P Deduction
Eligibility
10 Percent Of Gross
Revenues From M&P
Activities
Meaning Of M & P
ITA 125.1(3) - Definition
ITA 125.1(3) - Excluded
Activities
See Also IT-145R
© 2007, Clarence Byrd Inc.
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M&P Formula
[
Adjusted Active
Business Income
]
( 100 / 75 M & P Labour Costs ) + (100/85 M & P Capital Costs
( Total Labour Costs ) + ( Total ABI Capital Costs
)
)
All Items Defined In ITR5200
© 2007, Clarence Byrd Inc.
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General Rate Reduction
2007: 7% of full rate taxable income
7.5% for 2008
8.0% for 2009
9.0% for 2010
9.5% for 2011 and subsequent
© 2007, Clarence Byrd Inc.
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Application TO CCPCs
Taxable Income Reduced By:
Income Eligible For The SBD
Income Eligible For The M&P Deduction
100/16 Of The Small Business Deduction
100/7 Of The M&P Deduction
Aggregate Investment Income Under ITA 129(4)
© 2007, Clarence Byrd Inc.
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Application TO Non-CCPCs
Taxable Income Reduced By:
Income Eligible For The M&P Deduction
100/7 Of The M&P Deduction
© 2007, Clarence Byrd Inc.
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Foreign Tax Credits
Basic Concepts
Gross pre-withholding amounts
included in income
Tax credit for withholding
Withholding rate established by
treaty
© 2007, Clarence Byrd Inc.
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Non-Business (Property) FTC
Lesser Of:
Actual Foreign Non-Business Income Tax Paid
And An Amount Determined By:
Foreign Non Business Income
Adjusted Division B Income
Tax Otherwise Payable
© 2007, Clarence Byrd Inc.
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Non-Business (Property) FTC
Adjusted Division B
Income
Tax Otherwise Payable
Net Income, Less
Net Capital Loss
Carry Overs Deducted
111(1)(b)
Dividends Deducted
© 2007, Clarence Byrd Inc.
Basic + Surtax, Less
Abatement
ITA 123.3 (ART)
ITA 123.4 (GRR)
76
Non-Business (Property) FTC
If actual withholding exceeds limit:
No Carry Forward
Excess Can Be Deducted
Under ITA 20(12)
© 2007, Clarence Byrd Inc.
77
Business FTC
Least Of
Actual Foreign Business Income Tax Paid
An Amount Determined By:
Foreign Business Income
Adjusted Division B Income
Tax Otherwise Payable
Tax Otherwise Payable, Less Non-Business FTC
© 2007, Clarence Byrd Inc.
78
Business FTC
Adjusted Division B
Income
Tax Otherwise Payable
Net Income, Less
Net Capital Loss
Carry Overs Deducted
111(1)(b)
Dividends
© 2007, Clarence Byrd Inc.
Basic + Surtax, Less
No Abatement
ITA 123.3 (ART)
ITA 123.4 (GRR)
79
Business FTC
Additional Rules For
Unused Amounts
© 2007, Clarence Byrd Inc.
Carry Back 3 Years
Carry Forward 10 Years
Only Applies To
Incorporated Foreign
Income
80
Investment Tax Credits
Credit Vs. Deduction
Value Of Credit = 100%
Value Of Deduction = [(100%)(t)]
© 2007, Clarence Byrd Inc.
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Investment Tax Credits
Current Expenditures
Credit Deducted From Expenditures
Lose Deduction
Used In Current Period (Generally)
One Year Delay For SR&ED
© 2007, Clarence Byrd Inc.
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Investment Tax Credits
Capital Expenditures
Credit Deducted From Capital Cost In The
Following Period
Lose CCA
© 2007, Clarence Byrd Inc.
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Eligible Property
Eligible Assets
Qualified Property
Qualified SR&ED
Salaries of an eligible
apprentice
Costs of creating child
care spaces
© 2007, Clarence Byrd Inc.
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Rates
Qualified Property - 10%
SR&ED (CCPC)
SR&ED (Non-CCPC)
20%
Apprentice Salaries
$2 Million At 35%
Excess At 20%
10% On Maximum of $2,000
Child Care Spaces
Lesser of $10,000 and 25 percent of the costs for each
space
© 2007, Clarence Byrd Inc.
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Refundability
General Rules
No Tax Payable
Can’t Use Credits
Government Writes Cheque To The Business
© 2007, Clarence Byrd Inc.
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Refundability
Current SR&ED
100 Percent On Current Amounts
That Qualify For The Extra 15%
40 Percent On Other Current
SR&ED
Other (Including SR&ED
Capital Expenditures
40 Percent For CCPCs and
Individuals
No Upper Limit
© 2007, Clarence Byrd Inc.
87
Carry Overs
Back Three Years
Forward Twenty Years
Must Take All Other
Credits For The Year
And Reduce Tax Payable
To Nil
© 2007, Clarence Byrd Inc.
88
© 2007, Clarence Byrd Inc.
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