Ch - Corporate Tax introduction. 12 Taxable Income and Tax Payable for Corporations I. Calculation of Net Income For Tax Purposes and Taxable Income – Corporations follow the applicable ordering rules of Section 3 in computing NITP Net Income for Tax Purposes Less: Div C deductions Taxable Income Most of the Div. C deductions for corporations are DIFFERENT from the Div. C deductions for individuals. Div C deductions for Corporations: 1. Charitable donations 2. Dividends received from taxable Canadian corporations 3. Use of loss carryovers from subsequent or prior taxation years 1) Charitable donations For individuals tax credit – For corporations deduction to get to Taxable Income – For both – limited to 75% of NITP, 5 year CF of unused amounts 2) Dividends received from taxable Canadian corporations ITA 112(1) or foreign affiliates ITA 113(1) ( foreign company where taxpayer and related parties own more than 10% of the shares). – are deducted to get to Taxable Income (therefore, NO IMPACT ON TAXABLE INCOME) – Why? – Gross-up of dividends? – Ch 7 dividend > integration Sole proprietorCorporation 1 level of tax1 level of tax Another level of tax as a dividend to the man 3) Loss carryovers from subsequent or prior taxation years – Same rules as for individuals II. Corporate Tax Rate Depends on: 1) type of corporation 2) Type of income the corporation has 2 broad categories of “Taxable Canadian Corporations” Public Corporation – ITA 89(1) Private Corporations – ITA 89(1) -resident in Cda, listed on a prescribed stock – resident in Cda, not a public corporation, exchange in Canada not controlled by public corporations CCPC – ITA 125(7) -private corporation other than one controlled by non-resident persons/ public corporation
III. Components of Federal Corporate Tax Rate – 2012 The Federal corporate tax rate is composed of: Basic Federal Rate(38%) – Abatement(10%) – General Rate Reduction (13%) – Small Business Deduction (17%) + Additional Refundable Tax (6%) Federal Tax Rate Basic Federal Rate Abatement1 less: General Rate Reduction2 less: SBD3. on ABI add: Additonal Refundable Tax FederalTax Public Private CCPC BC Tax Rates Combined Rates Higher Note: The Feb. 19, 2013 BC Budget announced that the general corporate income tax will increase to 11% effective April 1, 2013. 5 Abatement – ITA124(1) – Deduction from corporate tax There may be deducted from the tax otherwise payable by a corporation under this Part for a taxation year an amount equal to 10% of the corporation’s taxable income earned in the year in a province. – Abatement is applicable to income earned in Canada. – Foreign business income is not earned in a province, therefore, abatement is reduced pro rata 2General Rate Reduction percentage – applied to “full rate taxable income”. Ie) income that does not benefit from the 1) Small Business Deduction 2) Manufacturing & Processing Deduction ) refundability of certain types of taxes on investment income of private companies 2012 and subsequent – 13% 3 Small Business Deduction (see below) 4Refundable when the CCPC pays a taxable dividend (will discuss in Ch. 13) 7 IV. Small Business Deduction (“SBC”) – Deduction against taxes payable of a CCPC to provide tax relief – Calculated as follows: SBD = 17 % of the least of : 1) Net Canadian active business income. 2) Taxable income, less: i) 100/28 * FTC (foreign tax credits) on foreign non-business income ii) 4 * FTC on foreign business income ) Annual business limit of $500,000, less any portion allocated to associated corporations Pizza company 1 = 500,000 want to grow to 700,000 Start pizza company 2 = 200,000 Notes: 1) A corporation must be a CCPC throughout the year to qualify for the SBD 2)
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Deduction is on income that qualifies as “Active Business Income” (“ABI”). ABI is defined as income from a business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade. 8 Specified Investment Business” means a business the principal purpose of which is to derive income (including interest, dividends, rents, and royalties) from property unless the corporation employs in the business throughout the year more than 5 full-time employees “Personal Services Corporation” means a business of providing services where a) An individual who performs services on behalf of the corporation (incorporated employee), or (only person that works at the company) b) Anyone related to the incorporated employee is a specified shareholder (owns > 10% of the corporation) and that hareholder could reasonably be regarded as an employee of the entity for which the services are performed. 3) The phrase “income of the corporation for the year from an active business” is defined in 125(7) to include any property income for the year pertaining to or incident to that business. (interest in temporary excess cash, rental of excess space needed in the business) Pizza business – need $20000 as “float” to run the company regularly. If you earn interest income on the $20000, it is allowed to be considered active business income. Incedental income 4) The annual business limit of $500,000 must be shared with associated companies ) SBD not available if CCPC exceeds a certain size as measured by its “Taxable Capital Employed in Canada” ( once TCEC reaches $15M) [125(5. 1)] 9 V. Associated Corporations Associated corporations must share the $500,000 Business Limit. The concept is to prevent individuals or related groups from separating their business operations into multiple companies that would each be eligible to claim the SBD of another $500,000. Section 256 outlines situations where corporations are considered to be associated with each other. A few are mentioned here as examples. Situation #1 – ITA 256(1)(a)
One of the corporations controlled, directly, or indirectly in any manner whatever, the other. | |Control | |Co#2 |De Jure – by pure share holdings, does co#2 own > 50%? | |49% | | |Co#1 |De Factor – Circumstances that would render control in ways other than shareholding | Situation #2 – 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.
A >50% >50% Co#1Co#2 A friends BPers. A can only own 1% of CO#2 but as a group, all they have to do is own more than 51% 51% 49%51% Co#1Co#2 Situation #3 – 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,
AMust be relatedB >50% One at least 25%>50% Co#1Co#2 Situation #4 – 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 AB/C/D 51%25% ea Co#1Co#2 Related if A owns 25% of Co#2 AND A is related to B/C/D
B/C/D could be kids or grandkids Situation #5 – 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 persons 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.
IV. Provincial Taxation Permanent Establishments (PE) – After Taxable Income is calculated, there are federal taxes and provincial taxes – What provinces have the right to tax? Concept of “permanent establishment” What is a PE? ITR 400(2) – Permanent establishment means a fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse.
Extended meaning – having an agent/ employee in a province, if that agent/employee has the general authority to contract for a corporation, or carries a stock of merchandise from which orders are regularly filled. (but mere presence of an independent agent is not considered evidence of a PE) Other: ITR 400(2)(d) – where a corporation that has a PE anywhere in Cda owns land in a province, such land will be deemed to be a PE. ITR 400(2)(e) – where a corporation uses substantial machinery/equipment in a province, that corporation shall be deemed to have a PE in that province.
Allocation of Taxable Income to a PE ITR 402(3) [Province’s gross revenues + Province’s salaries & wages ] /2 * Taxable Income [Total corporate gross revenues Total corporate salaries & wages ] 13 Example: Trevor’s Train Company has permanent establishments in BC, Alberta, and Ontario. The Company’s Taxable Income for the current year totaled $100,000, with gross revenues of $1,000,000, and salaries and wages of $500,000. Gross Revenues Salaries & Wages Province |Amount |Percent |Amount |Percent | |BC |$ 250,000 |25 |$ 100,000 |20 | |Alberta |400,000 |40 |200,000 |40 | |Ontario | 350,000 | 35 |200,000 | 40 | |Total |$ 1,000,000 |100 |500,000 |100 | Taxable income allocated to each province would be as follows: |Province |Average % |Taxable Income |Amount Allocated | |BC |22. |$ 100,000 |$ 22,500 | |Alberta |40 |100,000 |40,000 | |Ontario |37. 5 |100,000 |37,500 | |Total |100 | |$ 100,000 | (25% + 20%) x ? (100000) RevSalTaxable inc. 14 ———————– NITP – Div C deductions taxable income x tax rate taxes payable net taxes payable tax credits (only personal) Div C deductions are different for personal and corporate Individual – Stock option benefit deductions – – Home relocation loan – Use loss carryover from another year – |Investment SBD | | |38% 38% |38% 38% | | |(10%) (10%) |(10%) (10%) | | |28% 28% |28% 28% | | |(13%) (13%) |n/a n/a | | |15% 15% |28. 00% 28. 00% | | | |(17%) | | | |6. 67%4 | | |15% 15% |34. 67% 11. 00% | | | | | | | | |50| |10% 10% |10. 0% 2. [pic][? ] |% | |25% 25% |44. 67% 13. 5% | |