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Tax Notes 5
Tax Notes 5
Part V
Individuals Corporations
Employee stock option Donations
Home relocation loan Loss carry over
Loss carry over Dividends
Capital gain deduction
Northern allowance
DIVISION C DEDUCTIONS
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Acco 643 Lecture Notes
Part V
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Acco 643 Lecture Notes
Part V
1. NON-CAPITAL LOSSES
Note: Net capital losses are stated using the inclusion rate
In the year they were incurred
Up to 1987: 50%
1988 & 1989: 66 2/3 %
1990 to Feb. 27, 2000: 75%
Feb. 28 2000 to October 17, 2000: 66 2/3%
October 18, 2000 and later: 50%
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Acco 643 Lecture Notes
Part V
ÖACQUISITION OF CONTROL
èBACKGROUND
Over a period of years, some corporations may have experienced such large losses
that they are often unable to generate appropriate or sufficient income to utilize
losses.
As a result, rules are provided in the Act to restrict the use of loss carry overs in
situations where there has been an acquisition of control.
"Control" implies ownership of sufficient shares to carry with them the ability to
cast a majority of the votes on election of a board of directors.
Exception
- The Act deems the control of a corporation not to have been acquired when a person
acquires shares of a corporation and immediately before such transaction the person
was related to the acquired corporation. [256(7)(a)]
- The Act deems the control of a corporation not to have been acquired when a person
acquires the shares of a corporation from another person and both persons are related
(i.e. the vendor and the seller). [256(7)(a)]
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Part V
èTAX IMPLICATIONS
Impact
• Tax returns must be field
• Unpaid amounts 78(1)
• Prorated CCA & SBD
• Due to potential short year:
• May lose year on loss carry-overs
• May lose year on donation carry-over
Net capital losses for taxation years preceding the acquisition of control may not be
carried forward to taxation years ending after the acquisition;
Net capital losses for taxation years following the acquisition may not be carried
back to taxation years commencing before the acquisition.
This includes any unused business investment losses that are present at the deemed
year-end, as well as property losses.
Non-capital losses (NCL) can be carried forward but they are subject to severe
restrictions: NCL continue to be deductible in a taxation year ending after an
acquisition of control, but only
• if the business (not necessarily the corporation) that generated the losses continues
to be carried on;
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Acco 643 Lecture Notes
Part V
o Condition #3
• to the extent of total income earned by the corporation from carrying on that
business or similar business.
The same rules apply where post-acquisition of control losses are carried back to a
taxation year preceding the acquisition of control.
• Value of inventory
o If FMV < COST ⇒⇒ Ss 10(1) will increase the corporation's pre-acquisition non-
capital losses (or reduce its income)
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Acco 643 Lecture Notes
Part V
o If ACB > FMV of the property at the deemed year-end (for each property)
• The property for which an election is made must have a higher FMV than ACB in
order to trigger capital gains or recapture so as to reduce the amount of net capital
losses or non-capital losses that would otherwise expire on account of the acquisition
of control.
• The effect of the paragraph is that the corporation can choose proceeds of disposition
(amount designated) at any point between fair market value and the adjusted cost
base of the particular capital property.
• The capital property is then deemed to be reacquired at a cost equal to the amount of
the deemed proceeds of disposition.
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Acco 643 Lecture Notes
Part V
SUMMARY
• Business losses
“substantially all the income of which is derived from the sale, leasing, rental or
development, as the case may be, or similar properties or the rendering of similar
services”.
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Acco 643 Lecture Notes
Part V
è 111(4)(e) OPTION
Results:
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Part V
Terminal losses
Allowance for doubtful accounts
Capital losses
CEC losses
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Acco 643 Lecture Notes
Part V
7. Determine whether:
in order to see whether the losses being carried over can be applied against future
income 111(5).
8. Determine the steps needed to use up the non-capital loss carry-over, i.e., loss
utilisation planning tools
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Acco 643 Lecture Notes
Part V
• CCA, CECA
• Allowable reserves, i.e., allowance for doubtful accounts
• R&D expenditures
8. Reorganize to offset income from same business or from the sale of similar
products or services against losses, i.e., amalgamation or winding-up.
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Acco 643 Lecture Notes
Part V
• Deductible up to an annual maximum of 75% of the corporation's net income for the
year plus an additional 25% of any taxable capital gains that have arisen from gifts of
property made by the corporation in the year, plus 25% of any recaptured CCA resulting
from such gifts;
• Taxable capital gains on gifts of securities registered on a Canadian Stock Exchange are
25 % of the normal taxable capital gain.
4. TAXABLE DIVIDENDS
• Dividends paid are thus included in the recipient's income but the gross amount of
dividend included in the recipient corporation's net income may be deducted in the
computation of taxable income.
• Taxable Dividends
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Acco 643 Lecture Notes
Part V
Primary
Secondary
3. Tax incentives
• Small business deduction
• M&P profits deduction ( not advantageous anymore)
• ITC’s
• Capital gain deduction for individuals selling shares of a qualifying corp.
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Acco 643 Lecture Notes
Part V
SBD No SBD
Basic federal rate 38.00 38.00
Abatement (10.00) (10.00)
Small Business Deduction (17.00)
Manufacturing & Processing
11.00 28.00
Net federal 11.00 28.00
1 The reduction is 9% in 2009, 10% in 2010, 11.5% in 2011, and 13% in 2012.
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Acco 643 Lecture Notes
Part V
• Under Ss 124(1), there may be deducted from the 38% basic tax an amount equal to
10% of the corporation's taxable income earned in a province. No abatement is available
on income not earned in a province (e.g. business income earned outside Canada).
• The 10% abatement, when fully used, reduces the federal tax rate to 28%.
• The amount of the federal tax abatement is determined by allocating the corporation's
total taxable income to its permanent establishments in the provinces. This calculation
involves 4 steps:
2. Allocate the taxable income of the corporation to the various provinces in accordance
with the following formulae:
1/2 x (Provincial Gross Revenue + Prov. Salary & Wages) x Taxable income
Total Gross Revenue Total Salary & Wages
3. Calculate the provincial tax abatement as 10% of the amount of taxable income
earned in the provinces;
4. Deduct the Federal Tax Abatement from the corporation's Basic tax.
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Acco 643 Lecture Notes
Part V
in a particular place, who has general authority to contract or who has stock of
merchandise owned by his or her employer or principal, from which he or she
regularly fills order, that place is deemed to be a PE;
ÖSURTAX [123.2]
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Acco 643 Lecture Notes
Part V
income (minus losses) of the corporation for the year from an active business carried
on in Canada
the corporation's business limit for the year (2009), i.e. $500,000
• The small business deduction (SBD) must be prorated if the taxation year is less than 51
weeks, and the business limit must be allocated among associated corporations.
ÖDEFINITIONS
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Acco 643 Lecture Notes
Part V
è Public corporation: means a corporation that was resident in Canada and that has:
è Active business income of the corporation for the year (ABI) means the income of the
corporation for the year from an active business carried on by it including any income
pertaining to or incident to that business, but does not include income from a property.
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Part V
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Acco 643 Lecture Notes
Part V
Taxable income
Less:
• 100/7 of the M & P profits deduction (any corporation)
• 100/16 of the SBD (CCPC only)
• 100/7 of the Accelerated Tax Reduction (CCPC only)
• Aggregate Investment Income (CCPC only)
• Taxable resource income (Corp. in the resource sector)
The general rate reduction is then applied to this adjusted taxable income.
Purpose: Prevent double tax on foreign source income as tax was already paid in the
foreign jurisdiction
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Acco 643 Lecture Notes
Part V
o The investment tax credit ("ITC") is intended to stimulate investment in certain types
of activities and in certain regions of the country;
èQualified activities
o The amount of the credit depends upon the type of investment made by the taxpayer,
the region in which the investment is made.
o The ITC is deductible against taxes otherwise payable. Unused credits may be carried
back three years and carried forward for twenty years.
o Upon an acquisition of control, the rules for the carryover of ITC are similar to rules
existing for non-capital losses. [UFE comprehensive Q. 1997]
o The ITC is calculated as a percentage of the capital cost of certain qualified property,
and on the amount of qualified expenditures made in respect of SR & ED.
èQualified property
o After 1994, only qualified property used in business in the Maritimes and the Gaspe
continue to earn the ITC. The rate is 10% for property acquired after 1994.
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Acco 643 Lecture Notes
Part V
o In addition, an ITC is available for most current [37(1)(a)] and capital [37(1)(b)(i)]
expenditures on account of research and development carried on in Canada;
o The ITC rate for qualifying SR & ED depends on several factors. These include
corporate type, size and location.
o The regions and effective rates are summarized in the following table:
Qualified
SR & ED
Qualified Non-
Area and acquisition property CCPC CCPC *
o The quantum of additional credit arising in any year is limited by the "expenditure
limit". This limit sets a maximum annual amount of qualifying expenditures upon
which the additional credit may be claimed. In the case of an unassociated
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Acco 643 Lecture Notes
Part V
o The limit of $3 million of expenditures eligible for this rate (35%) will be reduced by
$10 for every dollar of (group) taxable income for the preceding year in excess of the
business limit.
o The rate is 35% on the first $3,000,000 for each year of SR & ED expenditures made
by the corporation or by a group of associated corporations. This annual expenditure
limit is reduced by $10 for each dollar by which the taxable income of the
corporation for the preceding taxation year plus the taxable incomes of any
associated corporations for the preceding year exceeds the amount of the business
limit. Once the corporate group's taxable income reaches $700,000 (2009), the SR &
ED expenditure limit of $3 million eligible to a 35% ITC is reduced to zero, but the
basic ITC rate of 20% still applies.
o The $3 million limit must be allocated among associated companies in the same way
that the annual business limit is.
• The expenditure limit of $3 million is also phased out evenly as taxable capital ranges
between $10 and $15 million for corporations subject to Large Corporation Tax (LCT).
This taxable capital phase out applies for taxation years commencing after 1995. The
expenditure limit of $3 million is reduced for large CCPC's with taxable capital in
excess of $10 million.
èITC UTILIZATION
o Any unused ITC can be carried back 3 years and forward 20 years.
o The ITC is a form of "subsidy or assistance" to the taxpayer. As such, the ITC
reduces the capital cost of an asset in the taxation year following the year in which
the ITC is used. If the asset is no longer with the corporation, the ITC is an income
inclusion [12(1)(t)] in the taxation year following the year in which the ITC is used.
o If the ITC relates to SR & ED, the use of ITC will reduce the pool of SR & ED
expenditures, if any, in the taxation year following the year the ITC is used.
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Part V
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Acco 643 Lecture Notes
Part V
o Certain corporations cannot benefit from the ITC since they do not pay tax because
of a loss for the current year or loss carryforward from the past.
o For purposes of calculating the refundable ITC, the following chart depicts the
general categories and rates:
• Individual 40%
• Qualifying corporations (capital expenditures, ITC at 35%) 40%
• Qualifying corporations (current expenditures, ITC at 35%) 100%
• CCPC other than a qualifying corporation 0%;40%;100%
o means a corporation:
o The 40% refund applies to capital expenditures for SR & ED which qualify for the
35% ITC.
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Acco 643 Lecture Notes
Part V
EXAMPLE
The $165,000 ITC which is not refundable [(60% x $275,000)] may be applied to reduce
the taxpayer's tax liability for the current, preceding 3, or following 20 taxation years.
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Acco 643 Lecture Notes
Part V
ÖLARGE CORPORATION TAX PART I.3 (Was repealed. However still applies
for the reduction in the expenditure limit for SR&ED)
Purpose: to “ensure that all large corporations pay federal Taxes and thus contribute
to deficit reduction”
Capital
Less: investment allowance
= Taxable capital
x percentage used for federal abatement
Capital Deduction
$10,000,000
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Acco 643 Lecture Notes
Part V
Capital
Capital stock
+ retained earnings
+ contributed & other surpluses
+ non-deductible reserves (including deferred credit balances)
+ loans & advances to the corporation
+ debt represented by bonds, debentures, notes, mortgages,
bankers’ acceptances or similar obligations
+ dividends declared & not paid
+ A/P outstanding more than 365 days
+ proportionate amount from partnerships
Investment Allowance
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