ACCT 363 – CHAPTER 13 – TAXATION OF CORPORATE INVESTMENT INCOME

Remember – from 2018, passive income over $50,000 will be subject to a reduced (grind) annual
business limit (available to CCPCs)

Eligible Dividends (38% gross up) – are taxed more favourably than non-eligible (15%).

Both dividends have tax credits applied (6/8 of 38% or 9/13 of 15%)

Company must decide if dividends being paid out are eligible or non-eligible.

Generally – public – eligible,

CCPCs – non-eligible, exception if GRIP balance

 Combined Federal/Provincial Corporate Tax Rates

o Eligible Dividends = 27.54 %
o Non-Eligible Dividends = 13.04%
 Provincial Dividend Tax Credit
o Eligible Dividends = 5/11 Or 45.5% Of The Gross Up
o Non-Eligible Dividends = 4/13 Or 30.8% Of The Gross Up

Exercise 13-1 – Integration – Non Eligible

Jan has a business she estimates will produce income of $100,000 during the tax year. If she
incorporates, all income would be eligible for SBD ad any dividends paid will be non-eligible. In province,
such corporate income is taxed at fed/prov rate of 155. Jan has other sources that put her in 45% tax
bracket. The provincial dividend credit on non-eligible is 30% gross up. Would Jan save taxes if she
channeled this income through corporation?

Solution – If he incorporates the corporation will pay taxes of $15,000 (15%)(100,000) leaving $85,000
to be paid out as dividends. Her individual tax payable on these would be

Non-eligible dividends received 85,000

Gross Up (15%)(85,000) 12,750
Grossed Up dividends 97,750
Personal Tax Rate 45%
Tax before Credit 43,988
Dividend Tax Credit [(9/13) + 30%)(12,750) (12,652)
Tax payable on dividends 31,336

Net after tax retention would be $53,664 (85,000 – 31,336). This compares to 55,000 [(100,000)(1-0.45)]
retained if a corporation is not used. Clearly using a corporation here is not good.

1
Exercise 13-2 – Integration Eligible

John has a business that he estimates will produce income of 100,000 during the taxation year ending
Dec. Because he controls another corporation that fully utilizes 500,000 of its SBD, if he incorporates this
business, none of the income will be eligible for SBD and any dividends would be designated eligible. In
the province, such corporate income is taxed at a combined rate of 30% John has other sources that put
him in a 42% tax bracket. Provincial tax credit on eligible dividends is 28% of gross up. Would John save
taxes by incorporating?

Solution – If he incorporates the corporation will pay taxes of $30,000 (30%)(100,000) leaving $70,000
to be paid out as dividends. His individual tax payable on these would be

Eligible dividends received 70,000

Gross Up (38%)(70,000) 26,600
Grossed Up dividends 96,600
Personal Tax Rate 42%
Tax before Credit 40,572
Dividend Tax Credit [(6/11) + 28%)(26,600) (21,957)
Tax payable on dividends 18,615

Net after tax retention would be $51,385 (70,000 – 18,615). This compares to 58,000 [(100,000)(1-0.42)]
retained if a corporation is not used. Clearly using a corporation here is not good.

REFUNDABLE TAXES ON INVESTMENT INCOME

AGGREGATE INVESTMENT INCOME

Net Taxable Capital Gains $xxx

Interest Xxx
Rents Xxx
Royalties Xxx
Total Positive Amounts $xxx
Net Capital Loss Carry Overs Deducted during the year (xxx)
ITA 129(4) Aggregate Investment Income $xxx

Not – the usual concept of investment income which is property income and doesn’t include net taxable
capital gains/losses

ART – based on lesser of Aggregate Investment Income and the amount of Taxable Income not eligible
for SBD.

ADJUSTED Aggregate Investment Income – this includes dividends from taxable Canadian corporations
(not connected corps). Also called Portfolio dividends. No deduction for net capital loss and is only used
to calculated annual business limit grind

A portion of tax paid on investment income at corporate level is refunded when income us distributed to
investors as dividends.

2
3 total taxes paid that can be refunded on the payment of dividends:

1. Part I Tax – normal taxable income amount of tax

2. Additional Refundable Tax on Investment income (ART) – 10-2/3% of lesser of
a. Corporates aggregate investment income
b. Amount by which taxable income exceeds amt eligible for SBD
3. Part IV Tax – rate of 38-1/3% on certain dividends received by private corporation

Exercise 13-3 – Zircon is a CCPC with Dec 31 year end. Zircon is not associated with any other company.
For the 2019 tax year, its Net Income for Tax Purposes is equal to 281,000. This is made up of active
business income of 198,000 dividends from taxable Canadian corps of 22,000, interest income on long
term investments of 15,000 and Tax cap gains on disposition of assets used in active business of $46,000

Company has available a net capital los carry forward of $26,000 {(1/2)(52,000)} and non capital loss
carry forward of 23,000. The Company intends to deduct both. In 2018, the corps ADJUSTED aggregate
income was 13,000 and its taxable capital employed in Canada (TCEC) was $6million.

Determine Zircon’s taxable income and its additional refundable tax on investment income for 2019 tax
year.

Solution Zircon’s taxable income would be:

Net Income for Tax Purposes 281,000

Dividends from taxable Canadian corps (22,000)
Net capital carry forward (26,000)
Non capital carry forward (23,000)
Taxable income $210,000

Zircon’s amount eligible for SBD is 198,000 is the least of the active business income (198,000), Taxable
income (210,000) and annual business limit of $500,000.

Given these calculations, Zircon’s additional refundable tax on investment would be the lesser of:

Aggregate Investment Income

Taxable Capital Gains 46,000
Net capital loss deducted (26,000)
Interest Income 15,000 35,000

Taxable Income 210,000

Amount Eligible for SBD (198,000) 12,000

The additional refundable tax on investment income would be $1,280 [(10-2/3%)(12,000)]. Note that
the taxable income limit is $23,000 (35,000 – 12,000) less than the Aggregate Investment Income. This is
due to deduction of 23,000 non capital loss carry forward

3
Exercise 13-4 – Flow of Investment Income

Shelly has investments that generate interest income of $100,000 per year. Due to her employment
income she is in the top tax bracket, with a combined fed/prov tax of 51%. She is considering the
transfer of these investments to her CCPC which would be subject to a rate on vestment income of 52%
(including the ART). Dividend tax credit for non eligible dividends in her province is 30%. Should she
transfer?

Solution – If she takes the money directly she will receive $49,000 [(100,000)(1-0.51)]. If the
investments are transferred to a corporation, the results would be as follows:

Corporate Investment Income 100,000

Corporate Tax at 52% (52,000)
After tax income 48,000
Dividend Refund [(48,000 / .61667) – 48,000] 29,837
Non-Eligible Dividends paid to Ms Nicastro 77,837

Non-Eligible Dividends received 77,837

Gross Up of 15% 11,676
Personal Taxable Income 89,513
Personal Tax Rate 51%
Tax Payable before credits 45,652
Dividend Tax Credit [(9/13 + 30%)(11,676)] (11,586)
Personal Tax Payable $34,066

Non-Eligible Dividends paid to Ms Nicastro 77,837

Personal Tax Payable (34,066)
After Tax Cash retained by with corporation $43,771

There would be no tax deferral using a corporation as she’d be paying out $1,000 more in tax than she
would in direct receipt (100,000 * 0.51). Also, the use of a corporation would reduce the after tax
funds - $43,771 vs $49,000.

REFUNDABLE PART IV TAX ON DIVIDENDS RECEIVED

Involved when there multi companies who are connected.

Example – Eastern Inc has 100% owned subsidiary, Western. Both are CCPC and have Dec 31 year end.
During current year, Western has income of 100,000 made up of interest and taxable capital gains.
Assume combined fed/prov tax rate for both is 50-2/3%, including the ART. Western pays out all after
tax income in dividends to Eastern.

Solution – on receipt of 100,000 investment income, Western would pay taxes of $50,667 [(100,000(50-
2/3%). However, when the remaining 49,333 is paid out in dividends, a dividend refund of $30,667 (28-

4
1/3% of the 80,000 total dividend becomes available, resulting in total dividend of 80,000 as shown in
following:

Investment Income of Western 100,000

Corp Tax at 50-2/3% (inc ART) (50,667)
Income before Dividends 49,333
Dividend Refund [(49,333 / 0.61667) - $49,333 30,667
Dividends paid to Eastern 80,000

As dividends are received tax free by Eastern, they will have after tax retention of 80,000. Unless Eastern
pays out taxable dividends to its shareholders, no additional Part I tax will be assessed. Could therefore
be a deferral of tax between related corporations

ONLY PRIVATE CORPORATIONS ARE LIABLE FOR PART IV TAX.

So are Subject Corporations – corporation resident in Canada and controlled by, or for the benefit of, an
individual or related group

PART IV rate – assessed at 38-1/3%

Applied WHEN?

 Dividend Is Received From An Unconnected Company

(Portfolio Dividend)
 Dividend Is Received From A Connected Company,
And The Company Paying The Dividend Received
A Dividend Refund As The Result Of The Payment

Exercise 13-5 – Part IV Tax

Opal Ltd, a CCPC received the following amounts of dividends during the year ending Dec 31, 2019.

 Dividends on Various Portfolio Investments $14,000

 Dividends from Emerald Inc [(100%)(41,500) $41,500
 Dividends from Ruby Inc [(30%)(60,000)] $18,000

Opal owns 100% of Emerald voting shares and 30% of voting shares in Ruby. The fmv of Ruby shares is
equal to 30% of fmv of all Ruby Inc shares. As a result of paying the 60,000 dividend, Ruby Inc received a
dividend refund of 15,000. Emerald Inc received no dividend refund for its dividend pmt.

Determine Part IV Tax payable by Opal as result of receiving dividends.

Solution

Amount of Part IV Tax is:

Tax on Portfolio Investment [(38-1/3%)(14,000)] 5,367

Tax on Emerald Dividends Nil
Tax on Ruby Inc Dividends [(30%)(15,000)] 4,500
Part IV Tax Payable $9,867

5
REVIEW OF INTEGRATION

Purpose is to avoid double taxation of income. Income earned in a corporation is taxed once and taxed
again in the hands of the shareholder when a dividend is paid.

If integration is working, total tax paid should be the same whether a salary of a dividend is paid.

INTEGRATION TOOL – gross up and tax credit on dividends.

1. Dividends are Grossed up

2. Dividend Tax credit applied (% of grossed up)
3. Eligible (generally public corporations and high tax rate) and Non-Eligible Dividends (generally
private corps and low tax rate)
a. Any taxable income that is an exception to the general rule (public high and private low)
is tracked in 1 of 2 accounts:
i. LRIP (Low Rate Income Pool) – account that tracks taxable income of public
company subject to low rate
ii. GRIP (General Rate Income Pool) – CCPC subject to high rates

INTEGRATION AND CCPCs

Complex system has been created to deal with investment income earned by corporations.

Trying to get investment income taxed at same rate.

3 forms of Refundable Tax to achieve integration

PROBLEM – issue of double taxation of income earned in corporation

Obvious Solution – lower corporate tax rates but could be used to defer tax

Better Solution – refundable taxes were created. Corporations pay high tax but later receive a refund
when company distributed after tax income as dividends.

6
ELIGIBLE DIVIDENDS

 Any dividend that is designed as such.

 Qualifies for 38 percent gross up.
 Receives federal dividend tax credit of 6/11 of the gross up.
 Procedures reduce maximum federal rate on eligible dividends to
24.8 percent.

NON-ELIGBLE DIVIDENDS

 Dividends that are not designated as eligible.

 Qualifies for 15 percent gross up.
 Receives federal dividend tax credit of 9/13 of the gross up.
 Procedures reduce maximum federal rate on non-eligible dividends to about 27.6 percent.

BASIC APPROACH

CCPCs

o Income eligible for SBD

o Investment income eligible for tax refund
 Assume most dividends are
non-eligible
 Exceptions in GRIP

PUBLIC COMPANIES

 Most income taxed at general rates

 Assume most dividends are eligible
 Exceptions in LRIP

GRIP – GENERAL RATE INCOME POOL – notional account to track amounts of a CCPC’s income that
qualify as a basis for paying eligible dividends. If there is a balance in the GRIP account, CCPC dividends
paid can be designated as eligible.

GRIP = C + D + E + F - G

Where,
 C = GRIP at end of preceding year
 D = 72% of the CCPC’s adjusted taxable income for the year.
o Adjusted Taxable Income is regular Taxable Income, reduced by the amount eligible for the
small business deduction and the lesser of the CCPC's aggregate income and its Taxable
Income for the year.
 E = Eligible dividends received during the year (100%)
 F = Adjustments for amalgamations and wind ups
 G = Eligible dividends paid during the preceding year

7
Exercise 13-6 – GRIP Balance

Lanson, a CCPC had no GRIP balance at its year end on Dec 31, 2017. During 2018, the company received
eligible dividends of 5,000 and designated all of its $25,000 in dividends paid as eligible At the end of
2018, Lanson has a GRIP of $35,000.

For 2019, Lanson has taxable income of $960,000. This amount includes net taxable capital gains of
$65,000, mortgage interest received of $23,000 and a net capital loss carry forward deduction of 14,000.
In addition, the company receives eligible dividends during the year of 85,000. In determining 2019 tax
payable, the company has a small business deduction of 42,750. During 2019, Lanson pays dividends of
78,000 with 42,000 being eligible. Determine the Company’s GRIP at the end of 2019.

GRIP Balance at end of 2018 35,000

Taxable Income 960,000
Amount Eligible for SBD (42,750 / 19%) (225,000)
Aggregate Investment Income
(less taxable income 65,000 + 23,000 – 14,000) (74,000)
Adjusted Taxable Income 661,000
Rate 72% 475,920
Eligible Dividends Received 85,000
Eligible Dividends Designated in 2018 (25,000)
GRIP at end of 2019 $570,920

NON-CCPCs and LRIP – income for non CCPCs will generally be at full tax rate. So generally, dividends
can be designated as eligible.

LRIP account – used to track balances that have not been subject to full corporate tax rates. When an
LRIP balance is present, any dividends paid by the corporation will be considered non-eligible.

LRIP = (A + B + C + D + E + F) – (G + H)

Where,

o A = LRIP at end of preceding year

o B = Non-eligible dividends received for the year
o C = Additions for corporate reorganizations
o D = Adjustment if CCPC in some preceding year
o E = Adjustment if credit union in some preceding year
o F = Adjustment if investment company in some preceding year
o G = Non-eligible dividends paid during the year
o H = Excess election during year

8
REFUNDABLE DIVIDEND TAX ON HAND (RDTOH)

PRE 2019 – all refundable taxes went into single account and the refund was the lesser of 38-1/3%
taxable dividends paid or the balance in the account.

NOW – divided into 2 accounts – Eligible RDTOH and Non-Eligible RDTOH

 No refund on eligible dividends if there is no balance in the Eligible RDTOH

 To access all available refundable taxes, non-eligible dividends may have to be paid
 Importance: Non-eligible dividends taxed at higher rates than eligible dividends

Exercise 13-7 – EDTOH Transitional Provision

Brok Ltd is a CCPC that uses Dec 31 as tax year end. On Dec 31, 2018 the corporation had an RDTOH
balance of $153,333. Its dividend refund for 2018 was 76,666. Determine the Jan 1, 2019 transitional
amounts for the Eligible RDTOH and the Non-Eligible RDTOH based on the information in each of the
following independent cases.

Case 1 – 2018 – Brok has no GRIP balance

Case 2 – Grip balance 300,000, during year designated 200,000 dividends as eligible.

Case 3 – Grip balance of 500,000. Designated 200,000 dividends as eligible

Solution – Opening balance in the single RDTOH account is $76,667 (153,333 – 76,666).

Case 1 -

Opening Balance in RDTOH Account 76,667

Transitional Eligible RDTOH – lesser of:
Opening balance = 76,667
No Grip Opening Balance = Nil Nil
Transitional Non-Eligible RDTOH 76,667

 Transitional Eligible RDTOH Nil

 Transitional Non-Eligible RDTOH $76,667

Case 2 -

Opening Balance in RDTOH Account 76,667

Transitional Eligible RDTOH – lesser of:
Opening balance = 76,667
[(38-1/3%)(Opening GRIP Balance)]
[(38-1/3%)(300,000 – 200,000)] = $38,333 (38,333)
Transitional Non-Eligible RDTOH $38,334

 Transitional Eligible RDTOH $38,333

 Transitional Non-Eligible RDTOH $38,334

9
Case 3 -

Opening Balance in RDTOH Account 76,667

Transitional Eligible RDTOH – lesser of:
Opening balance = 76,667
[(38-1/3%)(Opening GRIP Balance)]
[(38-1/3%)(500,000 – 200,000)] = $115,000 (76,667)
Transitional Non-Eligible RDTOH Nil

 Transitional Eligible RDTOH $76,667

 Transitional Non-Eligible RDTOH Nil

ELIGIBLE RDTOH

 Components
o Opening Balance
 Transitional balance for 2019
 After 2019 - December 31 balance for previous year
o Additions
 Part IV taxes on portfolio dividends
 Part IV taxes on eligible dividends received from connected companies in those
situation where the connected company received a refund from the company’s
Eligible RDTOH
o Deduction – Any dividend refund claimed from the Eligible RDTOH in the previous year

NON-ELIGIBLE RDTOH

 Components
o Opening Balance
 Transitional balance for 2019
 After 2019 - December 31 balance for previous year
o Additions
 Part I refundable tax for the year (see following slides)
 Part IV taxes on eligible dividends received from connected companies in those
situation where the connected company received a refund from the company’s
Non-Eligible RDTOH
o Deduction – Any dividend refund claimed from the Non-Eligible RDTOH in the previous year

An Importance Difference

 When dividends are designated as eligible, a refund can be made only to the extent of the
Eligible RDTOH
 A refund can be provided on non-eligible dividends using either RDTOH

10
REFUNDABLE PORTION OF PART I TAX

RDTOH Definition Limits Increase To The Least Of:

 ITA 129(4)(a)(i) – Investment Income Constraint

 ITA 129(4)(a)(ii) – Taxable Income Constraint
 ITA 129(4)(a)(iii) – Tax Payable Constraint

ITA 129(4)(a)(i) - Determined By Formula A-B, Where

 A Is 30-2/3% Of Aggregate Investment Income

 B Is The Amount, If Any, By Which The Non-Business FTC Exceeds 8% Of Foreign Investment Income

ITA 129(4)(a)(ii) - 30-2/3% Of The Amount, If Any, By Which Taxable Income Exceeds The Total Of:

 Amount Eligible For The Small Business Deduction

 (100 ÷ 38-2/3) Of Non-Business FTC
 4 Times Business FTC

ITA 129(4)(a)(iii) – Tax Payable under Part I

Exercise 13-8 – Debut Inc is a CCPC. During the tax year, ending Dec 31, 2019, Debut has the following
amounts of income

Dividends from Portfolio Investments 22,000

Foreign Non-Business Income (Net of 5% withholding) 14,250
Capital Gains 38,250
Net Rental Income 6,500
Interest Income on 10 year bond 9,200
Company’s Net Income for Tax Purposes is $121,825. The only deductions in the calculation of Taxable
income are the dividends on portfolio investments and a net capital loss carry forward of $9,000
[(1/2)(18,000)]. A 9,500 small business deduction and a foreign tax credit of 750 served to reduce tax
payable. Assume that the company’s part I tax payable has been correctly determined to be $19,536.
Determine the refundable amount of Part I tax for 2019.

Solution – the refundable amount would be the least of the following 3 figures:

Foreign Business Income (100%) 15,000

Taxable Capital Gains {(1/2)(38,250)} 19,125
Net Rental Income 6,500
Interest Income 9,200
Net Capital Loss Carry Forward Deducted (9,000)
Aggregate Investment Income under 129(4) 40,825
Rate 30-2/3%
Amount to Before Foreign Income Adjustment 12,520
Deduct Excess of
Foreign Non-Business Tax Credit (750)
Over 8% of Foreign nonbusiness income [(8%)(15,000) 1,200 Nil
Amount Under ITA 129(4)(a)(i) 12,520

11
 Taxable Income (121,825 – 22,000 – 9,000) 90,825
Deduct:
Amount Eligible for SBD Deduction (9,500/10%) (50,000)
[(100 / 38-2/3%)(750)] Foreign Non Business Tax Credit (1,940)
Adjusted Taxable Income 38,885
Rate 20-2/3%
Amount under ITA 129(4)(a)(ii) 11,925

Amount under ITA 129(4)(a)(iii) = Part I Tax Payable = $19,536

Lesser amount is $11,925 and this would be the refundable portion of Part I tax for the year.

DIVIDEND REFUND – ELIGIBLE DIVIDENDS

When a CCPC declares dividends, an amount can be designated as an eligible dividend to the extent
there is a balance in their GRIP account. Refund on these would then be lesser of:

 38-1/3% Of Eligible Dividends Paid During The Year

 Balance In Eligible RDTOH Account At The Year End

DIVIDEND REFUND – NON-ELIGIBLE DIVIDENDS

If amount of dividends paid in year exceed the amount that is designated as eligible, the excess will be
non-eligible. Refund here has 2 components.

 Component 1 - The Lesser Of:

o 38-1/3% Of Non-Eligible Dividends Paid During The Year
o Balance In Non-Eligible RDTOH Account At The Year End
 Component 2 – If there is an excess of 38-1/3 percent of non-eligible dividends paid over the
balance in the Non-Eligible RDTOH, this component is the lesser of:
o The amount of the excess
o Any balance that remains in the Eligible RDTOH after the refund on eligible dividends.

Exercise 13-9 – Dividend Refund

Alesia Ltd, is a CCPC with a tax year that ends Dec 31. Prior to application of the transitional rule, the
balance in the corporations single RDTOH account was 230,000 (ending balance 2018, less the 2018
refund). The balance in the GRIP account was $350,000 (ending 2018 balance, less eligible dividends
designated in 2018).

Based no these totals the transitional Eligible RDTOH would be 134,167 [(38-1/3%)(350,000)] and the
balance in the transitional Non Eligible RDTOH would be 95,833 (230,000 – 134,167)

During 2019, there were no additions to either RDTOH account. During 2019, the corporation paid
dividends of 600,000. Only 200,000 of these were designated eligible.

Determine the amount of the dividend refund on the payment of 1 the eligible dividends and 2 the non
eligible dividends.

12
Solution – Dividend refund on Eligible – would be 76,667, the lessor of:

 76,667 (38-1/3% of the 200,000 of eligible dividends paid in 2019)

 134,167 (the balance in the Eligible RDTOH on Dec 31, 2019.

Dividend Refund on Non-eligible –

Component 1 would be $95,833, the lessor of:

 153,333 (38-1/3% of the 400,000 of non eligible dividends paid in 2019

 95,833 (balance in the Non Eligible RDTOH on Dec 31, 2019)

Component 2, 38-1/3% of the 400,000 non eligible divs paid during 2019 exceeds the balance in the Non
eligible RDTOH by 57,500 (153,333 – 95,833). Given this, Component 2 would be equal to the lesser of:

 The excess of 57,500; and

 57,500 (134,167 – 76,667_, the balance left in the Eligible RDTOH after the refund on eligible
dividends is paid.

The purpose of component 2 is to allow access to the Eligible RDTOH for dividend refunds on the
payment of non eligible dividends when there is no balance left in the non eligible RDTOH.

The total refund resulting from the payment of non eligible dividends is $153,333 (95,833 + 57,500).
Note that 153,333 is equal to 38-1/3% of the 400,000 in non eligible dividends paid.

2019 ECONOMIC IMPACT OF SYSTEM CHANGES

In a given year, it may be difficult to:

Use all available RDTOH balance

And

Maximize eligible dividends

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EXAMPLE – RDTOH CALCULATIONS

Fortune Ltd. is a Canadian controlled private corporation. Based on the formula in ITR 402, 90 percent
of the Company’s income is earned in a province. The following information is available for the year
ending December 31, 2019:

Canadian Source Investment Income

(Includes $25,000 In Taxable Capital Gains) $100,000
Gross Foreign Investment Income (15% Withheld) 20,000
Gross Foreign Business Income (15% Withheld) 10,000
Active Business Income (No Associated Companies) 150,000
Portfolio Dividends Received 30,000
Net Income For Tax Purposes 310,000
Portfolio Dividends (30,000)
Net Capital Loss From Preceding Year Deducted (15,000)
Taxable Income 265,000

RDTOH - December 31, 2018 $ 30,000

Dividend Refund For 2018 7,000

Taxable Dividends Paid During 2019 60,000

GRIP – December 31, 2018 20,000

Eligible Dividends – 2018 8,000

TCEC – 2018 2,400,000

ADJUSTED Aggregate Investment Income - 2018 32,000

NO GRIND OF ANNUAL BUSINESS LIMIT – TCEC is less than 10million. Adjusted Aggregate Investment
Income is less than 50,000

BALANCES

 GRIP = $12,000 ($20,000 - $8,000)

 Eligible RDTOH = $4,600 – Lesser Of
o Transitional RDTOH =$23,000
o 38-1/3 Of GRIP = [(38-1/3%)($12,000)] = $4,600
 Non-Eligible RDTOH = $18,400 ($23,000 - $4,600)

14
PART I TAX PAYABLE

Base Amount Of Part I Tax [(38%)($265,000)] $100,700

Federal Tax Abatement [(10%)(90%)($265,000)] ( 23,850)

ART: Equal To The Lesser Of:

[(10-2/3%)($265,000 - $150,000)] = $12,267

[(10-2/3%)($100,000 + $20,000 - $15,000)] = $11,200 11,200

Foreign Non-Business Tax Credit ( 3,000)

Foreign Business Tax Credit ( 1,500)

Small Business Deduction ???

SMALL BUSINESS DEDUCTION – equal to 19% of the least of:

1. Active Business Income $150,000

2. Taxable Income $265,000

Deduct:
[(100/28)($3,000 Non-Business FTC)] ( 10,714)
[(4)($1,500 Business FTC)] ( 6,000)
Total $248,286

3. Annual Business Limit $500,000

The least of these figures is $150,000, providing for a small business deduction of $28,500
[(19%)($150,000)].

PART I TAX PAYABLE

Base Amount Of Part I Tax [(38%)($265,000)] $100,700

Federal Tax Abatement [(10%)(90%)($265,000)] ( 23,850)

ART: Equal To The Lesser Of:

[(10-2/3%)($265,000 - $150,000)] = $12,267

[(10-2/3%)($100,000 + $20,000 - $15,000)] = $11,200 11,200

Foreign Non-Business Tax Credit ( 3,000)

Foreign Business Tax Credit ( 1,500)

Small Business Deduction (28,500)

General Rate Reduction ??

15
GENERAL RATE REDUCTION

Taxable Income $265,000

Amount Eligible For SBD ( 150,000)

Aggregate Investment Income

($100,000 + $20,000 - $15,000) ( 105,000)

Full Rate Taxable Income $ 10,000

Rate 13%

General Rate Reduction $ 1,300

PART I TAX PAYABLE

Base Amount Of Part I Tax [(38%)($265,000)] $100,700

Federal Tax Abatement [(10%)(90%)($265,000)] ( 23,850)

ART: Equal To The Lesser Of:

[(10-2/3%)($265,000 - $150,000)] = $12,267

[(10-2/3%)($100,000 + $20,000 - $15,000)] = $11,200 11,200

Foreign Non-Business Tax Credit ( 3,000)

Foreign Business Tax Credit ( 1,500)

Small Business Deduction (28,500)

General Rate Reduction (1,300)

Part I Tax Payable 53,750

PART I REFUNDABLE

30-2/3% Of Aggregate Investment Income

[(30-2/3%)($105,000)] $ 32,200

Deduct Excess Of:

Foreign Non-Business Tax Credit ($ 3,000)

Over 8% Of Foreign Investment

Income [(8%)($20,000)] 1,600 ( 1,400)

ITA 129(4)(a)(i) $30,800

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Taxable Income $265,000

Deduct:

Amount Eligible For SBD ($150,000)

[(100 ÷ 38-2/3)($3,000)] ( 7,759)

[(4)($1,500 Business FTC)] ( 6,000) ( 163,759)

Total $101,241

Rate 30-2/3%

ITA 129(4)(a)(ii) $ 31,047

ITA 129(4)(a)(iii) Part I Tax Payable $ 53,750

The refundable portion of Part I tax is equal to $30,800, which is the least of the preceding three
amounts

PART IV REFUNDABLE – on the 30,000 of Portfolio Dividends

[(38-1/3%)($30,000)] = $11,500

RDTOH BALANCES

Eligible RDTOH

 Transitional Balance $ 4,600

 Part IV Tax On Eligible Dividends 11,500
 December 31, 2019 Balance $16,100

Non-Eligible RDTOH

 Transitional Balance $18,400

 Part I Refundable Tax 30,800
 December 31, 2019 Balance $49,200

GRIP

 Opening Balance $12,000

 Portfolio Dividends Received 30,000
 December 31, 2019 Balance $42,000

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DIVIDEND REFUND

 Allocation Of $60,000
o $42,000 can be designated as eligible
o $18,000 ($60,000 - $42,000) as non-eligible

Refund On Eligible – Lesser Of:

 [(38-1/3%)($42,000)] = 16,100; and

 Ending balance in Eligible RDTOH - $16,100
 The $16,100 would be subtracted from the Eligible RDTOH in 2020

Refund On Non-Eligible – Lesser Of

 [(38-1/3%)($18,000)] = $6,900
 Ending balance in the Non-Eligible RDTOH = $49,200
 The $6,900 would be subtracted from the Non-Eligible RDTOH in 2020

FEDERAL TAX PAYABLE

Using the preceding information, the total federal Tax Payable for Fortune Ltd. is calculated as follows:

Part I Tax Payable $53,750

Part IV Tax Payable 11,500

Dividend Refund ($16,100 + $6,900) ( 23,000)

Federal Tax Payable $42,250

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WORKING THROUGH LARGE PROBLEMS

1. Determine net income for tax purposes (reconciliation schedule)

2. Determine taxable income

3. Determine basic tax payable at 38 percent rate

4. Determine federal tax abatement (may require determining the amount to be allocated to
provinces.

5. Determine the small business deduction for CCPCs (without consideration of ART or GRR)

6. Determine aggregate investment income for CCPCs

7. Determine ART for CCPCs

8. Determine M&P profits deduction (without consideration of GRR)

9. Determine the general rate reduction

10. Determine the foreign non-business income tax credit

11. Determine the foreign business income tax credit

12. Determine the Part IV tax payable for CCPCs and other private corporations

13. Determine the refundable portion of Part I tax for CCPCs

14. Determine the RDTOH balances for CCPCs and other private corporations

15. Determine the dividend refund for CCPCs and other private corporations

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