Solution 12.

Solution 12.10

(1) Total federal tax under Part I

Tax @ 38% on $1,500 $ 570
Deduct: Federal tax abatement 10% of $1,500 150
Net amount $ 420
Add: Additional refundable tax 10 2/3 x $500(1) 53

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Deduct:
Small business deduction (SBD) 19% x $1,000 190
General rate reduction(2) Nil 190
Total federal tax under Part I $ 283
Provincial tax 12% x 1,500 180
Total tax $ 463
(2) The refundable portion of the corporation’s Part I tax for 2019
Least of:
(a) 302/3 x aggregate investment income $307
(All) (302/3% x $1,000)
(b) 302/3% x Taxable income $ 1,500
Less amount eligible for SBD 1,000
500 302/3% $153
(c) Part I tax $283
Refundable portion of Part I tax $153
The corporation will add $153 to its non-eligible RDTOH account which can be refunded
when the corporation pays a non-eligible dividend. If the corporation has a balance in its
eligible RDTOH account and pays a non-eligible dividend, the refund will first come from
the non-eligible RDTOH account. The corporation would need to distribute a $400
($153/381/3%) taxable dividend to receive a full refund of the $153 refundable tax.

NOTES TO SOLUTION
(1) 102/3% of the lesser of:
Aggregate investment income (AII) $1,000
Taxable income (TI) – income eligible for SBD ($1,500 – $1,000) $ 500
(2) There is no general rate reduction in this case since all the active business income is
eligible for the small business deduction and any other income of this CCPC is
aggregate investment income.
Solution 12.11

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Soluiton 12.12

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Solution 8: RDTOH, Dividend Refund
(A) Computation of Taxable Income
Net income for income tax purposes …………………………………..…… $186,250
Deduct: taxable dividends …………………………………………. $18,750
non-capital losses ………………………………………… 40,000
net capital losses ($52,000 limited to TCG) ...………….... 37,500 96,250
Taxable income ……………………………………………………………… $ 90,000
Part I Tax on Taxable Income
Tax @ 38% of $90,000 ……………………………………………………… $ 34,200
Deduct: federal tax abatement (10% of $90,000) …………………………… 9,000
Net ……………………………………………………………………………. $ 25,200
Additional refundable tax (ART) — 102/3% of lesser of:
(a) AII ($37,500 + $45,000 + $18,750 − $37,500 − $18,750) = $45,000
(b) TI − SBD income amount ($90,000 − $85,000) = $5,000 533
$ 25,733
Deduct: small business deduction (see Schedule 1) …………….. $16,150
General rate reduction ………………………………….. Nil $ 16,150
Part I tax payable (federal) ………………………………………………… $ 9,583
Part IV tax payable…………………………………………………………... 7,187
Dividend refund…………………………………………………………... (8,720)
Provincial tax: (4% x $85,000) + (15% x (90,000 – 85,000)) 1…………….. 4,000
Total tax payable …………………………………………………………... $ 12,050
Schedule 1: Small Business Deduction
Income from active business ………………………………………………. $ 85,000(I)
Taxable income (no foreign tax credits) …………………………………… $ 90,000(II)
Business limit ………………………………………………………………. $243,750(III)
19% of the least of amounts (I), (II), and (III) ……………………………… $ 16,150

Effective for taxation years beginning after 2018, CCPCs (and their associated corporations) with
significant investment income will see a reduction in their small business deduction limit that have
significant passive income. For CCPCs with passive investment income in excess of $50,000, the small
business deduction will be reduced by $5 for every $1 of investment income over $50,000.
Specifically, the small business deduction (SBD) limit will be reduced on a straight-line basis for
CCPCs (with associated companies) having between $50,000 and $150,000 in investment income, and
completely eliminated if passive investment income is greater than $150,000 (for the associated group).
The new legislation provides an adjusted aggregate investment income (AAII) definition for the
purposes of the SBD. In this case, the AAII would be calculated as follows:

Taxable capital gains $37,500

Less current year allowable capital losses nil
Portfolio dividends 18,750
Interest income 45,000
Total adjusted AII $101,250
The adjusted AII is $101,250 therefore the SBD limit will be affected. The reduction to the small
business limit is:
Reduction in SBD limit
AAII 101,250
less base 50,000
AAII in excess 51,250
Reduction in SBD limit x $5 $ 256,250

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Note: the solution assumes that the province implemented the federal passive income tax measures that affected the federal small business deduction,
therefore the small business deduction is clawed back at the same rate as it is federally. Some provinces, such as Ontario and New Brunswick are not
clawing back the small business deduction based on passive income (i.e. they are calculating the small business deduction as if the claw back does not apply).

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 The $500,000 SBD limit for 2019 would be $243,750 ($500,000 – 256,250) which would be shared
among associated corporations.

(B) Refundable Portion of Part I Tax

Least of:
(a) 302/3% x aggregate investment income (302/3% x ($45,000 +
$37,500 + $18,750 − $37,500 − $18,750)) ……………………….. $ 13,800
(b) Taxable income ………………………………………… $ 90,000
Less: Amount eligible for the SBD .……………………. (85,000)
30 2/3% x $5,000 = $ 1,533
(c) Part I tax …………………………………………………………… $ 10,858
Refundable portion of Part I tax — the least amount ……………………….. $ 1,533
Part IV Tax on Taxable Dividends Received
Taxable dividends subject to Part IV tax x 38.33% ($18,750 x 38.33%) …… $ 7,187
Deduct: non-capital loss claimed for Part IV x 38.33% (all claimed
under Part I) Nil
Tax ………………………………………………………………………….. $ 7,187

Non-
Eligible
RDTOH and Dividend refund eligible
RDTOH
RDTOH
Opening balance as of January 1, 2019 - $ -
Refundable Part I tax 1,533
Part IV tax on portfolio dividends @ 38 1/3% 7,187
Balance at the end of December 31, 2019 - prior to refund $ 7,187 $ 1,533

Dividend refund is equal to the total of three amounts:

1. The lesser of:
 38 1/3% x total of all eligible dividends paid in the year nil
 Its eligible RDTOH balance at the end of the year $ 7,187
$ -
plus
2. The lesser of:
 38 1/3% x total of all non- eligible dividends paid in the year $ 43,125
 Its non-eligible RDTOH balance at the end of the year 1,533
$ 1,533
plus
3. either:
 if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of
the year, the lesser of:
 the amount in excess $ 41,592
 the amount by which it eligible RDTOH balance at the end of the
year exceeds the amount in 1, if any 7,187
 in any other case, nil $ 7,187
The total dividend refund is $ 8,720

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