Week 7 Taxable Income for Corporations PDF

**WEEK 7 -- TAXABLE INCOME AND TAX PAYABLE FOR CORPORATIONS** **DEDUCTIONS TO ARRIVE AT TAXABLE INCOME DIVISION C -- B** **NET INCOME FOR TAX PURPOSES (Division B Income)** **\$XXXX** LESS: 1. **Donations** - Registered charities (Max 75% of NITFP) (\$XXXX) - Gifts to Canada or province a...

**WEEK 7 -- TAXABLE INCOME AND TAX PAYABLE FOR CORPORATIONS** **DEDUCTIONS TO ARRIVE AT TAXABLE INCOME DIVISION C -- B** **NET INCOME FOR TAX PURPOSES (Division B Income)** **\$XXXX** LESS: 1. **Donations** - Registered charities (Max 75% of NITFP) (\$XXXX) - Gifts to Canada or province and cultural property (\$XXXX) 2. **Dividends** (Include dividends without gross-up from taxable Canadian corporations **AND** from foreign dividends in net income) - Canadian dividends (\$XXXX) - Foreign affiliate dividends (≥ 10% ownership) (\$XXXX) - Foreign portfolio dividends (\< 10% ownership) FTC ONLY 3. **Loss Carryforwards** from subsequent or prior taxation years - Non-Capital Loss (\$XXXX) +-----------------------------------+-----------------------------------+ | ADD: | +Current Year Business Losses | | | | | Deductions | +Dividend Deductions | | | | | | +Net Capital Loss Carryovers (To | | | extent of TCGs) | +===================================+===================================+ | DEDUCT: | -- Dividends | | | | | 3(c) Income | -- Net TCG | +-----------------------------------+-----------------------------------+ - Net Capital Loss (\$XXXX) - Restricted Farm Loss (\$XXXX) - Farm Loss (\$XXXX) **TAXABLE INCOME (Division C Income)** **\$XXXX** **ORDERING OF DEDUCTIONS** **Deduction** **Income Type** **Carryback** **Carryforward** ------------------------ ----------------- --------------- ------------------ Dividends -- -- -- Restricted Farm Losses Farming income 3 Years 20 Years Donations Any income None 5 Years Net-Capital Losses TCG only 3 Years Indefinitely Non-Capital Losses\* Any income 3 Years 20 Years Farm Losses\* Any income 3 Years 20 Years \*Deduct the most restricted losses first but these first if they are nearing expiry**\ ** **COMPUTATION OF FEDERAL TAX 2024 -- B** **BASIC TAX RATE** **38%** Less: Federal Abatement (10%) -- Only on taxable income earned in Canada Less: GRR (13%) -- Only on income ineligible for SBD/M&P and not AII or Less: M&P Credit (13%) -- Only on income ineligible for SBD/GRR and not AII Less: SBD (19%) Less: Foreign Tax Credit (Non-Business) -- Gross amount fully included in income Less: Foreign Tax Credit (Business) -- Gross amount fully included in income Less: Investment Tax Credit (ITC) Plus: Additional Refundable Tax (ART) of 10⅔% **PART I TAX** Plus: Part IV Tax (On dividends received by private corporations) Less: Dividend Refund (Private corporations only) **NET FEDERAL TAX PAYABLE** **PROVINCIAL ALLOCATION OF INCOME** - Added to the corporate taxes are the provincial and territorial taxes. Each province and territory has its own corporate tax. The provincial small business rate ranges from 0% to 4%. The general provincial rate ranges from 8% to 16%. - Taxable income allocated to a province depends on whether there is a **permanent establishment** - A fixed place of business (e.g. office, branch, vision, factory, warehouse, mine, oil well, farm) - A dependent agent with authority to sign contracts - Selling goods to another province does NOT represent a permanent establishment in that province or country - Where only one permanent establish exists, no provincial allocation is necessary - Where income earned in several provinces, then must allocate Taxable Income to each province since provincial taxes have to be paid to each province based on this allocation - Average of % of Gross Rvenues and % of Salaries and Wages - Exclude property income not used in the main business from Gross Revenue **Example**: The Linford Company has permanent establishments in Alberta, Manitoba, and Ontario. The Company's Taxable Income for the current year totaled \$100,000, with gross revenyes of \$1,000,000 and salaries & wages of \$500,000. **GROSS REVENUES** **SALARIES & WAGES** -------------- -------------------- ---------------------- --------------- ---------------- **Province** **Amount** **Proportion** **Amount** **Proportion** Alberta \$250,000 25% \$100,000 20% Manitoba \$400,000 40% \$200,000 40% Ontario \$350,000 35% \$200,000 40\$ **Total** **\$1,000,000** **100%** **\$500,000** **100%** **Province** **Average Percent** **Taxable Income** **Amount Allocated** -------------- --------------------- -------------------- ---------------------- Alberta 22.5% \$100,000 \$22,500 Manitoba 40.0% \$100,000 \$40,000 Ontario 37.5% \$100,000 \$37,500 **Total** **100.0%** **--** **\$100,000** **SMALL BUSINESS DEDUCTION (SBD)** - SBD provides a 19% tax deduction for **CCPCs for ABI carried on in Canada** - Must be a CCPC throughout the **ENTIRE** fiscal period - If control changed to non-resident for part of the year, **no SBD for ENTIRE year** SBD-eligible income is the lesser of: 1. ABI in Canada 2. Taxable Income - Less: 100/28 × Foreign Tax Credit (Non-Business) - Less: 4 × Foreign Tax Credit Business 3. Annual Business Limit of \$500,000 - Less: Portion allocated to associated companies - Less: Greater of A. Reduction for large CCPCs based on prior year's TCEC B. Reduction based on prior year's AAII 5 × (ADJUSTED AII -- \$50,000) +-----------------------------------+-----------------------------------+ | **Aggregate Investment Income** | **Adjusted Aggregate Investment | | | Income** | | Based on Current Year | | | | Based on Previous Year | +===================================+===================================+ | - Interest, rents royalties, | - Interest, rents, royalties, | | foreign property income | foreign property income | | | | | - Net TCGs | - Net TCGs ONLY on assets not | | | used in an active business | | - Net capital losses deducted | | | | - NO deduction for net capital | | | losses deducted | +-----------------------------------+-----------------------------------+ **If you notice that client's AAII is above \$50,000, let them know that next year's annual business limit will be reduced which may result in a lower small business deduction)** **Active Business Income (ABI)** - Any business activity, including manufacturing, the sale of property (inventory), and the rending of services - Includes incidental property income (e.g. interest on short-term investments of temporary excess cash, short term rental of excess space, interest on overdue accounts receivables) - Includes property income received from an associated corporation if the associated corporation deducted the amount when computing its ABI (e.g. Company A pays Company B rent and Company A deducts it) - Includes SIB if it employs \>5 full time employees in the "business earning property income" **Property Income** - Interest, dividends, rents, royalties, and specified investment business income - Excludes incidental property income and property income received from an associated corporation (described above in ABI) **Specific Investment Business (SIB)** - A business where the main purpose is to earn property income from interest, dividends, rents, and royalties - Included in property income - Qualifies as ABI if it employs \> 5 full time employees in the "business earning property income" **Personal Service Business (PSB) and Personal Service Corporations -- B** - Definition: - A corporation (often referred to as the incorporated employee) provides services to another person - If not for the corporation, the individual performing the services would be regarded as an employee of the other person - Individual owns ≥ 10% of the corporation - Deductible expenses: - Salaries paid to incorporated employee - Employment related expense (e.g. travel) - Business expenses would not be deductible (e.g. promotion, entertainment, etc) - Not entitled to the SBD or GRR - PSB Tax = 38% -- 10% + **5% (Additional Tax)** = 33% (Max rate for individuals) - Can claim SBD and GRR if the corporation employs \> 5 full time employees in the business and PSB income qualifies as ABI - This is sometimes referred to as an incorporated employee - If the business carried on by a corporation is really one of an "employer/employee relationship", then it will be a personal service business if the other criteria are met - The personal service business ie not entitled to the SBD/GRR. - The only expenses deductible by the personal service business are the employee expenses and not the business expenses **Professional Corporations** - Provinces permit doctors, dentists, lawyers, accountants, veterinarians, chiropractors, and other professionals to incorporate their practice - Income earned by professional corporations is considered ABI and qualifies for SBD - No requirement for professional corporations to have \> 5 employees for SBD**\ ** **RDTOH AND REFUNDABLE PART I AND PART IV TAX** There are two issues that need to be resolved with the taxation of investment income earned by corporations 1. **TAXATION OF CORPORATE INVESTMENT INCOME** +-----------------------------------+-----------------------------------+ | PROBLEM | The basic corporate tax on | | | investment income for CCPCs is | | | roughly 40% (38% -- 10% + | | | Provincial Rate). This is less | | | than for individuals which ranges | | | from 48% to 54% for the top tax | | | bracket. This leaves open | | | possible tax deferment for | | | investment income earned in | | | corporations. | +===================================+===================================+ | SOLUTION | An **Additional Refundable Tax | | | (ART) of 10⅔%** to lesser of: | | | | | | 1. AII | | | | | | 2. Taxable Income -- | | | SBD-Eligible Amount | +-----------------------------------+-----------------------------------+ | AGGREGATE INVESTMENT INCOME | Net Taxable Capital Gains | | | | | (AII) | Interest | | | | | | Rents | | | | | | Royalties | | | | | | Foreign Portfolio Dividends | | | (\10% ownership of payor's voting | | | shares AND \>10% ownership of FMV | | | of all issued shares | | | | | | OR | | | | | | Recipient corporation, plus any | | | related persons, has \>50% | | | ownership of payor's voting | | | shares | +-----------------------------------+-----------------------------------+ | PROBLEM | The solution above causes | | | investment income to be taxed at | | | roughly 50⅔% (38% -- 10% + | | | Provincial Rate + 10⅔%). The tax | | | on Canadian dividends received is | | | 38⅓%. If the income after taxes | | | is paid out via dividend, the | | | shareholder will pay taxes (net | | | of the DTC) of roughly 45% on a | | | non-eligible dividend if they are | | | in the top tax bracket. The | | | corporate tax and tax on the | | | dividend combined would be much | | | greater than if the investment | | | income were earned directly by | | | the shareholder. | +-----------------------------------+-----------------------------------+ | SOLUTION | **Part IV refundable tax of 38⅓% | | | paid on Canadian dividends** | | | | | | Add to the CCPCs ERDTOH or | | | NERDTOH and is refundable when | | | dividends are paid out to | | | shareholders | +-----------------------------------+-----------------------------------+ **REFUNDABLE DIVIDEND TAX ON HAND (RDTOH)** +-----------------------------------+-----------------------------------+ | **ERDTOH** | **NERDTOH** | +===================================+===================================+ | - Part IV tax on **eligible** | - Part I tax on AII | | dividends received | | | | - Part IV tax on | | | **non-eligible** dividends | | | received | +-----------------------------------+-----------------------------------+ | **Opening Balance** | **Opening Balance** | | | | | **+** Part IV taxes paid on | **+** Refundable Part I Tax = | | eligible dividends received from | Lesser of: | | portfolio dividends | | | | 1. 30⅔% × AII | | **+** Part IV taxes on eligible | | | dividends from connected | 2. 30⅔% × (TI -- SBD-eligible | | corporations who received a | TI) | | refund from their ERDTOH | | | | 3. Part I Tax | | **--** Prior Year Refund | | | | **+** Part IV tax on non-eligible | | **Ending Balance** | dividends from connected | | | corporations who received a | | | refund from their NERDTOH | | | | | | **--** Prior Year Refund | | | | | | **Ending Balance** | +-----------------------------------+-----------------------------------+ | **Dividend Refund** | **Dividend Refund** | | | | | Lesser of: | Lesser of: | | | | | 1. ERDTOH Ending Balance | 1. NERDTOH Ending Balance | | | | | 2. 38⅓% × eligible dividends | 2. 38⅓% × non-eligible dividends | | paid | paid | | | | | If the eligible dividends paid | If the non-eligible dividends | | exceeds the balance in ERDTOH, | paid exceeds the balance in the | | the **NERDTOH** **CANNOT be | NERDTOH account, the **ERDTOH** | | accessed**. | **CAN be accessed**. | +-----------------------------------+-----------------------------------+ Under the old rules, if your client wanted to pay an eligible dividend, all they needed to consider was their GRIP balance. Now, you must look at the ERDTOH balance. If it is low, and there is a sufficiently NERDTOH balance, it is recommended to: - Pay an eligible dividend just high enough to use the balance in the ERDTOH - Pay a non-eligible dividend for any remainder **ELIGIBLE AND NON-ELIGIBLE DIVIDENDS -- B** **Eligible** **Non-Eligible** ----------------------- -------------- ------------------ **Gross-Up** 38% 15% **DTC** 6/11 9/13 **Dividend Received** \$100,000 \$100,000 **Gross-Up** \$38,000 \$15,000 **Taxable Dividend** \$138,000 \$115,000 **DTC** \$20,727 \$10,385 **GRIP** Opening Balance Plus: 72% × (Taxable Income -- SBD-Eligible Income -- AII) Plus: Eligible dividends received during the year Less: Eligible dividends paid during the previous year Ending Balance