Tax Notes:

Class 1
Chapter 11 – Corporations

Primary and secondary relationships:

 Primary – Dividends paid by the corporation are not deductible, but are taxable to the recipient
 Secondary – Payments such as salaries, interest, and rents are deductible and taxable to the
recipient

Determination of taxable income:

 Taxable income for a corporation is
1. Net income for tax purposes
2. Less: Special deductions
 Special deductions (Division C deduction)
1. Donations to charitable organizations -ITA 110.1(1)
 Limited to 75% of net income for tax purposes
 Unused donations can be carryforward 5 taxation years
2. Non-capital losses – ITA 111(1)(a)
 Carried back 3 years and forward 20 years
 Used against any other source of incomes
3. Net-capital losses – ITA 111(1)(b)
 Carried back 3 years and forward indefinitely
 Used only against taxable capital gains
4. Dividends from taxable Canadian corporations – ITA 112(1)
 Dividends received included as property income for net income tax purposes
 Dividends are deductible from taxable income if they are received from:
 Taxable Canadian corporations – ITA 89(1), or
 Foreign affiliate corporations
 Dividends from other Canadian corporations:
1. Result is dividends flow tax free
2. Private corporations may be subject to temporary tax (Chapter 13)
3. Removes the second level of tax until dividends are received by individuals

Calculation of corporate tax

Categories of corporations
1. Public corporations
- Canadian residence and shares are traded on a stock exchange
2. CCPC
- Canadian residence
- Not a public corporation, and
- Not controlled by non - residents of Canada
Federal tax
 The primary federal corporate income tax is 38% to the corporation’s taxable income
 The federal tax is reduced by the provincial abatement of 10%
 Federal tax may be increased or reduced further based on specific types of income earned by
certain corporations

Special Reduction
GRR – applies to particular parts of income
- Public corporation’s
1. Federal tax is reduced by 13% of the corporation’s taxable income
- CCPC
1. Federal tax is reduced by 13% on active business income
2. Above the annual SBD limit of 500,000
Refundable Tax on Investment Income

 Applies only to the investment income of CCPC’s

- Additional tax is 10 and 2/3% of investment income
- This tax is fully refundable to the corporation when dividends are paid
Small business deduction

 Available only to CCPC’s

 Deduction permits the normal federal tax rate to be reduced by 19% for the first 500,000 of
annual active business income of the corporation

Provincial Tax
 Expressed as % of corporate taxable income
 Each province and territory imposes a primary flat rate of tax on all corporate income
Note: Can have multi-provincial tax if business carries on in another province where they have a
permanent establishment such as an office

Integration of Corporate and Individual Taxation

Dividend Tax Credit
DTC is used to prevent the possibility of double taxation – it attempts to integrate the corporate and
personal tax

 Non-eligible dividends are subject to a 15% gross up (DTC is 9/13 x gross up)
 Eligible dividends are subject to a 38% gross up (DTC is 6/11 x gross up)

ACQUISITION OF CONTROL RULES

• When?
• Control (more than 50% of the voting shares) of a corporation is acquired by an
unrelated person

• What happens?
• Deemed taxation year end immediately prior to the date of the AOC
• File a tax return for the short taxation year end
• Prorate CCA claims
• Choose a new taxation year end

• Loss carry-overs
• Net capital losses, property losses and ABILs expire
• Non-capital losses can be carried forward provided that the loss business is
carried on at a profit (or with a reasonable expectation of profit) throughout
the period that the loss will be claimed
• Are only deductible to the extent there is income from the business
that generated the loss and/or income from a business selling
similar products or providing similar services

• Inventory
• Valued at the lower of cost or market at the deemed year end
• Resulting loss is recognized for tax purposes

• Accounts receivable
• Bad debts reserve is not permitted
• Uncollectible amounts must be claimed as a bad debts expense

• Depreciable property
• If the FMV of a class is less than the UCC, the UCC is reduced to the lower
FMV
 • Reduction is deemed to be CCA
• ACB remains the same

• Non-depreciable capital property

• If the FMV of a non-depreciable capital property is less than its ACB, the
difference is deemed to be a capital loss
• The ACB is reduced

• Election to Recognize Accrued Gains

• Can elect to recognize accrued gains on capital properties (non-depreciable or
depreciable property)
• Can create a capital gain that will offset losses that would otherwise expire on the
AOC
• If recapture arises, it can only be offset by non-capital losses
• May not be the best use of non-capital losses if they can be carried forward
(subject to the restrictions noted above) to future years
• Can choose an elected amount between the ACB and FMV to create the desired gain
• The elected amount becomes the new ACB of the property

Answer:
Non-capital loss MAXIMUM
- Net Income (40,000)
- Dividends from taxable Canadian corporations (12,000)
- Donations (limited to 75% of NI) 0
 - Net-capital losses (10,000)
Total non-capital loss (62,000)

Answer:
NI 300,000
Dividends from taxable Canadian corporations (20,000)
Donations (limited to 75% of NI) (40,000)
Non-capital losses (10,000)
Net-capital losses (15,000)
Taxable Income 215,000

Answer:
The net-capital losses expire and cannot be used, but the non-capital losses can be carried forward if the
people who acquired are staying in a similar line of business and it is expected that there will be business
income to write of non-capital losses
Answer:
Class 1 – No adjustments required – FMV is more than UCC
Class 8 – UCC needs to be adjusted (7,000) down to 20,000 as it cannot be greater than FMV
Class 12 – No adjustments required
Class 14 – UCC needs to be adjusted (500) down to 3,000 as it cannot be greater than FMV
The reduction to the UCC in class 8 (7,000) and class 14.1 (500) for a total of (7,500) will decrease the
business income of Y LTD for the year ending October 31.

Answer:
P LTD taxation year is deemed to end March 31st, immediately before Carl takes control. P LTD can select
a new year end for tax purposes
Investment in A LTD (14,000) – capital loss for the year end March 31st
Inventory – No adjustment because FMV is not below the cost
Land – No adjustment because FMV is not below cost
Building - No adjustment because FMV is not below cost
There is a (7,000) net – capital loss that expires year end March 31st if unused. P LTD can elect to realize
accrued gains, they should do so to use the net capital loss before it expires. They can realize a gain of
14,000 on the land bringing the ACB up to 94,000.

Answer:
Federal Tax:
Base 38% x 100,000 = 38,000
Abatement 10% x 100,000 = (10,000)
GRR 13% x 100,000 = (13,000)
Total Federal Tax 25,000

Chapter 12
PUC
 Calculated at the corporate level
 Based on capital contributed to corporation for newly issued treasury shares
 Average among all shareholders of the same class based on shares held
 Can be withdrawn from company tax free
 May or may not equal the ACB

ACB
 Calculated at the shareholder level
 Based on amount paid for shares
 Unique to each shareholder
 Considered on disposition of shares

Corporate Capitalization – Debt or Equity

 Debt and equity are capital property for tax purposes
  Both yield a return on investment in the form of interest or dividends
 Both are subject to capital gains treatment
 Loss incurred on a debt
- Is a capital loss
- If loan is made to SBC – the loss is considered an allowable business investment loss
(ABIL)
 Loss incurred on equity
- Is a capital loss
- If SBC shares are sold at a loss, the loss is considered an (ABIL)
- Timing – Capital loss is only recognized in the year in which
*Shares are disposed of, or
*Corporation becomes legally bankrupt; or
*Corporation is insolvent and has ceased operations

Corporate Capitalization by share capital

 Return of capital can take two forms
1. Sale of shares to other shareholders – results in capital gain or loss
2. Return of capital – PUC reduction – Public vs private company and Sale of shares
back to the corporation – “redemption”
Tax consequences on redemption
 Redemption price > PUC
Deemed Dividend
 For capital gains or losses purposes
Shares are deemed to be sold for proceeds = to the PUC of
the shares;
If the PUC is not equal to the ACB there will be a capital gain
or loss

Transferring assets to a corporation

ITA permits them to be transferred to a corporation at their tax cost – (even though for legal purposes the
transfer price may be FMV)
ITA 85 – Rollover

 Defers tax to the transferor at the time of transfer

 There will be future tax implications
ITA 85 – Transfer price

 Elected amount cannot be less than the boot

 Elected amount becomes:
- Sales proceeds – transferor (seller)
- Cost of assets – purchaser
 - Cost of property received – transferor
Allocation of the elected amount

 Elected amount is allocated in the following order:

1. Non – share consideration (up to FMV)
2. Preferred Shares (up to FMV)
3. Common Shares (remainder)
ITA 85 – Consideration

 FMV of consideration must equal FMV of assets transferred – IF NOT adverse tax consequences
will occur
 No tax implications if:
- Consideration includes shares
- Elected amount = tax costs
- Elected amount is equal to or greater than the boot (cannot be less)
ITA 85 – Elected amounts
Inventory and non-depreciable property

 Lesser of
- FMV of the asset
- Cost amount of the asset (tax value)
Depreciable Capital Property

 Least of
- FMV of the asset
- Cost (original) of the asset
- UCC of the asset
Where elected amount < original cost of asset, original cost becomes the corporation’s capital cost for
asset – UCC remains at elected amount

 Where shareholder and corporation are related and elected amount > original cost of asset:
- Corporation’s capital cost and UCC are limited to shareholder’s UCC + taxable income
recognized by shareholder on the transfer

Election to transfer assets at tax value:

Requirements

 Property transferred must be eligible property

- Capital property
 Depreciable
 Non-depreciable
 Inventory
 Resource property
The following assets are NOT ELIGIBLE
  Real estate that is being held for sale
 Real estate that is owned by a non-resident (unless it is used in a business)
 Cash (Not a capital asset)
 Prepaids (Not a capital asset)
 Depreciable property that has a terminal loss and is transferred by an affiliated person

Section 22 - Sale of A/R

 A/R is capital property and therefore a loss on AR would be a capital loss
- Only 50% of the capital loss would be deductible to the extent of taxable capital gains
 Income that led AR was fully taxable when received
 Leads to an inequitable result
 Section 22 allows for the loss of sale on receivable to be deducted from business income
 A joint election must be filed by the vendor and purchaser
 Receivables must be sold as part of the sale of all or substantially all of the business
 Purchaser can claim a future tax-deductible allowance against the value of the purchased
receivables (Without this election a purchaser cannot claim an allowance against the purchased
receivables)

Stop-Loss Rules
 Important to consider whether losses will be allowed when transferring assets with unrealized
capital losses or terminal losses
 Loss may be denied or postponed if the transfer is between affiliated parties ex. (A taxpayer and a
corporation controlled by that taxpayer or his spouse)
Answer:
PUC = (1,000 + 8,000) / (1,000 + 800) = $5 per share CS
Common share PUC total is $9,000
PUC = (7,000 / 500) = $14 per share PS
Preferred share PUC total is $7,000
Anne – ACB – 1,000; PUC – 1,000 x 5 = 5,000
Bill – ACB – 8,000; PUC – 800 x 5 = 4,000
Carl – ACB – 7,000; PUC – 500 x 14 = 7,000

Answer:
W LTD – ACB & PUC = 100
Victor buys from William – ACB = 100,000; PUC = 50 for Victor, William will have tax consequences of
100,000-50=99,950*50% =$49,975
Victor buys new shares from W LTD – ACB = 200,000; PUC = (200,000 + 100) / 2 = $100,050, in this
scenario William will have no tax consequences and the corporations PUC is $200,100

Answer:
Veronica tax implications arm’s length – 100,000 – 60,000 = 40,000 x 50% = 20,000 taxable capital gain
If sold back to the corporation then there will be a deemed dividend of 100,000 – 60,000 = 40,000
Proceeds (PUC) 60,000
ACB (60,000)
Capital Gain NIL