Businesses/ Corporations

Question 1

Common business expenses DISALLOWED

Answer 1

• Amortization / Impairment / Accounting Gains & Losses (deduct via CCA)
• Personal expenses and membership / club dues
• Charitable donations – deduction to determine Taxable Income for a Corp.
• Political contributions – limited tax credit available for an individual; Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit.
• Taxes, interest and penalties related to tax
• Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
• Expenses re: issue or sale of shares and refinancing costs (deduct over 5 years)
• Life insurance premiums (except where the policy has been assigned as collateral)
• Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
• Carrying charges on vacant land (non-deductible portion added to ACB)
• Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)

Question 2

Common business expenses ALLOWED

Answer 2

• Automobile expenses
• Home office expenses
• Convention expenses (limited to 2 per year)
• Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
• Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
• Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year

Question 3

“Luxury” automobile costs

Answer 3

• There are various limitations on the costs that may be deducted by a business in the determination of net business income:
  o CCA is calculated on a maximum vehicle value of $30,000 (before PST, GST, HST).
  o Interest on financing the purchase of the vehicle is limited to a maximum of $10 per day.
  o Vehicle lease payments are limited to $800 per 30 day period.
• Note that any taxable benefits that might arise where the business provides a “luxury” automobile to an employee or shareholder are calculated on the full value of the vehicle.

Question 4

Conventions expense

Answer 4

• The costs of attending a maximum of two conventions per year may be deducted when determining net business income if the convention held during the year by a business or professional organization at a location that is consistent with the territorial scope of the organization.

Question 5

Bonuses payable –
Limit on deferral

Answer 5

• All outstanding remuneration must be paid to the employee within 180 days of the year-end balance sheet date in order to be deductible by the company.
• If amounts remain unpaid for 180 days after the year end,
  o the amount shall be deemed not to have been incurred as an expense for that taxation year.
  o the company will claim a deduction for the expense when the amount is paid, and the employee will include the amount as income in the taxation year that it is received.

Question 6

Loss of CCPC status

Taxation

Answer 6

Loss of CCPC status (Taxation)
* Can occur if the company goes public, is no longer controlled by a Canadian resident, etc.
* Implications:
o Possible acquisition of control
o Tax balances  RDTOH pool cannot have any further additions (CDA would still be available if the company continued to be private)
o Small business deduction only available to CCPC  non-CCPC will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends
o Shares of the company will no longer be qualified small business corporation (QSBC) shares; not eligible for the lifetime capital gains exemption on the disposal of non-QSBC shares
o Tax return payments due two months after year-end, instead of three months
o Stock option taxation less favourable, as employees will not be able to defer the tax benefit arising from the exercise of stock options until the sale of the underlying shares

Reference: ITA 89, 129, 111, 110.6(1), 125 

Question 7

Owner-Manager Compensation
Salary vs. Dividends

Taxation

Answer 7

Owner- manager compensation – salary vs. dividends (Taxation)
* Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
* The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration
* Salary payments are deductible to the corporation whereas dividends are not
* Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
* Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
* Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments
* Dividend payments will reduce an individual’s cumulative net investment loss (CNIL)

Reference: ITA 18(1)(a), 121, 146

Question 8

Reserves for Bad Debts

Taxation

Answer 8

Reserves for bad debts (Taxation)
* A reserve may be deducted for bad debts to the extent that it is reasonable and based on specific uncollectible accounts
* A reserve claimed in one taxation year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income
o Effectively this means that the increase in the reserve amount should be deducted each year

Reference: ITA 20(1)(l), 12(1)(d)