Ch 12 Flashcards
General steps of Part I taxes payable?
- Taxable income
- Base amount
- Federal abatement
- Small business deduction (with or without GRIND)
- General rate reduction
- Additional refundable tax (Ch 13)
& done!
Details of the base amount
%
38% of taxable income
Details of federal abatement
%, purpose, conditions
10% of taxable income (Canadian income)
Purpose: leave room for provinces to apply their own taxes
Conditions:
(1) must prove you are operating only in Canada for full 10%
(2) 10% reduced depending on proportion of foreign/domestic operations for corps with foreign operations
Details of the small business deduction
%, purpose, conditions, limits
19% of least of…
(1) net active business income (Canadian)
(2) taxable income
(3) business limit - allocation(s) to associated corps - GRINDs for large corps and passive income
Purpose: provide incentive for Canadian small businesses
Conditions:
(1) must have ABI earned only in Canada (ABI = need to ‘do’ something, cannot be passive income)
(2) must be a CCPC (Canadian Controlled Private Corporation = if owner/controller is a Canadian resident for tax purposes, must be incorporated in Canada, private so company shares cannot be listed on TSX or int’l exchange)
Note: In case of status change, there will be a ‘deemed year’ to have a clear split and file appropriate tax returns
(3) cannot be a personal services corporation (avoid individual salary being taxed as a corporation)
Limits: applicable on max 500K taxable income but may be reduced by GRIND
Details of the SBD’s GRIND
Purpose, scenarios it applies to
Purpose: reduction in small business deduction for large corporations and passive income
Case 1: TCEC (taxable capital employed in Canada)
- PY TCEC < 10M - no reduction
- PY TCEC 10M-50M - subject to GRIND
- PY TCEC > 50M - no SBD at all (not a small business)
Case 2: AAII (adjusted aggregate investment income)
- AAII < 50K - no reduction
- AAII 50K-150K - subject to GRIND
- AAII > 150K - no SBD at all (nil)
Formula: SBD
First, figure out if the company is eligible for SBD.
Then, find the least of:
(1) Net active Canadian business income
Company’s taxable income generated from core activities only, without any investment income or other passive income
(2) Taxable income
(3) Annual business limit less any portion allocated to associated companies less grinds for large corporations and passive income. Scenarios include:
- If company makes more than 500K, first 500K gets SBD and other portion gets taxed at higher rate. 500K can also be reduced as a result of having to share SBD between associated corps.
- Private Canadian company meets definition of CCPC but is not a ‘small business’ anymore (CRA measures the size of company with taxable capital). Company won’t be entitled to whole 500K.
- Don’t want to incentivize individuals using CCPCs to earn investment income, but want actual small businesses to benefit from this. This income must be qualified as passive for those individuals.
GRIND calculation:
- If taxable capital < 10M, no reduction, will get 500K SBD → don’t use formula
- If taxable capital between 10M-50M, we get smaller amount of SBD → use formula
- If taxable capital > 50M, no SBD → ineligible so don’t use formula
Formula: SBD GRIND
Find the greater of:
-
TCEC (taxable capital employed in Canada) GRIND = A * (B/90,000)
A = Business limit for the year
B = 0.00225 * (TCEC for PY - 10M) -
AAII (adjusted aggregate investment income) GRIND = (D/500K) * 5(E - 50K)
D = Business limit for the year
E = AAII for PY
Notes:
Need to use PY values
Associated corporations: combined TCEC and AAII of all its corporations for the PY must be added
Details of the general rate reduction
%, purpose, conditions
Get 13% only on the portion that is not investment income and not small business income (whatever is left over, not captured elsewhere). Corporations that claim this can’t claim SBD or don’t have AII.
Purpose: cannot claim both SBD and GRR on same income, cannot claim GRR for AII
Condition: Only applicable on ‘full rate taxable income’
