Ch 14 Flashcards
Details on acquisition of control
Definition, consequences and considerations
Def: Control of corporation shifts from one person/group to another, top of the chain changes
Consequences and considerations (5):
(1) Deemed year end: short taxation year as a result of acquisition, need clear cut off to know when is one party paying the taxes (seller) and when is the other party taking over (buyer), acquisitions are not usually timed to align fiscal year end since they’re done for business reasons (not tax planning). Consequences include:
* CCA, SBD and SRED limit prorated
* Short TE counts as a year for losses
* Corporation must choose a new year end
(2) Charitable donations: cannot be carried forward
(3) Capital losses: cannot be carried forward
(4) Non capital losses: business losses can be carried forward under certain conditions
* Continuation of same business with the expectation of profit
* Losses must be used against income for same or similar business
(5) Unrecognized losses at deemed year end: assets that have FMV < Cost will we written down to FMV at year end
* More on this in next cards
Details of unrecognized losses at deemed year end
assets that have FMV < Cost will we written down to FMV at year end
- Non-depreciable property: securities, such as stocks, bonds and units of a mutual fund trust shares (or debt obligations) in a corporation; a partnership interest; and land (but not buildings) – FMV < ACB – deemed disposed at FMV = capital loss
- Depreciable property: type of capital property in respect of which a taxpayer is entitled to claim capital cost allowance (CCA) – FMV < UCC – deemed disposed at FMV = generate CCA, deducted at deemed year end – Note: The benefit of deemed disposal is that I still own the asset, but I now have a higher cost basis. When I sell the property in the future, I’ll get a smaller capital gain to pay taxes on.
- Accounts receivable: any doubtful accounts must be written off at deemed year end, else won’t be deductible if it becomes uncollectible later
AOC summary
Steps
- Determine that an AOC has taken place.
- Determine the deemed year end.
- Summarize the unrecognized gains/losses and determine which assets will be required to be deemed dispose
- Summarize the capital loss balance and determine a strategy to minimize the capital losses that will “disappear” post acquisition
- Determine if the business will continue post AOC and if the non capital losses should also be used up in the deemed YE
- Calculate the new cost of the assets that were deemed disposed
Details of association
Purpose, related individuals, control, rules
Purpose: avoid having individuals create several companies in order to claim benefits in each of them. Associated corporations must share:
* Small business deduction (both the 500K limit and in grinds)
* SRED expenditure limit (both the limit and the taxable capital calculation)
Def: related individuals include spouse, children, parents, grandparents, siblings, and all the former on the spouse’s side as well
Def: person/corporation/group owns shares (either common or preferred) with a FMV of over 50% of all issued and outstanding shares or person/corporation/group owns common shares with a FMV over 50% of all issued and outstanding common shares
Rules related to control include:
* Holding companies: shareholder of one company deemed to own shares of the other based on their stake %
* Underage children: parents deemed to own their shares
* Rights and options: not evaluated (treated as if exercised)
RULE 1
ITA 256(1)(A)
Whether direct or indirect control, still associated with each other
RULE 2
ITA 256(1)(B)
If same person or group own A and B, A and B must share SBD and other benefits
RULE 3
ITA 256(1)(C)
RELATED
Related people, own 2 companies, cross-ownership above 25%
↳ associated with each other
RULE 4
ITA 256(1)(D)
RELATED
1 individual controls one, group controls another, related individuals (one to all) → associated to each other
Association through a 3rd corporation
ITA 256(2)
2 corporations associated with same 3rd corporation are deemed associated to each other
Election: 3rd corporation can elect not to be associated
* 1st and 2nd able to use 100% of SBD
* 3rd will have no SBD
RULE 5
ITA 256(1)(E)
RELATED
Two related groups (one from grp A to all of grp B) own two corporations → cross-ownership
Details of government incentives
Purpose
Purpose: goal of the general tax system is to
1. Collect the cash to fund other things in the economy
2. Provide incentives towards general goals
* Incentivising certain specific economic regions
* Incentivising certain specific economic activities
* Stimulating the economy in general (ex: Canadian emergency wage subsidy)
Mechanisms for gov’t incentives
- Non-refundable investment tax credits: reduce taxes payable, can only use these if you have taxes payable to use them against, if credits > TP then carried forward
- Refundable investment tax credits: reduce taxes payable, if you qualify you will receive refund from CRA even if credits > TP or if corporation has no TP at all – Note: Tax credits are like income, you must pay tax on it
- Others include: tax holidays, grants & subsidies, interest-free or low interest loans, tax deductions like recent accelerated CCA changes
Investment tax credits
3 common types
- Apprentices (trades): 10% on first 20,000 of salaries paid, must be employed in prescribed trade in Canada
- Qualified property: 10% on property used for manufacturing and processing, logging, farming/fishing, storing grain in Atlantic provinces and some offshore regions
- Scientific R&D: 15% or 15% on qualified expenditures
* Conditions: applicable on current expenditures only, 15% if not a CCPC, 35% (up to a certain limit) if a CCPC
Formula: SRED
First, figure out total eligible expenses, applicable rate (15 or 35)
Enhanced rate eligibility: (1) must be a CCPC (2) limit formula:
1. Find A, which is either… (1) 0 - if taxable capital of corporation and associated corporations < 10M in PY (2) Lesser of 40M and taxable capital and associated corporations in PY (amount over 10M)
2. Plug A into the formula: [$3,000,000][($40,000,000 – A) / $40,000,000]
Notes: Credits calculated above are
* Qualify for 35% rate (Thus, they are 100% refundable)
* Expenses above this amount (and those incurred by a non-CCPC) subject to 15% rate
Details on refundable tax credits
Scenarios for 100%/40%/0% refund
Scenario where no taxes payable to use credits against (i.e. I don’t have taxes to pay), CCPC can get full 3M (annual expenditure limit) if PY TI < 500K and PY TCEC < 10M, credits refundable as follows:
* 100% - SRED expenses, portion that qualifies for 35% only
* 40% - Any ITC, so long as taxpayer = individual or ‘qualifying corporation’ (produced < 500K taxable income in PY and is a CCPC)
* 0% - Any other credits, ex: excess of the (previous) 40% or non-CCPC
Note: The non refundable portion can be carried back 3 years or forward 20 years.
* We prefer carrying back tax credits to get an immediate cash refund from the CRA for PY taxes (as opposed to carrying forward tax deferrals because of TVM implications and the opportunity cost of money).
