CH 5 - CORPORATE TAX Flashcards
When are coporations considered residents of Canada ?
all corporations incorporated in Canada are considered to be resident in Canada. It is possible for a foreign
incorporated corporation to be considered resident in Canada under Canadian common-law principles, which
generally establish a company’s residency for tax purposes to be where its central management and control is
exercised. Generally, this is where members of the board of directors meet and hold their meetings. Therefore, if a
foreign corporation has its central management and control based in Canada, it could be classified as resident in
Canada.
Filing requirements of a corporation ?
A corporation must file its corporate income tax return no later than six months after the end of its fiscal tax year.
The period is calculated by month; therefore, the corporation must count six months, no matter how many days a
month has. If the corporation’s year end date is not the last day of the month, the return is due on the same day of
the sixth month after the corporation’s year end
What form are corporations required to file a tax return with ?
A corporation files a tax return by completing CRA form T2, along with any other forms required in the T2 return for
supporting information.
Which corporate entities are exempt from filing a T2 tax return
- Tax exempt Crown corporations
- Hutterite colonies
- Registered charities
Does a corporation have to file a tax return even if there is no tax payable ?
Yes, they always have to file a tax return.
When is corporate tax paid ?
Income earned within a corporation is subject to withholding of income tax upon payment. As such, the
government requires that corporations remit instalment payments of corporate income taxes payable.
[This ensures
that income tax is collected throughout the year, rather than the tax return is filed. This is consistent with normal
tax collection of all employed clients through payroll source deductions or quarterly tax instalments by other
individuals]
Are corporate tax installments always required ?
Instalments are not required if the federal tax owing for the current or previous year is $3,000 or less.
[Instalments
are generally required to be paid on a monthly basis, however, some CCPCs may be eligible to make quarterly
instalments. The CCPC must have demonstrated an excellent payment history, a taxable income below $500,000,
and taxable capital employed in Canada under $10 million].
When do overdue taxes payable have to be paid?
Within 2 months of the taxation year end.
[For corporations who pay quarterly instalments, it has to be 3 months of the due date].
How much does CRA Charge for interest on late payments and instalments ?
CRA charges compounding interest only when all the following conditions apply:
* An instalment reminder has been sent to the taxpayer showing the required instalment payments.
* It has been determined by CRA that Instalments are required.
* Insufficient instalment payments were made or were late.
Is the interest on late payments tax deductible ?
Charged interest is calculated using the highest CRA prescribed interest rate compounded daily. Interest is not
deductible for tax purposes.
What are the 5 types of corporations ?
*CCPC
* Other private corporation
* Public corporation
* Corporation controlled by a public corporation
* Other corporation
What is required for a corporation to qualify as a CCPC ?
It must be a private corporation, which means that its shares are not listed on a stock exchange.
* It must be resident in Canada, **and must have been either incorporated or resident in Canada from at least June **
18, 1971 to the end of the current tax year.
* It must not be controlled directly or indirectly by one or more non-resident persons. Control is broadly defined
in Canadian tax law to include owning a majority of shares, either directly or indirectly, or having the ability to
exercise de facto control.
It must not be controlled directly or indirectly by one or more public corporations.
* It must not be controlled by a Canadian resident corporation that has its shares on a designated stock exchange
outside Canada.
* If all of its shares are owned by a non-resident person, by a public corporation, or by a corporation with a class
of shares listed on a designated stock change, that person may not have control of the corporation.
For a corporation to qualify as other “other private corporation” ?
*It must be resident in Canada.
* It must not be a public corporation.
* It must not be controlled by one or more public corporations.
* It must not be controlled by one or more prescribed federal Crown corporations (as defined in Regulation 7100
of Canada’s Income Tax Regulations).
For a corporation to qualify as public corporation ?
- It must have a class of shares listed on a designated Canadian stock exchange.
- It must have chosen or been designated by the minister of National Revenue to be a public corporation, and
complied with the prescribed conditions under Regulation 4800(1) of the Income Tax Regulations on the number
of its shares, the public trading of its shares, and the size of the corporation.
How can a shareholder withdraw income from a corporation ?
- Receive a salary from the corporation.
- Declare a dividend from the corporation.
[Both methods result in income that is taxable on the shareholder’s personal tax return.]
What is integration ?
The tax concept referred to as integration effectively equalizes the total tax cost incurred by the transfer of funds
from the corporation to your clients.
How does integration work for both methods of fund transfer from the corporation—salary and dividends:
- Salary—Salary reduces the taxable income of the corporation and the corporation pays less tax. The full salary
amount is included on the tax return of the shareholder, and its tax cost is borne entirely by the client. -
Dividends—Dividends do not reduce corporate income. They are paid from corporate after-tax income.
However, when the dividend is received by the shareholder, it is subject to dividend gross up and dividend tax
credit schemes. The dividend receives preferential tax treatment on the tax return of the shareholder because a
layer of tax has already been paid within the corporation. Because shareholders own the corporation, they pay
the first layer of tax within the corporation and then pay the remainder on their personal tax returns.
Is there a tax advantage to withdrawing money from the corp either as salary or dividend ?
there is no tax advantage to withdrawing money from the corporation in either the form of salary or dividends. Shareholders often select a mix of salary and dividends for reasons other than taxation.
What are the disadvantages of drawing a salary from the corporation ?
*The shareholder incurs the cost of making CPP contributions.
* The corporation faces increased costs and payroll taxes, such as provincial Workers’ Compensation and
employee health programs.
* If the corporation should incur a business loss in a future year, there is less ability to carry that loss back.
What are the advantages of drawing a dividend from the corporation ?
- No CPP contribution deductions—Paying and receiving a dividend does not require the corporation or
shareholders to make CPP contributions. - No income tax deductions—The dividend amount is not added to the corporation’s monthly payroll reporting, so
no source deductions have to be remitted to CRA for paying a dividend. - Less chance for payroll penalties—Paying a dividend saves the corporation from potential penalties for late
payroll reporting and remittances.
** Flexible timing—Receiving a dividend allows shareholders to declare the dividend at a suitable time (within
reason), which can defer taxation for the shareholder.**
What are the disadvantages of drawing on your corporation through a dividend ?
A dividend amount must be paid equally on all shares of a given class, which means that each shareholder
receives a dividend based on proportionate ownership, rather than on personal income needs.
* Without CPP contributions, shareholder have fewer income options at retirement.
* The corporation is required to file a dividend declaration.
* Different types of dividends are reported differently and subject to different tax rates on the shareholder’s
personal tax return.
* The corporation is required to set up a CRA dividend account.
* **The corporation is required to submit to T5 tax forms to CRA to report dividends paid each calendar year by end
of the following February, **with a copy to all shareholders for their personal tax returns
Deciding between a dividend and a salary ?
- Changes and updates to federal and provincial tax regulations
- The province of residence of the corporation and the shareholders
- Sources of other income and the effective marginal tax rate of the shareholders
- Eligibility of the dividend’s source of funds to benefit from the small business deduction
- Requirement to remit to CRA various salary-related deductions (e.g., CPP, Employment Insurance, Workers’
Compensation, health plans) - Loss of potential future RRSP deductions by issuing dividends
Factors that increase or decrease a CDA?
Capital gains and losses—Capital gains are taxable only at 50% of the realized gain amount. When a corporation
realizes a capital gain, the untaxed half of the gain increases the CDA balance. Similarly, the non-taxable portion
of realized capital losses (50% of the actual realized capital loss) reduces the CDA balance.
* Capital dividends received from another company—Receiving a capital dividend from another private corporation
in which the company owns shares increases the CDA balance.
* Net proceeds received from a life insurance policy contracted by the business—When a private corporation
receives life insurance proceeds as a beneficiary after the death of an insured client, the company does not pay
taxes on this death benefit. The difference between the death benefit received and the costs incurred by the
company to pay insurance premiums (the base cost adjusted by the policy) represents net income. This net
income increases the CDA balance.
* Sale of eligible capital property—If there is a gain on a sale of eligible capital property, the non-taxable portion
of the sale proceeds is added to the balance of the CDA. Eligible capital property includes intangible assets
owned by a company that provide lasting economic benefits. Examples include concessions or licenses with
an unlimited life. Note, however, that as of January 1, 2017, eligible capital property is tracked as a class 14.1
intangible assets, for the purpose of capital cost allowance.
What happens if the shareholder does not pay the loan ?
If they do not pay within 30 days of year end. It could be treated as
an interest benefit
[the interest is calculated at the prescribed rate and considered a deemed benefit to the shareholder, which must be reported on the shareholder’s personal tax return].
What is income inclusion, and when does it occur ?
It is when the loan becomes classed as a taxable benefit. This occurs when the loan is not paid of within 12 months of the corps fiscal year end.
[if income inclusion is required it applies to the tax return year the funds were borrowed, rather than two years later].
Can the shareholder offset the loan against personal funds used to support the business ?
Yes, amount contributed can be offset against the amount of the outstanding shareholder loan.
Is there a way to avoid backdated income inclusion ?
Yes, for the shareholder to report any outstanding loan balance as a bonus or dividend at the end of the second fiscal year, when repayment of the loan becomes unlikely.
[Shareholders should avoid borrowing and repaying several loans in succession. CRA may considers a series of
shareholder loans and repayments as a single loan, which can trigger income inclusion].
How is it reported accounting wise when the shareholder takes a loan from the company ?
A/R - for the company.
Any interested earned is treated as income of the company
If the shareholder ends up with backdated income due to not repaying the loan, is a T4 Issued ?
No, the company does not go back and issue a T4 slip or take a corporate deduction for income reported by the shareholder.
[Therefore, the shareholder will include that amount as income, the corporation cannot deduct it as a business
expense].
What is Paid-up Capital (PUC) ?
Paid-up Capital (PUC) is the amount invested by shareholders in their corporation that can be returned to them tax free.
[All other distributions from a corporation to shareholders are either treated as dividends or taxable shareholder
benefits, for tax purposes. Therefore, the amount that consists of the corporation’s PUC account is important to
determine tax consequences of corporate reorganizations, distributions, and dissolutions].
What is the rational for PUC, why even do it ?
The rationale for returning PUC funds tax free is that the initial investment in corporate shares was made from the client’s personal after-tax income. Therefore, that same PUC should not be taxed on its return.
The capital gains exemption is only available for which type of business ?
is only available on the disposition of shares of qualified small business corporations
(QSBC) and qualified farming or fishing properties.
What do you need to qualify for QSBC capital gains exemption ?
- They must be shares of a small business corporation at the time of sale or disposition.
- They must meet a 24-month holding period test.
- They must meet an asset test that requires at least 50% of the company assets to be used in an active business
throughout the 24-month period.
How do you purify a company and qualify for the capital gains exemption, what changes need to be made by the corporation?
- Pay down debt and other obligations
- Pay dividends to the shareholders
- Move non-qualifying assets into another corporation
What is the holding period test, and how long must shares have been held ?
he shares must have been held by the shareholder (or spouse) for the last 24 months. This allows you to qualify and claim the capital gains exemption.
What is a PSB and what does it not qualify for ?
It is a Personal Service Business, it is a business that essentially is setup for one employee and it is not eligible for Small business deducation. -(an incorporated entity that would otherwise be an individual).
[PSB does not e qualify
for the small business deduction, or even the general rate reduction. In fact, a 5% additional tax is levied on a PSB,
leaving it with an effective federal tax rate of 33% (plus provincial rates).]
Investments owned by a holding company can come in many forms, including the following types ?
- Shares in public companies
- Interest earning investments, such as cash, guaranteed investment certificates, term deposits, or bonds
- Real estate, including residential or commercial rental properties or land
- Shares in private companies
What are the advantages of holding companies ?
- Asset protection
- Business planning
- Tax savings
- Tax deferral
- Estate planning
What are the disadvantages of holding companies ?
- Incorporation costs—Costs involved in incorporating a holding company can be expensive.
- Ongoing costs—Annual legal and corporate fees must be paid.
- Administrative burden—Legal and tax filings are required for the corporation.
- Complexity—A level of complexity can be added to keep track of the assets being held.
- Higher taxes—Without careful planning, your clients may end up paying higher taxes than expected due to a
high corporate tax rate on investment income, compared to a client’s typical marginal tax rate.
What special tax is added to investment income in a corporation to make it equal to the highest personal rate ?
To ensure this goal, a special tax (at 10.67%) imposed under Part I of the Income Tax Regulations levies a refundable tax on aggregate investment income and the taxable portion of capital gains earned in a corporation.
[This additional tax effectively taxes the
investment income as if it was earned in the hands of a client at the highest marginal tax rate].
Are dividends that a corp receives from another canadian corp deductible ?
Yes, they are deductible when calculating taxable income.
[Because the company that pays the dividends has already paid
income tax on its earned income, taxing the dividends would be essentially a double tax. Therefore, most dividends
received by corporations are not subject to Part I tax.
What type of corporations are subject to tax on their dividends ?
**Private corporations and some other corporations are subject to a special 38.33% tax
under -[Part IV of the Income Tax Regulations]
[The goal of this tax is to ensure that the income tax payable under Part IV is approximately equivalent to the tax
that the client would be responsible for by receiving dividends directly].
What is a dividend refund ?
A corporation may recover part of the income tax it has paid on dividend income and other investment income. To
do so, it must pay dividends to its own shareholders, which is referred to as dividend refund.
[The refund is equal to
38.33% of the dividends paid by the corporation (whether or not eligible) or the balance in its refundable dividend
tax on hand amount, whichever is lower].
What does RDTOH stand for ?
refundable dividend tax on hand (RDTOH)
account.
[This account represents an amount receivable from the federal government, will be received if dividends
are paid].
What should eligible and non-eligible dividends be considered/based on ?
Eligible and non-eligible dividends should be considered based on the relative balances in their RDTOH pools
*because they are tracked separately (as of 2019).
Non-eligible RDTOH accounts include the following amounts ?
- Refundable Part I taxes paid on investment income, and the taxable portion of capital gains
- Refundable Part IV taxes on dividends received from connected Canadian companies, where the dividend
amount was paid from corporate profits that benefited from the small business deduction
Eligible RDTOH accounts include the following amounts ?
- Part IV taxes paid on portfolio dividend income received from public Canadian companies
- Part IV taxes paid on eligible Canadian dividends received from connected Canadian companies (eligible
dividends are paid from corporate profits that did not benefit from the small business deduction)**
Aggregate investment income includes the following items ?
- All eligible capital gains for the year in excess of any capital losses for the year, or above any net capital losses
from previous years that are applied - Total income from property net of exempt income, taxable dividends deductible net of related expenses,
business income from an interest in a trust that is property income under Paragraph 108(5)(a) of the Income Tax
Regulations - Minus, total losses for the year from property
Foreign investment income includes the following items ?
- All foreign investment income only from outside of Canada sources, including eligible portion of the taxable
capital gains for the year, net of the eligible portion of allowable capital losses for the year - Total income from property from a source outside Canada net of exempt income, taxable dividends deductible
after deducting related expenses, business income from an interest in a trust that is considered property income
under paragraph 108(5)(a) of the Income Tax Regulations - Minus, total losses for the year from property outside of Canada
DIVIDEND REFUND
A private corporation is entitled to a dividend refund if it was a private corporation at the time it paid the dividend.
It does not have to be a private corporation at the end of the tax year. To claim a dividend refund, the corporation
must have paid either eligible or ineligible taxable dividends to the shareholders, and there must be a balance in the
corresponding RDTOH account at the end of the year.
The dividend refund available for each RDTOH account is the lower of the following two items ?
- 38.33% of taxable dividends paid in the year as a private corporation
- The RDTOH balance in each pool at the end of the tax year
Upon payment of dividends, the paying corporation has to designate the dividend as what ?
Upon payment of dividends, the paying corporation has to designate the dividend as either capital, eligible, or
non-eligible. Eligible and non-eligible dividends should be considered based on the relative balances in their RDTOH
pools because they are tracked separately (as of 2019).
