Chapter 12 Flashcards
112(1)
o Instead of a dividend tax credit, there is a Division C deduction for inter-corporate dividends per 112(1)
o Any amounts included in NITP as dividends from other taxable Canadian corporations are fully deductible in Division C
110.1(1)
Division C Deduction for Charitable Donations
o For corporations, there is no tax credit, but there is a Division C deduction available for donations made by the company
o This is limited to 75% of the NITP of the corporation for the year and there is a 5 year carryover for any amounts that could not be used in a given year
Reg. 400(2)
a corporation can only report taxable income in provinces/territories where it has a permanent establishment (fixed place of business including an office, branch, oil well, farm, timberland, a factory, a workshop or a warehouse)
Reg 402(3)
if a corporation has permanent establishments in more than one province, taxable income is allocated based on a simple average of the gross revenues % and salaries and wages % that occur at that establishment
112(3)
- 112(3) contains the “stop-loss” rule which says any capital loss resulting from a disposition of shares by a corporation must be reduced by the amount of dividends received that are eligible for deduction under s.112(1)
- This includes dividends received for all years during which time the shares were owned
- 112(3.01) states the stop loss rules do not apply where both of the following are satisfied:
a. The corporation holding the shares along with other non-arm’s length persons owned no more than 5% of the class of shares on which the dividends were receive
b. The shares were held for more than one year
123(1)(a)
basic federal tax for corporations, at 38%
124(1)
Federal Abatement
* The 10% reduction to the basic federal rate is to “make room” for the provincial taxes that are added on to total taxes – this reduction is taken on all income earned in a province and it does not apply to any foreign income
* The abatement is reduced if some income is earned outside a Canadian jurisdiction; for example, if only 80% of a corporation’s taxable income was allocated to one or more provinces, the abatement would effectively be reduced to 8%
125(1)
Small Business Deduction 125(1)
* This is a substantial tax reduction available to CCPCs on the first $500,000 of active business income (“ABI”) earned in a taxation year
The small business deduction is calculated as 19% of the least of three amounts
a. Net Canadian active business income (incidental income)
b. Taxable income less
100/28 * foreign non-business tax credit from 126(2) [relevant foreign taxes paid for this course]
4 (which is the 248(1) “relevant factor”) * foreign business tax credit from 126(2) [relevant foreign taxes paid for this course]
c. Annual business limit of $500,000
125 (1.1)(c)
the small business deduction rate is 19%
125(7)
- 125(7) “income of the corporation for the year from an active business” (a)
- The definition essentially excludes any passive/investment income unless it can be argued that it is incidental (results from ordinary operation of the business) to the active business of the corporation
Definitions “Canadian-controlled Private Corporation”
a. Private corporation
b. Not controlled by a non-resident of Canada
c. Not controlled by a public corporation
d. Shares not listed on a designated stock exchange
125(2)
the “business limit” for the year is $500,000 (for the SBD)
125(3)
the $500,000 annual business limit must be shared between associated corporations to prevent the same family/related group being granted multiple annual business limits (see S. 256 for details on related corporations)
123.4(2)
General Rate Reduction (“GRR”) 123.4(2)
* a 13% reduction applies to a corporation’s income that is not already subject to a “special” tax rate – we refer to this as full rate taxable income (“FRTI”)
* 123.4(1) “general rate reduction percentage” (f)
* FRTI is taxable income minus income subject to the SBD minus income subject to the additional refundable tax (i.e. aggregate investment income)
* 123.4(1) “full rate taxable income”
129(4)
“Definitions”
129(4) “aggregate investment income”
Includes the following:
(a)(i) taxable capital gains
LESS
(a)(ii) allowable capital losses AND
(a)(iii) net capital loss carryovers deducted in Division C for the year
PLUS
(b) property income
OTHER THAN
(b)(i) exempt income (incidental property income)
(b)(iii) dividends eligible to be deducted in Division C
129(4) “non-eligible refundable dividend tax on hand”
least of three amounts
i. 30 2/3% * Aggregate Investment Income
ii. 30 2/3% * (Taxable Income – SBD amount)
iii. Part 1 Tax Payable
* The resulting NERDTOH is divided by 38 1/3% to calculate the non-eligible dividends that must be paid by the corporation for a full refund of the NERDTOH
129(4) “eligible refundable dividend tax on hand”
ERDTOH is calculated as
ADD
1. Opening Balance
2. Part IV Taxes paid on eligible portfolio dividends
3. Part IV Taxes paid on eligible dividends from connected corporations
SUBTRACT
1. Dividends refund claimed from the ERDTOH account in present year
- The result of the ERDTOH and NERDTOH accounts is that it limits the amount of dividend refunds that can be issued on dividends designated as eligible
- Now in order to receive back the Part 1 Refundable tax, a CCPC must pay out non-eligible dividends
- To get the maximum refund possible, if ERDTOH is exhausted, a company may have to pay out non-eligible dividends and reduce the NERDTOH account (even if there is a positive GRIP balance)
