Chapter 14 Flashcards
(12 cards)
111(4)
Limitations of Loss Carryforward on Acquisition
(a) & (b) all net capital losses immediately expire after a company is acquired, and net capital losses arising after acquisition may not be carried back to taxable capital gains arising prior to the acquisition
(c) & (d) ACB of non-depreciable capital property is written down to FMV prior to acquisition, and FMV becomes the new ACB of the property; the amount of the writedown is treated as a capital loss, and can only be applied against available capital gains prior to the acquisition (current year or carried back 3 years)
110.1(1.2)(a)
undeducted charitable donation amounts present at the time of acquisition of control cannot be carried forward
111(5)(a)(ii)(A)
any non-capital losses from an acquired business can only be applied against income from a “same or similar business”
249(4)
there is a deemed year end on the date of acquisition, resulting in the use of one year in the carryforward period for non-capital losses (if the acquirer changes their year end back to Dec. 31, this would result in two short fiscal periods in the calendar year, resulting in prorations of CCA and annual business limit for SBD)
111(5.1)
if UCC of depreciable property is greater than the FMV prior to acquisition, the UCC is written down to the FMV; the writedown is treated as CCA, but can only be applied against income prior to the acquisition; upon disposition, the ACB as well as the CC would still be the original capital cost
Don’t Forget
to gross up dividends, even where it is a final distribution from a company that is winding up
127(9)
Investment Tax Credit
- Investment tax credits are incentives that allow a deduction for a specified percentage of the cost of certain types of current and capital expenditures from federal tax payable
1. Salaries and wages of an eligible apprentice
Limited to first $20,000 of salaries and wages for each worker under an apprenticeship program, approved to the governmet, designed to certify or license individuals in the trade
2. Qualified property
Newly acquired property primarily for use in Canada that is available for use in specified activities, such as manufacturing and processing, logging, farming or fishing, and storing grain - Qualified Scientific Research and Experimental Development (SR&ED) Expenditures
Current expenditures for basic or applied research, and for the development of new products and processes - Unused investment tax credits may be carried back for up to 3 years and forward for 20 years
- In general, if a corporation makes a deductible current expenditure and receives an investment tax credit for that expenditure, the credit amount gets added back to income in the following year (the dollar for dollar reduction amount [tax credit] in current year, is added to income the next year and has the marginal tax rate of the corporation applied to it, resulting in significantly lower gross taxes paid)
89(1) “Personal Tax Definitions”
89(1) “paid-up capital”
- Paid up capital is conceptually the same idea as share capital for accounting purposes, and is the amounts contributed directly into the corporation by shareholders in exchange for issued shares; it is an amount that can be returned to shareholders tax-free as it is simply a refund of their initial investment into the company
- The paid up capital (PUC) is averaged amongst all shareholders, whereas the ACB is the average for one shareholder
89(1) “Capital Dividend Account”
* The (paraphrased) 89(1) definition of the capital dividend account is:
½ of realized capital gains (i.e. the non-taxable portion of capital gains)
Non-taxable proceeds received from a life insurance policy
Capital dividends received from other private companies
Less:
Capital dividends paid
½ of realized capital losses (i.e. the non-deductible portion of capital losses)
* CDA is a permanent account, meaning there is no year-end balance, and the account is updated constantly with every transaction that occurs
* If the account goes into a negative balance, there is no balance in the account to make an election under 83(2) and pay out capital dividend, until positive balances offset the negative balance, and the account has a positive balance again
84(9)
- Per 84(9), when shares are redeemed, they are also disposed of; if ACB and PUC are different, there is a disposition, and a capital gain/loss will result
- If proceeds of redemption is greater than paid-up capital there will be a taxable deemed dividend in the amount of the difference, but paid up capital is distributed as a tax-free dividend
83(2)
CAPITAL DIVIDEND ACCOUNT
* 89(1) Capital Dividends are amounts that can be distributed tax-free to shareholders as they represent income that is never meant to be subject to tax; only private corporations have CDAs
* The most common example of a CDA amount is the “non-taxed” portion of a capital gain earned by a corporation
84(2)
Winding Down a Corporation
* When a company ceases to do business and distributes all of its assets out to shareholders, the distribution must be designated in such a way that we are aware of the tax consequences.
* The order in which a corporation must distribute its equity amounts is as follows:
1. Paid up Capital
2. Capital Dividend Account
3. Taxable Dividend Accounts
* Therefore, all tax-free distributions are made prior to any taxable amounts.
256
Types of Related Corporations
and
256(1)
* Associated corporations get to decide which amount of the $500,000 small business deduction limit is allocated to which company
* If one company had only investment income for example, they may allocate all of the small business deduction limit to an associated corporation with only active business income
