Corporate Taxes

Question 1

What are the 4 Corporate Financial Statements?

Answer 1

1. Income Statement - indicates cash flow generated by the corp, expenses, tax paid and essentially the profit
2. Statement of Financial Position: is a snapshot in time, not a historical document. Indicates the corps exact financial position at a fixed time. Aka the Balance Sheet. Total assets always equal total liabilities.
3. Statement of Changes in Equity: Less useful for planner, used to determine is company is focused on growth or income for its shareholders.
4. Statement of Cash Flows: Complex, tracks historical changes in companies accounts or inventories for example.

Question 2

How would you calculate the dividend tax credit?

Answer 2

First know there are two types of dividends:
1. Eligible - divs from Canadian public corps like BNS, Endbridge
2. Ineligible - Divs paid by privately held CDN corps

Both have different tax rates BUT both are required to be first grossed up and then deducted by the Federal Tax Credit.

Eligible divs are grossed up by 38% (1.38) and their federal tax credit is 15.02% (.1502)

Ineligible divs are grossed up by less at 15% (1.15) and their federal tax credit is 9.03% (.903)

Say you have $10K in either credit, for $20K total.
First solve their grossed up amount:
10,000 x 1.38 = 13,800
10,000 x 1.15 = 11,500
= 25,300

Now time grossed up amount by clients tax rate:
25,300 x .33 = 8,349

Now you must deduct their federal tax credits on the grossed up amount too:
13,800 x .1502 = 2,072
11,500 x .903 = 1,038
= 3,111

Now MINUS grossed up amount from tax credit amount:
8,349 - 3,111 = 5,237 net tax liability

Question 3

What are the grossed up dividend rates for eligible divs and their federal tax credit?

Answer 3

ELIGIBLE = 38% and 15.02%

Question 4

What are the grossed up div rates for ineligible divs and their federal tax credit?

Answer 4

INELIGIBLE = 15% and 9.03%

Question 5

Always use the marginal tax rate for

Answer 5

• investment
• dividend after grossing up (once grossed up multiply the gross up by the fed tax credit and minus the difference for the net tax liability)
• interest income
• capital gain (50% of)
• income from a trust

Question 6

What is underpreciated capital cost? UCC

Answer 6

is the balance of the capital cost left for further depreciation at any given time. The amount of CCA you claim each year will lower the UCC of the property.

Question 7

What is Capital Cost Allowance CCA?

Answer 7

is the amount of amortization expense that the government will allow a company to deduct from its income for tax reporting purposes. The rules are clearly set by the Canada Revenue Agency (CRA) and must be strictly followed.

Question 8

The initial cost of acquiring an asset is called?

Answer 8

its capital cost

Question 9

What is Recapture of CCA?

Answer 9

A recapture of capital cost allowance (CCA) can occur when the proceeds from the sale of depreciable rental property are more than the total of both: the undepreciated capital cost (UCC) of the class at the start of the year. the capital cost of any additions during the year.

EG:
These items were stolen and your excellent insurance policy pays you $1,400. When you subtract the proceeds of disposition ($1,400) from your UCC, the difference is -$420. As this number is negative, you have a recapture of CCA and have to report it as income.