Structure of Corporate Taxation

Question 1

Employee profit sharing plan

Answer 1

no tax deferral. profit sharing plan builds assets to buy business (20 employees). immed taxable benefit, investment gains are taxable. they then have tax paid capital. deductible to corp. benefit to corp is that you can add significant liquidity restrictions.

Question 2

GAAR

Answer 2

catch all rule. every step of the transaction is legitimate but as a whole, tax move is contrary to tax policy. courts don’t like GAAR. rules have been developed within gaar to prevent adverse court rulings. unlikely a planner would ever recommend this strategy.

Question 3

Employee ownership trust

Answer 3

borrow money from corp to buy shares. would normally trigger shareholder benefit, but doesn’t with eot.

Question 4

c208 cleanup

Answer 4

capital gains treatment for what is normally dividends is only available when family member is taking over business

Question 5

Use of a trust

Answer 5

kids holding class c and d shares own them through a trust to keep them separate from matrimonial assets.

Question 6

low provincial tax rate on active business income results in poor integration

Question 7

small business deduction eligiblity

Answer 7

taxable assets of under 50m (clawback starts at 10m).

Question 8

ccpc

Answer 8

owned by resident of canada, primarily earning income in canada and located in canada. 50% of assets used to earn active income in 24 months before sale and 90% at time of sale.

Question 9

is it active or passive, how to tell

Answer 9

is the risk yours or someone elses

Question 10

how many employees for passive income to become active

Answer 10

6 dedicated solely to property management/rental

Question 11

eligible dividends

Answer 11

only come from income directly taxed at corp tax rate. or eligible dividend paid from canadian company(38% tax)

Question 12

dividend flexibility

Answer 12

board can determine how much of each dividend is paid out (eligible and non eligible). can also determine which shareholder gets eligible and which gets non eligible.

Question 13

corporate relationships

Answer 13

related - shareholders related to one another, relevant for sales and transfers of assets, requires to be done at fmv
connected - hold co shares 10% of op co. tax free intercorporate dividend, cda, rdtoh balances.
associated - similar groups of shareholders. limits ability to multiply sbd, income from one creates aaii for another.
affiliated - owned by same entity, superficial loss rules.

Question 14

Doctors owning a clinic together

Answer 14

small business deduction is essentially wiped out because of the combined amount of aaii in corps that hold shares in corp.

Question 15

tax advantages of incorporation

Answer 15

possible lcge, ability to choose when to defer income and the type and amount of dividends to be paid, ipp and hsa, change dividend types between different shareholders, pay non-deductible expenses with cheaper after-tax corp dollars, cda, rollovers, potential for income splitting (tougher with tosi), choice of year end, carry forward losses up to 10 years, rollovers into corp are easy, less frequent audit

Question 16

legal advantage of incorporation

Answer 16

some liability protection, share structure easier for succession planning, perpetual entity, separation from personal assets (cleaner accounting and bookkeeping), sell shares to raise money, credibility of corp or inc behind your name, makes it simpler to sell

Question 17

2 ways to create cda and whether to sit on or not

Answer 17

non taxable portion of cap gain or insurance proceeds in excess of acb.
capital loss will reduce amount of capital dividend account.
not a good idea to sit on it. you can take money out in cash or create a promissory note or other property. cda credit is 0 once you write the note

Question 18

acb of life insurance

Answer 18

premiums paid - ncpi - dividends paid. cda credit based on proceeds above acb. acb is treated as non eligible dividend when withdrawn. proceeds are non taxable to corp.

Question 19

which corps is cda available to

Answer 19

private only

Question 20

cda and letter of intent from public corp

Answer 20

when you sign that loi with the offer to buy, you lose your private status and any ability to use previously unused cda

Question 21

generally the best strategy is to leave active business income eligible for sbd in corp and take out passive income as its earned

Question 22

what businesses sell for

Answer 22

-assets-liabilities, liquidation sale. undesirable, probably selling in bad conditions
-multiple of revenue, ebitda (profitability). this is an ideal arrangement for seller, bottom line earnings
-salary and discretionary earnings - gas station, income you can take out of business

Question 23

Use a cbv for

Answer 23

marital breakdown, estate (tax purposes), selling business, borrow money

Question 24

asset sale example

Answer 24

ucc 190k, acb 220k, 540 fmv sale.
30k recapture @ active rate of 12.2% ontario 3660
160k taxable capital gain (50.17% (11.50% + 38.67%) non refundable tax portion is about 20% = 32k
=504,340 net and 160k cda credit,. non eligible dividend paid out for remaining (344,340)

Question 25

why share sales are worse for buyers

Answer 25

you inherit tax liabilities such as depreciated assets that could be subject to recapture. you also inherit the corps liabilities. if an asset sale, seller should maintain liability insurance for a period of time.

Question 26

why do asset sales and share sales happen

Answer 26

share sales - buyer can negotiate a lower price. can use more tax planning measures and lcge, regulatory approvals for the corp, ip assets that are hard to break up, publicly traded company (being purchased) will prefer share sales

asset sale - the seller negotiates a higher price, buyer is usually in control of the deal, buyer is financing themselves, buyer is the only one, only sell portion of a business (sell car inventory but keep building to rent to new owner), mid size firm (not public). financial services is usually asset sale.