Tax Flashcards
What are the component to consider when calculate employer-provided vehicle benefits?
- personal used km cal- consider when used less than 50% as well as greater or equal to 50%
- standby charge (lease vs owned )
- operational cost benefits
How to calculate standby charge?
If the car is owned by the employer
- 2% x number of complete months that available to the employee x cost of the car
- the cost of the car can be greater than than 30,000 a month , this cost including the gst and pst even if the employer claimed itc.
If the car is leased by the employer
- 2/3 x lease payment paid by the employer x months that is available to the employee
- cost of the lease can be exceeded 800/months, this cost including all the gst / pst calculation even if the employer claimed itc.
How to calculate the personal used percentage for employer-vehicle provided benefits?
Business used more than or equal to 50%
- actual uses persons km / (1667 x months available to the employee)
Business used less that 50%
- all the personal used km is taxable
How to calculate the operating cost benefits from the employer-provided vehicle?
Lesser of :
- 27 cents/km of personal used and
- 50% standby charge (if vehicle used 50% or more for business)
What are the implication of the low/no - interest loans?
Loan principal is not taxable
- interest benefit based on “prescribe rate”
- reduce by any interest paid during the year
Or by January 30 the next year
Benefit deducted if loan for purchase of
- investments
- or used for Employment duties in the manner that qualified for the deduction from his/her income
- used to purchase home that is at least 40km closer to home, employee can claim it on the division c deduction
Discuss tax implication relates to stock options.
There is never any tax benefits to grant date
Exercise date
- public company- FMV - exercise price x number of shares = benefits
- Ccpcs- benefits deferred to date shares sold
Deduction of 50% of benefit
- if FMV of shares when option granted does not exceed the option exercise price or
- Ccpcs shares held for at least 2 years
What are the implications relates to employee vs contractor?
Employee
- source deductions- the employer is responsible to withheld source deductions as well as matching the cpp and ei
Contractor
- expense deductibility by the payee, the expense incurred relates to generate of income
- they also responsible to remit gst if income earned is more than 30,000 a year
In general, it is preferred to be treated as contractor due to the ability to deduct more expenses from income earned by the payee. Also the payer is also pay less source deductions (cpp and ei) however, if the cra interpret the payee as an employee then the payer is subjected to penalties and interests for failing to submit the appropriate source deduction.
What are the test that cra used to determine if a personal is an employee or a contractor ?
Test (rc 4110)
Note: there is not no rules of how many of the rules below should apply, they are all subject to interpretation.
1) control of work- the right to fire or hire, salary, decide on time, manner, and place the work to be done
2) ownership of tools- who owns the tools
3) risk of profit/loss- do you have a chance to make profits? Do you run the risk of incurring losses due to bad debts, damage to equipment or materials or delays ? Do you cover operations loss ?
4) degree of integrations- kindna the combinations of the first three, how many clients does this contractor has?
What are the allow and non allowed reserves as a deduction for tax purpose?
Disallowed:
- contingent liabilities
- warranty liability
- unfounded pension expense
Allowed:
- bad debts
- undelivered goods and services or returned goods
- unpaid amounts or deferred revenue that will be paid within 36 months
Discuss the tax implication for real estate rental.
Separate CCA class for each building costing $50,00 or more
-recapture cannot be “cushion” by acquiring other buildings
CCA limited to net rental (revenue less all other deductible expenses)
- cannot use CCA to create or increase a rental loss (except: principal business)
-impact on principle resident excemption, don’t claim the CCA on principle resident when renting it. It will impact the acb.
Discuss the Implication for personal tax dividends.
Gross-up, then you get a dividend tax credit
Dividend sources:
- eligible: non CCPCS and Grip for CCPCS
- non-eligible: CCPCS (for ABI up to SBD threshold )
Implication for dividends if a corporation ?
-Not grossed-up
-deductible if received from taxable Canadian corporations
-if recipient is a private corporation
-part IV tax at 33.33%
-add to RDTOH
No tax if Payor a connected corporation
What is the implication of capital gains reserve?
When a taxpayer realizes a capital gain but doesn’t received full payment of the proceed of disposition then a reserve is allowed. This reserve is recognized over a period of time.
Amount not due within the year is equal to
Lesser of :
- reasonable reserve based on amount not due until after the end of the year and,
- 1/5 of gain x (4- number of preceding years)
How does the personal used property get taxed?
Personal used property all losses get denied but gain must be reported and 50% taxable
How does the listed perks all property get taxed?
Personal listed property can recognized losses that allowed a carried back 3 years and forward 7 years. However losses can only be recognized in art work, jewellery, rare book, stamps and coins.
When do we have deemed depositions?
- Normally at FMV
- on change in use of property
- on death of tax payer
- by way of gift during the life time of the tax payer
- by taxpayer ceases to be resident in Canada
How to calculate ACB of partnership interest?
Add:
share of partnership income contribute by the partner
+ share of any capital dividends received
+share of net proceeds on death of life insurance policies
Less:
Shares of partnership losses
- partnership drawings
-share of charity donation /political contributions
-itcs allocated /deducted to / by the partner
ACB of partnership interest maybe negative
-no taxed as capital gain until disposition (for active general partners)
Differentiate between the different losses including the non capital loss, net capital loss, listed personal property (LPP), ABIL.
Non-capital loss is applied to any source of income
-carry back 3 years and carry forward 20 years
Net capital loss is applied only to net taxable gains
- carry back 3 years and carry forward indefinitely
Listed personal property (LPP)- can only apply against other LPP gains
-carry back 3 years and carry forward 7 years
Allowable business investment loss (ABIL)- apply to any source of income, after 10 years, may carried forward indefinitely but has to used it as capital loss carried forward after)
When is ABIL incurred ?
ABIL arises from the disposition of shares/ debts of SBC
- not applied when the two corporations are non-arm length
ABIL= 50% x BIL
Can be applied to any incomes
How does proprietorship taxed ?
Business income/ loss reported on t1
- added to other income sources
- taxed based on individual’s bracket, credits, etc
How does partnership get taxed?
Income calculate at partnership level
- allocated based on partnership agreement
- taxed in partners’ hands
What are some of the advantages to incorporates?
- limited liabilities
- potential tax deduction on ABI
- deferral opportunity if earning retained
- access to lifetime capital gains exemption
- income splitting potential
- flexibility of owner- manager compensation
- flexibility re- year end selection
- facilitation of estate planning
What are some of the disadvantages of incorporation?
- cost :
- initial set up, on going compliance, winding up - inability to claim start-up losses against other personal income
- or access personal credits if no income - can always convert proprietorship into corporation once profitable
- 85(1) rollover
What are the scenario of association rules? Advantages and disadvantages?
Typical scenario:
- set up separate corporation for new business
- operate as divisions or separate corporation
Potential advantages if not associated
- gain multiple access to SBD
Potential disadvantages
- inability to offset losses of one against another
- consider shifting revenue & expenses
How does the corporation consider associated with one another?
Most likely situations
- one company controls the other
- companies controlled by the same person/ group
- each corporation control by one person
- persons controlled each corporation related
- one person owns at lease 25% of the shares do both corporations
What are the implication of receiving the salary or bonus?
- deducting from accounting/ taxable income
- taxable as employment income
- “earned income” for rrsp purposes
- subject to cpp contribution
- subject to withholding
- potential deferral of bonus < 180 days
- consider reasonable
Tax consideration for dividends.
Not deductible by corporation - but still reduce equity - lower personal tax rate - dividend tax credit Other factors - amount and type of tax-free surplus - existence of refundable tax -dividends improve CNIL -dividends may result in AMT
Implications of the Shareholder loan?
Can’t be outstanding on 2 consecutive Y/E
Watch for short year due to AoC, amalgamation
Deemed interest benefit
What are the conditions that attribution rules apply? Discuss the type of incomes that get transfer.
Loan or transfer of property to spouse or related minor
- property income attributes to transferor
- second generation income doesn’t count
Spouse
- capital gains/loss attribute to transferor
Related minor (e.g child under 18)
- capital gain/losses do not attribute
- attribution does not apply to income arising from investment of child tax benefits
What is kiddie tax ? Discuss in detail.
Tax on split income
- discourage certain income splitting with minor
- taxes income at the highest federal marginal rate
- not an attribution provision, but effect is comparable
- overrides other attribution provision
Most likely situation
-child receiving dividend from corporation controlled by parent
What are the reorganizations topic to consider for exam purposes?
- rollover from proprietorship to corporation (enter business)
- estate freeze (employee acquired scenario)
- mergers vs amalgamation/winding-up
What are the properties that are allowed to transfer and what are not? Under section 85 ?
Properly which maybe transferred:
- capital property
- Canadian and foreign resource property
- Eligible capital property
- inventory (other than real property)
Property which may not be transferred
- cash
- prepaid expense
- land inventory
Discuss the rollovers- consideration.
Consideration received for property must equal FMV
- FMV in = FMV out
- if the consideration > FMV
- transferor will receive taxable benefit
- if the consideration < FMV
- transferor treated as conferring benefit on related shareholders
Consideration
- must include shares
- may include non-share consideration as debt
- NSC cannot exceed the elected amount
Discuss the rollovers election.
Transferor and transferee elect a transfer price between the tax value and FMV
- elect at tax value to defer taxation
- ACB for capital property
- ucc for depreciate property
- 4/3 * CEC for eligible capital property
If all asset of business rolled over
- elect nominal amount for goodwill , goodwill $1 usually
What are the two options for the estate freeze. Discuss the difference as well as the section in ita that used for each.
External freeze:
- uses holdco and ita 85(1)
Internal freeze:
- no holdco created
- just reorganization of capital
- ita 86 applies
- unless overridden by ita 85(1)What are the advantages of doing an external freeze?
Advantages
- credit-proofing
- meet cash needed of various shareholder
- borrowing for acquisitions
Disadvantages:
- cost
- complexity
How does the holdco usually work ?
-85(1) rollover of shares to holdco
- parents take back holdco prefs
- redeemable /retractable at FMV
- children subscribe for common shares for holdco
- nominal investment required （say, $100)
- children get future growth in value
- parent and holdco file a join election under 85(1) to defer gain
- or trigger a limited gain to crystalize gain exemption
How does the internal estate freeze work ?
Parent exchange existing opco common share for opco preferred shares.
- redeemable/retractable at FMV
Children subscribe for new issued common shares of opco
- nominal investment required (say 100 shares)
- children get future growth in value
What is the price adjustment clause?
Allows consideration (e.g attribute of freeze shares) and elected amount to be adjusted if cra challenges the valuation
What is “crystalize” capital gain exemption ?
- allows shareholder to step up ACB of shares without a sales to third party
- avoid the risk of changes to legislation that could Eliminate the exemption in the future or possibility that shares will not meet qualifying tests at time of third party sales (“offside” because too many non-active assets”
-use 85(1) but choose an ETP that trigger a gain (eg. $800k + ACB )
How to avoid deemed dividends ?
External freezes : NSC should be </= puc of transferred shares
Why do companies want to merger?
To offset losses of one company against income of other
Simplify structure/ reduce costs
Tax attribution generally flow through
- ucc, losses
What is amalgamation ?
Combination of assets and liability
- vertical (e.g parent and sub)
- horizontal (e.g “sister” companies)
What happens in winding-up?
Assets and liabilities of sub transferred to parents
What is the tax implication of amalgamation ?
Triggers deemed year-ends
- for each of the predecessor corporations
- may accelerate loss expiry, shareholder receivables, unpaid amounts, etc
Loss carried forward
-May be applied prospectively
Losses incurred by newco may not be carried back
- exception: carry back to predecessor parent if new corporation formed via vertical amalgamation
What are the tax implication of winding-up?
-Deemed year-end not triggered
- loss carried forward
- maybe applied in the year after the year the winding up commenced
What are the topic to consider about when doing a business purchases and sale?
- asset vs shares
- lifetime capital gains exemption (LCGE)
- acquisition of control
- loss of CCPCS status
What are the difference between sales of a business via assets vs shares?
Assets:
- no undisclosed liabilities
- ucc bump
- goodwill becomes eligible capital property
- price usually higher
Shares
- flip-side of asset alternative
- get non-capital loss carryovers
- acquisition of control issues
- paying dividends prior to sales to clear RDTOH and CDA (if any)
- return of puc to the vendor on a tax free basis
What are the quant consideration of sale of asset vs shares?
LCGE will drive decision if available (relative significant)
- share sale quant is straightforward
- asset sale requires integration of corporation and personal taxes
What is acquisition of control?
Arise whenever an individual or group which acquired control diffident from the individual/group that controlled the corporation previously
What are the tax implication of AoC ?
Deemed year-end
- lose one year of carry forward
Unrealized loss recognized
Capitols loss expired
Non-capital losses carried forward against income from the same or similar business
Planning:
Elect to trigger unrealized gains
Subsequent merger
How to loss CCPCS status? And discuss some of the tax implication.
- acquisition by public company or non-resident
- deemed year-end
Loss of
-LCGE- RDTOH/CDA pay out before acquisition
- SBD
Tax due 2 months after year-end
what are the difference between acquire shares vs assets?
Acquisition of shares:
• No ability to pick and choose
• PUC in the business would not be increased, decrease the acquired ability to extract future profit on a tax free basis
• End Shareholder will bare the tax
• Lower total tax for the seller than sell of assets but LCGE could it the same tax effect compares to selling the assets.
Acquisition of assets:
• Avoid the assumption of liabilities (including non-disclose ones )
• Amount paid for the asset become the ACB of the assets
• Depreciation that can expense to the business income, if in high CCA rate, even more beneficial
o Help lower income for the parent’s
• Less desirable to seller because the company first have to pay the capital gain,
o Then paid the dividends tax rate
o However if there is CDA then it is tax free. It is depends on the intension of the asset sold, investment or assets.
o There could also be shareholder loan still outstanding => tax free
• Typically pay higher tax rate compares to the sale of assets
