Taxation

Question 1

Taxation

Criteria for distinguishing between employees and independent contractors

Answer 1

• control
• ownership of tools
• chance of profit / risk of loss
• integration
• specific results
• intent

Question 2

Taxation

Personal Services Business (Qualification)

Answer 2

A personal-services business (PSB) is:

• a business of providing services where:

o an individual who performs services on behalf of the corporation (“incorporated employee”), or any person related to the incorporated employee:

• is a specified shareholder of the corporation — a specified shareholder is an individual who owns, directly or indirectly, not less than a 10% interest in the company under consideration

AND

• the incorporated employee would reasonably be regarded as an employee of the person to whom the services were provided; but for the existence of the corporation

UNLESS

• the corporation employs in the business throughout the year more than five full-time employees

OR

• the services are provided to an associated corporation (see the e-book chapter on stakeholder relationships for a discussion on associated corporations).

Question 3

Taxation

Personal Services Business (Tax rate and rules)

Answer 3

the following rules apply to income from a PSB:

• PSB income is not eligible for the small business deduction.
• PSB income is not eligible for the general rate reduction.

Additionally, no outlay or expenses are deductible related to earning PSB income, except the following:

• salary paid in the year to the incorporated employee
• the cost to the corporation of any benefits / allowances provided to the incorporated employee
• any amounts expended by the corporation to the extent that such expenses would have been deductible by an individual employee from the individual’s employment income
• legal expenses incurred in collecting fees for services rendered

The effective federal tax rate that applies to PSB income is 33%.

Question 4

Taxation

Taxable vs Non-Taxable Benefits

Allowances: Motor vehicles used in travelling in the performance of employment duties

Answer 4

Taxable:

An allowance for motor vehicles is deemed not to be reasonable (and, therefore, taxable) if any of the following criteria apply:

• The allowance is not based solely on kilometres travelled in conducting the employer’s business (the employee is required to keep a log of employment kilometres to substantiate employment kilometres travelled).
• The employee receives both an allowance and a reimbursement for motor vehicle expenses.
• The employee is reimbursed an amount greater than the CRA’s limits.

Non-Taxable:

The CRA sets limits on the reasonability of the per-kilometre amount of a motor vehicle allowance. Allowances within these limits are not taxable. If the per-kilometre rates are greater than the amounts below, the entire amount becomes taxable, not just the incremental difference.

In 2020, the limits are $0.59 per kilometre for the first 5,000 kilometres driven, and $0.53 per kilometre driven over 5,000.

Question 5

Taxation

Taxable vs Non-Taxable Benefits

Allowances: Travelling expenses other than motor vehicle expenses

Answer 5

Taxable:

If an allowance is either unreasonably high or unreasonably low, it is included in the employee’s income as a taxable benefit, and the employee can then deduct expenses to the extent that the employee qualifies to deduct those expenses.

Non-Taxable:

The allowance is generally considered to be reasonable (and, therefore, exempt from tax) if the amount of the allowance is approximately equal to the amount spent by the employee on accommodation, travel (other than motor vehicle), and meals.

Question 6

Taxation

Taxable vs Non-Taxable Benefits

Counselling services

Answer 6

Taxable:

Employer payments for financial counselling services (other than for job replacement or retiring) and income tax return preparation are taxable.

Non-Taxable:

Employer payments for counselling services in respect of mental or physical health and re-employment or retirement of an employee are not taxable.

Question 7

Taxation

Taxable vs Non-Taxable Benefits

Discounts

Answer 7

Taxable:

Discounts on merchandise where the price paid by the employee is less than the fair value of the merchandise and the employee received the discount because of their employment. The difference between the fair value of the merchandise and the price paid by the employee is a taxable benefit.

Non-Taxable:

Discounts on merchandise where the price paid by the employee is less than the fair value of the merchandise, but similar discounts are available to the general public, are not taxable.

Question 8

Taxation

Taxable vs Non-Taxable Benefits

Gifts and awards

Answer 8

Taxable:

Gifts and awards are taxable when any of the following criteria apply:

• They are non-cash in excess of $500 in a year in aggregate.
• They are cash or near cash (such as gift certificates).
• They are given for performance, such as an award for meeting a sales target.
• They are given to non-arm’s length employees, such as relatives, shareholders, or people related to them.

The fair market value of each gift is used to calculate the total value of gifts and awards given in the year. The value of GST/HST must be included.

Non-Taxable:

Gifts and awards are not taxable when any of the following criteria apply:

• They are non-cash, up to an aggregate of $500 per year.
• They are immaterial (such as coffee, tea, mugs, or T-shirts).

Question 9

Taxation

Taxable vs Non-Taxable Benefits

Service Awards

Answer 9

Taxable:

X

Non-Taxable:

In addition to the gifts and awards discussed above, a separate length of service award is not taxable if all of the following criteria apply:

• It is given for at least five years of service (and after that, in increments of five years).
• It is non-cash, up to a value of $500.
• It is paid to an arm’s length employee.

Question 10

Taxation

Taxable vs Non-Taxable Benefits

Health Care

Answer 10

Taxable:

Employer premiums paid for a public health-care plan are taxable.

Non-Taxable:

Employer premiums paid for a private health-care plan are not taxable.

Question 11

Taxation

Taxable vs Non-Taxable Benefits

Life Insurance

Answer 11

Taxable:

Employer premiums paid for life insurance on an employee’s life are a taxable benefit to the employee if the employee is the beneficiary under the plan.

Non-Taxable:

Employer premiums paid for life insurance on an employee’s life are not a taxable benefit to the employee if the employer is the beneficiary under the plan.

Question 12

Taxation

Taxable vs Non-Taxable Benefits

Meals

Answer 12

Taxable:

Subsidized meals offered to the employee at less than cost to the employer are taxable.

Non-Taxable:

Subsidized meals offered to the employee where the price paid by the employee is equal to or greater than the cost to the employer are not taxable.

Question 13

Taxation

Taxable vs Non-Taxable Benefits

Pension Plans

Answer 13

Taxable:

X

Non-Taxable:

Employer contributions to registered pension plans (RPP), deferred profit sharing plans, and the Canada Pension Plan (CPP) are not taxable.

Question 14

Taxation

Taxable vs Non-Taxable Benefits

Recreational facilities or club dues

Answer 14

Taxable:

The use of employer recreational facilities and club dues incurred for the benefit of the employee are taxable.

Non-Taxable:

The use of employer recreational facilities and club dues incurred primarily for the benefit of the employer are not taxable.

Under the ITA, the term “primarily” is generally considered to be more than 50%.

Question 15

Taxation

Taxable vs Non-Taxable Benefits

Reimbursements

Answer 15

Taxable:

X

Non-Taxable:

A reimbursement is an amount paid by an employer to an employee as substantiated by vouchers or receipts.

The general rule is that the amount is not taxable if the reimbursement is for employment-related expenses. If the amount is for a personal expense, it is taxable.

Also see the rule for relocation payments: reimbursements for housing loss.

Question 16

Taxation

Taxable vs Non-Taxable Benefits

Relocation payments

Answer 16

Taxable Benefit:

When an employer requires a current or potential employee to relocate for employment purposes, the employer may provide the employee with a moving allowance or may reimburse the employee for moving expenses.

If a moving allowance is provided, the amount of the allowance is a taxable benefit to the employee; however, the employee can then deduct eligible moving expenses.

Non-Taxable Benefit:

If the employer reimburses the employee for moving expenses, the amount of the reimbursement is not a taxable benefit.

(Note: As the employee has been reimbursed for the moving expenses, the employee cannot then deduct moving expenses.)

Question 17

Taxation

Taxable vs Non-Taxable Benefits

Relocation payments: Housing Loss

Answer 17

Taxable Benefit:

When an employee is required to move for employment purposes and, as a result, sells his or her former residence at a loss, his or her employer may reimburse the employee for some or all of the loss.

One-half of any reimbursement in excess of $15,000 is a taxable benefit to the employee.

For example, an employee may sell her former residence at a loss of $40,000 and her employer may reimburse her for $32,000 of the loss. The taxable benefit to the employee is ($32,000 – $15,000) × ½ = $8,500.

Question 18

Taxation

Taxable vs Non-Taxable Benefits

Tools

Answer 18

Taxable:

If the cost of tools used for employment is reimbursed, and if the employee owns the tools after the reimbursement, the reimbursement is taxable.

Non-Taxable:

If the cost of tools used for employment is reimbursed, and if the employer owns the tools after the reimbursement, the reimbursement is not taxable.

Question 19

Taxation

Taxable vs Non-Taxable Benefits

Transportation passes

Answer 19

Taxable:

Airline transportation passes to airline employees who are paying less than 50% of economy fare on a space-confirmed basis are taxable.

Non-Taxable:

Transportation passes for bus, air, and rail employees (standby flying only) are not taxable.

Question 20

Taxation

Taxable vs Non-Taxable Benefits

Tuition fees

Answer 20

Taxable:

Tuition fees paid or reimbursed on behalf of an employee for the benefit of the employee are taxable.

Non-Taxable:

Tuition fees paid or reimbursed on behalf of an employee for the benefit of the employer are not taxable.

Question 21

Taxation

Taxable Benefit

Stand-by Charge

Answer 21

A standby charge is assessed when an employer provides an employee with an automobile and the employee is permitted to use the automobile for personal purposes. The benefit arises because the employee does not have to use after-tax cash to either purchase or lease an automobile for personal purposes. The employer may either own or lease the automobile.

Calculation of the standby charge when the automobile is not used more than 50% of the time for employment purposes:

Employer owns the vehicle: 2% × (C × D)

Employer leases the vehicle: 2/3 × (E – F)

C: The full original cost of the automobile including sales tax (GST/HST and PST)

D: Total available * days when the employer owned the vehicle / 30 (result is rounded to the nearest whole number, unless the fraction is 0.5, in which case it is rounded down to the nearest whole number)

E: Lease payments for the year including sales tax

F: Portion of the lease payments made for loss or damages and any liability arising as a result of the use of the automobile.

Reduction in standby charge if:

• The employee is required to use the automobile for employment duties.
• The automobile is used primarily (50% or more) for employment purposes.
• Personal-use kilometres for the year are less than 20,004.

Reduction amount = taxable benefit x (Personal-use kilometres) / (1,667 × D)

Question 22

Taxation

Taxable Benefit

Operating Cost Benefit

Answer 22

Automobile is not used more than 50% of the time for employment purposes = personal kilometres × prescribed rate

Automobile is used more than 50% of the time for employment purposes = Lesser of:

• personal kilometres × prescribed rate
• one-half of standby charge

The prescribed rate for 2020 is $0.28 per kilometre of personal use (unchanged from 2019).

Question 23

Taxation

Taxable Benefit

Automobile Summary

Answer 23

Given the above information, when an employer owns an automobile and pays the operating costs, the net taxable benefit will be as follows:

Standby charge + Operating cost benefit – Reimbursement(s) by employee

When an employee owns an automobile and the employer pays the operating costs, the net taxable benefit will be as follows:

Operating cost benefit – Reimbursement(s) by employee

Question 24

Taxation

Taxable Benefit

Stock Options

Answer 24

Employee of public company:

On exercise date:Employment benefit = (fair market value on exercise date – exercise price) × the number of shares acquired under the option plan

On selling date: Taxable capital gain = 50% × the number of shares sold × (proceeds of disposition – fair market value on exercise date)

Employee of CCPC

On selling date: Employment benefit = (fair market value on exercise date – exercise price) × the number of shares acquired under the option plan that are sold in the year
Taxable capital gain = 50% × the number of shares sold × (proceeds of disposition – fair market value on exercise date)

Question 25

Taxation

Deductions (Employment Income)

Workspace in the home (Items)

Answer 25

Ordinary employee:

• utilities
• repairs and maintenance

Commissioned salesperson:

• insurance on home
• property taxes on home
• utilities
• repairs and maintenance

Question 26

Taxation

Deductions (Employment Income)

Workspace in the home (Conditions)

Answer 26

Conditions:

1. It is the place where the individual principally (more than 50%) performs his or her employment duties.

OR

2. Both of the following:
   a. It is used exclusively for the purpose of earning employment income during the period.
   b. It is used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing his or her employment duties.

Question 27

Taxation

Deductions (Employment Income)

Lease Cost for Motor Vehicle

Answer 27

The maximum deduction is the lesser of:

1. [(A × B) / 30] – C – D – E

A: $800 plus sales tax

B: days that the vehicle was leased for all years to the end of the current year

C: aggregate lease costs deducted in all preceding years

D: imputed interest at the CRA prescribed rate on refundable deposits over $1,000

E: total reimbursement, since the inception of the lease, by employer to employee with respect to the particular lease to the end of the current year

2. [(F × G) / 0.85H] – D – E

D: imputed interest at the CRA prescribed rate on refundable deposits over $1,000

E: total reimbursements for the current year with respect to the particular lease

F: total actual lease payments for the current year including GST/PST

G: $30,000 + GST/PST

H: the greater of: (100/85) × & the manufacturer’s list price (excluding GST/PST)

Question 28

Taxation

Deductions (Employment Income)

Employee’s RPP contributions — ITA 8(1)(m)

Answer 28

employee RPP contributions; does not include employer’s contributions

Question 29

Taxation

Deductions (Employment Income)

Motor Vehicle

Answer 29

Motor vehicle operating costs include:

• fuel (gasoline, propane, and oil)
• maintenance and repairs
• insurance
• licence and registration fees
• lease cost for motor vehicle (see Section 3.1 below)

Question 30

Taxation

Deductions (Employment Income)

Travel Expenses

Answer 30

Deductible items:

• 50% of meals while travelling away from the metropolitan area in which the employer is located for more than 12 hours in a day
• transportation costs including airfare, train or bus
• lodging

Question 31

Taxation

Deductions (Employment Income)

Sales expenses — ITA 8(1)(f)

Answer 31

Deductible items:

• advertising and promotion, including 50% of the cost of entertaining clients of the employer
• 50% of meals while travelling away from the metropolitan area in which the employer is located for more than 12 hours in a day
• transportation costs including airfare, train, or bus
• lodging
• motor vehicle operating costs (such as fuel, including gasoline, propane, and oil; maintenance and repairs; insurance; and licence and registration)
• lease costs for motor vehicle (see limitation in Section 3.1 below)
• parking related to visiting clients of the employer
• property taxes and insurance on home office
• licences (such as for real estate sales)

Conditions:

Conditions:

1. The individual is employed to sell property or negotiate contracts.
2. The individual is required by his or her employment contract to pay his or her own expenses.
3. The individual is required to work away from his or her employer’s place of business.
4. The individual was paid fully or in part by commissions.
5. The individual was not in receipt of a non-taxable travelling allowance.
6. Deductible expenses cannot exceed commissions received by the employee in the year.

Question 32

Taxation

Eligible vs Non-Eligible dividends

Answer 32

Eligible dividends:

Dividend gross-up 38%

Dividend tax credit as a fraction of the gross-up 6/11

Dividend tax credit as percentage of the actual dividend 20.727%

Non-Eligible dividends:

Dividend gross-up 15%

Dividend tax credit as a fraction of the gross-up 9/13

Dividend tax credit as percentage of the actual dividend 10.385%

Question 33

Taxation

Other deductions - personal

Moving Expenses

Answer 33

Conditions for deduction

• The move must result in the new residence being at least 40 kilometres closer to the new work location / school than the old residence. The 40-kilometre distance is measured by the nearest land route.
• Moving expenses that exceed income from the new work location / school in the year of the move may be carried forward and deducted from income earned at the new work location /school in subsequent years.
• The moving expenses must have been paid. The taxpayer must not have been reimbursed for the moving expenses.

Moving expenses eligible for deduction include:

• travelling costs (including meals and lodging) from the former residence to the new residence (see discussion below for optional measurement of meals and automobile costs)
• transportation and storage costs incurred in moving household effects
• the cost of meals and accommodation near the old residence or an acquired new residence for a period not exceeding 15 days

o Days to travel from the former residence to the new residence do not count toward the 15-day maximum.

o If the taxpayer takes a house-hunting trip to the new location, only the meals and accommodation for the days after the lease is signed or the new house is purchased may be included here. Days prior to signing a new lease / buying the new property do not qualify. Travel costs (such as flights) are not deductible for house-hunting trips.

• lease cancellation costs on the old residence
• selling costs of the old residence, including advertising costs, legal fees, real estate commissions, and penalties for early termination of a mortgage
• if the old residence has been sold, the cost of legal fees and title transfer taxes on the new residence (excluding GST)
• the cost of maintaining a vacant former residence (including mortgage interest, property taxes, and insurance premiums) to the extent of the least of:

i) the actual amount of maintenance expenses
ii) $5,000

• the cost of changing the address on legal documents, replacing automobile and driving licences, and utility hookups and disconnects

Question 34

Taxation

Other deductions - personal

Child Care expenses

Answer 34

Child care expenses are generally considered a personal or living expense and thus may not be deducted except as allowed under specific rules. Specifically, the child care expenses must have been incurred to allow a taxpayer to do one of the following:

• be employed
• carry on a business
• carry on research for which a grant was received
• attend a designated educational institution or secondary school

The parent or supporting individual with the lower net income is allowed the deduction for child care expenses (see exceptions described below). A supporting person includes:

• the child’s parent
• the spouse or common-law partner of the child’s parent
• an individual who may make a claim for an eligible dependant, infirm dependant over 17, or family caregiver amount for the child (this would include a grandparent if the child lives with the grandparent)

Limits:

Under 7 = $8,000

7 to 16 = $5,000

15 or over (dependant due to issues not qualified for disability tax credit) = $5,000

Any age (dependant due to issues qualified for disability tax credit = $11,000

Question 35

Taxation

Deferred Income Plans

RRSP Deduction Limit

Answer 35

The formula for calculating a taxpayer’s RRSP deduction limit for a taxation year is determined as follows:

A + B + R – C

Where

A is the unused RRSP deduction room from the prior year.

B is the amount, if any, by which

a) the lesser of:
i. the RRSP dollar limit for the year, and
ii. 18% of the taxpayer’s earned income for the preceding taxation year

exceeds the total of all amounts, each of which is

b) the tax payer’s pension adjustment for the preceding taxation year in respect of an employer, or
c) a prescribed amount in respect of the taxpayer for the taxation year. *

R is the taxpayer’s total pension adjustment reversal for the year.

C is the taxpayer’s net past service pension adjustment for the prior year.

The RRSP dollar limit is indexed for inflation each year. The limits for 2018 to 2020 are as follows:

2018 = $26,230

2019 = $26,500

2020 = $27,230

Allowable ‘‘Earned Income’’: Passive income sources such as interest, dividends and income from a limited partnership are not included in “earned income.”

Question 36

Taxation

Division C Deductions

Stock Options

Answer 36

Employees of a public company:

Conditions = Fair market value of the share on the grant date is equal to or less than the exercise price (option is not in the money on the grant date).
Timing of deduction = Year the option is exercised (same year as the employment income inclusion)

Employees of a CCPC:

Conditions =

Fair market value of the share on the grant date is equal to or less than the exercise price (option is not in the money on the grant date).

OR

Fair market value of the share on grant date is greater than the exercise price (option is in the money on the grant date), but the shares acquired under the option plan are held for at least two years after the option is exercised.
Timing of deduction = same as employees of public company

Question 37

Taxation

Division C Deductions

Lifetime Capital Gains deductions

Answer 37

Gross capital gains = $883,384

Question 38

Taxation

Taxes Payable - personal

Non-Refundable tax credits

Answer 38

Basic personal amount = $12,298 to $13,229. If income is over $214,368, then it is incrementally adjusted downwards to $12,298. Between $150K and $214K this is where the adjustment is applied.

Age amount = individuals over 65 years of age get $7,637 less 15% of net income in excess of $38,508.

CPP/QPP = Maximum pensionable earnings are $58,700 for 2020. If pensionable earnings are in excess of $58,700, the maximum CPP contribution is ($58,700 – $3,500) × 5.25% = $2,898.
A self-employed individual is required to contribute both the employee and employer amounts, so the maximum required contribution is 2 × (pensionable earnings – $3,500) × 5.25%.

Canada Employment Amount = $1,245.

Other = tuition, interest on student loans (in full)

Question 39

Taxation

Taxes Payable - personal

Refundable tax credits

Answer 39

Canada Workers Benefit

Refundable medical expenses

GST/HST Credit

Canada Child Benefit

Question 40

Taxation

Taxes Payable - personal

Personal Tax Credits

Answer 40

Donations: 15% on first $200 & 29% on excess

Question 41

Taxation

Business Income

Items to add back and deduct from GAAP Net Income

Answer 41

To add:

Interest and penalties on late payment for taxes
CCA Recapture
Accounting losses (capital asset disposition)
Charitable donations
Political contributions
Warranties (only actual cash paid is deductible and not accrued)
Meals at 50%
Club dues
Automobile allowance ($0.59 for 1st 5,000 km, $0.53 for each additional)
Soft costs on construction or renovation of a building
Unpaid remuneration (180 days)

To deduct:

CCA
Terminal Loss
Accounting gains
Financing (amortized over life of the loan)

Question 42

Taxation

Business Income

CCA

Answer 42

Recapture arises if, after adding the cost of all additions and deducting all disposals, the UCC balance is negative. A negative UCC balance means the taxpayer has previously claimed too much CCA. The negative balance is added back to UCC to arrive at a nil balance in UCC and is also added to the taxpayer’s net income for tax purposes.

A terminal loss arises if, after adding the cost of all additions and deducting all disposals, a positive balance remains in the class and the taxpayer owns no other assets in that CCA class (that is, the taxpayer has sold the last asset in the class). The positive balance is deducted from UCC to arrive at a nil balance in UCC and is also deducted from the taxpayer’s net income for tax purposes.

Question 43

Taxation

CCA Classes

Answer 43

Class 1 = 4% declining balance: Buildings acquired after 1987

Class 1 = 6% declining balance:Non-residential buildings acquired after March 18, 2007, and not used by any person prior to March 19, 2007; must be included in a separate class to get the 2% bump-up

Class 1 = 10% declining balance: Manufacturing buildings used at least 90% (measured by square footage) for manufacturing and processing use, acquired after March 18, 2007, and not used by any person prior to March 19, 2007; must be included in a separate class to get the 6% bump-up.

Class 3 = 5% declining balance: Buildings acquired prior to 1988

Class 8 = 20% declining balance: Furniture and fixtures; office equipment, including fax machines, copiers, and any equipment not included in another CCA class

Class 10 = 30% declining balance: Automotive equipment, including passenger vehicles costing up to $30,000 before taxes and also other automotive equipment such as delivery vans

Class 10.1 (a) = 30% declining balance: Passenger vehicles costing more than $30,000 before tax

Class 12 (b) = 1: Library books; tableware; kitchen utensils costing less than $500; dies, patterns, and moulds; medical and dental instruments; tools costing less than $500; linens; feature films; computer software that is not systems software

Class 13 = Straight-line based on minimum of five years: Leasehold improvements — details below

Class 14 (c) = Straight-line based on the legal life of the asset: Patents, franchises, concessions or licences that have a limited legal life (patents with a limited legal life may be included in either Class 14 or Class 44)

Class 14.1 = 5% declining balance: Intangible capital assets acquired after January 1, 2017 that are not included in Class 14 or Class 44. (examples: goodwill, customer lists, trademarks, and licences with an unlimited life)

Class 17 = 8% declining balance: Roads, sidewalks, airplane runways, parking areas

Class 44 = 25% declining balance: Patents acquired after April 26, 1993

Class 50 = 55% declining balance: Computer hardware and systems software acquired after March 18, 2007, and before January 28, 2009; and after January 31, 2011

Class 53 (d) = 50% declining balance: Manufacturing and processing equipment acquired after 2015

Question 44

Taxation

Business Income

CCA Calculation

Answer 44

UCC balance, beginning of year

+Additions in the year (1)

–Disposals in the year (2)

+50% of net additions (3)

=Base amount for CCA

–CCA claimed in the year

–50% of net additions (per above)

=UCC balance, end of year

Question 45

Taxation

Death of a taxpayer

Capital Losses

Answer 45

If, in the year of death, total allowable capital losses are greater than total taxable capital gains, the excess may be deducted first against any other income included in the taxpayer’s terminal return and next against any other income included in the deceased taxpayer’s income tax returns for the preceding year. This is an exception to the general rule that allowable capital losses and net capital losses may only be deducted against taxable capital gains (see e-book chapter on taxable capital gains).

Question 46

Taxation

Death of a taxpayer

Depreciable and non-depreciable property

Answer 46

Beneficiary is the spouse and ITA 70(6) is not elected out of:
Non-depreciable = Deemed proceeds is the death taxpayer ACB; No tax consequences
Depreciable = UCC of death taxpayer is that of the beneficiary; no capital gains, loss, recapture, etc.

Beneficiary is not the spouse, or is the spouse and ITA 70(6) is elected out of:
Non-depreciable = Deemed proceeds equal the fair market value (FMV) of the property to the deceased taxpayer
Deemed cost to the beneficiary is the FMV of the property
Depreciable = The UCC to the beneficiary is the fair value of the property & Deemed proceeds equal the fair value of the property to the deceased taxpayer

Question 47

Taxation

Division C Deductions

Corporate Taxes

Answer 47

Charitable Donations: annual deduction is limited to 75% of the corporation’s net income for tax purposes for the year.

Loss Carryovers

Dividends received by a corporation resident in Canada

Question 48

Taxation

Corporate Taxes Payable

Formula for CCPC

Answer 48

CCPC

+Basic federal tax

–Federal abatement

–Small business deduction

–Manufacturing and processing profits deduction

–General rate reduction

+Additional refundable tax

–Foreign tax credits

–Investment tax credits

=Federal Part I tax

+Provincial tax

+Part IV tax

–Dividend refund out of refundable dividend tax on hand

=Tax payable before instalments

Question 49

Taxation

Corporate Taxes Payable

Formula for Non-CCPC

Answer 49

Non-CCPC

+Basic federal tax

–Federal abatement

–Manufacturing and processing profits deduction

–General rate reduction

–Foreign tax credits

–Investment tax credits

=Federal Part I tax

+Provincial tax

=Tax payable before instalments

Question 50

Taxation

Corporate Taxes Payable

Income by Source

Answer 50

Aggregate Investment Income: Interest, rental income, royalties, dividends, net taxable capital gains LESS Division C deductions related to AII (net capital loss) and dividends deducted.

Active Business Income (ABI) = Net income for TP less AII (above) less foreign business income.

The starting point for calculating corporate taxes, for both a CCPC and a non-CCPC, is to apply the 38% general corporate rate to taxable income.

Question 51

Taxation

Corporate Taxes Payable

Federal Tax Abatment

Answer 51

A federal tax abatement of 10% is available on taxable income earned in a province or territory of Canada. The purpose of the 10% abatement is to leave room for the provinces to levy provincial taxes. Taxable income is allocated to each province or territory in which the corporation has a permanent establishment.

For Core 1, assume the corporation has a permanent establishment in only one province, so the federal abatement will be 10% of taxable income.

Note: Throughout this section, references to provinces in Canada also include Canadian territories.

Question 52

Taxation

Corporate Taxes Payable

Small Business Deduction

Answer 52

The SBD rate for 2019 and subsequent years is 19%

The maximum amount of income on which the SBD may be claimed is $500,000, and the $500,000 limit must be shared among associated corporations.

The SBD is 19% multiplied by the least of three amounts:

1. ABI earned in Canada
2. Taxable income, less

• 100/28 × foreign tax credit (FTC) on foreign non-business income, and
• 4 × FTC on foreign business income

3. Annual business limit ($500,000) allocated to the company

The purpose of the SBD is to provide for a reduction in taxes for smaller private corporations. To ensure that large CCPCs do not receive the benefit of the SBD, the $500,000 annual limit is reduced as follows:

Reduction = A × (B / 11,250)

A = amount of the corporation’s annual business limit for the year (currently $500,000)

B = 0.225% (0.00225) of the corporation’s taxable capital employed in Canada, in the previous year, in excess of $10,000,000

Question 53

Taxation

Corporate Taxes Payable

Taxable Capital (for associations)

Answer 53

Add:

• share capital
• contributed surplus
• retained earnings
• reserves not deductible in the determination of net income for tax purposes
• loans and advances payable
• indebtedness represented by bonds, debentures, notes, mortgages, and so forth
• other indebtedness outstanding for more than 365 days before the year end

Deduct:

• allowance for investments in debt and equity instruments of other corporations

= total taxable capital for the year

Multiply by:

• federal abatement %

= taxable capital employed in Canada

Question 54

Taxation

Corporate Taxes Payable

General Rate Reduction

Answer 54

The GRR is equal to 13% of full rate taxable income.

Full rate taxable income =
Taxable income
- Income eligible for SBD
- Income eligible for M&P deduction
- AII included in taxable income

Question 55

Taxation

Corporate Taxes Payable

Investment Tax Credits

Answer 55

The ART is equal to 10 2/3 % of the lesser of:

• AII included in taxable income
• taxable income less the amount eligible for the SBD

FTCs:

Both foreign business income and foreign property income are included in taxable income of a Canadian corporation, and Canadian tax is paid on that income. FTCs are granted for foreign taxes already paid on the foreign income. FTCs are calculated separately for foreign non-business income and foreign business income.

For Core 1, if relevant, assume any FTC is equal to foreign tax paid.

Question 56

Taxation

Corporate Taxes Payable

Part IV refundable tax

Answer 56

Part IV refundable tax is determined as follows:

• 38 1/3 % × dividend received from non-connected taxable Canadian corporations (referred to as portfolio dividends),

PLUS

• Investor’s share of dividend refund received by a connected corporation *

Question 57

Taxation

Corporate Taxes Payable

RDTOH (Dividend Refund)

Answer 57

The private corporation will obtain a dividend refund for the year equal to the lesser of:

1. 38 1/3 % of taxable dividends paid
2. RDTOH * at the end of the year (before the dividend refund)