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Core 1 > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

Investment in an Associate

A

Chapt 54 & 55
IAS 28
ASPE 3051

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2
Q

What is investment in an Associate

A

It is when an investor has significant influence over an entity. SI is ability to influence the financial/operational decisions of the entity through voting powers of at least 20% or other means

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3
Q

How is SI recognized

A
  • Thru min 20% voting powers and demonstrated by
  • Representation on the the board
  • Participation in policy making processes
  • Material interCo transactions
  • Interchange of managerial personnel
  • Provision of technical info
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4
Q

How is investment in an Associate measured under IFRS

A

Associates & entities under joint control are accounted using the EQUITY method

Initial measurement - at cost
Subsequently - Equity method :
Add equity income for the period
Deduct Dividend recvd from associate during the period

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5
Q

How to calculate equity income

A

Associate’s net income
x
Ownership %
=
Share of associate income
+
FV Differential amortization
+
Share of realized interCo P/L from prior year
-
Share of unrealized interCo P/L in current year
=
Equity income

* Investor's share of changes is recognized in OCI (equity income)
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6
Q

Difference between the Cost and Equity methods

A

Equity - Acquisition costs for invetments that will not be subsequently measured at FV may be capitalized.

Cost - They will be expensed unless the financial asset is aquired at arms length of it will not be subsequently measured at FV

Equity - Share of profit of investee and dividend recvd are passed through the investment asset account

Cost - Share of profit is not recorded. Dividend recvd is passed through the income account

FV -
Acquisition costs are expensed
Dividend recvd is passed thru income acc
Fair value adjustments are made thru investment acc and OCI (holding gain/loss on investment)

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7
Q

How is the unrealized profit in ending inventory calculated

A

Sales in ending inventory x Gross profit% x investor % ownership

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8
Q

Difference with ASPE

A

Initial measurement - Cost
Subsequent measurement - Equity or Cost method when there is significant influence
If investee shares are publicly traded with quoted price, use Equity or Fair Value method

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9
Q

Deferred Taxes

A

Chapt 47

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10
Q

What is Taxable Temporary Difference

A
  • Most common TTD occur when NBV of depreciable capital assets is greater than the UCC of the assets. Meaning more CCA taken than depreciation.
  • The impact of TTD is recording a Deferred Income tax liability
  • If the TTD will cause future income tax to decrease, then it is a Deductible Temporary Difference
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11
Q

Capital Cost Allowance

A

Chapt 8
Schedule 11 ITA

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12
Q

Calculation of CCA

A

Undepreciated Capital Cost (UCC) B/f
+
Acquisitions during the yr
-
Disposals during the yr ( lesser of cost / selling price)
+
Accelerated investment incentive ( if additions are more than disposals )
=
Base for CCA calculation
-
CCA claimed for the year
-
Accelerated investment incentive
=
UCC c/f

  • AII = one half of the excess of additions over disposals
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13
Q

Common CCA Rates

A

Class 1- Bldg/Non residential/Manufacturing 4/6/10% DB
Class 8 - Furniture/Fixture/Office equipment 20% DB
Class 10 - Passenger vehicle (up to $36k), delivery vans, other vehicles 30% DB
Class 10.1 - Passenger vehicle (over $36k) - 30% DB
Class 12 - lease hold improvement - cost divided by lesser of:
- Five yrs SL
- Remaining lease term + I renewal term SL
Class 14 - Limited life intangibles - SL over legal life
Class 14.1 - Unlimited life intangibles/ incorporation cost less that $3k 5% DB
Class 50 - Computer hardware/ systems software 55%DB

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14
Q

Class 10.1 CCA percularities

A
  • For class 10.1, one half of the CCA for the year may be claimed in the year of disposal
  • Where Immediate expensing has happend, and the asset is being disposed, adjusted proceeds are credited to UCC resulting in Recapture
  • Adjusted proceeds is calculated as:
    34k/cost of vehicle x sales proceeds
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15
Q

Separate Class rules

A
  1. Must be in a separate class
    - Luxury passenger vehicles - costing over $34k. addition limited to $34k
    - Rental properties costing $50k or more
  2. Can elect to be in a separate class 8
    • Office photocopiers
      - Electronic communication equipment
  3. To receive enhanced Class 1 rates, these have to be in a separate class
    • 6% for non-res bldg used over 90% for business ( not manufac)
    • 10% for non-res bldg used over 90% for manufacturing
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16
Q

Immediate expensing rules

A
  • Applies to CCPCs and proprietorships
  • For all properties except classes 1-6, 14.1, 17, 47, 49, 51
  • Maximum is $1.5M to be shared between associates
  • Acquired after April 18, 2021 and available for use by 2024
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17
Q

Recapture / Terminal loss

A

Recapture - Negative UCC balance results after additions and disposals are made to opening UCC balance. They are added to taxable income

Terminal loss - Postive bal results after disposals are made to opening UCC balance . And that disposal was the last asset is the class. They are deducted from taxable income

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18
Q

Business Income / Loss

A

Chapt 9
ITA 18, 67

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19
Q

What are ITA 18 Expense rules for Schedule 1 deductions

A
  • Must be to generate income
  • Reasonable
  • Not capital
  • Not for reserve
  • Not for personal expense and
  • Not to generate a tax exempt income
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20
Q

Taxable Income for a Corporation

A

Chapt 24

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21
Q

How to arrive at taxable income for a corporation

A

Div B Income (Income for tax purposes)
-
Div C deductions
=
Div C Income (Taxable income)

22
Q

What are the Div C deductions

A

Corporations
- Charitable donations
- Dividends
- Net capital loss carry over
- Non- capital loss carry over

Individuals
- Employee stock options
- Social assistance/ workers compensation payments
- Northern resident
- Lifetime Capital gains deduction
- Net capital loss carry over
- Non-capital loss carry over

23
Q

Qualifying dividends for Div C

A
  1. From taxable Canadian corporations
  2. From taxable subsidiary corporations resident in Canada
  3. Non resident corporations carrying on business in Canada
  4. Foreign affiliates that have been taxed in their jurisdiction
24
Q

Taxes Payable for a corporation

A

Chapt 25

25
Q

Components of Part 1 Corporate tax for CCPC

A

Basic federal tax
-
Federal Abatement (10% of Tax inc in provinces)
-
Small Business Deduction
-
Manufacturing & Processing deduction
-
General Rate Reduction
+
Additional refundable tax
-
Foreign tax credit
-
Investment tax credit
=
Federal tax part 1

26
Q

How to calculate taxes payable for a corporation

A

Steps
1. Calculate net Income for tax purposes
2. Calculate taxable income sources
3. Calculate Part 1 tax using detailed or simplified approach

  • Simplified uses effective rates of income sources
  • Detailed requires calculation of each component
27
Q

Classify taxable income

A
  • Active Business income (ABI)
  • Aggregate Investment Income (AII)
  • Specified Investment Income (SIB)
  • Foreign Business Income (FBI)
  • Dividend Income
  • Personal Services Business income (PSB)
28
Q

What is an SIB

A
  • A business, that its principal purpose is to derive income from property such as rents, dividend, interest and royaties.
  • Has five or less employees
  • They could have had more than 5, if not that another corporation provides them managerial /administrative services
29
Q

What is PSB

A

It is a business of providing service, where the person who provides the service is
- a shareholder of the corporation - at least 10% AND
- the incorpiorated employee is an employee of the person for whom the services were provided UNLESS
- the corporation has more than 5 employees in a yr
- the services are provided for an associate corporation

30
Q

How are PSBs taxed

A

They are not eligible for
1. SB deductions
2. GR reductions
They are entitled to
1. Salary paid to incorporated employee
2. Cost to the coy of benefit/allowances of the incorporated employee
3. Amt spent by the coy to the extent that it would have been a deductible as an employee in employment
4. Legal fees to collect fees for services rendered

31
Q

What is Aggregate Investment Income

A

It includes property income and net taxable capital gains adjusted for some Division C deductions

32
Q

How to calculate AII (aggregate business investment)

A

Investment income included in net income
(investment income & taxable capital gains)
-
Div C deductions
=
AII

33
Q

How to calculate AII details

A

Net rental income xx
Dividend xx
Interest xx
Royalties xx
Net taxable capital gains xx
Investment income in Div B Income xxx
Less
Div C Adjustment related to investment (x)
Net capital loss c/f deducted in div C (x)
Dividends deducted in div C (x)

AII xxxx

34
Q

What is ABI

A

Income from any business that is not SIB or PSB

35
Q

Calculate Net Canadian ABI for a corporation

A

Net income for tax purpose (4 DIv C ) XXX
Investment income in net income (xx) * not AII
Foreign Business income (xx)
=
Net Canadian ABI xx

36
Q

Short form tax Federal tax rates

A
  1. CCPC
    - ABI up to limit - 9%
    - AII - 38 2/3%
  2. Non CCPC Income - 15%
37
Q

Deductions

A

Federal abatement - 10% inc earned in province
SBD - 19%
M&P D - 13%
GRR - 13%
FTC
ITC

This is an addition
ART (+) - 10 2/3 %

38
Q

How to calculate taxable income when there are various permanent establishments

A

Establishment A, B & C
- Get the percentage to total of the revenue for each establishment
- Get the percentage to total for the expense for each establishment
- Get the average of % Rev + %Exp for establishment A.
- The average % is multiplied by the taxable income to get the taxable income for establishemnt A

39
Q

SBD Calculation

A

It effectively lowers rate on ABI earned by a ccpc
It is the lowest of
1. ABI earned in Canada
2. Taxable income less
- 100/28 x foreign tax credit on foreign non-business income
- 4 x FTC on foreign business income
3. Amount of annual business limit assigned to the coy

40
Q

Notes

A

For
Taxable income - deduct what is not allowable that is in the income
ABI - Remove above and also AII

41
Q

Taxable business limit reduction

A

SBD is to provide reduction in taxes to smaller CCPCs
To ensure larger CCPCs do not take advantage, the business limit ofx (B( $500k is reduced based on taxable capital abover $10M in the preceeding yr

Reduction = A x (B/11,250)
A = Annual business limit for the corp
B = .028125% of excess over $10M taxable capital in prior yr

42
Q

Passive Income Business Limit Reduction

A

Business limit is reduced when AAII earned by a CCPC in the preceeding year is in excess of $50k

(BL/500,000) x 5 x (AAII-50,000)

43
Q

Calculate GRR

A

GRR of 13% is applied to Full rate taxable income
Full rate taxable income =
Taxable income xxx
- Income for SBD (xx)
- Income for manufacturing & Processing (xx)
- AII included in taxable income (XX)
=
Full rate taxable income xx
13%
=
GRR

44
Q

Calculate ART

A

ART is to prevent deferral of tax on investment income earned by a corporation. It is a charge that is refunded to the corp when they pay out dividend to the shareholders.

It is 10 2/3 % of the lesser of :
- AII in taxable income
- taxable income - eligible SBD

45
Q

M & P Profits Deductions

A

13% of the lesser of
1. M&P profits less eligible SBD
2. Taxable income less
- Eligible SBD
- 4 x FTC of foreign business income
- AII (CCPC only)

46
Q

SR & ED Investment Tax Credits (ITCs)

A

ITCs on SR & ED can be used to reduce income tax payable and in some cases provide a refund
CCPC
$3m(of qualified SR & ED expense) x 35% x 100%

+
Amt above $3m x 15% x 40 % (if CCPC is qualifying)

  • 40 % is refundable if CCPC does not go above $500m taxable income

Public = 15 % of eligible expense

47
Q

Non Business foreign Tax credit

A

The lesser of -

  • The non-business income tax paid in the year
  • Amt determined by formula that approximates proportion of federal tax actually paid on foreign business income
  • Tax otherwise payable in the year less foreign non-business income tax credit
48
Q

Business Foreign Tax Credit

A

Least of :
- Business income tax paid in the year
- Taxpayer’s unused tax credit in respect of the country for the past 10 years
- Amt determined by formula that approximates proportion of federal tax actually paid on foreign business income

49
Q
A
50
Q

CDA GRIP NERDTOH ERDTOH

A
51
Q

What is GRIP

A

It is an estimate of after-tax corporate income that is taxed at the high corporate tax rate

The 72% rate used in the determination of GRIP balance is based on the notional combined federal and provincial corporate tax rate of 28%

Core 1 (8 decks)

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