Tax II - Chapter 11 Taxable Income and Taxes Payable After General Reductions for Corporations

Comparison of Taxable Income Calculation for Individuals and Corporations

1) Corporations do not have employment income, other income or other deductions

2) Most corporations begin with accounting income and reconcile book-to-tax differences to arrive at Division B income.

Division C deductions

Dividends

Charitable Gifts

Loss Carryovers

Deductions of Taxable Dividends

Step 1 - All dividends must be included in Division B Income

Step 2 - Division C Deduction is available for "Qualifying Dividends" such that the dividends are not subject to Part 1 tax for receiving corporation

Qualifying Dividends

Taxable Canadian corporations

Controlled corporation resident in Canada

Donations to Registered Charities

Charitable donations are deducted under Division C for Corporations

Division C deduction is limited to 75% of the corporation's Division B income

Any Excess donations can be carried forward for up to five years.

Net Capital Loss Carryover time

Back 3:

Forward: Indefinitely

Non-Capital Loss Carryover time

Back 3:

Forward: 20

Restricted farm losses carryover time

Back 3:

Forward: 20

Farm Losses carryover time

Back 3:

Forward: 20

Non- Capital Loss Carryover

Total losses

= business+ property +ABILS + Net capital losses deducted under divsion c + Dividends deducted under division C - less total imcome from business -property - net taxable capital gains

ABILS (allowable business Investment Losses)

Are a subset of capital losses but can be claimed against any source of income

ABILS determined using the same inclusion rates as allowable capital losses

Unuse ABILS may be carried back 3 years of carried forward 10 years. If still unused, they reclassify back to a net capital loss subject to indefinite carry forward

Net Capital Loss Carryovers

= Allowable capital loss for the year - Taxable capital gains for the year

The amount carried over is already calculated using current inclusion rates. When future inclusion rates differ, adjustments must be made.

Consideration of Division C deductions

The deduction can be applied against any type of income.

Number of years available in the carryover period.

The likelihood that the type of income needed will arise in the carryover period.

Appilcation of Division C deductions

Dividends received

Net Capital Loss

Donation

ABIL's

Non-capital Losses

Objectives of Provisions Affecting Taxation of Corporations

Intergrations

provide tax incentives to certain types of corporations

Integrations

prevent double taxation of corporate income:

By taxing at the corporate level where the income is originally earned and

The individual level using the dividend gross-up and dividend tax credit.

Public Corporation

A corporation whose shares are publicly listed on a "designated stock exchange" in Canada.

Private corporations

Canadian resident corporations are not controlled by one more public corporations

Canadian - Controlled Private Corporation

Private Candain Corporation that is not controlled by non-residents or public corporations

No class of its share are listed on a stock exchange

Basic rate

Every corporation in Canada is subject to a base federal rate of 38% and subsequent modifications are applied, depending on the corporation type

Abatement from Federal tax

The purpose of abatement is to give room for provinces to tax income that was earned in their respective province

Each province/ territory has its own provincial tax rate

When a corporation earns income in multiple provinces, total taxable income must be allocated to each province with a permanent establishment as follows:

((Gross Revenues in Provinces / total gross revenues ) + (Salaries/Wages in Province / Total Salaries/ Wages))/2

General Rate Reduction (GRR)

13% reduction applies against "full rate taxable income", which is a corporation's

taxable income that has not benefited from another special rate reduction