MECH 3360 - Tax & Funding

Engineering Economics - Lecture 9

Federal, provisional, and municipal taxes are imposed on what?

Income, property, or transactions.

What are taxes used for?

Funding for government expenditures, redistribute wealth, and as an instrument of fiscal policy.

Explain how taxes can be used AS A TOOL for fiscal policy.

Lowering taxes encourage investment, while raising it dampens the level of economic activity.

The average tax rate is calculated as:

Total taxes payable / Taxable income

What is the marginal tax rate?

The tax rate that applies to the next taxable dollar. It commonly refers to the different rates that depend on level of income.

Corporate taxes have provincial and federal components. Explain both components.

Federally, tax rates are flat and depend on the size of the firm, from 35%-60%, while provincially, small business deductions can reduce the tax rate to about 20%.

When a company buys a capital asset…

It cannot deduce the cost of the purchase from its income, but it can deduct the subsequent annual depreciation.

Depreciation is recorded as what on income statements?

It is an expense, reducing net income.

Depreciation is controlled by what rate?

Capital Cost Allowance.

What are examples of capital assets? What are not examples of capital assets?

Printers, distillery machines. Ink and grain are not capital assets.

How may investment funds to finance a project be acquired?

Internally through depreciation and retained earnings, and externally by selling equity or borrowing capital.

How are depreciation charges utilized as a customary practice? How does this help a firm?

They are used as a source of funds to replace worn assets. It allows them to be self-sustaining.

What are retained earnings?

It is after-tax income that can be distributed to shareholders as dividends, also known as stocks.

Stock prices are indicative of what?

Current earnings per share and the growth potential of the firm.

How may a stock price rise?

It rises if the market is confident that the earnings are being retained in order to place the firm in a more profitable position.

What is equity financing?

It is the result of selling part ownership in a firm.

What is debt financing?

It is the strategy of borrowing funds or by selling bonds.

What advantage does debt financing have?

It does not dilute ownership and can offer certain tax advantages.

What disadvantage does debt financing have?

The charges may be a financial burden during periods of low economic activity.

What advantages does leasing have over other traditional financing methods?

Use of a service even if a firm lacks cash, and it has less effect on future borrowing capacity

True or false: Leasing does not come with tax advantages whatsoever.

False. Under certain conditions, there are tax advantages that come with leasing.