ADMN 3710 chapter 1

Chapter 1: Taxation – Its Role in Decision Making

Page 1: Introduction

• Copyright © 2024 McGraw Hill Limited

• Electronic Presentations in Microsoft® PowerPoint® prepared by Daniel Mahne, CPA, MTa RSM Canada

Page 2: Overview of Taxation's Role

• Key Topics:

  • Taxation and the Financial Decision Process

  • Taxation as a Controllable Cost

  • Cash Flow after Tax

  • The Fundamental Income Tax Structure and its Complexity

  • Conclusion

Page 3: Taxation and the Financial Decision Process

• Businesses confront various forms of taxation from:

  • Municipal, provincial, and federal governments

• Income tax is primarily levied at:

  • Federal and provincial levels

• Income tax is significant as it:

  • Is based on profits

Page 4: Impact of Taxation on Investment

• Return on Investment is measured via cash flows that are:

  • After tax

• Every financial decision has:

  • A tax impact affecting cash flows

• The ultimate goal is:

  • Maximization of shareholder wealth through decisions that:

    • Reduce or defer tax payments

Page 5: Decision-Making Process Elements

• The decision-making process includes:

  • Identifying alternatives

  • Analyzing:

    • Short-range costs

    • Long-range costs

    • Benefits of each alternative

• Amount and timing of tax payable vary significantly by alternative.

Page 6: Decision-Making Process Framework

• Step-by-step approach consists of:

  • Identifying possible courses of action

  • Evaluating short-range and long-range costs and benefits

  • Assessing tax implications of each alternative

• Leads to better cash flows and long-term value maximization.

Page 7: Taxation as a Controllable Cost

• Taxation is an inherent cost of doing business, akin to other relevant costs.

• Decision-makers must:

  • Understand and control tax costs

• Tax should be viewed as a controllable cost in decision-making.

Page 8: Cash Flow after Tax

• Importance of after-tax cash flow in analysis:

  • All cash flows should consider after-tax implications

  • Positive after-tax cash flow is favorable

• Management should minimize tax impacts; neglecting this may lead to:

  • Inefficient tax structures

  • Unfavorable decisions based on pre-tax analysis.

Page 9: Wage Increase Cost Example

• Example: Cost of an 8% wage increase:

  • Employer with a 27% tax rate has a 5.8% after-tax cost

  • Employee with a 50% tax rate has a 4% after-tax value

• Highlights the disparity in perspectives:

  • Real cost to one party differs from the real benefit to the other.

Page 10: Fundamental Income Tax Structure

• Major variables in decision-making:

  1. Types of income:

     • Business, Property, Employment, Capital Gains

  2. Taxpayers categorized into:

     • Individuals, Corporations, Trusts

Page 11: Business Structures and Tax Jurisdictions

• Additional decision-making variables include: 3. Business and Investment Structures:

  • Proprietorship, Corporation, Partnership, Limited Partnership, Joint Arrangement, Income Trust

  4. Tax Jurisdictions affect taxation:

     • Provincial, Federal, Foreign

Page 12: Business Income Structure Alternatives

• Alternative structures for business income:

  • Partnership

  • Corporation

  • Joint Arrangement

Page 13: Conclusion

• Taxation is a crucial factor in financial decisions.

• Must not be overlooked due to its complexity.

• Integrating taxation into the formal decision-making process will enhance cash flows.