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Lecture 5

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Administrative Studies
ADMS 4562
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45625 1AKADMS 456203CORPORATE TAX LECTURE 5 NOTESlast updated January 13 2014 Tonights Topics and Problem Set1 800000 QSBC capital gains exemptionChapter 13 13340 to 13355 s 1106 see problems contained in these notes and Problem set in separate document2 Income Splitting with Family Members as Shareholders3 Corporate Attribution Rules Chapter 13 13390 S 744 see problems contained in these notes Recommended Exercises and Multiple Choice QuestionsChapter 13 Exercises 8 and 10 you can assume that the appropriate dividend gross up is 25 and Multiple Choice Questions 6 and 71800000 Lifetime Capital Gains Exemption CGEThe March 21 2013 federal budget has increased the CGE to 800000 starting in 2014 This amount ie 800000 will be indexed to inflation ie it will be further increased in 2015 and thereafter based on the rate of inflationThe 2007 federal budget increased the CGE to 750000 from 500000 for dispositions that occur on or after March 19 2007 The availability of the 750000 in 2013 lifetime capital gains exemption is an advantage of incorporating a small business a CCPC earning active business income in CanadaThis same exemption is also available for capital gains on certain farming and fishing assetsThis course will not focus on family farms or fishing propertiesNote that the 750000 capital gains exemption is really a 375000 taxable capital gains deduction because onlyof a capital gain is included in incomeEach individual has a lifetime total 750000 in 2013 capital gains exemption CGEAny previously utilized CGEs will reduce the balance remaining The actual amount in a given year that an individual can claim as a CGE is a least of formulaThis least of formula will reduce the amount of CGE that a taxpayer can claim if there are any net capital losses in the year or if there have been any allowable business investment losses ABILs claimed in the year or in a prior year or if there is a cumulative net investment loss CNILThe exact formula and the definition of CNIL will not be discussed in this courseFor more information see FIT 13370CopyrightJoanne MageeJason Fleming45625 2The definition of a QSBC is in s 11061 see Exhibit 1311 of FIT There are the three tests in the definition and hence three steps to determine whether shares are shares of a qualified small business corporation QSBC so that any capital gain on the sale of the shares are eligible for the 750000 exemption 11Test 1 SBC TestIs the company a small business corporation at the time of sale An SBCa CCPC with90 assetsFMV either 1 used principally50 in an active business carried on primarily50 in Canada by itself or a related s2512 corporation andor 2 shares or debt of other connected SBCs see definition of small business corporation in s 2481 Exhibit 1310 of FIT Two typical nonqualifying assets areinvestments which are not short term investments of working capitalvacant land held but not used in the businessIf the CCPC doesnt meet the 90 test you can purify it by getting rid of some of the nonqualifying assetseg convert investments to cash and invest in active business assets or pay off debts or pay it out to shareholder typically as a dividend must either use the cash in the active business or get rid of it The problem if often how to minimize tax in a purificationthere often will be a capital gain on the sale of investments and corporate tax and personal tax if the after tax amount is paid out to the shareholder as a salary or taxable dividend Note that the capital loss on the disposition of shares or debt of an SBC qualifies as a business investment loss BIL and that 12 of a BIL is an allowable business investment loss ABIL ss 38c 391c An ABIL is deductible against all types of income not just taxable capital gains111TEST YOURSELF ON THE DEFINITION OF SMALL BUSINESS CORPORATION Which of the following Canadian controlled private corporations will definitely qualify as a small business corporation a A company which owns only one asset a rental building used primarily in an active business in Canada by a company controlled by the sister of the controlling shareholderb A company which owns only one asset 50 of the shares of another CCPC which carries on an active business in Canada c A company which carries on a manufacturing business in Canada CopyrightJoanne MageeJason Fleming
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