ADMS 4562 Lecture Notes - Lecture 9: Foreign Tax Credit, Montreal Exchange, Income Statement
11 May 2018
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Professor
3520-9: Last updated on October 29, 2014 1-8
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
1 Lecture 9: Taxable Income and Tax for Corporations
▪ Corporations are taxed as separate entities & are taxpayers [see definitions of taxpayer &
person in ITA 248 (1)]
▪ Corporations file T2 returns (individuals file T1 returns) & include their financial statements
with their tax returns
1.1 Recommended Exercises
▪ Exercise 12-1 [Review of Net Income]
▪ Exercise 12-2 [Taxable Income]
▪ Exercise 14-4 [Associated Companies]
▪ Exercise 13-1 [Integration (Non-Eligible Dividends)]
▪ Exercise 13-2 [Integration (Eligible Dividends)]
▪ Exercise 12-7, 15-2 [Active Business Income]
2 Three Main Types of Corporations
▪ There are three main types of corporations [ITA 89(1)]
▪ Public corporations
▪ resident in Canada, listed on a designated Canadian stock exchange (all Canadian
exchanges are designated)
▪ Private corporations = not public
▪ Canadian controlled private corporations (CCPCs) = a special type of private corporation
= a private corporation that is not controlled by public companies or non-residents
▪ Income earned by a CCPC is eligible for special tax treatment
▪ Canadian active business income is eligible for the Small Business Deduction
▪ Investment income is eligible for other special treatment that results in lower tax
rates
▪ Research & development tax incentives are more generous
3 Computation of Net Income [12-1 to 12-4]
▪ Corporations use financial statement income to calculate Division B income (also called net
income for tax purposes)
▪ See Fig. 12-1
▪ Exercise 12-1 reviews some important items
4 Computation of Taxable Income [12-5 to 12-9]
▪ Division B income minus Division C deductions = Taxable income
▪ The 3 major Division C deductions for corporations earning income in Canada are:
▪ Charitable donations [ITA 110.1(1)]
find more resources at oneclass.com
find more resources at oneclass.com
3520-9: Last updated on October 29, 2014 2-8
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
▪ Dividends from taxable Canadian corporations [ITA 112]
▪ Loss carryovers [ITA 111]
▪ See Fig. 12-2
4.1 Charitable Donations
▪ ITA 110.1(1): limited to 75% of net income
▪ The rules are the same as for individuals except that donations by a corporation are eligible
for a taxable income (division C) deduction rather than a tax credit
▪ This is because corporations are subject to a flat tax rate rather than progressive tax rates
▪ All unclaimed donations can be carried forward 5 years
4.2 Dividends from Taxable Canadian Corporations[12-10 to 12-12]
▪ ITA 112
▪ This deduction means that dividends between Canadian corporations are essentially tax-free
and this prevents double taxation
4.3 Loss Carryovers [12-24 to 12-30]
▪ ITA 111: the rules are the same as for individuals
▪ the two most important carryovers are
▪ Non capital losses
▪ carry back 3 years, carry forward 20 years
▪ Net capital losses
▪ carry back 3 years, carry forward indefinitely. Can only be used to offset taxable
capital gains
5 Tax Payable [12-45 to 12-72]
▪ The following table sets out the general corporate tax rate for business income in 2014 and
the lower rate for the first $500,000 of active business income earned by Canadian controlled
private corporations (CCPCs). The actual provincial rates vary depending on the province
▪ see tables and example especially at 12-49, Figure 12-3, 12-65
find more resources at oneclass.com
find more resources at oneclass.com
3520-9: Last updated on October 29, 2014 3-8
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
For $100 of income
General
rate for
business
income
Eligible for
Small Business
Deduction
Basic or general corporate rate [ITA 123]
38
38
Federal abatement (for income subject to provincial taxes)
[ITA 124, Reg. 400-402]
(10)
(10)
28
28
Small Business Deduction
(17)
General rate reduction
(13)
Non-business or business foreign tax credit
(FTC)
(FTC)
Political contributions credit [ITA 127(3)]
(PTC)
(PTC)
Investment tax credit [ITA 127(5)]
(ITC)
(ITC)
15
11
Provincial tax (assumed to be Ontario in 2014)
11.5
4.5
Total tax
26.5
15.5
5.1 Basic Corporate Rate under ITA 123 and General Rate Reduction under ITA 123.4(2)
▪ Basic rate = 38% x taxable income
▪ Tax rates have been reduced federally to make Canadian taxes more competitive. This
reduction has been accomplished by subtracting from the basic tax rate the general rate
reduction
▪ The general rate reduction is 13% in 2014.
▪ CCPCs earn 2 types of income that do not qualify for the 13% general rate reduction because
they already benefit from other preferential corporate tax treatment
▪ Active business income eligible for the 17% small business deduction (discussed later)
▪ Investment income (e.g. interest income, rental income and taxable capital gains) earned
by a CCPC and subject to refundable tax provisions (introduced in lecture 10)
find more resources at oneclass.com
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Document Summary
Recommended exercises: exercise 12-1 [review of net income, exercise 12-2 [taxable income, exercise 14-4 [associated companies, exercise 13-1 [integration (non-eligible dividends), exercise 13-2 [integration (eligible dividends), exercise 12-7, 15-2 [active business income] = a private corporation that is not controlled by public companies or non-residents. Income earned by a ccpc is eligible for special tax treatment: canadian active business income is eligible for the small business deduction. Investment income is eligible for other special treatment that results in lower tax rates: research & development tax incentives are more generous. Computation of net income [12-1 to 12-4: corporations use financial statement income to calculate division b income (also called net income for tax purposes, see fig. 12-1: exercise 12-1 reviews some important items. 4: division b income minus division c deductions = taxable income, the 3 major division c deductions for corporations earning income in canada are, charitable donations [ita 110. 1(1)]
