Chapter 13 summary notes All of chapter 13 summarized. Was really helpful for me to just read through this before going into an exam.

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Accounting & Financial Management
AFM 461
Stanley Laiken

Chapter 13: employment remuneration Bonus paid now or later as dividend?  It can be shown that the time value of money makes paying out a dividend better  deferral of tax  Tax deferral advantage is greatest when corporation is eligible for SBD Salaries, bonuses, and other payments  In order to stay within the SBD limit, sometimes company will take on a loan with a shareholder and make interest payments to decrease corporate income Salaries and bonuses  Deductible only if reasonable o Generally if paid out to an arms length person, then the amount is reasonable  Unpaid renumeration o Is not deductible if not paid within 180 days after the end of the employer’s fiscal period 78(4)  Non arms length accrual o If the company makes an accrual to a non-arms length person (for anything EXCEPT remuneration), then they are allowed to expense/deduct it in year one, as long as it is paid by the end of the 2 taxation year  If NOT paid by 2 year, amount is added back to income in 3 rd taxation year and deemed to be paid (in tax) and lent back to the corporation by the shareholder  Therefore when the shareholder actually gets paid back, there will be no tax consequences because they were all recognized nd after the 2 year  The company can also file an election to exempt itself from this. It can be filed up to 6 months after the 2 year, but if it is, then a 25% penalty is imposed where you add 25% of the loan in income on the 3 year nd o The loan is deemed to be repaid by the end of the 2 year and then lent back again.  Example could be royalty accruals Genuine liability 18(1(e)  In order for accruals to be deductible, they must be genuine liabilities where there is an obligation to pay  Cannot be contingent liability where payment is dependent on the occurrence of an event Shareholder benefits  If shareholder gets a loan from company and is later forgiven from the amount, then S/H must include the principle amount in income  Company may buy a house for the shareholder o This needs to be included in income for s/h, and may be deductible for the company IF the house is used to create income for the company  Exception is a cottage/lodge. CANNOT be deductible! Shareholder Loans  Normally if a loan is obtained or repaid, there is no deduction or taxation  for shareholders, this rule does not apply o However, this may cause shareholders to take a loan and never repay it as a tax evasive way to get income from company Shareholder loan inclusion (15(2.2))  Shareholder must include principle of loan in income and get deductions for repayments  Exceptions: o Debt between non-resident persons o Debt that arises in ordinary course of lender’s business  This allows a shareholder to get a loan from say, a bank o Debt is paid within 1 year after company’s fiscal year end o Arrangements for repayment made 15(2.4)(f) o 4 types of loans 15(2.4)  loan made to shareholder who is also an employee (but not specified employee) 15(2.4)(e)  loan made to s/h who is also an employee to assist acquiring:  a house for his occupation (or for the spouse as well) 15(2.4)(b)  previously unissued, fully paid shares of corporation purchased from the corporation 15(2.4)(c)  a motor vehicle to be used in their duties of employment 15(2.4)(d) **essentially for the exception to exist, the shareholder must have received the loan because of their employment, and arrangements for bonafide payments must be made for repayment (even if it is an employee capcity)(paid within 1 year after company’s fiscal year end) Imputed interest benefit  is required to be included in income if the loan is not made to a regular person o ie) to a employee, shareholder, or non-arms length person Imputed interest benefit for home purchase/relocation:  calculated when the employee does not take the loan into income  Lessor of : o The prescribed rate in effect at the time loan was received o The prescribed rate in effect during that quarter  The home purchase loan is deemed to be received every five years as a way to update the prescribed rate at time of loan received  The excess of imputed interest over actual interest paid during the year or 30 days after year end is the benefit taxable in the year (prorated per day outstanding each quarter)  If the home qualifies for home relocation loan, then the first 25,000 of imputed interest benefit is eligible for deduction in division C 110(1)(j) o To qualify, the move must be to move 40km closer to work than before  counting days: include the day of the loan, exclude the last day of the loan Fringe benefits  Sometimes remuneration package received by s/h may include benefits such as heath insurance and such o These are only eligible for employees, so s/h must include these benefits into income o Retiring allowances may be deductible by the paying corporation but s/h must include in income unless put into a RRSP Other planning aspects of using corporations Compensation  If a company is owned by two people, both people have to be paid in the same way o Can’ t have one person get salary and one get dividends  However, you can solve this problem by having the owners set up a holding company that owns the original company o Ie) instead of A and B owning 50-50 of Z corp, they can have A own A ltd, which owns 50% of Z corp  The holding company technique can also defer taxes if the shareholder does not need the cash immediately (keep the dividend in A ltd and B ltd) Small business corporation 248(1)  A CCPC corporation  all or substantially (90%) all of the assets (valued at FMV) were: o used principally in an active business primarily (>50%) in Canada by the corporation or a related corporation (INCLUDES GOOD WILL) o shares or debt (of a SBC that was connected with the particular corp) o combination of the two **if there is 10% of the assets or liabilities that are not used in active business or in shares or debt, then the company is NOT an SBC Qualified small business corporation share  The sale of these shares may be eligible for the capital gains deduction o To a maximum of 375,000 of taxable capital gains net of any portion of capital gains deduction previously claimed o Before march 19, 2007, the limit was 250,000 Qualified small business corporation share (QSBCS) 110.6(1)  SBC test: o The shares are held in a company that is an SBC at determination time (at the time of disposal) o The share held is owned by the individual, individual’s spouse  Holding Period Test o Throughout the 24 months preceding determination time, the shares are
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