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Final

AFM 461 Study Guide - Final Guide: Contingent Liability, Small Business, Income Splitting


Department
Accounting & Financial Management
Course Code
AFM 461
Professor
Stanley Laiken
Study Guide
Final

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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 2nd taxation year
If NOT paid by 2nd year, amount is added back to income in 3rd
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
after the 2nd year
The company can also file an election to exempt itself from this.
It can be filed up to 6 months after the 2nd year, but if it is, then
a 25% penalty is imposed where you add 25% of the loan in
income on the 3rd year
o The loan is deemed to be repaid by the end of the 2nd
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

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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
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