Study Guides (390,000)
CA (150,000)
UW (7,000)
AFM (500)
Midterm

AFM 461 Study Guide - Midterm Guide: Foreign Tax Credit, Tax Credit, Dividend Tax


Department
Accounting & Financial Management
Course Code
AFM 461
Professor
Dan Rogozynski
Study Guide
Midterm

This preview shows pages 1-3. to view the full 10 pages of the document.
Chapter 12
Active business
Only an active business qualifies for the small business deduction
Active business is defined as any business carried on b the corporation other than a
specified investment business or a personal service business and includes an adventure or
concern in the nature of trade (ITA 125(7))
oA specified investment business (SIB) is defined to mean:
1. A business (other than the business of a credit union or of leasing property
other than real property)
2. The principle purpose of which is to derive income from property (including
interest, dividends, rents and royalties)
3. Unless the corporation employs in the business throughout the year more
than five full-time employees
Also exception if the corporation does not employ more than 5 full-
time employees but another corporation associated with it that
provides the service does
oPersonal service business, can be thought of as an incorporated employee, defined
to mean:
1. A business of providing services where:
An individual who performs services on behalf of the corporation or
any personal related to the incorporated employee (a specified
shareholder owning more than 10% of ownership)
Exception:
oThe corporation employs throughout the year more than 5 full-
time employees or
oServices are provided to an associated corporation
Small business deduction calculation
A credit against the tax otherwise payable on income
To qualify, must be a Canadian-controlled private corporation throughout the year
Formula is:
o17% of the least of:
1. Net Canadian active business income
2. Taxable income fully taxed in Canada achieved by removing from the total
taxable income, foreign-source income estimated as the sum of:
Foreign-source investment income, estimated as 100/28 times the
foreign tax credit on foreign non-business income
Foreign-source business income, estimated as the relevant factor, 4
times the foreign tax credit on foreign business income
Taxable income exempt from Part I tax b reason of an enactment of
Parliament
3. the business limit, $500,000 less any portion allocated to associated
corporation
this business limit is reduced if the taxable capital in the preceding
year exceeds $10 million by the following formula:
oA x B/11,250
oA is the corporation’s business limit for the year
oB is 0.225% x (D – 10 million)

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

oD is the corporation’s or the associated group’s, total taxable
capital employed in Canada for its preceding taxation year
Federal Part I tax payable schedule
Taxable income ---------------------------------------------------------------------------- xxxx
Basic federal tax (38%) ------------------------------------------------------------------- xxxx
Federal abatement (10% of Canadian sourced income) ------------------------ (xxxx)
Additional refundable tax -------------------------------------------------------------- (xxxx)
Foreign business tax credit ------------------------------------------------------------ (xxxx)
Foreign non-business tax credit ------------------------------------------------------ (xxxx)
Small business deduction -------------------------------------------------------------- (xxxx)
Investment tax credit ------------------------------------------------------------------- (xxxx)
General deduction ----------------------------------------------------------------------- (xxxx)
13% of taxable income less:
The amount of income eligible for the manufacturing and processing profits
deduction
Income from a personal service business
The amount of income eligible for the small business deduction
Aggregate investment income
Dividend refund (on dividends received from non-connected corp, 33%) ----- (xxxx)
Federal tax payable ------------------------------------------------------ xxxx
Associated companies
When two or more CCPC are associated for tax purposes, the business limit of $500,000
must be reduced
An individual is related to everyone except aunts, uncles, niece, nephew and cousins
An individual relates to a corporation through control (control you either have it or you don’t,
ownership is multiplication)
A related group is a group of persons each of whom is related to each member of the group.
Two corporations are related where:
oBoth corporations are controlled by the same person
oOne corporation is controlled by one person, who is related to a person or any
member of a related group that controls the other corporation
oOne corporation is controlled by one person or a related group and that person or
one member of the related group is related to each member of the unrelated group
which controls the other corporation
oTwo corporations are controlled by unrelated groups and at least one member of one
of the group is related to each member of the other group
For association rules, there are five general rules 256(1)(a)(b)(c)(d)(e)
o256(1)(a) -> one company controls the other
o256(1)(b) -> both companies controlled by the same person or group of persons
o256(1)(c) -> all the following conditions must be satisfied:
1. Each of the corporations must be controlled, directly or indirectly in any
manner whatever, by a person (control test)
2. The person who controls one of the corporations must be related to the
person who controls the other corporation (related test)
3. Either of the two persons own not less than 25% of the issued shares of any
class, other than specified class
o256(1)(d) -> applies where one corporation is controlled by a single person and the
other corporation is controlled by a group of persons

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

1. One of the corporations must be controlled, directly or indirectly in any
manner whatever, by one person (control test)
2. That person must be related to each member of a group of persons that
controls the other corporation (related test)
3. That person must own not less than 25% of the issued shares of any class,
other than specified shares, of the capital stock of the other corporation
o256(1)(e) -> applies to two group-controlled corporations
1. Each of the corporations must be controlled, directly or indirectly in any
manner whatever, by a related group (control test)
2. Each member of one of the related groups must be related to all of the
members of the other related group (related test)
3. One or more members of both related groups must own, either alone or
together, not less than 25% of the issued shares of any class, other than a
specified class of shares of the capital stock of the other corporation
Investment tax credit
Everyone qualifies for 20% investment tax credit for all qualifying scientific research and
development
For CCPC, there is an additional 15% (20% after 2013), restricted in total to $3 million of
qualifying expenditures, provided taxable income of preceding year does not exceed
500,000
oif exceeded 500,000, limit of $3 million is reduced by $10 for every dollar of excess,
at 800,000, limit is reduced to 0 (formula is 8,000,000 – 10 times (greater of 500,000
or the taxable income of the associated group)
olimit is also reduced if the taxable capital exceeds 10 million. The limit is reduced by
$3 for every $40 in taxable capital in excess of 10 million. At 50 million of taxable
capital, the expenditure limit is nil
there is also refundable investment tax credit (only available if preceding year taxable
income not exceeding $500,000) as follow:
o100% cash refund of the available 35% ITC based on qualifying SR&ED current
expenditures not in excess of the expenditure limit for the year
o40% cash refund of the available 35% ITC based on qualifying SR&ED capital
expenditure
o40% cash refund of the available 20% ITC on qualifying SR&ED current
expenditures in excess of the expenditure limit
Prescribed proxy amount -> elected to allocate overhead related directly to SR&ED in
Canada
o60% of the salary base of employees directly engaged in SR&ED
oException is with specified employee (an individual, together with the shares of the
related individual, owns more than 10%)
Lesser of:
a. ¾ of their full salary
b. 2.5 times the year’s maximum pensionable earnings for CPP
purposes (51,100 for 2013)
Additional refundable tax (ART)
A refundable tax on “aggregate investment income”
Calculated as:
o6 2/3% x the lesser of:
1. Aggregate investment income and
You're Reading a Preview

Unlock to view full version