ACC 522 – Chapter 1 Notes: Taxation – Its Role in Decision Making
Taxation and the Financial Decision Process
Business enterprises and individuals are subject to many forms of taxation by municipal,
provincial, and federal authorities.
Most significant form of taxation affecting ROI is income tax – at both federal and provincial
level. By its nature, it taxes more heavily those enterprises that are more successful in
o Investor’s ROI is measured by the cash flow returned after the payment of all related
Cash flow exists only on an after-tax basis; therefore, every decision necessarily has a tax impact.
Whether or not the ultimate result of the decision is successful.
Two important principles must be adhered to when applying taxation to financial decision-
making: (1) tax should be considered a controllable cost and (2) cash flow exists on an after-tax.
Taxation – A Controllable Cost
Tax cost should be regarded as a cost of doing business similar to other relevant costs.
Provincial income tax rates vary considerably among provinces.
Under the direct sales option, all income earned in the new province is taxed in the house
province. However, if a branch sales office established, a portion of the firm’s total profits is
allocated to the new province by an arbitrary formula based on the ratio of sales and wages paid
in the new province to the sales and wages paid by the total entity.
If the new territory suffers losses for several years before the full potential of the territory is
realized, then the direct-sales or the branch-sales office approach permits an enterprise to use the
losses incurred in the new province to reduce immediately th