La fiscalité des options d'achat d'actions Le guide de planification fiscale 2015-2016 L'imposition des options sur actions En tant que stratégie d'incitation, vous pouvez donner à vos employés le droit d'acquérir des actions de votre société à un prix fixe pour une période limitée. Normalement, les actions valent plus que le prix d'achat au moment où l'employé exerce l'option. Par exemple, vous fournissez à l'un de vos employés clés l'option d'acheter 1 000 actions dans la société à 5 chacun. Il s'agit de la juste valeur marchande (JVM) estimée par action au moment de l'octroi de l'option. Lorsque le prix des actions augmente à 10, votre employé exerce son option d'acheter les actions pour 5 000. Depuis leur valeur actuelle est de 10.000, il a un bénéfice de 5.000. Comment l'avantage est-il imposé? Les conséquences fiscales de l'exercice de l'option dépendent du fait que la société qui octroie l'option soit une société privée contrôlée par le Canada, la période pendant laquelle l'employé détient les actions avant de les vendre et si l'employé Sans lien de dépendance avec la société. Si la société est une SPCC, il n'y aura pas d'incidence sur le revenu jusqu'à ce que l'employé dispose des actions, à condition que l'employé ne soit pas lié aux actionnaires majoritaires de la société. En général, la différence entre la JVM des actions au moment de l'exercice de l'option et le prix de l'option (soit 5 par action dans notre exemple) sera imposée comme revenu d'emploi dans l'année où les actions sont vendues. L'employé peut demander une déduction du revenu imposable égal à la moitié de ce montant, si certaines conditions sont remplies. La moitié de la différence entre le prix de vente ultime et la JVM des actions à la date d'exercice de l'option sera présentée comme un gain en capital imposable ou une perte en capital admissible. Exemple: En 2013, votre entreprise, une CCPC, a offert à plusieurs de ses employés la possibilité d'acheter 1000 actions dans la société pour 10 chacun. En 2015, on estime que la valeur du stock a doublé. Plusieurs des employés décident d'exercer leurs options. D'ici 2016, la valeur du stock a doublé à nouveau à 40 par action, et certains des employés décident de vendre leurs actions. Étant donné que la société était une SPCC au moment de l'octroi de l'option, il n'y a aucun avantage imposable jusqu'à ce que les actions soient vendues en 2016. Son hypothèse est que les conditions de la déduction 50 sont remplies. L'avantage est calculé comme suit: Que faire si le stock diminue de valeur Dans l'exemple numérique ci-dessus, la valeur du stock a augmenté entre le moment où le stock a été acquis et le moment où il a été vendu. Mais que se passerait-il si la valeur de l'action diminuait à 10 au moment de la vente en 2016. Dans ce cas, l'employé déclarerait un revenu net inclus de 5.000 et une perte en capital de 10.000 (5.000 pertes en capital admissibles). Malheureusement, même si l'inclusion du revenu bénéficie du même traitement fiscal qu'un gain en capital, ce n'est en fait pas un gain en capital. Il est imposé comme revenu d'emploi. Par conséquent, la perte en capital réalisée en 2016 ne peut être utilisée pour compenser l'inclusion de revenu résultant de l'avantage imposable. Toute personne en situation financière difficile en raison de ces règles doit communiquer avec le bureau local des Services fiscaux de l'ARC afin de déterminer si des arrangements de paiement spéciaux peuvent être pris. Options d'achat d'actions des sociétés ouvertes Les règles sont différentes lorsque l'entreprise qui octroie l'option est une société ouverte. La règle générale est que l'employé doit déclarer un avantage imposable d'emploi dans l'année où l'option est exercée. Cette prestation est égale au montant par lequel la JVM des actions (au moment de l'exercice de l'option) dépasse le prix d'option payé pour les actions. Lorsque certaines conditions sont remplies, une déduction égale à la moitié de l'avantage imposable est autorisée. Pour les options exercées avant 4 h 00 HNE le 4 mars 2010, les employés admissibles des sociétés ouvertes pourraient choisir de différer l'imposition de l'avantage imposable sur l'emploi qui en résulte (sous réserve d'une limite annuelle d'acquisition de 100 000). Toutefois, les options de sociétés ouvertes exercées après 4 h 00 HNE le 4 mars 2010 ne sont plus admissibles au report. Certains employés qui ont profité de l'élection de report d'impôt ont éprouvé des difficultés financières en raison d'une baisse de la valeur des titres faisant l'objet d'options, au point que la valeur des titres était inférieure au passif d'impôt différé sur l'option d'achat d'actions sous-jacente. Une option spéciale était disponible afin que le passif d'impôt sur l'option d'achat d'actions différées n'excède pas le produit de disposition des titres faisant l'objet de l'option (les deux tiers de ce produit pour les résidents du Québec), à condition que les titres aient été cédés après 2010 et avant 2015 et que le choix a été effectué à la date d'échéance de votre déclaration de revenus pour l'année de la disposition. 2015-2016 Grant Thornton SENCRL, srl. Un membre canadien de Grant Thornton International Ltd (b) division c déduction fiscale du revenu de stock Ceci est la fin de l'aperçu. Inscrivez-vous pour accéder au reste du document. Prévision de texte non formaté: b) Division C Déduction d'impôt sur le revenu imposable 1. Seulement disponible si le prix de l'option est d'au moins la JVM à la date d'attribution: art. 110 (1) d). 2. Exception pour les SPCC: disponible si stock détenu 2 ans: art. 110 (1) (d.1) Les employés des SPCC peuvent utiliser l'art. 110 (1) d) ou d.1) Les employés d'autres sociétés ne peuvent utiliser que l'art. 110 (1) (d) 4 Les conditions requises pour la cotisation publique. Les options étaient les suivantes - pour les options sur les 100 000 premières actions attribuées chaque année - lorsque le prix de l'option est au moins la JVM à la date de l'octroi - l'employé doit choisir Joanne Magee jmageeyorku. ca 4561-3: 92209 20 À la date de l'octroi 8 (c.-à-d. Le prix de l'option en FMV au moment de l'octroi) JVM à la date de l'exercice 14 JVM à la date de vente 26 Réponse Offre d'achat d'actions 14 - Gain à la vente (26-14) 6 Les 4 revenus d'emploi et 2 déductions de la catégorie C sont déclarés au cours de la même année en général au cours de l'exercice. Mais sont reportés à l'année de la vente si 1. l'employeur est une CCPC ou 1. les options étaient admissibles co publique. Options exercées avant 16 h le 4 mars 2010 Le gain en capital imposable est déclaré dans l'année de vente c) Le 4 mars 2010 Modifications apportées au budget fédéral A) Cessions d'options d'achat d'actions par les employés Lorsque les employés exercent leurs options et que les actions sont émises, N'est pas déductible à l'employeur. Avant le budget 2010, une échappatoire permettait aux employeurs de réclamer une déduction totale si les employés prenaient de l'argent comptant plutôt que des actions lorsqu'ils exerçaient leurs options. Cela a été considéré comme une échappatoire parce que dans les deux cas, l'employé pourrait demander la déduction de l'option d'achat d'actions. Le budget a éliminé la lacune: pour les options exercées après 16 h le 4 mars 2010, l'employé ne peut pas demander la déduction à moins que l'employeur ait choisi de renoncer à la déduction pour le paiement en espèces. 5 Tous les problèmes dans le texte et dans l'exemple ci-dessus concernent l'émission de stocks et non les sorties de fonds. (D) Élection spéciale visant à réduire les conséquences fiscales défavorables de la fiscalité publique (D) Élection spéciale visant à réduire les conséquences fiscales néfastes du public Report de la société - Si un contribuable a précédemment différé son droit à l'option d'achat d'actions et que les titres ont diminué en valeur, il peut y avoir des conséquences fiscales défavorables sur la vente des titres parce que l'art. 7), mais les pertes en capital (LCA) admissibles ne sont déductibles que des gains en capital imposables (TCG) (sauf dans l'année du décès). 7 Si la vente a lieu avant 2015 et qu'un contribuable choisit, un ensemble compliqué de règles réduit l'incidence fiscale défavorable en veillant à ce que la taxe ne dépasse pas le produit reçu à la vente (si les États-Unis ont des règles similaires. 03910 PROFESSEUR JosephFrankovic Loi de l'impôt sur le revenu Actx00A0 (RSC 1985, ch. 1 (5e suppl.)) Note marginale: Conversion de sociétés d'assurance en sociétés mutuelles 139 Lorsqu'une société d'assurance qui est une société canadienne applique un montant en paiement pour Des actions de la société achetées ou autrement acquises par elle en vertu d'une proposition de mutualisation en vertu de la section III de la partie VI de la Loi sur les sociétés d'assurances ou en vertu d'une loi de la province en vertu des lois de la corporation qui prévoit la conversion de la société en Une société mutuelle par l 'achat de ses actions conformément à cette loi: a) l' article 15 ne s'applique pas à l 'exigence d' inclure dans le calcul du revenu d 'un actionnaire de la société une partie de ce montant; Une partie de ce montant est réputée, pour l'application du paragraphe 138 (7), avoir été versée aux actionnaires ou, pour l'application de l'article 84, avoir été reçue à titre de dividende. NOTE: Les dispositions d'application ne sont pas incluses dans le texte consolidé. R. S. 1985, c. 1 (5 e suppl.), Art. 139 1994, c. 7, Sch. Est. 734. Démutualisation des sociétés d'assurances Note marginale: Définitions 139.1 (1) Les définitions qui suivent s'appliquent au présent article et aux articles 139.2 et 147.4. «Prestation de reconversion» désigne une prestation reçue relativement à la démutualisation d'une société d'assurance en raison d'un intérêt, avant la démutualisation, de toute personne dans une police d'assurance à laquelle la société d'assurance a été partie. (Avantage de transformation) la date limite pour un paiement à l'égard d'une démutualisation d'une société d'assurance signifie la plus récente: a) la fin du jour qui est de 13 mois après le moment de la démutualisation; Le paiement dépend du résultat d'un premier appel public à l'épargne d'actions de la société ou d'une société de portefeuille à l'égard de la société d'assurance, la fin du jour qui est de 60 jours après le jour où l'offre est terminée, c) Le paiement est effectué après la date limite initiale pour le paiement et il est raisonnable de conclure que le paiement a été reporté au-delà de cette date initiale parce qu'il n'y avait pas suffisamment d'informations disponibles 60 jours avant cette date initiale en ce qui concerne la localisation d'une personne, Le jour qui suit six mois après que ces renseignements sont disponibles et d) la fin de tout autre jour que le ministre juge acceptable. (Chance), la démutualisation signifie la conversion d'une société d'assurance d'une société mutuelle en une société qui n'est pas une société mutuelle. (Dmutualisation): une société qui: a) dans le cadre de la démutualisation d'une société d'assurance, a émis des actions de son capital-actions auprès des parties intéressées et b) détient des actions du capital-actions de la société d'assurances acquises dans le cadre de la Démutualisation qui lui confère 90 voix ou plus des voix pouvant être exercées à l'égard d'actions en toutes circonstances lors d'une assemblée annuelle: (i) des actionnaires de la société d'assurance, (ii) des actionnaires de la société d'assurance et des porteurs de polices d'assurance À laquelle la société d'assurance est partie. (Socit de portefeuille), la date limite initiale pour un paiement est le temps qui serait, si la date limite de définition était lue sans référence à l'alinéa c) de cette définition, être la date limite pour le paiement. Société d 'investissement mutuelle. À l'égard d'une société d'assurance, une société mutuelle créée pour détenir des actions du capital-actions de la compagnie d'assurance, lorsque les seules personnes habiles à voter à une assemblée annuelle de la société mutuelle sont des assurés de la compagnie d'assurance. (Socit mutuelle de portefeuille): a) dans une société de portefeuille mutuelle donnée, les droits et intérêts suivants détenus par une personne à l'égard de la société donnée en raison d'un intérêt ou d'une participation antérieure de toute personne dans une police d'assurance à laquelle Une société d'assurances, à l'égard de laquelle la société donnée est la société de portefeuille mutuel, a été une partie: (i) des droits semblables aux droits attachés aux actions du capital-actions d'une société, (ii) tous les autres droits avec (B) dans une société mutuelle d'assurance, les droits et intérêts suivants détenus par une personne à l'égard de la mutuelle en raison d'un intérêt ou d'une participation antérieure de toute personne morale Dans une police d'assurance à laquelle cette société a été partie: (i) des droits similaires aux droits attachés aux actions du capital-actions d'une société, (ii) tous les autres droits relatifs à l'assurance mutuelle Corporation en tant que société mutuelle, et (iii) tout droit contingent ou absolu de recevoir une prestation dans le cadre de la démutualisation de la mutuelle. (Droits de proprit) comprend une société de personnes. (Personne) du capital-actions d'une société comprend un droit accordé par la société pour acquérir une part de son capital-actions. (Action) «prestation d'assurance déterminée» La prestation d'assurance déterminée désigne une prestation de conversion imposable qui est: a) une amélioration des prestations au titre d'une police d'assurance; b) une émission d'une police d'assurance; c) un engagement d'une compagnie d'assurance d'une obligation de payer D) une réduction du montant des primes qui seraient autrement payables en vertu d'une police d'assurance. (Avantage dtermin) «intervenant» désigne une personne qui a le droit de recevoir ou qui a reçu une prestation de conversion, mais qui, à l'égard de la démutualisation d'une société d'assurance, n'inclut pas une société de portefeuille dans le cadre de la démutualisation ou De la compagnie d'assurance. Une prestation de conversion imposable est une prestation de conversion reçue par un intervenant dans le cadre de la démutualisation d'une société d'assurance, autre qu'une prestation de conversion qui est: a) une action d'une catégorie du capital-actions de la société ( B) une action d'une catégorie du capital-actions d'une société qui est ou devient une société de portefeuille dans le cadre de la démutualisation ou (c) un droit de propriété d'une société de portefeuille mutuel à l'égard de la société d'assurance. (2) Pour l'application du présent article: a) sous réserve des alinéas b) à g), si, en fournissant un avantage à l'égard d'une démutualisation, une personne morale Devient obligé, de façon absolue ou conditionnelle, d'effectuer ou de prévoir un paiement, la personne à laquelle l'engagement ou le paiement a été donné est considérée comme ayant reçu un avantage (i) en raison de l'engagement de l'obligation; (Ii) n'est pas une conséquence de l'établissement du paiement; b) lorsqu'une société verse un paiement (autre qu'un paiement effectué en vertu d'une police d'assurance, dans le cas d'une prestation à l'égard d'une démutualisation); (I) sous réserve des alinéas (f) et (g), le bénéficiaire du paiement est considéré comme ayant reçu un avantage à la suite de la réalisation du paiement Du paiement et (ii) aucune prestation n'est considérée comme ayant été reçue à la suite de l'engagement d'une obligation, soit contingente, soit absolue, d'effectuer ou d'organiser le paiement; c) aucun avantage n'est considéré comme ayant été reçu Par suite de l'engagement d'une obligation absolue ou éventuelle d'une société de faire ou d'organiser un paiement (autre qu'un paiement, effectué conformément aux conditions d'une police d'assurance, qui n'est pas un dividende de la politique), à moins qu'il soit raisonnable de conclure (D) si une obligation de la part des sociétés de faire ou d'organiser un paiement dans le cadre d'une démutualisation cesse au plus tard à la date limite initiale pour le paiement et Le paiement est effectué en tout ou en partie, aucune prestation n'est considérée comme ayant été reçue à la suite de l'engagement de l'obligation, à moins que le paiement ne soit un paiement (autre qu'un dividende de la politique) conformément aux modalités d'une police d'assurance E) aucune prestation n'est considérée comme ayant été reçue à la suite de l'engagement d'une obligation absolue ou éventuelle d'une société de faire ou d'organiser un paiement lorsque i) l'alinéa a) s'appliquerait à l'égard de Ii) l'alinéa d) s'appliquerait à l'égard de l'obligation si ce paragraphe était lu sans référence aux mots au plus tard à l'échéance initiale du paiement; iii) il est raisonnable de conclure qu'il y avait Pas avant la date limite initiale du paiement, des informations suffisantes concernant la localisation d'une personne pour effectuer ou arranger le paiement, et (iv) ces informations sont disponibles un jour donné après le délai initial et l'obligation ne cesse pas plus Six mois après le jour donné; f) aucune prestation n'est considérée comme ayant été reçue en conséquence: (i) de l'engagement d'une obligation absolue ou éventuelle d'une société de conclure ou d'organiser un paiement de rente par l'émission d'un contrat de rente, Ou ii) le versement d'une rente en vertu du contrat ainsi délivré lorsqu'il est raisonnable de conclure que l'objet de l'engagement ou le versement de la rente est de compléter les prestations prévues soit par un contrat de rente auquel s'applique le paragraphe 147.4 ) Ou à l'alinéa 254a), ou à un contrat de rente collectif qui avait été émis en vertu d'un régime de pension agréé qui a été liquidé ou en vertu de celui-ci; g) aucune prestation n'est considérée comme ayant été reçue en conséquence: Modification visée au paragraphe 147.4 (2) s'appliquerait, mais à l'alinéa 147.4 (2) a) (ii), ou ii) à une substitution à laquelle l'alinéa 147.4 (3) a) s'applique h) Une partie intéressée est considérée comme recevant une prestation dans le cadre de la démutualisation d'une société d'assurance: i) lorsque la prestation est un paiement effectué au moment de la démutualisation ou avant cette date ou est un paiement auquel s'applique l'alinéa b), le moment Le moment de la démutualisation, (B) lorsque l'étendue de la prestation ou les parties prenantes qui y ont droit dépend du résultat d'une première Une offre publique d'actions de la société ou d'une société de portefeuille à l'égard de la société d'assurance et que l'offre est conclue avant le jour qui est de 13 mois après la date de la démutualisation, Le montant total de la prestation dépend de l'issue d'un premier appel public à l'épargne d'actions de la société ou d'une société de portefeuille à l'égard de la compagnie d'assurance, du moment où l'offre est terminée, (D) s'il est raisonnable de conclure que La personne qui confère le bénéfice ne dispose pas d'informations suffisantes concernant la localisation de l'intervenant avant la dernière des périodes déterminées en vertu des clauses (A) à (C), pour informer l'intervenant de la prestation, le moment auquel une information suffisante concernant (E) la fin de tout autre jour acceptable par le ministre (i) le moment auquel une société d'assurance est considérée comme démutualisée est le moment À laquelle elle émet d'abord une part de son capital-actions (à l'exception des actions de son capital-actions émises par elle lorsqu'elle était une société mutuelle si la société n'a pas cessé d'être une société mutuelle en raison de l'émission de ces actions) ) Sous réserve de l'alinéa (3) b), la valeur d'une prestation reçue par un intervenant est la juste valeur marchande de l'avantage au moment où l'intervenant reçoit la prestation. Note marginale: Cas spéciaux (3) Pour l'application du présent article: a) lorsque les prestations d'une police d'assurance sont améliorées (autrement que par une modification visée au paragraphe 147.4 (2), mais pour le sous-alinéa 147.4 (2) (A) (ii), s'appliquent) dans le cadre d'une démutualisation, la valeur de l'amélioration est réputée être une prestation reçue par le preneur d'assurance et non par toute autre personne; b) lorsque les primes payables en vertu d'une police d'assurance à une compagnie d'assurance Sont réduites en raison d'une démutualisation, le souscripteur est réputé, en conséquence de l'engagement de réduire les primes, avoir reçu un avantage égal à la valeur actuelle au moment de la démutualisation des primes supplémentaires qui auraient été payables si Les primes n'avaient pas été réduites dans le cadre de la démutualisation; c) le versement d'un dividende de la police par une société d'assurances ou l'engagement d'une société de payer un dividende de la police est considéré comme étant lié à la démutualisation de la société (Ii) l'obligation d'effectuer le paiement est subordonnée à l'approbation des parties prenantes pour la démutualisation, (iii) le paiement ou la contrepartie, (D) sauf aux fins des alinéas (c), (e) et (f) de la présente loi, il ne peut raisonnablement être considéré comme ayant été fait ou donné, selon le cas, pour s'assurer que les dividendes directs ne sont pas affectés négativement par la démutualisation; , Si une partie du dividende est une prestation de conversion à l'égard de la démutualisation d'une société d'assurance et qu'une partie de celle-ci n'est pas, chaque partie du dividende est réputée être un dividende de la police distinct de l'autre partie e) (F) le versement d'un dividende de la police inclut l'application du dividende de la police pour payer une prime au titre d'une police d'assurance ou pour rembourser une police G) lorsque la démutualisation d'une société d'assurance est effectuée par la fusion de la société avec une ou plusieurs autres sociétés pour former une personne morale, cette entité est réputée être la même société que la société d'assurances H) une société d'assurance est réputée avoir adhéré à une police d'assurance au moment où la société d'assurance devient responsable à l'égard des obligations d'un assureur aux termes de la police et i) nonobstant l'alinéa 248 (7) a) , Lorsqu'un chèque ou un autre moyen de paiement envoyé à une adresse est retourné à l'expéditeur sans être reçu par le destinataire, il est réputé ne pas avoir été envoyé. Note marginale: Conséquences de la démutualisation (4) Lorsqu'une société d'assurances particulière démutualise: a) chacun des revenus, pertes, gains en capital et pertes en capital d'un contribuable provenant de la disposition, de la modification ou de la dilution des droits de propriété des contribuables (B) aucun montant payé ou payable à une partie intéressée relativement à la disposition, à la modification ou à la dilution des parties prenantes, les droits de propriété de la société donnée peuvent être inclus dans la catégorie 14.1 de l'annexe (2) à l'égard des droits de propriété dans la société donnée; d) lorsque la contrepartie donnée par une personne pour une action du capital-actions De la société en particulier ou d'une société de portefeuille relativement à la démutualisation (ou à des droits de propriété particuliers dans une société de portefeuille mutuel à l'égard de la société donnée) comprend le transfert, la cession, la modification ou la dilution des droits de propriété dans la société donnée, De la part (ou des droits de propriété particuliers) à la personne est réputée nulle; e) lorsqu'une société de portefeuille liée à la démutualisation acquiert, dans le cadre de la démutualisation, une part du capital-actions Une société en particulier et émet une part de son propre capital social à une partie intéressée en contrepartie de la quote-part du capital-actions de la société donnée, le coût pour la société holding de la part du capital-actions de la société donnée est réputé nul F) lorsqu'une partie intéressée reçoit une prestation de conversion imposable et que le paragraphe (14) ne s'applique pas à la prestation, (i) la société qui a accordé la prestation est réputée avoir payé un dividende à ce moment sur les actions de son capital (Ii) sous réserve du paragraphe (16), la prestation reçue par l'intervenant est réputée être un dividende reçu par l'intéressé à ce moment; (g) pour l'application de la présente partie, Un dividende est réputé, aux termes de l'alinéa f) ou de l'alinéa (16) i), avoir été payé par une société non-résidente, cette société est réputée, à l'égard du paiement du dividende, être une société résidant au Canada qui est Une société canadienne imposable, à moins qu'un montant ne soit réclamé en vertu de l'article 126 à l'égard de l'impôt sur le dividende; h) pour l'application de l'article 70, du paragraphe 104 (4) et de l'article 128.1, la juste valeur marchande des droits aux prestations qui doivent être (I) lorsqu'une personne acquiert un contrat de rente à l'égard duquel, en raison de l'application de l'alinéa (2) f), aucun avantage Est réputé avoir été reçu pour l'application du présent article, (i) le coût du contrat de rente à la personne est réputé nul, (ii) l'article 12.2 ne s'applique pas au contrat de rente. Note marginale: Juste valeur marchande des droits de propriété (5) Pour l'application de l'article 70, du paragraphe 104 (4) et de l'article 128.1, lorsqu'une société d'assurance fait à tout moment une annonce publique de son intention de demander l'approbation de sa démutualisation , La juste valeur marchande des droits de propriété dans la société est réputée nulle pendant toute la période qui commence à cette date et b) se termine soit au moment de la démutualisation, soit, L'annonce publique qu'il n'a plus l'intention de démutualiser, à l'époque ultérieure. Note marginale: Société d'assurance-capital versée (6) Lorsqu'une société d'assurance résidant au Canada a démutualisé, dans le calcul du capital versé à un moment donné relativement à une catégorie d'actions du capital-actions de la société, ) Il est déduit le total des montants dont chacun aurait été, au sens du paragraphe 84 (1), réputé avoir été payé au plus tard à la date donnée par la société à titre de dividende sur une action de cette société En raison d'une augmentation du capital versé (déterminée sans référence au présent paragraphe) à l'occasion de la démutualisation et b) il est ajouté le montant, le cas échéant, par lequel (i) le total de tous les montants dont chacun Est réputé, aux termes du paragraphe 84 (3), (4) ou (4.1), être un dividende sur les actions de cette catégorie payé par la société avant le moment donné (ii) le total de tous les montants dont chacun serait réputé, (3), (4) ou (4.1) est un dividende sur les actions de cette catégorie payé par la société avant le moment donné, si la présente loi se lisait sans référence au présent paragraphe. Note marginale: Sociπetπe d'immobilisations payπees (7) Lorsqu'une sociπetπe particulπerπe qui réside au Canada a πetπe en tout temps une sociπetπe de holding dans le cadre de la demutualisation d'une sociπetπe d'assurance, dans le calcul du capital versπe, Une classe d'actions du capital-actions de la société donnée: a) il est déduit le total de tous les montants représentant chacun un montant par lequel le capital versé aurait augmenté, au plus tard à cette date, Le moment particulier résultant de l'acquisition d'actions d'une catégorie du capital-actions de la société d'assurances de la société au moment de sa démutualisation et b) il est ajouté le montant, le cas échéant, par lequel (i) Tous les montants dont chacun est réputé, aux termes du paragraphe 84 (3), (4) ou (4.1), être un dividende sur les actions de cette catégorie payé par la société donnée avant le moment donné; (ii) le total de tous les montants dont chacun Le paragraphe 84 (3), (4) ou (4.1) serait réputé être un dividende sur les actions de cette catégorie payé par la société donnée avant le moment donné, si la présente loi se lisait sans égard pour le présent paragraphe. Note marginale: Dividendes de polices (8) Lorsque le versement d'un dividende de politique par une société d'assurance est une prestation de conversion imposable: a) pour l'application de la présente loi, autre que le présent article, le dividende de la police est réputé ne pas être un dividende B) aucun montant relatif au dividende de la police ne peut être inclus, explicitement ou implicitement, dans le calcul d'un montant déductible par l'assureur pour une année d'imposition en vertu de l'alinéa 20 (7) c) ou du paragraphe 138 (3) . Note marginale: Paiement et réception de la prime (9) Si, à l'occasion de la démutualisation d'une société d'assurance, une personne, en se référant aux paragraphes (f) et (g) et au paragraphe (3) A) sont lus sans référence à l'application du paragraphe 147.4 (2), reçoivent une prestation particulière qui est une prestation d'assurance déterminée, (a) la société d'assurance qui est tenue de verser des prestations en vertu de la police à laquelle l'avantage particulier se rapporte Réputée avoir reçu une prime au moment de la démutualisation à l'égard de cette police, égale à la valeur de la prestation particulière b) pour l'application de l'alinéa a), dans la mesure où les obligations d'une société d'assurance donnée La société en question est réputée ne pas être tenue de verser des prestations en vertu de la police et c) sous réserve de l'alinéa 15) e), lorsque la personne reçoit l'avantage particulier , La personne est réputée avoir payé, au moment de la démutualisation, une prime à l'égard de la police à laquelle se rapporte la prestation égale à la valeur de la prestation particulière. Note marginale: Coût de la prestation de conversion imposable (10) Lorsque, dans le cadre de la démutualisation d'une société d'assurance, un intervenant reçoit une prestation de conversion imposable (autre qu'une prestation d'assurance déterminée), l'intervenant est réputé avoir acquis l'avantage à un Coût égal à la valeur de l'avantage. Note marginale: Aucun avantage pour les actionnaires (11) Le paragraphe 15 (1) ne s'applique pas à une prestation de conversion. (12) Sous réserve du paragraphe (14), pour l'application des dispositions de la présente loi (sauf l'alinéa (9) c)) qui portent sur les régimes enregistrés d'épargne-retraite, les régimes enregistrés d'épargne-retraite Les fonds de revenu de retraite, les régimes de retraite, les régimes de participation différée aux bénéfices et les fonds ou régimes de retraite ou de pension, la réception d'une prestation de conversion est considérée comme une contribution ou une distribution d'un tel régime, fonds ou arrangement. (13) Pour l'application de la présente loi, les alinéas 146 (2) c.4) et 146.3 (2) g) et le paragraphe 198 (6) s'appliquent sans égard Conversion. Note marginale: Prestation de retraite (14) Une prestation de conversion reçue à raison d'une participation dans une police d'assurance-vie détenue par une fiducie régie par un régime enregistré d'épargne-retraite, un fonds enregistré de revenu de retraite, un régime de participation différée aux bénéfices ou un régime ou un régime de retraite Réputé reçu en vertu du régime ou du fonds, selon le cas, s'il est reçu par une personne autre que la fiducie. Note marginale: Assurance salariée (a) une partie prenante reçoit une prestation de conversion en raison de l'intérêt des parties intéressées dans une police d'assurance collective en vertu de laquelle des personnes ont été assurées dans le cadre de leur emploi ou en raison de leur emploi; Paiement d'une prime décrite à l'alinéa c), le coût intégral d'une assurance donnée en vertu de la police était assumé par les personnes assurées en vertu de la protection particulière; c) l'intervenant paie une prime en vertu de la police à l'égard de la police; Une couverture particulière ou une autre police d'assurance collective à l'égard de la protection qui a remplacé la protection particulière, (i) la prime est réputée avoir été payée par l'alinéa (9) c), ou (ii) il est raisonnable de conclure que: L'objet de la prime est d'appliquer, pour le bénéfice des personnes assurées en vertu de la couverture particulière ou de la garantie de remplacement, tout ou partie de la valeur de la partie de la prestation de conversion qui peut raisonnablement être considérée comme étant à l'égard Les règles suivantes s'appliquent: e) pour l'application de l'alinéa 6 (1) f) et des règlements pris pour l'application du paragraphe 6 (4), la prime est réputée être un montant payé par les personnes qui Sont assurés en vertu de la couverture particulière ou de la garantie de remplacement, selon le cas, et ne constituent pas un montant payé par l'intervenant, et (f) aucun montant ne peut être déduit de la prime dans le calcul du revenu des intervenants. Note marginale: Transfert des avantages de conversion aux employés et autres (a) un intervenant reçoit une prestation de conversion (appelée «prestation de conversion pertinente» dans le présent paragraphe) en raison de l'intérêt de toute personne dans une police d'assurance; L'actionnaire fait un paiement d'un montant (autrement que par le transfert d'une action qui a été reçue par l'intervenant comme tout ou partie de la prestation de conversion pertinente et qui n'a pas été reçue comme une prestation de conversion imposable) à un particulier (I) qui a reçu des prestations en vertu de la police, (ii) qui a, ou avait à un moment donné, un droit absolu ou conditionnel de recevoir des prestations en vertu de la police, (iii) Iv) qui a reçu le montant parce qu'un particulier remplit la condition énoncée aux sous-alinéas (i), (ii) ou (iii), (c) il est raisonnable de conclure que le paiement a pour objet de distribuer un montant (I) l'objectif principal de la police était de fournir des prestations de retraite ou une couverture d'assurance aux particuliers relativement à leur emploi auprès d'un employeur, ou (ii) tout ou partie du coût de la couverture d'assurance en vertu du (E) le paragraphe (14) ne s'applique pas à la prestation de conversion pertinente, et f) l'une des conditions suivantes s'applique, à savoir: (i) la personne physique particulière réside en Canada au moment du paiement, l'intervenant est une personne dont le revenu imposable est exonéré d'impôt en vertu de la présente partie et le paiement serait inclus dans le calcul du revenu de la personne en cause si le présent article était lu sans référence au présent paragraphe individual, (ii) the payment is received before Decenber 7, 1999 and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the relevant conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the payment, (iii) the payment is received after December 6, 1999, the payment would, if this section were read without reference to this subsection, be included in computing the income of the particular individual and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the relevant conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the payment, or (iv) the payment is received after December 6, 1999 and the payment would, if this section were read without reference to this subsection, not be included in computing the income of the particular individual, the following rules apply: (g) subject to paragraph (l), no amount is, because of the making of the payment, deductible in computing the stakeholders income, (h) except for the purpose of this subsection and without affecting the consequences to the particular individual of any transaction or event that occurs after the time that the payment was made, the payment is deemed not to have been received by, or made payable to, the particular individual, (i ) the corporation that conferred the relevant conversion benefit is deemed to have paid to the particular individual at the time the payment was made, and the particular individual is deemed to have received at that time, a dividend on shares of the capital stock of the corporation equal to the amount of the payment, (j) all obligations that would, but for this subsection, be imposed by this Act or the regulations on the corporation because of the payment of the dividend apply to the stakeholder as if the stakeholder were the corporation , and do not apply to the corporation, (k) where the relevant conversion benefit is a taxable conversion benefit, except for the purpose of this subsection and the purposes of determining the obligations imposed by this Act or the regulations on the corporation because of the conferral of the relevant conversion benefit, the stakeholder is deemed, to the extent of the fair market value of the payment, not to have received the relevant conversion benefit, and (l) where the relevant conversion benefit was a share received by the stakeholder ( otherwise than as a taxable conversion benefit), (i) where the share is, at the time of the payment, capital property held by the stakeholder, the amount of the payment shall, after that time, be added in computing the adjusted cost base to the stakeholder of the share, (ii) where subparagraph (i) does not apply and the share was capital property disposed of by the stakeholder before that time, the amount of the payment is deemed to be a capital loss of the stakeholder from the disposition of a property for the taxation year of the stakeholder in which the payment is made, and (iii) in any other case, paragraph (g) shall not apply to the payment. Marginal note: Flow-through of share benefits to employees and others (a) because of the interest of any person in an insurance policy, a stakeholder receives a conversion benefit (other than a taxable conversion benefit) that consists of shares of the capital stock of a corporation, (b) the stakeholder transfers some or all of the shares at any time to a particular individual (i) who has received benefits under the policy, (ii) who has, or had at any time, an absolute or contingent right to receive benefits under the policy, (iii) for whose benefit insurance coverage was provided under the policy, or (iv) who received the shares because an individual satisfied the condition in subparagraph (i), (ii) or (iii), (c) it is reasonable to conclude that the purpose of the transfer is to distribute all or any portion of the conversion benefit to the particular individual, (i) the main purpose of the policy was to provide retirement benefits or insurance coverage to individuals in respect of their employment with an employer, or (ii) all or part of the cost of insurance coverage under the policy had been borne by individuals (other than the stakeholder), (e) subsection (14) does not apply to the conversion benefit, and (f) one of the following applies, namely, (i) the particular individual is resident in Canada at the time of the transfer, the stakeholder is a person the taxable income of which is exempt from tax under this Part and the amount of the transfer would, if this section were read without reference to this subsection, be included in computing the income of the particular individual, (ii) the transfer is made before December 7, 1999 and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the transfer, (iii) the transfer is made after December 6, 1999, the amount of the transfer would, if this section were read without reference to this subsection, be included in computing the income of the particular individual and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the transfer, or (iv) the transfer is made after December 6, 1999 and the amount of the transfer would, if this section were read without reference to this subsection, not be included in computing the income of the particular individual, the following rules apply: (g) no amount is, because of the transfer, deductible in computing the stakeholders income, (h) except for the purpose of this subsection and without affecting the consequences to the particular individual of any transaction or event that occurs after the time that the transfer was made, the transfer is deemed not to have been made to the particular individual nor to represent an amount payable to the particular individual, and (i) the cost of the shares to the particular individual is deemed to be nil. Marginal note: Acquisition of control (18) For the purposes of subsections 10(10), 13(21.2) and (24) and 18(15), sections 18.1 and 37, subsection 40(3.4), the definition superficial loss in section 54, section 55, subsections 66(11), (11.4) and (11.5), 66.5(3) and 66.7(10) and (11), section 80, paragraph 80.04(4)(h), subsections 85(1.2) and 88(1.1) and (1.2), sections 111 and 127 and subsections 249(4) and 256(7), control of an insurance corporation (and each corporation controlled by it) is deemed not to be acquired solely because of the acquisition of shares of the capital stock of the insurance corporation, in connection with the demutualization of the insurance corporation, by a particular corporation that at a particular time becomes a holding corporation in connection with the demutualization where, immediately after the particular time, (a) the particular corporation is not controlled by any person or group of persons and (b) 95 of the fair market value of all the assets of the particular corporation is less than the total of all amounts each of which is (i) the amount of the particular corporations money, (ii) the amount of a deposit, with a financial institution, of such money standing to the credit of the particular corporation, (iii) the fair market value of a bond, debenture, note or similar obligation that is owned by the particular corporation that had, at the time of its acquisition, a maturity date of not more than 24 months after that time, or (iv) the fair market value of a share of the capital stock of the insurance corporation held by the particular corporation. NOTE: Application provisions are not included in the consolidated text see relevant amending Acts. 2000, c. 19, s. 38 2016, c. 12, s. 50. Table of ContentsChapter 11 Computation of Taxable Income and Tax After General Reductions for Corporations Learning Goals para11,000 Computation Of Taxable Income For A Corporation para11,025 Purpose The purpose of the deduction is to prevent the double taxation of corporate income. When dividends are paid, the source of the dividends is usually after-tax retained earnings of the payer corporation. If a recipient corporation were to pay tax on the dividends it receives, the income that gave rise to the dividends would effectively be taxed twice. A provision prevents that second imposition of tax at the level of the recipient corporation. In fact, retained earnings can, in many cases, be flowed through any number of shareholder corporations in the form of taxable dividends without attracting tax under Part160I. When the retained earnings are ultimately paid as dividends to an individual shareholder, the dividend gross-up and tax-credit mechanism will operate to reduce, at the individual taxpayer level, the potential double taxation of income generated by a corporation. para11,025.10 Concept of integration of individual and corporate tax on income The dividend deduction for corporate shareholders is the second building block of the theory of integration. The first building block, the dividend gross-up and tax credit for individual shareholders, was previously discussed in Chapters1606 and 10. The function of the dividend deduction for a corporation is to remove some of the potential multiple taxation of dividend income as the income moves through a series or chain of corporations. Simply stated, the integration concept, discussed in more detail in Chapter 12. requires that a tax system should be designed so that a taxpayer is indifferent (i. e. pays the same amount of tax), no matter what type of entity or person earns the income. In the context of corporations and their shareholders under a perfectly integrated tax system, the total tax burden should be identical whether the individual receives the income directly or indirectly, as a shareholder, from dividends through the corporate structure. The Canadian income tax system is not perfectly integrated. Near perfect integration occurs numerically where the combined corporate rate of tax (federal and provincial) is equal to: bull 20 for Canadian-controlled private corporations on their business income eligible for a low rate of tax, and bull about 31 for Canadian-resident corporations on their business income subject to the higher general rate of tax. However, even at these rates there are flaws in the system. For example, the dividend tax credit should represent the underlying tax paid by the corporation. However, under our present income tax system, even when the corporation has not paid any tax due to losses, for example, shareholders still receive a dividend tax credit. para11,025.20 Application of the concept of integration To illustrate the corporate dividend deduction aspect of integration, assume that there is a chain of three taxable Canadian corporations: A160Ltd. a Canadian-resident public corporation, owns 100 of B160Ltd. which in turn owns 100 of C160Ltd. Also, assume that each of the corporations is taxed at a combined rate of 35, and the individual shareholders of A160Ltd. are all taxed at a combined rate of 40 all of the after-tax income is passed up to the next level in the form of eligible dividends, i. e. eligible for the 45 gross-up and tax credit in the hands of an individual shareholder. In the absence of a corporate deduction for dividends received from another corporation the following would result. The result of this example is that on the 1,000 of income initially earned by C Ltd. the ultimate tax burden is 762. The dividend deduction, as discussed above, eliminates the corporate tax in both B160Ltd. and C160Ltd. The tax burden remaining would be composed of the 350 on the income earned initially by C Ltd. and the tax of 85 on the 943 grossed-up dividend received by the individual shareholders calculated as follows: The total income tax is now 435 compared to 762. However, as can be seen, there is still some degree of double taxation even with the dividend tax credit when the corporate tax rate is at this level (i. e. 435 versus 400 under perfect integration). para11,025.30 Conclusion From the above example, one can conclude that where dividend income flows through a series of corporations there will be only two incidents of income tax. Initially, the corporation that earns the business or property income will pay income tax and eventually the individual shareholder who receives the income in the form of a dividend will also pay some income tax. In the next chapter, the topic of integration will be expanded even further with different corporate rates and other factors. para11,030 Dividends paid from untaxed income Over the years, the intercorporate dividend deduction has created problems which the government has attempted to rectify. For example, a corporation may pay a dividend from income that was not taxed in the payer corporation. This might occur when income for accounting purposes is higher than income for tax purposes, due to a more rapid write-off of assets for tax purposes. The utilization of carried-over losses may also offset income, so that some amounts that are distributed as dividends may not be taxed fully in the corporation that pays the dividend. This is usually due to timing differences between the payment of the dividend and the offset of losses. In these cases, there is a breakdown of the assumption that underlies the intercorporate dividend deduction, namely, that the dividend deduction prevents double taxation because the income that gave rise to the dividends was taxed in the payer corporation. This problem is compounded when individual shareholders gross up the dividends and deduct a dividend tax credit, on the assumption that the payer corporation or a predecessor corporation paid tax on the income it distributed as dividends. The purpose and effect of the dividend gross-up and tax-credit mechanism will be discussed more fully in the next chapter. para11,035 34After-tax financing34 Another problem that is linked with the intercorporate dividend deduction occurs when what has become known as 34after-tax financing34 is undertaken. A corporation that has generated losses in the past may not find debt financing attractive. This is because the deduction for interest expense provides no immediate tax relief where the corporation does not have to pay tax currently. Instead, the interest expense deduction merely increases the corporations non-capital losses which may be deductible in the future or may expire. Alternatively, a corporation with unused losses could issue preferred shares to another corporation, such as a financial institution, to obtain the necessary financing. The result is that the corporation that issues the preferred shares will, obviously, not receive a deduction for dividends paid on the preferred shares. However, the financing corporation, because of the intercorporate dividend deduction, will not ordinarily pay tax on the dividends it receives. Consequently, because interest income is taxable and dividends are ordinarily not, the financing corporation may be prepared to lend funds at a rate lower than the market rate of interest. Rules are designed to eliminate the benefits of after-tax financing on 34term preferred shares34, 34short-term preferred shares34 and collateralized preferred shares. para11,040 Dividends paid on shares subsequently sold for a loss The intercorporate dividend deduction is also linked to a potential problem when dividends are received on shares held by a corporation for a short period and subsequently sold at a loss. Such dividends would ordinarily be deductible in computing taxable income, or in the case of certain dividends (e. g. capital dividends), would be tax exempt. On the other hand, the loss on the disposition of the shares would be deductible as an allowable capital loss (if the shares were held as a capital property), or as a business loss (if the shares were held as inventory). It may be argued that, to some extent, the loss on disposition may have been caused by the payment of the dividend for example, witness the normal decline in the value of shares after the ex-dividend date. Consequently, there are rules that, when certain conditions are present, will reduce the corporations capital loss or inventory loss by an amount equal to the aggregate of certain types of dividends received on such shares prior to the disposition. The loss reductions will occur if one of the following conditions is present: (a) the corporation owned the shares for less than 365 continuous days immediately prior to the disposition date, or (b) the corporation owned more than 5 of the issued shares of any class of the capital stock on which the dividends were received. The type of dividends that will reduce such capital losses are essentially taxable dividends (deductible in computing the corporations taxable income), and tax-exempt capital dividends received on the shares during the period of ownership. Similarly, inventory losses are reduced by deductible taxable dividends received by any taxpayer-shareholder plus non-taxable dividends received. para11,050 Charitable Donations While individuals are provided with a non-refundable tax credit for various donations, as discussed in Chapter16010. corporations are permitted a deduction in Division160C. The types of donation that provide a corporation with this deduction are the same as the types of donation that provide an individual with a tax credit. Also, a corporations deduction for gifts is, generally, limited to 75 of the corporations net income for tax purposes under Division160B. However, the deduction is limited to 100 of the amount of a taxable capital gain in respect of gifts of appreciated capital property. As well, the deduction limit is 100 of any CCA recapture arising on the gift of depreciable capital property. Any unused donations for a given year can be carried forward five years to be deducted in a carryforward year. The total claim for donations carried forward to a year and current donations made in that year cannot exceed the Division B income limit. The maximum donation need not be deducted in a given year, such that undeducted amounts are available within the carryforward period. To be deducted, a donation must be proven, if necessary, by a receipt that contains prescribed information. para11,060 Loss Carryovers The rules governing the deductibility of net capital losses and non-capital losses are the same for corporations and individuals. A capital loss carryover from the current year may be carried back to a prior year in which income included capital gains and non-capital losses. The capital loss would then be offset against the capital gain, reducing the amount of non-capital losses needed to minimize taxes payable for the prior year. This increases the non-capital losses available to be carried over into the current year. The carryforward of non-capital losses, restricted farm losses, and farm losses arising in the 2006 and subsequent taxation years is 20 years. The following table shows the carryover period for net and non-capital losses. para11,065 Non-capital loss A non-capital loss for a particular year, as it affects a corporation (for the purposes of this text), is generally defined to include: This definition is designed to offset the current years losses from various sources (items (E) and (D)) against the current years income from other sources (item (F)). Then the balance or the unabsorbed excess loss can be carried over and deducted in another year. Non-capital losses and farming and fishing losses may be carried back three taxation years and forward 20 taxation years. To carry losses back to a taxation year for which a return has been filed, the corporation need only file one form (Schedule1604) and not a full, amended tax return. IC 84-1, par.16011 Although a 20-year carryforward period is quite long, it is possible for carried-over losses to expire. Recognize that 20 years is a very long time for a business to sustain losses with no income earned to offset those losses. Most businesses would not last that long with those losses. However, planning should be undertaken to ensure that the losses are utilized within the carryover period. Income can be increased to absorb non-capital losses by omitting optional or permissive deductions such as capital cost allowances, cumulative eligible capital amounts, scientific research and experimental development expenditures or reserves. The deduction of these amounts can be deferred to future years when there is offsetting income. The Canada Revenue Agency (CRA) usually permits the revision of a permissive deduction for a prior year. An Information Circular indicates that a letter to the director of the taxpayers district taxation office that outlines the requested revisions will be sufficient if other conditions set out in paragraphs1609 and16010 are met. In addition, the corporation should consider the sale of unnecessary or redundant assets to generate income which could be used to absorb losses. The CRA may also allow the substitution of one type of loss for another, as long as the year in which the substitution is made is still open to assessment (as discussed in Chapter16014 ). For example, a non-capital loss may have been carried back to a year in which there was a net taxable capital gain. Subsequently, an allowable capital loss may arise. The resultant net capital loss may be carried back and substituted for the non-capital loss, leaving the freed non-capital loss available for carryforward. The operations of Bigloss Ltd. generated the following data for its December 31, 2008 taxation year: In its 2007 taxation year, its first profitable year in several, Bigloss Ltd. had taxable income under Division160C of 40,000. Compute the non-capital loss for Bigloss Ltd. in 2008 and determine the amount of that loss that can be carried back to 2007. Before calculating the non-capital loss for 2008, a review of the construction of section1603 income would be useful in understanding the basic concept. The following calculation reorganizes the above information using the ordering and application rules in section 3. Note that the denominator C in the fraction BC, in effect, divides the net capital loss A by the inclusion rate of the loss year. Thus, when the 1997 net capital loss of 45,000, which is a 3 4 amount, is divided by 3 4 . the result is 60,000, which was the full capital loss in 1997. Then, B, which is the inclusion rate for the year in which the loss is being deducted, is multiplied by the full loss, the result is 2 3 of 60,000, or 40,000, which is the net capital loss for 2000. To deal with the carryover of these losses conceptually, it may be easier to carry full amounts of capital losses realized either back or forward against full gains in the carryover year. Then the appropriate inclusion rate could be applied to the net full gains in the carryover year. Unfortunately, as discussed below, the definition of net capital loss (i. e. the amount available for carryover) is given in terms of the fractional allowable capital losses. The amount of net capital loss realized in 1997 and deducted in 2000 and 2001 and, hence, the amount of net capital loss available for carryforward after 2001 can be reconciled as follows: para11,080 Restrictions and ordering of deductions A taxpayer can choose how much, if any, of its previously unclaimed carried-over losses to deduct in a particular year and in which order to deduct such losses and other Division160C deductions. However, the taxpayer must deduct a loss of a particular type (that is, non-capital loss, net capital loss, restricted farm loss or farm loss) in the chronological order in which the loss was incurred. Logic would suggest that those deductions in Division160C, which are more restricted in their deductibility, be claimed as soon as possible and before those deductions which are less restricted. There are two basic types of restriction on losses available for carryover. (1) The first is a restriction on the type of income against which the loss carryover can be deducted. This type of restriction is often referred to as 34streaming34. (2) The other is a restriction on the number of years a loss can be carried over. For example, a net capital loss can only be applied against net taxable capital gains, but is unrestricted as to carryforward time. A non-capital loss can be applied against any source of income, but is time-restricted. A restricted farm loss is restricted both as to the type of income against which it can be applied and to time. Therefore, restricted farm losses should usually be deducted first. Between net capital losses and non-capital losses, the decision depends on whether taxable capital gains are anticipated. If there are current taxable capital gains and an examination of the corporations balance sheet indicates no accrued or prospective capital gains, then net capital losses should probably be deducted before non-capital losses. EXHIBIT16011-2 Summary for Carryover Rules for Division C Deductions para11,085 Choice to deduct net capital losses to preserve non-capital losses Item E in the definition of non-capital loss enables taxpayers, at their option, to deduct net capital losses to preserve non-capital losses. The purpose of this choice is to correct a long-standing anomaly in the legislation which inadvertently penalized taxpayers in certain specific situations, as shown in the example below. Whether a taxpayer decides to utilize this option depends upon whether the corporation is expected to generate, in the near future, adequate business income or taxable capital gains. The non-capital loss can be increased by the amount of any net capital loss actually deducted for that year. The only restriction on the deduction of a net capital loss is that there is a net taxable capital gain in the year that is at least equal to the net capital loss being deducted. For example, assume that a corporation (or an individual) has in 2008 a business loss of 100,000, a net taxable capital gain of 40,000 and an adjusted net capital loss of 60,000 carry forward. The tax consequences are as follows: If the definition of non-capital loss did not contain the addition for net capital losses deducted, a corporation could deduct 40,000 of the net capital loss of 60,000 (equal to the net taxable capital gain) but would not do so because such a deduction would have no impact upon the taxable income which would still be zero. In addition, if the 40,000 was deducted, the taxpayer would no longer have a potential use of the 40,000 net capital loss in the future when the taxpayer is in a taxable position. The non-capital loss for the 2008 taxation year without the addition would be: The result is that the net taxable capital gain has been used to offset the business loss resulting in a lower non-capital loss (i. e. 60,000 versus 100,000). The taxpayer may or may not be happy with this result depending upon the taxpayers expected future income sources. Since net capital losses can only be applied to net taxable capital gains (i. e. 40,000) a potential net capital loss deduction has been blocked by the current business loss of 100,000. The addition of deducted net capital losses to the non-capital loss balance provides a positive tax consequence to claiming a net capital loss deduction, even though the deduction has no impact upon the taxable income as shown below. However, as a result of the deduction of net capital losses, the non-capital loss is increased by a net capital loss deducted: The result is that 40,000 of the net capital loss carryover has been deducted under Division C to offset the 40,000 of net taxable capital gain under paragraph1603( b ). This preserves the full 100,000 of business loss to be carried over as a non-capital loss, which can be deducted from any source of income in a carryover year. The following data summarize the operations of Parliamentary Fertilizers Limited, a Canadian-controlled private corporation, for the years 2005 to 2008 ended December16031. The corporation has a net capital loss balance of 18,750 which arose in 1997. Calculate the taxable income of the company for each of the years indicated, on the assumption that future other business income and taxable capital gains are uncertain, and tabulate the losses available for carryover at the end of 2008. (For the purposes of this type of problem, dealing with each item, line-by-line, across the years, will help keep track of carryovers more easily than dealing with income one year at a time.) mdashNOTES TO SOLUTION (1) 160Items aggregated from the various non-capital sources under paragraph1603( a ) cannot be negative. Losses from these sources are deducted under paragraph1603( d ). (2) 160Allowable capital losses are only deductible to the extent of taxable capital gains under paragraph1603( b ). The remainder is available for carryover to another year. (3) 160Losses from the various non-capital sources and from allowable business investment losses are only deductible under paragraph1603( d ). However, the net income amounts after the deductions in paragraph1603( d ) cannot be negative. Note that the excess of the deductions in paragraph1603( d ) over the aggregate income in paragraph1603( c ) is only one component of the addition to the non-capital loss carryover balance computed below. (4) 160Income for the year cannot be negative. There is no statutory order in which Division160C deductions must be taken. However, the time and source restrictions of loss carryovers, as previously discussed, should be taken into account. In addition, where the income under Division160B is not large enough to cover all potential Division C deductions, then the dividend deduction under section160112 should always be taken first. Dividends from taxable Canadian corporations are the only Division C deduction for corporations which do not have a carryover clause. (5) 160Dividends from taxable Canadian corporations should be deducted first in case there is not enough income for any further Division C deductions. Undeducted dividends cannot be carried over. (6) 160A deduction in the computation of taxable income should not be taken if it reduces the balance to a negative number, since normally negative taxable income has no meaning. The one exception to this rule is in respect of net capital losses which can be added to the non-capital loss balance if they are deducted in a particular year. (7) 160The deduction of charitable donations is limited to 75 of Division B income for the year. Donations not deducted in the year they are made, can be carried forward to the next five taxation years. However, the Division B income limitation applies to the sum of donations carried forward and current donations. Since the unused donations of a particular taxation year have a time restriction of 5160years, it would be advisable to claim them prior to claiming current year donations. (8) 160Deductions for net capital loss carryovers are restricted to the extent of the net taxable capital gains included in paragraph 3( b ) for the carryover year. Subsection160111(1.1) adjusts the 2005 net capital loss deduction by a formula which corrects for the fact that in the loss year (1997) the inclusion rate for capital gains was three-quarters, while in the year that the loss is being claimed (i. e. 2005) the inclusion rate is one-half. Since the inclusion rate is the same for 2006 and 2007, no adjustment is necessary for the 2006 capital loss: When control of the corporation is acquired by another person or another group of persons, a corporations ability to carry forward or carry back non-capital losses or farm losses is severely restricted. In addition, net capital losses, losses from property and allowable business investment losses (ABILs) that are unutilized at the time of the acquisition of control may not be carried forward8212they simply expire. IT-302R3, pars. 382116 As mentioned previously, the loss utilization restrictions become operative when control of a corporation is acquired by another person or another group of persons. The acquisition of control is considered to occur when control over the voting rights (i. e. de jure control that exists where more than 50 of the votes necessary to elect the Board of Directors is held) of the corporation is acquired by a person or group of persons. While it is clear that control refers to voting control, some uncertainty exists as to how the CRA will interpret the phrase 34group of persons34 for the purposes of these rules. The CRA has indicated that it will look for evidence of a groups intention to 34act in concert34 to control a corporation. Corporations are often unable to generate appropriate or sufficient income to utilize losses and, hence, are unable to recover taxes previously paid or reduce taxes payable. Consequently, such loss corporations become attractive targets for acquisition by profitable corporations which, through a variety of strategies, could shelter their income from tax by utilizing the losses of the acquired corporation. Because such strategies ultimately result in reduced tax revenues, the government, understandably, does not view such transactions with favour. As a result, over the years the government has introduced increasingly restrictive legislation to curb such transactions which are sometimes referred to as 34tax-loss trading34. Two of the more common loss utilization strategies are outlined as follows: (1) In the first, after control of the loss corporation is acquired, the operations of the income-earning acquirer corporation and the loss corporation are restructured so that income is generated in the latter corporation. For example, the assets of a profitable business or division in the income-generating corporation are transferred to the loss corporation. Usually the transfer will be accomplished by means of a tax-free rollover by moving profit-generating assets to the loss corporation (discussed in Chapter16016 ). The income that is so generated is used to absorb the losses of the loss corporation. (2) The second strategy involves implementing intercompany transactions which produce expense deductions to the income-generating corporation while generating income for the loss corporation. Interest on loans, rental contracts and commission contracts are examples of such intercompany transactions. The legislative restrictions which are aimed at curtailing the utilization of tax losses, are based on certain transactions and events which are deemed to occur when there has been an acquisition of control. These transactions and events, as well as other rules that comprise the restrictions, are discussed below. para11,100 Deemed year-end The corporation is deemed to have a taxation year-end immediately before the time of the acquisition of control of the corporation (referred to hereinafter as the 34deemed taxation year-end34). The result is that various adjustments that are normally made at a year-end, are required to be made before the acquisition of control. For example, the requirement that inventory be valued at the lower of cost or market at a taxation year-end will cause any accrued losses in inventory to be realized. This adjustment will increase the corporations pre-acquisition non-capital losses or farm losses. As will be explained later, such pre-acquisition losses are available for carryforward, but only after certain restrictive conditions are satisfied. The advent of the deemed year-end causes other adjustments (discussed below) to increase the corporations pre-acquisition of control non-capital losses and farm losses. As a result of the deemed year-end, the corporation is required to satisfy the normal compliance requirements of filing tax returns, reviewing unpaid amounts, determining the status of charitable donations and loss carryovers and their carryforward period, etc. However, a short taxation year that may result from an acquisition of control will not advance the replacement period required to benefit from the rollovers available for an involuntary or voluntary disposition. These rollovers allow a full 24 months and 12 months after an involuntary and voluntary disposition, respectively, from the end of the short taxation year in which such a disposition occurs. Unless the deemed year-end coincides with the corporations normal year-end, the corporation may have two taxation years lasting less than 24160months in total. To illustrate this, assume that a corporation whose normal taxation year-end is December16031, experiences an acquisition of control on April1601, 2008. The corporation will have a deemed year-end of March16031, 2008. If the corporation chooses to return to its original taxation year-end of December16031, the corporation will have two taxation years ending in the 12-month period ending December16031, 2008. The first taxation year will be 3160months long, the second 9160months long. If the corporation chose a date for its subsequent taxation years to be, say, March16031, as permitted, it would then have two taxation years lasting a total of only 15160months8212namely, the deemed taxation year ending on March16031, 2008 will be 3160months long and the taxation year ending March16031, 2009 will be 12160months long. The foregoing example can be illustrated with the following diagram: The upshot of this is that the normal 276-month (3160years back plus 20 years forward) carryover period for non-capital losses is reduced. This, in itself, represents a constraint in that the corporation has a shorter period over which to generate income to utilize the losses. A short taxation year will also cause any capital cost allowance or small business deduction (discussed in Chapter16012 ) to be proportionately reduced. para11,105 Accrued or unrealized losses on inventory A taxpayer is required to value its inventory at the end of each taxation year. The Act requires that each item of inventory be valued at the lower of cost and market (LCM), while the Regulations permit valuation at the fair market value of the entire inventory. Either way, the result is that any accrued or unrealized inventory losses are realized in the deemed taxation year, thus, decreasing the taxpayers income or increasing its non-capital losses or farm losses in the pre-acquisition period. para11,110 Accrued or unrealized losses on accounts receivable The restrictions and their consequences that apply to accrued inventory losses are parallelled in the provisions that relate to accrued losses on accounts receivable. The largest amount that a corporation could deduct as a reserve for doubtful accounts for each separate trade receivable, must be claimed as an actual bad debt in the deemed taxation year. That is, where there has been an acquisition of control, the normal method of computing a reserve by aging the accounts and applying a fixed percentage to each age category is not permitted. Instead, each debt must be considered individually as to its collectibility and, if collection is doubtful, the debt must be written off as a bad debt. The amount deducted is deemed to be a separate debt and any amount or amounts subsequently received in respect of the separate debt must be included in income. As is the case in accrued inventory losses, accrued losses on accounts receivable become part of time-limited non-capital or farm losses, which are deductible only if certain restrictive conditions are satisfied. para11,115 Accrued or unrealized losses on depreciable capital property Accrued or unrealized losses on depreciable capital property are measured as the amount by which: (a) the undepreciated capital cost (UCC), at the deemed year-end, in a prescribed class exceeds the aggregate of: (b) the fair market value of all the property in the class at the deemed year-end, plus (5) 160The adjusted cost base at December 1, 2008, remains at 110,000 and the UCC remains at 104,000, since no election was made. (6) 160The corporations income for tax purposes for the year ending December16031, 2009, is 15,000 as computed by section 3. The corporation may apply the losses of the ladies shoe retail business against the total of the corporations income from that business and from the sale of similar products. The result of the aggregation is, therefore, 12,000, being nil from the ladies shoe retail business plus 12,000 from the sale of similar products with the 8,000 taxable capital gain being excluded. Thus, the maximum deduction is 12,000. (7) 160This amount is available for carryforward as follows: The 2007 loss expires on December16031, 2026, i. e. in 20 taxation years, including the deemed taxation year at November16030, 2008, and the one-month taxation year at December 31, 2008. The November 2008 loss expires on December16031, 2027, i. e. in 20160taxation years. (8) 160The corporations income for tax purposes for the year ending December16031, 2009, is 15,000. However, the corporation may make a deduction to the extent of nil under this assumption because the ladies shoe retail business generated no income in the year and there was no income from the sale of similar products or services by the assumption made in this alternative. (9) 160This amount is available for carryforward as follows, assuming a December16031 taxation year-end is chosen: 821234,0008195(being the 2007 loss of 37,500 - 3,500 claimed in the December16031, 2008 year) expires on December16031, 2025 821219,5008195(see note160(7)) expires on December16031, 2027, i. e. 20160taxation years. (10) 160On the assumption that the optional net capital loss deduction is taken in order to increase the non-capital losses for the deemed taxation year. (11) 160The adjusted cost base balance at December 1, 2008 is 126,000, being the deemed proceeds of disposition in the deemed disposition elected upon. (12) 160The adjusted cost base balance (i. e. capital cost, in the case of depreciable property) at December 1, 2008, for future capital gains purposes, is 118,000, being deemed proceeds of disposition in the deemed disposition elected upon. The UCC 114,000 at the same date is increased by all of the recapture of 6,000, but only 1 2 of the capital gain of 8,000 elected as deemed proceeds on the deemed disposition, (i. e. 104,000 6,000 1 2 215 8,000). (13) 160The addition of 19,500 to the non-capital loss balance is logical, since the 19,500 represents the loss from business sources for the deemed year-end. para11,160 Taxable Income of a Corporation in General Recall that the starting point for the calculation of a corporations taxable income is its net income for tax purpose computed under Division160B. Where financial statements have been prepared using generally accepted accounting principles, it may be necessary to adjust income for financial accounting purposes to income for tax purposes as determined by Division160B. This usually involves a reconciliation process, introduced in previous chapters. Generally, expenditures deducted for financial accounting purposes but not deductible for tax purposes, must be added to financial accounting income, and expenditures not deducted for financial accounting purposes but deductible for tax purposes may be deducted in the reconciliation. To perform this reconciliation in the preparation of a corporate tax return, Schedule1601 is completed. Frenzied Taxpayers Limited reported a net loss for financial accounting purposes of 53,000 for 2007 and a net income of 126,000 for 2008. It showed a provision for income taxes of 113,000 for 2008 only. Expenses deducted for financial accounting purposes in both years included: charitable donations of 15,000 per year, depreciation of 105,000 per year and bond discount amortization of 5,000 per year. The corporation included in financial accounting income, in both years, dividends from taxable Canadian corporations of 23,000 and dividends of 15,300 net of a 15 withholding tax from foreign corporations which were not foreign affiliates. The corporation had no capital gains in either year. In 2007, capital cost allowance of 14,800 (i. e. less than the maximum of 14,844) had been taken on a brick building purchased in 2001 (Class1601) leaving an undepreciated capital cost balance of 356,250 on January1601, 2008, the beginning of the 2008 taxation year. In addition, 44,800 in capital cost allowance had been taken on equipment leaving an undepreciated capital cost balance of 179,200 on January1601, 2008. In 2008, no additions or disposals were made to these classes of assets. The corporation had non-capital losses of 18,000 available for carryover until 2010 and a 1999 net capital loss of 5,000 available for carryover. Calculate the taxable income of the corporation for the years indicated. mdashNOTES TO SOLUTION (1) 160Income tax is not an expenditure made to produce income. It is an appropriation of profits after they have been earned. (2) 160This is not an expenditure made to produce income for tax purposes, but an appropriation of profits after they have been earned. However, a foreign tax credit may be available in the computation of tax. (3) 160Donations, normally, are not deductible in the computation of income, but are deductible in the computation of taxable income of a corporation. (4) 160Bond discount amortizations are prohibited, but payments reflecting bond discounts are deductible at the earlier of redemption or maturity. (5) 160Capital cost allowances for 2008 were computed as follows: (6) 160Even though 23,000 was deducted, only 15,100 of the dividends deducted have any effect since there is no loss carryover for dividends not deducted. Even where there is a loss from business and property, the addition to the non-capital losses of dividends deducted under section160112 is offset by the paragraph1603( c ) income which in fact includes the dividends in question. The dividend deduction only neutralizes the paragraph 3( c ) inclusion, as can be seen by a substitution of these numbers in the definition of non-capital loss. (7) 160The amount of charitable donations that may be deducted in a year is limited to 75 of income as computed in Division160B of Part160I. However, charitable donations not deducted in the current year can be carried forward five years. (8) 160Non-capital losses would not be deducted in 2007, because after the dividends have been deducted, there is no income against which to absorb them in that year. (9) 160Net capital loss carryovers cannot be deducted in 2007 and 2008 because there were no taxable capital gains against which to absorb them in these years. However, if there are net taxable capital gains available under paragraph1603( b ) in the future or in the 3160years before 2007 (to the extent the taxable capital gains have not been offset by allowable capital losses), there is a potential increase in the non-capital losses at the taxpayers discretion. The decision to utilize this option will depend upon which source of income will be generated first, business income or net taxable capital gains. para11,200 Basic Computation Of Tax For All Corporations para11,210 Objectives of Provisions Affecting Taxation of Corporations Although a corporation is regarded as a separate entity, in an economic sense the separation of a corporation and its shareholders may be artificial. However, the flexibility provided by corporations, often involving tax planning, has resulted in considerable complexity of the legislation pertaining to the taxation of corporations. This legislation appears to have three main objectives. The first objective is the alleviation of the multiple taxation of corporate income by taxing income at the level of the corporation and, then, at the level of the shareholder on dividends received from after-tax corporate earnings. The Act attempts to integrate these two taxes primarily by way of the dividend gross-up and tax credit mechanism. If the system of integration were perfect, it would completely eliminate the double taxation of corporate income, as previously discussed at the beginning of this chapter and demonstrated in Chapter16012. The Canadian system of integration is not perfect in this sense, but it does remove much of the effect of double taxation on investment income and some types of business income. The examination of this aspect will be continued in detail in the next chapter. ITA: 55(2) ITA: 110.6, 245, 246 The second objective of these provisions is to prevent the avoidance of tax through the use of a corporation. In prior years, there was a considerable incentive to convert amounts that would normally be distributed to individual shareholders as dividends into amounts that resulted in capital gains. This was known as 34dividend stripping34 and many provisions were put in place to stop this practice. The incentive to convert dividends into capital gains was renewed with the introduction of the capital gains deduction which continues for shares of qualified small business corporations. Major anti-avoidance provisions are found in the Act. However, in making distributions to corporate shareholders, there has been an incentive to convert what might be taxed as a capital gain into a non-taxable intercorporate dividend. Hence, provisions to prevent such 34capital gains stripping34 have been implemented. The third objective of these provisions is to provide tax incentives to certain types of corporations. The small business deduction, which will be discussed in the next chapter, is probably the most important of these. The small business deduction will be shown to substantially reduce tax for a Canadian-controlled private corporation. The manufacturing and processing profits deduction will be alluded to. Investment tax credits, including the credit for scientific research expenditures, will be discussed. para11,212 Types of Corporations The Canadian corporate tax system draws a distinction among types of corporations. For the purpose of this text, we need to consider three types: bull a private corporation bull a Canadian-controlled private corporation and bull a public corporation. Certain tax preferences, such as the small business deduction, or tax accounts, such as the capital dividend account, apply to only certain types of corporations. Hence, the need to distinguish the types of corporations is important. para11,213 Private corporation The Act defines a 34private corporation34 as one that is resident in Canada and not controlled by one or more public corporations (or a prescribed federal Crown corporation). A private corporation has certain tax preferences or considerations, as discussed in Chapter 12. such as a capital dividend account and a refundable dividend tax on hand account. In public practice, much tax consulting work is done for private corporations, since they are more numerous than public corporations. Some types of private corporations enjoy the most favourable tax rates. Some tax credits are also more favourable for private corporations than for public corporations, such as the investment tax credit on scientific research and experimental development expenditures. Remember, private corporations include not only small and medium-sized companies they include large-sized companies as well. There are numerous large private corporations operating in Canada8212a prime example is McCain Foods, owned by the McCain family. para11,214 Canadian-controlled private corporation (CCPC) A 34CCPC34 is defined as a private corporation that is a Canadian corporation that is not controlled, directly or indirectly, in any manner whatever, by one or more non-residents, by one or more public corporations, or by a combination of the two. Also, no class of its shares are listed on a designated stock exchange. Notice that the definition is negative. That is, there is no requirement that it be Canadian-controlled, it just cannot be controlled by non-residents or public corporations. Consequently, a Canadian private corporation that is controlled 50 by Canadian residents and 50 by non-residents is a CCPC. One of the principal tax advantages of a CCPC is the small business deduction. From an individuals perspective, capital gains deduction eligibility is based on the corporation having CCPC status. Also, a CCPC and its shareholders enjoy the highest level of integration. para11,215 Public corporations Public corporations are those resident in Canada and which have a class of shares listed on a 34designated stock exchange34 in Canada, as designated by the Minister of Finance. Public corporations do not enjoy any of the tax preferences available to private corporations. The tax system has become almost fully integrated at the public corporation level, as a result of the higher gross-up and the tax credit for eligible dividends. para11,216 Diagrammatic summary of types of corporations The figure below shows the three basic types of corporations. para11,220 General Rates for Corporations para11,225 Overview of rates and credits ITA: 123 ITA: 123.28211127 ITA: 123.4 ITA: 124 ITA: 125, 125.1 ITA: 126 ITA: 127 The general federal rate of tax to be paid on the taxable income of all corporations under Part160I of the Act is 38. However, the basic federal rate of 38 is subject to modification, depending on the type of corporation. The Act provides for a tax rate reduction for corporations. Another provision reduces the federal tax payable, in recognition of provincial income taxes, by an amount equal to 10 of the corporations taxable income earned in a province or territory of Canada. Two other provisions reduce federal tax payable, for certain corporations, by means of the small business deduction and manufacturing and processing profits deduction, respectively. Foreign tax credits are available to reduce federal tax payable. Another provision exists for a number of tax credits, including the political contribution tax credit, the investment tax credit, and the apprenticeship job creation tax credit, which reduce the amount of federal tax payable. para11,235 Effect of provincial corporate tax rates In addition to the federal taxes imposed, each province levies an additional income tax on a corporations taxable income. Furthermore, the taxable income calculation may vary from province to province because of provincial taxing statutes. The provincial rate varies from province to province, but on the whole lies between 2.5 and 16. para11,240 Effect of corporation type As mentioned previously, the type and status of the corporation has a bearing on how its income is taxed. There are three major classifications of corporations to be concerned with. These are described in 18211,212 to 18211,216. As a result of the combined federal and provincial rate and several of the modifications to that rate, the rates of tax applicable to Canadian corporations will vary from a low of about 22.0 to a high of about 35.5, depending on the classification of the corporation and the type of income earned. para11,245 General rate reduction The Act provides a corporation with a deduction from tax, computed by multiplying the corporations 34general rate reduction percentage34 by its 34full-rate taxable income34. The 34general rate reduction percentage34 is 8.5 in 2008. The 34full-rate taxable income34 of a corporation, generally, is a corporations taxable income that has not benefited from special rate reductions, such as the manufacturing and processing profits deduction (alluded to later in this chapter) and the small business deduction (discussed in Chapter 12 ), among others. The amount of the rate reduction is dependent on the nature of the corporation. Paragraph ( a ) of the definition of 34full-rate taxable income34 applies to corporations other than Canadian-controlled private corporations (CCPCs). For the purposes of this chapter, full-rate taxable income is the amount of the corporations taxable income minus income, if any, eligible for the manufacturing and processing profits deduction. Examples of this calculation are presented later in this Chapter. The general rate reduction will increase to 8.5 for 2008, 9.0 for 2009, 10.0 for 2010, 11.5 for 2011, and 13.0 for 2012 and later calendar years. The following table shows the future federal corporate tax rates as currently proposed. para11,250 Abatement from Federal Tax for Income Earned in a Province Part160IV of the Regulations provides the prescribed method to determine the taxable income earned in a province by a corporation. The term 34taxable income earned in the year in a province34 by a corporation is defined as being the aggregate of the taxable incomes of the corporation earned in the year in each of the provinces. The Regulations also set out the method of calculating the taxable income earned in a particular province during the year. The taxable income earned in a particular province is that taxable income which is attributable to a permanent establishment that the corporation has in the province. If a company has no permanent establishment in a province, it will not have earned any taxable income in that province for the purposes of the abatement. The term 34permanent establishment34 is defined as a fixed place of business of the corporation, including an office, a branch, a mine or oil well, a farm, a timber land, a factory, a workshop or a warehouse. Where the corporation does not have a fixed place of business, its permanent establishment is the principal place in which the corporations business is carried out. A corporation is deemed to have a permanent establishment in a place, if the corporation carries on business through an employee or agent, established in a particular place: (a) who has general authority to contract for his or her employer or principal or (b) who has a stock of merchandise owned by his or her employer or principal from which he or she regularly fills orders which he or she receives. However, the fact that a corporation has business dealings through a commission agent, broker or other independent agent, or maintains an office solely for the purchase of merchandise, does not of itself mean that the corporation has a permanent establishment. The use of substantial machinery or equipment in a particular place at any time in a taxation year constitutes a permanent establishment in that place as does the ownership of land in a province by a corporation that, otherwise, has a permanent establishment in Canada. The CRA indicates that the application of the criteria for a permanent establishment set out in the Regulations will often involve questions of fact which must be answered by the circumstances of each case. para11,265 Cases on the meaning of permanent establishment 61160DTC 1222 (Ex.160Ct.) The case of M. N.R. v. Panther Oil and Grease Manufacturing Co. of Canada Ltd. presents a specific fact situation. Here the taxpayer had a factory in Ontario, but maintained a sizable sales force throughout Canada under the direction of district sales managers. These sales managers were under the direction of division managers, one of whom lived in Quebec. He had an office, not listed as the companys, in his home. The division and district managers kept a small quantity of the companys goods on hand for small orders when quick delivery was requested. However, most orders were filled from Ontario. It was held that the extensive sales organization in Quebec, itself, constituted a branch in that province and district managers constituted 34agencies34 of the company. It was also found that the stock of merchandise from which small orders were filled qualified as a permanent establishment. 64160DTC 660 (T. A.B.) In the case of Enterprise Foundry (N. B.) Ltd. v. M. N.R. . the appellant was incorporated in New Brunswick, but all of its sales were made to customers in Quebec. About 40 of its orders were filled from a stock of merchandise maintained in a public warehouse in Montreal. The taxpayers key employee had the authority to deliver goods from the stock of merchandise and also had general authority to contract for his employer. It was held that there was a permanent establishment in Quebec. The taxpayer corporation, whose head office was in Ontario, manufactured electrical appliances which it sold exclusively to wholesalers throughout the country. The company employed a sales representative and junior salesmen in the Province of Quebec. Orders received by the sales representative, who had no authority to accept them, were forwarded to head office and, if accepted there, the goods were shipped directly to the purchaser. During the years in question, the Quebec representative maintained an office in his home at his own expense. There was no agreement with the company to set up the office, but he found it convenient to do so. The company supplied him with company stationery and literature, price sheets, catalogues, sales promotional material and inter-office memoranda. He was also supplied with substantial quantities of samples of the companys products the value of which varied from 4,700 to 11,000 to be used in demonstrations and in promoting sales. The telephone directory did not list the representatives residence as the companys place of business and there was no business sign of any type on the premises. The office was used for taking orders and for training junior salesmen. During six months of one year, the company maintained a stock of appliances valued at about 120,000 in rented warehouse space in Montreal and filled Quebec orders from this stock. The company had no employees at that warehouse the handling of goods there was carried out by the warehouse personnel. The company had no control over any part of the warehouse and the public had no knowledge of the companys goods being stored there. Determine whether or not the company has a 34permanent establishment34 in the Province of Quebec by reference to Regulation160400(2). Reference: M. N.R. v. Sunbeam Corporation (Canada) Ltd. . 61160DTC 1063 (Ex.160Ct.). para11,300 Tax DeductionsCredits mdashNOTES TO SOLUTION (1) 160If the Canadian income tax effects on foreign investment income could be isolated, as in the case where the corporations only source of income was foreign non-business income (other than from real property), such as interest income, it would be considered to be earned in the province of which the taxpayer is a resident and, therefore, would be eligible for the federal tax abatement. As a result, it is the tax otherwise payable (B) after the abatement on which the non-business income tax deduction is based. On the other hand, foreign business income is assumed to be earned in a permanent establishment in the foreign country and, therefore, is not eligible for the federal tax abatement. Thus, the tax otherwise payable (C) before the abatement is the relevant base for the business income tax deduction. (2) 160Note how these credits against Canadian tax do not exceed foreign tax paid on the foreign income. These reductions of Canadian tax are also restricted to the estimated amount of Canadian tax paid on the foreign income. Example Problem 2 Reconsider the facts in Example Problem1601 with the additional information that income for tax purposes of 472,000 includes manufacturing and processing profits of 296,471 (MP, as determined by the Regulations) that will earn a tax deduction of 25,200 at 8.5 of MP. Assume that the foreign tax credits remain the same. Calculate total tax payable under Part160I using a 11 provincial rate of tax applied to federal taxable income earned in a province. mdashNOTES TO SOLUTION para11,800 REVIEW QUESTIONS para11,825 MULTIPLE CHOICE QUESTIONS para11,850 EXERCISES All of the voting shares of Loser Limited, a manufacturer of widgets, have been acquired by Holdco Ltd. an investment holding company. At the time of the acquisition on March16010, 2008, Loser Limited had non-capital business losses of 600,000 generated in 2007. Loser Limited also had 30,000 of net capital losses carried forward from 1999. As well, at the time of the acquisition, it was discovered that the balance of undepreciated capital cost in its Class1608 was 70,000 while the fair market value of the assets in that class was only 40,000. The balance in its cumulative eligible capital account (being from the acquisition on August16031, 2007, of an exclusive customer list) was 50,000 while the fair market value of the customer list was 68,000. The corporations inventory had a cost of 630,000, while its market value was 680,000. The book value of the corporations receivables was 240,000, while its realizable value was estimated at 225,000. The corporations only non-depreciable capital property, land, had accrued gains of 56,000 over its cost of 200,000. Loser Limited has a December16031 year-end. The corporation had business losses of 3,000 from January1601 to March1609, 2008. The holding company will inject added capital and augment the management of Loser Limited in an attempt to turn Losers widget manufacturing business around. (A)160What are the tax implications of the acquisition of the shares of Loser Limited by Holdco Ltd. assuming the maximum election under paragraph 111(4)( e ) is made (B)160Determine the minimum amount of elected proceeds under paragraph 111(4)( e ) to offset expiring losses, if the accrued gains on the land were 100,000 instead of the 56,000 and Loser Limited had an additional loss arising from property of 10,000. Reconsider the example problem of Frenzied Taxpayers Limited in this chapter in 18211,160. If 7,900 less capital cost allowance had been taken in 2007, all 23,000 of the inter-company dividends could have been deducted, pursuant to section160112, in 2007. Re-calculate the taxable income of the corporation for the years indicated after taking 7,900 less in capital cost allowance for Class1608 in 2007. Comment on whether the corporation is in a better tax position at the end of 2008 with respect to capital cost allowance and taxable income under this alternative. Puttingitall Together Limited, a Canadian corporation, had its net income under Division160B computed as follows for the year ending December16031: During the year the corporation made charitable donations of 80,000. Its carryforward position from the previous year was as follows: Compute the corporations taxable income for the current year. Exporter Limited is a Canadian public company carrying on a part of its business through an unincorporated branch in Japan. Its income from that business in Japan for the current taxation year ended December16031 was 77,575,723 yen. The corporation paid income tax instalments on that income during the year of 31,006,289 yen. During the year the exchange rate was 1160yen .009793 Canadian dollars. During its current taxation year ended December16031, Exporters income under Division160B was 2,500,000 excluding the income from Japan. During the year, the corporation received dividends of 100,000 from taxable Canadian corporations. This amount was included in the computation of Division160B income. The corporation was also able to deduct 25,000 of its net capital losses carried forward. There was no foreign investment income during the year. Compute the corporations foreign business tax credit for the year. Maxprof Limited is a Canadian public company with the following income under Division160B for its taxation year ended December16031, 2008: During the year the company made donations of 69,000 to registered charities and 5,750 to federal political parties. It was carrying forward non-capital losses of 127,600. It is considered to earn 86 of its taxable income in Canada, as computed by the Regulation. Compute the federal Part160I tax payable for the year. para11,875 ASSIGNMENT PROBLEMS The following data summarize the operations of Red Pocket Limited for the years of 2005 to 2008 ended September 30. The corporation has a net capital loss balance of 13,500 which arose in 1999. Compute the taxable income for Red Pocket Limited for the years indicated and show the amounts that are available for carryforward to 2009. (Deal with each item line-by-line across the years, rather than computing income one year at a time.) On November 1, 2008, Chris purchased all the issued shares of Transtek Inc. from an acquaintance, Tom. Transtek carries on a transmission repair business and has done so since its incorporation on January 1, 2007. In addition to the transmission repair business, Transtek rents out a small building it owns. Neither the transmission repair business nor the rental endeavour has been successful. When Chris purchased Transtek, his financial projections indicated that Transtek would have significant income within two years. Chris credited Transteks failure to Toms brash personality and laziness. Chris, on the other hand, has a strong work ethic and has many contacts in the automotive industry to refer work to him. The values of the capital assets owned by Transtek at the time of purchase by Chris are as follows: Chris selected June 30, 2009, as the first fiscal year-end for Transtek after his purchase. The following is a schedule of Transteks income (and losses) from its inception, January 1, 2007, through June 30, 2010. (A)160Discuss the tax implications of the acquisition of Transtek Inc. on November 1, 2008, ignoring all possible electionsoptions. (B)160Determine the tax consequences of the acquisition of Transtek Inc. under the assumption that: (i) the maximum amount of all electionsoptions is utilized and (ii) the partial amount of all electionsoptions is utilized so that only enough income is generated to offset most or all of the losses which would otherwise expire on the acquisition of control. In 2006, a chain of bakeries, called Buscat Ltd. commenced operation. The industry is highly competitive and because of Mr. Buscats lack of marketing skills, the corporation incurred losses in the first three taxation years of operations as follows: On July 1, 2009, Mr. Buscat decided to sell 75 of his common shares to Mr. Bran, owner of Buns Plus Ltd. Mr. Bran has been in the business of supplying bread dough, pastry dough and bun bags for 10160years and has been very successful. Buns Plus Ltd. has two divisions: a bakery and a coffee shop, which it intends to transfer to Buscat Ltd. The following income tax data relates to Buscat Limiteds operations from January1601, 2009 to June16030, 2009: During the later part of the 2009 calendar year, the bakerycoffee shop of Buns Plus Ltd. was transferred to Buscat Ltd. For the six-month period ending on December16031, 2009, Buscat Limited had net income of 90,000 from all its businesses. The net income earned was as follows: In the 2010 taxation year, Buscat Ltd. expects to earn 250,000, of which 65,000 will be from the original Buscat bakery business and 20,000 from the coffee shop business. 160Prepare an analysis of the income tax implications of the acquisition of shares. In your analysis, consider the two election options from which an election choice is most likely to be made. The controller of Video Madness Inc. has prepared the accounting income statement for the year ended April 30, 2008: Video Madness Inc. Income Statement For the Year Ended April160 30, 2008 Prepare a schedule reconciling the accounting net income to income for tax purposes and taxable income. Indicate the appropriate statutory reference for your inclusions or exclusions. The taxpayer, whose head office was in Manitoba, manufactured and sold various fans. Local sales agencies were maintained in Ontario and in Quebec. At the Ontario agency, two qualified representatives handled business under the company name. They were authorized to sign quotations. Contracts could be made, terms of payment arranged and credit given without reference to the head office in Winnipeg. The company name was displayed for public visibility, was used on calling cards, and was listed in the telephone directory. The Ontario agency, occupying one-half of a building with warehouse facilities, maintained an inventory worth about 6,000. Orders for standard-sized fans were filled from stock-in-trade. Orders for large fans were filled from the head office in Winnipeg. The Quebec agency was substantially similar to that in Ontario. 61160DTC 1063 (Ex.160Ct.) Determine whether or not the company has a 34permanent establishment34 in the provinces of Ontario and Quebec. In reaching a conclusion, compare this situation with the case of M. N.R. v. Sunbeam discussed in this chapter. Barltrop Limited is a Canadian public company involved in the software consulting business. Its controller provided you with the following information related to its 2008 taxation year ended December16031: Barltrop Limited has permanent establishments in the U. S. B. C. and Alberta. Its gross revenues and salaries and wages data have been allocated as follows: Assume that the British Columbia corporation tax rate is 12 and the Alberta rate is 10. Also, assume that taxable income for Alberta is computed on the same basis as federal taxable income. Gross revenues exclude income from property not used in connection with the principal business operation of the corporation. Compute the total tax payable by the company for the 2008 taxation year, including provincial tax. Show all calculations. Infotech is a public company in its first year of business in the information technology industry. It operates out of a plant in Ottawa, Ontario. In 2008, it incurred 2,200,000 of scientific research and experimental development expenditures (SR38ED) which qualify for deduction under subsection16037(1) of the Act. The breakdown of these expenses is as follows: Infotechs federal income tax rate after abatement is 19.5. Its taxable income before deducting the 2,200,000 claim under section16037 is 3,200,000. (A)160Compute the maximum investment tax credit available to Infotech in 2008. (B)160Compute the companys net federal Part I tax payable after the investment tax credit, assuming a maximum section16037 deduction is claimed. (C)160What is the amount, if any, of the investment tax credit carryover (D)160Compute the companys deduction or income inclusion in the following year if no further SR38ED expenditures are made. Up, Up and Away Limited is a public corporation that manufactures hot air balloons in the province of New Brunswick. For the year ended September 30, 2008, its accounting income statement was as follows: Selected Additional Information Calculate the total taxes payable for 2008 using a 13 provincial rate of tax. Tecniquip Limited is a public corporation whose head office is located in Toronto, Ontario. The activities of the corporation are carried on through permanent establishments in the provinces of Ontario and Alberta, and in the United States. The following is an allocation of selected items for the fiscal year ended December16031, 2008. In computing income from manufacturing, the corporation claimed a deduction of 150,000 under subsection16037(1) of the Act for scientific research and experimental development (SR38ED). 100,000 of the deduction related to expenditures of a current nature and 50,000 was the cost of equipment purchased during the year for use by it in scientific research and experimental development carried on in Canada. No SR38ED expenditures are expected to be made in 2009. During the year, the corporation made charitable donations totalling 50,000 and claimed non-capital losses of 60,000 and the net capital losses carried forward from 1999 of 9,000. The M38P profits tax deduction has been correctly computed as 67,529 on MP of 794,459. Compute the federal Part160I tax payable and provincial tax at 12 for Ontario and 10 for Alberta, assuming that taxable income allocated to those provinces is the appropriate provincial tax base. Show all calculations, whether or not necessary to your final answer. para11,880 Advisory Case King Enterprises Inc. Ian King has operated a successful office supply wholesaling business, King Enterprises Inc. for many years. Last week, he called to tell you that he is interested in putting an offer in on the shares of a company that is in some financial difficulty, Royal Forms Inc. (34Royal34). Royal is in the business of producing custom, as well as standard, forms for business use. In fact, Royal is a supplier of King Enterprises. This company has been in business for the past eight years, but has been losing money for the past six years. Last year they sold the land and building they used in their operations in a depressed real estate market, in order to get some cash. Their big problem seems to be that they are undercapitalized. Ian sees this purchase as a real opportunity for him to pick up a company at a bargain price, turn it around to profitability and, at the same time, reduce King Enterprises tax liability with the losses. He would like you to prepare a report for him on the tax issues before he decides whether to make an offer.
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