Tax Notes 5

Acco 643 Lecture Notes
Part V
Computation of Taxable Income and

Tax After General Reductions
for Corporations
DIVISION C - TAXABLE INCOME
Net Income for Tax Purposes (Division B)
Minus: Division C deductions
Individuals Corporations
Employee stock option Donations
Home relocation loan Loss carry over
Loss carry over Dividends
Capital gain deduction
Northern allowance
= Taxable Income (if any)
DIVISION C DEDUCTIONS
Type of Apply Against Carry Over

Deduction Type of Income Back Forward
Dividends Any type 0 0

Donations Any type 0 5
Net Capital Losses Taxable Capital Gains 3 Indefinitely
Non Capital Losses Any type 3 7 (10 years for t/y
ending after March 22, 2004
20 years after 2005)
Restricted Farm Losses Farm Income 3 10 / 20
Farm Losses Any type 3 10 / 20
Application of Division C Deductions
Consider: 1. Type of income the deduction can be applied against

2. Number of years available in the carry-over period.
3. The likelihood that the type of income needed will arise in
the carry-over period.
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Part V
Generally apply most restrictive loss first.
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Part V
DIVISION C DEDUCTION (cont'd)
1. NON-CAPITAL LOSSES
3(d) losses from an office, employment, business or property plus ABIL
Add: Net capital losses claimed under Division C

Add: Dividends deducted under Division C
Deduct: 3(c) income
Equals: Non-capital loss for the year
2. NET CAPITAL LOSSES
Allowable capital loss for the year
Less: Taxable capital gain for the year
Equals: Net capital loss for the year
Note: Net capital losses are stated using the inclusion rate
In the year they were incurred
Up to 1987: 50%
1988 & 1989: 66 2/3 %
1990 to Feb. 27, 2000: 75%
Feb. 28 2000 to October 17, 2000: 66 2/3%
October 18, 2000 and later: 50%
Adjust to today’s inclusion rate.
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Part V
ÖACQUISITION OF CONTROL
èBACKGROUND
Over a period of years, some corporations may have experienced such large losses
that they are often unable to generate appropriate or sufficient income to utilize
losses.
These corporations usually have accumulated large amounts of capital or non

capital losses carry forwards and they really have no prospect of being able to use
these amounts.
Such corporations become attractive takeover targets for profitable corporations

that are in a position to structure their affairs in a manner that will make use of the tax
benefits associated with these losses.
The situation is of concern to the government because such strategies ultimately

result in reduced tax revenues and thereby increase the federal deficit.
As a result, rules are provided in the Act to restrict the use of loss carry overs in
situations where there has been an acquisition of control.
èCONTROL DE JURE OR LEGAL CONTROL
"Control" implies ownership of sufficient shares to carry with them the ability to
cast a majority of the votes on election of a board of directors.
Exception
- The Act deems the control of a corporation not to have been acquired when a person
acquires shares of a corporation and immediately before such transaction the person
was related to the acquired corporation. [256(7)(a)]
- The Act deems the control of a corporation not to have been acquired when a person
acquires the shares of a corporation from another person and both persons are related
(i.e. the vendor and the seller). [256(7)(a)]
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Part V
èTAX IMPLICATIONS
 DEEMED YEAR END
Impact
• Tax returns must be field
• Unpaid amounts 78(1)
• Prorated CCA & SBD
• Due to potential short year:
• May lose year on loss carry-overs
• May lose year on donation carry-over
 ACQUISITION OF CONTROL AND EFFECT ON LOSSES
Net capital losses [paragraphs 111(4)(a), 111(4)(b)]
Net capital losses for taxation years preceding the acquisition of control may not be
carried forward to taxation years ending after the acquisition;
Net capital losses for taxation years following the acquisition may not be carried
back to taxation years commencing before the acquisition.
This includes any unused business investment losses that are present at the deemed
year-end, as well as property losses.
Non-capital losses [Subsections 111(5) to 111(5.5)]
Non-capital losses (NCL) can be carried forward but they are subject to severe
restrictions: NCL continue to be deductible in a taxation year ending after an
acquisition of control, but only
o Condition #1 (must be met before going to condition #2)
• if the business (not necessarily the corporation) that generated the losses continues
to be carried on;
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Part V
o Condition #2 (must be met before going to condition #3)
• if the business is carried on for profit or with a reasonable expectation of profit

throughout the year following the acquisition of control, and
o Condition #3
• to the extent of total income earned by the corporation from carrying on that
business or similar business.
The same rules apply where post-acquisition of control losses are carried back to a
taxation year preceding the acquisition of control.
èSPECIFIC ITEMS [Some of LossCo' assets must be reevaluated; this

reevaluation might increase LossCo's net capital
losses and non-capital losses]
• Value of inventory
o If FMV < COST ⇒⇒ Ss 10(1) will increase the corporation's pre-acquisition non-
capital losses (or reduce its income)
• Accounts Receivable [111(5.3)]
o 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 (20(1)(p));
o No reserve for doubtful accounts under 20(1)(l) is allowed.
• Depreciable property [111(5.1)]
o If UCC of a prescribed class

at the deemed year-end > the FMV of all assets in the
class
⇒⇒ the class must be written down to the FMV, and

⇒⇒ the amount written down is treated as CCA and will add to any NCL for the
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Part V
deemed taxation year.
• Eligible capital property [111(5.2)]
o If CEC > 3/4 of FMV of the eligible capital property
⇒⇒ the CEC must be written down to the FMV, and

⇒⇒ the amount written down is treated as a deduction under 20(1)(b) and will
add to any NCL for the deemed taxation year.
• Non-depreciable capital property [111(4)(c) and 111(4)(d)]
o If ACB > FMV of the property at the deemed year-end (for each property)
⇒⇒ The non-depreciable capital property must be written down to its fair

market value and this lower value becomes the new ACB of the property,
⇒⇒ The resulting capital loss can be applied against available capital gains or
⇒⇒ Increases the net capital losses at the deemed year-end which are deemed to
expire if not offset by capital gains.
è Election for property with accrued gains [111(4)(e)]
• Paragraph 111(4)(e) allows the corporation to elect to have a deemed disposition at

the deemed year-end of any depreciable or non depreciable capital property.
• The property for which an election is made must have a higher FMV than ACB in
order to trigger capital gains or recapture so as to reduce the amount of net capital
losses or non-capital losses that would otherwise expire on account of the acquisition
of control.
• The effect of the paragraph is that the corporation can choose proceeds of disposition
(amount designated) at any point between fair market value and the adjusted cost
base of the particular capital property.
• The capital property is then deemed to be reacquired at a cost equal to the amount of
the deemed proceeds of disposition.
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Part V
SUMMARY
Expire at deemed year end
• Net capital losses

• Property losses
• ABIL’s
Survive but may be Restricted
• Business losses
CONDITIONS FOR LOSS UTILISATION

ON ACQUISITION OF CONTROL [111(5)]
1. Loss business carried on throughout the year.

2. Loss business carried on with reasonable expectation of profit.
3. Loss deductible only against income from the same business or the sale of similar
products or services (similar business).
Same or Similar Business
“substantially all the income of which is derived from the sale, leasing, rental or
development, as the case may be, or similar properties or the rendering of similar
services”.
“Business” is not the same as “corporation”.
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Part V
è 111(4)(e) OPTION
• Applies to capital property (depreciable and non-depreciable)
• Deemed disposal at any amount between ACB and FMV
Results:
1. Triggers recapture and/or capital gains thus increases income at the

deemed year-end
2. Uses up losses that might expire immediately, or losses that may
expire in the future
3. May protect non-capital losses
4. Increases cost for tax purposes
For CCA: UCC + recapture + 1/2 x CG

For CG: Designated (elected) amount
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Part V
ACQUISITION OF CONTROL - STEPS TO TAKE
1. Deemed year-end on the day before.
2. Realise “accrued” losses automatically
Terminal losses
Allowance for doubtful accounts
Capital losses
CEC losses
3. Determine the tax position of the company at this point
i) Calculate Division B income

And/or
Non & net capital loss for the year
ii) Calculate loss carry-overs

Identify property losses, ABIL’s and
net capital losses since these expire
4. Consider 111(4)(e) election to create income to:
i) offset losses that will expire, or

ii) offset losses that may expire
due to carry forward period running out
restrictions
5. Recalculate Division B and taxable incomes after the

election to apply loss carry-overs
Determine which losses expire
i) net capital losses

ii) non-capital losses: property losses
ABIL’s
Recalculate non capital losses by year
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Part V
6. Recalculate cost base of properties for purposes of:
Capital gains 53(2)(b.2)

Recapture 13(7)(f)
7. Determine whether:
i) the loss business is being carried on (after AOC) with a reasonable

expectation of profit, and
ii) the company is carrying on the same business or selling the same or similar
products or services
in order to see whether the losses being carried over can be applied against future
income 111(5).
8. Determine the steps needed to use up the non-capital loss carry-over, i.e., loss
utilisation planning tools
• Transfer of income producing assets

• Amalgamation
• Wind-up.
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Part V
LOSS UTILISATION: STEPS TO USE UP LOSSES
1. Omit optional or permissive deductions such as
• CCA, CECA
• Allowable reserves, i.e., allowance for doubtful accounts
• R&D expenditures
2. Revise prior year CCA (IC 84-1)
3. Capitalizing interest on money borrowed to acquire depreciable property rather

than claiming the expense.
4. Sell redundant assets
5. Share subscription by ProfitCo to Loss Co;
6. Transfer profitable assets (or a whole division) of purchaser to Loss Co. to

generate income in Loss Co. (must meet same or similar business rule)
7. Intercompany charges such as royalties or commissions (must be reasonable and

necessary for the business)
8. Reorganize to offset income from same business or from the sale of similar
products or services against losses, i.e., amalgamation or winding-up.
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Part V
3. CHARITABLE GIFTS UFE 1999
• For a corporation, charitable gifts are a deduction in computing taxable income;
• Deductible up to an annual maximum of 75% of the corporation's net income for the
year plus an additional 25% of any taxable capital gains that have arisen from gifts of
property made by the corporation in the year, plus 25% of any recaptured CCA resulting
from such gifts;
• The 75% income limit also applies to gifts to the Crown;
• Donations in excess of 75% may be carried forward for five years.
• Taxable capital gains on gifts of securities registered on a Canadian Stock Exchange are
25 % of the normal taxable capital gain.
4. TAXABLE DIVIDENDS
• Because a dividend is a distribution of after-tax income, dividends should not be taxable

when paid from one corporation to another;
• Dividends paid are thus included in the recipient's income but the gross amount of
dividend included in the recipient corporation's net income may be deducted in the
computation of taxable income.
• Therefore, dividends received from taxable Canadian corporations and from

corporations resident controlled by the recipient are deductible in computing taxable
income.
• Taxable Dividends
What: Dividends from taxable Canadian corporations
Why: Prevent double taxation

Dividends paid out of after-tax earnings
How: Income under sections 82 and 12(l)(j)

Deduction under section 112 for corporation
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Part V
OBJECTIVES OF TAX LAW AFFECTING CORPORATIONS
Primary
1. Raise revenue for the government
Secondary
1. Prevent double taxation

• Provincial abatement
• Foreign tax credit
• Integration of corporate & personal tax
2. Prevent tax avoidance

• tax loss trading – acquisition of control [111]
• multiple small business deductions – associated corporations rules [256]
• conversion of dividends to capital gains [55(2)]
• conversion of capital gain to dividend [84.1]
• conversion of ABI into investment income [129(6)]
3. Tax incentives
• Small business deduction
• M&P profits deduction ( not advantageous anymore)
• ITC’s
• Capital gain deduction for individuals selling shares of a qualifying corp.
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Part V
ÖBASIC CORPORATE TAX RATES
SBD No SBD
Basic federal rate 38.00 38.00
Abatement (10.00) (10.00)
Small Business Deduction (17.00)
Manufacturing & Processing
11.00 28.00
Net federal 11.00 28.00
General tax reduction 0 (9.0) 1
Total 11.00 19.00
ÖCORPORATE TAX PAYABLE
Taxable Income $ XXX
Tax @ 38% $ XXX

Federal abatement @ 10% max (XXX)
Additional refundable tax (ART of 6 2/3%)) $ XXX
Deduct: Non business FTC (XXX)

Business FTC (XXX)
Small business deduction (XXX)
M&P profits deduction (XXX)
General rate reduction (XXX)
Foreign tax credit (XXX)
Political donation credit (XXX)
Subtotal XXX
Deduct: Investment tax credit (XXX)
Part I tax payable $ XXX
Deduct: Dividend refund (XXX)

Part IV tax XXX
1 The reduction is 9% in 2009, 10% in 2010, 11.5% in 2011, and 13% in 2012.
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Part V
Net federal tax payable $ XXX
ÖFEDERAL TAX ABATEMENT [124(1)]
• Under Ss 124(1), there may be deducted from the 38% basic tax an amount equal to
10% of the corporation's taxable income earned in a province. No abatement is available
on income not earned in a province (e.g. business income earned outside Canada).
• The 10% abatement, when fully used, reduces the federal tax rate to 28%.
• The amount of the federal tax abatement is determined by allocating the corporation's
total taxable income to its permanent establishments in the provinces. This calculation
involves 4 steps:
1. Determine whether the corporation has a permanent establishment in one or more

provinces;
2. Allocate the taxable income of the corporation to the various provinces in accordance
with the following formulae:
1/2 x (Provincial Gross Revenue + Prov. Salary & Wages) x Taxable income
Total Gross Revenue Total Salary & Wages
3. Calculate the provincial tax abatement as 10% of the amount of taxable income
earned in the provinces;
4. Deduct the Federal Tax Abatement from the corporation's Basic tax.
• The concept of permanent establishment is defined in subsection 400(2) of the

Regulations:
Permanent establishment means a fixed place of business of the corporation, including

an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a
warehouse.
• A corporation may be deemed to have a permanent establishment (PE) in a particular

place:[Reg. 400(2)]
 Where a corporation carries on business through an employee (or agent), established
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Part V
in a particular place, who has general authority to contract or who has stock of
merchandise owned by his or her employer or principal, from which he or she
regularly fills order, that place is deemed to be a PE;
 Where a corporation which otherwise has a permanent establishment in Canada also

owns land in a province, the land is deemed to be a PE;
 Where a corporation uses substantial machinery or equipment in a particular place at

any time in a taxation year, it is deemed to have a PE in that place.
ÖSURTAX [123.2]
Was repealed and no longer applies.
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Part V
ÖSMALL BUSINESS DEDUCTION [Section 125]
• A Canadian-controlled private corporation (CCPC) may deduct from tax an amount

equal to 17% of the least of the following amounts:
 income (minus losses) of the corporation for the year from an active business carried
on in Canada
 taxable income minus
• 3 times the business foreign tax credit (proposed)

and
• 4 times the non-business foreign tax credit (proposed)
 the corporation's business limit for the year (2009), i.e. $500,000
• The small business deduction (SBD) must be prorated if the taxation year is less than 51
weeks, and the business limit must be allocated among associated corporations.
ÖDEFINITIONS
è Canadian-controlled private corporation: must be all of the following:
1. a private corporation resident in Canada i.e. a Canadian corporation resident in

Canada and:
• is not a public corporation and

• is not controlled by:
 one or more public corporations; or
 one or more Federal Crown corporations; or
 any combination of public corporations and Crown corporations,
2. a corporation that is not controlled directly or indirectly by

• one or more non-resident persons,
• one or more public corporations, or
• any combination thereof,
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Part V
è Public corporation: means a corporation that was resident in Canada and that has:
 a class of shares listed on a prescribed stock exchange in Canada.
N.B.: A CCPC need not in fact be Canadian-controlled, only not non-resident

controlled. A 50% Canadian resident ownership will suffice. Similarly, a
maximum 50% ownership by a public corporation will not result in a change in
status.
Hence, a private corporation that is owned 50% by non-residents and 50% by

residents qualifies as a CCPC.
è Active business carried on by a corporation means any business carried on by the

corporation other than a specified investment business or a personal services business
and includes an adventure or concern in the nature of trade.
è Active business income of the corporation for the year (ABI) means the income of the
corporation for the year from an active business carried on by it including any income
pertaining to or incident to that business, but does not include income from a property.
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Part V
ÖMANUFACTURING AND PROCESSING PROFITS DEDUCTION

(Not advantageous to take anymore)
 Is a tax incentive to corporations in the manufacturing and processing sectors

 A corporation can be public, private, or CCPC to claim M & P credit
 Is equal to 7% of the lesser of:
♦ M & P profits less amount used to compute the SBD

♦ The taxable income less
⇒ The amount on which the SBD was computed
⇒ 10/4 times the Business foreign tax credit
⇒ if CCPC, the aggregate investment income
ÖCCPC RATE REDUCTION
SEE CORPORATE TAX RETURN T2 FOR DETAILS.

GENERALLY FOR INCOME OVER THE SBD, THE TAX RATE WILL BE
EQUAL TO THE GENERAL RATE FOR ACTIVE BUSINESS.
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Part V
ÖGENERAL RATE REDUCTION
 S. 123.4 grants a tax reduction from 9% available to most corporations

 The general rate reduction applies from the 2009 through 2012 calendar years and
reduces the federal effective rate of tax for each of these years.
 The taxable income eligible for the general rate reduction is determined as follows:
Any Corporations : (See T2 corporate tax return for detailed calculations)
Taxable income
Less:
• 100/7 of the M & P profits deduction (any corporation)
• 100/16 of the SBD (CCPC only)
• 100/7 of the Accelerated Tax Reduction (CCPC only)
• Aggregate Investment Income (CCPC only)
• Taxable resource income (Corp. in the resource sector)
 The general rate reduction is then applied to this adjusted taxable income.
ÖFOREIGN TAX CREDIT
Purpose: Prevent double tax on foreign source income as tax was already paid in the
foreign jurisdiction
Reference: 126(1) non business

126(2) business
Theory: Canadian residents taxed on world income

Country where income is earned has first right to tax
Result: Pay higher of the two tax rates
Notes: Separate calculation for each country.
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Part V
ÖINVESTMENT TAX CREDIT
o The investment tax credit ("ITC") is intended to stimulate investment in certain types
of activities and in certain regions of the country;
èQualified activities
o The credit is available to a taxpayer in respect of acquisitions of depreciable property

used by the taxpayer in Canada in some qualified activities including:
- Manufacturing or processing of goods for sale or lease;

- Operating an oil or gas well, extracting minerals;
- Logging;
- Farming or fishing.
o The amount of the credit depends upon the type of investment made by the taxpayer,
the region in which the investment is made.
o The ITC is deductible against taxes otherwise payable. Unused credits may be carried
back three years and carried forward for twenty years.
o Upon an acquisition of control, the rules for the carryover of ITC are similar to rules
existing for non-capital losses. [UFE comprehensive Q. 1997]
o The ITC is calculated as a percentage of the capital cost of certain qualified property,
and on the amount of qualified expenditures made in respect of SR & ED.
èQualified property
o Qualified property must be new depreciable property, that is a building, machinery

and equipment, i.e. most capital expenditures into classes 8, 9, 10, 15, 21, 22, 24, 27,
28, 29, 34, 38, 39, 40, 41 and 43. To qualify for the credit, the prescribed building or
equipment must be used primarily in one or more of the qualified activities cited
above.
o After 1994, only qualified property used in business in the Maritimes and the Gaspe
continue to earn the ITC. The rate is 10% for property acquired after 1994.
èQualified SR & ED expenditures
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Part V
o Section 37 provides for the deduction of SR & ED expenditures.
o In addition, an ITC is available for most current [37(1)(a)] and capital [37(1)(b)(i)]
expenditures on account of research and development carried on in Canada;
o Qualified expenditures for SR & ED is defined to mean those used in a systematic

investigation or search carried out in a field of science and technology by means of
an experiment or analysis.
o The ITC rate for qualifying SR & ED depends on several factors. These include
corporate type, size and location.
o The regions and effective rates are summarized in the following table:
Qualified
SR & ED
Qualified Non-
Area and acquisition property CCPC CCPC *
Atlantic provinces and Gaspé 10% 20% 35%
Other locations in Canada nil 20% 35%
èCCPC and Scientific Research [127(10.1) TO 127(10.4)]
o Generally speaking, the ITC in respect of an expenditure in respect of scientific

research and experimental development (SR&ED), is 20%.
o In order to provide a 35% ITC to smaller corporations, an additional credit is

provided on qualifying expenditures available to certain corporations in certain
circumstances. The additional credit of 15% plus the 20% credit available to all
corporations on qualifying expenditures provides the 35% credit for smaller
corporations.
o The quantum of additional credit arising in any year is limited by the "expenditure
limit". This limit sets a maximum annual amount of qualifying expenditures upon
which the additional credit may be claimed. In the case of an unassociated
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Part V
corporation, that expenditure limit is currently $3 million each year.
o The limit of $3 million of expenditures eligible for this rate (35%) will be reduced by
$10 for every dollar of (group) taxable income for the preceding year in excess of the
business limit.
o The rate is 35% on the first $3,000,000 for each year of SR & ED expenditures made
by the corporation or by a group of associated corporations. This annual expenditure
limit is reduced by $10 for each dollar by which the taxable income of the
corporation for the preceding taxation year plus the taxable incomes of any
associated corporations for the preceding year exceeds the amount of the business
limit. Once the corporate group's taxable income reaches $700,000 (2009), the SR &
ED expenditure limit of $3 million eligible to a 35% ITC is reduced to zero, but the
basic ITC rate of 20% still applies.
o The $3 million limit must be allocated among associated companies in the same way
that the annual business limit is.
• The expenditure limit of $3 million is also phased out evenly as taxable capital ranges
between $10 and $15 million for corporations subject to Large Corporation Tax (LCT).
This taxable capital phase out applies for taxation years commencing after 1995. The
expenditure limit of $3 million is reduced for large CCPC's with taxable capital in
excess of $10 million.
èITC UTILIZATION
o Subsection 127(5) provides for a deduction of available investment tax credits

(including carryover amounts) from a taxpayer's Part I tax otherwise payable
(including surtaxes).
o Any unused ITC can be carried back 3 years and forward 20 years.
o The ITC is a form of "subsidy or assistance" to the taxpayer. As such, the ITC
reduces the capital cost of an asset in the taxation year following the year in which
the ITC is used. If the asset is no longer with the corporation, the ITC is an income
inclusion [12(1)(t)] in the taxation year following the year in which the ITC is used.
o If the ITC relates to SR & ED, the use of ITC will reduce the pool of SR & ED
expenditures, if any, in the taxation year following the year the ITC is used.
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Part V
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Part V
èREFUNDABLE INVESTMENT TAX CREDITS [127.1]
o Certain corporations cannot benefit from the ITC since they do not pay tax because
of a loss for the current year or loss carryforward from the past.
o To assist these corporations the ITC may be claimed as a refundable tax.
o In general, a refund can be made for up to 40% of a taxpayer's ITC.
o For purposes of calculating the refundable ITC, the following chart depicts the
general categories and rates:
Type of taxpayer Rates
• Individual 40%
• Qualifying corporations (capital expenditures, ITC at 35%) 40%
• Qualifying corporations (current expenditures, ITC at 35%) 100%
• CCPC other than a qualifying corporation 0%;40%;100%
 Qualifying corporation [127.1(2)]
o means a corporation:
(a) that throughout the year was a CCPC; and

(b) whose taxable income for the immediately preceding taxation year, together with
the taxable incomes of all associated corporations does not exceed their business
limit for that year.
o A qualifying corporation may be entitled to a 100% refund on ITC earned in respect

of current expenditures rather than the 40% refund.
o The 100% refund applies to the 35% ITC for qualified expenditures in respect of
SR & ED carried on in Canada, other than capital expenditures.
o The 40% refund applies to capital expenditures for SR & ED which qualify for the
35% ITC.
o A qualifying corporation is entitled to a refund of 40% on the portion of SR & ED

expenditures in excess of the expenditure limit ($3 million), as it is entitled to an ITC
of 20% on that excess.
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Part V
EXAMPLE
o Company A had taxable income in the previous year of $400,000 (therefore a

qualifying corp.) and incurred in the current year $1,500,000 of current and
$1,000,000 of capital expenditures in respect of SR & ED activities carried on in
Canada.
Calculation of Investment Tax Credit
Current Expenditures $1,500,000 @ 35% = $525,000

Capital expenditures $ 500,000 @ 35% = $175,000
$ 500,000 @ 20% = $100,000
Total ITC $800,000
Refundable portion of ITC
Current expenditures $ 525,000 @ 100% = $525,000

Capital expenditures $ 275,000 @ 40% = $110,000
Total $635,000
The $165,000 ITC which is not refundable [(60% x $275,000)] may be applied to reduce
the taxpayer's tax liability for the current, preceding 3, or following 20 taxation years.
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Part V
ÖLARGE CORPORATION TAX PART I.3 (Was repealed. However still applies
for the reduction in the expenditure limit for SR&ED)
• Corporate minimum tax
• Similar to provincial capital taxes
Purpose: to “ensure that all large corporations pay federal Taxes and thus contribute
to deficit reduction”
• Reduced by the surtax paid in the year

• Excess Canadian surtax carries over to reduce LCT (back 3, forward 7)
• Pay the greater of LCT and surtax
Tax Payable [181.1]
Taxable capital employed in Canada (SEE BELOW)

Less: capital deduction of $10 m (to be shared with related corporations)
X 0.225% tax rate
Less: Canadian surtax payable for the year
Less: Unused surtax credits (from 7 preceding and 3 following years)
= Part I.3 tax payable
Taxable Capital Employed in Canada [181.2]
Capital
Less: investment allowance
= Taxable capital
x percentage used for federal abatement
= Taxable Capital Employed in Canada
Capital Deduction
$10,000,000
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Part V
less: allocation to related corporations

= Capital Deduction
Special Rules
Use unconsolidated balance sheet

Do not use the “equity method”
Use GAAP
Capital
Capital stock
+ retained earnings
+ contributed & other surpluses
+ non-deductible reserves (including deferred credit balances)
+ loans & advances to the corporation
+ debt represented by bonds, debentures, notes, mortgages,
bankers’ acceptances or similar obligations
+ dividends declared & not paid
+ A/P outstanding more than 365 days
+ proportionate amount from partnerships
- deferred tax debit balances

- deficit
Investment Allowance
Carrying value of:
+ shares of another corporation

+ loan or advance to another corporation (other than a financial institution)
+ bond, debenture, note, mortgage, hypothec or similar obligation
of another corporation (other than a financial institution)
+ loan or advance to or a bond, debenture, note, mortgage or similar
obligation of a corporate partnership
+ an interest in a partnership
+ dividend receivable
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Tax Notes 5

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Tax Notes 5

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Acco 643 Lecture Notes

Computation of Taxable Income and

Net Income for Tax Purposes (Division B)

Minus: Division C deductions

= Taxable Income (if any)

Type of Apply Against Carry Over

Dividends Any type 0 0

Application of Division C Deductions

Consider: 1. Type of income the deduction can be applied against

Generally apply most restrictive loss first.

DIVISION C DEDUCTION (cont'd)

3(d) losses from an office, employment, business or property plus ABIL

Add: Net capital losses claimed under Division C

Equals: Non-capital loss for the year

2. NET CAPITAL LOSSES

Allowable capital loss for the year

Less: Taxable capital gain for the year

Equals: Net capital loss for the year

Adjust to today’s inclusion rate.

These corporations usually have accumulated large amounts of capital or non

Such corporations become attractive takeover targets for profitable corporations

The situation is of concern to the government because such strategies ultimately

èCONTROL DE JURE OR LEGAL CONTROL

 DEEMED YEAR END

 ACQUISITION OF CONTROL AND EFFECT ON LOSSES

Net capital losses [paragraphs 111(4)(a), 111(4)(b)]

Non-capital losses [Subsections 111(5) to 111(5.5)]

o Condition #1 (must be met before going to condition #2)

o Condition #2 (must be met before going to condition #3)

• if the business is carried on for profit or with a reasonable expectation of profit

èSPECIFIC ITEMS [Some of LossCo' assets must be reevaluated; this

• Accounts Receivable [111(5.3)]

o Each debt must be considered individually as to its collectibility and, if collection is

o No reserve for doubtful accounts under 20(1)(l) is allowed.

• Depreciable property [111(5.1)]

o If UCC of a prescribed class

⇒⇒ the class must be written down to the FMV, and

deemed taxation year.

• Eligible capital property [111(5.2)]

o If CEC > 3/4 of FMV of the eligible capital property

⇒⇒ the CEC must be written down to the FMV, and

• Non-depreciable capital property [111(4)(c) and 111(4)(d)]

⇒⇒ The non-depreciable capital property must be written down to its fair

è Election for property with accrued gains [111(4)(e)]

• Paragraph 111(4)(e) allows the corporation to elect to have a deemed disposition at

Expire at deemed year end

• Net capital losses

Survive but may be Restricted

CONDITIONS FOR LOSS UTILISATION

1. Loss business carried on throughout the year.

Same or Similar Business

“Business” is not the same as “corporation”.

• Applies to capital property (depreciable and non-depreciable)

• Deemed disposal at any amount between ACB and FMV

1. Triggers recapture and/or capital gains thus increases income at the

For CCA: UCC + recapture + 1/2 x CG

ACQUISITION OF CONTROL - STEPS TO TAKE

1. Deemed year-end on the day before.

2. Realise “accrued” losses automatically

3. Determine the tax position of the company at this point

i) Calculate Division B income

ii) Calculate loss carry-overs

4. Consider 111(4)(e) election to create income to:

i) offset losses that will expire, or