9-1

Chapter 9 Corporate Income Taxes

Note: Unless otherwise specified, tax rates from Tables 9.1 and 9.2 are used in the
solutions.

Corporate Income Taxes

9.1 (b)

Gains, Losses, Disposal Tax Effect

9.2 UCC with 50% rule = 0.85(0.7)4$50,000 = $10,204

Corporate Income Taxes

9.3 Taxable income = $200,000 $84,000 $4,000 = $112,000; net income =
(1 0.30)$112,000 = $78,400

9.4 Net cash generated = $78,400 + $4,000 = $82,400

9.5 Since all of these expenses are tax deductible, both companies have the same
taxable income of $240,000.

9.6

(a) Taxable income:

$2,500,000 $1,280,000 $128,000 = $1,092,000

(b) Income tax calculation using data from Tables 9.1 and 9.2 (Saskatchewan):
Combined small business tax rate on $400,000 taxable income = 11.0% +
4.5% = 15.5%
Combined manufacturing tax rate on remaining $692,000 = 19.5% + 10% =
29.5%
Income taxes = 0.155($400,000) + 0.295($692,000) = $266,140

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Gains, Losses, Disposal Tax Effect

*
9.7

(a) Disposed of in year 3:

UCC 2 0.85(0.70) 2 $60, 000

$24,990
loss $20, 000 $24,990
($4,990)

(b) Disposed of in year 5:

UCC 4 0.85(0.70) 4 $60, 000

$12, 245
loss $10, 000 $12, 245
($2, 245)

(c) Disposed of in year 6:

UCC5 0.85(0.70)5 $60, 000

$8,571
loss $5, 000 $8,571
($3,571)

*
9.8

UCC 4 0.85(0.70) 4 $300, 000

$61, 225

(a) If sold at $10,000:

loss $10, 000 $61, 225

($51, 225)
disposal tax effect $51, 225(0.34)
$17, 416

*
An asterisk next to a problem number indicates that the solution is available to students
on the Companion Website.

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(b) If sold at $125,460:

gain $125, 460 $61, 225

$64, 235
disposal tax effect $64, 235(0.34)
$21,839

(c) If sold at $200,000:

gain $200, 000 $61, 225

$138, 775
disposal tax effect $138, 775
$47,183

9.9

(a) Taxable operating income:

Gross revenue $ 1,250,000

Expenses:
Labour 350,000
Material 185,000
CCA 32,500
Rental 57,200
Taxable income 625,300

(b) Taxable gains:

$23,000 $20,000 = $3,000

(c) Total taxes:

Alberta-based small business combined tax rate = 11.0% + 3.0% = 14.0%

Alberta-based nonmanufacturing combined tax rate = 19.5% + 10% = 29.5%
income taxes 0.14 $400, 000 0.295 225,300 tax on gains
$122, 464 0.295 $3, 000 $123,349

(d) Disposal tax effect:

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(0.295)($3,000) = $885

9.10 Given: = $50,000, = 10 years, S = $1,000

(a) SL depreciation:

$50,000 $1,000
D $4,900
10
B2011 $35,300 3($4,900) $35, 400

(b) DDB method:

D2011 = $6,400

(c) Optimal time to switch: in year 7

(d) SOYD

45
D2014 ($50, 000 $1, 000) $40, 091
55

(e) Taxable gain:

UCC3 $0.85(0.70)3 ($50, 000)

$14,578
disposal tax effect $0.35(14,578 $30, 000)
$5,398

Incremental & Marginal Tax Rates

9.11

(a) Marginal tax rates:

Existing taxable income already exceeds small business maximum of

$400,000 (small business tax rate = 11.0% + 5.5% = 16.5%). Therefore,
marginal tax rates before and after venture = 19.5% + 14.0 % = 33.5%

(b) Average tax rates:

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Without the project = ($400,000/$450,000) 16.5% + ($50,000/$450,000)

33.5% = 18.39%
With the project = ($400,000/$600,000) 16.5% + ($150,000/$600,000)
33.5% = 19.38%

9.12 Marginal tax rate = Average tax rate = 33.5%

9.13

(a) Economic depreciation for the milling machine:

$200,000 $30,000 = $170,000

(b) Marginal tax rates with the project (assume O&M costs are unchanged):

Marginal tax rate Combined manufacturing tax rate

19.5% 13.0% 32.5%

(c) Average tax rate:

Small business rate on first $400,000 = 11.0% + 5.0% = 16.0%

Combined
Project Taxable Taxable
n Revenue CCAn Income Income
1 $80,000 $30,000 $50,000 $520,000
2 80,000 51,000 29,000 499,000
3 80,000 35,700 44,300 514,300
4 80,000 24,990 55,010 525,010
5 80,000 17,493 62,507 532,507
6 80,000 12,245 67,755 537,755

Combined Combined Average

Taxable Income Tax
n Income Taxes Rate
1 $520,000 $103,000 19.81%
2 499,000 96,175 19.27%
3 514,300 101,148 19.67%
4 525,010 104,628 19.93%
5 532,507 107,065 20.11%
6 537,755 108,770 20.23%

9.14 Incremental tax rate calculation:

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Combined small business tax rate for Alberta = 11.0% + 3.0% = 14.0%
Combined nonmanufacturing tax rate for Alberta =19.5% + 10.0% =
29.5%

Year 1 Year 2
Revenue $200,000 $200,000
Operating costs 100,000 100,000
CCA 7,500 12,750
Taxable income $92,500 $87,250

Year 1 Year 2
Taxable income without project $350,000 $350,000
Income taxes @ 14.0% 49,000 49,000

Taxable income with project 442,500 437,250

Income taxes @ 14.0% on first
$400,000 and 29.5% thereafter 68,538 66,989

Incremental taxable income 92,500 87,250

Incremental income taxes 19,538 17,989
Incremental tax rate 21.1% 20.6%

9.15 (a) and (b) B.C. combined manufacturing tax rate = 19.5% + 11.5% = 31.0%

Economic Condition
Taxable Income Good Fair Poor
before expansion $2,000,000 $2,000,000 $2,000,000
due to expansion 2,000,000 500,000 (100,000)
after expansion 4,000,000 2,500,000 1,900,000
Income taxes $1,544,800 $965,500 $733,780
Marginal tax rate 31.0% 31.0% 31.0%
Incremental tax rate 31.0% 31.0% 31.0%
Average tax rate 31.0% 31.0% 31.0%

Comments: Note that all tax rates over the project life remain unchanged
because there is no small business deduction with a public company.

9.16 Taxable income from project during year 1:

Combined small business tax rate in Quebec = 11.0% + 8.0% = 19.0%

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CCA1 0.15($100, 000)

$15, 000
taxable income $50, 000 $15, 000
$35, 000

(a) Increment in income tax due to the project during year 1:

Without With Project

Project Project Alone
Taxable income $95,000 $130,000 $35,000
Income taxes 18,050 24,700 ?
increment in income taxes = $24,700 $18,050 = $6, 650

(b) Incremental tax rate:

$6,650/$35,000 = 19.0%

The marginal tax rate is 19.0% also.

9.17 Incremental tax calculations:

(a) Additional taxable income due to project:

Year
1 2 3
Annual revenue $80,000 $80,000 $80,000
Operating cost 20,000 20,000 20,000
CCA 7,500 12,750 8,925
Taxable income $52,500 $47,250 $51,075

(b) Additional income tax calculation:

Combined small business tax rate for Ontario = 16.5%

Combined manufacturing tax rate for Ontario = 31.5%

Year 1 Without With Project

Project Project Alone
Taxable income $ 500,000 $ 552,500 $ 52,500
income taxes 97,500 114,038 16,538

Year 2 Without With Project

Project Project Alone

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Taxable income 500,000 547,250 47,250

income taxes 97,500 112,384 14,884

Year 3 Without With Project

Project Project Alone
Taxable income 500,000 551,075 51,075
income taxes 97,500 113,589 16,089

(c) Capital gain taxes:

UCC 0.85(0.70) 2 $50, 000

$20,825
disposal tax effect 0.315($20,825 $10, 000)
$3, 410

9.18 (a) and (b):

Property
n Un1 Taxes
1 $3,500,000 $42,000
2 2,975,000 35,700
3 2,082,500 24,990
4 1,457,750 17,493
5 1,020,425 12,245
6 714,297 8,572
7 500,008 6,000
8 350,005 4,200
Total $151,200

Investment Tax Credits

9.19

Year 1: Building: eligible for 10% ITC (Atlantic Provinces)

ITC1 (bldg) = 0.10 $3,500,000 = $350,000
CCA1(bldg@4%) = (0.04) $3,500,000 = $70,000
UCC1(bldg) = $3,430,000
Equipment: SR&ED investment eligible for ITCs as a CPCC
Calculate the Expenditure Limit (EL) based on the previous years
taxable income to determine the ITC rate:

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EL = $3,000,000 10($525,000$400,000) = $1,750,000

ITC1 (equip) = 0.35 $1,750,000 + 0.20 $1,250,000 =
$862,500
CCA1(equip@20%) = (0.20) $1,750,000 = $175,000
UCC1(equip) = $1,575,000

Net Effect in the First Year:

The taxable income is lowered by the sum of the two CCA
amounts: $245,000
The sum of the two ITC amounts can be deducted from taxes
owing: $1,212,500

Year 2: Building: The beginning UCC must be lowered by the year 1 ITC:
CCA2(bldg@4%) = (0.04) ($3,430,000$350,000)= $123,200
UCC2(bldg) = $3,430,000$350,000$123,200 = $2,956,800
Equipment: The beginning UCC must be lowered by the year 1
ITC:
CCA2(equip@20%) = (0.20) ($1,575,000$862,500)=
$142,500
UCC2(equip) = $1,575,000$862,500$142,500 = $570,000
Net Effect in the Second Year:
The taxable income is lowered by the sum of the two CCA
amounts: $265,700

9.20 Total planned expenditures = $975,000

Maximum amount eligible for ITC = 20 spaces $40,000/space = $800,000

The company applies the maximum credit to the asset with the higher CCA
rate (the furnishings) to get the maximum benefit:

ITC(furnishings) = 0.25 $75,000 = $18,750

ITC(building) = 0.25 $725,000 = $181,250

Year 1: Building:
CCA1(bldg@4%) = (0.04) $900,000 = $18,000
UCC1(bldg) = $882,000
Furnishings:

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CCA1(furn@20%) = (0.20) $75,000 = $7,500

UCC1(furn) = $67,500
Net Effect in the First Year:
The taxable income is lowered by the sum of the two CCA
amounts: $25,500
The sum of the two ITC amounts can be deducted from taxes
owing: $200,000

Year 2: Building: The beginning UCC must be lowered by the Year 1 ITC:
CCA2(bldg@4%) = (0.04) ($882,000$181,250)= $28,030
UCC2(bldg) = $882,000$181,250$28,030 = $672,720
Furnishings: The beginning UCC must be lowered by the Year 1
ITC:
CCA2(furn@20%) = (0.20) ($67,500$18,750)= $9,750
UCC2(furn) = $67,500$18,750$9,750 = $39,000
Net Effect in the Second Year:
The taxable income is lowered by the sum of the two CCA
amounts: $37,780

Corporate Income Taxes

9.21
(a) Taxable income:

Revenues: $1,450,000
Expenses:
Labour 550,000
Materials 185,000
CCA 32,500
Rental 45,000
Total taxable income $1,162,500

(b) Taxable gain:

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gain proceeds from old equipment UCC

$23, 000 $20, 000
$3, 000

(c) Marginal and average tax rates:

Combined small business tax rate on $400,000 taxable income =
11.0% + 5.0% = 16.0%
Combined nonmanufacturing tax rate on $762,500 = 19.5% + 16.0% =
35.5%
Income taxes = 0.16($400,000) + 0.355($762,500) = $334,688
Effective tax rate = $334,688/$1,162,500 = 28.79%
Marginal tax rate = 35.5%

(d) Net cash flow:

Taxable income $1,162,500

Income taxes 334,688
Net income $827,812
Adjustment:
Add CCA 32,500
Add proceed from
equipment sale 23,000
Subtract gains tax
@ 35.5% (1,065)
Net cash flow $882,247

Gains, Losses, Disposal Tax Effect

9.22

(a) CCA:

Building (Class 1 asset, d = 4%, placed in service in February):

CCA building $400, 000(0.04 / 2)

$8, 000

Equipment (Class 43 asset, d = 30%)

CCA equipment $200, 000(0.30 / 2)

$30, 000

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Total CCA allowed:

CCA total $8, 000 $30, 000

$38, 000

(b) Tax liability:

Sales revenue $1,500,000

Expenses:
Cost of goods sold 600,000
Bond interest 50,000
CCA 38.000
Taxable income $812,000
Income taxes 324.800
Net income $487,200

Short Case Studies

ST 9.1

(a) Economic depreciation:

economic depreciation = $4,000 $2,500 = $1,500

(b) Cost basis:

depreciation base = $14,000 + $800 + $200 = $15,000

(c) Taxable gains and gains taxes:

U 3 $0.85(0.70) 2 $4, 000

$1, 666
disposal tax effect $0.40(1, 666 $2,500)
$334

(d) Capital gains:

U 3 $1, 666
disposal tax effect 0.40($1, 666 $4, 000) 0.40(1/ 2)($4, 000 $5, 000)
$1,134

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(e) Book value at the end of year 3 under 175% DB:

B3 = $1,420

(f) Optimal time to switch: during the fourth year

ST 9.2 (a) and (b) Additional annual taxable income due to expansion:

Since the taxable income before and after the expansion is less than
$400,000, the marginal and average tax rates are the small business value.

Combined small business tax rate for Nova Scotia = 11.0% + 5.0% =
16.0%

(c) PW of income taxes:

CCA schedules: base = $20,000, d = 20%

n CCA
1 $2,000
2 3,600
3 2,880

Incremental income taxes over a three-year period:

Operating Year
Year l Year 2 Year 3
Revenue $30,000 $30,000 $30,000
Expense 10,000 10,000 10,000
CCA 2,000 3,600 2,880
Taxable income $18,000 $16,400 $17,120
Income taxes 2,880 2,624 2,739

Equivalent cost of income taxes:

PW (10%) $2,880( P / F , 10%, 1) 2,624( P / F ,10%, 2) 2,739( P / F ,10%,3)

$6,845

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ST 9.3

(a) Incremental operating income:

Operating Year
Year l Year 2 Year 3 Year 4 Year 5
Revenue $15,000,000 $15,000,000 $15,000,000 $15,000,000 $15,000,000
Expenses:

Mfg. cost 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000

O&M costs 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
CCA 750,000 1,275,000 892,500 624,750 437,325
Taxable 7,050,000 6,525,000 6,907,500 7,175,250 7,362,675
income
Income 2,467,500 2,283,750 2,417,625 2,511,337 2,576,936
taxes(35%)
Net income 4,582,500 4,241,250 4,489,875 4,663,912 4,785,739

(b) Gains or losses:

U 5 0.85(0.70) 4 $5,000,000
$1,020,425
disposal tax effect 0.35($ 1,020,425 $1,600,000)
$202,851

ST 9.4 (a)

Combined tax rates for Alberta, small business = 14.0% on first $400K,
manufacturing rate = 29.5%

(b) Gains or losses:

Plant:
U 8 0.9(0.80)7 $10,000,000
$1,887,436
disposal tax effect 0.3662($1,887,436 $6,000,000)
$1,506,021

Equipment:
U 8 0.85(0.70)7 $40,000,000
$280,046
disposal tax effect 0.3662($280,046 $4,000,000)
$1,362,247

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(c)
Income Statement (in thousands of dollars)

1 2 3 4 5 6 7 8
Revenue 30,000.0 30,000.0 30,000.0 30,000.0 30,000.0 30,000.0 30,000.0 30,000.0
Expenses
Mfg cost 9,000.0 9,000.0 9,000.0 9,000.0 9,000.0 9,000.0 9,000.0 9,000.0
Operating
cost 12,000.0 12,000.0 12,000.0 12,000.0 12,000.0 12,000.0 12,000.0 12,000.0
CCA
Plant 1,000.0 1,800.0 1,440.0 1,152.0 921.6 737.3 589.8 471.9
Equipment 6,000.0 10,200.0 7,140.0 4,998.0 3,498.6 2,449.0 1,714.3 1,200.0
Taxable
income 2,000.0 -3,000.0 420.0 2,850.0 4,579.8 5,813.7 6,695.9 7,328.1
Income taxes 528.0 -823.0(1) 61.9 778.8 1,289.0 1,653.0 1,913.3 2,099.8
Net income 1,472.0 -2,177.0 358.1 2,071.3 3,290.8 4,160.7 4,782.6 5,228.3

(1) As a start-up company, Diamonid may not be able to use this years loss against other taxable
income in the company. So there is no simple answer about what marginal tax rate applies to this
loss, as it may be carried forward to future years. For simplicity, the same marginal tax rates are
used as for the other years.

Copyright 2012 Pearson Canada Inc., Toronto, Ontario.