Taxable Income and Tax Payable Part Two

Refundable Tax Part 1 Tax Payable This is a refund on a CCPC’s investment income. 6 2/3 % tax is levied on a corporation that was a CCPC throughout the year on its investment income. Added to federal tax payable. Only refunded when corporation pays a taxable dividend to the shareholders.

Refundable Tax The refundable tax is calculated on the Lesser of: Taxable income. Investment income. Aggregate investment income is used to calculate refundable tax.

RDTOH Refundable portion of federal tax at 26 2/3 % of a CCPC,s investment income taxed under part 1 Income from property includes rents, taxable capital gains and interest. Taxable dividends from Canadian and foreign affiliate corporations are excluded. RDTOH is an running account total calculated at the end of each taxation year.

RDTOH Adjustments Refundable taxes cannot exceed real taxes. RDTOH is adjusted for the lesser of: Investment income. Taxable income. Taxable income is reduced by the amount on which the SBD rate is calculated. Any dividend refunds reduce the account of the following year.

Part IV Tax Tax levied on dividends excluded from taxable income under sec 112 and 113. Levied at the rate of 1/3, the rate applied to taxable dividends received by individuals. Applicable to private corporations as well. Any part IV tax paid is added to the RDTOH account and again is refundable on paying a taxable dividend to shareholders.

Part IV Tax Two types of dividends: 1) those received from non-connected corporations. 2) those received from connected corporations The first are always subject to the 1/3 Part IV tax. The other is not always subject to the tax.

Definition of Connected The dividend-paying corporation is controlled by the dividend-receiving corporation. The dividend-receiving corporation owns shares more than 10% of the voting shares of the dividend-paying corporation and those represent more than 10% of the FMV of all the issued share capital. A corporation is controlled if more than 50%of its voting shares belong to: The other corporation. Persons related to the other corporations. The other corporation and persons related to it.

Connected Corporations Dividends are allowed to pass freely between connected corporations. No Part IV tax unless: The payer corporation receives a dividend refund from its RDTOH. Formula. Payers dividend refund x dividends received from a connected corporation/total dividends paid by the payer. Must only pay Part IV tax on the amount of dividend refund received by the payer corporation.

RDTOH Balance The beginning of the of the year balance in the account minus. The prior year’s dividend refund, plus, The current year’s refundable portion of Part I tax, plus, The current year’s additional 6 2/3% tax plus, The current year’s Part IV tax payable.

CDA Account Allows private corporations to distribute non–taxable dividends to the shareholders. Composed of: The non-taxable portion of capital gains. The non-taxable portion of proceeds of dispositions of eligible capital property. Life insurance proceeds in excess of ACB. Capital dividends received from other corporations. Starts on the first day of its first taxation year ending after 1971 and ends at the time the calculation is made. CDA is reduced by any capital dividend paid.

CDA Cont’d FORM T2054 must be filed on the first of. The day on which the dividend becomes payable. The day on which any part of the dividend is paid. Late penalty. 1/12 of 1% of the amount of the dividend OR 500/12 for each month or part month between the filing date and the due date.

Tax Planning

Incorporation Corporations can pay a lower rate of tax in most cases. Corporate tax on $250,000 has a federal rate of about 11.00% or $27,500. Personal federal rate of 24.7% or $61,820. Tax savings of $34,320. Incorporation is beneficial if you do not need all the money. You can legally do it.

Incorporation Corporation can be used as a tax deferral tool. Remember money belongs to the company. Retained earnings is the after tax surplus of the corporation. Money can only be taken out of retained earnings by issuing a dividend. Potential exists for income splitting with spouses and children.

Tax Planning in a Corporation Combination of salary and bonus. Tax must be remitted within 180 days from year end on all bonuses declared. 78(4) disallows the deduction if not paid. Use of shareholders loans. Payment of dividends and salary combination.

Incorporation Some of these techniques come under attack from CRA and can lead to double taxation. I.E. Reasonability test of salary paid to spouse. Dividends have no such test. Paid out to shareholders on record.

Indirect Payments or Benefits 56(2) states that where a payment or transfer of property is made to some other person pursuant to the direction of, or with the concurrence of a taxpayer, an amount must be included in computing the taxpayer’s income to the same extent that it would have been if the transfer was made directly to him or her. Example would be gifting property to relatives.

Shareholder Benefits 15(1) requires shareholders to include in income, the value of any benefits conferred on them by a corporation, or the value of any corporate property appropriated by them. Examples: Use of company-owned dwelling. Use of company-owned plane. Shares sold to shareholders below FMV.

Shareholder Loans Shareholders may borrow, in their capacity as employees to: Acquire a dwelling. Acquire shares from treasury (not another shareholder). Acquire an automobile used to perform employment duties.

Deemed Dividends The return of capital in excess of the PUC amount results in a deemed dividend. An increase in the PUC without a corresponding increase in net assets will result in a deemed dividend. Property acquired in exchange for share and non-share consideration. Sec84(1) covers these transactions.

Tax Planning Individuals Manage the use of tax deductions and credits. Deferring tax liability. Income splitting between two or more taxpayers. Incorporation (covered)

Managing Tax Deductions and Credits Use up all non-refundable tax credits first. Claim all discretionary deductions in the higher income year for maximum tax advantage. Maximize all credits that can be combined with a spouse.