Chapter 15 Taxable Income And Tax Payable For Corporations

2© 2006, C. Byrd Inc. Computation Of Net Income – Schedule 1 Accounting Net Income Accounting Net Income Additions Additions Deductions Deductions Net Income For Tax Purposes Net Income For Tax Purposes

3© 2006, C. Byrd Inc. Additions 1.Income And Other Taxes 1.Income And Other Taxes 2.Amortization Expense 2.Amortization Expense 3.Accounting Loss on Capital Asset Disposals 3.Accounting Loss on Capital Asset Disposals 4. Net Taxable Capital Gains 4. Net Taxable Capital Gains

4© 2006, C. Byrd Inc. Additions 5.Recapture of CCA 5.Recapture of CCA 6. Charitable Donations 6. Charitable Donations 7.Political Donations 7.Political Donations 8.Interest/Penalties - Income Taxes 8.Interest/Penalties - Income Taxes

5© 2006, C. Byrd Inc. Additions - Continued 9.R & D - Accounting Expense 9.R & D - Accounting Expense 10. Club Dues And Fees 10. Club Dues And Fees 11.Meals And Entertainment (Non-Deductible) 11.Meals And Entertainment (Non-Deductible) 12.Automobile Costs (Non- Deductible) 12.Automobile Costs (Non- Deductible)

6© 2006, C. Byrd Inc. Additions - Continued 13.Tax Reserves Deducted Last Year 13.Tax Reserves Deducted Last Year 14.Accounting Reserves Not Deductible 14.Accounting Reserves Not Deductible 15.Accounting Resource Deductions 15.Accounting Resource Deductions 16. Bond Discount Amortization 16. Bond Discount Amortization

7© 2006, C. Byrd Inc. Deductions 1.Accounting Gains On Disposals 1.Accounting Gains On Disposals 2.Terminal Losses 2.Terminal Losses 3.CCA 3.CCA 4.CEC 4.CEC

8© 2006, C. Byrd Inc. Deductions 5.ABIL 5.ABIL 6.R & D (Tax) 6.R & D (Tax) 7.Interest Capitalized (Accounting) 7.Interest Capitalized (Accounting)

9© 2006, C. Byrd Inc. Deductions - Continued 8. Tax Reserves For Current Year 8. Tax Reserves For Current Year 9. Tax Resource Deductions 9. Tax Resource Deductions 10. Bond Premium Amortization 10. Bond Premium Amortization

10© 2006, C. Byrd Inc. Deductions Not Available To Corporations Lifetime Capital Gains Deduction Lifetime Capital Gains Deduction Employee Stock Option Deduction Employee Stock Option Deduction Home Relocation Loan Deduction Home Relocation Loan Deduction Northern Residents Deductions Northern Residents Deductions Social Assistance And Workers’ Compensation Social Assistance And Workers’ Compensation

11© 2006, C. Byrd Inc. Dividends - The Problem A Ltd. B Ltd.C Ltd. $1,000$600$360 Corporate Tax Rate = 40%

12© 2006, C. Byrd Inc. Dividends From Untaxed Income Corporation Taxed At 20% On $100 Corporation Taxed At 20% On $100 Individual Pays $24 [(30%)($100 - $20)] Individual Pays $24 [(30%)($100 - $20)] Total = $44 = ($20 + $24) Total = $44 = ($20 + $24) Corporation Not Taxed Corporation Not Taxed Individual Pays $30 [(30%)($100)] Individual Pays $30 [(30%)($100)] Total = $30 < $44 When Corporation Taxed Total = $30 < $44 When Corporation Taxed

13© 2006, C. Byrd Inc. Dividends On Preferred Shares Debt At 10% Debt At 10% Cost Of Capital If Corporation Taxed Cost Of Capital If Corporation Taxed Cost Of Capital If Corporation Not Taxed Cost Of Capital If Corporation Not Taxed Preferred Shares At 8% Preferred Shares At 8% Redeemable/Retractable Preferred Redeemable/Retractable Preferred

14© 2006, C. Byrd Inc. Stop Loss Rules The Scenario The Scenario Acquire At $10 On June 30 Acquire At $10 On June 30 Receive $1 Dividend On July 1 Receive $1 Dividend On July 1 Sell At $9 On July 2 Sell At $9 On July 2 The Solution: Loss Disallowed Unless: Own 365 Days; And Corporation Owns No More Than 5% Of Payor

15© 2006, C. Byrd Inc. Acquisition Of Control - The Problem Profit Company Loss Company Acquisition

16© 2006, C. Byrd Inc. Meaning Of Acquisition Of Control Not Equal To “Change In Control” Not Equal To “Change In Control” Acquisition Of 50% Acquisition Of 50% Owner Of 100 % Sells 30% To A and 30 % To B Owner Of 100 % Sells 30% To A and 30 % To B

17© 2006, C. Byrd Inc. Deemed Year End - ITA 249(4) Example: 31/12 year end, acquisition on 30/6/2005 Example: 31/12 year end, acquisition on 30/6/2005 Deemed New Year End 30/6/2005 Deemed New Year End 30/6/2005 Keep Old Year End Keep Old Year End Allowed To Establish New Year End Allowed To Establish New Year End

18© 2006, C. Byrd Inc. Deemed Year End - ITA 249(4) Usual Year End Procedures File Return Value Inventories Short Fiscal Period CCA Calculations Annual Business Limit Counts Towards Loss Expiry

19© 2006, C. Byrd Inc. Acquisition Of Control Net Capital Losses And Allowable Business Investment Losses – ITA 111(4)(a) & (b) Net Capital Losses And Allowable Business Investment Losses – ITA 111(4)(a) & (b) Existing Carry Overs Die Existing Carry Overs Die New Losses Cannot Be Carried Back New Losses Cannot Be Carried Back

20© 2006, C. Byrd Inc. Acquisition Of Control Non-Capital Losses - 111(5) Non-Capital Losses - 111(5) Can Be Carried Forward Can Be Carried Forward Subject To Restrictions Subject To Restrictions Must Carry On Business In Which Losses Occurred Must Carry On Business In Which Losses Occurred Reasonable Expectation Of Profit Reasonable Expectation Of Profit Can Only Be Applied Against Income Generated By The Same Or A Similar Line Of Business Can Only Be Applied Against Income Generated By The Same Or A Similar Line Of Business

21© 2006, C. Byrd Inc. Accrued Losses Inventories Normal Year End Procedures Accounts Receivable - 111(5.3) Maximum Write-Off Required

22© 2006, C. Byrd Inc. Accrued Losses Depreciable Property Asset Cost = $100,000 UCC = $ 60,000 FMV = $ 50,000 ITA 111(5.1) Write Down To $50,000 Difference Is Deemed CCA

23© 2006, C. Byrd Inc. Accrued Losses Eligible Capital Property - 111(5.2) Eligible Capital Property - 111(5.2) CEC > 3/4 FMV CEC > 3/4 FMV Write Down Write Down ITA 20(1)(b) Deduction ITA 20(1)(b) Deduction

24© 2006, C. Byrd Inc. Accrued Losses Non-Depreciable Property - 111(4)(c) & (d) Non-Depreciable Property - 111(4)(c) & (d) ACB > FMV ACB > FMV Write Down Write Down Capital Loss (Will Disappear) Capital Loss (Will Disappear)

25© 2006, C. Byrd Inc. ITA 111(4)(e) Election General Rule General Rule Can elect between ACB and FMV Can elect between ACB and FMV FMV > ACB: Creates Capital Gain FMV > ACB: Creates Capital Gain May also create recapture (can’t avoid) May also create recapture (can’t avoid)

26© 2006, C. Byrd Inc. ITA 111(4)(e) Election Case 1 Case 1 ACB = $ 50,000 ACB = $ 50,000 FMV = 100,000 FMV = 100,000 UCC = 20,000 UCC = 20,000 Elect $100,000 Elect $100,000 Capital Gain $ 50,000 Capital Gain $ 50,000 Recapture 30,000 Recapture 30,000 New ACB100,000 New ACB100,000 New UCC75,000 New UCC75,000

27© 2006, C. Byrd Inc. ITA 111(4)(e) Election Case 2 ACB = $ 50,000 FMV = 30,000 UCC = 20,000 Elect $30,000 Capital Gain$ Nil Recapture10,000 New ACB30,000 New UCC30,000

28© 2006, C. Byrd Inc. ITA 111(4)(e) Election Case 3 Case 3 ACB = $ 50,000 ACB = $ 50,000 FMV = 10,000 FMV = 10,000 UCC = 20,000 UCC = 20,000 Write down to $10,000 is required by 111(5.1) Write down to $10,000 is required by 111(5.1)

29© 2006, C. Byrd Inc. Profits In The Loss Business During 2004, Loss Leader experiences an overall Net Loss of $150,000, with all of the loss arising in their shoe division. Their hat division broke even for the year. In 2005, the shoe division broke even, while the hat division showed a profit of $200, No Acquisition: $50, Acquisition: $200,000

30© 2006, C. Byrd Inc. Loss Carry Overs Non-Capital Loss - ITA 111(8)(b) Non-Capital Loss - ITA 111(8)(b) Business Losses($60,000) Business Losses($60,000) Dividends Received10,000 Dividends Received10,000 Bond Interest5,000 Bond Interest5,000 ABIL( 3,000) ABIL( 3,000) Taxable Capital Gains15,000 Taxable Capital Gains15,000 Allowable Capital Losses( 7,000) Allowable Capital Losses( 7,000) Total($40,000) Total($40,000)

31© 2006, C. Byrd Inc. ITA 3 Rules 3(a) Non-Capital$15,000 3(b) Net Capital8,000 3(c) Sum$23,000 3(d) Non-Capital( 63,000) Net IncomeNil Net Capital Loss Carry Over Of $8,000 Available

32© 2006, C. Byrd Inc. Alternatives No Net Capital Loss Deduction No Net Capital Loss Deduction Net Capital Loss Deduction Of $8,000 Net Capital Loss Deduction Of $8,000

33© 2006, C. Byrd Inc. Alternative 1 - Non-Capital Loss With No Net Capital Deduction Part E: Business Loss$60,000 Business Loss$60,000 ABIL3,000 ABIL3,000 Dividends10,000$73,000 Dividends10,000$73,000 Part F: ITA 3(c)( 23,000) ITA 3(c)( 23,000) Non-Capital Loss $50,000

34© 2006, C. Byrd Inc. Part E: Business Loss$60,000 Business Loss$60,000 ABIL3,000 ABIL3,000 Dividends10,000 Dividends10,000 Net Capital Loss8,000$81,000 Net Capital Loss8,000$81,000 Part F: ITA 3(c)( 23,000) ITA 3(c)( 23,000) Non-Capital Loss $58,000 Alternative 2 - Non-Capital Loss With Net Capital Deduction Of $8,000

35© 2006, C. Byrd Inc. Ordering Of Deductions Timing Timing Oldest Must Be Used Before Others Of Same Type Oldest Must Be Used Before Others Of Same Type Type Type Restricted By Income Type Restricted By Income Type Restricted By Time Restricted By Time

36© 2006, C. Byrd Inc. Geographical Allocation Permanent Establishments – ITR 400(2) Permanent Establishments – ITR 400(2) Fixed Place Of Business Fixed Place Of Business Stock Of Inventories, Land, Equipment Stock Of Inventories, Land, Equipment Activity: Permanent Establishments Activity: Permanent Establishments Gross Revenues Gross Revenues Salaries And Wages Salaries And Wages Procedures Procedures A Simple Average A Simple Average No Weighting No Weighting

37© 2006, C. Byrd Inc. Gross Revenues

38© 2006, C. Byrd Inc. Salaries And Wages

39© 2006, C. Byrd Inc. Allocation To Provinces

40© 2006, C. Byrd Inc. Federal Tax Payable Basic Rate - ITA 123(1) Basic Rate - ITA 123(1) 38% Of Taxable Income 38% Of Taxable Income Federal Tax Abatement - ITA 124(1) Federal Tax Abatement - ITA 124(1) 10% Of Taxable Income Earned In A Province 10% Of Taxable Income Earned In A Province Surtax - ITA Surtax - ITA Use 4% Of 28% Of Taxable Income Use 4% Of 28% Of Taxable Income General Rate Reduction General Rate Reduction 7% Of “Full Rate Taxable Income” For 2004 And Subsequent Years 7% Of “Full Rate Taxable Income” For 2004 And Subsequent Years

41© 2006, C. Byrd Inc. Provincial Rates General (%) General (%) Alberta11.50 Alberta11.50 British Col British Col Nova Scotia16.00 Nova Scotia16.00 Ontario14.00 Ontario14.00 Quebec9.90 Quebec9.90 Small Business (%) Alberta3.00 British Col.4.50 Nova Scotia5.00 Ontario5.50 Quebec8.50

42© 2006, C. Byrd Inc. Tax Payable With $100,000 Taxable Income Basic At 38% Of $100,000$38,000 Basic At 38% Of $100,000$38,000 Abatement At 10% Of $100,000 ( 10,000) Abatement At 10% Of $100,000 ( 10,000) Surtax At 4% Of $28,0001,120 Surtax At 4% Of $28,0001,120 GRR At 7% Of $100,000 ( 7,000) GRR At 7% Of $100,000 ( 7,000) Total Federal Tax$22,120 Provincial At 15% Of $100,00015,000 Provincial At 15% Of $100,00015,000 Total$37,120 Total$37,120

43© 2006, C. Byrd Inc. Objectives Of Corporate Taxation 1. Avoid Double Taxation 1. Avoid Double Taxation Corporation Gets Dividend Deduction Corporation Gets Dividend Deduction Individual Gets Gross Up And Credit Individual Gets Gross Up And Credit 2. Prevent Avoidance Through Corporation 2. Prevent Avoidance Through Corporation Corporation: Prevent Capital Gains From Becoming Dividends Corporation: Prevent Capital Gains From Becoming Dividends Individual: Prevent Dividends From Becoming Capital Gains Individual: Prevent Dividends From Becoming Capital Gains 3. Providing Incentives 3. Providing Incentives Small Business Deduction Small Business Deduction M&P, ITCs, SR&ED M&P, ITCs, SR&ED

44© 2006, C. Byrd Inc. Large Corporations Tax Eliminated as of January 1, Eliminated as of January 1, Good riddance – A very unfair type of tax! Good riddance – A very unfair type of tax!

45© 2006, C. Byrd Inc. Small Business Deduction (SBD) Objectives Relief To Small Business Encourage Active Business Income Provide For The Accumulation Of Capital In A New Business

46© 2006, C. Byrd Inc. Basic Concepts Canadian Controlled Private Corporation (CCPC) Active Business Income Annual Business Limit $300, $400,000 Associated Companies

47© 2006, C. Byrd Inc. SBD Example With $100,000 Of Taxable Income Federal Tax At 38%$38,000 Federal Tax Abatement( 10,000) Tax Before Surtax$28,000 Federal Surtax1,120 Tax Before SBD$29,120 SBD At 16%( 16,000) Federal Tax$13,120 Provincial Tax At 7% 7,000 Total Tax Payable$20,120

48© 2006, C. Byrd Inc. Property Income The Problem The Problem Specified Investment Business Specified Investment Business See ITA 125(7) See ITA 125(7) Incidental Property Income Incidental Property Income Treated As Active Business Income Treated As Active Business Income

49© 2006, C. Byrd Inc. Personal Services Corporations The Problem The Problem Personal Services Corporations Personal Services Corporations See ITA 125(7) See ITA 125(7)

50© 2006, C. Byrd Inc. Management Companies The Problem The Problem

51© 2006, C. Byrd Inc. Related Individuals - 251(2)(a) Individual

52© 2006, C. Byrd Inc. Related Corporations One Corporation - ITA 251(2)(b) Two Corporations - ITA 251(2)(c) Control - 256(1.2)(c) More Than 50% FMV - All Shares More Than 50% FMV - Voting Shares Group – 256(1.2)(a) Specified Class - 256(1.1) Other Definitions

53© 2006, C. Byrd Inc. Deeming Rules ITA 256(1.3) Children Under 18 ITA 256(1.4) Options To Own Right To Force Redemption Or Cancellation ITA 256(2) A Associated With B C Associated With B A And C Have Deemed Association Other Definitions

54© 2006, C. Byrd Inc. Association Rules ITA 256(1)(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other; Company ACompany B More than 50%

55© 2006, C. Byrd Inc. Association Rules ITA 256(1)(b) both of the corporations were controlled directly or indirectly in any manner whatever, by the same person or group of persons; Company ACompany B More than 50% Ms. Smith More than 50%

56© 2006, C. Byrd Inc. Association Rules ITA 256(1)(c) each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; Company ACompany B More than 50% Mrs. SmithMr. Smith Not less than 25%

57© 2006, C. Byrd Inc. Association Rules ITA 256(1)(d) one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; Company ACompany B More than 50% Mr. Goh Mrs. Goh Mr. Goh’s Brother Not less than 25%

58© 2006, C. Byrd Inc. Association Rules ITA 256(1)(e) each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more person who were members of both related groups, either alone or together, owned in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class of the capital stock thereof; Company ACompany B More than 50% Mr. Brown Mrs. Brown Mr. Fortin Mrs. Fortin 40%

59© 2006, C. Byrd Inc. Calculating The SBD ITA 125(1) Specifies The Deduction As 16% Of The Least Of: ITA 125(1) Specifies The Deduction As 16% Of The Least Of: Net Canadian Active Business Income Net Canadian Active Business Income Taxable Income, Less: Taxable Income, Less: 10/3 Times The Foreign Non-Business Income Tax Credit Without Consideration Of The ART Or The GRR; And 10/3 Times The Foreign Non-Business Income Tax Credit Without Consideration Of The ART Or The GRR; And 3 Times The Foreign Business Income Tax Credit Without Consideration Of The GRR 3 Times The Foreign Business Income Tax Credit Without Consideration Of The GRR The Annual Business Limit ($300,000), Less Any Portion Allocated To Associated Corporations. The Annual Business Limit ($300,000), Less Any Portion Allocated To Associated Corporations.

60© 2006, C. Byrd Inc. Elimination Of SBD For Large Corporations Reduction = (A)(B/$11,250), where Reduction = (A)(B/$11,250), where A Is The Corporation’s Annual Business Limit A Is The Corporation’s Annual Business Limit B is.225% Of The Excess Of Taxable Capital Employed In Canada Over A $10,000,000 Threshold B is.225% Of The Excess Of Taxable Capital Employed In Canada Over A $10,000,000 Threshold

61© 2006, C. Byrd Inc. Manufacturing And Processing Profits Deduction General Rules General Rules Tax Credit Tax Credit Only On M&P Income Only On M&P Income A 7% Reduction In Tax Payable A 7% Reduction In Tax Payable Does not get 7 percent general rate reduction. Does not get 7 percent general rate reduction.

62© 2006, C. Byrd Inc. M&P Deduction – Example Tax At 38% ($100,000)$38,000 Abatement At 10%( 10,000) GRR Nil Net After Abatement$28,000 Surtax At 4%1,120 M & P At 7%( 7,000) Net Federal Tax$22,120 Provincial At 15%15,000 Effective Total Tax$37,120

63© 2006, C. Byrd Inc. Calculation - ITA 125.1(1) Tax Credit = 7% of the lesser of: M & P Profits (ITR), Less Amounts Eligible For The SBD Taxable Income, Less SBD Amount 3 Times The Foreign Business Income Tax Credit Aggregate Investment Income Under 129(4) – Interest + Taxable Capital Gains +Rents – Net Capital Losses Deducted (No Dividends)

64© 2006, C. Byrd Inc. M&P Deduction Eligibility 10 Percent Of Gross Revenues From M&P Activities Meaning Of M & P ITA 125.1(3) - Definition ITA 125.1(3) - Excluded Activities See Also IT-145R

65© 2006, C. Byrd Inc. M&P Formula All Items Defined In ITR5200

66© 2006, C. Byrd Inc. General Rate Reduction (GRR) 7% Of “Full Rate Taxable Income” 7% Of “Full Rate Taxable Income” “Full Rate Taxable Income” “Full Rate Taxable Income” Does Not Include Income That Has Benefited From Other Tax Reductions Does Not Include Income That Has Benefited From Other Tax Reductions

67© 2006, C. Byrd Inc. Application TO CCPCs Taxable Income Reduced By: Taxable Income Reduced By: Income Eligible For The SBD Income Eligible For The SBD 100/16 Of The Small Business Deduction 100/16 Of The Small Business Deduction Income Eligible For The M&P Deduction Income Eligible For The M&P Deduction 100/7 Of The M&P Deduction 100/7 Of The M&P Deduction Aggregate Investment Income Under ITA 129(4) Aggregate Investment Income Under ITA 129(4)

68© 2006, C. Byrd Inc. Application TO Non-CCPCs Taxable Income Reduced By: Taxable Income Reduced By: Income Eligible For The M&P Deduction Income Eligible For The M&P Deduction 100/7 Of The M&P Deduction 100/7 Of The M&P Deduction

69© 2006, C. Byrd Inc. Foreign Tax Credits Basic Concepts Basic Concepts Pre-Withholding Amounts Included In Income Pre-Withholding Amounts Included In Income Tax Credit For Withholding Tax Credit For Withholding Withholding Rate Established By Treaty Withholding Rate Established By Treaty

70© 2006, C. Byrd Inc. Non-Business (Property) FTC Lesser Of: Lesser Of: Actual Foreign Non-Business Income Tax Paid Actual Foreign Non-Business Income Tax Paid And An Amount Determined By: And An Amount Determined By:

71© 2006, C. Byrd Inc. Non-Business (Property) FTC Adjusted Division B Income Adjusted Division B Income Net Income, Less Net Income, Less Net Capital Loss Carry Overs Deducted 111(1)(b) Net Capital Loss Carry Overs Deducted 111(1)(b) Dividends Dividends Tax Otherwise Payable Basic + Surtax, Less Abatement ITA ITA 123.4

72© 2006, C. Byrd Inc. If actual withholding exceeds limit: No Carry Forward Excess Can Be Deducted Under ITA20(12) Non-Business (Property) FTC

73© 2006, C. Byrd Inc. Business FTC Least Of Least Of Actual Foreign Business Income Tax Paid Actual Foreign Business Income Tax Paid An Amount Determined By: An Amount Determined By: Tax Otherwise Payable, Less Non-Business FTC Tax Otherwise Payable, Less Non-Business FTC

74© 2006, C. Byrd Inc. Business FTC Adjusted Division B Income Adjusted Division B Income Net Income, Less Net Income, Less Net Capital Loss Carry Overs Deducted 111(1)(b) Net Capital Loss Carry Overs Deducted 111(1)(b) Dividends Dividends Tax Otherwise Payable Basic + Surtax, Less No Abatement ITA ITA 123.4

75© 2006, C. Byrd Inc. Business FTC Additional Rules For Unused Amounts Carry Back 3 Years Carry Forward 10 Years Only Applies To Incorporated Foreign Income

76© 2006, C. Byrd Inc. Investment Tax Credits Credit Vs. Deduction Credit Vs. Deduction Value Of Credit = 100% Value Of Credit = 100% Value Of Deduction = [(100%)(t)] Value Of Deduction = [(100%)(t)]

77© 2006, C. Byrd Inc. Investment Tax Credits Current Expenditures Current Expenditures Credit Deducted From Expenditures Credit Deducted From Expenditures Lose Deduction Lose Deduction Used In Current Period (Generally) Used In Current Period (Generally) One Year Delay For SR&ED One Year Delay For SR&ED

78© 2006, C. Byrd Inc. Investment Tax Credits Capital Expenditures Capital Expenditures Credit Deducted From Capital Cost In The Following Period Credit Deducted From Capital Cost In The Following Period Lose CCA Lose CCA

79© 2006, C. Byrd Inc. Property And Rates Eligible Assets Eligible Assets Qualified Property Qualified Property Qualified SR&ED Qualified SR&ED Salaries Of An Eligible Apprentice Salaries Of An Eligible Apprentice Rates Qualified Property - 10% SR&ED (CCPC) $2 Million At 35% Excess At 20% SR&ED (Non-CCPC) 20% Apprentice Salaries 10% On Maximum of $2,000

80© 2006, C. Byrd Inc. $2 Million Limit Reduction Limit Based On Previous Year’s Taxable Income Reduction Limit Based On Previous Year’s Taxable Income [$2,000,000 – (10)(A - $300,000)], where A = Previous Year’s Taxable Income B = Business Limit

81© 2006, C. Byrd Inc. Refundability General Rules No Tax Payable Can’t Use Credits Government Writes Cheque To The Business

82© 2006, C. Byrd Inc. Refundability Current SR&ED 100 Percent On Current Amounts That Qualify For The Extra 15% 40 Percent On Other Current SR&ED Other (Including SR&ED Capital Expenditures 40 Percent For CCPCs and Individuals No Upper Limit

83© 2006, C. Byrd Inc. Carry Overs Back Three Years Back Three Years Forward Twenty Years (2006 Budget) Forward Twenty Years (2006 Budget) Must Take All Other Credits For The Year And Reduce Tax Payable To Nil Must Take All Other Credits For The Year And Reduce Tax Payable To Nil

84© 2006, C. Byrd Inc.