Chapter 15 Taxable Income And Tax Payable For Corporations

2© 2007, Clarence 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© 2007, Clarence Byrd Inc. Additions 1.Amortization, Depreciation, and Depletion 1.Amortization, Depreciation, and Depletion 2.Recapture Of CCA 2.Recapture Of CCA 3.Reserves Deducted In Prior Years 3.Reserves Deducted In Prior Years 4. Losses On Dispositions Of Capital Assets (Accounting Amounts) 4. Losses On Dispositions Of Capital Assets (Accounting Amounts)

4© 2007, Clarence Byrd Inc. Additions - Continued 5.R&D (Accounting Amounts) 5.R&D (Accounting Amounts) 6. Warranty Costs (Accounting Amounts) 6. Warranty Costs (Accounting Amounts) 7.Debt Discount Amortization 7.Debt Discount Amortization 8.Foreign Taxes Paid (Accounting Amounts) 8.Foreign Taxes Paid (Accounting Amounts)

5© 2007, Clarence Byrd Inc. Additions - Continued 9.Excess Of Taxable Capital Gains Over Allowable Capital Losses 9.Excess Of Taxable Capital Gains Over Allowable Capital Losses 10. Income Tax Expense 10. Income Tax Expense 11.Interest And Penalties On Income Tax Assessments 11.Interest And Penalties On Income Tax Assessments 12.Automobile Costs (Non- Deductible) 12.Automobile Costs (Non- Deductible)

6© 2007, Clarence Byrd Inc. Additions - Continued 13.50% Of Business Meals 13.50% Of Business Meals 14.Club Dues And Cost Of Recreational Facilities 14.Club Dues And Cost Of Recreational Facilities 15.Non-Deductible Accounting Reserves 15.Non-Deductible Accounting Reserves 16. Political Contributions 16. Political Contributions

7© 2007, Clarence Byrd Inc. Additions - Continued 17.Charitable Donations 17.Charitable Donations 18.Asset Impairment Write- Downs 18.Asset Impairment Write- Downs

8© 2007, Clarence Byrd Inc. Deductions 1. CCA 1. CCA 2.CEC 2.CEC 3.Terminal Losses 3.Terminal Losses 4.Deductible Reserves 4.Deductible Reserves

9© 2007, Clarence Byrd Inc. Deductions 5.Gains On Dispositions Of Capital Assets (Accounting Amounts) 5.Gains On Dispositions Of Capital Assets (Accounting Amounts) 6.Deductible R & D Costs 6.Deductible R & D Costs 7.Deductible Warranty Costs 7.Deductible Warranty Costs 8.Debt Premium Amortization 8.Debt Premium Amortization

10© 2007, Clarence Byrd Inc. Deductions - Continued 9. Foreign Non-Business Tax Deduction – ITA 20(12) 9. Foreign Non-Business Tax Deduction – ITA 20(12) 10. Allowable Business Investment Losses 10. Allowable Business Investment Losses

11© 2007, Clarence Byrd Inc. Corporate Taxable Income Deductions Not Available To Corporations 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

12© 2007, Clarence Byrd Inc. Corporate Taxable Income Deductions Available To Corporations Deductions Available To Corporations Losses (Same as for individuals) Losses (Same as for individuals) Charitable Donations (A deduction rather than a credit) Charitable Donations (A deduction rather than a credit) Dividends (Unique to corporations) Dividends (Unique to corporations)

13© 2007, Clarence Byrd Inc. Dividends - The Problem A Ltd. B Ltd.C Ltd. $1,000$600$360 Corporate Tax Rate = 40%

14© 2007, Clarence 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

15© 2007, Clarence Byrd Inc. Dividends On Preferred Shares Debt At 10% Debt At 10% Cost Of Capital If Corporation Taxed = 6% Cost Of Capital If Corporation Taxed = 6% Cost Of Capital If Corporation Not Taxed = 10% Cost Of Capital If Corporation Not Taxed = 10% Preferred Shares At 8% Preferred Shares At 8% Redeemable/Retractable Preferred Redeemable/Retractable Preferred Accounting may treat as debt Accounting may treat as debt

16© 2007, Clarence 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 for loss of $1 Sell At $9 On July 2 for loss of $1 Anti-Avoidance: Loss Disallowed Unless: Own 365 Days; And Corporation Owns No More Than 5% Of Payor

17© 2007, Clarence Byrd Inc. Acquisition Of Control - The Problem Profit Company Loss Company Acquisition Loss Transferred To Profit Company

18© 2007, Clarence Byrd Inc. Meaning Of Acquisition Of Control Control: Ownership of shares that carry the right to elect a majority of the board of directors. Control: Ownership of shares that carry the right to elect a majority of the board of directors. Common Scenario: One person acquires shares from a different arm’s length person. Common Scenario: One person acquires shares from a different arm’s length person.

19© 2007, Clarence Byrd Inc. Meaning Of Acquisition Of Control Can also occur through redemption of shares Can also occur through redemption of shares A owns 60 percent – B owns 40 percent – If all of A’s shares were redeemed, B would have acquired control. A owns 60 percent – B owns 40 percent – If all of A’s shares were redeemed, B would have acquired control.

20© 2007, Clarence Byrd Inc. Deemed Year End - ITA 249(4) Example: Dec. 31 year end, acquisition on June 30, 2007 Example: Dec. 31 year end, acquisition on June 30, 2007 Deemed New Year End June 30, 2007 Deemed New Year End June 30, 2007 Keep Old Year End Keep Old Year End Allowed To Establish New Year End Allowed To Establish New Year End

21© 2007, Clarence 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

22© 2007, Clarence 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) Unused Carry Forwards Die Unused Carry Forwards Die New Losses Cannot Be Carried Back New Losses Cannot Be Carried Back

23© 2007, Clarence 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

24© 2007, Clarence Byrd Inc. Accrued Losses Inventories Normal Year End Procedures Accounts Receivable - 111(5.3) Maximum Write-Off Required

25© 2007, Clarence 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 The $10,000 Is Deemed CCA

26© 2007, Clarence 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

27© 2007, Clarence 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 if not used at deemed year end.) Capital Loss (Will disappear if not used at deemed year end.)

28© 2007, Clarence 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 if you want the capital gain.) May also create recapture (Can’t avoid if you want the capital gain.)

29© 2007, Clarence Byrd Inc. ITA 111(4)(e) Election Case 1 Case 1 Capital Cost = $ 50,000 Capital Cost = $ 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 Cap. Cost100,000 New Cap. Cost100,000 New UCC75,000 New UCC75,000 [$50,000 + (1/2)($100,000 - $50,000)]

30© 2007, Clarence 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

31© 2007, Clarence Byrd Inc. ITA 111(4)(e) Election Case 3 Case 3 ACB = $ 50,000 ACB = $ 50,000 FMV = 5,000 FMV = 5,000 UCC = 20,000 UCC = 20,000 Write down to $5,000 is required by 111(5.1) Write down to $5,000 is required by 111(5.1) The $15,000 is deemed CCA The $15,000 is deemed CCA

32© 2007, Clarence Byrd Inc. Profits In The Loss Business During 2007, 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 2008, the shoe division broke even, while the hat division showed a profit of $200,000. No Acquisition in 2007: 2008 Income = $50,000 Acquisition in 2007: 2008 Income = $200,000

33© 2007, Clarence Byrd Inc. Non-Capital Loss Carry Overs Example Example 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)

34© 2007, Clarence 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

35© 2007, Clarence 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

36© 2007, Clarence 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

37© 2007, Clarence 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

38© 2007, Clarence Byrd Inc. Ordering Of Taxable Income Deductions Timing Timing Oldest must be used before others of same type Oldest must be used before others of same type No other restrictions on order No other restrictions on order Type Type Restricted By Income Type Restricted By Income Type Restricted By Time Restricted By Time

39© 2007, Clarence 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

40© 2007, Clarence Byrd Inc. Gross Revenues

41© 2007, Clarence Byrd Inc. Salaries And Wages

42© 2007, Clarence Byrd Inc. Allocation To Provinces

43© 2007, Clarence 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 Repealed as of 2008 Repealed as of 2008 General Rate Reduction General Rate Reduction 7% Of Full Rate Taxable Income 7% Of Full Rate Taxable Income

44© 2007, Clarence Byrd Inc. Provincial Corporate Rates General (%) General (%) Alberta10.0 Alberta10.0 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

45© 2007, Clarence Byrd Inc. Tax Payable With $100,000 Taxable Income Basic At 38% Of $100,000$38,000 Abatement At 10% Of $100,000 ( 10,000) Surtax At 4% Of $28,0001,120 GRR At 7% Of $100,000 ( 7,000) Total Federal Tax$22,120 Provincial At 15% Of $100,00015,000 Total (Rate = 37.12%)$37,120

46© 2007, Clarence 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

47© 2007, Clarence 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

48© 2007, Clarence Byrd Inc. Basic Concepts Canadian Controlled Private Corporation (CCPC) Active Business Income Annual Business Limit 2007 and subsequent - $400,000 Associated Companies Must share the $400,000 limit

49© 2007, Clarence 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 5% 5,000 Total Tax Payable$18,120

50© 2007, Clarence Byrd Inc. Property Income The Problem The Problem Interest and rent may involved an active business Interest and rent may involved an active business The Solution The Solution Specified Investment Business does not get SBD Specified Investment Business does not get SBD Excludes businesses with 5 or more full time employees Excludes businesses with 5 or more full time employees Incidental Property Income Incidental Property Income Treated As Active Business Income Treated As Active Business Income

51© 2007, Clarence Byrd Inc.

52© 2007, Clarence Byrd Inc. Related Individuals - 251(2)(a) Individual

53© 2007, Clarence 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

54© 2007, Clarence Byrd Inc. Deeming Rules ITA 256(1.2)(d) – Holding Companies Shareholder of holding company is deemed to own held shares. 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

55© 2007, Clarence 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%

56© 2007, Clarence 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%

57© 2007, Clarence 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%

58© 2007, Clarence 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%

59© 2007, Clarence 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%

60© 2007, Clarence 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 ($400,000), Less Any Portion Allocated To Associated Corporations. The Annual Business Limit ($400,000), Less Any Portion Allocated To Associated Corporations.

61© 2007, Clarence 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 (TCEC) over $10,000,000 B is.225% Of The Excess Of Taxable Capital Employed In Canada (TCEC) over $10,000,000 When TCEC = $10,000,000: no reduction When TCEC = $10,000,000: no reduction When TCEC = $15,000,000: reduction = 100% When TCEC = $15,000,000: reduction = 100%

62© 2007, Clarence Byrd Inc. Elimination Of SBD For Large Corporations Taxable Capital Employed In Canada Taxable Capital Employed In Canada GAAP determined debt and equity capital of the corporation, less debt and equity investments in other corporations. When not all of the corporation’s Taxable Income is allocated to a province, the resulting amount is multiplied by the same percentage that is applied to the abatement in order to determine the portion of the total capital that is employed in Canada.

63© 2007, Clarence Byrd Inc. Personal Services Corporations The Problem The Problem Individual establishes a corporation to provide employee type services Individual establishes a corporation to provide employee type services The Solution The Solution Personal services corporations are not eligible for the SBD Personal services corporations are not eligible for the SBD Can only deduct salaries and other expenses that would be available to an employee Can only deduct salaries and other expenses that would be available to an employee

64© 2007, Clarence Byrd Inc. Management Companies Objective Organized to provide services to an unincorporated business (usually a professional practice) Eligible for small business deduction provided markup is reasonable (15%)

65© 2007, Clarence Byrd Inc. Professional Corporations Several provinces now permit professionals (e.g., accountants) to incorporate Several provinces now permit professionals (e.g., accountants) to incorporate This has reduced the need for management companies This has reduced the need for management companies In general, eligible for the SBD In general, eligible for the SBD

66© 2007, Clarence 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. Only beneficial at provincial level and for CCA classes Only beneficial at provincial level and for CCA classes

67© 2007, Clarence 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 Tax37,120

68© 2007, Clarence 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)

69© 2007, Clarence 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

70© 2007, Clarence Byrd Inc. M&P Formula All Items Defined In ITR5200

71© 2007, Clarence Byrd Inc. General Rate Reduction 2007: 7% of full rate taxable income 2007: 7% of full rate taxable income 7.5% for % for % for % for % for % for % for 2011 and subsequent 9.5% for 2011 and subsequent

72© 2007, Clarence 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)

73© 2007, Clarence 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

74© 2007, Clarence Byrd Inc. Foreign Tax Credits Basic Concepts Basic Concepts Gross pre-withholding amounts included in income Gross pre-withholding amounts included in income Tax credit for withholding Tax credit for withholding Withholding rate established by treaty Withholding rate established by treaty

75© 2007, Clarence 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:

76© 2007, Clarence 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 Deducted Dividends Deducted Tax Otherwise Payable Basic + Surtax, Less Abatement ITA (ART) ITA (GRR)

77© 2007, Clarence Byrd Inc. If actual withholding exceeds limit: No Carry Forward Excess Can Be Deducted Under ITA 20(12) Non-Business (Property) FTC

78© 2007, Clarence 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

79© 2007, Clarence 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 (ART) ITA (GRR)

80© 2007, Clarence Byrd Inc. Business FTC Additional Rules For Unused Amounts Carry Back 3 Years Carry Forward 10 Years Only Applies To Incorporated Foreign Income

81© 2007, Clarence 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)]

82© 2007, Clarence 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

83© 2007, Clarence 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

84© 2007, Clarence Byrd Inc. Eligible Property Eligible Assets Eligible Assets Qualified Property Qualified Property Qualified SR&ED Qualified SR&ED Salaries of an eligible apprentice Salaries of an eligible apprentice Costs of creating child care spaces Costs of creating child care spaces

85© 2007, Clarence Byrd Inc. 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 Child Care Spaces Lesser of $10,000 and 25 percent of the costs for each space

86© 2007, Clarence Byrd Inc. Refundability General Rules No Tax Payable Can’t Use Credits Government Writes Cheque To The Business

87© 2007, Clarence 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

88© 2007, Clarence Byrd Inc. Carry Overs Back Three Years Back Three Years Forward Twenty Years Forward Twenty Years 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

89© 2007, Clarence Byrd Inc.