Week 1 - Key Areas To Review From ACTG4710 - ACTG4720-Post On Canvas-1

Key Areas to Review
from ACTG4710
-
Applicable to
ACTG4720
1
Copyright Canada 2019, Beppino Pasquali FCPA, FCA. All rights reserved. This material may not be reproduced in
whole or in part by any means or methods whiteout the written consent of the copyright holder.
Income Tax Act Organization
Section
Division A Liability For Tax 2
Division B Computation of Net Income 3 - 108
Subdivision
a Income from office and employment 5-8
b Income from business and property 9 - 37.3
c Taxable CG and Allowable CL 38 - 55
d Other sources of income 56 - 59.1
e Deduction in computing income 60 - 66.8
Division C Computation of Taxable

Income 110 -114
Division E Computation of Tax 117 - 127
Division E.1 Minimum Tax 127.5
2
Distinction Between Income
From A Business And Property
Income
Income From A Business
Subsection 248 (1) Defines “Business” as a
profession, calling, trade, manufacture or
undertaking of any kind whatever and an
Adventure or concern in the nature of trade
• Active income
Income From A Property

Subsection 248 (1) Defines “Property” to
include dividends, interest, rent and royalties, a
right of any kind, a choice in action and money
• Passive income
3
Distinction Between
Business Income and
Capital Gains
• Why is distinction important?

– Income receipts are fully taxed
– Capital receipts are only partially taxed as
capital gains
• To determine, courts look at taxpayer
intention
– Observable behavioural factors or “badges
of trade”
4
Distinction Between
Business Income and
Capital Gains
Jurisprudence
- Question of “fact”
Courts look at the conduct of the taxpayer during
the period before, during and after the period of
the transaction
1. Courts look at the primary intention of the
taxpayer in transaction
2. Secondary intention
Factors To Assess Intention
1. Relationship of the transaction to the
taxpayer’s business
2. Nature of the transaction
3. Nature of assets involved
4. Number and frequency of transaction
5
Capital Gains/Losses
CALCULATION OF CAPITAL GAIN
(LOSS)
Terminology
Accounting Income Tax
terminology terminology
Selling Price $xx Proceeds of Disposition (P of D) Sec. 54
Cost $xx Adjusted Cost Base (ACB) Sec. 54
Selling costs xx (xx) Expenses of disposition Ssec. 40(1)
Profit (Loss) $xx Gain (loss)
(xx) Exemption or reserve, if any Sec. 40
$xx Capital gain (CG) or Capital loss (CL) Sec. 39
$xx Taxable capital gain (TCG) or
Sec. 38
Allowable capital loss (ACL)
6
CALCULATION OF CAPITAL GAIN
(LOSS)
Terminology
• Dispositions
– Any transaction entitling a taxpayer to
proceeds of disposition
• Deemed dispositions:
– On change in use of property
– On death of a taxpayer
– By way of gift during the lifetime of a
taxpayer
– When taxpayer ceases to be a resident of
Canada
7
CAPITAL GAIN RESERVE
ITA 40 (1) (a) allows a taxpayer to defer a portion of the
capital gain if the proceeds are not received until after the
year.
The reserve is calculated as the percentage of the
proceeds not yet due multiplied by the CG.
Max reserve under ITA 40 (1) (a) (iii) is lesser of:
A. Reasonable amount in respect of proceeds
not yet due
B. 1/5 x (4 minus # of preceding tax years
ending after disposition)
Add into income CG reserve from previous year
40 (2) Limitation
- Not resident of Canada
- Transaction between Corporation and
controlling shareholders
* The time period is increased from 5 years to 10 years, if the

property sold to a child is a farm property or shares in a small
business corporation
8
NON ARM’S LENGTH TRANSFERS
Example:
Ms Ing sold a property to her daughter. The
following are the details of the properties:
Land Building
Cost $200,000 $150,000
UCC n/a $100,000
FMV $500,000 $300,000
What are the tax implications to Ms Ing and her
daughter, relating to the sale?
9
BUSINESS INVESTMENT LOSS (BIL)
ITA 39 (1) (c) defines a BIL as the capital loss

realized on a disposition to which ITA 50 (1) applies
or in an arm’s length disposition of a share of a
capital stock of or a debt owing by a small business
corporation (definition ITA 248 (1))
Allowable business investment loss (ABIL)
Defined as the taxable portion of a BIL which is

50% of BIL
10
Depreciable Capital Property
Disposition Of Assets
 Terminal Loss ITA 39 (1)(b)(i)
- at end of fiscal year, all
assets in a class have been
disposed of but a balance
remains in the pool
 Recapture ITA 39 (1)
- at end of a fiscal year, the
balance of a class pool is
negative
 Capital Gain
- the selling price of a
depreciable property
exceeds the original cost of
the specific property sold
(No Capital Loss available
on depreciable property –
ITA 39
11
(1)(b)
VOLUNTARY / INVOLUNTARY
DISPOSITION
A disposition of property (voluntary of involuntary)

may result in a capital gain or recapture of CCA,
even though the person intends to replace the
property
Subsection 13 (4)
Allows the taxpayer to elect to defer recognition of
recapture of CCA where qualified property has been
disposed of
Subsection 44 (I)
Allows the taxpayer to elect to defer recognition of
capital gain on same disposition
12
DISPOSITION
• To qualify for this election, the

property must be replaced:
a) Voluntary disposition – by later of the end

of the first taxation year after the year of
disposition and 12 months after the end of
the year of disposition; and
b) Involuntary disposition – by later of the
end of the second taxation year after the
year of disposition and 24 months after the
end of the year of disposition.
13
DISPOSITION
• Full amount of gain deferred (and deferred

capital gain amount will reduce the cost/UCC
of new asset) if:
Proceeds of ≤ Purchase of
old property replacement property
• Full amount of recapture deferred (and

deferred recapture amount will reduce UCC
of new asset) if:
Potential
≤ Purchase of
recapture
replacement property
14
The Taxation of Corporations
Advantages And Disadvantages
Of Incorporation Of A Business
Advantages:
1) Limited liability
2) Tax deferral where
corporation rate < personal tax rate
3) Different types of income –
Dividends vs. Salary
4) Income splitting
5) Estate planning
Disadvantages:
1) Tax cost if corporation tax rate > 20%
2) Cost of incorporation and filing returns
3) Loss carryforwards
15
Types Of Corporations
Public Corporation -Resident in Canada and shares

ITA 89 (1), 262, listed on prescribed stock
Reg 4800 exchange in Canada
Private Corporation -Resident in Canada and not a

ITA 89 (1) public corporation and not
controlled by one or more
public corporations
Canadian Controlled Private Corporation

(CCPC) (ITA 125(7), IT 458R2)
- Is a private corporation not controlled directly or
indirectly by non residents, public corporation or any
combination of the two
16
Calculation Of Taxable Income
Net Income For Tax Purposes XXX

Special Reductions:
Donations to charitable organizations x
Net capital losses x
Non capital losses x
Dividends from taxable
Canadian corporation x
Dividends from foreign affiliates x (xx)
Taxable Income xx
17
Calculation of Corporate Tax
General Rates for Corporations
Basic 38%
Less: Federal abatement for prov tax (10)
Net federal tax 28%

Less: Federal tax reduction (13)
Basic federal tax rate 15%
Provincial tax (assumed) 12
Effective total tax 27%
18
Income from an Active
Business of a CCPC
Small Business Deduction
ITA 125(1)
Purpose: Assist small CCPCs to retain capital to
expand their businesses
Tax Rates Applicable to Taxable Income

Eligible for Small Business Deduction
Federal Tax Rate 38%

Less: Federal Abatement (10%)
Net Federal Tax after Abatement 28%
Less: Small Business Deduction (19%)
Total Federal Tax 9%
Provincial Tax (hypothetical) 4%
Effective Total Tax 13%
For CCPCs only (throughout taxation year)
19
Associated Corporation Rules

ITA 256
• Relevance
– Small business deduction 125
20
Investment Income
Earned by a CCPC
Purpose - Encourage early distribution of earnings to
the shareholder
Refundable Tax - Developed to provide a

corporation with a refund of a portion of the initial
tax paid on investment income, when dividends are
ultimately paid
Theory - Tax on investment income is reduced

to an effective tax rate of 20%
Therefore, the dividend tax credit
allows the shareholder credit for that
20% of tax paid by corporation
Therefore, integration
21
Investment Income
Earned by a CCPC
Theoretical Tax Rates Applicable to Taxable
Income of a Canadian-Controlled Private
Corporation eligible a for Dividend Refund
Federal tax rate. . . . . . . . . . . . . . . . . . . . . . . . 38.00%

Abatement for provincial tax. . . . . . . . . . . . . (10.00)
Net federal tax before dividend refund . . . . . 28.00%
Add: Additional Refundable Tax (ART). . . . 10.67
38.67
Refund on payment of dividends from
investment income. . . . . . . . . . . . . . . . . . (30.67)
Net federal tax after dividend refund . . . . . . 8.00%
Provincial tax (theoretical) . . . . . . . . . . . . . 12.00
Effective total tax . . . . . . . . . . . . . . . . . . . . . 20.00%
22
Integration
Income From Investments
Calculation Of Refundable
Dividend Tax On Hand (RDTOH)
Purpose - RDTOH may be viewed as an account which
accumulates all of the tax paid by a private
corporation on its portfolio dividend income
plus a portion of tax paid by a CCPC on other
investment income
Principal Components of RDTOH
Refundable portion of Part I tax paid (20%) on investment
income plus 10 2/3% of Additional Refundable Tax on
investment income (effectively 30 2/3% of Aggregate
Investment Income (AII)
PLUS
Amount of part IV tax paid on taxable dividends
MINUS
Reduction in RDTOH when dividend paid and the corporation
received a dividend refund = $38.33 refund for each $100
taxable dividend paid
23
Investment Income
Earned by a CCPC
Calculation Of Refundable Dividend
Tax On Hand (RDTOH)
Purpose - RDTOH may be viewed as an account which
accumulates all of the tax paid by a private
corporation on its portfolio dividend income
plus a portion of tax paid by a CCPC on other
investment income
Principal Components of RDTOH
Refundable portion of Part I tax paid (20%) on investment
income plus 10 2/3% of Additional Refundable Tax on
investment income (effectively 30 2/3% of Aggregate
Investment Income (AII)
PLUS
Amount of part IV tax paid on taxable dividends
MINUS
Reduction in RDTOH when dividend paid and the corporation
received a dividend refund = $38.33 refund for each $100
taxable dividend paid
24
Part IV Tax On Portfolio And Other
Dividends
General concept
• To avoid double taxation corporations do not pay tax on
intercorporate dividends
• Under Part IV however a corporation must pay a tax of
38 1/3% of the dividend received
• The Part IV tax is added to the RDTOH balance + 100%
refundable when dividends are paid by corporation
• Part IV tax is not payable on dividends received from
companies which the private corporation is “connected”
(as defined in 186 (4))
• Except - Where the connected corporation (payor) has been
entitled to a dividend refund 186 (1) (b)
If applicable - Part IV tax payable on that portion of
dividend for which the connected corporation received a
dividend refund
25
Dividend Refund
A private corporation* will obtain a dividend
refund under 129 (1) (a) each year equal to the
least of:
(A) 38 1/3% of all taxable dividends paid in year
(B) The corporation’s RDTOH balance at the end
of the year
* Must be a private corporation at the end of the year
26
Connected Corporation -
186 (4)
(A) A controlled corporation, where control
represents ownership of more than 50% of
voting shares by any combination of
persons with whom not deal at arm’s length
or
(B) A corporation in which the corporation has
more than a 10% interest in the voting
shares and 10% of the FMV of all issued
shares of corporation
27
Integration
Investment Income for CCPC
Corporation
Conceptual Illustration
Interest/Rent etc. $100.00
Part 1 Tax (Theoretical Rate)1 50.67
49.33
Add: Refundable tax – 30.67 % x AII
(A portion of initial Part I tax is refunded when
taxable dividends are paid by corp) 30.67
Available for Distribution 80

Corporate Tax (50.67 – 30.67) 20
Shareholder (Individual)
Dividend Received 80
Gross-up (15%) 12
Taxable Amount 92
Tax (50% - assumed) 46
DTC (assumed equal to gross-up) 12
Net Tax 34
Total Tax Corporation (net of refund) 20
Shareholder (Individual) 34
Total 54
• Tax if same income is earned directly by individual: $100 x 50% = $50
• Generally, integration does not work for investment income – COST $4.00
28
Integration
Capital Gains - CCPC
Conceptual Illustration
Assume: Capital Gain - $200 – Taxable Capital gain (1/2) - $100
- Capital Dividend Account (1/2) – 100 * (CDA)
Corporation
TCG (1/2) $100
Tax (Net of Dividend Refund) 20
Available for Distribution 80
Shareholder (Individual)
Dividend Received 80
Gross-up (15%) 12
Taxable Amount 92
Tax (50% - assumed) 46
DTC (assumed equal to gross-up) 12
Net Tax 34
Total Tax Corporation (net) 20
Shareholder (Individual) 34
54
After tax ((80-34) + 100 CDA) $146
Compare to Individual: TCG 100
Tax (50%) 50
After tax (200-50) $150
*Tax free portion of capital gain goes to capital dividend account (CDA) and can be
distributed tax free to shareholders resident in Canada as a capital dividend (s83(2) election
required by corporation before dividend is paid)29

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Key Areas to Review

Division C Computation of Taxable

Income From A Property

• Why is distinction important?

* The time period is increased from 5 years to 10 years, if the

NON ARM’S LENGTH TRANSFERS

BUSINESS INVESTMENT LOSS (BIL)

ITA 39 (1) (c) defines a BIL as the capital loss

Allowable business investment loss (ABIL)

Defined as the taxable portion of a BIL which is

A disposition of property (voluntary of involuntary)

• To qualify for this election, the

a) Voluntary disposition – by later of the end

• Full amount of gain deferred (and deferred

• Full amount of recapture deferred (and

Public Corporation -Resident in Canada and shares

Private Corporation -Resident in Canada and not a

Canadian Controlled Private Corporation

Calculation Of Taxable Income

Net Income For Tax Purposes XXX

General Rates for Corporations

Net federal tax 28%

Tax Rates Applicable to Taxable Income

Federal Tax Rate 38%

For CCPCs only (throughout taxation year)

Associated Corporation Rules

Refundable Tax - Developed to provide a

Theory - Tax on investment income is reduced

Federal tax rate. . . . . . . . . . . . . . . . . . . . . . . . 38.00%

* Must be a private corporation at the end of the year

Available for Distribution 80

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