Ch 13 Flashcards
Details of integration
Purpose, conditions of effective integration
Purpose: total taxes paid on certain type of income to be the same, whether earned by corporation and paid out to individual or earned directly by individual
Conditions of effective integration:
1. Appropriate designation: eligible v. non-eligible dividends
2. Fed & prov gross up rates such that personal taxable income = pre-tax corporate income
3. Fed & prov dividend tax credit to make up for artificially added individual income as a result of gross up
Details of investment income
The 2 types
Aggregate investment income (AII): used when calculating additional refundable tax on investment income (ART)
* AII = Net TCG + interest + rents + royalties = [total positive amounts] - capital loss CF
Adjusted aggretate investment income (AAII): Used when calculating small business deduction (from Ch. 12)
* AAII = Net TCG (only on CG, not used in AB) + interest + rents + royalties + portfolio dividends
Details of additional refundable tax on investment income (ART)
%, purpose
10 2/3 % of lesser of (1) AII (2) Amount by which taxable income > amount on which SBD was determined
Note: if TI does not exceed that amount, simply use TI
Purpose: Eliminate the opportunity for taxpayers to use a corporation to defer taxation on investment income (taxpayer goal is always to reduce, save or defer their taxes) since this creates incentive to use corporations to earn investment income (which shouldn’t be done, should instead be passive)
Additional discussion: The gov’t is happy to give tax deferral opportunities for business income, since this incentivizes business and the economy. However, it is not okay with tax deferral when it comes to investment income since this must be declared as passive. Tax deferral is powerful because of the notion of time value of money. A dollar in the past was worth considerably more than a dollar today. One would rather pay taxes in following years rather than this year (same dollar value ‘worth less’) and meanwhile use their funds for more productive things.
How does one evaluate the strength of integration?
We must calculate the after-tax income left over after the income has been paid out as a dividend (for corporations) and after personal taxes have been paid (for individuals) to evaluate the strength/effectiveness of integration.
Scenario where corporation’s after-tax income retained < scenario where income earned by individual directly = bad integration.
- Solution: ART = refundable tax credit (refunded to corporation when dividend is paid out)
Formula: ART
Find 10 & ⅔ % of the lesser of:
1. Aggregate investment income (AII) as defined in ITA 129(4)
2. Amount, if any, by which taxable income for the year exceeds the amount upon which SBD is determined.
After deducting ART, we finally get Part I taxes payable
Details of Part IV taxes payable
Purpose
Purpose: Dividends from Canadian corporations are not included in Part I taxes payable (since they are not included in taxable income). Now, since ART is refundable, this creates an opportunity for taxpayers to operate multiple corporations to defer taxation. Part IV tax corrects this
Recall: we don’t want to encourage deferred taxes on investment income to avoid incentivizing earning investment income through corporations instead of passively
Formula: Part IV tax on dividends
Add up:
1. 38 & ⅓ % of portfolio dividends
2. Proportionate % of dividend refunds received by connected corporations (after paying out dividend)
Def: connected means a corporation that owns 10%+ of another
Def: portfolio means a non-connected corporation
Notes: Part IV tax is also refundable (once income paid out as a dividend). This achieves
1. Discouraging taxpayers from using multiple corporations to defer tax (as indicated in purpose)
2. Ensure integration is achieved by making it refundable (like ART solution)
How does one access refundable tax credits? (ART and Part IV tax)
Must pay out a dividend. Refund amount contingent upon:
* Type of dividend: Eligible v. Non-Eligible
* RDTOH account balances (i.e. refundable dividend tax on hand)
Dividend designation: details for Eligible dividend
Who pays these out, conditions
Non-CCPCs pay out eligible dividends
* Income was taxed at higher rate at corporate level, so must be taxed lower at individual level resulting in higher personal after-tax income
* But eligible dividends must only be paid out after non-eligible ones if LRIP (low rate income pool) has a balance
Non-CCPC that pays out eligible dividends when there is a LRIP balance → subject to Part III tax: (1) 20% if accident (2) 30% if an attempt to manipulate
Dividend designation: details for Non-Eligible dividends
Who pays these out, conditions
CCPCs pay out non-eligible dividends
* Income was taxed at lower rate at corporate level, so must be taxed higher at individual level
* But CCPC may pay out eligible dividend if GRIP (general rate income pool) balance allows them to
CCPC pays out eligible dividend > GRIP balance → excess subject to Part III tax: (1) 20% if accidental (2) 30% if an attempt to manipulate
Formula: CCPC’s GRIP balance
GRIP balance from PY + 72% of (taxable income - SBD income - AII) + 100% of eligible dividends received TY + Adjustments for amalgamations and wind-ups - Eligible dividends paid in PY = Current GRIP balance
Nature of RDTOH accounts
Cumulative: must be tracked overtime to determine eventual refund entitlement amount
Refundable taxes
3 types
- Refundable portion part I tax
- Eligible dividend refund
- Non-eligible dividend refund
Formula: refundable portion Part I tax
Will need it for non-eligible dividend refund
Least of:
1. 30 % ⅔ % of AII TY
2. 30 & ⅔ % of amount by which taxable income > amount SBD determined upon
3. Tax for TY payable under part I
Formula: eligible dividend refund (and eligible RDTOH account)
Once eligible dividend paid out, lesser of:
1. 38 & ⅓ % of total eligible dividends paid TY
2. Ending balance of eligible RDTOH
E-RDTOH:
Beg. bal. from PY + Part IV taxes paid on eligible portfolio dividends + Part IV taxes paid on eligible dividends from connected corporations (if dividends included refund from paying corporation’s eligible RDTOH) - Dividend refund claimed from eligible RDTOH in PY
