Chapter 11 Flashcards
corporate (8 cards)
Given the choice, individual shareholders of a corporation prefer to receive their return on investment by way of dividends, rather than from the sale of shares at a profit.” Is this statement true? Explain.
Shareholders don’t always prefer dividends. QSBC shares benefit from the capital gains deduction. Capital gains (50% inclusion rate) are usually taxed lower than non-eligible dividends, except in the lowest bracket. Eligible dividends are taxed lower than capital gains in lower brackets but higher in the top bracket.
Corporations and individuals determine their taxable income in different ways. What are the differences?
Corporations calculate taxable income differently by deducting net capital losses, non-capital losses, dividends from Canadian corporations, foreign affiliate dividends, and charitable donations. Unlike individuals, corporations cannot claim the $1,250,000 capital gains deduction.
If the shares of a corporation that has non-capital losses are about to be sold and if those losses arise from business operations, why is it important for the vendor to consider the nature of the purchaser?
A change in control restricts loss carry-overs to the same or similar business that incurred the losses. If the buyer is in a similar business, they can combine operations to use the losses against future profits. Loss corporations are more valuable to buyers in the same line of business who can benefit from tax savings.
How does the tax treatment of intercorporate dividends affect the relationship between dividends and capital gains when one corporation invests in shares of another corporation? (Assume that both entities are taxable Canadian corporations.)
When a corporation receives dividends from another Canadian corporation, the dividends are tax-free, unlike capital gains from selling shares, which are taxable. This tax treatment creates a strong incentive for corporations to prefer dividend income over capital gains, unlike individual shareholders.
Briefly state the advantages and disadvantages of earning investment income in a Canadian-controlled
private corporation.
Interest income and/or rental income earned by one Canadian-controlled private corporation may be treated as specified investment business income. At the same time, income from the same source(s) earned by another Canadian-controlled private corporation may be treated as active business income. Why is this? And to what extent will the rate of tax applied to that income be different for the two corporations?
“The use of the small business deduction by a Canadian-controlled private corporation does not result in a tax saving; rather, it creates a tax deferral.” Explain.
Because income earned by a corporation is first subject to corporate tax and then taxed a second time when after-tax profits are distributed to individual shareholders, shareholders are entitled to claim a dividend tax credit. Does the dividend tax credit eliminate the double taxation of corporate profits? Explain.
The dividend tax credit reduces personal tax to recognize corporate taxes already paid, assuming rates of 27.5% or 13%. If corporate tax rates are higher, double taxation occurs. If lower, tax savings occur. The outcome depends on the province, with some double taxation happening when business income not eligible for the small business deduction is distributed.
