Tax - Midterm Flashcards
(26 cards)
AII
Rental Income
Interest Income
Net Taxable Capital Gains (Including Business Assets)
Capital Loss Carryforwards
NO Dividends
Need to determine tax
AAII
Net Taxable Capital Gains (Not for business assets)
Dividends from non-connected corporations
Rental Income
Interest Income
NO Loss Carryforwards
Used for determining SBD limit deduction
SBD Deduction
SBD is as lesser of :
- Taxable Capital between 10M and 50M
- AAII between 50k and 150k
CCPC with SBD
CCPC without SBD
13%
27%
Components of CFA Account
Non-taxable portion of Capital Gains
Capital Dividends from Other Corps
Life insurance proceeds minus ACB of policyholder
Minus Capital Dividends Paid
Advice to give for selling company
Clear out RDTOH, CDA
NO CAPITAL LOSSES ON DEPRECIABLE PROPERTY
Tax treatment of dividends received by a corp (connected vs non-connected)
Corps - Include in income
By canadian corp - div is deductible
Portfolio dividends - may be subject to pat IV tax
Individuals -
Gross Up and then tax credit
Stock Dividend Treatment
Treated as cash dividend
amount of dividend deemed to be equal to increase in PUC due to stock dividend, regardless of FMV - also considered to be cost of shares
Dividend in Kind Treatment
Corp deemed disposed of assets at FMV
Shareholders deemed to acquire assets at FMV
Dividend paid/received equal to FMV of assets
Loss to corp on transfer of assets to controlling SH is denied
When do deemed dividends occur
When PUC increases with no corresponding increase in net assets
DD is added to ACB of shares (so they are not taxed again)
When does DD not occur?
Increase in PUC is less than increase in FMV of net assets
Increase in PUC is bc of stock dividend
Increase in PUC bc of decrease in another PUC for a similar or larger amount
Increase in PUC due to conversation of Contributed Surplus
When FMV> increase in PUC - Contributed Surplus
When increase in PUC > increase in FMV - deemed dividend
What is PUC Reduction/Treatment
Happens for entire class of shares
Reduction in PUC without redemption of any shares
If amount of PUC reduction is greayer than PUC - Deemed dividend
If lesser, PUC is simply reduced
If PUC reduction > ACB of shares - Capital Gain - ACB values change accrodginly
DD does not occur if shares are redeemed from open market -
Winding Up Procedures
Determine ABI, AII, CDA on sale of assets
Subtract Liabilities including tax liabilities (consider AAII and reductions to SBD)
Add back RDTOH amounts
Determine amount of deemed dividends, elect for CDA and taxable dividends
Ensure taxable dividends are adequate for RDTOH refund
Determine Capital Gain or Capital Loss for shareholders
GIVE ADVICE!! - Pay out PUC, Pay out CDA, Pay out RDTOH, wait till in lower tax bracket
AR Election - Sale of assets
Reserve must be added to income regardless of whether section 22 is used
With the election, any capital gains or losses on AR are treated as business income for the seller and purchaser
Without the election, they would be considered capital amounts for both - purchaser cannot deduct a reserve without the election
If Section 22 is elected, purchaser MUST include the gain in income
They can then deduct the reserve for doubtful debts and bad debts
ONLY allowed if purchaser has purchased substantially all the assets and intends to continue the business
Treatment of inventory in sale of assets
Vendor - disposed inventory is considered sold and proceeds are in income
Purchaser - an inventory purchase is consdered inventory and recorded at cost
What type of sale do vendors prefer
Vendor: Share sale offers tax advantage of use of CGE and low tax rates for CG, however if they want to retain entity asset sales make more sense
What type of sale do purchasers like
Prefer Asset Sales
- Asset purchase offers tax advantage through higher future CCA deductions based on purchase price of assets When shares are acquired, UCC balances are not impacted - internally generated goodwill is not recognized and CCA for acquisition of goodwill will not be availalble - instead goodwill is reflected in purchase price of shares (ACB)
Capital Gains Deduction vs Capital Gain Exemption
Deduction is 1/2 of 971190
QSBC Share
SBC Test
Holding Period Test
Basic Asset Test
SBC Test
AT TIME OF DISPOSITION (A particular point in time)
Corp was?
- CCPC
- All or substantially all (90%) of FMV of assets were:
- Used principally in active business carried primarily in Canada (>50%)
- Shares or debt of a SBC that was connected
- Or combindation
Cash - active or inactive?
Possible to plan to ensure that substantially all of the assets are active business assets prior to share sale to meet the test - purification
Achieved through removal of non-active assets
- If non-active assets are sold, cash is still non-active, and must either be used or removed
- Possible purification strategies:
○ Use non-active assets and after tax proceeds of disposition to pay off liabilities
○ Replace non-active assets that are not used in business with active business assets
○ Pay out non-active as taxable dividends or bonuses
○ Pay out as tax-free capital dividends or PUC distributions
Cash is not always a non-active asset
- Operating account used in ops on regular basis = active business asset
- Cash/marketable securities that are not needed or regularly drawn upon - non-active business assets
- Loans to shareholder (unless by cirtue of employment) - are non-active business assets
- If cash in down time of business is invested - it may stil be an active asset
TIP:
- ALWAYS SEE if we are looking at a past or future transaction
○ For future transactions (sale share) if SBC test is not met, we could advise to purify company prior to sale to ensure CGE can be used
Cash is a redundant asset when it is in excess of working capital
- Do we have enough receivables and inventory to pay our AP
- If you have redundant cash -
○ Pay off liabilities before sale
○ Pay out dividend befor sale
PROF EXPECTS US TO GIVE ADVICE ON EXAMS - WILL NOT BE EXPLICITYL ASKED
When we see share sales on an exam:
- Is it a CCPC?
- Is it a QSBC - tests
- Is the CGE available?
Holding Period Test
For last 24 months, all assets must be held by person or related individual/corp
Basic Asset Test
for 24 months preceeding, more than 50% of assets must be active business assets (without shares of subsidiary) - if this condition is not met, we use the modified test where
Parent and subsidiary (connected, does not have to be SBC) must meet 50% ad 90% test, and can include shares in subsidiary as part of calc
