Division C Abzug Aktienoptionen

Kapitel 11 Berechnung von steuerpflichtigen Einkünften und Steuern nach allgemeinen Kürzungen für Unternehmen Lernziele para11000 Berechnung des steuerpflichtigen Einkommens für eine Körperschaft para11.025 Zweck Der Zweck des Abzugs besteht darin, die Doppelbesteuerung von Unternehmenseinkünften zu verhindern. Wenn Dividenden gezahlt werden, ist die Quelle der Dividenden in der Regel nach Steuern behaltene Gewinne der Zahler-Gesellschaft. Wenn eine Empfängergesellschaft auf die erhaltenen Dividenden Steuern zahlen würde, würden die Einkünfte, aus denen die Dividenden entstanden, zweimal effektiv besteuert. Eine Bestimmung verhindert, dass die zweite Steuer auf der Ebene der Empfängergesellschaft. In der Tat können die Gewinnrücklagen in vielen Fällen durch eine beliebige Anzahl von Gesellschaftergesell - schaften in Form von steuerpflichtigen Dividenden geflossen sein, ohne im Rahmen von Teil160I eine Steuer zu erheben. Wenn die Gewinnrücklagen letztlich als Dividenden an einen einzelnen Anteilseigner gezahlt werden, wird der Dividenden-Bruttobetrag und der Steuerkreditmechanismus dazu dienen, die potenzielle Doppelbesteuerung der von einem Unternehmen erzielten Einkünfte auf individueller Ebene der Steuerzahler zu reduzieren. Para11.025.10 Konzept der Integration der individuellen und körperschaftsteuerlichen Erträge Der Dividendenabzug für Gesellschafter ist der zweite Baustein der Integrationstheorie. Der erste Baustein, die Dividendenausschüttung und die Steuergutschrift für einzelne Gesellschafter, wurde bereits in den Kapiteln 1606 und 10 erörtert. Die Funktion des Dividendenabzugs für eine Körperschaft besteht darin, einen Teil der potenziellen Mehrfachbesteuerung der Dividendenerträge im Einkommensbereich zu beseitigen Durch eine Reihe oder Kette von Kapitalgesellschaften. Das in Kapitel 12 genauer erläuterte Integrationskonzept verlangt, dass ein Steuersystem so gestaltet werden sollte, dass ein Steuerpflichtiger gleichgültig ist (dh dasselbe Steuerentgelt bezahlt wird), unabhängig davon, welche Art von Einheit oder Person das Einkommen erzielt . Im Rahmen von Kapitalgesellschaften und deren Anteilseignern unter einem voll integrierten Steuersystem sollte die Gesamtsteuerbelastung identisch sein, ob die Einkünfte direkt oder indirekt als Anteilseigner aus Dividenden über die Unternehmensstruktur erhalten werden. Das kanadische Einkommensteuer-System ist nicht perfekt integriert. In der Nähe perfekt Integration tritt numerisch, wo die kombinierte Körperschaftssteuer (Bund und Provinz) gleich ist: Stier 20 für kanadisch kontrollierte private Unternehmen auf ihre geschäftlichen Einkommen für eine niedrige Steuerrate und Stier etwa 31 für kanadisch-ansässige Unternehmen Auf ihr Geschäftseinkommen unterliegen dem höheren allgemeinen Steuersatz. Allerdings gibt es auch bei diesen Sätzen Mängel im System. Zum Beispiel sollte die Dividendensteuergutschrift die zugrunde liegende Steuer darstellen, die von der Gesellschaft gezahlt wird. Nach unserem derzeitigen Einkommensteuersystem haben die Gesellschafter aber auch dann noch eine Dividende, wenn die Körperschaft keine Steuern auf Verluste ausbezahlt hat. Para11,025.20 Anwendung des Konzepts der Integration Um die Corporate Dividendenabzug Aspekt der Integration zu illustrieren, davon ausgehen, dass es eine Kette von drei steuerpflichtigen kanadischen Unternehmen: A160Ltd. Eine kanadisch-ansässige öffentliche Körperschaft, besitzt 100 von B160Ltd. Die wiederum besitzt 100 von C160Ltd. Auch davon ausgehen, dass jede der Gesellschaften mit einem kombinierten Satz von 35 besteuert wird, und die einzelnen Aktionäre der A160Ltd. Mit einem kombinierten Satz von 40 besteuert werden, werden alle Erträge nach Steuern auf die nächste Stufe in Form von anrechenbaren Dividenden gezahlt, d. H. Für die 45 Bruttobeträge und Steuergutschriften in den Händen eines einzelnen Anteilseigners. In Ermangelung eines Unternehmensabzugs für Dividenden, die von einem anderen Unternehmen erhalten wurden, würde sich ergeben. Das Ergebnis dieses Beispiels ist, dass bei den 1.000 Einkommen, die anfänglich von der C Ltd. erworben wurden, die endgültige Steuerbelastung 762 beträgt. Der Dividendenabzug, wie oben diskutiert, beseitigt die Körperschaftsteuer in beiden B160Ltd. Und C160Ltd. Die verbleibende Steuerbelastung würde sich aus den 350 auf die ursprünglich von der C AG erworbenen Erträge und der Steuer von 85 auf die 943 dividendenberechtigte Dividende der einzelnen Aktionäre wie folgt zusammensetzen: Die Gesamteinkommenssteuer beträgt jetzt 435 gegenüber 762.Doch, wie gesehen werden kann, gibt es noch einen gewissen Grad der Doppelbesteuerung auch mit der Dividendensteuergutschrift, wenn der Körperschaftssteuersatz auf dieser Ebene liegt (dh 435 versus 400 unter perfekter Integration). Para11.025.30 Schlussfolgerung Aus dem obigen Beispiel kann man schließen, dass dort, wo Dividendeneinkommen durch eine Reihe von Kapitalgesellschaften fließt, es nur zwei Zwischenfälle der Einkommensteuer gibt. Anfänglich wird die Körperschaft, die das Erwerbs - oder Vermögenseinkommen erwirbt, Einkommensteuer zahlen und schließlich wird der einzelne Anteilseigner, der das Einkommen in Form einer Dividende erhält, auch eine Einkommensteuer bezahlen. Im nächsten Kapitel wird das Thema Integration nochmals mit unterschiedlichen Unternehmensraten und anderen Faktoren erweitert. Para11.030 Dividenden aus unversteuertem Einkommen Im Laufe der Jahre hat der intercorporate Dividendenabzug Probleme verursacht, die die Regierung zu korrigieren versucht hat. Zum Beispiel kann eine Körperschaft eine Dividende aus Einkünften zahlen, die nicht in der Zahlergesellschaft besteuert wurden. Dies könnte eintreten, wenn die Erträge aus steuerlichen Gründen höher sind als die Erträge aus steuerlichen Gründen, die auf eine raschere Abschreibung von Vermögenswerten für steuerliche Zwecke zurückzuführen sind. Die Ausnutzung von Verlustvorträgen kann auch das Ergebnis verrechnen, so dass manche Beträge, die als Dividenden ausgeschüttet werden, nicht vollständig in der Körperschaft besteuert werden können, die die Dividende ausschüttet. Dies ist in der Regel auf zeitliche Unterschiede zwischen der Zahlung der Dividende und dem Verlustausgleich zurückzuführen. In diesen Fällen gibt es eine Aufschlüsselung der Annahme, die dem intercorporate Dividendenabzug zugrunde liegt, nämlich dass der Dividendenabzug die Doppelbesteuerung verhindert, weil die Einkünfte, aus denen die Dividenden entstanden, in der Zahlergesellschaft besteuert wurden. Dieses Problem wird verschärft, wenn einzelne Aktionäre die Dividenden aufbrauchen und eine Dividendensteuergutschrift abziehen, unter der Annahme, dass die Körperschaftsteuerpflichtige Körperschaft oder eine Vorgängerkörperschaft auf die Einkünfte verzichtet, die sie als Dividenden ausschütten. Der Zweck und die Wirkung des Dividendenbrutto - und des Steuerkreditmechanismus werden im nächsten Kapitel genauer erläutert. Para11.035 34Nachsteuerliche Finanzierung34 Ein weiteres Problem, das mit dem intercorporate Dividendenabzug verbunden ist, tritt auf, wenn eine so genannte 34Entersteuerfinanzierung34 unternommen wird. Ein Unternehmen, das in der Vergangenheit Verluste erzeugt hat, kann keine Fremdfinanzierung attraktiv finden. Dies ist darauf zurückzuführen, dass der Abzug für Zinsaufwendungen keine unmittelbare Steuerentlastung vorsieht, wenn die Gesellschaft derzeit keine Steuern zahlen muss. Stattdessen erhöht der Zinsaufwandabzug lediglich die nicht kapitalgedeckten Kapitalgesellschaften, die künftig abzugsfähig sind oder auslaufen können. Alternativ könnte ein Unternehmen mit nicht genutzten Verlusten Vorzugsaktien an eine andere Kapitalgesellschaft, wie ein Finanzinstitut, ausgeben, um die notwendige Finanzierung zu erhalten. Das Ergebnis ist, dass die Gesellschaft, die die Vorzugsaktien ausgibt, offensichtlich keinen Dividendenvorauszug für die Vorzugsaktien erhält. Allerdings wird die Finanzierungsgesellschaft wegen der intercorporate Dividendenabzug, gewöhnlich nicht Steuer auf die Dividenden zahlen, die sie erhält. Da die Zinserträge steuerpflichtig sind und die Dividenden normalerweise nicht anfallen, kann das Finanzierungsinstitut bereit sein, Mittel zu einem niedrigeren als dem Marktzinssatz zu leihen. Die Regeln sollen die Vorteile der Nachsteuerfinanzierung auf 34term Vorzugsaktien34, 34 kurzfristigen Vorzugsaktien34 und besicherten Vorzugsaktien eliminieren. Para11.040 Dividendenausschüttungen auf Aktien, die nachträglich für Verluste verkauft werden Die intercorporate Dividendenabschreibung ist auch mit einem potenziellen Problem verbunden, wenn Dividenden kurzfristig von Aktien eines Unternehmens gehalten und anschließend mit Verlust verkauft werden. Diese Dividenden würden normalerweise bei der Berechnung des steuerpflichtigen Einkommens oder bei bestimmten Dividenden (z. B. Dividenden) steuerfrei sein. Andererseits wäre der Verlust aus der Veräußerung der Aktien als zulässiger Kapitalverlust (wenn die Aktien als Kapitalimmobilie gehalten werden) oder als Geschäftsverlust (wenn die Aktien als Inventar gehalten wurden) abziehbar. Es kann argumentiert werden, dass der Veräußerungsverlust bis zu einem gewissen Grad durch die Auszahlung der Dividende entstanden sein könnte, z. B. der normale Rückgang des Wertes der Aktien nach dem Ex-Dividendendatum. Infolgedessen gibt es Regeln, die, wenn bestimmte Bedingungen vorhanden sind, den Kapitalverlust der Kapitalgesellschaften oder den Inventurverlust um einen Betrag verringern werden, der dem Aggregat von bestimmten Arten von Dividenden entspricht, die auf solchen Aktien vor der Verfügung empfangen werden. Die Verlustminderung tritt ein, wenn eine der folgenden Voraussetzungen vorliegt: (a) wenn die Gesellschaft die Aktien für weniger als 365 kontinuierliche Tage unmittelbar vor dem Veranlagungsdatum besaß, oder (b) der Gesellschaft mehr als 5 der ausgegebenen Aktien von Jede Klasse des Grundkapitals, an dem die Dividenden eingegangen sind. Die Art der Dividenden, die solche Kapitalverluste reduzieren, sind im Wesentlichen steuerpflichtige Dividenden (abzugsfähig bei der Berechnung der steuerpflichtigen Körperschaften) und steuerbefreite Kapitaldividenden, die während der Eigentumsdauer an den Aktien gezahlt werden. In ähnlicher Weise werden die Inventurverluste durch abziehbare steuerpflichtige Dividenden, die von jedem Steuerpflichtigen-Aktionär plus nicht besteuerte Dividenden erhalten empfangen. Para11.050 Wohltätige Spenden Während Einzelpersonen mit einer nicht erstattbaren Steuergutschrift für verschiedene Spenden zur Verfügung gestellt werden, wie in Kapitel 16010 diskutiert. Körperschaften ist ein Abzug in Division160C erlaubt. Die Arten der Abgabe, die eine Gesellschaft mit diesem Abzug zur Verfügung stellen, sind die selben wie die Arten der Abgabe, die eine Einzelperson mit einer Steuergutschrift zur Verfügung stellen. Auch ist ein Unternehmen Abzug für Geschenke, ist in der Regel auf 75 der Körperschaften Nettoeinkommen für steuerliche Zwecke unter Division160B begrenzt. Der Abzug ist jedoch auf 100 des Betrags eines steuerpflichtigen Kapitalgewinns in Bezug auf Geschenke geschätzter Vermögensgegenstände beschränkt. Ebenso ist die Abzugsgrenze 100 jeder CCA-Rückeroberung, die sich aus der Gabe abschreibender Vermögensgegenstände ergibt. Unbenutzte Spenden für ein bestimmtes Jahr können auf fünf Jahre übertragen werden, die in einem Vortragsjahr abgezogen werden. Der Gesamtantrag für Spenden auf ein Jahr und die laufenden Spenden in diesem Jahr dürfen die Einkommensgrenze der Division B nicht überschreiten. Die maximale Spende muss nicht in einem bestimmten Jahr abgezogen werden, so dass innerhalb der Übertragungszeit nicht abgezogene Beträge zur Verfügung stehen. Abgezogen werden muss eine Spende, wenn nötig, durch eine Quittung, die vorgeschriebene Informationen enthält. Para11,060 Verlustvorträge Die Regeln für die Abzugsfähigkeit von Nettokapitalverlusten und Nicht-Kapitalverlusten sind für Kapitalgesellschaften und Einzelpersonen gleich. Eine Kapitalverlustvorsorge aus dem laufenden Jahr kann auf ein Vorjahr zurückgeführt werden, in dem Erträge Kapitalgewinne und Nichtkapitalverluste enthalten. Der Kapitalverlust würde dann mit dem Veräußerungsgewinn verrechnet werden, wodurch der Betrag der für die Minimierung der für das Vorjahr zu zahlenden Steuern erforderlichen Kapitalverluste reduziert wird. Dadurch erhöhen sich die nicht verfügbaren Kapitalverluste in das laufende Jahr. Der Vortrag von Nicht-Kapitalverlusten, eingeschränkten Betriebsverlusten und Betriebsverlusten, die in den Jahren 2006 und den darauffolgenden Steuerjahren entstanden sind, beträgt 20 Jahre. Die folgende Tabelle zeigt die Verschleppungsperiode für Netto - und Nicht-Kapitalverluste. Para11,065 Nicht-Kapitalverlust Ein nicht kapitalbedingter Verlust für ein bestimmtes Jahr, da er eine Körperschaft (im Sinne dieses Textes) betrifft, wird in der Regel so definiert, dass er die folgenden Verluste aus verschiedenen Quellen ausgleichen kann (Posten (E) und (D)) gegenüber den jetzigen Einkünften aus anderen Quellen (Posten (F)). Dann kann der Restbetrag oder der nicht absorbierte Überschuss in ein anderes Jahr übertragen und abgezogen werden. Nicht-Kapitalverluste und landwirtschaftliche und Fischverluste können drei Besteuerungsjahre und 20 Steuerjahre nachgereicht werden. Um Verluste in ein Steuerjahr zurückzuführen, für das eine Rückgabe beantragt wurde, braucht die Gesellschaft nur ein Formular (Schedule1604) und keine vollständige, geänderte Steuererklärung einzureichen. IC 84-1, Par.16011 Obwohl eine 20-jährige Übertragungsperiode recht lang ist, ist es möglich, dass die übertragenen Verluste auslaufen. Erkennen Sie, dass 20 Jahre ist eine sehr lange Zeit für ein Unternehmen, um Verluste zu erhalten, ohne Einkommen verdient, um diese Verluste auszugleichen. Die meisten Unternehmen würden nicht so lange dauern, mit diesen Verlusten. Es sollte jedoch geplant werden, um sicherzustellen, dass die Verluste innerhalb der Übertragungsperiode genutzt werden. Das Einkommen kann erhöht werden, um Nicht-Kapitalverluste zu absorbieren, indem optionale oder zulässige Abzüge wie Kapitalkostenentschädigungen, kumulative anrechenbare Kapitalbeträge, wissenschaftliche Forschungs - und Entwicklungsausgaben oder - reserven weggelassen werden. Der Abzug dieser Beträge kann auf zukünftige Jahre aufgeschoben werden, in denen ein Ergebnisausgleich besteht. Die Canada Revenue Agency (CRA) erlaubt in der Regel die Revision eines zulässigen Abzugs für ein Vorjahr. Ein Informationsrundschreiben weist darauf hin, dass ein Schreiben an den Direktor des Steuerbesitzers, das die beantragten Änderungen umreißt, ausreicht, wenn andere Voraussetzungen der Absätze 1609 und 16010 erfüllt sind. Darüber hinaus sollte das Unternehmen den Verkauf von unnötigen oder redundanten Vermögenswerte, um Einnahmen zu generieren, die verwendet werden könnten, um Verluste zu absorbieren. Die CRA kann auch die Ersetzung einer Art von Verlust für eine andere erlauben, solange das Jahr, in dem die Substitution durchgeführt wird, noch offen für die Bewertung ist (wie in Kapitel 16014 besprochen). Beispielsweise könnte ein Kapitalverlust auf ein Jahr zurückgeführt worden sein, in dem ein steuerpflichtiger Kapitalgewinn bestehe. Anschließend kann ein zulässiger Kapitalverlust entstehen. Der daraus resultierende Nettokapitalverlust kann zurückbezahlt werden und ersetzt den nicht-kapitalbedingten Verlust, so dass der befreite nichtkapitalige Verlust für den Vortrag zur Verfügung steht. Die Geschäftstätigkeit der Bigloss Ltd. hat für das Steuerjahr am 31. Dezember 2008 folgende Daten erstellt: In ihrem Steuerjahr 2007 war das erste profitable Geschäftsjahr der Bigloss Ltd. mit einem steuerpflichtigen Einkommen unter der Division160C von 40.000 Euro verbunden. Berechnen Sie den Nicht-Kapitalverlust für die Bigloss Ltd. im Jahr 2008 und bestimmen Sie den Betrag dieses Verlustes, der bis zum Jahr 2007 zurückgezahlt werden kann. Vor der Berechnung des nicht-Kapitalverlustes für 2008 wäre eine Überprüfung des Aufbaus des Sektors 1603 für das Verständnis nützlich Das Grundkonzept. Die folgende Berechnung reorganisiert die obigen Informationen unter Verwendung der Ordnungs - und Anwendungsregeln in Abschnitt 3. Man beachte, dass der Nenner C in dem Bruchteil BC tatsächlich den Nettokapitalverlust A durch die Einschlussrate des Verlustjahres teilt. So, wenn die 1997 Netto-Kapitalverlust von 45.000, die eine 3 4 Menge ist, wird durch 3 4 geteilt. Das Ergebnis ist 60.000, das war der volle Kapitalverlust im Jahr 1997. Dann wird B, die die Einbeziehung Rate für das Jahr, in dem der Verlust abgezogen wird multipliziert mit dem vollen Verlust, das Ergebnis ist 2 3 von 60.000, oder 40.000, das ist der Nettokapitalverlust für das Jahr 2000. Um mit der Übertragung dieser Verluste konzeptionell fertig zu werden, kann es leichter sein, volle Beträge von Kapitalverlusten, die entweder rückwärts oder vorwärts gegen volle Gewinne im Übertragungsjahr realisiert werden, zu tragen. Dann könnte die angemessene Einbeziehungsquote auf die vollen Nettogewinne im Übertragungsjahr angewendet werden. Unglücklicherweise wird, wie nachstehend erörtert, die Definition des Nettovermögensverlustes (d. h. der zur Verfügung stehende Betrag) in Form der fraktionierten zulässigen Kapitalverluste angegeben. Der Betrag des Nettovermögensverlusts, der in den Jahren 2000 und 2001 abgezogen wurde, und damit der für den Vortrag nach 2001 zur Verfügung stehende Nettovermögensverlust kann wie folgt abgestimmt werden: para11,080 Einschränkungen und Bestellung von Abzügen Ein Steuerpflichtiger kann wählen, wie viel , Falls überhaupt, von ihren bisher nicht beanspruchten Überweisungsverlusten, die in einem bestimmten Jahr abgezogen werden sollen und in der diese Verluste und andere Abzüge der Division160C abzugsfähig sind. Der Steuerpflichtige muss jedoch in der chronologischen Reihenfolge, in der der Verlust entstanden ist, einen Verlust eines bestimmten Typs (dh Kapitalverlust, Nettokapitalverlust, beschränkten Betriebsverlust oder Betriebsverlust) abziehen. Die Logik würde vorschlagen, dass diese Abzüge in der Abteilung 160C, die in ihrer Abzugsfähigkeit stärker eingeschränkt sind, so bald wie möglich und vor den weniger beschränkten Abzügen beansprucht werden. Es gibt zwei grundlegende Arten der Beschränkung von Verlusten, die für Übertragungen verfügbar sind. (1) Die erste ist eine Beschränkung der Art der Erträge, gegen die der Verlustvortrag abgezogen werden kann. Diese Art von Beschränkung wird oft als 34streaming34 bezeichnet. (2) Die andere ist eine Beschränkung der Anzahl der Jahre, in denen ein Verlust übertragen werden kann. Beispielsweise kann ein Nettovermögensverlust nur gegen Nettoveräußerungsgewinne angewendet werden, ist aber hinsichtlich der Übertragungsdauer uneingeschränkt. Ein Nicht-Kapitalverlust kann gegen jede Einkommensquelle angewendet werden, ist aber zeitlich begrenzt. Ein eingeschränkter Betriebsverlust beschränkt sich sowohl auf die Art des Einkommens, gegen die es angewandt werden kann, als auch auf die Zeit. Daher sollten in der Regel eingeschränkte Betriebsverluste zuerst abgezogen werden. Zwischen Nettokapitalverlusten und Nicht-Kapitalverlusten hängt die Entscheidung davon ab, ob steuerliche Veräußerungsgewinne zu erwarten sind. Bestehen gegenwärtig besteuerbare Veräußerungsgewinne und eine Prüfung der Unternehmensbilanz weist keine aufgelaufenen oder zukünftigen Veräußerungsgewinne auf, so dürften die Nettovermögensverluste wahrscheinlich vor Nicht-Kapitalverlusten abgezogen werden. EXHIBIT16011-2 Zusammenfassung für die Beförderungsregeln für die Abteilung C Abzüge para11,085 Wahl, um die Nettokapitalverluste zum Erhalt von Nichtvermögensverlusten abzuziehen Artikel E in der Definition des Nicht-Kapitalverlustes ermöglicht es den Steuerpflichtigen, nach ihrer Wahl Nettovermögensverluste abzuziehen Nicht-Kapitalverluste. Ziel dieser Wahl ist es, eine seit langem bestehende Anomalie in der Gesetzgebung zu korrigieren, die die Steuerpflichtigen in bestimmten Situationen versehentlich benachteiligt hat, wie im folgenden Beispiel gezeigt wird. Ob ein Steuerpflichtiger beschließt, diese Option zu nutzen, hängt davon ab, ob das Unternehmen voraussichtlich in der nahen Zukunft angemessene Unternehmenserträge oder steuerbare Kapitalgewinne generieren wird. Der nicht kapitalmäßige Verlust kann um den Betrag des Nettoverlusts erhöht werden, der für dieses Jahr tatsächlich abgezogen wurde. Die einzige Einschränkung für den Abzug eines Nettovermögensverlusts besteht darin, dass ein Nettovermögensgewinn in dem Jahr gewährt wird, der mindestens dem Nettokapitalverlust entspricht, der abgezogen wird. Nehmen wir zum Beispiel an, dass ein Unternehmen (oder eine Einzelperson) im Jahr 2008 einen Geschäftsverlust von 100.000, einen Netto-steuerbaren Kapitalgewinn von 40.000 und einen bereinigten Netto-Kapitalverlust von 60.000 Übertragungen hat. Die steuerlichen Konsequenzen sind wie folgt: Wenn die Definition von Nicht-Kapitalverlust nicht die Addition für Netto-Kapitalverluste in Abzug gebracht hat, könnte ein Unternehmen 40.000 des Netto-Kapitalverlustes von 60.000 (gleich dem Netto-steuerpflichtigen Kapitalgewinn) abziehen, aber nicht Weil ein solcher Abzug keine Auswirkung auf das zu versteuernde Einkommen hätte, das noch null betragen würde. Darüber hinaus, wenn die 40.000 abgezogen wurde, würde der Steuerpflichtige nicht mehr eine potenzielle Nutzung der 40.000 Netto-Kapitalverlust in der Zukunft, wenn der Steuerpflichtige in einer steuerpflichtigen Position ist. Der Kapitalverlust für das Steuerjahr 2008 ohne den Zusatz wäre: Das Ergebnis ist, dass der Nettovermögensgewinn verwendet wurde, um den Geschäftsverlust auszugleichen, der zu einem niedrigeren Kapitalverlust führt (d. H. 60.000 bis 100.000). Der Steuerpflichtige kann oder nicht mit diesem Ergebnis abhängig von der Steuerzahler erwarteten zukünftigen Einkommensquellen glücklich sein. Da Nettokapitalverluste nur auf Nettovermögensgewinne (i. e. 40.000) angewendet werden können, wurde ein möglicher Nettokapitalverlustabzug durch den aktuellen Geschäftsverlust von 100.000 gesperrt. Der Zusatz von abgezogenen Nettokapitalverlusten zum Nicht-Kapitalverlust-Saldo führt zu einer positiven steuerlichen Konsequenz für die Geltendmachung eines Nettokapitalverlustabzugs, obwohl der Abzug keinen Einfluss auf das steuerpflichtige Einkommen hat, wie nachfolgend dargestellt. Durch den Abzug von Nettovermögensverlusten wird jedoch der nicht kapitalmäßige Verlust um einen abgezogenen Nettoverlust erhöht: Daraus resultiert, dass 40.000 der Nettokapitalverlustvorkehrungen unter der Division C abgezogen wurden, um die 40.000 netto Nettovergütung auszugleichen Steuerpflichtiger Kapitalgewinn nach Absatz 1603 (b). Dies bewahrt den vollen 100.000 Geschäftsverlust, der als Nicht-Kapitalverlust übertragen werden soll, der von jedem Einkommen in einem Übertragungsjahr abgezogen werden kann. Die folgenden Daten fassen die Geschäftstätigkeiten von Parliamentary Fertilizers Limited, einer kanadischen Gesellschaft mit beschränkter Haftung, für die Jahre 2005 bis 2008 zusammen. Die Gesellschaft hat eine Netto-Kapitalverlustbilanz von 18.750, die im Jahr 1997 entstanden ist. Berechnen Sie das steuerpflichtige Einkommen des Unternehmens für jedes der angegebenen Jahre unter der Annahme, dass zukünftige andere Geschäftserträge und steuerliche Veräußerungsgewinne ungewiss sind, und tabellieren Sie die verfügbaren Verluste (Für die Zwecke dieser Art von Problem, den Umgang mit jedem Punkt, Zeile für Zeile, im Laufe der Jahre wird dazu beitragen, den Überblick über Übertragungen leichter als den Umgang mit Einkommen ein Jahr zu einer Zeit. ) MdashHINWEISE ZUR LÖSUNG (1) 160Gegenstände, die von den verschiedenen Nicht-Kapitalquellen gemäß § 1603 a) aggregiert werden, können nicht negativ sein. Verluste aus diesen Quellen werden nach Absatz 1603 Buchstabe d abgezogen. (2) 160Erlassbare Kapitalverluste sind nur im Umfang der steuerlichen Veräußerungsgewinne nach Absatz 1603 (b) abzugsfähig. Der Rest ist für die Übertragung zu einem anderen Jahr zur Verfügung. (3) 160 Verluste aus den verschiedenen Nicht-Kapitalquellen und aus zulässigen Verlusten für Unternehmensanla - gen sind nur nach Absatz 1603 (d) abzugsfähig. Die Nettoeinkommensbeträge nach den Abzügen in Absatz 1603 (d) können jedoch nicht negativ sein. Es sei darauf hingewiesen, dass der Überschuss der Abzüge in Absatz 1603 (d) über die Gesamteinnahmen in Absatz 1603 (c) nur ein Bestandteil der Addition der nachstehend berechneten Nicht-Kapitalverlustvorträge ist. (4) Das Ergebnis für das Jahr kann nicht negativ sein. Es gibt keine gesetzliche Reihenfolge, in der Division160C Abzüge getroffen werden müssen. Jedoch sollten die Zeit - und Quellenbeschränkungen von Verlustvorträgen, wie zuvor diskutiert, berücksichtigt werden. Wenn die Erträge aus der Division160B nicht groß genug sind, um alle potenziellen Abzüge der Division C zu decken, sollte der Dividendenabzug nach Ziffer 160112 immer zuerst getroffen werden. Dividenden von steuerpflichtigen kanadischen Kapitalgesellschaften sind die einzige Division C Deduktion für Unternehmen, die nicht über eine Verschleppungsklausel. (5) 160Dividenden aus steuerpflichtigen kanadischen Kapitalgesellschaften sollten zuerst abgezogen werden, wenn nicht genügend Einkommen für weitere Abzüge der Division C vorhanden ist. Nicht abgezogene Dividenden können nicht übernommen werden. (6) Ein Abzug bei der Berechnung des steuerpflichtigen Einkommens sollte nicht vorgenommen werden, wenn er den Saldo auf eine negative Zahl reduziert, da normalerweise kein steuerpflichtiges Einkommen keine Bedeutung hat. Die einzige Ausnahme von dieser Regel ist die Nettokapitalverluste, die dem Nicht-Kapitalverlust-Saldo hinzugefügt werden können, wenn sie in einem bestimmten Jahr abgezogen werden. (7) 160Der Abzug von Wohltätigkeitsspenden ist auf 75 des Einkommens der Abteilung B für das Jahr beschränkt. Spenden, die nicht im Laufe des Jahres abgezogen werden, können auf die nächsten fünf Steuerjahre vorgetragen werden. Die Division B Einkommensbegrenzung gilt jedoch für die Summe von Spendenvorträgen und laufenden Spenden. Da die ungebrauchten Spenden eines bestimmten Steuerjahres eine zeitliche Beschränkung von 5160Jahren haben, wäre es ratsam, sie vor dem Inanspruchnahme der laufenden Spenden zu beanspruchen. (8) 160Durchführungsverpflichtungen für Netto-Kapitalverlustvorträge sind auf den Umfang der in Absatz 3 Buchstabe b) genannten steuerbaren Nettoveräußerungsgewinne für das Übertragungsjahr beschränkt. Unterabschnitt 160111 (1.1) regelt den Verlust des Nettoverlusts von 2005 durch eine Formel, die korrigiert, dass im Verlustjahr (1997) die Einbeziehungsquote für Kapitalgewinne drei Viertel betrug, während in dem Jahr, in dem der Verlust beansprucht wird (d 2005) beträgt die Einschlussquote die Hälfte. Da die Einbeziehungsquote für 2006 und 2007 gleich ist, ist für den Kapitalverlust von 2006 keine Anpassung erforderlich: Wenn die Kontrolle der Gesellschaft von einer anderen Person oder einer anderen Gruppe von Personen erworben wird, die eine Kapitalvortragsfähigkeit oder eine Kapitalrückführung vornimmt Verluste oder Betriebsverluste sind stark eingeschränkt. Darüber hinaus können Nettokapitalverluste, Verluste aus Grundstücken und zulässigen Unternehmensanla - geverlusten (ABILs), die zum Zeitpunkt des Erwerbs der Kontrolle nicht ausgenutzt sind, nicht vorgetragen werden8212die einfach ablaufen. IT-302R3, pars. 382116 Wie bereits erwähnt, werden die Verlustrutzungsbeschränkungen wirksam, wenn die Kontrolle eines Unternehmens von einer anderen Person oder einer anderen Gruppe von Personen erworben wird. Der Erwerb der Beherrschung gilt als erfolgt, wenn die Kontrolle über die Stimmrechte (dh de jure Kontrolle, die vorhanden ist, wenn mehr als 50 der Stimmen zur Wahl des Verwaltungsrates erforderlich sind) der Gesellschaft von einer Person oder Gruppe von Personen erworben wird . Während es klar ist, dass sich die Kontrolle auf die Wahlsteuerung bezieht, besteht eine gewisse Unsicherheit darüber, wie die CRA die Phrase 34 Personengruppe 34 für die Zwecke dieser Regeln interpretieren wird. Die CRA hat darauf hingewiesen, dass sie nach Beweisen für eine Gruppe beabsichtigt, im Konzert34 zu handeln, um ein Unternehmen zu kontrollieren. Unternehmen sind häufig nicht in der Lage, angemessene oder ausreichende Einnahmen zu generieren, um Verluste zu nutzen und sind daher nicht in der Lage, zuvor gezahlte Steuern zurückzuerlangen oder die zu zahlenden Steuern zu senken. Folglich werden solche Verlustgesellschaften zu attraktiven Zielen für den Erwerb von gewinnbringenden Kapitalgesellschaften, die durch eine Vielzahl von Strategien ihr Einkommen aus Steuern unter Nutzung der Verluste des erworbenen Unternehmens schützen könnten. Weil solche Strategien letztendlich zu geringeren Steuereinnahmen führen, sieht die Regierung verständlicherweise solche Transaktionen nicht mit Gunst. Infolgedessen hat die Regierung im Laufe der Jahre zunehmend restriktive Gesetze eingeführt, um solche Transaktionen einzudämmen, die manchmal als 34Tax-Verlust-Handel bezeichnet werden34. Zwei der häufigsten Verlustauslastungsstrategien werden wie folgt umrissen: (1) Nach Erwerb der Kontrolle über die Verlustkörperschaft werden die Geschäfte der einkommensverdienenden Erwerbsgesellschaft und der Verlustgesellschaft so umstrukturiert, dass Einnahmen erzielt werden Letztere Körperschaft. Zum Beispiel werden die Vermögenswerte eines gewinnbringenden Unternehmens oder einer Sparte in der einkommensschaffenden Körperschaft an die Verlustgesellschaft übertragen. Die Übertragung erfolgt in der Regel durch einen steuerfreien Rollover, indem gewinnorientierte Vermögenswerte an den Verlustkorporten übergeben werden (siehe Kapitel 16016). Die Einnahmen, die so erzeugt wird, wird verwendet, um die Verluste der Verlustgesellschaft zu absorbieren. (2) Die zweite Strategie beinhaltet die Implementierung von konzerninternen Transaktionen, die Kosteneinsparungen für das einkommensschaffende Unternehmen erbringen und gleichzeitig Erträge für die Verluste erbringen. Zinsen auf Darlehen, Mietverträge und Provisionsverträge sind Beispiele für solche intercompany Transaktionen. Die gesetzlichen Beschränkungen, die darauf abzielen, die Nutzung von steuerlichen Verlusten zu beschneiden, beruhen auf bestimmten Transaktionen und Ereignissen, die nach dem Erwerb der Kontrolle als erfolgt gelten. Diese Transaktionen und Ereignisse sowie andere Regeln, die die Beschränkungen umfassen, werden unten diskutiert. Para11.100 Jahresende Die Körperschaft gilt unmittelbar vor dem Zeitpunkt des Erwerbs der Beherrschung der Körperschaft als Besteuerung (im Folgenden das 34-jährige Steuerjahr). Das Ergebnis ist, dass verschiedene Anpassungen, die normalerweise am Jahresende vorgenommen werden, vor dem Erwerb der Kontrolle erfolgen müssen. Zum Beispiel wird die Anforderung, dass Inventar zu einem niedrigeren der Kosten oder Markt am Ende eines Steuerjahres bewertet werden, dazu führen, dass aufgelaufene Verluste in der Inventur realisiert werden. Diese Anpassung erhöht die Unternehmen vor-Akquisition nicht-Kapital Verluste oder Betriebsverluste. Wie später noch erläutert werden wird, stehen derartige Vorbeschaffungsverluste für die Übertragung zur Verfügung, jedoch nur, nachdem gewisse restriktive Bedingungen erfüllt sind. Das Aufkommen des angenommenen Jahresendes verursacht andere Anpassungen (unten diskutiert), um die Unternehmen vor-Erwerb der Kontrolle nicht-Kapital Verluste und Farm-Verluste zu erhöhen. Als Ergebnis des Jahresende ist die Gesellschaft verpflichtet, die normalen Compliance-Anforderungen der Einreichung Steuererklärungen, Überprüfung der unbezahlten Beträge, die Bestimmung der Status der wohltätigen Spenden und Verlustvorträgen und deren Durchführung Zeitraum, etc. Aber eine kurze Besteuerung Ein Jahr, das sich aus einem Erwerb der Beherrschung ergeben kann, wird die Ersatzfrist nicht verlängern, die erforderlich ist, um von den für eine unfreiwillige oder freiwillige Verfügung zur Verfügung stehenden Rollovers zu profitieren. Diese Rollover erlauben eine vollständige 24 Monate und 12 Monate nach einer unfreiwilligen und freiwilligen Verfügung vom Ende des kurzen Besteuerungsjahres, in dem eine solche Verfügung herrscht. Sofern das angenommene Jahresende nicht mit dem normalen Jahresende des Unternehmens zusammenfällt, kann das Unternehmen zwei Besteuerungsjahre haben, die insgesamt weniger als 24160 Monate betragen. Um dies zu illustrieren, nehmen wir an, dass eine Gesellschaft, deren normale Besteuerung Jahresende Dezember16031 ist, erlebt einen Erwerb der Kontrolle am April 1601, 2008. Die Gesellschaft wird ein Jahresende von März 16031, 2008 haben. Wenn das Unternehmen beschließt, zu seinem ursprünglichen zurückzukehren Besteuerung Jahresende Dezember 16031, hat die Gesellschaft zwei Besteuerungsjahre endet in der 12-Monats-Zeitraum bis zum Dezember16031, 2008. Das erste Steuerjahr wird 3160months lang sein, die zweite 9160months lang. Wenn die Gesellschaft einen Zeitpunkt für ihre späteren Besteuerungsjahre, dh, März16031, wie zulässig wählte, würde sie dann zwei Besteuerungsjahre haben, die insgesamt nur 15160Monate8212Nahrungsmittel betragen, wird das Steuerjahr, das am 31. März 2008 endet, 3160Monate lang sein Steuerjahr bis März16031, 2009 wird 12160months lang sein. Das vorstehende Beispiel kann mit dem folgenden Diagramm veranschaulicht werden: Das Ergebnis ist, dass die normale Laufzeit von 276 Monaten (3160Jahre zurück und 20 Jahre vorwärts) für Nicht-Kapitalverluste reduziert wird. Dies an sich stellt eine Einschränkung dar, dass die Gesellschaft eine kürzere Zeitdauer hat, über die Einkommen zur Nutzung der Verluste zu generieren. Ein kurzes Besteuerungsjahr wird auch dazu führen, dass die Kapitalkostenzuschüsse oder der Kleinbetriebabzug (siehe Kapitel 16012) proportional gekürzt werden. Para11.105 Aufgelaufene oder nicht realisierte Verluste aus Vorräten Ein Steuerpflichtiger ist verpflichtet, sein Inventar am Ende eines jeden Steuerjahres zu bewerten. Das Gesetz verlangt, dass jedes Inventar mit dem niedrigeren der Kosten und dem Markt (LCM) bewertet wird, während das Reglement die Bewertung zum Marktwert des gesamten Inventars zulässt. In jedem Fall ergibt sich daraus, dass aufgelaufene oder nicht realisierte Inventurverluste im Jahr der Besteuerung realisiert werden, wodurch das Einkommen der Steuerzahler gesenkt oder die Verluste aus Kapitalverlust oder Betriebsverlust in der Zeit vor dem Erwerb erhöht werden. Para11,110 Aufgelaufene oder nicht realisierte Verluste aus Lieferungen und Leistungen Die Beschränkungen und Auswirkungen, die für aufgelaufene Inventarschäden gelten, sind in den Rückstellungen, die sich auf abgegrenzte Verluste aus Forderungen beziehen, parallel. The largest amount that a corporation could deduct as a reserve for doubtful accounts for each separate trade receivable, must be claimed as an actual bad debt in the deemed taxation year. That is, where there has been an acquisition of control, the normal method of computing a reserve by aging the accounts and applying a fixed percentage to each age category is not permitted. Instead, each debt must be considered individually as to its collectibility and, if collection is doubtful, the debt must be written off as a bad debt. The amount deducted is deemed to be a separate debt and any amount or amounts subsequently received in respect of the separate debt must be included in income. As is the case in accrued inventory losses, accrued losses on accounts receivable become part of time-limited non-capital or farm losses, which are deductible only if certain restrictive conditions are satisfied. para11,115 Accrued or unrealized losses on depreciable capital property Accrued or unrealized losses on depreciable capital property are measured as the amount by which: (a) the undepreciated capital cost (UCC), at the deemed year-end, in a prescribed class exceeds the aggregate of: (b) the fair market value of all the property in the class at the deemed year-end, plus (5) 160The adjusted cost base at December 1, 2008, remains at 110,000 and the UCC remains at 104,000, since no election was made. (6) 160The corporations income for tax purposes for the year ending December16031, 2009, is 15,000 as computed by section 3. The corporation may apply the losses of the ladies shoe retail business against the total of the corporations income from that business and from the sale of similar products. The result of the aggregation is, therefore, 12,000, being nil from the ladies shoe retail business plus 12,000 from the sale of similar products with the 8,000 taxable capital gain being excluded. Thus, the maximum deduction is 12,000. (7) 160This amount is available for carryforward as follows: The 2007 loss expires on December16031, 2026, i. e. in 20 taxation years, including the deemed taxation year at November16030, 2008, and the one-month taxation year at December 31, 2008. The November 2008 loss expires on December16031, 2027, i. e. in 20160taxation years. (8) 160The corporations income for tax purposes for the year ending December16031, 2009, is 15,000. However, the corporation may make a deduction to the extent of nil under this assumption because the ladies shoe retail business generated no income in the year and there was no income from the sale of similar products or services by the assumption made in this alternative. (9) 160This amount is available for carryforward as follows, assuming a December16031 taxation year-end is chosen: 821234,0008195(being the 2007 loss of 37,500 - 3,500 claimed in the December16031, 2008 year) expires on December16031, 2025 821219,5008195(see note160(7)) expires on December16031, 2027, i. e. 20160taxation years. (10) 160On the assumption that the optional net capital loss deduction is taken in order to increase the non-capital losses for the deemed taxation year. (11) 160The adjusted cost base balance at December 1, 2008 is 126,000, being the deemed proceeds of disposition in the deemed disposition elected upon. (12) 160The adjusted cost base balance (i. e. capital cost, in the case of depreciable property) at December 1, 2008, for future capital gains purposes, is 118,000, being deemed proceeds of disposition in the deemed disposition elected upon. The UCC 114,000 at the same date is increased by all of the recapture of 6,000, but only 1 2 of the capital gain of 8,000 elected as deemed proceeds on the deemed disposition, (i. e. 104,000 6,000 1 2 215 8,000). (13) 160The addition of 19,500 to the non-capital loss balance is logical, since the 19,500 represents the loss from business sources for the deemed year-end. para11,160 Taxable Income of a Corporation in General Recall that the starting point for the calculation of a corporations taxable income is its net income for tax purpose computed under Division160B. Where financial statements have been prepared using generally accepted accounting principles, it may be necessary to adjust income for financial accounting purposes to income for tax purposes as determined by Division160B. This usually involves a reconciliation process, introduced in previous chapters. Generally, expenditures deducted for financial accounting purposes but not deductible for tax purposes, must be added to financial accounting income, and expenditures not deducted for financial accounting purposes but deductible for tax purposes may be deducted in the reconciliation. To perform this reconciliation in the preparation of a corporate tax return, Schedule1601 is completed. Frenzied Taxpayers Limited reported a net loss for financial accounting purposes of 53,000 for 2007 and a net income of 126,000 for 2008. It showed a provision for income taxes of 113,000 for 2008 only. Expenses deducted for financial accounting purposes in both years included: charitable donations of 15,000 per year, depreciation of 105,000 per year and bond discount amortization of 5,000 per year. The corporation included in financial accounting income, in both years, dividends from taxable Canadian corporations of 23,000 and dividends of 15,300 net of a 15 withholding tax from foreign corporations which were not foreign affiliates. The corporation had no capital gains in either year. In 2007, capital cost allowance of 14,800 (i. e. less than the maximum of 14,844) had been taken on a brick building purchased in 2001 (Class1601) leaving an undepreciated capital cost balance of 356,250 on January1601, 2008, the beginning of the 2008 taxation year. In addition, 44,800 in capital cost allowance had been taken on equipment leaving an undepreciated capital cost balance of 179,200 on January1601, 2008. In 2008, no additions or disposals were made to these classes of assets. The corporation had non-capital losses of 18,000 available for carryover until 2010 and a 1999 net capital loss of 5,000 available for carryover. Calculate the taxable income of the corporation for the years indicated. mdashNOTES TO SOLUTION (1) 160Income tax is not an expenditure made to produce income. It is an appropriation of profits after they have been earned. (2) 160This is not an expenditure made to produce income for tax purposes, but an appropriation of profits after they have been earned. However, a foreign tax credit may be available in the computation of tax. (3) 160Donations, normally, are not deductible in the computation of income, but are deductible in the computation of taxable income of a corporation. (4) 160Bond discount amortizations are prohibited, but payments reflecting bond discounts are deductible at the earlier of redemption or maturity. (5) 160Capital cost allowances for 2008 were computed as follows: (6) 160Even though 23,000 was deducted, only 15,100 of the dividends deducted have any effect since there is no loss carryover for dividends not deducted. Even where there is a loss from business and property, the addition to the non-capital losses of dividends deducted under section160112 is offset by the paragraph1603( c ) income which in fact includes the dividends in question. The dividend deduction only neutralizes the paragraph 3( c ) inclusion, as can be seen by a substitution of these numbers in the definition of non-capital loss. (7) 160The amount of charitable donations that may be deducted in a year is limited to 75 of income as computed in Division160B of Part160I. However, charitable donations not deducted in the current year can be carried forward five years. (8) 160Non-capital losses would not be deducted in 2007, because after the dividends have been deducted, there is no income against which to absorb them in that year. (9) 160Net capital loss carryovers cannot be deducted in 2007 and 2008 because there were no taxable capital gains against which to absorb them in these years. However, if there are net taxable capital gains available under paragraph1603( b ) in the future or in the 3160years before 2007 (to the extent the taxable capital gains have not been offset by allowable capital losses), there is a potential increase in the non-capital losses at the taxpayers discretion. The decision to utilize this option will depend upon which source of income will be generated first, business income or net taxable capital gains. para11,200 Basic Computation Of Tax For All Corporations para11,210 Objectives of Provisions Affecting Taxation of Corporations Although a corporation is regarded as a separate entity, in an economic sense the separation of a corporation and its shareholders may be artificial. However, the flexibility provided by corporations, often involving tax planning, has resulted in considerable complexity of the legislation pertaining to the taxation of corporations. This legislation appears to have three main objectives. The first objective is the alleviation of the multiple taxation of corporate income by taxing income at the level of the corporation and, then, at the level of the shareholder on dividends received from after-tax corporate earnings. The Act attempts to integrate these two taxes primarily by way of the dividend gross-up and tax credit mechanism. If the system of integration were perfect, it would completely eliminate the double taxation of corporate income, as previously discussed at the beginning of this chapter and demonstrated in Chapter16012. The Canadian system of integration is not perfect in this sense, but it does remove much of the effect of double taxation on investment income and some types of business income. The examination of this aspect will be continued in detail in the next chapter. ITA: 55(2) ITA: 110.6, 245, 246 The second objective of these provisions is to prevent the avoidance of tax through the use of a corporation. In prior years, there was a considerable incentive to convert amounts that would normally be distributed to individual shareholders as dividends into amounts that resulted in capital gains. This was known as 34dividend stripping34 and many provisions were put in place to stop this practice. The incentive to convert dividends into capital gains was renewed with the introduction of the capital gains deduction which continues for shares of qualified small business corporations. Major anti-avoidance provisions are found in the Act. However, in making distributions to corporate shareholders, there has been an incentive to convert what might be taxed as a capital gain into a non-taxable intercorporate dividend. Hence, provisions to prevent such 34capital gains stripping34 have been implemented. The third objective of these provisions is to provide tax incentives to certain types of corporations. The small business deduction, which will be discussed in the next chapter, is probably the most important of these. The small business deduction will be shown to substantially reduce tax for a Canadian-controlled private corporation. The manufacturing and processing profits deduction will be alluded to. Investment tax credits, including the credit for scientific research expenditures, will be discussed. para11,212 Types of Corporations The Canadian corporate tax system draws a distinction among types of corporations. For the purpose of this text, we need to consider three types: bull a private corporation bull a Canadian-controlled private corporation and bull a public corporation. Certain tax preferences, such as the small business deduction, or tax accounts, such as the capital dividend account, apply to only certain types of corporations. Hence, the need to distinguish the types of corporations is important. para11,213 Private corporation The Act defines a 34private corporation34 as one that is resident in Canada and not controlled by one or more public corporations (or a prescribed federal Crown corporation). A private corporation has certain tax preferences or considerations, as discussed in Chapter 12. such as a capital dividend account and a refundable dividend tax on hand account. In public practice, much tax consulting work is done for private corporations, since they are more numerous than public corporations. Some types of private corporations enjoy the most favourable tax rates. Some tax credits are also more favourable for private corporations than for public corporations, such as the investment tax credit on scientific research and experimental development expenditures. Remember, private corporations include not only small and medium-sized companies they include large-sized companies as well. There are numerous large private corporations operating in Canada8212a prime example is McCain Foods, owned by the McCain family. para11,214 Canadian-controlled private corporation (CCPC) A 34CCPC34 is defined as a private corporation that is a Canadian corporation that is not controlled, directly or indirectly, in any manner whatever, by one or more non-residents, by one or more public corporations, or by a combination of the two. Also, no class of its shares are listed on a designated stock exchange. Notice that the definition is negative. That is, there is no requirement that it be Canadian-controlled, it just cannot be controlled by non-residents or public corporations. Consequently, a Canadian private corporation that is controlled 50 by Canadian residents and 50 by non-residents is a CCPC. One of the principal tax advantages of a CCPC is the small business deduction. From an individuals perspective, capital gains deduction eligibility is based on the corporation having CCPC status. Also, a CCPC and its shareholders enjoy the highest level of integration. para11,215 Public corporations Public corporations are those resident in Canada and which have a class of shares listed on a 34designated stock exchange34 in Canada, as designated by the Minister of Finance. Public corporations do not enjoy any of the tax preferences available to private corporations. The tax system has become almost fully integrated at the public corporation level, as a result of the higher gross-up and the tax credit for eligible dividends. para11,216 Diagrammatic summary of types of corporations The figure below shows the three basic types of corporations. para11,220 General Rates for Corporations para11,225 Overview of rates and credits ITA: 123 ITA: 123.28211127 ITA: 123.4 ITA: 124 ITA: 125, 125.1 ITA: 126 ITA: 127 The general federal rate of tax to be paid on the taxable income of all corporations under Part160I of the Act is 38. However, the basic federal rate of 38 is subject to modification, depending on the type of corporation. The Act provides for a tax rate reduction for corporations. Another provision reduces the federal tax payable, in recognition of provincial income taxes, by an amount equal to 10 of the corporations taxable income earned in a province or territory of Canada. Two other provisions reduce federal tax payable, for certain corporations, by means of the small business deduction and manufacturing and processing profits deduction, respectively. Foreign tax credits are available to reduce federal tax payable. Another provision exists for a number of tax credits, including the political contribution tax credit, the investment tax credit, and the apprenticeship job creation tax credit, which reduce the amount of federal tax payable. para11,235 Effect of provincial corporate tax rates In addition to the federal taxes imposed, each province levies an additional income tax on a corporations taxable income. Furthermore, the taxable income calculation may vary from province to province because of provincial taxing statutes. The provincial rate varies from province to province, but on the whole lies between 2.5 and 16. para11,240 Effect of corporation type As mentioned previously, the type and status of the corporation has a bearing on how its income is taxed. There are three major classifications of corporations to be concerned with. These are described in 18211,212 to 18211,216. As a result of the combined federal and provincial rate and several of the modifications to that rate, the rates of tax applicable to Canadian corporations will vary from a low of about 22.0 to a high of about 35.5, depending on the classification of the corporation and the type of income earned. para11,245 General rate reduction The Act provides a corporation with a deduction from tax, computed by multiplying the corporations 34general rate reduction percentage34 by its 34full-rate taxable income34. The 34general rate reduction percentage34 is 8.5 in 2008. The 34full-rate taxable income34 of a corporation, generally, is a corporations taxable income that has not benefited from special rate reductions, such as the manufacturing and processing profits deduction (alluded to later in this chapter) and the small business deduction (discussed in Chapter 12 ), among others. The amount of the rate reduction is dependent on the nature of the corporation. Paragraph ( a ) of the definition of 34full-rate taxable income34 applies to corporations other than Canadian-controlled private corporations (CCPCs). For the purposes of this chapter, full-rate taxable income is the amount of the corporations taxable income minus income, if any, eligible for the manufacturing and processing profits deduction. Examples of this calculation are presented later in this Chapter. The general rate reduction will increase to 8.5 for 2008, 9.0 for 2009, 10.0 for 2010, 11.5 for 2011, and 13.0 for 2012 and later calendar years. The following table shows the future federal corporate tax rates as currently proposed. para11,250 Abatement from Federal Tax for Income Earned in a Province Part160IV of the Regulations provides the prescribed method to determine the taxable income earned in a province by a corporation. The term 34taxable income earned in the year in a province34 by a corporation is defined as being the aggregate of the taxable incomes of the corporation earned in the year in each of the provinces. The Regulations also set out the method of calculating the taxable income earned in a particular province during the year. The taxable income earned in a particular province is that taxable income which is attributable to a permanent establishment that the corporation has in the province. If a company has no permanent establishment in a province, it will not have earned any taxable income in that province for the purposes of the abatement. The term 34permanent establishment34 is defined as a fixed place of business of the corporation, including an office, a branch, a mine or oil well, a farm, a timber land, a factory, a workshop or a warehouse. Where the corporation does not have a fixed place of business, its permanent establishment is the principal place in which the corporations business is carried out. A corporation is deemed to have a permanent establishment in a place, if the corporation carries on business through an employee or agent, established in a particular place: (a) who has general authority to contract for his or her employer or principal or (b) who has a stock of merchandise owned by his or her employer or principal from which he or she regularly fills orders which he or she receives. However, the fact that a corporation has business dealings through a commission agent, broker or other independent agent, or maintains an office solely for the purchase of merchandise, does not of itself mean that the corporation has a permanent establishment. The use of substantial machinery or equipment in a particular place at any time in a taxation year constitutes a permanent establishment in that place as does the ownership of land in a province by a corporation that, otherwise, has a permanent establishment in Canada. The CRA indicates that the application of the criteria for a permanent establishment set out in the Regulations will often involve questions of fact which must be answered by the circumstances of each case. para11,265 Cases on the meaning of permanent establishment 61160DTC 1222 (Ex.160Ct.) The case of M. N.R. v. Panther Oil and Grease Manufacturing Co. of Canada Ltd. presents a specific fact situation. Here the taxpayer had a factory in Ontario, but maintained a sizable sales force throughout Canada under the direction of district sales managers. These sales managers were under the direction of division managers, one of whom lived in Quebec. He had an office, not listed as the companys, in his home. The division and district managers kept a small quantity of the companys goods on hand for small orders when quick delivery was requested. However, most orders were filled from Ontario. It was held that the extensive sales organization in Quebec, itself, constituted a branch in that province and district managers constituted 34agencies34 of the company. It was also found that the stock of merchandise from which small orders were filled qualified as a permanent establishment. 64160DTC 660 (T. A.B.) In the case of Enterprise Foundry (N. B.) Ltd. v. M. N.R. . the appellant was incorporated in New Brunswick, but all of its sales were made to customers in Quebec. About 40 of its orders were filled from a stock of merchandise maintained in a public warehouse in Montreal. The taxpayers key employee had the authority to deliver goods from the stock of merchandise and also had general authority to contract for his employer. It was held that there was a permanent establishment in Quebec. The taxpayer corporation, whose head office was in Ontario, manufactured electrical appliances which it sold exclusively to wholesalers throughout the country. The company employed a sales representative and junior salesmen in the Province of Quebec. Orders received by the sales representative, who had no authority to accept them, were forwarded to head office and, if accepted there, the goods were shipped directly to the purchaser. During the years in question, the Quebec representative maintained an office in his home at his own expense. There was no agreement with the company to set up the office, but he found it convenient to do so. The company supplied him with company stationery and literature, price sheets, catalogues, sales promotional material and inter-office memoranda. He was also supplied with substantial quantities of samples of the companys products the value of which varied from 4,700 to 11,000 to be used in demonstrations and in promoting sales. The telephone directory did not list the representatives residence as the companys place of business and there was no business sign of any type on the premises. The office was used for taking orders and for training junior salesmen. During six months of one year, the company maintained a stock of appliances valued at about 120,000 in rented warehouse space in Montreal and filled Quebec orders from this stock. The company had no employees at that warehouse the handling of goods there was carried out by the warehouse personnel. The company had no control over any part of the warehouse and the public had no knowledge of the companys goods being stored there. Determine whether or not the company has a 34permanent establishment34 in the Province of Quebec by reference to Regulation160400(2). Reference: M. N.R. v. Sunbeam Corporation (Canada) Ltd. . 61160DTC 1063 (Ex.160Ct.). para11,300 Tax DeductionsCredits mdashNOTES TO SOLUTION (1) 160If the Canadian income tax effects on foreign investment income could be isolated, as in the case where the corporations only source of income was foreign non-business income (other than from real property), such as interest income, it would be considered to be earned in the province of which the taxpayer is a resident and, therefore, would be eligible for the federal tax abatement. As a result, it is the tax otherwise payable (B) after the abatement on which the non-business income tax deduction is based. On the other hand, foreign business income is assumed to be earned in a permanent establishment in the foreign country and, therefore, is not eligible for the federal tax abatement. Thus, the tax otherwise payable (C) before the abatement is the relevant base for the business income tax deduction. (2) 160Note how these credits against Canadian tax do not exceed foreign tax paid on the foreign income. These reductions of Canadian tax are also restricted to the estimated amount of Canadian tax paid on the foreign income. Example Problem 2 Reconsider the facts in Example Problem1601 with the additional information that income for tax purposes of 472,000 includes manufacturing and processing profits of 296,471 (MP, as determined by the Regulations) that will earn a tax deduction of 25,200 at 8.5 of MP. Assume that the foreign tax credits remain the same. Calculate total tax payable under Part160I using a 11 provincial rate of tax applied to federal taxable income earned in a province. mdashNOTES TO SOLUTION para11,800 REVIEW QUESTIONS para11,825 MULTIPLE CHOICE QUESTIONS para11,850 EXERCISES All of the voting shares of Loser Limited, a manufacturer of widgets, have been acquired by Holdco Ltd. an investment holding company. At the time of the acquisition on March16010, 2008, Loser Limited had non-capital business losses of 600,000 generated in 2007. Loser Limited also had 30,000 of net capital losses carried forward from 1999. As well, at the time of the acquisition, it was discovered that the balance of undepreciated capital cost in its Class1608 was 70,000 while the fair market value of the assets in that class was only 40,000. The balance in its cumulative eligible capital account (being from the acquisition on August16031, 2007, of an exclusive customer list) was 50,000 while the fair market value of the customer list was 68,000. The corporations inventory had a cost of 630,000, while its market value was 680,000. The book value of the corporations receivables was 240,000, while its realizable value was estimated at 225,000. The corporations only non-depreciable capital property, land, had accrued gains of 56,000 over its cost of 200,000. Loser Limited has a December16031 year-end. The corporation had business losses of 3,000 from January1601 to March1609, 2008. The holding company will inject added capital and augment the management of Loser Limited in an attempt to turn Losers widget manufacturing business around. (A)160What are the tax implications of the acquisition of the shares of Loser Limited by Holdco Ltd. assuming the maximum election under paragraph 111(4)( e ) is made (B)160Determine the minimum amount of elected proceeds under paragraph 111(4)( e ) to offset expiring losses, if the accrued gains on the land were 100,000 instead of the 56,000 and Loser Limited had an additional loss arising from property of 10,000. Reconsider the example problem of Frenzied Taxpayers Limited in this chapter in 18211,160. If 7,900 less capital cost allowance had been taken in 2007, all 23,000 of the inter-company dividends could have been deducted, pursuant to section160112, in 2007. Re-calculate the taxable income of the corporation for the years indicated after taking 7,900 less in capital cost allowance for Class1608 in 2007. Comment on whether the corporation is in a better tax position at the end of 2008 with respect to capital cost allowance and taxable income under this alternative. Puttingitall Together Limited, a Canadian corporation, had its net income under Division160B computed as follows for the year ending December16031: During the year the corporation made charitable donations of 80,000. Its carryforward position from the previous year was as follows: Compute the corporations taxable income for the current year. Exporter Limited is a Canadian public company carrying on a part of its business through an unincorporated branch in Japan. Its income from that business in Japan for the current taxation year ended December16031 was 77,575,723 yen. The corporation paid income tax instalments on that income during the year of 31,006,289 yen. During the year the exchange rate was 1160yen .009793 Canadian dollars. During its current taxation year ended December16031, Exporters income under Division160B was 2,500,000 excluding the income from Japan. During the year, the corporation received dividends of 100,000 from taxable Canadian corporations. This amount was included in the computation of Division160B income. The corporation was also able to deduct 25,000 of its net capital losses carried forward. There was no foreign investment income during the year. Compute the corporations foreign business tax credit for the year. Maxprof Limited is a Canadian public company with the following income under Division160B for its taxation year ended December16031, 2008: During the year the company made donations of 69,000 to registered charities and 5,750 to federal political parties. It was carrying forward non-capital losses of 127,600. It is considered to earn 86 of its taxable income in Canada, as computed by the Regulation. Compute the federal Part160I tax payable for the year. para11,875 ASSIGNMENT PROBLEMS The following data summarize the operations of Red Pocket Limited for the years of 2005 to 2008 ended September 30. The corporation has a net capital loss balance of 13,500 which arose in 1999. Compute the taxable income for Red Pocket Limited for the years indicated and show the amounts that are available for carryforward to 2009. (Deal with each item line-by-line across the years, rather than computing income one year at a time.) On November 1, 2008, Chris purchased all the issued shares of Transtek Inc. from an acquaintance, Tom. Transtek carries on a transmission repair business and has done so since its incorporation on January 1, 2007. In addition to the transmission repair business, Transtek rents out a small building it owns. Neither the transmission repair business nor the rental endeavour has been successful. When Chris purchased Transtek, his financial projections indicated that Transtek would have significant income within two years. Chris credited Transteks failure to Toms brash personality and laziness. Chris, on the other hand, has a strong work ethic and has many contacts in the automotive industry to refer work to him. The values of the capital assets owned by Transtek at the time of purchase by Chris are as follows: Chris selected June 30, 2009, as the first fiscal year-end for Transtek after his purchase. The following is a schedule of Transteks income (and losses) from its inception, January 1, 2007, through June 30, 2010. (A)160Discuss the tax implications of the acquisition of Transtek Inc. on November 1, 2008, ignoring all possible electionsoptions. (B)160Determine the tax consequences of the acquisition of Transtek Inc. under the assumption that: (i) the maximum amount of all electionsoptions is utilized and (ii) the partial amount of all electionsoptions is utilized so that only enough income is generated to offset most or all of the losses which would otherwise expire on the acquisition of control. In 2006, a chain of bakeries, called Buscat Ltd. commenced operation. The industry is highly competitive and because of Mr. Buscats lack of marketing skills, the corporation incurred losses in the first three taxation years of operations as follows: On July 1, 2009, Mr. Buscat decided to sell 75 of his common shares to Mr. Bran, owner of Buns Plus Ltd. Mr. Bran has been in the business of supplying bread dough, pastry dough and bun bags for 10160years and has been very successful. Buns Plus Ltd. has two divisions: a bakery and a coffee shop, which it intends to transfer to Buscat Ltd. The following income tax data relates to Buscat Limiteds operations from January1601, 2009 to June16030, 2009: During the later part of the 2009 calendar year, the bakerycoffee shop of Buns Plus Ltd. was transferred to Buscat Ltd. For the six-month period ending on December16031, 2009, Buscat Limited had net income of 90,000 from all its businesses. The net income earned was as follows: In the 2010 taxation year, Buscat Ltd. expects to earn 250,000, of which 65,000 will be from the original Buscat bakery business and 20,000 from the coffee shop business. 160Prepare an analysis of the income tax implications of the acquisition of shares. In your analysis, consider the two election options from which an election choice is most likely to be made. The controller of Video Madness Inc. has prepared the accounting income statement for the year ended April 30, 2008: Video Madness Inc. Income Statement For the Year Ended April160 30, 2008 Prepare a schedule reconciling the accounting net income to income for tax purposes and taxable income. Indicate the appropriate statutory reference for your inclusions or exclusions. The taxpayer, whose head office was in Manitoba, manufactured and sold various fans. Local sales agencies were maintained in Ontario and in Quebec. At the Ontario agency, two qualified representatives handled business under the company name. They were authorized to sign quotations. Contracts could be made, terms of payment arranged and credit given without reference to the head office in Winnipeg. The company name was displayed for public visibility, was used on calling cards, and was listed in the telephone directory. The Ontario agency, occupying one-half of a building with warehouse facilities, maintained an inventory worth about 6,000. Orders for standard-sized fans were filled from stock-in-trade. Orders for large fans were filled from the head office in Winnipeg. The Quebec agency was substantially similar to that in Ontario. 61160DTC 1063 (Ex.160Ct.) Determine whether or not the company has a 34permanent establishment34 in the provinces of Ontario and Quebec. In reaching a conclusion, compare this situation with the case of M. N.R. v. Sunbeam discussed in this chapter. Barltrop Limited is a Canadian public company involved in the software consulting business. Its controller provided you with the following information related to its 2008 taxation year ended December16031: Barltrop Limited has permanent establishments in the U. S. B. C. and Alberta. Its gross revenues and salaries and wages data have been allocated as follows: Assume that the British Columbia corporation tax rate is 12 and the Alberta rate is 10. Also, assume that taxable income for Alberta is computed on the same basis as federal taxable income. Gross revenues exclude income from property not used in connection with the principal business operation of the corporation. Compute the total tax payable by the company for the 2008 taxation year, including provincial tax. Show all calculations. Infotech is a public company in its first year of business in the information technology industry. It operates out of a plant in Ottawa, Ontario. In 2008, it incurred 2,200,000 of scientific research and experimental development expenditures (SR38ED) which qualify for deduction under subsection16037(1) of the Act. The breakdown of these expenses is as follows: Infotechs federal income tax rate after abatement is 19.5. Its taxable income before deducting the 2,200,000 claim under section16037 is 3,200,000. (A)160Compute the maximum investment tax credit available to Infotech in 2008. (B)160Compute the companys net federal Part I tax payable after the investment tax credit, assuming a maximum section16037 deduction is claimed. (C)160What is the amount, if any, of the investment tax credit carryover (D)160Compute the companys deduction or income inclusion in the following year if no further SR38ED expenditures are made. Up, Up and Away Limited is a public corporation that manufactures hot air balloons in the province of New Brunswick. For the year ended September 30, 2008, its accounting income statement was as follows: Selected Additional Information Calculate the total taxes payable for 2008 using a 13 provincial rate of tax. Tecniquip Limited is a public corporation whose head office is located in Toronto, Ontario. The activities of the corporation are carried on through permanent establishments in the provinces of Ontario and Alberta, and in the United States. The following is an allocation of selected items for the fiscal year ended December16031, 2008. In computing income from manufacturing, the corporation claimed a deduction of 150,000 under subsection16037(1) of the Act for scientific research and experimental development (SR38ED). 100,000 of the deduction related to expenditures of a current nature and 50,000 was the cost of equipment purchased during the year for use by it in scientific research and experimental development carried on in Canada. No SR38ED expenditures are expected to be made in 2009. During the year, the corporation made charitable donations totalling 50,000 and claimed non-capital losses of 60,000 and the net capital losses carried forward from 1999 of 9,000. The M38P profits tax deduction has been correctly computed as 67,529 on MP of 794,459. Compute the federal Part160I tax payable and provincial tax at 12 for Ontario and 10 for Alberta, assuming that taxable income allocated to those provinces is the appropriate provincial tax base. Show all calculations, whether or not necessary to your final answer. para11,880 Advisory Case King Enterprises Inc. Ian King has operated a successful office supply wholesaling business, King Enterprises Inc. for many years. Last week, he called to tell you that he is interested in putting an offer in on the shares of a company that is in some financial difficulty, Royal Forms Inc. (34Royal34). Royal is in the business of producing custom, as well as standard, forms for business use. In fact, Royal is a supplier of King Enterprises. This company has been in business for the past eight years, but has been losing money for the past six years. Last year they sold the land and building they used in their operations in a depressed real estate market, in order to get some cash. Their big problem seems to be that they are undercapitalized. Ian sees this purchase as a real opportunity for him to pick up a company at a bargain price, turn it around to profitability and, at the same time, reduce King Enterprises tax liability with the losses. He would like you to prepare a report for him on the tax issues before he decides whether to make an offer. Chapter 10 Computation of Taxable Income and Taxes Payable for Individuals Learning Goals para10,000 Computation Of Taxable Income For An Individual 34Taxable income34 is defined in the Act as a taxpayers net income for the year, plus or minus the deductions permitted by Division C. While Part I, Division B, of the Act focuses on the computation of income for tax purposes, Division C contains the statutory rules for determining taxable income from net income for tax purposes. The following illustrates the three distinct steps in computing income tax liability. These steps apply to both corporations and individuals. Division C includes a number of allowable deductions, including the rules relating to these deductions, but only a few of these apply to individuals. Division C deductions applicable to individuals include those for: Section 110 8212employee stock options, charitable donations of employee stock option shares, shares received under a deferred profit sharing plan, home relocation loans, workers compensation, social assistance, treaty and international organization exemptions, and vows of perpetual poverty. Section 110.2 8212deduction for lump-sum payments. Section 110.6 8212deduction for capital gains on farm property and shares of a qualified small business corporation. Section 110.7 8212deduction for northern residents. Section 111 8212deduction for carryover losses including non-capital losses, net capital losses, restricted farm losses, and farm losses. As shown, the deductions permitted are quite specific and, hence, will not be available to all taxpayers. Where an individual claims more than one deduction in the same taxation year, an ordering rule is provided. para10,010 Miscellaneous Division160C Deductions and Additions para10,032 Legislative intent and government policy Income and losses are computed for a taxation year, which is a somewhat arbitrary period. Over a longer period, losses might be expected to offset income, with only the net income being taxable in that longer period. The availability of a carryover period for losses is intended to broaden the period within which losses can offset income. The statute provides for losses to be carried back against prior years income or forward against future years income. Taxpayers are thus provided some relief from the economic risk of an activity and are provided with encouragement to persevere. The necessity for limitations is, however, crucial. Limitations, together with the broad general rules that apply to the utilization or restriction of various types of losses, will be discussed in this chapter. Commentary in previous chapters has alluded to the fact that losses which cannot be applied in the year in which they occur because of a restriction in Division160B may be deducted in Division160C by carrying the losses back three years through amended returns andor applying the balance of the losses to future years, subject to any further restrictions as indicated below. para10,035 Non-capital loss carryovers A 34non-capital loss34 (non-CL) available for carryover is a defined term. For individuals, the definition can be summarized in computational form as follows: Note that in order to become a carryover non-capital loss, a current years loss from non-capital sources must, in essence, exceed income from all other sources in the current year. Non-capital losses may be carried over as follows, with the earliest losses being applied first: Note that the portion of an allowable business investment loss, which is discussed in some detail in Chapters 7 and 13, not used in the year of loss, becomes a non-capital loss and is available for carryover in the manner just described. para10,040 Net capital loss carryovers ITA: 111(8) 34net capital loss34 A 34net capital loss34 (net CL) for a particular taxation year available for carryover to another year is defined to be the excess of allowable capital losses over taxable capital gains for that particular year plus allowable business investment losses not absorbed in the seven-year carryforward period as a non-capital loss, as discussed above. Net capital losses may be carried back three years and forward indefinitely. It is important to note that net capital losses for a particular year are calculated using the inclusion rate of that year. The following are the historical inclusion rates. Capital Gains Inclusion Rate: Since net capital losses may arise in years with different capital gains inclusion rates to be deducted against other net taxable capital gains computed by other inclusion rates, it is necessary to convert net capital losses to the capital gains inclusion rate appropriate to the carryover year in which the net capital loss is deducted. Net capital losses realized in a year with a lower inclusion rate must be increased when carried forward to a year with a higher inclusion rate. Net capital losses realized in a year with a higher inclusion rate must be decreased when carried back to a year with a lower inclusion rate. The amount of the net capital loss to be deducted in the year, taking into account any differences in the rates of inclusion, is computed using the following formula: (a) net taxable capital gains for the year and (b) the total of each amount for different years of net capital losses determined by the formula A160is the amount of the net capital loss arising from a particular 34loss year34 and claimed in Division C in the current year B160is the inclusion rate for the year in which the net capital loss is to be deducted and C160is the inclusion rate for the year in which the loss was realized. For example, a net capital loss of 9,000 realized in 1999 with its 3 4 inclusion rate would be converted to 6,000 in 2008 with its 1 2 inclusion rate (i. e. 9,000 215 1 2 3 4 6,000). Conceptually, the 9,000 net capital loss in 1999 resulted from a 12,000 capital loss (i. e. 9,000 215 4 3 ). The same 12,000 capital loss in 2008 would result in a net capital loss of 6,000 (i. e. 12,000 215 1 2 ). Note that both the words 34deducted34 and 34claimed34 are used in reference to net capital losses. The word 34claimed34 appears to refer to net capital losses in their original, unadjusted amount as computed in the 34loss year34 at the inclusion rate for that year. The word 34deducted34 appears to refer to the net capital losses after they have been adjusted by the formula to the inclusion rate appropriate for the year in which they will offset taxable capital gains. Larry Loser had net capital losses of 10,000 in the taxation year ending December16031, 1987 and 2,000 in each of the taxation years ending December16031, 1989 and 1994. He had capital gains of 5,000 in 1998, 4,000 in 1999, and 3,000 in 2008. He has had no other capital gains or losses. Determine the maximum amount to be deducted in the taxation years 1998, 1999, and 2008. mdashNOTE TO SOLUTION (1) 160The 10,000 of 1987 net capital loss is a fractional amount computed at a 1 2 inclusion rate. This amount is adjusted to the 1998 inclusion rate of 3 4 as follows: The 2,000 of 1989 net capital loss is a fractional amount computed at a 2 3 inclusion rate. This amount is adjusted to the 1998 inclusion rate of 3 4 as follows: The 2,000 of 1994 net capital loss is a fractional amount computed at a 3 4 inclusion rate. Therefore, it need not be adjusted for use before February16028, 2000. (2) 160The losses are adjusted from the 3 4 inclusion rate (as adjusted above) to the 1 2 inclusion rate as follows: These adjustment factors do nothing more than convert the fractional loss of a particular year into a full loss by dividing by 1 2 . 2 3 or 3 4 in the denominator (i. e. item C in the formula) and then computing the net capital loss at the inclusion rate for the year of the deduction by multiplying by 3 4 . 2 3 . or 1 2 in the numerator (i. e. item160B in the formula). Hence, 10,000 divided by 1 2 is 20,000 which was the full capital loss in 1987 before the 1 2 inclusion rate was applied. Then 20,000 multiplied by 3 4 produces 15,000 which is the net capital loss stated in terms of a 3 4 inclusion rate used before February16028, 2000. Note that the losses carried forward from the 34loss year34 are those from the earliest loss year. This is illustrated in the net capital loss carryover calculation presented above. Note, also, how net capital losses deducted in a particular year, as modified by the adjustments for different inclusion rates, are limited to net taxable capital gains of that year. para10,045 Farm loss When a taxpayer incurs an operating loss from carrying on a farm business, current-year losses generally are not treated any differently than losses are treated for any other type of business that result in a non-capital loss, unless the restricted farm-loss rules or hobby farm considerations apply. Where farming is not the taxpayers chief source of income, the CRA will frequently attempt to apply the restricted farm-loss rules. These have been the source of considerable tax litigation over the years. The difficulty of the provision is in the wording 34where a taxpayers chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income34. para10,045.10 Farming as a chief source of income 77 DTC 5213 (S. C.C.) In Moldowan v. The Queen . the Supreme Court defined the principal criteria for determining whether a taxpayer is carrying on a farm business as hisher chief source of income as: bull time devoted to the farming business bull capital committed to the business and bull the actual and potential profit as indicative of a reasonable expectation of profit. According to the Supreme Court of Canada (S. C.C.), these criteria were considered among other relevant facts. For example, in this case, Mr. Moldowan devoted all his time in July and August to breeding horses and invested a significant amount of capital in the development of a racetrack and stables. The taxpayer also had other investments and was a full-time businessman. Justice Dickson, writing for the S. C.C. described Moldowan as carrying on one of many businesses and, in here the ownership and training of horses was held to be a sideline business. The S. C.C. pointed out that the Income Tax Act considers three classes of farmers: bull those for whom farming can be reasonably expected to provide their chief source of income bull those for whom farming is carried on as a sideline business and bull those who carry on farming as a hobby. para10,045.20 Sideline farming business Generally, individuals who carry on a sideline farming business will be subjected to the restricted farm-loss provisions. This category assumes (and it must be demonstrated when necessary) that there is a reasonable expectation of profit from the farming operation. The amount of farm losses that may be deducted from other sources of income during a taxation year is restricted. The amount of farm loss from a sideline farming business that may be deducted during the current year is the lesser of: bull the actual loss and bull 2,500, plus half of the next 12,500 of losses for a year (maximum 8,750). Farm losses in excess of 8,750 become restricted farm losses and may not be utilized during the year. Restricted farm losses are deductible under paragraph 111(1)( c ), in computing taxable income for the three preceding taxation years as a loss carryback, or in the following 20 taxation years as a loss carryforward. A restricted farm loss from other year(s) is only deductible in calculating taxable income to the extent of the lesser of net farming income in the year and income calculated under section 3. Unless there is farm income in the year, restricted farm losses will not be deductible in arriving at taxable income. para10,045.30 Hobby farm losses A 34hobby34 farmer is a category of a farming operation that is considered by the CRA or the courts to have no reasonable expectation of profit. The reason for distinguishing a hobby farm from a farming business is to ensure that hobby farmers do not obtain deductions for expenses incurred for personal hobbies. The loss incurred is considered to be a personal or living expense, and hence, not deductible. This treatment is consistent with the treatment of any other hobby where there is no reasonable expectation of profit. para10,060 Capital Gains Deduction8212Historical Overview Individuals can shelter up to 750,000 of capital gains on qualified small business corporation shares, qualified farm property, or qualified fishing property by claiming a capital gains deduction in the computation of taxable income. The capital gains deduction originated in 1985. The 1985 federal budget introduced a lifetime cumulative deduction for net taxable capital gains (net TCGs) for individuals (other than trusts) resident in Canada. The announced purpose of this deduction was to provide an incentive for investment. Until the February16025, 1992 federal budget, the deduction was virtually unrestricted as to type of capital gains on a disposition. The February16025, 1992 federal budget imposed a restriction on the capital gains deduction resulting from the disposition, after February 1992, of most real property (i. e. land and buildings), described as non-qualifying real property. Since the whole thrust of the present Act is to tax a fraction of capital gains, the introduction of this provision created considerable complexity in the legislation, to accommodate this exception. The February 22, 1994 federal budget eliminated the 100,000 lifetime general capital gains deduction for gains realized on dispositions of property occurring after the budget date. However, the budget did not eliminate the lifetime capital gains exemption for shares of a qualified small business corporation or for qualified farm property that existed in 1992. The budget which eliminated the 100,000 lifetime general capital gains exemption contained a provision which would allow an individual to recognize all or any part of the gains on the taxpayers capital property accrued to February16022, 1994. Generally, the individual had to file an election with his or her 1994 tax return to recognize an amount of accrued gain that could be offset by the available capital gains exemption. The gain that was recognized by this election will reduce future capital gains by either increasing the cost of the property elected on or creating a special account which can be drawn down by future capital gains on those assets. These special accounts are called 34exempt gains balance34 for eligible capital property and 34exempt capital gains balance34 for mutual funds. The capital gains deduction available on qualified small business corporation shares will be discussed in Chapter16013. para10,065 The Qualified Farm Property CGD The maximum CGD may be claimed as a deduction against any capital gains on qualified farm property (QFP). QFP is defined at subsection 110.6(1) as: bull real property, used in a farming business in Canada by either the taxpayer (including beneficiaries under certain trusts), a spouse or common-law partner, a child or a parent, a corporation (which is a family farm corporation), or a partnership (which is a family farm partnership) bull share capital in a family farm corporation bull an interest in a family farm partnership and bull an eligible capital property used in a farming business in Canada. There are definitions in the Act for each of these four types of QFPs, and also certain 34time period34 tests are imposed. These definitions and tests are far too extensive to elaborate on in this text. para10,066 The Qualified Fishing Property CGD The maximum lifetime capital gains exemption is extended to include capital gains realized on dispositions (occurring on or after May1602, 2006) of a fishing property, a share of the capital stock of a family fishing corporation, an interest in a family fishing partnership, or a qualified fishing property. The terms 34share of the capital stock of a family fishing corporation34 and 34interest in a family fishing partnership34 are defined in a manner similar to the family farming definitions. One half of gains realized on the disposition of eligible capital property that is qualified fishing property are eligible for the capital gains exemption. para10,070 Ordering of Division C Deductions para10,075 General ordering rules for Division160C para10,100 Computation Of Tax For Individuals The total tax credit is a maximum of 2,880 (i. e. 15 of 9,600 15 of 9,600). This tax credit is available if an individual supports his or her spouse. Note, however, that the spouses tax credit base is reduced by the Division160B income of the dependent spouse for the whole year, even if the marriage occurred in the year. On the other hand, if the individual was living apart from his or her spouse at the end of the year because of a marriage breakdown, only the spouses income for the year, while married and not separated, is considered. The CRAs position has been that in the year of marriage both spouses cannot claim each other even if the quantum limitations have been adhered to since they both cannot have supported each other. ITA: 248(1) 34common-law partner34 A common-law partner is treated like a spouse. The term 34common-law partner34 is defined as two persons, regardless of sex, who co-habit in a conjugal relationship and have done so for a continuous period of at least one year or who is the parent of a child of whom the taxpayer is also a parent. Hence, the married status tax credit is allowed in a common-law relationship if the conditions in the extended meaning are met and the conditions in paragraph160118(1)( a ) are met. para10,150 Equivalent-to-married status for wholly dependent person credit A tax credit base equal to the tax credit base for married status is provided in respect of a wholly dependent person where the taxpayer is not entitled to a married credit (i. e. an individual who is not married or living in a common-law relationship). This provision might apply to an individual who, at any time in the year, was single, divorced, separated, widowed and who supported a relative. The calculation of the credit is the same as that shown for the married credit, with the Division160B income of the wholly dependent person in excess of the threshold reducing the credit. A number of additional conditions must apply for the tax credit to be available. ITA: 248(1) 34self-contained domestic establishment34 IT-513R, par. 11821122 bull The dependent person must live, at some time in the year, in the same self-contained domestic establishment as the taxpayer claiming the tax credit. The dependant must be wholly dependent for support on that taxpayer andor other persons. The taxpayer need not own the residence. A rental unit qualifies. bull The dependant must be related to the taxpayer by blood, marriage or adoption. As a result, nieces, nephews, aunts, uncles and cousins would not qualify as a marital equivalent under this provision (unless they fit the definition of child which is very broad and should be examined). bull Unless the dependant is a child of the taxpayer, the dependant must be resident in Canada. 97 DTC 5081 (F. C.T. D.) bull Unless the dependant is the parent or grandparent of the taxpayer or is dependent by reason of physical or mental infirmity, the dependant must be under 18 years of age at any time in the year. In the case of The Queen v. Mercier . the taxpayer argued that the age requirement for children discriminates against single parents with children 18 years of age or older who, in the opinion of the taxpayer, should qualify for the credit and, hence, violates the Charter of Rights and Freedoms. The Court held that the provision does not violate the equality guarantee of the Charter. bull Only one equivalent-to-married tax credit is available to a taxpayer. bull The dependant cannot be claimed under this tax credit if the dependant has been claimed under the married status credit by another taxpayer. bull Where two taxpayers are eligible for the equivalent-to-married tax credit in respect of the same person or the same domestic establishment, only one person is permitted the tax credit and only one equivalent-to-married tax credit can be claimed for a given domestic establishment. If the taxpayers cannot agree as to who should have the tax credit, then neither can have the tax credit. For example, Tom and Donna, who are both single, support their mother in the same domestic establishment. Either Tom or Donna can have the tax credit, but not both. If they cannot agree, then neither can have the tax credit. bull Where a taxpayer has claimed a dependant under this paragraph, neither the taxpayer nor any other taxpayer can claim that dependant for the 18 years of age or older and infirm credit or the caregiver credit. For example, if a married couple with one infirm child, 20 years of age, separates during the year and the spouse who supports the child claims the child under the equivalent-to-married credit, then that spouse cannot make an additional claim as a dependent child 18 years of age or older and infirm. The other spouse also cannot make a claim for that child even if he or she did, in fact, wholly support the child during part of the year. bull Where an individual is required under the terms of a written agreement or court order to make payments in the year in respect of the support of a child, the individual is not entitled to claim any personal tax credit in respect of the child. It might be noted that the interpretation of the phrase 34at any time in the year is an unmarried person34 appears to have the effect of enabling a person who presently qualifies for an equivalent-to-married tax credit and marries during the year to still qualify for this tax credit in the year of marriage, but not subsequently. Of course, the person claiming a dependant would not be allowed a claim for marital status. para10,155 Child amount The child amount is a non-refundable child tax credit for parents based on an amount of 2,038 215 15 306 for each child under the age of 18 at the end of the year. Where the child resides together with the childs parents throughout the year, either of those parents may claim the credit. In other cases, the credit is claimable in respect of a child by the parent who is eligible to claim the wholly dependent person credit for the year in respect of a child (or who would be eligible if that child were the parents only child). For the year of the birth, adoption or death of a child, the full amount of the credit is also claimable. Any unused portion of the credit is transferable to the parents spouse or common-law partner. para10,160 Single status8212Basic personal tax credit The base of the basic personal tax credit is set at 9,600 in 2008 and, when multiplied by 15, provides a tax credit of 1,440 (rounded) for 2008. para10,165 Caregiver credit for in-home care of relative Individuals are entitled to a credit of up to 614 (i. e. 15 of 4,095) for residing with and providing in-home care for an adult relative. For this purpose, the relatives include the individuals child or grandchild or the individuals or spouses common-law partners parent, grandparent, brother, sister, aunt, uncle, nephew or niece. A parent or grandparent must either have attained the age of 65 years or be dependent because of physical or mental infirmity. All other dependent relatives must have attained the age of 18 and be dependent because of mental or physical infirmity. The base amount of 4,095 is reduced by the dependants income in excess of 13,986. The credit is not available if the dependants income exceeds 18,081. Where an individual is entitled to an equivalent-to-married credit for a dependent, no one can claim the caregiver credit or the credit for infirm dependants age 18 or older in respect of that dependant. para10,170 Dependants credit A dependant is defined to include, for this purpose, a child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew of the taxpayer or the taxpayers spouse or common-law partner. However, the dependants must have attained the age of 18 before the end of the year in order to qualify for the tax credit. Also, the individual must be dependent on the taxpayer because of mental or physical infirmity. The tax credit is computed for 2008 as: IT-513R, Appendix A The CRA indicates that mental or physical infirmity in respect of the dependent person should require the infirm person to be dependent during a considerable period of time and not just temporarily. Note that the maximum amount of the dependant credit is the same as that of the caregiver credit, but the income threshold is much lower for the dependant credit. Thus, the dependant credit can be eliminated more quickly, making the caregiver credit more attractive, numerically. However, the caregiver credit has the more restrictive condition that the dependant must ordinarily reside in the same self-contained domestic establishment as the taxpayer claiming the credit. The tax credit available for a dependent person must be shared by all individuals who are entitled to a tax credit in respect of the same dependant. Where these supporting individuals cannot agree on an allocation of the tax credit, the Minister may make the allocation. Furthermore, a taxpayer who is entitled to a deduction for support payments for a spouse is not entitled to claim a tax credit for the spouse. However, the CRA does permit a tax credit claim in the year of separation or divorce. Where an individual is required under the terms of a written agreement or court order to make payments in the year in respect of the support of a child, the individual is not entitled to claim any personal tax credit in respect of the child. This provision is necessary to parallel the non-deductibility of child support payments as discussed in Chapter1609. The subsection ensures that, since the child support payments are not deductible, the supporting parent would not be able to claim this deduction. para10,175 Additional amount Where a taxpayer is entitled to claim a dependant for the equivalent-to-married (ETM) credit, the dependant cannot be claimed under the caregiver credit or the credit for infirm dependants age 18 or older. Where the caregiver credit or the credit for an infirm dependant age 18 or older would have been larger than the ETM credit, the difference can be claimed under this provision as an additional credit. The effect is to allow the equivalent of the caregiver credit for a person in respect of whom the ETM credit is claimed. para10,180 Age credit The non-refundable age tax credit is computed on a base of 5,276 for 2008. Since the appropriate percentage for the year is 15, the tax credit for 2008 is 791 (rounded). It is available to an individual who has attained the age of 65160years before the end of the year. However, this age tax credit is reduced by 15 of the excess of the individuals Division160B income over 31,524 and is, thus, completely eliminated when the net income exceeds 66,697. For example, if an individuals Division B income is 55,000, the age tax credit would be computed as: para10,185 Pension income amount This non-refundable pension tax credit is determined as follows: Age 65 and Older The pension credit is equal to 15 of the lesser of: 2. the 34pension income34 Pension income includes, but is not limited to: (a) a payment in respect of a life annuity arising from a superannuation pension fund or plan (b) an annuity payment under a registered retirement savings plan or a payment under a registered retirement income fund (c) an annuity payment under a deferred profit sharing plan and (d) the income portion of other annuity payments. The pension credit is equal to 15 of the lesser of: 2. the 34qualified pension income34 The only difference is to change the definition of pension income to qualified pension income. Qualified pension income includes: (a) a payment in respect of a life annuity arising from a superannuation pension fund or plan or (b) certain annuities or payments received by the individual as a consequence of the death of the individuals spouse. Certain amounts are not included in pension income or qualified pension income. These excluded amounts are: (a) the Old Age Pension or Supplement (b) the Canada Pension Plan (or provincial plan) pension ITA: 248(1) 34death benefit34 (c) a death benefit (d) the amount of any payment which is included in income and then deducted under another provision such as lump-sum payments from withdrawing from a pension fund, an RRSP or a DPSP, retiring allowances, or pension benefits or DPSP benefits transferred into a spousal RRSP and (e) a payment out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or a prescribed provincial pension plan. para10,190 Canada employment credit This non-refundable credit is computed as 15 times the lesser of: bull The individuals employment income for the year, and para10,195 Summary of personal tax credits Exhibit 10-4 provides a summary of the numerical components of the most common personal tax credits. EXHIBIT 10-4 Section 118 Tax Credits (rounded) For the purposes of this book, where provincial tax credits are calculated for individuals, a rate of 10 (equal to the lowest provincial rate used in this book) will be applied to the above federal tax credit base, net of any applicable reduction for income in excess of the federal Division B income threshold. George, age 50, has the following dependants, each of whom has Division B income as indicated for 2008: Determine the personal tax credits available under section 118 for each of Georges dependants for 2008. All of the dependants live with George. Note that neither of the sons provides a dependant tax credit. They are covered under the Child Tax Benefit system, discussed later in this chapter. para10,200 Adoption Expense Tax Credit The Act provides a non-refundable tax credit of up to 10,643 in the year in which an adoption is completed for eligible adoption expenses incurred during the adoption period. Details of the credit are as follows: bull eligible adoption expenses include: (i) fees paid to an adoption agency licensed by a provincial or territorial government, (ii) court costs, legal and administrative expenses, (iii) reasonable travel and living expenses of the child and the adoptive parents, (iv) document translation fees, (v) mandatory fees paid to a foreign institution, and (vi) any other reasonable expenses required by a provincial or territorial government or an adoption agency licensed by a provincial or territorial government, bull the adoption period is the period that: (a) begins at the earlier of the time that the childs adoption file is opened with a provincial or territorial ministry responsible for adoption (or with an adoption agency licensed by a provincial or territorial government) and the time, if any, that an application related to the adoption is made to a Canadian court, and (b) ends at the time of the adoption. bull an eligible child is one who has not reached the age of 18160years at the time that the adoption is completed. para10,210 Public Transit Passes Credit This non-refundable tax credit is based on the total of all amounts paid in the year in respect of eligible public transit passes. The amounts paid for passes for the use of the individual taxpayer, the individuals spouse or common-law partner, or a child of the individual, who has not reached the age of 19 before the end of the year. An eligible public transit pass is a public transit pass that is valid for a period of at least one month of public transit. Public transit includes transit by local bus, streetcar, subway, commuter train, commuter bus, and local ferry. Receipts for passes must be retained for verification purposes. This credit accommodates: bull electronic payment cards for costs related to the use of public transit for at least 32160one-way trips during an uninterrupted period not exceeding 31 days, and bull weekly passes where an individual purchases at least four consecutive weekly passes. para10,220 Childrens Fitness Credit This non-refundable tax credit is based on up to 500 of eligible fees for enrolment of a child under the age of 16 in an eligible program of physical activity. The credit can be claimed by either parent, for the 2008 taxation year and subsequent taxation years. It must be supported by a tax receipt that contains sufficient information for the CRA to monitor compliance. Eligible expenses include those for the operation and administration of the program, instructors, renting facilities, equipment used in common (e. g. team jerseys provided for the season), referees and judges, and incidental supplies (e. g. trophies). Expenses that are not eligible include the purchase or rental of equipment for exclusive personal use, travel, meals, and accommodation. An eligible program of prescribed physical activity is defined as: An ongoing, supervised program, suitable for children, in which substantially all of the activities undertaken include a significant amount of physical activity that contribute to cardio-respiratory endurance, plus one or more of muscular strength, muscular endurance, flexibility and balance. To recognize the particular challenges that children with disabilities face, the age limit for them to qualify is 18 years instead of 16 years. In addition, a separate 500 non-refundable tax credit for disabled children who spend a minimum of 100 on registration fees for eligible programs is provided. The extra 400 recognizes the extra costs that children with disabilities encounter when involved in programs such as these. bull of ecologically sensitive land. The 75 of Division B income limit should not be expected to apply in most cases. However, the limit would become an effective limit, if gifts are made in an unusual year of relatively low income or a loss year. para10,245 Total charitable gifts Gifts made to certain types of organizations listed under the definition of 34total charitable gifts34 may be eligible for the tax credit to a maximum tax credit base of 75 of Division160B income. Only the gifts to these specified organizations are eligible and they must be supported by proper receipts. Where gifts of capital property and works of art, which are inventory to the donor, have a fair market value greater than adjusted cost base or cost amount, and the gift is not cultural property, the taxpayer may make a designation of a transfer price. The taxpayer can designate a transfer price between fair market value and adjusted cost base or cost amount as proceeds of disposition and the value of the gift. Capital gains or income could, thus, be avoided by selecting the adjusted cost base or cost amount but the value of the gift and the resultant tax credit under these paragraphs would be lower. If personal-use property is acquired as part of an arrangement under which the property is gifted to a charity, then the 1,000 rule will not apply. This rule is designed to prevent abuses connected with the donation of art and other personal-use property. para10,250 Gifts of publicly traded securities The income inclusion rate for capital gains from gifts of publicly traded securities is reduced to zero for this purpose, instead of the usual 50. Securities eligible for this treatment include shares listed on a designated stock exchange. The 2007 federal Budget extended the tax-free capital gain rule to donations of such securities to private foundations effective on or after March 19, 2007. Legislation eliminates tax on capital gains realized on the exchange of unlisted shares and partnership interests for publicly-traded securities, if the publicly-traded securities are then donated to a qualified donee within 30160days of the exchange (in which case, any further capital gain on the donation would also be nil). The unlisted securities must include, at the time they are issued, a condition allowing the holder to exchange them for publicly-traded securities, and the publicly-traded securities must be the only consideration received on the exchange. Special rules apply where the exchanged securities are partnership interests. This applies to donations made on or after February16026, 2008. para10,255 Total cultural gifts Where an artist makes a cultural gift that is a work of art created by the individual and that is property in the artists inventory, the artist is deemed to have received proceeds of disposition equal to the cost to the artist of the work of art. A cultural gift is included in the definition of 34total cultural gifts34 and means objects that the Cultural Property Export Review Board has determined meets certain conditions. The result of this provision is that the artist is entitled to a credit based on the full fair market value of the art donated, but has no income to report as a result of the donation and its consequent disposition of the art from inventory. There is no net income limitation and there is a five-year carryforward. para10,260 Tickets to events Where a charitable organization issues receipts for the price of tickets to fund-raising events involving an element of entertainment or other benefit for the donor, only the excess of the amount paid over the fair market value of the benefit received is allowed to be considered part of the charitable gift. para10,265 Total Crown gifts Gifts made to the Government of Canada or to the government of a province are considered to be gifts made to Her Majesty and are defined as Crown gifts. There is a 75 of net income limitation to equal the limitation on other charitable gifts. Again, there is a five-year carryforward on these gifts. para10,270 Total ecological gifts A net income limitation of 100 applies to donations of certain ecologically sensitive land. This provision is meant to encourage the conservation and protection of Canadas environmental heritage and applies to qualified donations of land including qualified donations of covenants, servitudes and easements. As a further incentive, for ecological gifts made on or after May1602, 2006, any capital gain realized on the donation (other than gifts to a private foundation) are subject to a zero capital gains inclusion rate. para10,280 Medical Expense Credit para10,285 Calculation of the credit Not all medical and health care costs are fully covered by a provincial health insurance plan or by a private health services plan. Expenses that must be borne by the taxpayer may qualify for the non-refundable medical expense credit. For example, certain cosmetic or elective procedures and a fraction of dental services may not be covered. The medical expense tax credit is calculated as: In essence, the federal tax credit is 15 (10 used for provincial tax credit) of medical expenses in excess of the 1,962 for 2008 or 3 of the Division160B income threshold. The medical expenses must be proven by filing receipts and must be paid within any 12-month period ending in the year unless the individual dies in the year. Where the individual dies in the year, the medical expenses must be paid by the claimant for the deceased person within any period of 24 months that includes the date of death. para10,290 Medical expenses The legislation includes over 30 detailed paragraphs outlining the very technical rules and conditions defining medical expenses. A brief description of these paragraphs is provided below however, a careful examination of these provisions and an Interpretation Bulletin must be made in order to determine the eligibility of each item. ITA: 118(6), 118.4(2) IT-519R2, par.1603 ( a )8212This paragraph includes in the tax credit base general medical expenses (illness, hospitalization, etc.) paid to dentists, nurses and medical practitioners (a wider term than medical doctors for the taxpayer, his or her spouse and dependants of the individual. Hence, either spouse may qualify for a tax credit for the expenses of each other. For other dependants, the definition includes most individuals related to the taxpayer and dependent on the taxpayer for support. ( b ), ( b .1), ( b .2), ( c ), and ( d )8212These five provisions deal with full-time or part-time attendants or attendants for the care of an individual eligible for the impairment credit andor full-time care in a nursing home, group home or otherwise. Each provision has its own unique conditions. The amount eligible for the credit in respect of attendant care for an individual eligible for the impairment credit is limited to 10,000 (20,000 in the year of death). More than 10,000 can be claimed in respect of an individual, but no impairment credit or attendant care deduction can be claimed in respect of that individual. ( e )8212This category of expense, for care and training for the mentally or physically handicapped, is not completely medical in nature. ( f ), ( g ), and ( h )8212These provisions deal with the transportation of taxpayers to medical centres. Note that for travel expenses envisaged in paragraph160( h ), individuals may choose a detailed or simplified method to calculate certain travel expenses. The detailed method would use actual costs, substantiated by receipts. The simplified method applies to meals and vehicle expenses which can be based on flat rates. The flat rate for meals is 15 per meal to a maximum of 45 per day, per person. The flat rate for vehicle expenses is based on the province or territory in which the individual travels and varies by province or territory. (See Chapter1609. under moving expenses, for a detailed list of rates for vehicle expenses.) ( i ), ( i .1)8212These provisions deal with certain specific medical equipment or products. ( j )8212These paragraph allows for the expenses of eyeglasses, etc. for the taxpayer, his or her spouse or a dependant. ( k )8212The cost of specialized equipment dealing with oxygen and of insulin and of other specified substances is allowable by virtue of this paragraph. ( l )8212This paragraph permits certain specific expenses related to the care of a trained dog who assists the blind or deaf and the cost of an animal trained to assist an individual who has a severe and prolonged physical impairment. ( l .1)8212This paragraph allows a reasonable cost for arranging a bone marrow transplant or organ transplant. ( l .2), ( l .21)8212These paragraphs allow expenses for modifying a home if an individual is confined to a wheelchair for a long period of time, lacks normal physical development, or has a severe and prolonged mobility impairment. ( l .3)8212This paragraph allows expenses for rehabilitative therapy to adjust for speech or hearing loss, including training in lip reading and sign language. ( l .4)8212Amount paid on behalf of an individual with a speech or hearing impairment for sign language interpretation or real-time captioning services if the payment is made to a person who is in the business of providing such services. ( l .41)8212Amount paid on behalf of an individual with a mental or physical impairment for note-taking services if the payment is made to a person who is in the business of providing such services and the individual has been certified as requiring those services. ( l .42)8212The cost of voice recognition software used by an individual with a physical impairment if the individual has been certified as requiring that software. ( l .43)8212This paragraph allows expenses for reading services used by an individual who is blind or who has a severe learning disability, if the need for the service is certified in writing by a medical practitioner and paid to persons engaged in the business of providing such services ( l .44)8212This paragraph allows expenses for deaf-blind intervening services used by an individual who is both blind and profoundly deaf (if paid to persons engaged in the business of providing such services) ( l .5)8212This paragraph allows a maximum of 2,000 incurred to move an individual to housing that is more accessible or in which the individual is more mobile or functional. ( l .6)8212This paragraph allows reasonable expenses relating to alterations to a home driveway to facilitate access to a bus by an individual with a severe and prolonged mobility impairment. ( l .7)8212This paragraph allows the lesser of 5,000 and 20 of the cost of a van adapted within six months of its purchase for use by an individual using a wheelchair. ( l .8)8212This paragraph allows reasonable expenses incurred to train an individual to care for a relative having a mental or physical infirmity. The relative must be either a member of the taxpayers household or dependent on the taxpayer for support. ( l .9)8212This paragraph allows expenses for remuneration for therapy provided to the patient because of the patients severe and prolonged impairment. ( l .91)8212This paragraph allows expenses for remuneration for tutoring services that are rendered to, and are supplementary to the primary education of, the patient who has a learning disability or mental impairment. ( m )8212This paragraph provides the statutory authority for a regulation which supplements the equipment listed in paragraphs ( i ) and ( k ), noted above, and may stipulate a dollar limit for claims in respect of a particular device or equipment. ( n )8212Drugs and prescriptions, etc. as prescribed by a medical practitioner and administered by a pharmacist, are allowed by virtue of this paragraph. ( o )8212This provision allows certain diagnostic services such as x-rays, laboratory tests, etc. ( p )8212The cost of dentures made in a province by an authorized person is allowed by this provision. ( q )8212This paragraph allows a premium for a private health services plan. To the extent that the premium has been deducted in computing the individuals business income, it is not deductible as a medical expense. ( r )8212The incremental cost, to an individual who suffers from celiac disease, of acquiring gluten-free products if the individual has been certified as requiring a gluten-free diet. ( s ), ( t )8212These paragraphs allow expenses for drugs or medical devices obtained under Health Canadas Special Access Programme ( u )8212This paragraph allows expenses: 8226160for the purchase of medical marihuana or marihuana seeds, from Health Canada, for use by a patient who is authorized to possess marihuana for medical purposes under the Marihuana Medical Access Regulations (MMAR) or who holds an Exemption for possession under Section 56 of the Controlled Drugs and Substances Act (CDSA) and 8226160for the purchase of medical marihuana, for use by a patient who is authorized to possess marihuana for medical purposes under the MMAR or who holds an Exemption for possession under Section 56 of the CDSA, from an individual who possesses a Designated-person Production Licence under the MMAR to cultivate or produce marihuana for medical purposes on behalf of that patient or who holds a designated person Exemption for cultivation or production under Section 56 of the CDSA to cultivate or produce marihuana for medical purposes on behalf of that patient. Mr.160Taxpayer has income under Division160B of 25,000 and 30,000 for 2007 and 2008, respectively. His wife and children have no income in these years. He incurs the following receipted medical expenses on behalf of himself, his wife, and three dependent children. para10,305 Amount of and conditions for impairment credit The Act provides the formula for calculating the non-refundable tax credit for an individual with a mental or physical impairment and the conditions for entitlement to the credit. The tax credit for 2008 is 1,053 (i. e. 15 of 7,021). This tax credit is available to taxpayers who have 34one or more severe and prolonged impairments in physical or mental functions34 that has been certified by a medical doctor. A health professional, other than a medical doctor, may be eligible to certify the impairment. An optometrist may certify the existence of an impairment of sight. An audiologist may certify an impairment of hearing. An occupational therapist may certify the existence of an impairment with respect to an individuals ability to walk or to feed or to dress himself or herself. A psychologist may certify to the existence of an impairment with respect to an individuals ability to perceive, think and remember. A speech-language pathologist may certify a severe and prolonged speech impairment. A physical therapist may certify a marked restriction in walking. Cumulative effects of multiple restrictions must usually be certified by a medical doctor. The impairment, or the cumulative effect of multiple restrictions, must have caused the individual to be markedly restricted all or almost all of the time in his or her basic activities of daily living. The impairment must have lasted or be expected to last for a continuous period of at least 12160months. Such impairment would include blindness, deafness and other listed impairments. It would also occur where, even with the use of appropriate devices, medication or therapy, the individual is generally unable (or requires an inordinate amount of time) to feed or to dress himself or herself or perform specified fundamental functions. No claim can be made under this subsection if a claim has been made for a full-time attendant or care in a nursing home. However, a claim for expenses of an attendant costing less than 10,000 in computing the medical expense tax credit will not deny this impairment tax credit. A supplement amount of 4,095 for 2008 is available for each disabled child under the age of 18 years at the end of the year. The supplement amount is reduced by the excess of the total of child care and attendant care expenses, paid in the year and deducted in respect of the child, over 2,399 (for 2008). para10,310 Transfer of impairment credit A transfer of this credit is available to a taxpayer, if the dependants themselves cannot use all or some part of this credit. The impaired dependant must use as much of the credit as necessary to reduce his or her federal income tax to zero, before the remainder can be transferred. The transfer of the unused part of the impairment credit is available to a taxpayer if: bull the taxpayer claimed an equivalent-to-married credit for the dependant bull the dependant was the taxpayers child, grandchild, parent, grandparent (including in-laws), brother, sister, aunt, uncle, nephew or niece, and the taxpayer could have claimed an equivalent-to-married credit for that dependant if the taxpayer did not have a spouse or common-law partner and if the dependant did not have any income bull the dependant was the taxpayers child or grandchild and the taxpayer claimed them as a dependant or for the caregiver credit bull the dependant was the taxpayers child or grandchild and the taxpayer could have claimed them as a dependant or for the caregiver credit if they had no income or bull the dependant was the taxpayers parent or grandparent (including in-laws) and the taxpayer could have claimed them as a dependant of for the caregiver credit if they had no income. The net result of these rules is that if a parent supports two or more disabled children, the parent is entitled to the transfer of the unused portion of the impairment tax credit of those children, even though only one child may be claimed as an equivalent-to-married tax credit. The spousal transfer of this credit is discussed later. ITA: 118.3(3) ITA: 118.2, 118.3, 118.4 ITA: 118.4(2) IT-519R2, par. 3 The legislation deals with the allocation of the impairment tax credit where more than one individual is entitled to the credit for the same dependant. A definition of impairment is contained in the provision and applies not only to the disability credit, but also to the medical expenses credit. A definition of the term used to describe a medical practitioner is also contained in the provision and appears to codify the description in an Interpretation Bulletin. para10,320 Tuition, Education, and Textbook Credits para10,325 Tuition fees The federal tuition fee tax credit is equal to 15 (10 used for provincial tax credit) of eligible tuition fees paid in respect of that year. The Act provides for a tax credit in respect of tuition fees paid to an educational institution in Canada. The fees must be paid to a university, college or other educational institution in respect of courses at a post-secondary school level, or an institution certified by the Minister of Human Resources Development providing courses that furnish a person, who is at least 16160years of age at the end of the year, with skills for an occupation. The total of fees paid to a qualified institution in a year must exceed 100. Tuition fees for full-time and part-time students include items such as library and laboratory charges. Also, eligible for the credit are mandatory ancillary fees, other than student association fees, required to be paid by all full-time and part-time students for courses at the post-secondary school level. Eligible fees include those charged for health services and athletics. In addition to student association fees, the following are excluded: charges for property to be acquired by students, services not ordinarily provided at post-secondary educational institutions in Canada and tax exempt financial assistance to students. Also, mandatory charges paid for the construction, renovation or maintenance of a building or facility, generally, do not qualify for the credit. A fee that would be eligible, but for the fact that it is not required from all students, may be claimed to a limit of 250. The tax credit for tuition paid in the year to a university outside Canada is more restricted. The student must be in full-time attendance at a university in a course leading to a degree. The course must be of at least 13 consecutive weeks duration. A tax credit for fees paid by a Canadian resident who commuted to an educational institution providing courses at the post-secondary level in the United States is allowed. Again, the amount of the fees paid in the year to a particular institution must exceed 100. para10,330 Education credit This federal credit is calculated by a formula which multiplies 15 (10 used for provincial tax credit) of 400 by the number of months in the year during which the individual was enrolled in a qualifying educational program as a full-time student at a designated educational institution. Part-time students at a qualifying post-secondary educational institution who are eligible for the disability tax credit or who, by reason of their certified mental or physical impairment, cannot be enrolled on a full-time basis are treated like full-time students. The enrolment must be proven by filing a certificate issued by the educational institution. Where the student is enrolled at an institution certified by the Minister of Human Resources Development, the purpose of the enrolment must be to obtain or improve skills for an occupation. The terms 34designated educational institution34 and 34qualifying educational program34 are defined. Part-time students (other than students eligible for the impairment tax credit) may claim a federal credit of 15 (10 used for provincial tax credit) of 120 per month during which he or she was enrolled at a designated educational institution and specified educational program. The program must require the student to spend not less than 12 hours in the month on courses in the program. Post-secondary students enrolled in distance education programs or correspondence courses may meet the full-time or part-time requirements if the courses meet the required standards. IT-515R2, IT-516R2 IT-516R2, par. 9821112, IT-515R2, par. 9821111 Two Interpretation Bulletins discuss the detailed rules governing the education tax credit and tuition fee tax credit, respectively. These bulletins provide some very important interpretation of the technical terms relating to these credits and should be examined carefully. In particular, note the difference between the interpretation of 34full-time attendance34 in the two bulletins. para10,335 Textbook credit A non-refundable textbook tax credit is available in addition to the education tax credit. The credit base is: bull 65 for each month for which the student qualifies for the full-time education tax credit amount, and bull 20 for each month that the student qualifies for the part-time education tax credit amount. para10,340 Carryforward The unused portion of a students tuition fee, education, and textbook tax credits can be claimed by the student in a subsequent taxation year. This allows an indefinite carryforward of these credits by the student to the extent that they are not transferred in the year earned to a spouse or supporting individual. Students are permitted to transfer part of the unused credits and carry forward the remainder. para10,345 Transfer of tuition, education, and textbook credits to spouse and parent and grandparent ITA: 118.8, 118.81, 118.9 The tuition fee, education, and textbook credits may be transferred to a spouse or to a parent or grandparent of the student. To qualify, the student must designate, in writing, an amount transferred to a spouse or to a parent or grandparent. The formula for calculating the amount that may be claimed as a tax credit by the spouse or by the parent or grandparent is the lesser of: (a)160the amount determined by the formula A - B where160A160is the lesser of: ITA: 118.01, 118.02, 118.03 160(a)160750 (i. e. 15 of 5,000), and 160(b)160the students tuition credit and education credit for the year (excluding unused amounts carried forward). ITA: 118, 118.3, 118.7 160B160is the amount of the students Part I tax payable after deducting credits for personal, age, pension, and employment, public transit passes, childrens fitness, mental or physical impairment, EI and CPP, and unused tuition and education, and (b)160the amount designated by the student in writing for the transfer to a spouse or to a parent or grandparent. In effect, this formula allows the transfer of the excess of up to 750 of a students tuition, education, and textbook credits over those credits required by the student to reduce federal tax to nil. Debbie, who is not dependent upon any person, was enrolled as a full-time student at the University of Toronto for eight months during 2008. Debbie provides you with the following information for 2008: (A)160Determine the amount of Debbies federal tuition and education credits which can be deducted by her parent. (B)160Determine the amount of Debbies unused federal tuition and education tax credits at the end of 2008. para10,350 Credit for interest on student loans A student may deduct a federal tax credit of 15 (10 used for provincial tax credit) of interest on a federal or provincial student loan payable in respect of the year or in any of the five preceding taxation years. Qualifying loans are those made under the Canada Student Loans Act or a similar provincial statute. para10,360 Credit for Employment Insurance Premiums and CPP Contributions The federal tax credit is equal to 15 (10 used for provincial tax credit) of: (a) all amounts payable by the individual in respect of an employees premiums for Employment Insurance (b) all amounts payable by the individual as an employees contributions under the Canada (or Quebec) Pension Plan and (c) all amounts payable by the individual as a contribution for self-employed earnings under the Canada (or Quebec) Pension Plan. For 2008, the Employment Insurance premium rate for the employee is 1.73 of earnings to a maximum annual earnings amount of 41,100. At this level of earnings the maximum level of premium of 711.03 is reached. (Employers must pay a premium of 2.42 (i. e. 1.4160times the employee payment), for a total maximum of 994.62.) The rate of contribution to the Canada Pension Plan for 2008 is 4.95 of pensionable earnings. The maximum pensionable earnings is 44,900 with a basic exemption of 3,500. Thus, the maximum contribution is calculated as follows: 4.95 of (44,900 - 3,500) 2,049.30 For a self-employed individual, the maximum is twice the above amount or 4,098.60. para10,370 Transfer of Unused Credits to Spouse or Common-law Partner The federal dividend tax credit available to an individual is a non-refundable tax credit. There are two rates of dividend tax credit depending on the source of the dividends: bull a rate of 2 3 of the gross-up applies to dividends paid by a Canadian-controlled private corporation (CCPC) from income subject to tax at the low rate applicable to active business income (ABI), and bull a rate of 11 18 of the gross-up applies to dividends paid by (i) a public corporation resident in Canada (and any other non-CCPC resident in Canada) from income subject to tax at the general corporate tax rate, and (ii) a CCPC resident in Canada to the extent that its income (other than investment income) is taxed at the general corporate rate. Since the gross-up is a fraction of the dividend, the dividend tax credit can be calculated in three different ways depending on the information available: For the purposes of this book, unless otherwise stated, where provincial tax credits are calculated for individuals, a theoretical dividend tax credit rate will be applied to the grossed up dividend as follows: bull a provincial rate of 6 2 3 where the 25 gross-up apples, and bull a provincial rate of 12 where the 45 gross-up applies. Theoretically, the combined federal and provincial dividend tax credit should equal the gross-up of 25 or 45 of the dividend or 20 or 31 of the grossed-up dividend. This will be explored in Chapter 12. This would imply a provincial dividend tax credit rate applied to the grossed-up dividend of: bull 6 2 3 , i. e. 13 1 3 federal 6 2 3 provincial for a total of 20 of the grossed-up dividend, and bull 12, i. e. 19 federal 12 provincial for a total of 31 of the grossed-up dividend. However, provinces, in their use of the tax-on-income (TONI) structure, may specify their own rate of dividend tax credit. As a result of the reduction in the federal corporate income tax rates, the legislation will adjust the federal dividend gross-up and tax credit to coincide with the corporate tax rate reduction. para10,390 Election to transfer dividends to spouse An election is available to deem taxable dividends from taxable Canadian corporations received by one spouse or common-law partner, who cannot use the dividend tax credit because of low income, to be received by the other spouse or common-law partner. However, this election can only be used if the married personal tax credit claimed by the higher income spouse for the dependent spouse or common-law partner is increased or created by transferring the dividend income in this way. If the election can be made, the taxpayer must include the grossed up dividends transferred from the spouse or common-law partner, but may deduct the dividend tax credit available on the dividends. Consider the following situations where the low-income spouse has 300 of grossed up dividends from Canadian-resident public corporations plus some other source of income. In Case 1, an election is available, since after the election, a credit for the spouse has been created. In Case1602, the spousal credit has increased from 360 to 405 by the transfer of the dividends and, hence, the election is available. In Case1603, the election is available, since the spousal credit has increased from 1,035 to 1,080. para10,400 Credits for Part-Time and Non-Residents Generally, for the period of residence in Canada of a part-time resident, the individual can deduct specified tax credits prorated by the number of days that the individual is resident in the year divided by the number of days in the calendar year: bull basic personal amount, married amount, equivalent-to-married amount, dependant amount and caregiver amount ITA: 126(7) 34tax for the year otherwise payable under this Part34 ( a ) The term 34tax for the year otherwise payable under this Part34 is defined for the purposes of the foreign non-business income tax credit. As it applies generally to individuals, it is the tax payable under Part160I of the Act before specified deductions from tax, including the deduction of the dividend tax credit and the credit for employment outside Canada. The foreign business income tax credit, also, applies to individual taxpayers and is similar in its calculation. The major difference is that any business income tax paid but not deducted is available as an 34unused foreign tax credit34 to be carried back three years and forward 10 years. This foreign tax credit will be dealt with in more detail, as it applies to corporations, in the next chapter. Where either non-business or business income taxes paid are not deductible as a credit, all or part of the excess may be eligible for a deduction from an individuals liability for surtax. Furthermore, a non-deductible excess of non-business income tax paid may be eligible for a provincial foreign tax credit. para10,500 Federal Political Contribution Tax Credit A tax credit is available for contributions to a registered federal political party or a candidate for election to the House of Commons. Receipts signed by the registered agent of the party or the official agent of the candidate are required to substantiate the credit claimed. The maximum credit is 650 which is reached with a contribution of 1,275 or more on the following sliding scale: para10,510 Tax on Old Age Security Benefits The Part I.2 tax results in the repayment of federal Old Age Security benefits included in computing the taxpayers income, to the extent that the taxpayers income is in excess of an indexed threshold (64,718 for 2008). The repayment is computed as: Note that the amount of this tax is deductible from income however, offsetting the Part160I.2 tax in part160(b), above, through the deduction removes the potential double tax on this amount, as discussed in Chapter1609. Jimena Buck, a widow, received the Old Age Security benefit of 6,000 in 2008. Her Division160B income, excluding the deduction for the Part160I.2 tax, is 70,000. Outline all of the tax implications of receiving the Old Age Security benefit in this case. para10,520 Tax Reduction on Retroactive Lump-Sum Payments When an individual receives a lump-sum payment in a year that relates to prior years, the graduated tax rate schedule, when applied to the lump sum, may result in more income tax payable in the year of receipt than in the prior years had the lump sum been spread over those previous years. The legislation provides for a reduction of tax on the following lump sums: bull income from an office or employment or income received because of the termination of an office or employment, received under the terms of a court judgment, arbitration award or in settlement of a lawsuit bull superannuation or pension benefits, other than non-periodic benefits bull spouse or child support payments and bull employment insurance and other benefits that may be prescribed by regulations. The right to receive the lump sum must have existed in a prior year. For the tax reduction to apply, the lump sum received in the year must be at least 3,000. The amount of income that is eligible for this special treatment is deducted in arriving at taxable income and then subject to notional tax. The notional tax is calculated as if the lump-sum payment had actually been received in the year to which it related. Interest, calculated at a prescribed rate, is added to the tax to reflect the fact that the notional tax was not actually paid in a previous year. This calculation will not affect any income-based benefits or deductions in those prior years. para10,530 Application of Rules for Computation of Tax and Credits Example Problem 1 The following 2008 correct computation of taxable income for John Q. Citizen has been prepared for your analysis: (1)160John, age 67, and his wife Jill, age 64, are both resident in your province. Jill has no income and is blind. (2)160John has made the following selected payments in 2008: (3)160Johns employer correctly withheld the following amounts: (4)160John filed his return on April 30, 2009. Compute the total amount of federal taxes payable for the year. This 34minimum amount34 minus a special foreign tax credit is then compared to regular Part I tax, net of all non-refundable tax credits (generally, before adding the 48 surtax for income not earned in a province). The greater amount becomes the basis of federal Part I tax for the year. The special foreign tax credit, which is basically equal to the greater of the foreign tax credit determined under normal rules or 15 of foreign income is the only credit available to a taxpayer subject to minimum tax. All other tax credits, such as dividend tax credits and political donation credits will not be deductible from the minimum amount. In addition, even where the minimum amount is less than Part I tax, the restricted tax credits will be available only to the extent that Part I tax payable for the year does not go below the minimum amount. para10,550 Adjusted taxable income The provision sets out the rules for computing adjusted taxable income, being a recalculation of taxable income using certain assumptions set out in the section. The CRAs form160T691, for simplicity, starts with regular taxable income and adds back or subtracts amounts to arrive at adjusted taxable income. The amounts added back include: bull the portion of the loss (including a share of a partnership loss) from certified film or videotape properties that relates to CCA or carrying charges such as interest and financing charges bull losses on resource properties as a result of certain incentive deductions such as Canadian exploration expense, Canadian development expense, depletion allowance, or Canadian oil and gas property expense bull 30 of the excess of capital gains over capital losses for the year bull 3 5 of the employee stock option deductions and the other share deductions para10,800 REVIEW QUESTIONS para10,825 MULTIPLE CHOICE QUESTIONS para10,850 EXERCISES para10,875 ASSIGNMENT PROBLEMS Paragraph 3( a ) of the Income Tax Act requires that all sources of income be included. It is necessary to disclose each source of income in the computation of net income for tax purposes. Identify the source of income that would include each of the following: (a) Dividend income from a Canadian-controlled private corporation. (b) Loss from a sole proprietorship. (c) Cashiers income from a grocery store. (d) Commissions earned from sales with a real estate company. (e) Research consulting fees. (f) Rental income earned on a single dwelling. (h) Gain on the sale of land by a real estate development company. (i) Profit from the sale of shoes earned in an incorporated company. (j) Employment insurance income. (k) Dividend income earned from a foreign investment. (l) Tips earned as a hair stylist. Blake, a recent accounting program graduate, earned the following during the year: (a) In accordance with section 3 of the Income Tax Act . compute Blakes net income for tax purposes for the year. (b) Assume that Blake has a non-capital loss carryforward from five years ago of 3,000. Compute his taxable income for the year. Consider the following two taxpayer situations. Compute each taxpayers net income for the year, utilizing the aggregating formula of section 3 of the Income Tax Act . Where necessary, compute the net capital loss or the non-capital loss. Jeffrey Lowe is an associate in a local law firm. He also has a number of sources of income from various investments and sideline businesses. Jeffrey has provided you with the following information for 2008: Calculate Jeffreys 2008 net income for tax purposes in accordance with section 3 of the Income Tax Act . Marginal tax rates, or the tax rate applicable to the next dollar of income earned, are relevant to many decisions. Jacob earns 90,000. Calculate Jacobs marginal tax rate using the federal and notional provincial rates provided in this chapter. ITA: Division B, C The following tax information is extracted from Mrs.160Hawkins books and records: The following balances are losses carried forward from December16031, 2007: During the latter part of 2008, Mrs.160Hawkins moved from Montreal to Toronto to commence working for Leaves Co. Ltd. She received a 100,000 housing loan from Leaves Co. Ltd. which she used to help purchase a house in Toronto. Mrs.160Hawkins received the interest-free loan on October1601, 2008. Mrs.160Hawkins previously worked for Les Habitants Co. Lt233e (a public company). Prior to leaving Les Habitants Co. Lt233e, Mrs.160Hawkins exercised the stock option that she held in Les Habitants Co. Lt233e. Mrs.160Hawkins was able to purchase 2,000 listed common shares of Les Habitants Co. Lt233e for 4 per share (the fair market value of the shares at the time the option was granted). The shares were trading at 10 per share at the time she exercised her option to purchase the shares. Assume that the prescribed interest rate for the last quarter of 2008 is 7. Calculate Mrs.160Hawkins income and taxable income in 2008, in accordance with the ordering rules of Divisions B and C. Ignore the leap-year effects. The following information has been provided by your client, Mr.160Stanley Norman: (1)160The above capital gains do not include capital gains from qualified farm property or qualified small business corporation shares. (2)160Mr.160Norman had a 21,000 net capital loss which was realized in 2004. (3)160Mr.160Norman has not had a capital gain prior to 2006 and did not claim a net capital loss in the period 1985 to 2005. Dealing with each item line-by-line across the years, rather than one year at a time: (A)160determine Mr.160Normans income from the sources indicated for 2006 to 2008 according to the ordering rules in section1603, and (B)160determine Mr.160Normans taxable income from the sources indicated from 2006 to 2008 according to the ordering rules in Division160C after amending the returns. The following selected tax information has been taken from the books and records of your client, Mr.160Taxloss. The following balances are losses carried forward from December16031, 2006: Mr.160Taxloss was not a member of a registered pension plan and, hence, his pension adjustment for the relevant years was nil. His earned income for 2006 was 33,250. Prepare a schedule for the calculation of income and taxable income for 2007 and 2008, in accordance with the ordering rules under Divisions B and C, after applying any loss carryforward and loss carryback provisions through an amended return. (Deal with each item line-by-line across the years, rather than computing income one year at a time.) Mr. and Mrs. Ataila immigrated to Canada on May 1. Mr. Ataila earned 12,400 in Argentina and 72,400 as a senior geologist in Canada. Mrs. Ataila is a homemaker, and mother of three small children. Her child care expenses totalled 4,580 for the time she spent planning her entry into the workforce. Mr. and Mrs. Ataila have approached you for assistance with their Canadian tax returns. Discuss what you believe are the areas of their returns that they are most interested in. Mrs.160Plant, age 47, is married and has three children: Amanda, age 24, Joan, age 17, and Courtney, age 16. Her own income for tax purposes of 60,000 includes employment income of 52,000. Amanda has been certified as impaired by a medical doctor. Her only income is 6,000 from social assistance payments relating to her disability. She took a university course on a part-time basis for four months. Mrs.160Plant paid her tuition fees of 300. Joan attended a university on a full-time basis in another city for eight months, had employment income for tax purposes of 4,200 from a summer job while living at home and received a 2,500 scholarship. Mrs.160Plant paid Joans tuition fees of 3,000 and Joan paid her own moving costs to and from the university which were 150 each way. Courtney, who is attending high school, had employment income for tax purposes of 2,800 from summer employment and a part-time job. Mr.160Plant, age 50, has the following sources of income: (A)160Calculate the non-refundable tax credits available to Mrs.160Plant for 2008. Compute Joans taxable income to determine if any of her tuition, education, and textbook tax credits will be available to Mrs.160Plant. Prepare detailed calculations supporting your claim. All ages are given as of the end of 2008. (B)160Determine whether Mrs.160Plant is entitled to claim the Canada Child Tax Benefit. Angelina and Romeo are the divorced parents of Maria, who is 10 years old. Angelina and Romeo have joint custody and Maria lives every second month with the other. Both Angelina and Romeo have claimed Maria for the eligible dependent tax credit. Is the claim by Angelina and Romeo allowed ITA: 118, 118.28211118.9 IT-513R Mrs.160Hopeful, age 66, separated from her husband on October 17, 2008. She started receiving support payments from Mr.160Hopeful of 2,500 per month in November 2008. All of the support payments made commencing in November 2008 are considered to be pursuant to the divorce settlement. Of the 2,500 monthly payment, 1,000 is for the support of their daughter, Rachel. (In 2008, Mr.160Hopeful earned a salary of 100,000 per year and also earned other investment income.) Mrs.160Hopeful has income of 26,200. Their eldest daughter Rachel is 40 and infirm and lives with Mrs.160Hopeful since she is severely mentally handicapped. She has been certified as impaired by a medical doctor. A part-time attendant helps care for Rachel at a cost of 12,000 per year. Rachel has no income. Discuss the tax credits related to her daughter Rachel that are available to Mrs.160Hopeful. Mr.160Unfortunate provides you with the following medical expenses and additional information for himself and members of his family who live with him, when he asks you to prepare his 2008 tax return. Assume that you have correctly computed the incomes under Division B for 2008 as follows: Discuss the tax implications of Mr.160Unfortunate claiming the above medical expenses for each of 2008 and 2009. Assume that all income amounts for 2009 will be the same as those for 2008. ITA: 82, 118, 118.8 Mr.160and Mrs.160Realestate, ages 55 and 50, received the following income during 2008: Calculate Mrs.160Realestates federal tax (ignoring the foreign tax credit) under the following situations:Income Tax Actx00A0(R. S.C. 1985, c. 1 (5th Supp.)) Marginal note: Amounts included in income of deposit insurance corporation 137.1 (1) For the purpose of computing the income for a taxation year of a taxpayer that is a deposit insurance corporation, the following rules apply: (a) the corporations income shall, except as otherwise provided in this section, be computed in accordance with the rules applicable in computing income for the purposes of this Part and (b) there shall be included in computing the corporations income such of the following amounts as are applicable: (i) the total of profits or gains made in the year by the corporation in respect of bonds, debentures, mortgages, hypothecary claims, notes or other similar obligations owned by it that were disposed of by it in the year, and (ii) the total of each such portion of each amount, if any, by which the principal amount, at the time it was acquired by the corporation, of a bond, debenture, mortgage, hypothecary claim, note or other similar obligation owned by the corporation at the end of the year exceeds the cost to the corporation of acquiring it as was included by the corporation in computing its profit for the year. Marginal note: Amounts not included in income (2) The following amounts shall not be included in computing the income of a deposit insurance corporation for a taxation year: (a) any premium or assessment received, or receivable, by the corporation in the year from a member institution and (b) any amount received by the corporation in the year from another deposit insurance corporation to the extent that that amount can reasonably be considered to have been paid out of amounts referred to in paragraph (a) received by that other deposit insurance corporation in any taxation year. Marginal note: Amounts deductible in computing income of deposit insurance corporation (3) There may be deducted in computing the income for a taxation year of a taxpayer that is a deposit insurance corporation such of the following amounts as are applicable: (a) the total of losses sustained in the year by the corporation in respect of bonds, debentures, mortgages, hypothecary claims, notes or other similar obligations owned by it and issued by a person other than a member institution that were disposed of by it in the year (b) the total of each such portion of each amount, if any, by which the cost to the corporation of acquiring a bond, debenture, mortgage, hypothecary claim, note or other similar obligation owned by the corporation at the end of the year exceeds the principal amount of the bond, debenture, mortgage, hypothecary claim, note or other similar obligation, as the case may be, at the time it was so acquired as was deducted by the corporation in computing its profit for the year (d) the total of all expenses incurred by the taxpayer in collecting premiums or assessments from member institutions (e) the total of all expenses incurred by the taxpayer (i) in the performance of its duties as curator of a bank, or as liquidator or receiver of a member institution when duly appointed as such a curator, liquidator or receiver, (ii) in the course of making or causing to be made such inspections as may reasonably be considered to be appropriate for the purposes of assessing the solvency or financial stability of a member institution, and (iii) in supervising or administering a member institution in financial difficulty and (f) the total of all amounts each of which is an amount that is not otherwise deductible by the taxpayer for the year or any other taxation year and that is (i) an amount paid by the taxpayer in the year pursuant to a legal obligation to pay interest on borrowed money used (A) to lend money to, or otherwise provide assistance to, a member institution in financial difficulty, (B) to assist in the payment of any losses suffered by members or depositors of a member institution in financial difficulty, (C) to lend money to a subsidiary wholly-owned corporation of the taxpayer where the subsidiary is deemed by subsection 137.1(5.1) to be a deposit insurance corporation, (D) to acquire property from a member institution in financial difficulty, or (E) to acquire shares of the capital stock of a member institution in financial difficulty, or (ii) an amount paid by the taxpayer in the year pursuant to a legal obligation to pay interest on an amount that would be deductible under subparagraph 137.1(3)(f)(i) if it were paid in the year. Marginal note: Limitation on deduction (4) No deduction shall be made in computing the income for a taxation year of a taxpayer that is a deposit insurance corporation in respect of (a) any grant, subsidy or other assistance to member institutions provided by it (b) an amount equal to the amount, if any, by which the amount paid or payable by it to acquire property exceeds the fair market value of the property at the time it was so acquired (c) any amounts paid to its member institutions as allocations in proportion to any amounts described in subsection 137.1(2) (d) any amount paid by it to another deposit insurance corporation that is, because of paragraph (2)(b), not included in computing the income of that other deposit insurance corporation or (e) any amount that may otherwise be deductible under paragraph 20(1)(p) in respect of debts owing to it by any of its member institutions that has not been included in computing its income for the year or a preceding taxation year. Marginal note: Definitions (5) In this section, deposit insurance corporation deposit insurance corporation means (a) a corporation that was incorporated by or under a law of Canada or a province respecting the establishment of a stabilization fund or board if (i) it was incorporated primarily (A) to provide or administer a stabilization, liquidity or mutual aid fund for credit unions, and (B) to assist in the payment of any losses suffered by members of credit unions in liquidation, and (ii) throughout any taxation year in respect of which the expression is being applied, (A) it was a Canadian corporation, and (B) the cost amount to the corporation of its investment property was at least 50 of the cost amount to it of all its property (other than a debt obligation of, or a share of the capital stock of, a member institution issued by the member institution at a time when it was in financial difficulty, or bien de placement investment property means (a) bonds, debentures, mortgages, hypothecary claims, notes or other similar obligations (i) of or guaranteed by the Government of Canada, (ii) of the government of a province or an agent thereof, (iii) of a municipality in Canada or a municipal or public body performing a function of government in Canada, (iv) of a corporation, commission or association not less than 90 of the shares or capital of which is owned by Her Majesty in right of a province or by a Canadian municipality, or of a subsidiary wholly-owned corporation that is subsidiary to such a corporation, commission or association, or (v) of an educational institution or a hospital if repayment of the principal amount thereof and payment of the interest thereon is to be made, or is guaranteed, assured or otherwise specifically provided for or secured by the government of a province, (b) any deposits, deposit certificates or guaranteed investment certificates with (ii) a corporation licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee, or (iii) a credit union or central that is a member of the Canadian Payments Association or a credit union that is a shareholder or member of a central that is a member of the Canadian Payments Association, (c) any money of the corporation, and (d) in relation to a particular deposit insurance corporation, debt obligations of, and shares of the capital stock of, a subsidiary wholly-owned corporation of the particular corporation where the subsidiary is deemed by subsection 137.1(5.1) to be a deposit insurance corporation ( bien de placement ) member institution. in relation to a particular deposit insurance corporation, means (a) a corporation whose liabilities in respect of deposits are insured by, or (b) a credit union that is qualified for assistance from that deposit insurance corporation. ( institution membre ) Marginal note: Deeming provision (5.1) For the purposes of this section, other than subsection 137.1(2), paragraph 137.1(3)(d), subparagraph 137.1(3)(e)(i), subsection 137.1(9) and paragraph 11(a), a subsidiary wholly-owned corporation of a particular corporation described in the definition deposit insurance corporation in subsection 137.1(5) shall be deemed to be a deposit insurance corporation, and any member institution of the particular corporation shall be deemed to be a member institution of the subsidiary, where all or substantially all of the property of the subsidiary has at all times since the subsidiary was incorporated consisted of (b) shares of the capital stock of a member institution of the particular corporation obtained by the subsidiary at a time when the member institution was in financial difficulty (c) debt obligations issued by a member institution of the particular corporation at a time when the member institution was in financial difficulty (d) property acquired from a member institution of the particular corporation at a time when the member institution was in financial difficulty or (e) any combination of property described in paragraphs 137.1(5.1)(a) to 137.1(5.1)(d). Marginal note: Deemed not to be a private corporation (6) Notwithstanding any other provision of this Act, a deposit insurance corporation that would, but for this subsection, be a private corporation shall be deemed not to be a private corporation. Marginal note: Deposit insurance corporation deemed not a credit union (7) Notwithstanding any other provision of this Act, a deposit insurance corporation that would, but for this subsection, be a credit union shall be deemed not to be a credit union. Marginal note: Deemed compliance (8) For the purposes of subsection 137.1(5), a corporation shall be deemed to have complied with clause (a)(ii)(B) of the definition deposit insurance corporation in subsection 137.1(5) throughout the 1975 taxation year if it complied with that clause on the last day of that taxation year. Marginal note: Special tax rate (9) The tax payable under this Part by a corporation for a taxation year throughout which it was a deposit insurance corporation (other than a corporation incorporated under the Canada Deposit Insurance Corporation Act ) is the amount determined by the formula: A is the rate that would, if subsection 125(1.1) applied to the corporation for the taxation year, be the corporations small business deduction rate for the taxation year within the meaning assigned by that subsection and B is the corporations taxable income for the taxation year. Marginal note: Amounts paid by a deposit insurance corporation (10) Where in a taxation year a taxpayer is a member institution, there shall be included in computing its income for the year the total of all amounts each of which is (a) an amount received by the taxpayer in the year from a deposit insurance corporation that is an amount described in any of paragraphs 137.1(4)(a) to 137.1(4)(c), to the extent that the taxpayer has not repaid the amount to the deposit insurance corporation in the year, (b) an amount received from a deposit insurance corporation in the year by a depositor or member of the taxpayer as, on account of, in lieu of payment of, or in satisfaction of, deposits with, or share capital of, the taxpayer, to the extent that the taxpayer has not repaid the amount to the deposit insurance corporation in the year, or (c) the amount by which (i) the principal amount of any obligation of the taxpayer to pay an amount to a deposit insurance corporation that is settled or extinguished in the year without any payment by the taxpayer or by the payment by the taxpayer of an amount less than the principal amount (ii) the amount, if any, paid by the taxpayer on the settlement or extinguishment of the obligation to the extent that the excess is not otherwise required to be included in computing the taxpayers income for the year or a preceding taxation year. Marginal note: Principal amount of an obligation to pay interest (10.1) For the purposes of paragraph 137.1(10)(c), an amount of interest payable by a member institution to a deposit insurance corporation on an obligation shall be deemed to have a principal amount equal to that amount. Marginal note: Deduction by member institutions (11) There may be deducted in computing the income for a taxation year of a taxpayer that is a member institution such of the following amounts as are applicable: (a) any amount paid or payable by the taxpayer in the year that is described in subsection 137.1(2) to the extent that it was not deducted in computing the taxpayers income for a preceding taxation year and (b) any amount repaid by the taxpayer in the year to a deposit insurance corporation on account of an amount described in paragraph 137.1(10)(a) or 137.1(10)(b) that was received in a preceding taxation year to the extent that it was not, by reason of subsection 137.1(12), excluded from the taxpayers income for the preceding year. Marginal note: Repayment excluded (a) a member institution has in a taxation year repaid an amount to a deposit insurance corporation on account of an amount that was included by virtue of paragraph 137.1(10)(a) or 137.1(10)(b) in computing its income for a preceding taxation year, (b) the member institution has filed its return of income required by section 150 for the preceding year, and (c) on or before the day on or before which the member institution is required by section 150 to file a return of income for the taxation year, it has filed an amended return for the preceding year excluding from its income for that year the amount repaid, the amount repaid shall be excluded from the amount otherwise included by virtue of paragraph 137.1(10)(a) or 137.1(10)(b) in computing the member institutions income for the preceding year and the Minister shall make such reassessment of the tax, interest and penalties payable by the member institution for preceding taxation years as is necessary to give effect to the exclusion. NOTE: Application provisions are not included in the consolidated text see relevant amending Acts. R. S. 1985, c. 1 (5th Supp.), s. 137.1 1994, c. 21, s. 65 2001, c. 17, s. 216 2007, c. 2, s. 38 2013, c. 34, s. 285. Table of Contents