chapter_14_ctp_11_tx

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Chapter 14Other Issues In

Corporate Taxation


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2011, Clarence Byrd Inc. 2

Acquisition Of Control- The Problem

ProfitCompany

LossCompany

Acquisition

Loss Transferred To Profit Company


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Meaning Of Acquisition Of Control

Control: Ownership ofshares that carry the right to

elect a majority of the boardof directors.

Common Scenario: Oneperson acquires shares froma different arms lengthperson.


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Deemed Year End - ITA 249(4) Example: Dec. 31 year end,

acquisition on June 30, 2010

Deemed New Year End- June 30, 2010

Can Keep Old Fiscal YearEnd

Allowed To Establish New Year End


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Acquisition Of Control

Net Capital Losses And Allowable BusinessInvestment Losses

ITA 111(4)(a) & (b)

Unused Carry ForwardsDie

New Losses Cannot BeCarried Back


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Accrued Losses

InventoriesNormal Year EndProcedures

Accounts Receivable ITA 111(5.3)

Maximum Write-OffRequired


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Accrued Losses

Depreciable Property

Asset Cost = $100,000

UCC = $ 60,000FMV = $ 50,000

ITA 111(5.1)

Write Down To $50,000The $10,000 Is DeemedCCA


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Accrued Losses

Eligible Capital Property ITA 111(5.2)

CEC > 3/4 FMVWrite Down

ITA 20(1)(b) Deduction


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Accrued Losses

Non-Depreciable Property ITA 111(4)(c) & (d)

ACB > FMVWrite Down

Capital Loss (Will disappear ifnot used at deemed year end.)


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ITA 111(4)(e) Election

General Rule

Can elect between ACB and FMV

FMV > ACB: Creates Capital Gain

May also create recapture on depreciable assets(cant avoid if you want the capital gain.)


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ITA 111(4)(e) Election Case 1

Capital Cost = $ 50,000FMV = 100,000UCC = 20,000

Elect $100,000Capital Gain $ 50,000Recapture 30,000New Capital Cost 100,000New UCC 75,000

[$50,000 + (1/2)($100,000 - $50,000)]


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Case 2 ACB = $ 50,000FMV = 30,000

UCC = 20,000 Elect $30,000

Capital Gain $ NilRecapture 10,000New ACB 30,000New UCC 30,000


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Case 3 ACB = $ 50,000FMV = 5,000

UCC = 20,000

Write down to $5,000 isrequired by ITA 111(5.1)

The $15,000 is deemed CCA


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Profits In The Loss Business

During 2011, Loss Leader experiences an overall Net Loss

of $150,000, with all of the loss arising in their shoedivision. Their hat division broke even for the year. In2012, the shoe division broke even, while the hat divisionshowed a profit of $200,000.

No Acquisition in 2011: 2012 Income = $50,000 Acquisition in 2011: 2012 Income = $200,000


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Related Individuals - 251(2)(a)

Individual


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Related CorporationsOne Corporation - ITA 251(2)(b)Two Corporations - ITA 251(2)(c)

Control - ITA 256(1.2)(c)More Than 50% FMV - All Shares - OrMore Than 50% FMV - Voting Shares

Group ITA 256(1.2)(a) Specified Class ITA 256(1.1)

Other Definitions


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Deeming RulesITA 256(1.2)(d) Holding Companies

Shareholder of holding company is deemed to own held shares.ITA 256(1.3)

Children under 18 Shares deemed to be owned by parent

ITA 256(1.3) - Rights and options Options to own

Right to force redemption or cancellationITA 256(1.5)

Persons are related to himself, herself, or itself

Other Definitions


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ITA 256(2) A associated with B C associated with B A and C have deemed association

Other Definitions


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Association RulesITA 256(1)(a)One of the corporations controlled, directly or indirectly in anymanner whatever, the other;

Company A Company B More than 50%


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Association RulesITA 256(1)(b)Both of the corporations were controlled directly or indirectly in anymanner whatever, by the same person or group of persons;

Company A Company B

More than 50%

Ms. Smith

More than 50%


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Association RulesITA 256(1)(c)Each of the corporations was controlled, directly or indirectly in any mannerwhatever, by a person and the person who so controlled one of the corporations wasrelated to the person who so controlled the other, and either of those persons owned,in respect of each corporation, not less than 25% of the issued shares of any class,other than a specified class, of the capital stock thereof;

Company A Company B

More than 50% More than 50%

Mrs. Smith Mr. Smith

Not less than 25%


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Association RulesITA 256(1)(d)One of the corporations was controlled, directly or indirectly in any mannerwhatever, by a person and that person was related to each member of a group of

persons that so controlled the other corporation, and that person owned, in respect ofthe other corporation, not less than 25% of the issued shares of any class, other thana specified class, of the capital stock thereof;

Company A Company B


Mr. GohMrs. Goh

Mr. Gohs Brother

Not less than 25%


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Association RulesITA 256(1)(e)Each of the corporations was controlled, directly or indirectly in any mannerwhatever, by a related group and each of the members of one of the related groupswas related to all of the members of the other related group, and one or more personwho were members of both related groups, either alone or together, owned inrespect of each corporation, not less than 25% of the issued shares of any class,

other than a specified class of the capital stock thereof;

Company A Company B


Mr. BrownMrs. Brown

Mr. FortinMrs. Fortin

40%


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Investment Tax Credits

Credit Vs. Deduction Value Of Credit = 100% Value Of Deduction = [(100%)(tax rate)]


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Current Expenditures A credit against Tax Payable during the currentyear

Added back to income in the following year.


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Capital Expenditures A credit against Tax Payable in the current year

Credit deducted from capital cost in thefollowing period

Lose CCA on amount of investment tax credit


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Eligible Property

Eligible ExpendituresSalaries of an eligibleapprentice

Costs of creatingeligible child carespacesQualified Property

Qualified SR&ED


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Rates Apprentice salaries

10% on maximum of $20,000 per apprentice Child care spaces

25% on a maximum of $10,000 per space

Qualified property - 10% SR&ED (CCPC)

$3 million at 35%Excess at 20%

SR&ED (non-CCPC)20%


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Refundability

General RulesNo Tax PayableCant Use Credits

Government Writes Cheque To The Business


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Refundability

Current SR&ED100 percent on current amountsthat qualify for the extra 15%

40 percent on other currentSR&ED Other (including SR&ED

capital expenditures)

40 percent for CCPCs andindividualsNo upper limit


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Carry Overs

Back Three Years

Forward Twenty Years

Must Take All OtherCredits For The Year

And Reduce Tax

Payable To Nil BeforeUsing


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Acquisition Of Control

Unused investment tax creditsmay create attractive takeovertargets

Given this, there are rulessimilar to those that apply toloss carry forwards.


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Tax Basis Shareholders Equity

Paid Up Capital (PUC)Based On Legal StatedCapital

ITA 89(1)Similar To ContributedCapital in Accounting


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Tax Basis Shareholders Equity

Retained EarningsPre-1972 Capital Surplus OnHand

Capital Gains Accrued Before 1972 Realized After 1971

Pre-1972 Undistributed SurplusPost-1971 Undistributed Surplus

Capital Dividend Account Treatment Of RDTOH (an

asset from a tax point of view)


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Paid Up Capital

Importance An investment of after tax fundsCan be distributed tax free

Note: PUC is not equal to ACB Defined

Legal Capital (as per corporate law)Limited number of adjustments


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Paid Up Capital

Example: J & J issues 1,000 shares of stock on January 1,2011 for $10,000 ($10 Per Share) and an additional 3,000shares on December 31, 2012 for $60,000 ($20 Per Share).

1/1/11: PUC = ACB = $10 Per Share

31/12/12: PUC = $70,000 4,000 = $17.50 Per Share

Individual buying on December 31, 2012

PUC = $17.50/Share

ACB = $20.00/Per Share


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Capital Dividend Account

General Idea

Like RDTOH - A TrackingMechanism

Private Companies Only(including non-Canadiancontrolled)

With election, balance can bedistributed tax free


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Capital Dividend Account

ComponentsUntaxed Portion Of Net CapitalGains

Capital Dividends ReceivedUntaxed Portion Of CEC GainsUntaxed Life Insurance ProceedsReduced By Capital Dividends

Paid


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Use Of Corporate Surplus

Cash dividendsSubject to gross up and taxcredit procedures

(Individuals)Not deductible indetermining corporateincome of payor

f l


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Use Of Corporate SurplusStock Dividends

Common Stock (100,000 Shares) $1,000,000

Retained Earnings 4,000,000

Total Shareholders Equity $5,000,000

A 10 percent stock dividend is declared (FMV = $70 per share)

Transfer To PUC - [(100,000)(10%)($70)] = $700,000

U Of C S l


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Use Of Corporate SurplusStock Dividends

Common Stock (110,000 Shares) $1,700,000

Retained Earnings 3,300,000

Total Shareholders Equity $5,000,000

Holder of 100 shares at $60 gets 10 new shares at $70

Taxable Dividend = $700

ACB = ($6,000 + $700)/110 = $60.91


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Dividends In Kind

Example:Distribute An Investment With A Cost Of $1Million And A FMV Of $1.5 Million.

Recipient: Taxable Dividend Of $1.5 Million

Payor: Disposition At $1.5 Million, CapitalGain Of $500,000


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ITA 83(2) Capital Dividend

All Dividends Are Taxed If NoElection

Election (Form T2054) Allows Any

Dividend To Be Treated As ACapital Dividend (If Balance Available In Capital Dividend Account)

Penalty For Excess ElectionDoes Not Reduce ACB Of SharesDoes Not Reduce PUC Of Shares


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ITA 84(1) Deemed Dividend

General Idea PUC Increase In Excess Of Net

Asset Increase Creates Added Tax Free

Distribution ITA 53(1)(b) - Addition To ACB Of

Shares

Exceptions Stock Dividends Shifts Between Classes Conversion Of Contributed Surplus


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ITA 84(2) Deemed Dividends

With winding-up under ITA 88(2):ITA 84(2) Deemed Dividend Equals The Excess Of The

Amount Distributed Over PUC


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Components Of 84(2) Dividend

ITA 88(2)(b)Indicates That ITA 84(2)Deemed Dividend Is Made Up Of:

Capital Dividend (If Elected) Distribution Of Any Pre-1972

CSOH [Deemed Not To Be ADividend By 88(2)(b)(ii)]

Residual Is A TaxableDividend


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ITA 84(3) Example

Mr. Jones owns all 5,000 shares of L&L Ltd. The shares have a PUCof $75,000 and his ACB is $40,000. One-half of the shares areredeemed for $55,000.

Redemption Price $55,000

PUC [(1/2)($75,000)] ( 37,500)

ITA 84(3) Deemed Dividend $17,500


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ITA 84(4) Deemed Dividends A Liquidating Dividend

Involving a PUC Reduction

If Amount Distributed ExceedsPUC, The Excess Is A DeemedDividend


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ITA 84(4) Example

Company distributes $80 per share. The shares have a PUC Of$60 Per Share.

ITA 84(4) Deemed Dividend Of $20 Per Share PUC Down By $60 To Nil

ACB Down By $60


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ITA 84(4.1) Example

If Public Company

Entire distribution is treated as deemed dividend

Exception if transaction considered to be outside the normalcourse of business (e.g., company sold business segment anddistributed the proceeds)


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2011 Clarence Byrd Inc 56

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