Chapter Objectives Be able to: n Explain the different possible relationships that a shareholder may have with a corporation and the implications of each. n Calculate Taxable Income. n Calculate Federal and Provincial corporate taxes.

Relationship between the Corporation and its Shareholders n In addition to shareholders providing equity capital to the corporation (the primary relationship), shareholders can also act as:a creditor, a supplier, a customer, an employee, and a lessor (the secondary relationships). n In the primary relationship, shareholders receive dividends when earnings are distributed and capital gains when shares are sold at a profit. n In the secondary relationship, shareholders receive salaries, interest, sales and lease payments. n The main difference in the two relationships is that dividends are not taxed until paid but when they are paid, there may be a significant amount of double taxation. As opposed to salaries and so on which are taxed only once in the shareholder’s income but the income is likely in the current period.

Determination of Taxable Income n In general terms, to arrive at taxable income, net income for tax purposes is reduced by loss carryovers, dividends from other Canadian corporations, and charitable donations.. n The loss carryover provisions are the same as for individuals. However, there are two aspects which are unique to corporations: change in control of a corporation and loss utilization in corporate groups. There are special rules for change in control and their purpose is to prevent the transfer of unabsorbed corporate losses to other parties through a change in share ownership. In spite of the fact that corporations may be related, they can not offset profits and losses within the corporate group. n Inter-corporate dividends are usually tax-free. n Charitable donations are a deduction for corporations, as opposed to a tax credit for individuals.

Calculation of Tax n CCPCs and public corporations pay federal and provincial taxes. n Basic federal tax consists of the primary federal tax (a flat rate of 38%) less the federal abatement for provincial taxes (a flat rate of 10%). n Federal tax payable consists of basic federal tax plus federal surtax and refundable tax on investment income less special rate reductions, small business deduction, manufacturing & processing profits deduction, and federal tax credits. n Provincial tax consists of primary provincial tax less province-specific tax credits. n When a corporation carries on business through a permanent establishment in more than one province, a formula using wages and sales is used in allocating taxable income amongst the profits.

Calculation of Tax (continued) n The Federal surtax is 4% of basic Federal tax or 1.12% of taxable income. n The Refundable tax on investment income is 6 2/3% of investment income. However, it is fully refundable upon payment of dividends. n Special rate reductions are available for both public corporations and CCPCs and change annually over the next few years. n The Small Business Deduction is 16% of the lesser of active income, taxable income, and annual limit ($200,000). n The Manufacturing and Processing Deduction is based on a formula using manufacturing capital and manufacturing labour. The rates vary between public corporations and CCPCs.