Division C Abzug Aktienoptionen

Die Besteuerung von Aktienoptionen Der steuerliche Planungsleitfaden 2015-2016 Die Besteuerung von Aktienoptionen Als Anreizstrategie können Sie Ihren Mitarbeitern das Recht einräumen, Anteile an Ihrem Unternehmen zu einem festen Preis für einen begrenzten Zeitraum zu erwerben. Normalerweise werden die Aktien zum Zeitpunkt der Ausübung der Option mehr wert sein als der Kaufpreis. Zum Beispiel stellen Sie einen Ihrer Schlüsselmitarbeiter mit der Option zum Kauf von 1.000 Aktien im Unternehmen zu je 5 zur Verfügung. Dies ist der geschätzte Marktwert (FMV) pro Aktie zum Zeitpunkt der Gewährung der Option. Wenn der Aktienkurs auf 10 erhöht, übt Ihr Mitarbeiter seine Option, die Aktien für 5.000 zu kaufen. Da ihr aktueller Wert 10.000 ist, hat er einen Gewinn von 5.000. Wie ist die besteuerte Besteuerung Die Einkommensteuer-Konsequenzen der Ausübung der Option hängt davon ab, ob die Gesellschaft, die die Option gewährt, eine kanadisch kontrollierte Privatgesellschaft (CCPC) ist, der Zeitraum, in dem der Mitarbeiter die Anteile hält, bevor er sie schließlich verkauft und ob der Mitarbeiter handelt An der Armlänge mit dem Unternehmen. Wenn die Gesellschaft ein CCPC ist, gibt es keine Einkommensteuerfolgen, bis der Mitarbeiter über die Aktien verfügt, sofern der Arbeitnehmer nicht mit den herrschenden Aktionären der Gesellschaft verbunden ist. Im Allgemeinen wird die Differenz zwischen dem FMV der Aktien zum Zeitpunkt der Ausübung der Option und dem Optionspreis (i. S. 5 pro Aktie in unserem Beispiel) im Jahr der Veräußerung der Aktien als Erwerbseinkommen besteuert. Der Arbeitnehmer kann einen Abzug von steuerpflichtigem Einkommen in Höhe der Hälfte dieses Betrags verlangen, wenn bestimmte Voraussetzungen erfüllt sind. Die Hälfte der Differenz zwischen dem endgültigen Verkaufspreis und dem FMV der Aktien zum Zeitpunkt der Ausübung der Option wird als steuerpflichtiger Kapitalgewinn oder zulässiger Kapitalverlust ausgewiesen. Beispiel: Im Jahr 2013 bot Ihr Unternehmen, ein CCPC, mehrere seiner Führungskräfte die Möglichkeit an, 1.000 Aktien im Unternehmen für jeweils 10 zu kaufen. Im Jahr 2015, seine geschätzt, dass der Wert der Aktie hat sich verdoppelt. Mehrere der Mitarbeiter entscheiden, ihre Optionen auszuüben. Bis 2016 hat sich der Wert der Aktie wieder auf 40 pro Aktie verdoppelt, und einige der Mitarbeiter beschließen, ihre Aktien zu verkaufen. Da die Gesellschaft ein CCPC zum Zeitpunkt der Gewährung der Option war, gibt es keinen steuerpflichtigen Vorteil, bis die Aktien im Jahr 2016 verkauft werden. Es wird davon ausgegangen, dass die Bedingungen für die 50 Deduktion erfüllt sind. Die Leistung wird wie folgt berechnet: Was passiert, wenn die Aktie im Wert sinkt Im obigen Zahlenbeispiel stieg der Wert der Aktie zwischen dem Erwerb der Aktie und dem Zeitpunkt der Veräußerung. Aber was würde passieren, wenn der Aktienwert auf 10 zum Zeitpunkt des Verkaufs im Jahr 2016 sank In diesem Fall würde der Mitarbeiter berichten eine Nettoeinkommen Einbeziehung von 5.000 und 10.000 Kapitalverlust (5.000 zulässigen Kapitalverlust). Leider, während die Einkommensaufnahme die gleiche steuerliche Behandlung wie ein Kapitalgewinn gewährt wird, ist es nicht tatsächlich ein Kapitalgewinn. Seine besteuert als Erwerbseinkommen. Infolgedessen kann der im Jahr 2016 realisierte Kapitalverlust nicht dazu verwendet werden, die Einkommensverrechnung aus dem steuerpflichtigen Nutzen auszugleichen. Jedermann in schwierigen finanziellen Verhältnissen als Ergebnis dieser Regeln sollten ihre lokalen CRA Tax Services Büro, um festzustellen, ob besondere Zahlungsmodalitäten getroffen werden können. Aktienoptionen der öffentlichen Hand Die Regeln sind unterschiedlich, wenn das Unternehmen, das die Option gewährt, eine Aktiengesellschaft ist. Grundsätzlich gilt, dass der Arbeitnehmer in dem Jahr, in dem die Option ausgeübt wird, eine steuerpflichtige Arbeitsleistung zu melden hat. Diese Leistung entspricht dem Betrag, zu dem die FMV der Aktien (zum Zeitpunkt der Ausübung der Option) den für die Aktien gezahlten Optionspreis übersteigt. Wenn bestimmte Voraussetzungen erfüllt sind, ist ein Abzug in Höhe der Hälfte des steuerbaren Vorteils zulässig. Für Optionen, die vor dem 4. März 2010 bis 4:00 Uhr EST ausgeübt wurden, könnten berechtigte Mitarbeiter öffentlicher Gesellschaften wählen, die Besteuerung auf die sich daraus ergebende steuerpflichtige Arbeitsleistung (vorbehaltlich einer jährlichen Sperrfrist von 100.000) zu verzögern. Aktienoptionen, die nach 4:00 Uhr EST am 4. März 2010 ausgeübt werden, sind jedoch nicht mehr berechtigt. Einige Mitarbeiter, die von der Steuerabgrenzung profitierten, erlebten finanzielle Schwierigkeiten infolge eines Wertverlusts der Optionsscheine bis zu dem Punkt, dass der Wert der Wertpapiere unter der latenten Steuerschuld des zugrunde liegenden Aktienoptionsgelds lag. Eine Sonderwahl war möglich, so dass die Steuerschuld für das aufgeschobene Aktienoptionsprogramm den Veräußerungserlös für die optionierten Wertpapiere (zwei Drittel dieser Erlöse für die Einwohner von Quebec) nicht übersteigen würde, sofern die Wertpapiere nach dem Jahr 2010 und danach bestellt wurden 2015, und dass die Wahl bis zum Fälligkeitsdatum Ihrer Einkommensteuererklärung für das Jahr der Verfügung eingereicht wurde. 2015-2016 Grant Thornton LLP. Ein kanadisches Mitglied von Grant Thornton International Ltd (b) Teilung c steuerpflichtiger Einkommensabzug von Aktien Dies ist das Ende der Vorschau. Melden Sie sich für den Rest des Dokuments. Unformatierte Textvorschau: (b) Division C Steuerpflichtiger Ertragsabschlag der Aktienoptionsleistung 1. Nur verfügbar, wenn der Optionspreis mindestens FMV am Tag der Gewährung beträgt: s. 110 (1) (d). 2. Ausnahme für CCPCs: verfügbar, wenn Vorrat 2 Jahre: s. 110 (1) (d.1) Mitarbeiter von CCPCs können entweder s. 110 (1) (d) oder (d.1) Arbeitnehmer anderer Unternehmen können nur s. 110 (1) (d) 4 Die Voraussetzungen für die öffentliche Zusammenarbeit. Optionen wurden wie folgt für Optionen auf die ersten 100.000 Aktien gewährt jedes Jahr-wenn Optionspreis mindestens FMV zum Zeitpunkt der Gewährung ist - Mitarbeiter muss wählen Joanne Magee jmageeyorku. ca 4561-3: 92209 20 Fakten Optionspreis 10 FMV Am Tag der Gewährung 8 (dh Optionskurs ampgt FMV zum Zeitpunkt der Gewährung) FMV am Ausübungstag 14 FMV am Verkaufsdatum 26 Beantragung Aktienoption Vorteil 14 - 10 4 Erwerbseinkommen Aktienoption Deduktion 12 x 3 2 Division C Deduktion ACB 14 Steuerbares Kapital Gewinn aus Veräußerung (26-14) 6 Die 4 Erwerbseinkünfte und 2 Divisionen C werden im gleichen Jahr in der Regel im Ausübungsjahr ausgewiesen. Sondern auf das Jahr des Verkaufs, wenn 1. der Arbeitgeber ist ein CCPC oder 1. die Optionen waren qualifizierende öffentliche co. Optionen, die bis 16.00 Uhr ausgeübt werden 4. März 2010 Die 6 steuerpflichtigen Kapitalgewinne werden im Verkaufsjahr ausgewiesen (c) 4. März 2010 Bundeshaushaltsänderungen (A) Mitarbeiteraktienoptionen Auszahlungen Wenn Mitarbeiter ihre Optionen ausüben und Aktien ausgegeben werden, Ist kein Abzug für den Arbeitgeber. Vor dem Haushalt 2010, eine Lücke erlaubte Arbeitgeber Anspruch auf vollen Abzug, wenn die Mitarbeiter Bargeld im Gegensatz zu Aktien, wenn sie ihre Optionen ausgeübt. Dies wurde als Lücke betrachtet, weil in beiden Fällen der Mitarbeiter den Aktienoptionsabzug geltend machen konnte. Das Budget hat die Lücke beseitigt: Für Optionen, die nach 16.00 Uhr 4. März 2010 ausgeübt werden, kann der Arbeitnehmer keinen Anspruch auf den Abzug erheben, es sei denn, der Arbeitgeber hat gewählt, auf den Abzug für die Barzahlung zu verzichten. 5 Alle Probleme im Text und im obigen Beispiel beziehen sich auf die Ausgabe von Aktien und nicht auf Auszahlungen. (B) Verzicht auf die Gesellschaft - Ausgeschieden für Aktienoptionen, die nach 4 Uhr am 4. März 2010 ausgeübt werden .6 (C) Rückvergütungsanspruch Neue Verrechnungssteueranforderungen für Aktienoptionsleistungen nach 2010. (D) Sonderwahl zur Verringerung der steuerlichen Nachteile der öffentlichen Finanzen Unternehmensaufschub - Wenn ein Steuerpflichtiger zuvor seine Aktienoptionsleistung aufgeschoben hat und die Wertpapiere unter Wert fallen, kann es zu nachteiligen steuerlichen Konsequenzen für den Verkauf der Wertpapiere kommen, da die s. (S. 110 Abs. 1 d) Abzug), aber zulässige Kapitalverluste (ACLs) sind nur abzugsfähig gegen steuerliche Veräußerungsgewinne (TCGs) (außer im Jahr des Todes). 7 Wenn der Verkauf vor 2015 erfolgt und ein Steuerpflichtiger wählt, verringert ein komplizierter Satz von Regeln die nachteiligen Steuerwirkungen, indem er sicherstellt, dass die Steuer den Erlös nicht übersteigt, der auf dem Verkauf empfangen wird (wenn 5 die Vereinigten Staaten ähnliche Regeln haben 03910 PROFESSOR JosephFrankovic Klicken Sie hier, um die Beleginformationen zu bearbeiten. Einkommensteuer Actx00A0 (RSC 1985, c. 1 (5. Zus.)) Randnotiz: Umwandlung von Versicherungsgesellschaften in gemeinnützige Körperschaften 139 Wenn ein Versicherungsunternehmen, der ein kanadisches Unternehmen ist, Aktien der von ihr im Rahmen eines Vermittlungsvorschlags unter Teil III des VIs VI des Versicherungsgesetzes oder nach einem Gesetz der Provinz gekauften oder anderweitig erworbenen Körperschaft nach dem Gesellschaftsrecht der Gesell - schaft, die die Umwandlung der Gesellschaft vorsieht Eine Aktiengesellschaft durch den Erwerb ihrer Anteile gemäß diesem Gesetz, (a) Ziffer 15 gilt nicht für die Einbeziehung eines Teils dieses Betrags bei der Berechnung der Einkünfte eines Gesellschafters der Gesellschaft und (b) Nr Ein Teil dieses Betrages für die Zwecke des Absatzes 138 (7) an die Aktionäre oder für die Zwecke des § 84 als Dividende gezahlt zu werden. ANMERKUNG: Die Anwendungsbestimmungen werden nicht in den konsolidierten Text aufgenommen, siehe relevante Änderungsrechtsakte. R. S. 1985, c. 1 (5. Zus.), S. 139, 1994, c. 7, Sch. I, s. 734. Demutualisierung von Versicherungsunternehmen Randnotiz: Definitionen 139.1 (1) Die Definitionen in diesem Unterabschnitt gelten in diesem Abschnitt und in den Abschnitten 139.2 und 147.4. Umwandlungsleistung bedeutet eine Leistung im Zusammenhang mit der Demutualisierung einer Versicherungsgesellschaft aufgrund eines Interesses vor der Demutualisierung einer Person in einer Versicherungspolice, an der die Versicherungsgesellschaft beteiligt war. Englisch: eur-lex. europa. eu/LexUriServ/LexUri...0083: EN: HTML Frist für die Zahlung einer Demutualisierung eines Versicherungsunternehmens bedeutet spätestens (a) das Ende des Tages, das 13 Monate nach dem Zeitpunkt der Demutualisierung liegt, (b) wenn der Gesamtbetrag der Englisch: eur-lex. europa. eu/LexUriServ/LexUri...0083: EN: HTML Die Zahlung hängt von dem Ergebnis eines Börsengangs der Aktien der Gesellschaft oder einer Holdinggesellschaft für die Versicherungsgesellschaft ab, das Ende des Tages, der 60 Tage nach dem Tag des Angebots des Angebots liegt, (c) Englisch: eur-lex. europa. eu/LexUriServ/LexUri...0083: EN: HTML Die Zahlung erfolgt nach Ablauf der ersten Zahlungsfrist, und es ist vernünftigerweise zu folgern, dass die Zahlung über diese ursprüngliche Frist hinaus verschoben wurde, da 60 Tage vor Ablauf dieser Frist keine ausreichende Information über die Lage einer Person, Der Tag, der sechs Monate nach Erhalt dieser Informationen vorliegt, und (d) das Ende eines jeden Tag, der für den Minister akzeptabel ist. (Chance) Demutualisierung bedeutet die Umwandlung eines Versicherungsunternehmens von einer Gegengesellschaft zu einer Körperschaft, die kein gemeinsames Unternehmen ist. (Dmutualisation) Holdinggesellschaft eine Kapitalgesellschaft, die (a) im Zusammenhang mit der Demutualisierung eines Versicherungskonzerns Kapitalaktien an Stakeholder ausgegeben hat und (b) Aktien des Grundkapitals der im Zusammenhang mit der Gesellschaft erworbenen Versicherungsgesellschaft besitzt Demutualisierung, die es auf einer jährlichen Versammlung von (i) Aktionären der Versicherungsgesellschaft oder (ii) Aktionäre der Versicherungsgesellschaft und der Versicherungsnehmer zu 90 oder mehr der Stimmen, die für Aktien unter allen Umständen gehandelt werden könnten, berechtigt Dem die Versicherungsgesellschaft angehört. (Socit de portefeuille) ist die Frist für die Zahlung, wenn die Frist für die Einreichung der Frist ohne Bezugnahme auf Absatz (c) dieser Definition abgelaufen ist. (Wahrscheinlichkeit initiale) gegenseitige Holdinggesellschaft gegenseitige Holdinggesellschaft. In Bezug auf eine Versicherungsgesellschaft, eine gegenseitige Gesellschaft, die gegründet wurde, um Aktien des Grundkapitals der Versicherungsgesellschaft zu halten, wenn nur die auf einer Jahresversammlung der Gegenseitigkeit stimmberechtigten Personen Versicherungsnehmer der Versicherungsgesellschaft sind. (Socit mutuelle de portefeuille) Eigentumsrechte bedeutet (a) in einer bestimmten gegenseitigen Holdinggesellschaft die folgenden Rechte und Interessen, die eine Person in Bezug auf die jeweilige Gesellschaft aufgrund eines Interesses oder früheren Interesses einer Person in einer Versicherungspolice hält, Eine Versicherungsgesellschaft, für die die jeweilige Gesellschaft die wechselseitige Holdinggesellschaft ist, ist eine Partei: i) Rechte, die den Ansprüchen an Aktien des Grundkapitals eines Unternehmens ähnlich sind, und (ii) alle anderen Rechte mit Interessen und Interessen der jeweiligen Gesellschaft als Gegenseitigkeitsgesellschaft und (b) in einer Versicherungsgesellschaft auf Gegenseitigkeit die folgenden Rechte und Interessen, die von einer Person im Hinblick auf die gegenseitige Versicherungsgesellschaft aufgrund eines Interesses oder früheren Interesses einer Person gehalten werden In einem Versicherungsvertrag, an dem diese Körperschaft beteiligt ist: i) Rechte, die den mit dem Grundkapital eines Unternehmens verbundenen Rechten ähnlich sind, (ii) alle anderen Rechte in Bezug auf die Versicherungspolicen und ihre Interessen Gesellschaft als Gegenseitigkeitsgesellschaft und (iii) ein etwaiges bedingtes oder uneingeschränktes Recht auf eine Leistung im Zusammenhang mit der Demutualisierung der Versicherungsgesellschaft. (Droits de proprit) Person schließt eine Partnerschaft ein. (Personne) des Gesellschaftskapitals umfasst ein von der Gesellschaft gewährtes Recht, einen Anteil am Grundkapital zu erwerben. (Aktion) spezifizierte Versicherungsleistung angegebene Versicherungsleistung bedeutet eine steuerpflichtige Umwandlungsleistung, die (a) eine Leistungsverbesserung im Rahmen eines Versicherungsvertrags ist, (b) eine Versicherungspolice, c) ein Unternehmen, das von einer Versicherungsgesellschaft eine Zahlungspflicht hat Eine Policendividende oder d) eine Verringerung der Prämien, die ansonsten im Rahmen einer Versicherung fällig werden. (Avantage dtermin) ist eine Person, die berechtigt ist, eine Umwandlungsleistung zu erhalten oder eine Umwandlungsleistung zu erhalten, aber im Hinblick auf die Demutualisierung eines Versicherungsunternehmens keine Holdinggesellschaft im Zusammenhang mit der Demutualisierung oder einer gegenseitigen Holdinggesellschaft einschließt Der Versicherungsgesellschaft. (Intress) steuerpflichtige Umwandlungsleistung steuerpflichtige Umwandlungsleistung bedeutet eine Umwandlungsleistung, die ein Stakeholder im Zusammenhang mit der Demutualisierung eines Versicherungsunternehmens erhalten hat, mit Ausnahme eines Umwandlungszuschusses, der (a) einer Anteilsklasse des Grundkapitals der Gesellschaft entspricht ( B) eine Anteilsklasse des Grundkapitals einer Kapitalgesellschaft, die im Zusammenhang mit der Demutualisierung eine Kapitalgesellschaft ist oder wird, oder (c) ein Eigentumsrecht an einer gegenseitigen Kapitalgesellschaft in Bezug auf die Versicherungsgesellschaft. (Avantage de transformation imposable) Randnotiz: Regeln für die allgemeine Anwendung (2) Für die Zwecke dieses Abschnitts (a) gilt vorbehaltlich der Buchstaben b bis g, wenn eine Leistung in Bezug auf eine Demutualisierung gewährt wird Deutsch: eur-lex. europa. eu/LexUriServ/LexUri...0083: DE: HTML. Englisch: eur-lex. europa. eu/LexUriServ/LexUri...0083: EN: HTML (2) wird die Person, an die die Verpflichtung geknüpft ist, eine Zahlung zu leisten oder zu vereinbaren, eine Leistung (i) als Folge der Verpflichtung der Verpflichtung erhalten; Ii) nicht als Folge der Zahlung der Zahlung, b) wenn ein Unternehmen bei der Erbringung einer Leistung in Bezug auf eine Demutualisierung eine Zahlung leistet (mit Ausnahme einer nach den Versicherungsbedingungen geschlossenen Zahlung) (I) vorbehaltlich der Absätze (f) und (g) der Empfänger der Zahlung eine Leistung als Folge der Leistung erhalten hat (Ii) es wird davon ausgegangen, dass keine Leistung als Folge der Verpflichtung einer unabdingbaren oder absoluten Verpflichtung eingegangen wird, die Zahlung zu leisten oder zu vereinbaren (c) es wird keine Leistung als eingegangen betrachtet Als Folge der Verpflichtung, eine unab - hängige oder bedingte Verpflichtung eines Unternehmens, eine Zahlung zu leisten oder zu vereinbaren (mit Ausnahme einer Zahlung, die gemäß den Bedingungen einer Versi - cherungspolice, d. h. Dass es genügend Informationen über die Lage einer Person gibt, um die Zahlung zu tätigen oder zu veranlassen, (d) wenn die Verpflichtung einer Körperschaft, eine Zahlung im Zusammenhang mit einer Demutualisierung zu tätigen oder zu vereinbaren, mit oder vor der ersten Zahlungsfrist und ohne die So wird kein Leistungsanspruch als Folge der Verpflichtung der Verpflichtung eingegangen, es sei denn, die Zahlung sei eine Zahlung (ausgenommen eine Policendividende) gemäß den Bestimmungen einer Versicherungspolice ( E) es wird keine Leistung als Folge der Verpflichtung einer Kapitalgesellschaft angesehen, eine Zahlung zu leisten oder zu vereinbaren, wenn (i) Absatz (a) jedoch für diesen Absatz gelten würde Die Verpflichtung, (ii) Buchstabe d), wenn dieser Absatz ohne Bezugnahme auf die Worte am oder vor der ersten Frist für die Zahlung gelesen wurde, in Bezug auf die Verpflichtung anwendbar ist, (iii) es vernünftig ist, zu folgern, Nicht vor Beginn der ersten Frist für die Zahlung ausreichende Informationen über den Standort einer Person, die die Zahlung vornehmen oder anordnen soll, und iv) diese Informationen an einem bestimmten Tag nach dem ersten Termin zur Verfügung stehen und die Verpflichtung nicht mehr als Sechs Monate nach dem jeweiligen Tag (f) wird keine Leistung als Folge von (i) einem Unternehmen einer absoluten oder bedingten Verpflichtung eines Unternehmens, eine Annuitätszahlung durch die Ausgabe eines Annuitätsvertrags zu tätigen oder zu vereinbaren, Oder (ii) den Erhalt einer Annuitätszahlung im Rahmen des so erlassenen Vertrages, wenn vernünftigerweise der Schluss gezogen werden kann, dass der Zweck des Unternehmens oder die Erbringung der Annuitätszahlung darin besteht, Leistungen zu ergänzen, die in einem Annuitätsvertrag gewährt werden, auf den Unterabschnitt 147.4 (1 ) Oder Absatz 254 (a) oder eines Konzernrentevertrages, der unter oder nach einem angemeldeten Pensionsplan ausgegeben wurde, g) keine Leistung als Folge von (i) anzunehmen ist Änderungsantrag, auf den Absatz 147.4 Absatz 2 Bezug genommen wird, aber für Unterabsatz 147.4 Absatz 2 Buchstabe a Ziffer ii, oder ii) eine Ersetzung, auf die Absatz 147.4 Absatz 3 Buchstabe a anwendbar ist; Dass ein Anspruchsberechtigter im Zusammenhang mit der Demutualisierung eines Versicherungsunternehmens eine Leistung erhält, i) wenn es sich um eine Zahlung handelt, die am oder vor dem Zeitpunkt der Demutualisierung erbracht wird oder eine Zahlung gemäß Absatz (b) ist, An dem die Zahlung geleistet wird, und (ii) in jedem anderen Fall die letzte von (A) dem Zeitpunkt der Demutualisierung, (B) wenn der Umfang der Leistung oder der Anspruchsberechtigten davon abhängig ist vom Ausgang einer ersten Das öffentliche Angebot von Aktien der Gesellschaft oder einer Holdinggesellschaft in Bezug auf die Versicherungsgesellschaft und das Angebot vor dem Tag, der 13 Monate nach dem Zeitpunkt der Demutualisierung, dem Zeitpunkt der Vollendung des Angebots, abgeschlossen ist, Englisch: eur-lex. europa. eu/LexUriServ/LexUri...0083: EN: HTML Der Gesamtbetrag der Leistung hängt von dem Ergebnis einer Börseneinführung der Aktien der Gesellschaft oder einer Holdinggesellschaft für die Versicherungsgesellschaft, dem Zeitpunkt des Abschlusses des Angebots, (D) ab Hat die Person, die die Leistung verleiht, keine ausreichenden Informationen über die Lage des Stakeholders vor den späteren unter den Klauseln (A) bis (C) festgelegten Zeitpunkten, um den Stakeholder der Leistung zu beraten, Zu dem Ort, an dem der Stakeholder so empfiehlt, dass der Stakeholder von dieser Person empfangen wurde, und (E) das Ende eines jeden anderen Tages, der für den Minister akzeptabel ist (i) der Zeitpunkt, zu dem ein Versicherungsunternehmen als demutualisiert betrachtet wird, die Zeit ist An dem sie erstmals einen Anteil am Grundkapital ausgibt (ausgenommen Aktien des von ihr ausgegebenen Grundkapitals, wenn es sich um eine Aktiengesellschaft handelte, wenn die Gesellschaft aufgrund der Ausgabe dieser Aktien nicht mehr als Gegenpartei auftritt) und (j ) Vorbehaltlich des Absatzes (3) (b) ist der Wert einer Leistung, die ein Stakeholder erhalten hat, der Marktwert der Leistung zu dem Zeitpunkt, zu dem der Stakeholder die Leistung erhält. Randnotiz: Sonderfälle (3) Für die Zwecke dieses Abschnitts a) werden die Leistungen im Rahmen eines Versicherungsvertrags verstärkt (anders als durch eine Änderung, auf die Absatz 147.4 Absatz 2, jedoch auf Unterabsatz 147.4 Absatz 2 Bezug genommen wird) (A) (ii) im Zusammenhang mit einer Demutualisierung gilt der Wert der Erweiterung als eine vom Versicherungsnehmer erhaltene Leistung und nicht von einer anderen Person, b) wenn Prämien, die im Rahmen einer Versicherungspolice an eine Versicherungsgesellschaft gezahlt werden, gelten Im Zusammenhang mit einer Demutualisierung gesenkt werden, wird der Versicherungsnehmer als Folge der Verpflichtung, die Prämien zu senken, zum Zeitpunkt der Demutualisierung der zu zahlenden Zusatzprämien eine Leistung in Höhe des Barwertes erhalten haben, Die Prämien im Zusammenhang mit der Demutualisierung nicht gesenkt wurden, (c) die Zahlung einer Policendividende durch eine Versicherungsgesellschaft oder ein Unternehmen einer Verpflichtung der Gesellschaft zur Zahlung einer Policendividende als mit der Demutualisierung der Gesellschaft verbunden betrachtet wird Nur in dem Ausmaß, dass (i) die Policendividende in dem von der Gesellschaft an die Stakeholder gesendeten Demutualisierungsvorschlag verwiesen wird, (ii) die Zahlungsverpflichtung von der Zustimmung der Stakeholder zur Demutualisierung abhängig gemacht wird und (iii) die Zahlung oder Kann nicht davon ausgegangen werden, dass die Dividendenpolitik durch die Demutualisierung nachteilig beeinflusst wird (d) mit Ausnahme der Absätze (c), (e) und (f) , Wenn ein Teil der Policendividende eine Umwandlungsleistung für die Demutualisierung eines Versicherungsunternehmens ist und ein Teil davon nicht besteht, so wird jeder Teil der Dividende als eine von dem anderen Teil getrennte Versicherungsdividende betrachtet (F) die Zahlung einer Policendividende beinhaltet die Anwendung der Policendividende zur Zahlung einer Prämie im Rahmen einer Versicherung oder zur Rückzahlung einer Police Darlehen g) wenn die Demutualisierung eines Versicherungsunternehmens durch die Verschmelzung der Gesellschaft mit einer oder mehreren anderen Gesellschaften zu einer Körperschaft erfolgt, so gilt diese Körperschaft als die gleiche Körperschaft wie die Fortsetzung des Versicherungsunternehmens H) eine Versicherungsgesellschaft gilt als Vertragspartei einer Versicherungspolice im Zeitpunkt der Haftung der Versicherungsgesellschaft für Pflichten eines Versicherers im Rahmen der Police und i) abweichend von Absatz 248 Absatz 7 Buchstabe a) , Wenn ein Scheck oder andere Zahlungsmittel, die an eine Adresse geschickt werden, an den Absender zurückgesandt werden, ohne dass er von dem Empfänger empfangen worden ist, gilt er als nicht gesendet. Randnotiz: Folgen der Demutualisierung (4) Wenn eine bestimmte Versicherungsgesellschaft demutualisiert, (a) jedes Einkommen, Verlust, Kapitalgewinn und Kapitalverlust eines Steuerpflichtigen aus der Veräußerung, Veränderung oder Verwässerung der Eigentumsrechte des Steuerpflichtigen im Besonderen Gesellschaft als Ergebnis der Demutualisierung gilt als null (b) kein Betrag, der an einen Stakeholder im Zusammenhang mit der Anordnung, Änderung oder Verwässerung der Eigentumsrechte der Stakeholder an der jeweiligen Gesellschaft gezahlt oder gezahlt werden kann, kann in die Klasse 14.1 des Anhangs aufgenommen werden II des Körperschaftssteuergesetzes (c) Nach den §§ 85 Abs. 1 oder 2 WG kann in Bezug auf die Eigentumsrechte in dem betreffenden Unternehmen keine Wahl getroffen werden, (d) wenn die Gegenleistung einer Person für einen Anteil am Grundkapital berücksichtigt wird Der jeweiligen Gesellschaft oder einer Holdinggesellschaft im Zusammenhang mit der Demutualisierung (oder für bestimmte Eigentumsrechte an einer gegenseitigen Holdinggesellschaft in Bezug auf die jeweilige Gesellschaft) beinhaltet die Übertragung, Abtretung, Veränderung oder Verwässerung der Eigentumsrechte an der jeweiligen Gesellschaft Des Anteils (oder der Besitzrechte) an der Person gilt als null (e), wenn eine im Zusammenhang mit der Demutualisierung bestehende Kapitalgesellschaft im Zusammenhang mit der Demutualisierung einen Anteil am Grundkapital der jeweiligen Gesellschaft von der Bestimmten Körperschaft und stellt einen Anteil des eigenen Aktienkapitals an einen Stakeholder als Gegenleistung für den Anteil des Grundkapitals der jeweiligen Gesellschaft dar, so gelten die Kosten für die Kapitalgesellschaft des Anteils am Grundkapital der jeweiligen Körperschaft als null (F) wenn ein Anspruchsberechtigter eine steuerbare Umwandlungsleistung erhält und der Unterabschnitt (14) nicht für die Leistung gilt, (i) die Körperschaft, die die Leistung gewährt, zu diesem Zeitpunkt eine Dividende auf Aktien des Kapitals gezahlt hat (Ii) Vorbehaltlich des Absatzes (16) gilt die Leistung, die der Stakeholder erhalten hat, als eine Dividende, die der Stakeholder zu diesem Zeitpunkt erhalten hat (g) für die Zwecke dieses Teils, wenn Eine Dividende gemäß Absatz (f) oder Absatz (16) (i) von einer gebietsfremden Gesellschaft gezahlt wird, gilt diese Körperschaft für die Zahlung der Dividende als Kapitalgesellschaft mit Sitz in Kanada Eine steuerpflichtige kanadische Körperschaft, es sei denn, für die Zwecke der §§ 70 Abs. 4 Nr. 4 Nr. 4 und § 128 Abs. 1 HGB wird der Steueranspruch auf die Dividende gemäß § 126 beansprucht Die im Zusammenhang mit der Demutualisierung erhalten wurden, vor dem Zeitpunkt des Eingangs als null und i) wenn eine Person einen Annuitätsvertrag erwirbt, für den aufgrund der Anwendung von Absatz (2) (f) keine Leistung gewährt wird (I) die Kosten des Annuitätenvertrages für die Person gelten als null, und (ii) gilt Abschnitt 12.2 nicht für den Annuitätsvertrag. Randnotiz: Angemessener Marktwert der Eigentumsrechte (5) Für die Zwecke des § 70 Abs. 4 Nr. 4 Nr. 4 und § 128 Abs. 1 lit. Wird der Marktwert der Eigentumsrechte an der Gesellschaft während der gesamten Zeitspanne, die (a) zu diesem Zeitpunkt beginnt und (b) endet, entweder zum Zeitpunkt der Demutualisierung oder für den Fall, dass die Gesellschaft an irgendeiner Stelle endet, als null betrachtet Nachfolgende Zeit eine öffentliche Ankündigung, die es nicht mehr beabsichtigt, zu demutualisieren, zu dem späteren Zeitpunkt. Randnotiz: Paid-up-Kapitalversicherungs-Gesellschaft (6) Hat eine in Kanada ansässige Versicherungsgesellschaft bei der Berechnung des eingezahlten Kapitals zu einer bestimmten Zeit in Bezug auf eine Anteilsklasse des Grundkapitals der Gesellschaft eine Demutualisierung vorgenommen, (a ) Wird die Summe aller Beträge in Abzug gebracht, von denen jeder für diesen Unterabschnitt nach Absatz 84 (1) von der Gesellschaft als Dividende auf einen Teil davon bezahlt wurde oder vor dem jeweiligen Zeitpunkt Aufgrund der Erhöhung des eingezahlten Kapitals (die ohne Bezug auf diesen Unterabschnitt bestimmt wird) im Zusammenhang mit der Demutualisierung und (b) der Betrag, zu dem (i) die Summe aller Beträge, Nach Absatz 84 (3), (4) oder (4.1) eine Dividende auf Aktien der von der Gesellschaft vor dem jeweiligen Zeitpunkt gezahlten Klasse vor dem jeweiligen Zeitpunkt (ii) der Summe aller Beträge, (3), (4) oder (4.1) eine Dividendenausschüttung für Anteile der von der Gesellschaft vor dem jeweiligen Zeitpunkt gezahlten Anteilsklasse vorzunehmen, wenn dieses Gesetz ohne Bezug auf diesen Unterabschnitt gelesen wurde. Randnotiz: Kapitalbeteiligte Kapitalgesellschaft (7) Befindet sich ein in Kanada ansässiges Unternehmen zu irgendeiner Zeit als Holdinggesellschaft im Zusammenhang mit der Demutualisierung eines Versicherungsunternehmens bei der Berechnung des eingezahlten Kapitals zu einem bestimmten Zeitpunkt in Bezug auf Eine Anteilsklasse des Grundkapitals der jeweiligen Gesellschaft, (a) die Summe aller Beträge, von denen jeder ein Betrag ist, um den das eingezahlte Kapital, jedoch für diesen Unterabschnitt, erhöht worden wäre oder vorher, abgezogen wird Die besondere Zeit als Folge des Erwerbs von Aktien einer Kapitalklasse des Grundkapitals der Versicherungsgesellschaft aus der Kapitalgesellschaft auf deren Demutualisierung und (b) wird der Betrag hinzugefügt, durch den (i) Wobei alle Beträge nach Absatz 84 Absätze 3, 4 oder 4 als Dividendenausschüttung für Anteile dieser Klasse gelten, die von der jeweiligen Gesellschaft vor dem jeweiligen Zeitpunkt gezahlt werden, (ii) die Summe aller Beträge, Nach Absatz 84 (3), (4) oder (4.1) als Dividendenausschüttung für Anteile derjenigen Klasse gelten, die die betreffende Gesellschaft vor dem jeweiligen Zeitpunkt bezahlt hat, wenn dieses Gesetz ohne Bezug auf diesen Unterabschnitt gelesen wurde. Randnotiz: Policendividende (8) Ist die Zahlung einer Policendividende durch eine Versicherungsgesellschaft eine steuerpflichtige Umwandlungsleistung, (a) gilt die Policendividende für die Zwecke dieses Gesetzes nicht als politische Dividende Und (b) kann kein Betrag in Bezug auf die Policendividende explizit oder implizit in die Berechnung eines vom Versicherer für jedes Steuerjahr gemäß Paragraph 20 Absatz 7 Buchstabe c oder Unterabschnitt 138 Absatz 3 abziehbaren Betrags einbezogen werden, . Randnotiz: Zahlung und Erhalt der Prämie (9) Wurde im Zusammenhang mit der Demutualisierung eines Versicherungsunternehmens eine Person ohne Bezugnahme auf die Absätze (f) und (g) und Absatz (3) (A) ohne Bezugnahme auf die Anwendung von Unterabschnitt 147.4 (2) gelesen wurden, erhalten eine besondere Leistung, die eine bestimmte Versicherungsleistung ist, (a) die Versicherungsgesellschaft, die verpflichtet ist, Leistungen nach der Politik zu leisten, auf die sich die besondere Leistung bezieht Eine Prämie im Zeitpunkt der Demutualisierung für diese Politik in Höhe des Wertes des jeweiligen Vorteils (b) für die Zwecke des Absatzes (a) zu erhalten, sofern die Pflichten eines bestimmten Versicherungsunternehmens im Sinne des Absatzes (a) Die Police von einer anderen Versicherungsgesellschaft vor dem Zeitpunkt der Demutualisierung übernommen wurde, gilt die jeweilige Körperschaft als nicht verpflichtet, Leistungen im Rahmen der Police zu leisten, und (c) vorbehaltlich des Absatzes (15) (e), wenn die Person die besondere Leistung erhält Gilt die Person, die zum Zeitpunkt der Demutualisierung eine Prämie für die Versicherungspolice gezahlt hat, auf die sich die Leistung bezieht, gleich dem Wert des jeweiligen Vorteils. Randnotiz: Kosten der steuerpflichtigen Umwandlungsleistung (10) Erhält ein Stakeholder im Zusammenhang mit der Demutualisierung eines Versicherungsunternehmens einen steuerpflichtigen Umwandlungsfreibetrag (mit Ausnahme einer bestimmten Versicherungsleistung), so gilt der Anspruchsberechtigte als erworben Kosten gleich dem Wert der Leistung. Randnotiz: keine Aktionärsleistung (11) Unterabschnitt 15 (1) gilt nicht für eine Umwandlungsleistung. Marginal note: Exclusion of benefit from RRSP and other rules (12) Subject to subsection (14), for the purposes of the provisions of this Act (other than paragraph (9)(c)) that relate to registered retirement savings plans, registered retirement income funds, retirement compensation arrangements, deferred profit sharing plans and superannuation or pension funds or plans, the receipt of a conversion benefit shall be considered to be neither a contribution to, nor a distribution from, such a plan, fund or arrangement. Marginal note: RRSP registration rules, etc. (13) For the purposes of this Act, paragraphs 146(2)(c.4) and 146.3(2)(g) and subsection 198(6) shall be applied without reference to any conversion benefit. Marginal note: Retirement benefit (14) A conversion benefit received because of an interest in a life insurance policy held by a trust governed by a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan or superannuation or pension fund or plan is deemed to be received under the plan or fund, as the case may be, if it is received by any person (other than the trust). Marginal note: Employee-paid insurance (a) a stakeholder receives a conversion benefit because of the stakeholders interest in a group insurance policy under which individuals have been insured in the course of or because of their employment, (b) at all times before the payment of a premium described in paragraph (c), the full cost of a particular insurance coverage under the policy was borne by the individuals who were insured under the particular coverage, (c) the stakeholder pays a premium under the policy in respect of the particular coverage or under another group insurance policy in respect of coverage that has replaced the particular coverage, and (i) the premium is deemed by paragraph (9)(c) to have been paid, or (ii) it is reasonable to conclude that the purpose of the premium is to apply, for the benefit of the individuals who are insured under the particular coverage or the replacement coverage, all or part of the value of the portion of the conversion benefit that can reasonably be considered to be in respect of the particular coverage, the following rules apply: (e) for the purposes of paragraph 6(1)(f) and regulations made for the purposes of subsection 6(4), the premium is deemed to be an amount paid by the individuals who are insured under the particular coverage or the replacement coverage, as the case may be, and not to be an amount paid by the stakeholder, and (f) no amount may be deducted in respect of the premium in computing the stakeholders income. Marginal note: Flow-through of conversion benefits to employees and others (a) a stakeholder receives a conversion benefit (in this subsection referred to as the relevant conversion benefit) because of the interest of any person in an insurance policy, (b) the stakeholder makes a payment of an amount (otherwise than by way of a transfer of a share that was received by the stakeholder as all or part of the relevant conversion benefit and that was not so received as a taxable conversion benefit) to a particular individual (i) who has received benefits under the policy, (ii) who has, or had at any time, an absolute or contingent right to receive benefits under the policy, (iii) for whose benefit insurance coverage was provided under the policy, or (iv) who received the amount because an individual satisfied the condition in subparagraph (i), (ii) or (iii), (c) it is reasonable to conclude that the purpose of the payment is to distribute an amount in respect of the relevant conversion benefit to the particular individual, (i) the main purpose of the policy was to provide retirement benefits or insurance coverage to individuals in respect of their employment with an employer, or (ii) all or part of the cost of insurance coverage under the policy had been borne by individuals (other than the stakeholder), (e) subsection (14) does not apply to the relevant conversion benefit, and (f) one of the following applies, namely, (i) the particular individual is resident in Canada at the time of the payment, the stakeholder is a person the taxable income of which is exempt from tax under this Part and the payment would, if this section were read without reference to this subsection, be included in computing the income of the particular individual, (ii) the payment is received before Decenber 7, 1999 and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the relevant conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the payment, (iii) the payment is received after December 6, 1999, the payment would, if this section were read without reference to this subsection, be included in computing the income of the particular individual and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the relevant conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the payment, or (iv) the payment is received after December 6, 1999 and the payment would, if this section were read without reference to this subsection, not be included in computing the income of the particular individual, the following rules apply: (g) subject to paragraph (l), no amount is, because of the making of the payment, deductible in computing the stakeholders income, (h) except for the purpose of this subsection and without affecting the consequences to the particular individual of any transaction or event that occurs after the time that the payment was made, the payment is deemed not to have been received by, or made payable to, the particular individual, (i) the corporation that conferred the relevant conversion benefit is deemed to have paid to the particular individual at the time the payment was made, and the particular individual is deemed to have received at that time, a dividend on shares of the capital stock of the corporation equal to the amount of the payment, (j) all obligations that would, but for this subsection, be imposed by this Act or the regulations on the corporation because of the payment of the dividend apply to the stakeholder as if the stakeholder were the corporation, and do not apply to the corporation, (k) where the relevant conversion benefit is a taxable conversion benefit, except for the purpose of this subsection and the purposes of determining the obligations imposed by this Act or the regulations on the corporation because of the conferral of the relevant conversion benefit, the stakeholder is deemed, to the extent of the fair market value of the payment, not to have received the relevant conversion benefit, and (l) where the relevant conversion benefit was a share received by the stakeholder (otherwise than as a taxable conversion benefit), (i) where the share is, at the time of the payment, capital property held by the stakeholder, the amount of the payment shall, after that time, be added in computing the adjusted cost base to the stakeholder of the share, (ii) where subparagraph (i) does not apply and the share was capital property disposed of by the stakeholder before that time, the amount of the payment is deemed to be a capital loss of the stakeholder from the disposition of a property for the taxation year of the stakeholder in which the payment is made, and (iii) in any other case, paragraph (g) shall not apply to the payment. Marginal note: Flow-through of share benefits to employees and others (a) because of the interest of any person in an insurance policy, a stakeholder receives a conversion benefit (other than a taxable conversion benefit) that consists of shares of the capital stock of a corporation, (b) the stakeholder transfers some or all of the shares at any time to a particular individual (i) who has received benefits under the policy, (ii) who has, or had at any time, an absolute or contingent right to receive benefits under the policy, (iii) for whose benefit insurance coverage was provided under the policy, or (iv) who received the shares because an individual satisfied the condition in subparagraph (i), (ii) or (iii), (c) it is reasonable to conclude that the purpose of the transfer is to distribute all or any portion of the conversion benefit to the particular individual, (i) the main purpose of the policy was to provide retirement benefits or insurance coverage to individuals in respect of their employment with an employer, or (ii) all or part of the cost of insurance coverage under the policy had been borne by individuals (other than the stakeholder), (e) subsection (14) does not apply to the conversion benefit, and (f) one of the following applies, namely, (i) the particular individual is resident in Canada at the time of the transfer, the stakeholder is a person the taxable income of which is exempt from tax under this Part and the amount of the transfer would, if this section were read without reference to this subsection, be included in computing the income of the particular individual, (ii) the transfer is made before December 7, 1999 and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the transfer, (iii) the transfer is made after December 6, 1999, the amount of the transfer would, if this section were read without reference to this subsection, be included in computing the income of the particular individual and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the conversion benefit (or a later day acceptable to the Minister), that this subsection applies in respect of the transfer, or (iv) the transfer is made after December 6, 1999 and the amount of the transfer would, if this section were read without reference to this subsection, not be included in computing the income of the particular individual, the following rules apply: (g) no amount is, because of the transfer, deductible in computing the stakeholders income, (h) except for the purpose of this subsection and without affecting the consequences to the particular individual of any transaction or event that occurs after the time that the transfer was made, the transfer is deemed not to have been made to the particular individual nor to represent an amount payable to the particular individual, and (i) the cost of the shares to the particular individual is deemed to be nil. Marginal note: Acquisition of control (18) For the purposes of subsections 10(10), 13(21.2) and (24) and 18(15), sections 18.1 and 37, subsection 40(3.4), the definition superficial loss in section 54, section 55, subsections 66(11), (11.4) and (11.5), 66.5(3) and 66.7(10) and (11), section 80, paragraph 80.04(4)(h), subsections 85(1.2) and 88(1.1) and (1.2), sections 111 and 127 and subsections 249(4) and 256(7), control of an insurance corporation (and each corporation controlled by it) is deemed not to be acquired solely because of the acquisition of shares of the capital stock of the insurance corporation, in connection with the demutualization of the insurance corporation, by a particular corporation that at a particular time becomes a holding corporation in connection with the demutualization where, immediately after the particular time, (a) the particular corporation is not controlled by any person or group of persons and (b) 95 of the fair market value of all the assets of the particular corporation is less than the total of all amounts each of which is (i) the amount of the particular corporations money, (ii) the amount of a deposit, with a financial institution, of such money standing to the credit of the particular corporation, (iii) the fair market value of a bond, debenture, note or similar obligation that is owned by the particular corporation that had, at the time of its acquisition, a maturity date of not more than 24 months after that time, or (iv) the fair market value of a share of the capital stock of the insurance corporation held by the particular corporation. NOTE: Application provisions are not included in the consolidated text see relevant amending Acts. 2000, c. 19, s. 38 2016, c. 12, s. 50. Table of ContentsChapter 11 Computation of Taxable Income and Tax After General Reductions for Corporations Learning Goals para11,000 Computation Of Taxable Income For A Corporation para11,025 Purpose The purpose of the deduction is to prevent the double taxation of corporate income. When dividends are paid, the source of the dividends is usually after-tax retained earnings of the payer corporation. If a recipient corporation were to pay tax on the dividends it receives, the income that gave rise to the dividends would effectively be taxed twice. A provision prevents that second imposition of tax at the level of the recipient corporation. In fact, retained earnings can, in many cases, be flowed through any number of shareholder corporations in the form of taxable dividends without attracting tax under Part160I. When the retained earnings are ultimately paid as dividends to an individual shareholder, the dividend gross-up and tax-credit mechanism will operate to reduce, at the individual taxpayer level, the potential double taxation of income generated by a corporation. para11,025.10 Concept of integration of individual and corporate tax on income The dividend deduction for corporate shareholders is the second building block of the theory of integration. The first building block, the dividend gross-up and tax credit for individual shareholders, was previously discussed in Chapters1606 and 10. The function of the dividend deduction for a corporation is to remove some of the potential multiple taxation of dividend income as the income moves through a series or chain of corporations. Simply stated, the integration concept, discussed in more detail in Chapter 12. requires that a tax system should be designed so that a taxpayer is indifferent (i. e. pays the same amount of tax), no matter what type of entity or person earns the income. In the context of corporations and their shareholders under a perfectly integrated tax system, the total tax burden should be identical whether the individual receives the income directly or indirectly, as a shareholder, from dividends through the corporate structure. The Canadian income tax system is not perfectly integrated. Near perfect integration occurs numerically where the combined corporate rate of tax (federal and provincial) is equal to: bull 20 for Canadian-controlled private corporations on their business income eligible for a low rate of tax, and bull about 31 for Canadian-resident corporations on their business income subject to the higher general rate of tax. However, even at these rates there are flaws in the system. For example, the dividend tax credit should represent the underlying tax paid by the corporation. However, under our present income tax system, even when the corporation has not paid any tax due to losses, for example, shareholders still receive a dividend tax credit. para11,025.20 Application of the concept of integration To illustrate the corporate dividend deduction aspect of integration, assume that there is a chain of three taxable Canadian corporations: A160Ltd. a Canadian-resident public corporation, owns 100 of B160Ltd. which in turn owns 100 of C160Ltd. Also, assume that each of the corporations is taxed at a combined rate of 35, and the individual shareholders of A160Ltd. are all taxed at a combined rate of 40 all of the after-tax income is passed up to the next level in the form of eligible dividends, i. e. eligible for the 45 gross-up and tax credit in the hands of an individual shareholder. In the absence of a corporate deduction for dividends received from another corporation the following would result. The result of this example is that on the 1,000 of income initially earned by C Ltd. the ultimate tax burden is 762. The dividend deduction, as discussed above, eliminates the corporate tax in both B160Ltd. and C160Ltd. The tax burden remaining would be composed of the 350 on the income earned initially by C Ltd. and the tax of 85 on the 943 grossed-up dividend received by the individual shareholders calculated as follows: The total income tax is now 435 compared to 762. However, as can be seen, there is still some degree of double taxation even with the dividend tax credit when the corporate tax rate is at this level (i. e. 435 versus 400 under perfect integration). para11,025.30 Conclusion From the above example, one can conclude that where dividend income flows through a series of corporations there will be only two incidents of income tax. Initially, the corporation that earns the business or property income will pay income tax and eventually the individual shareholder who receives the income in the form of a dividend will also pay some income tax. In the next chapter, the topic of integration will be expanded even further with different corporate rates and other factors. para11,030 Dividends paid from untaxed income Over the years, the intercorporate dividend deduction has created problems which the government has attempted to rectify. For example, a corporation may pay a dividend from income that was not taxed in the payer corporation. This might occur when income for accounting purposes is higher than income for tax purposes, due to a more rapid write-off of assets for tax purposes. The utilization of carried-over losses may also offset income, so that some amounts that are distributed as dividends may not be taxed fully in the corporation that pays the dividend. This is usually due to timing differences between the payment of the dividend and the offset of losses. In these cases, there is a breakdown of the assumption that underlies the intercorporate dividend deduction, namely, that the dividend deduction prevents double taxation because the income that gave rise to the dividends was taxed in the payer corporation. This problem is compounded when individual shareholders gross up the dividends and deduct a dividend tax credit, on the assumption that the payer corporation or a predecessor corporation paid tax on the income it distributed as dividends. The purpose and effect of the dividend gross-up and tax-credit mechanism will be discussed more fully in the next chapter. para11,035 34After-tax financing34 Another problem that is linked with the intercorporate dividend deduction occurs when what has become known as 34after-tax financing34 is undertaken. A corporation that has generated losses in the past may not find debt financing attractive. This is because the deduction for interest expense provides no immediate tax relief where the corporation does not have to pay tax currently. Instead, the interest expense deduction merely increases the corporations non-capital losses which may be deductible in the future or may expire. Alternatively, a corporation with unused losses could issue preferred shares to another corporation, such as a financial institution, to obtain the necessary financing. The result is that the corporation that issues the preferred shares will, obviously, not receive a deduction for dividends paid on the preferred shares. However, the financing corporation, because of the intercorporate dividend deduction, will not ordinarily pay tax on the dividends it receives. Consequently, because interest income is taxable and dividends are ordinarily not, the financing corporation may be prepared to lend funds at a rate lower than the market rate of interest. Rules are designed to eliminate the benefits of after-tax financing on 34term preferred shares34, 34short-term preferred shares34 and collateralized preferred shares. para11,040 Dividends paid on shares subsequently sold for a loss The intercorporate dividend deduction is also linked to a potential problem when dividends are received on shares held by a corporation for a short period and subsequently sold at a loss. Such dividends would ordinarily be deductible in computing taxable income, or in the case of certain dividends (e. g. capital dividends), would be tax exempt. On the other hand, the loss on the disposition of the shares would be deductible as an allowable capital loss (if the shares were held as a capital property), or as a business loss (if the shares were held as inventory). It may be argued that, to some extent, the loss on disposition may have been caused by the payment of the dividend for example, witness the normal decline in the value of shares after the ex-dividend date. Consequently, there are rules that, when certain conditions are present, will reduce the corporations capital loss or inventory loss by an amount equal to the aggregate of certain types of dividends received on such shares prior to the disposition. The loss reductions will occur if one of the following conditions is present: (a) the corporation owned the shares for less than 365 continuous days immediately prior to the disposition date, or (b) the corporation owned more than 5 of the issued shares of any class of the capital stock on which the dividends were received. The type of dividends that will reduce such capital losses are essentially taxable dividends (deductible in computing the corporations taxable income), and tax-exempt capital dividends received on the shares during the period of ownership. Similarly, inventory losses are reduced by deductible taxable dividends received by any taxpayer-shareholder plus non-taxable dividends received. para11,050 Charitable Donations While individuals are provided with a non-refundable tax credit for various donations, as discussed in Chapter16010. corporations are permitted a deduction in Division160C. The types of donation that provide a corporation with this deduction are the same as the types of donation that provide an individual with a tax credit. Also, a corporations deduction for gifts is, generally, limited to 75 of the corporations net income for tax purposes under Division160B. However, the deduction is limited to 100 of the amount of a taxable capital gain in respect of gifts of appreciated capital property. As well, the deduction limit is 100 of any CCA recapture arising on the gift of depreciable capital property. Any unused donations for a given year can be carried forward five years to be deducted in a carryforward year. The total claim for donations carried forward to a year and current donations made in that year cannot exceed the Division B income limit. The maximum donation need not be deducted in a given year, such that undeducted amounts are available within the carryforward period. To be deducted, a donation must be proven, if necessary, by a receipt that contains prescribed information. para11,060 Loss Carryovers The rules governing the deductibility of net capital losses and non-capital losses are the same for corporations and individuals. A capital loss carryover from the current year may be carried back to a prior year in which income included capital gains and non-capital losses. The capital loss would then be offset against the capital gain, reducing the amount of non-capital losses needed to minimize taxes payable for the prior year. This increases the non-capital losses available to be carried over into the current year. The carryforward of non-capital losses, restricted farm losses, and farm losses arising in the 2006 and subsequent taxation years is 20 years. The following table shows the carryover period for net and non-capital losses. para11,065 Non-capital loss A non-capital loss for a particular year, as it affects a corporation (for the purposes of this text), is generally defined to include: This definition is designed to offset the current years losses from various sources (items (E) and (D)) against the current years income from other sources (item (F)). Then the balance or the unabsorbed excess loss can be carried over and deducted in another year. Non-capital losses and farming and fishing losses may be carried back three taxation years and forward 20 taxation years. To carry losses back to a taxation year for which a return has been filed, the corporation need only file one form (Schedule1604) and not a full, amended tax return. IC 84-1, par.16011 Although a 20-year carryforward period is quite long, it is possible for carried-over losses to expire. Recognize that 20 years is a very long time for a business to sustain losses with no income earned to offset those losses. Most businesses would not last that long with those losses. However, planning should be undertaken to ensure that the losses are utilized within the carryover period. Income can be increased to absorb non-capital losses by omitting optional or permissive deductions such as capital cost allowances, cumulative eligible capital amounts, scientific research and experimental development expenditures or reserves. The deduction of these amounts can be deferred to future years when there is offsetting income. The Canada Revenue Agency (CRA) usually permits the revision of a permissive deduction for a prior year. An Information Circular indicates that a letter to the director of the taxpayers district taxation office that outlines the requested revisions will be sufficient if other conditions set out in paragraphs1609 and16010 are met. In addition, the corporation should consider the sale of unnecessary or redundant assets to generate income which could be used to absorb losses. The CRA may also allow the substitution of one type of loss for another, as long as the year in which the substitution is made is still open to assessment (as discussed in Chapter16014 ). For example, a non-capital loss may have been carried back to a year in which there was a net taxable capital gain. Subsequently, an allowable capital loss may arise. The resultant net capital loss may be carried back and substituted for the non-capital loss, leaving the freed non-capital loss available for carryforward. The operations of Bigloss Ltd. generated the following data for its December 31, 2008 taxation year: In its 2007 taxation year, its first profitable year in several, Bigloss Ltd. had taxable income under Division160C of 40,000. Compute the non-capital loss for Bigloss Ltd. in 2008 and determine the amount of that loss that can be carried back to 2007. Before calculating the non-capital loss for 2008, a review of the construction of section1603 income would be useful in understanding the basic concept. The following calculation reorganizes the above information using the ordering and application rules in section 3. Note that the denominator C in the fraction BC, in effect, divides the net capital loss A by the inclusion rate of the loss year. Thus, when the 1997 net capital loss of 45,000, which is a 3 4 amount, is divided by 3 4 . the result is 60,000, which was the full capital loss in 1997. Then, B, which is the inclusion rate for the year in which the loss is being deducted, is multiplied by the full loss, the result is 2 3 of 60,000, or 40,000, which is the net capital loss for 2000. To deal with the carryover of these losses conceptually, it may be easier to carry full amounts of capital losses realized either back or forward against full gains in the carryover year. Then the appropriate inclusion rate could be applied to the net full gains in the carryover year. Unfortunately, as discussed below, the definition of net capital loss (i. e. the amount available for carryover) is given in terms of the fractional allowable capital losses. The amount of net capital loss realized in 1997 and deducted in 2000 and 2001 and, hence, the amount of net capital loss available for carryforward after 2001 can be reconciled as follows: para11,080 Restrictions and ordering of deductions A taxpayer can choose how much, if any, of its previously unclaimed carried-over losses to deduct in a particular year and in which order to deduct such losses and other Division160C deductions. However, the taxpayer must deduct a loss of a particular type (that is, non-capital loss, net capital loss, restricted farm loss or farm loss) in the chronological order in which the loss was incurred. Logic would suggest that those deductions in Division160C, which are more restricted in their deductibility, be claimed as soon as possible and before those deductions which are less restricted. There are two basic types of restriction on losses available for carryover. (1) The first is a restriction on the type of income against which the loss carryover can be deducted. This type of restriction is often referred to as 34streaming34. (2) The other is a restriction on the number of years a loss can be carried over. For example, a net capital loss can only be applied against net taxable capital gains, but is unrestricted as to carryforward time. A non-capital loss can be applied against any source of income, but is time-restricted. A restricted farm loss is restricted both as to the type of income against which it can be applied and to time. Therefore, restricted farm losses should usually be deducted first. Between net capital losses and non-capital losses, the decision depends on whether taxable capital gains are anticipated. If there are current taxable capital gains and an examination of the corporations balance sheet indicates no accrued or prospective capital gains, then net capital losses should probably be deducted before non-capital losses. EXHIBIT16011-2 Summary for Carryover Rules for Division C Deductions para11,085 Choice to deduct net capital losses to preserve non-capital losses Item E in the definition of non-capital loss enables taxpayers, at their option, to deduct net capital losses to preserve non-capital losses. The purpose of this choice is to correct a long-standing anomaly in the legislation which inadvertently penalized taxpayers in certain specific situations, as shown in the example below. Whether a taxpayer decides to utilize this option depends upon whether the corporation is expected to generate, in the near future, adequate business income or taxable capital gains. The non-capital loss can be increased by the amount of any net capital loss actually deducted for that year. The only restriction on the deduction of a net capital loss is that there is a net taxable capital gain in the year that is at least equal to the net capital loss being deducted. For example, assume that a corporation (or an individual) has in 2008 a business loss of 100,000, a net taxable capital gain of 40,000 and an adjusted net capital loss of 60,000 carry forward. The tax consequences are as follows: If the definition of non-capital loss did not contain the addition for net capital losses deducted, a corporation could deduct 40,000 of the net capital loss of 60,000 (equal to the net taxable capital gain) but would not do so because such a deduction would have no impact upon the taxable income which would still be zero. In addition, if the 40,000 was deducted, the taxpayer would no longer have a potential use of the 40,000 net capital loss in the future when the taxpayer is in a taxable position. The non-capital loss for the 2008 taxation year without the addition would be: The result is that the net taxable capital gain has been used to offset the business loss resulting in a lower non-capital loss (i. e. 60,000 versus 100,000). The taxpayer may or may not be happy with this result depending upon the taxpayers expected future income sources. Since net capital losses can only be applied to net taxable capital gains (i. e. 40,000) a potential net capital loss deduction has been blocked by the current business loss of 100,000. The addition of deducted net capital losses to the non-capital loss balance provides a positive tax consequence to claiming a net capital loss deduction, even though the deduction has no impact upon the taxable income as shown below. However, as a result of the deduction of net capital losses, the non-capital loss is increased by a net capital loss deducted: The result is that 40,000 of the net capital loss carryover has been deducted under Division C to offset the 40,000 of net taxable capital gain under paragraph1603( b ). This preserves the full 100,000 of business loss to be carried over as a non-capital loss, which can be deducted from any source of income in a carryover year. The following data summarize the operations of Parliamentary Fertilizers Limited, a Canadian-controlled private corporation, for the years 2005 to 2008 ended December16031. The corporation has a net capital loss balance of 18,750 which arose in 1997. Calculate the taxable income of the company for each of the years indicated, on the assumption that future other business income and taxable capital gains are uncertain, and tabulate the losses available for carryover at the end of 2008. (For the purposes of this type of problem, dealing with each item, line-by-line, across the years, will help keep track of carryovers more easily than dealing with income one year at a time.) mdashNOTES TO SOLUTION (1) 160Items aggregated from the various non-capital sources under paragraph1603( a ) cannot be negative. Losses from these sources are deducted under paragraph1603( d ). (2) 160Allowable capital losses are only deductible to the extent of taxable capital gains under paragraph1603( b ). The remainder is available for carryover to another year. (3) 160Losses from the various non-capital sources and from allowable business investment losses are only deductible under paragraph1603( d ). However, the net income amounts after the deductions in paragraph1603( d ) cannot be negative. Note that the excess of the deductions in paragraph1603( d ) over the aggregate income in paragraph1603( c ) is only one component of the addition to the non-capital loss carryover balance computed below. (4) 160Income for the year cannot be negative. There is no statutory order in which Division160C deductions must be taken. However, the time and source restrictions of loss carryovers, as previously discussed, should be taken into account. In addition, where the income under Division160B is not large enough to cover all potential Division C deductions, then the dividend deduction under section160112 should always be taken first. Dividends from taxable Canadian corporations are the only Division C deduction for corporations which do not have a carryover clause. (5) 160Dividends from taxable Canadian corporations should be deducted first in case there is not enough income for any further Division C deductions. Undeducted dividends cannot be carried over. (6) 160A deduction in the computation of taxable income should not be taken if it reduces the balance to a negative number, since normally negative taxable income has no meaning. The one exception to this rule is in respect of net capital losses which can be added to the non-capital loss balance if they are deducted in a particular year. (7) 160The deduction of charitable donations is limited to 75 of Division B income for the year. Donations not deducted in the year they are made, can be carried forward to the next five taxation years. However, the Division B income limitation applies to the sum of donations carried forward and current donations. Since the unused donations of a particular taxation year have a time restriction of 5160years, it would be advisable to claim them prior to claiming current year donations. (8) 160Deductions for net capital loss carryovers are restricted to the extent of the net taxable capital gains included in paragraph 3( b ) for the carryover year. Subsection160111(1.1) adjusts the 2005 net capital loss deduction by a formula which corrects for the fact that in the loss year (1997) the inclusion rate for capital gains was three-quarters, while in the year that the loss is being claimed (i. e. 2005) the inclusion rate is one-half. Since the inclusion rate is the same for 2006 and 2007, no adjustment is necessary for the 2006 capital loss: When control of the corporation is acquired by another person or another group of persons, a corporations ability to carry forward or carry back non-capital losses or farm losses is severely restricted. In addition, net capital losses, losses from property and allowable business investment losses (ABILs) that are unutilized at the time of the acquisition of control may not be carried forward8212they simply expire. IT-302R3, pars. 382116 As mentioned previously, the loss utilization restrictions become operative when control of a corporation is acquired by another person or another group of persons. The acquisition of control is considered to occur when control over the voting rights (i. e. de jure control that exists where more than 50 of the votes necessary to elect the Board of Directors is held) of the corporation is acquired by a person or group of persons. While it is clear that control refers to voting control, some uncertainty exists as to how the CRA will interpret the phrase 34group of persons34 for the purposes of these rules. The CRA has indicated that it will look for evidence of a groups intention to 34act in concert34 to control a corporation. Corporations are often unable to generate appropriate or sufficient income to utilize losses and, hence, are unable to recover taxes previously paid or reduce taxes payable. Consequently, such loss corporations become attractive targets for acquisition by profitable corporations which, through a variety of strategies, could shelter their income from tax by utilizing the losses of the acquired corporation. Because such strategies ultimately result in reduced tax revenues, the government, understandably, does not view such transactions with favour. As a result, over the years the government has introduced increasingly restrictive legislation to curb such transactions which are sometimes referred to as 34tax-loss trading34. Two of the more common loss utilization strategies are outlined as follows: (1) In the first, after control of the loss corporation is acquired, the operations of the income-earning acquirer corporation and the loss corporation are restructured so that income is generated in the latter corporation. For example, the assets of a profitable business or division in the income-generating corporation are transferred to the loss corporation. Usually the transfer will be accomplished by means of a tax-free rollover by moving profit-generating assets to the loss corporation (discussed in Chapter16016 ). The income that is so generated is used to absorb the losses of the loss corporation. (2) The second strategy involves implementing intercompany transactions which produce expense deductions to the income-generating corporation while generating income for the loss corporation. Interest on loans, rental contracts and commission contracts are examples of such intercompany transactions. The legislative restrictions which are aimed at curtailing the utilization of tax losses, are based on certain transactions and events which are deemed to occur when there has been an acquisition of control. These transactions and events, as well as other rules that comprise the restrictions, are discussed below. para11,100 Deemed year-end The corporation is deemed to have a taxation year-end immediately before the time of the acquisition of control of the corporation (referred to hereinafter as the 34deemed taxation year-end34). The result is that various adjustments that are normally made at a year-end, are required to be made before the acquisition of control. For example, the requirement that inventory be valued at the lower of cost or market at a taxation year-end will cause any accrued losses in inventory to be realized. This adjustment will increase the corporations pre-acquisition non-capital losses or farm losses. As will be explained later, such pre-acquisition losses are available for carryforward, but only after certain restrictive conditions are satisfied. The advent of the deemed year-end causes other adjustments (discussed below) to increase the corporations pre-acquisition of control non-capital losses and farm losses. As a result of the deemed year-end, the corporation is required to satisfy the normal compliance requirements of filing tax returns, reviewing unpaid amounts, determining the status of charitable donations and loss carryovers and their carryforward period, etc. However, a short taxation year that may result from an acquisition of control will not advance the replacement period required to benefit from the rollovers available for an involuntary or voluntary disposition. These rollovers allow a full 24 months and 12 months after an involuntary and voluntary disposition, respectively, from the end of the short taxation year in which such a disposition occurs. Unless the deemed year-end coincides with the corporations normal year-end, the corporation may have two taxation years lasting less than 24160months in total. To illustrate this, assume that a corporation whose normal taxation year-end is December16031, experiences an acquisition of control on April1601, 2008. The corporation will have a deemed year-end of March16031, 2008. If the corporation chooses to return to its original taxation year-end of December16031, the corporation will have two taxation years ending in the 12-month period ending December16031, 2008. The first taxation year will be 3160months long, the second 9160months long. If the corporation chose a date for its subsequent taxation years to be, say, March16031, as permitted, it would then have two taxation years lasting a total of only 15160months8212namely, the deemed taxation year ending on March16031, 2008 will be 3160months long and the taxation year ending March16031, 2009 will be 12160months long. The foregoing example can be illustrated with the following diagram: The upshot of this is that the normal 276-month (3160years back plus 20 years forward) carryover period for non-capital losses is reduced. This, in itself, represents a constraint in that the corporation has a shorter period over which to generate income to utilize the losses. A short taxation year will also cause any capital cost allowance or small business deduction (discussed in Chapter16012 ) to be proportionately reduced. para11,105 Accrued or unrealized losses on inventory A taxpayer is required to value its inventory at the end of each taxation year. The Act requires that each item of inventory be valued at the lower of cost and market (LCM), while the Regulations permit valuation at the fair market value of the entire inventory. Either way, the result is that any accrued or unrealized inventory losses are realized in the deemed taxation year, thus, decreasing the taxpayers income or increasing its non-capital losses or farm losses in the pre-acquisition period. para11,110 Accrued or unrealized losses on accounts receivable The restrictions and their consequences that apply to accrued inventory losses are parallelled in the provisions that relate to accrued losses on accounts receivable. 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.