Chapter 14 CTP 11 TX

Chapter 14
Other Issues In
Corporate Taxation
2011, Clarence Byrd Inc. 2
Acquisition Of Control
- The Problem
Profit
Company
Loss
Company
Acquisition
Loss Transferred To Profit Company
Meaning Of

Control: Ownership of
shares that carry the right to
elect a majority of the board
of directors.
Common Scenario: One
person acquires shares from
a different arms length
person.
Meaning Of

Can also occur through redemption of shares
A owns 60 percent B owns 40 percent If all of
As shares were redeemed, B would have
acquired control.
Deemed Year End - ITA 249(4)
Example: Dec. 31 year end,
acquisition on June 30, 2010
Deemed New Year End
- June 30, 2010
Can Keep Old Fiscal Year
End
Allowed To Establish New
Year End
Net Capital Losses And
Allowable Business
Investment Losses
ITA 111(4)(a) & (b)

Unused Carry Forwards
Die

New Losses Cannot Be
Carried Back

Non-Capital Losses
ITA 111(5)
Can Be Carried Forward
Subject To Restrictions
Must Carry On Business In Which
Losses Occurred
Reasonable Expectation Of Profit
Can Only Be Applied Against
Income Generated By The Same
Or A Similar Line Of Business
Accrued Losses
Inventories
Normal Year End
Procedures

Accounts Receivable
ITA 111(5.3)
Maximum Write-Off
Required
Accrued Losses
Depreciable Property
Asset Cost = $100,000
UCC = $ 60,000
FMV = $ 50,000
ITA 111(5.1)
Write Down To $50,000
The $10,000 Is Deemed
CCA
Accrued Losses
Eligible Capital Property
ITA 111(5.2)
CEC > 3/4 FMV
Write Down
ITA 20(1)(b) Deduction
Accrued Losses
Non-Depreciable Property
ITA 111(4)(c) & (d)
ACB > FMV
Write Down
Capital Loss (Will disappear if
not used at deemed year end.)

ITA 111(4)(e) Election
General Rule
Can elect between ACB and FMV
FMV > ACB: Creates Capital Gain
May also create recapture on depreciable assets
(cant avoid if you want the capital gain.)
Case 1
Capital Cost = $ 50,000
FMV = 100,000
UCC = 20,000
Elect $100,000
Capital Gain $ 50,000
Recapture 30,000
New Capital Cost 100,000
New UCC 75,000
[$50,000 + (1/2)($100,000 - $50,000)]
Case 2
ACB = $ 50,000
FMV = 30,000
UCC = 20,000
Elect $30,000
Capital Gain $ Nil
Recapture 10,000
New ACB 30,000
New UCC 30,000
Case 3
ACB = $ 50,000
FMV = 5,000
UCC = 20,000

Write down to $5,000 is
required by ITA 111(5.1)
The $15,000 is deemed CCA
Profits In The Loss Business
During 2011, Loss Leader experiences an overall Net Loss
of $150,000, with all of the loss arising in their shoe
division. Their hat division broke even for the year. In
2012, the shoe division broke even, while the hat division
showed a profit of $200,000.
No Acquisition in 2011: 2012 Income = $50,000
Acquisition in 2011: 2012 Income = $200,000
Related Individuals - 251(2)(a)
Individual
Related Corporations
One Corporation - ITA 251(2)(b)
Two Corporations - ITA 251(2)(c)
Control - ITA 256(1.2)(c)
More Than 50% FMV - All Shares - Or
More Than 50% FMV - Voting Shares
Group ITA 256(1.2)(a)
Specified Class ITA 256(1.1)
Other Definitions
Deeming Rules
ITA 256(1.2)(d) Holding Companies
Shareholder of holding company is deemed to own held shares.
ITA 256(1.3)
Children under 18
Shares deemed to be owned by parent
ITA 256(1.3) - Rights and options
Options to own
Right to force redemption or cancellation
ITA 256(1.5)
Persons are related to himself, herself, or itself

Other Definitions

ITA 256(2)
A associated with B
C associated with B
A and C have deemed association
Other Definitions
Association Rules
ITA 256(1)(a)
One of the corporations controlled, directly or indirectly in any
manner whatever, the other;
Company A Company B
More than 50%
Association Rules
ITA 256(1)(b)
Both of the corporations were controlled directly or indirectly in any
manner whatever, by the same person or group of persons;
Company A Company B
More than 50%
Ms. Smith
More than 50%
Association Rules
ITA 256(1)(c)
Each of the corporations was controlled, directly or indirectly in any manner
whatever, by a person and the person who so controlled one of the corporations was
related to the person who so controlled the other, and either of those persons owned,
in respect of each corporation, not less than 25% of the issued shares of any class,
other than a specified class, of the capital stock thereof;
Company A Company B
More than 50% More than 50%
Mrs. Smith Mr. Smith
Not less than 25%
Association Rules
ITA 256(1)(d)
One of the corporations was controlled, directly or indirectly in any manner
whatever, by a person and that person was related to each member of a group of
persons that so controlled the other corporation, and that person owned, in respect of
the other corporation, not less than 25% of the issued shares of any class, other than
a specified class, of the capital stock thereof;

Company A Company B
Mr. Goh
Mrs. Goh
Mr. Gohs Brother
Not less than 25%
Association Rules
ITA 256(1)(e)
Each of the corporations was controlled, directly or indirectly in any manner
whatever, by a related group and each of the members of one of the related groups
was related to all of the members of the other related group, and one or more person
who were members of both related groups, either alone or together, owned in
respect of each corporation, not less than 25% of the issued shares of any class,
other than a specified class of the capital stock thereof;
Company A Company B
Mr. Brown
Mrs. Brown
Mr. Fortin
Mrs. Fortin
40%
Investment Tax Credits
Credit Vs. Deduction
Value Of Credit = 100%
Value Of Deduction = [(100%)(tax rate)]
Current Expenditures
A credit against Tax Payable during the current
year
Added back to income in the following year.

Capital Expenditures
A credit against Tax Payable in the current year
Credit deducted from capital cost in the
following period
Lose CCA on amount of investment tax credit
Eligible Property
Eligible Expenditures
Salaries of an eligible
apprentice
Costs of creating
eligible child care
spaces
Qualified Property
Qualified SR&ED

Rates
Apprentice salaries
10% on maximum of $20,000 per apprentice
Child care spaces
25% on a maximum of $10,000 per space
Qualified property - 10%
SR&ED (CCPC)
$3 million at 35%
Excess at 20%
SR&ED (non-CCPC)
20%

Refundability
General Rules
No Tax Payable
Cant Use Credits
Government Writes Cheque To The Business
Refundability
Current SR&ED
100 percent on current amounts
that qualify for the extra 15%
40 percent on other current
SR&ED
Other (including SR&ED
capital expenditures)
40 percent for CCPCs and
individuals
No upper limit
Carry Overs
Back Three Years
Forward Twenty Years
Must Take All Other
Credits For The Year
And Reduce Tax
Payable To Nil Before
Using
Unused investment tax credits
may create attractive takeover
targets
Given this, there are rules
similar to those that apply to
loss carry forwards.
Tax Basis Shareholders Equity
Paid Up Capital (PUC)
Based On Legal Stated
Capital
ITA 89(1)
Similar To Contributed
Capital in Accounting
Tax Basis Shareholders Equity
Retained Earnings
Pre-1972 Capital Surplus On
Hand
Capital Gains Accrued Before 1972
Realized After 1971
Pre-1972 Undistributed Surplus
Post-1971 Undistributed Surplus
Capital Dividend Account
Treatment Of RDTOH (an
asset from a tax point of view)
Paid Up Capital
Importance
An investment of after tax funds
Can be distributed tax free
Note: PUC is not equal to ACB
Defined
Legal Capital (as per corporate law)
Limited number of adjustments
Paid Up Capital
Example: J & J issues 1,000 shares of stock on January 1,
2011 for $10,000 ($10 Per Share) and an additional 3,000
shares on December 31, 2012 for $60,000 ($20 Per Share).
1/1/11: PUC = ACB = $10 Per Share
31/12/12: PUC = $70,000 4,000 = $17.50 Per Share
Individual buying on December 31, 2012
PUC = $17.50/Share
ACB = $20.00/Per Share

General Idea
Like RDTOH - A Tracking
Mechanism
Private Companies Only
(including non-Canadian
controlled)
With election, balance can be
distributed tax free
Components
Untaxed Portion Of Net Capital
Gains
Capital Dividends Received
Untaxed Portion Of CEC Gains
Untaxed Life Insurance Proceeds
Reduced By Capital Dividends
Paid
Use Of Corporate Surplus
Cash dividends
Subject to gross up and tax
credit procedures
(Individuals)
Not deductible in
determining corporate
income of payor
Stock Dividends
Common Stock (100,000 Shares) $1,000,000
Retained Earnings 4,000,000
Total Shareholders Equity $5,000,000

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

Transfer To PUC - [(100,000)(10%)($70)] = $700,000
Stock Dividends
Common Stock (110,000 Shares) $1,700,000
Retained Earnings 3,300,000
Total Shareholders Equity $5,000,000

Holder of 100 shares at $60 gets 10 new shares at $70
Taxable Dividend = $700
ACB = ($6,000 + $700)/110 = $60.91
Dividends In Kind
Example:
Distribute An Investment With A Cost Of $1
Million And A FMV Of $1.5 Million.

Recipient: Taxable Dividend Of $1.5 Million

Payor: Disposition At $1.5 Million, Capital
Gain Of $500,000
ITA 83(2) Capital Dividend
All Dividends Are Taxed If No
Election
Election (Form T2054) Allows Any
Dividend To Be Treated As A
Capital Dividend (If Balance
Available In Capital Dividend
Account)
Penalty For Excess Election
Does Not Reduce ACB Of Shares
Does Not Reduce PUC Of Shares
ITA 84(1) Deemed Dividend
General Idea
PUC Increase In Excess Of Net
Asset Increase
Creates Added Tax Free
Distribution
ITA 53(1)(b) - Addition To ACB Of
Shares
Exceptions
Stock Dividends
Shifts Between Classes
Conversion Of Contributed Surplus
ITA 84(2) Deemed Dividends
With winding-up under ITA 88(2):
ITA 84(2) Deemed Dividend Equals The Excess Of The
Amount Distributed Over PUC
Components Of 84(2) Dividend
ITA 88(2)(b)
Indicates That ITA 84(2)
Deemed Dividend Is Made Up Of:
Capital Dividend (If Elected)
Distribution Of Any Pre-1972
CSOH [Deemed Not To Be A
Dividend By 88(2)(b)(ii)]
Residual Is A Taxable
Dividend
ITA 84(3) Deemed Dividend
On Redemption, Acquisition By
Corporation, Or Cancellation Of
Shares
General Idea: If Payment To
Shareholder Exceeds PUC, The
Excess Is A Deemed Dividend
If Payment Exceeds ACB, The
Excess Is A Capital Gain
Remove ITA 84(3) Deemed
Dividend From POD under ITA 54
ITA 84(3) Example
Mr. Jones owns all 5,000 shares of L&L Ltd. The shares have a PUC
of $75,000 and his ACB is $40,000. One-half of the shares are
redeemed for $55,000.
Redemption Price $55,000
PUC [(1/2)($75,000)] ( 37,500)
ITA 84(3) Deemed Dividend $17,500
ITA 84(3) Example (Continued)
Redemption Price $55,000
ITA 84(3) Dividend ( 17,500)
POD $37,500
ACB ( 20,000)
Capital Gain $17,500

ITA 84(4) Deemed Dividends
A Liquidating Dividend
Involving a PUC Reduction
If Amount Distributed Exceeds
PUC, The Excess Is A Deemed
Dividend
ITA 84(4) Example
Company distributes $80 per share. The shares have a PUC Of
$60 Per Share.
ITA 84(4) Deemed Dividend Of $20 Per Share
PUC Down By $60 To Nil
ACB Down By $60
ITA 84(4.1) Example
If Public Company
Entire distribution is treated as deemed dividend
Exception if transaction considered to be outside the normal
course of business (e.g., company sold business segment and
distributed the proceeds)

Chapter 14 CTP 11 TX

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