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91 Cards in this Set
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What characteristics of Corporations are significantly different from partnerships? |
Limited Liability Continuous Existence No Duty of Loyalty Ease of transfer of ownership No requirement to carry on business activity |
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What is a public corporation? |
Shares listed on stock exchange Elected/designated public corp by CRA Shares held by at least 150 shareholders who hold at least $500 each |
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What are qualifications of CCPC? |
Not public Resident in Canada Not controlled by non-resident Not controlled by public corp |
Canadian Controlled Private Corporation |
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Explain difference between sale prices of closed end and open end investment corp. |
The NAV at a point in time is the fair market value of the investments held by corp divided by # shares issued. This is sale price of an open ended corp (MF). Closed-end trade at more or less than NAV based on market demand. |
NAV - net asset value |
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What is a closed-end investment corp? |
-Sells shares to investors and uses proceeds to purchase financial securities -Fixed # of shares -After issue trade on secondary market - stock exchange or OTC |
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What is not required to establish a Corp? |
Business plan |
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What industries require federal charter? |
banking broadcasting rail transportation |
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What documents required to establish a corporation? |
Application Articles of Incorp Notice of Directors (must be named initially, though can be changed at first shareholder meeting) Name Search Report, Filing Fee |
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What is contained in articles of incorp? What is not contained? |
biz name, # directors, # and class of shares, restriction on activity -Excludes date of first shareholders meeting |
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How do you calculate shareholder equity? |
Initial Investment + retained earnings (this is not impacted by the market value of shares) |
AKA book value of shares |
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What type of dividends can be issued by private and or public corps? |
Capital Dividends - only by private Stock Dividend-either Regular Dividend-either Capital Gain Dividend -investment corp *taxed as 50% gain, not like a dividend |
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Difference between common and preferred shares |
Common - true ownership - all benefits and risks Preferred - preferred claim on assets of corp, specified dividend rate and receive that div before common, may forfeit equity growth |
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How are capital dividends taxed? |
-They are tax free -pd ONLY from private corps -pd from Cap div account -arise from tax free portions of cap gains, life insur and goodwill sales |
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What are 3 ways a corp can account for profit? |
1. Distribute as a taxable dividend
2. Retain Earnings, increasing value of existing shares 3. Capitalize RE by adding to paid up capital account and issuing a stock dividend |
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What is the effect of a corp issuing a stock dividend? |
-book value is the same -number of shares issued increases -capital account and shareholder equity increases |
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What is the effect retaining earnings without issuing stock dividend? |
-Increases book value of shares
-increases RE and shareholder equity |
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What is effect of distributing earnings as taxable dividend? |
Leaves book value, number of shares and shareholder equity unchanged |
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How is the value of a share impacted by a stock split? |
-paid-up capital per share decreases proportionately with number of shares issued |
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What is the purpose of a stock split? |
To make share price more attractive |
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When are you considered insolvent? |
-Owe more than $1K -Stopped paying debt obligations -debts due and accruing which exceed value of assets -unable to meet due debts -not declared bankrupt |
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What is process of and conditions for voluntary bankruptcy? |
-insolvent -owe less than $250K -formal consumer proposal was not accepted -make an assignment to declare bankruptcy -cease to have rights to deal with property |
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What acts of bankruptcy would allow a creditor you owe more than $1000 to file a petition to have you declared bankrupt?
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-assigning assets to trustee in unsatisfactory manner -transferring assets to 3rd party -paying off one creditor w preference -failing to give up seized goods -fleeing, failing to meet liabilities as due |
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Why would a court not grant a bankruptcy discharge?
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-Assets insuficient to pay off at least 50% of debt -have not kept adequate records -continued business after insolvent -bankruptcy caused by rash speculation or extravagant living |
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When and why was income tax introduced?
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1917 as a temporary measure to finance costs of World War I.
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How much of fed/prov revenues are made up of income tax?
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Fed 46% Prov 33% |
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Who would not be considered a commonlaw partner by Income Tax Act?
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Someone who has NOT lived conjugally w you: -for at least 12 continuous months (excluding separation of less than 90days) -and is natural or adoptive parent of your child -and has custody or control of your child and child dependent on that person for support |
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Who is not eligible for GST credit?
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If none of these apply: Resident of Canada AND -Under 19 -Or under 19 and unmarried -Or under 19 and never lived with your child |
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Who can apply for GST credit for a child?
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If ALL the following apply: -child 18 or younger and dependent on you/spouse -child unmarried -child not a parent of child they lived with -child lives with you |
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What is the conversion rate of tax credits?
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Most credits converted lowest federal rate of 15% -Elligible dividends 15.02% -Other than eligible div 11.017% -Charitable - 15% $200, 29% $200-75% net income(100% yr of death) |
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What are examples of refundable tax credits?
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GST tax credit (must reapply each year) |
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Which provice do you file taxes for if you moved throughout year?
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Province of residence at Dec 31st
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What are examples of Other Employment Income |
Items excluded from T4 Tips, Royalties, supplementary unemployment benefit plan, profit sharing plan, research grants, wage loss replacements plan, certain GST rebates |
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Which incomes are included in total income but excluded from taxable income?
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WCB, Social Assistance payments, net federal supplements. Note that EI is taxable. |
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When can you deduct tax preparation as a carrying charge? |
If you have income from a business or property (not investment income)
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How is the Age Amount credit calculated?
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If 65 by Dec 31st, 2014 age amount is 6916, and is reduced by 15% of your income above $34,873. Eliminated when income exceeds $80,980.
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What are education/tuition/textbook amount credits?
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Tuit: amount above $100 Edu: $400/mo FT, $120/mo PT Text: $65/mo FT, $20/mo PT Can be transferred to relation, but not sibling |
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How would borrowing to invest in a qualified small business corp use all three tax advantages?
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Avoidance - using cap gain exemption Deferral - gain not triggered until shares sold Conversion - offset salary w interest expense, with intent of later redeming capital gains |
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Describe Tax Planning following setps 2-4 of the Financial Planning Process (pg 86).
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1: Engagement 2: Objectives: effect of inc tax expend on cashflow, est. tax planning strategies 3: Collect & Analyze data: 3 yrs tax returns 4: identify strategies: avoidance, deferral, conversion 5: Implement 6: Monitor & Update |
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Total Debt Service Ratio |
Mortgage Pmt + Property Tax + 50% condo + Loan Payments + heating costs _____________________________ Gross Income |
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What are advantages of Sole Proprietorship & partnership?
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-Lean Mgt and Admin -Business loss deductible against other income -Creation and dissolution is simple (unless partnership agreement) |
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What are disadvantages of sole proprietorships & partnerships?
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-Little opp for tax deferral, avoidance & conversion -limited income splitting -Unlimited liability -Death of sole proprietor has greater impact on biz |
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Characteristics of general partners |
general partnership forms without any legal formalities -entitled to active management -unlimited personal liability |
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Risk of general partner
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-liable for negligence of any wrongful act or failure to act comitted by any other partner -personally responsible for debts and obligations of partnership -jointly and severally liable |
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Describe how partnership viewed as an entity and an aggregate
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Entity- viewed as separate from partners when entering a contract or hiring an employee Aggregate - predominate view of liability, individual operations of each partner carrying on a business partnership |
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What are the default provisions of partnerships set out by provincial legislations?
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Property: not available for personal use Profit/loss: legally entitled to equal share of capital, profit, losses (CRA may view tax different based on contributions) Mangement: all entitled, but not obgligated No partner entitled to remuneration Consent of all partners required to admit new partner Duty of loyalty |
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What are the common modifications of provincial partnership legislation?
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Decisions by majority or investment Requirements of new partners Alternate allocation of capital/income Override dissolution, specifying compensation upon death/retirement and allow expulsion |
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How do you calculate ACB of partnership interest? What is not included in ACB calculation?
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Contribution of capital +Profits (or -losses) -Deduction for withdrawals CCA must be included in partners biz income, but does not impact ACB |
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What amounts are deducted from ACB of partnership interest?
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Deductions -drawings & distribution -losses -exploration & development exp -investment tax credits |
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What type of property is a partnership interest? |
Non-depreciable capital property (sale or disposition of partnership interest can result in capital gain) |
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What are the 3 types of partnerships?
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general: have full liability limited: must have one general partner called promotor (usually a corp). limited to at risk amount for losses as long as not active in mgt. limited liability: |
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What are the default dissolution rules of a partnership? |
Partnership automatically disolves if one partner retires, dies or becomes insolvent. Default rules prevent expulsion of a partner.
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How does a partner file income for a partnership?
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-Partners must file 1. Financial statements of partnership 2. Reconciliation of income 3. T1 General 4. Information returns (if 5+ partners) |
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How is a partnership taxed?
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-Partner taxed on share of income, not on distributions received -computed as though partnership a separate person resident in Canada -income, losses, capital gains retain character -income/losses allocated according to respective interests |
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What CRA provisions could override a partnership agreement of income allocation? |
1. Principal reason for agreement to reduce or postpone income tax 2. Partners not at arm's length AND allocation not reasonable considering capital invested, work performed etc. |
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What is a section 97 rollover?
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ITA provision that a partner may contribute depreciable property or other capital property to parthnership at ACB or UCC
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What amounts are added to partnership ACB?
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Additions -capital (excluding loans) -net income/profit -capital dividends rec'd -benefit/assistance rec'd re development or exploration |
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How do you calculate Cap Gain on disposition of partnership interest?
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Proceeds - (ACB + Cost of sale) ACB= Original cost + share of income - drawings |
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Without a partnership agreement, why would retirement of one partner not force other partners to have capital gain/loss from disposal of their interest?
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Section 97 rollover would allow remaining partners to transfer their partnership interests to new partnership thus avoid realizing gain/loss.
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Compare general and limited partners.
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General: Sign declaration to set up partnership Jointly & Severally liable Active in biz mgt LTD Partner: max potential loss is investment Passive Investor Prevented from biz mgt |
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How is income from partnership interest purchased by loan or gift from spouse attributable for a general and a ltd partner?
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General: not attributable bc income considered business income Ltd: attributable bc income considered property income |
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Compare ltd partner vs limited liability partner.
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Ltd partner: Not personally liable for co debts beyond investment LLP: personally liable for co debts not liable for negligence of other partners suitable for professionals who cannot incorp. |
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Compare joint ventures vs partnerships. |
Joint Ventures ex: theatrical project single biz transactions can have no profit motive Partnership ex: medical practice must have profit motive of biz activities established for ongoing biz transactions |
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what is the diff between corporations affairs and business?
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Affairs are internal arrangements (shareholders) and business is external (customers, suppliers)
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How are directors appointed?
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At least one director must be appointed by notice of directors at time of incorp. Director elections can take place at annual shareholder meetings.
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What are powers of directors? What are not powers or requirements?
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Power: approve issuance of shares in accordance with corp's articles of incorp (not with notice of directors), declare dividends, adopt by-laws, call shareholder meetings at least annually (do not have to be a shareholder)
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What is a duty of a director? What is not a duty?
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Duty: exercise care, act in best interests, refrain from abuse, avoid insider trading A power, but not duty to declare a dividend or to call shareholder meetings |
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what document specifies the # of directors?
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Articles of Incorporation specifies the min and max # of directors(NOT specified in bylaws)
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What is purpose of shareholders meetings? What is not done at by shareholders?
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Purpose: Eleect new directors, discuss financial statements Do NOT make changes to day to day operations nor elect officers or auditors |
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What do shareholders agreements address?
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Share issuance, lending money, amount of dividends, new debt, corporate collateral, hiring family members, transferring shares, changing nature of biz, signing maajor contracts (usually override default rules) |
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What three documents can change default corporate law?
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Articles of incorporation By-laws Shareholders' agreement |
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What does the Business Corporation Act do?
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sets default rules governing relationship between corp and shareholders, sets out procedures for incorporating biz |
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How do corporate law and securities law differ |
Corp law requires disclosure of info to existing shareholdrs, but not to potential investors. Securities law requires both. If issuing shares to raise capital, may also be governed by securities law.
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What do you add to corporate net accounting income to reconcile net income for tax purposes?
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Income tax & tax interest/penalties Depreciation Expense Charitable Donations Taxable Capital Gains |
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What do you deduct from corporate net accounting income to reconcile net income for tax purposes?
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Accounting gain on disposal of assets (100%) Capital Cost Allowance Dividends not taxable under section 84 |
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What do you deduct from net income for tax purposes to arrive at taxable income for Part I tax for corporations?
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Charitable donations (to max 75% net income) Taxable Dividends Losses from prior years (non-capital or net capital losses) |
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How do you calculate tax payable for a corp after determining taxxable income?
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38% basic fed corp rate -13% general rate reduction OR -17% SMABUD -10% fed abatement (if earning income in Can) +10% provincial tax |
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What is corporate tax rate with SMABUD and with general reduction? |
SMABUD 21% General 25% |
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What is a taxable Canadian Corp and what scheme is available for their dividends?
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Resident in Canada Not exempt from tax (municipal/prov corps, charities and some non-proft are exempt) Eligible for gross up and credit of dividends |
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What is a CCPC and how are their dividends taxed?
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CCP controlled only by Cdn residents and not by public co Eligible for SMABUD Dividends non-eligible, ie 118% gross up and fed 11.017% credit + a prov credit |
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Which companies are eligible for the enhanced dividend tax credit? what is the Enhanced DTC? |
Public companies resident in Canada Other corporations in Canada that are not CCPCs and subject to general tax rate CCPCs to extent income above SMABUD limit Gross up 138% Credit 15.02% |
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How are portfolio dividends earned in a corporation from a non-connected company taxed?
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Parth IV tax at 33 1/3% with equivalent amount credited to notional RDTOH account. Withdraw from RDTOH at $1 for every $3.
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How are portfolio interest and other income earned in a corporation taxed?
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At the general Part 1 rate of 38% plus an additional 6 2/3%. 26 2/3% are credited to RDTOH account to be refunded when income dividend out of co. (note no refund available to div's from co's not paying Cdn tax) |
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What is an associated company and what is its definition used to determine?
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2 co's are associated if -1 is controlled by other (50% voting share) -both controlled by same people -owners of both related AND 1 owns > 25% share in other DETERMINES if have to share SMABUD limit |
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What is a connected company and what is its definition used to determine? |
USED to determine if part IV taxes are owing -Co paying div is controlled by co receiving -Recipient owns >10% of payer |
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Which companies eligible for SMABUD
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-CCPC w corp capital <15 mill -limit shared by associated co's -500,000 active and taxable income (after deductions for donations, taxable divs loss of prior yrs) |
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What are the filing requirements of a corporation?
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T2 and GIFI (general index of financial information) or financial statements w/i 6 mo's end of tax yr. Penalties 5% plus 1%/complete month late filing.
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What is the tax implication of a shareholder recovering loans made to the company?
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No tax implication unless the shareholder charged the company interest.
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What is the effect of returning paid up capital to the shareholder?
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1. Not taxable to shareholder/corp 2. Decreases company equity 3. Decreases value of shares 4. Decreases ACB of shares |
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When can a company loan money to shareholders with a reasonable repayment period ?
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If lending is nature of biz. OR if shareholder also an employee & for purpose of buying home, buying unissued co shares or to buy vehicle for use working for co. (taxable ben if prescribed interest not charged) |
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When can a company loan money to shareholders for any reason?
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If shareholder repays loan within one year of corporate year end in year loan made.
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How do you enact an Estate Freeze?
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1. Beneficiaries subscribe to common shares of HOLDCO for nominal cost. 2. Original owner of OPCO section 85/86 rolls OPCO shares to HOLDCO in exchange for all voting preferred shares at equal value of OPCO shares. 3. Preferred s/hs rec set income & control OPCO. 4. All future growth occurs w common shares. |
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