Tax

When corporate tax rates are 15% and tax rates for individuals are 40% is it always better for the individual to transfer their business to a corporation?

- although the corp. has a lower tax rate, if they plan to distribute after tax profits in the form of dividends to the shareholder then there will be a second level of tax -also important to consider the tax effects of a possible business failure/sale

How and when does income earned by a corporation affect the tax position of an individual who is a shareholder?

-after tax profits may be distributed to the shareholders as a dividend, when the shareholder receives this dividend they have earned property income and will be taxed accordingly -alternatively if a corporation retains after tax profits the value of shares owned by the shareholder will increase in value and when/if the shareholder disposes of the shares a capital gain will result

What is an after-tax approach to decision making?

-all cash flow decisions will impact the amount and timing of the tax cost, therefore, cash flow only exists on an after-tax basis -decision makers need to think after tax when evaluating alternative courses of action to minimize the tax cost, failure to do so may result in a permanently inefficient tax structure

What are some of the factors in determining residency?

-amount in time spent in Canada on a regular basis -motives for being absent or present -maintenance of a dwelling place in Canada while away and/or its accessibility -origin and background of an individual -general mode and routine of individuals life -existence of social and financial connections with Canada

If income tax is imposed after profits have been determined, why is taxation relevant to business decision making?

-before tax cash flow has no relevance to the value of an enterprise, investment or when it comes to analyzing various courses of action that affect value -the choice of one alternative over another may affect both the amount and timing of tax on income generated by that activity -decisions that reduce/postpone the payment of tax affect the ultimate return o investment and value of the enterprise

Explain the framework for taxable income.

-each entity subject to tax determines its taxable income on the basis of a taxation year -income for each entity includes and is restricted to the world income generated from 5 general categories (each category has its own brief set of fundamental principles) -the net incomes for each of the 5 categories are aggregated in accordance with a strict formula, the sum of which is referred to as "net income for tax purposes" -the sum of the 5 categories is then reduced by a limited number of items, the total after deductions now becomes the entity's taxable income

When is a corporation considered a Canadian resident?

-if it was incorporated in Canada -if it's central management and control is in Canada

What three methods can be used to defer/reduce the tax cost?

-shifting income from one period to another -transferring income to another taxpayer/entity -changing the type of income

What are the fundamental variables of the income tax system?

-taxable entities -types of income -alternative business structures -tax jurisdictions

What considerations must me made when shifting income from one period to another?

-time value of money -future tax rates or income levels that will cause those tax rates -discretionary opportunities within the tax system

Explain how international tax conventions relate to tax

Canada has entered into reciprocal tax treaties with many foreign countries in order to: -rationalize and define the jurisdictional authority on transactions of an international nature -avoid double taxation

Explain how statute law relates to tax

Canadian federal tax system is developed on the legal statute known as the income tax act -provincial jurisdictions also impose a tax on income

differentiate between income from property and gain on sale of capital property

income from property is the return that is earned on invested capital (ie dividends or rent) gain on sale of capital property is the gain derived from the sale of capital property

what are the two primary entities liable for tax? and who are the ultimate recipients of profit and cash flow

individuals and corporations are the two primary taxpaying entities individuals are the ultimate recipients of profit and cash flow

Differentiate between "net income for tax purposes" and "taxable income"

net income for tax purposes is the sum of the income from the five categories of income- it is calculated the same for individuals and corporations taxable income is the amount of net income for tax purposes less and specific deductions- deductions are different for individuals and corporations

Does the CRA deal with all tax avoidance activities in the same way?

no, CRA attempts to divide tax avoidance transactions between those that are an abuse/misuse of the tax system and those that are not -when an action is considered to be abusive, CRA will attempt to deny the resulting benefits by applying one of the anti-avoidance rules

can tax plans be developed with certainty?

no, planning is taking steps now in preparation of certain activities that may occur in the future, but these activities may not occur and the desired tax result is therefore not achieved -additionally, speculation of future scenarios are never certain

if a transaction was taken for purposes than business, investment, or family purposes, will GAAR eliminate the tax benefit?

no, the benefit is only removed if the transaction is considered a misuse or abuse of the tax system as a whole

Is paying tax later better than paying it sooner?

not always, paying tax later delays the tax cost and frees up cash for other purposes, but future periods could have higher tax rates compared to the current period which means delaying the tax cost may result in a higher amount of tax payable

What is tax evasion?

omitting/including an act with intent to deceive

What are the 6 business/investment structures?

proprietorship, partnership, limited partnership, corporation, joint venture, income trusts and corporation

What are the three sources of Canadian tax law?

statute law common law international tax conventions

What is withholding tax?

tax on an amount that originates in Canada but is paid directly to a non-resident -payer must withhold a portion of the obligated payment and remit it directly to the Canadian Tax Authorities -

What is tax planning?

the legitimate arranging of one's financial statements in a manner that defers or reduces the related tax cost

What is meant by the statutory scheme? describe the schemes relevance to the Canadian income tax system

the statutory scheme is the fundamental base of the income tax system -it is an aggregating formula which establishes the concepts of a taxpayers income for tax purposes in comparison to other concepts of income -defines what types of income are subject to tax and how any related losses affect a taxpayers income -combines several types of income into a single income account, but each type of income is determined in accordance with its own set of rules

what is an avoidance strategy?

transaction(s) that result in a tax benefit and was not taken primarily for bona fide business, investment, or family purposes

When is a non-resident taxed in Canada?

when they; -carry on business in Canada -dispose of Canadian property (real estate, capital property for carrying on business in Canada, investments in partnerships and trusts etc.) -is employed in Canada

Can a Canadian resident be subject to tax in Canada as well as in a foreign country on the same earned income?

yes, a Canadian is taxed on world income in Canada and the foreign country may also impose a tax on the foreign earned income -in order to avoid double taxation, the Canadian tax calculation permits a reduction of Canadian taxes for foreign taxes paid on the same amount

True or False: Tax is a controllable cost

True

What are the three tax jurisdictions?

Provincial, Federal and Foreign

Explain what constitutes a deemed resident and what their tax liability is

an individual that sojourns in Canada for 183+ days -includes members of Canadian forces and diplomats (and their spouse/children) -taxed on world-wide income during entire tax year

Explain what constitutes a part-time resident and what their tax liability is

an individual who cuts all ties with Canada or becomes a Canadian resident during the tax year -they will be taxed on worldwide income for the period of time they were a resident and only on Canadian source income when they were a non-resident

Explain what constitutes a common law or factual resident and what their tax liability is

an individual who has social and/or economic ties for the entire tax year -taxed on all world-wide income for entire tax year

What is tax avoidance?

avoiding or reducing tax payable through a series of transactions not intended by the tax system

What types of income for tax purposes may result when a profit is achieved on the sale of property (ie. land)?

business income: if the land was acquired for the purpose of reselling it at a profit capital gain: if the land was acquired for long term use to generate income or for personal enjoyment

For tax purposes would you prefer that a financial loss be a capital or business loss?

business loss because this type of loss can be deducted from any other source of income whereas a capital loss can only be deducted against a capital gain (and only half the amount of the capital loss is considered for tax purposes)

How is withholding tax calculated?

calculated at a flat rate and based on gross amount paid -does not take into consideration any related expenses that may have been incurred by the recipient

Explain how common law relates to tax

disputes on the income tax act are settled in court and the decisions made in these trials have helped to define and interpret unclear areas of the income tax act

What are the major types of payments that may be subject to Canadian withholding tax when paid to non-residents?

dividends, rents, royalties, pension benefits, interest (only if paid to a non-arms length related party), RRSP and RRIF payments, certain management an admin fees

What categories of income could an employer have?

employment: if they carry out their services under the direction/control of an employer business: if they provide services directly to a client under their own direction and control

When does GAAR apply?

Four Conditions: 1. a tax benefit results from a transaction(s) 2. transaction was an avoidance transaction and not taken for business, investment, or family purposes 3. no other provision of the act stops the taxpayer from achieving the intended advantage 4. the transaction is an abusive transaction (classified as a misuse or abuse of the income tax act

Name the three tax paying entities

Human, Corporation, Trust

explain lawful and unlawful avoidance

Lawful avoidance is when a taxpayer makes a transaction or series of transactions for business, family, or investment purposes that results in a tax benefit Unlawful avoidance is making a transaction or series of transactions for no purpose other than the tax benefit (CRA will determine whether these transactions are a misuse/abuse of the income tax system)

True or False: the sections of the income tax act interpreted by CRA on informational bulletins and circulars are law

False CRA's interpretations of the income tax act are guidelines but are not law and can be disputed in court

What are some anti-avoidance rules regarding property? ie transferring property to a foreign corporation or spouse

-transaction price cannot be less than the FMV of the property transferred to prevent taxpayers for avoiding taxable gains -when a Canadian taxpayer sells property or services to a non-arms length foreign entity for an amount that is less than what would have been reasonable if it were sold on the market, then the reasonable price is imposed for tax purposes--> this rule prevents a Canadian entity from avoiding tax by shifting Canadian taxable income to its foreign parent corporation -when property is transferred to a spouse the future income from that property is included in he income of the original owner for tax purposes --> this prevents taxpayers from shifting income to family members who may be subject to lower tax rates

What are the basic skills required to develop a good tax plan?

-understanding of the income tax system -measure the time value of money -anticipate complete cycle of transactions -develop optional methods of achieving the desired business result and analyze each of their tax implications -speculate on possible future scenarios and assess their likelihood -place the tax issue in perspective by applying common sense and sound business judgement -understand the tax position of other parties involved in the transaction

What is the taxation year for a corporation and an individual?

Corporations are taxed based on their fiscal year (however, professional corporations are required to have fiscal periods that coincide with the calendar year) Individuals are taxed based on the calendar year

Name the five types of income

Employment, Business, Property, Capital Gains and Other

Does the income tax act take precedence over international tax treaties?

No, international tax treaties take precedence over the income tax act

Which of the following are taxable entities? proprietorship, partnership, limited partnership, corporation, joint venture, income trusts, individuals and corporation

Only individuals, corporations and income trusts are taxed directly. The remaining business structures are taxed through the individual who has ownership of the business

Distinguish between tax planning, avoidance and evasion

Tax planning and tax avoidance transactions are presented clearly and in full to be scrutinized by CRA who will decide whether the transaction(s) is an abuse or misuse of the system Tax evasion is purposefully excluding/altering the facts with intention to deceive

Is a non-resident liable for tax in Canada?

Yes, but only for Canadian source income