Taxation Canada Flashcards

Under the Income Tax Act, what is the Part IV tax and when does it apply?

Answer: A 38.33% refundable tax on eligible dividends (and 38.33% on non-eligible dividends) received by a private corporation from non-connected corporations to prevent tax deferral through corporate investment structures

Part IV tax is a refundable tax imposed on portfolio dividends received by private corporations and certain subject corporations. It prevents the deferral advantage of receiving dividends through a corporation rather than individually. The tax is refunded through the RDTOH mechanism when dividends are paid out.

Under the Income Tax Act, what is the tax consequence of an interest-free loan from a corporation to a shareholder?

Answer: The loan amount is included in the shareholder's income under subsection 15(2) unless repaid within one year after the end of the corporation's tax year or unless specific exceptions apply

Under subsection 15(2), shareholder loans are included in the borrower's income unless repaid within the specified timeframe or unless exceptions apply (loans to employees, loans for home purchase, etc.). If included in income and later repaid, a deduction is available under paragraph 20(1)(j).

Under the Income Tax Act, what is the thin capitalization rule for Canadian corporations?

Answer: Interest deductions on debts owing to specified non-residents are denied to the extent that the outstanding debts exceed a 1.5:1 debt-to-equity ratio

Canada's thin capitalization rules (section 18(4)) deny the deduction of interest on debts to specified non-resident shareholders (25%+ ownership) to the extent that the average outstanding debts exceed 1.5 times the equity (contributed surplus, retained earnings, PUC). The denied interest is treated as a dividend.

What are the loss carryover rules under the Income Tax Act for non-capital losses?

Answer: Non-capital losses can be carried back 3 years and forward 20 years

Non-capital losses (business losses, employment losses, and ABILs that become non-capital losses) can be carried back 3 taxation years and forward 20 taxation years from the year the loss arose. Net capital losses have different rules: carry back 3 years and forward indefinitely.

Under the Income Tax Act, what is the purpose of the associated corporation rules?

Answer: To require associated corporations to share the $500,000 small business deduction limit, preventing multiplication of the benefit through the use of multiple corporations

The associated corporation rules ensure that a group of associated corporations must share the $500,000 small business deduction limit. Without these rules, taxpayers could multiply access to the low tax rate by establishing multiple CCPCs, each claiming its own $500,000 limit.

Under the Income Tax Act, how is a taxable benefit calculated when an employer provides an employee with a low-interest or no-interest loan?

Answer: The benefit is the difference between the interest calculated at the CRA prescribed rate and any interest actually paid by the employee within 30 days after year-end

Under subsection 80.4(1), a taxable benefit arises when an employer provides a low-interest or interest-free loan. The benefit is calculated as the CRA's prescribed interest rate on the loan balance minus any interest actually paid by the employee within 30 days after the year-end.