Deck 13: The Canadian-Controlled Private Corporation

Question 1

The following diagram depicts the ownership structure of two CCPCs. Bob Ligh is Lisa Light's son. Sarah Paint and Alan Canvas are not related to Bob and Lisa in any manner, what-so-ever. All of the shares held are common.
Required:

A) Determine if the two companies are associated, referring to the applicable section of the Income Tax Act.
B) Briefly explain what the most significant tax implication is when two or more corporations are associated.

Answer 1

A) The two corporations are associated as defined by paragraph 256(1)(c) of the ITA.
Each corporation is controlled by one person, and the two people are
related, and one of the people, Lisa Light, owns not less than 25% of the shares of either corporation.
B) The associated companies will have to share the small business deduction.

Question 2

There are several benefits to incorporating a business. Some of those benefits are:

A) A tax deferral is available if the shareholder requires the corporation's profits for personal use in the year; the shareholder may participate in a registered pension plan through the corporation; and dividend payments may be deferred until after a shareholder has retired.
B) There is greater flexibility to bring family members on board as owners; non-taxable benefits may be provided to the shareholder; and dividend distributions are deductible for tax purposes.
C) Lower tax rates are often recognized; the shareholder may receive compensation; and the corporation offers preferable tax rates on the business' investment income.
D) The shareholder may choose when they will receive dividend income from the corporation; a capital gains deduction may be available if conditions are met when shares are transferred to the shareholder's children; and active business income
Under $500,000 is eligible for a lower tax rate.

Answer 2

D

Question 3

Corporation X had an RDTOH balance of $15,000 at the end of 20X0, and the dividend refund to the company that year was $7,000. The company's Part IV tax for 20X1 is $8,000. The company's active business income is $475,000 and its taxable income is
$410,000. Corporation Y, which is associated with Corporation X, was allocated
$125,000 of the small business deduction in 20X1. Corporation X's aggregate
Investment income was $50,000 in 20X1. Part I tax for 20X1 was $60,000. What is the RDTOH balance at the end of 20X1? (Round all numbers)

A) $8,000
B) $65,625
C) $26,735
D) $16,000

Answer 3

C

Question 4

Which of the following types of corporate income are subject to the special refundable tax of 10 2/3%, and a tax reduction of 30 2/3% upon distribution of the income to shareholders?

A) Specified investment income and taxable capital gains.
B) Specified investment income and dividend income.
C) Business income and net property income.
D) Dividend income and net taxable capital gains.

Question 5

Which of the following scenarios does not describe two associated corporations (in a de jure context)?

A) Yellow Corp. is wholly owned by Mrs. Smith. James Smith (Mrs. Smith's son), owns 65% of the shares of Green Corp. His mother owns the remaining 35% of the shares.
B) Kelly Booker owns 100% of the shares of Read Co. His mother and father each own 30% of the shares of Write Co. A friend, Mr. Words, owns 10% of Write Co., and Kelly owns the remaining shares.
C) Blue Corp. owns 90% of the shares of White Corp.
D) Mr. and Mrs. Field each own 50% of the shares of Green Co. Their children, Sue and Tim, each own 40% of Brown Co., and Mrs. Field owns the remaining 20% of the shares.

Question 6

Beans Co. is a Canadian-controlled private corporation with a December 31
year-end. The company had profits of $200,000 during the year. Of this amount,
$15,000 was from dividend income received from a taxable Canadian corporation. The remaining income was from active business.
Additional information:
The dividends were received from Grow Ltd., a connected Canadian-controlled private corporation. Grow has only one class of shares, and the total amount of dividends paid was $50,000. Grow received a refund of $9,000 as a result of
paying the dividend.
Beans Co. had a balance in its Refundable Dividend Tax on Hand Account of
$3,000 at the end of the previous year.
Beans Co. is associated with Peas Co. which used $220,000 of the small business deduction limit this year.
The profits include a donation expense of $1,000.
Amortization of $30,000 was expensed during the year. CCA has been correctly calculated at $28,500 and has not been transferred from the tax accounts to the
financial statements. Beans utilizes the maximum CCA deduction each year. Required:

A) Calculate the small-business deduction for Beans Co. for the current fiscal year.
B) Calculate the Part IV Tax for Beans Co. for the current fiscal year.

Question 7

Private Co. received a $5,000 dividend from Public Co., which is a non-connected corporation. Which of the following applies?

A) The dividend will be subject to a tax rate of 38 1/3%.
B) The dividends can be reinvested by Private Co. on a tax-free basis.
C) Receipt of the dividend will result in an immediate dividend refund for Private Co.
D) The dividend will be subject to Part I tax.

Question 8

Chartered Tours Inc. (CTI) started operations this year and had a net income for tax purposes of $800,000. (Chartered Tours Inc. operates in a province which ha a provincial tax reduction on income earned from manufacturing and
processing.)
During the year, CTI:
a) made a contribution of $25,000 to eligible charities;
b) received $30,000 in dividends from taxable Canadian corporations;
c) recognized manufacturing and processing profits of $250,000; and
d) had active business income of $770,000.
For tax purposes, CTI is associated with Rocky Mountain Hikers Inc. (RMHI).
RMHI used $310,000 of the small business deduction for its active business income.
Required:
Calculate the following, ignoring provincial taxes:
a) CTI's taxable income
b) CTI's small business deduction
c) The M & P deduction available to CTI
d) CTI's general rate reduction
e) The balance in CTI's GRIP account at the end of the year