St. John Corporation, a Canadian controlled private corporation has Taxable Income of $250,000 in 2020, 87 percent of which is earned in a Canadian province. The company reported Canadian active business income of $235,000 for the year, and no foreign taxes were paid. The corporation has no M&P activity. It is associated with one other company, which received $200,000 of the annual business limit. What is the federal Tax Payable for St. John Corporation for the 2020 year?

Question

Quizplus · Accepted Answer

First, we need to calculate the small business deduction limit for St. John Corporation. The limit is based on the aggregate taxable income earned in Canada by the corporation and all associated corporations.

Aggregate taxable income = (St. John Corp taxable income) + (associated corporation taxable income) 
= $250,000

Small business deduction limit = lesser of $500,000 and (9% x aggregate taxable income) 
= lesser of $500,000 and $22,500 
= $22,500

Since St. John Corporation has reported active business income of $235,000, it can claim the full small business deduction of $22,500.

The federal tax payable will be calculated as follows:

(Taxable income - small business deduction) x federal tax rate

= ($250,000 - $22,500) x 15% 
= $29,625

However, since the corporation is associated with another corporation that has received $200,000 of the small business limit, St. John Corporation is only entitled to claim a reduced small business deduction.

Reduced small business deduction = small business deduction x (1 - associated corporation's taxable income/aggregate taxable income)

= $22,500 x [1 - ($200,000/$250,000)] 
= $22,500 x 0.2 
= $4,500

New taxable income = taxable income - reduced small business deduction 
= $250,000 - $4,500 
= $245,500

New federal tax payable = (New taxable income - small business deduction) x federal tax rate

= ($245,500 - $4,500 - $22,500) x 15% 
= $26,650

Therefore, the correct answer is C) $26,650.

St John Corporation, a Canadian Controlled Private Corporation Has Taxable