7-lesson noteO01-23-24 chapter 13

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School
Northern Alberta Institute of Technology **We aren't endorsed by this school
Course
TAXX 3304
Subject
Accounting
Date
Oct 25, 2023
Pages
15
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TAXX 3304-O01 2023 - 2024 D. Gee Module 5 - refundable taxes lesson notes Video 1 Course outcomes supported in this module: Outcome 2: Reconcile accounting net income to net income for tax purposes and calculate taxable income for a corporation. The following concepts, skills, and issues are used to support this Outcome: Differentiate between accounting net income, net income for tax purposes, and taxable income for a corporation. • Apply income tax rules to reconcile accounting net income to net income for tax purposes and taxable income. • Advise taxpayers on the utilization of loss carryovers. Outcome 3: Calculate corporate federal taxes payable. The following concepts, skills, and issues are used to support this Outcome: • Apply common tax deductions and credits. Calculate a taxpayer's federal income tax liability, including Part I Tax, Part IV Tax, and the Dividend Refund . Outcome 4: Prepare a T2 Corporation Income Tax Return using tax preparation software. The following concepts, skills, and issues are used to support this Outcome: • Apply common tax deductions and credits. Calculate a taxpayer's federal income tax liability, including Part I Tax, Part IV Tax, and the Dividend Refund. Main References: The following are topics covered in this module [chapters]. Please refer to the reading list and omissions for any topics or portions of topics not covered in the course. These notes serve as a summary of the important aspects of the chapter and to lead our class discussions; however, the reading list and omission listing dictates material that is examinable. Chapter 13 - Taxation of corporate investment income Refundable taxes on investment income Refundable Part I tax on investment income Refundable Part IV tax basics Refundable dividend tax on hand [RDTOH] -tracking accounts Note - while notes show chapter 13 separate from chapters 12 and 14, these are integrated together in our class presentation as federal income tax payable. Page 1 of 15
TAXX 3304-O01 2023 - 2024 D. Gee Module 5 - refundable taxes lesson notes Chapter 13 - "taxation of corporate investment income" deals with refundable taxes. Pay the tax now, but we may get some of it back [refund] if the corporation does something [corporation will pay taxable dividends to its shareholders]. Chapter 12 - as need to calculate Part I tax to get to overall federal tax payable. Chapter 14 - associated corporation rules must also be considered. Impacts the claiming of the small business deduction. Main concepts (topics) need to know in this module: NIFT reconciliation [covered earlier in course] Schedule 1 of T2 Taxable income (TI) [covered earlier in course] Chapter 12 Part I Tax [covered in last module] ABI [active business income] o Associated corporations AII [aggregate investment income] Chapter 12 Chapter 14 Refundable taxes RDTOH [refundable dividend tax on hand] 1. Eligible RDTOH [ERDTOH] 2. Non-eligible RDTOH [NERDTOH] Dividend refund 1. On eligible dividends 2. On non-eligible dividends Part IV tax Chapter 13 Page 2 of 15
TAXX 3304-O01 2023 - 2024 D. Gee Module 5 - refundable taxes lesson notes I 1. Calculate net income for tax purposes: reconciliation of accounting net income to net income for tax purposes [module 3 and summary on Figure 12-1 text p. 736 / last yr. p. 712] Ch. 6 II 2. Calculate taxable income [text p. 738 - Figure 12-2 / last yr. p. 713] = Net income for tax purposes minus a. Dividends received from taxable Canadian corporations [p. 738 - 739 / last yr. p. 714] b. Charitable donations - maximum of 75% of net income for tax purposes [p. 737 / last yr. p.713] c. Loss carryovers - noncapital, net capital [p. 741-743 / last yr. p 717-719], farm and restricted farm losses. Mainly concerned about concept or awareness on farming losses Chapter 12 III 1. Calculate Active Business Income (ABI) = [Net income for tax purposes - non-active interest income - dividend income - rental income - (taxable capital gains less allowable capital losses)] text p. 753-755 / last yr. p. 728-730 2. Calculate Aggregate Investment Income (AII) = [non-active interest income + rental income + (taxable capital gains less allowable capital losses) - net capital losses claimed ] text p. 794-795 / last yr. p. 770. Types of income IV 3. Calculate base amount of Part I tax = 38% x taxable income [text p. 745 / last yr. p. 721] 4. Calculate Federal Tax Abatement = Taxable income earned in Canada x 10% [text p. 745 / last yr. p. 721] 5. Calculate small business deduction (SBD) for CCPC's (only if throughout the year) = least of the following x 19% [text p. 749-753 / last yr. 724-728] a. ABI b. Taxable income c. Annual business limit of $500,000 unless associated corporations in which case the $500,000 must be shared between the associated corporations [text p. 755 / last yr. 731]. The annual business limit may be reduced [grind] for large corporations and passive income [p. 759-762 / last yr. 734-738] 6. Calculate Manufacturing and Processing profits deduction = lesser of the following x13% [text p. 766-769 / last yr. p. 741-744] a. M & P profits [typically given]- income qualifying for the SBD b. Taxable income - income qualifying for the SBD - AII (for CCPC's) 7. Calculate General Rate Reduction [text p.769-771 / last yr. 744-747] = ( taxable income - amount of income qualifying for SBD - amount of income qualifying for M&P deduction - AII) x 13% 8. Calculate the 10-2/3% additional refundable tax (ART) on CCPC investment income [text p. 770-776 / last yr. 770-776] = 10-2/3% x the lesser of: a. AII b. Taxable income - income qualifying for the SBD Steps 5 - 10 Chapter 12 - Part I tax [tax on income] Page 3 of 15
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