ACCT-224 Lecture Notes - Lecture 1: Income Splitting, Withholding Tax, Capital Cost Allowance

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4 Mar 2018

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Module 1 background to income tax / residency / In this module, we will consider who is subject to income tax in canada and the basic rules to calculate the income on which the tax will be applied. As the title suggests, the income tax system is a tax based on the income of a person subject to the tax, called a taxpayer . Naturally, determining the income on which tax will be applied will be a critical part of the process. We will therefore dedicate considerable time throughout this course on the rules for the calculation of income subject to tax in canada. All tax systems fundamentally operate in the same manner, that is, by applying a tax rate to a defined base of taxation. For example, sales taxes are collected by applying a tax rate (example, the gst rate of 5%) to the tax base, which is the taxable sale price of goods and services bought/sold.

Related Questions

Have you heard about proposals for a "flat tax"? The idea is to have our federal income tax be extremely simplified, with almost all income being taxed, and almost no deductions allowed; however, the tax would be a much lower percentage, like maybe a 15% across the board tax, and with everyone paying the same tax rate. They would also exempt a large part of income from any tax, so that the first $25,000 income per family for example would be tax free. Thus, a family making only $50,000 has half its income tax free, but a wealthy family making $200,000 has 88% of its income subject to tax. Some argue it still benefits the rich, others argue it does not, and that a flat tax would give much less incentive to cheat on taxes or hide income since the tax rate is only 15%. Do a little online research on the flat tax (there's plenty of comment on the internet) and discuss what you think of it.

Information for Entity A for the year ended December 31, 2018 ($ in millions):

Income from continuing operations before tax	$160
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense included in operating income	12
Depreciation deducted on tax return in excess of depreciation expense	32
Permanent differences (all related to operating income):
Nondeductible portion of entertainment expense	8
Interest received on municipal bonds	3
Balance in deferred tax asset account, January 1, 2018	1
Balance in deferred tax liability account, January 1, 2018	2
The applicable enacted tax rate for all periods is 40%.

Show work.

A. Prepare the appropriate journal entry to record income taxes.

B. What is Entity A's net income?

C. Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect, for example, one example is when rent revenue is collected in advance from tenants (deferred rent revenue for financial accounting purposes) but will be recognized as the tenants occupy the property. You can think of others. How are future deductible amounts recognized in the financial statements? As between deferred tax assets and deferred tax liabilities, which would management prefer and why?

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Simon Fahrquest is the sole shareholder of Dawg Ltd., a very successful business that was incorporated a number of years ago. The company has always qualified as a CCPC and uses a December 31 year end.

Simon has never been particularly fond of peopl, but has always loved dogs, particularly those of mixed breed. While he has no family, he currently owns 12 dogs, none of which are purebred.

While Dawg LTd. has always been very profitable, Simon has chosen to live modestly in a dog firendly residential property that he has owned for many years. Each year, he estimates the amount of cash that he will need for his living expenses which vary year to year and looks to his corporation to provide the needed cash.

Since after meeting Simon's financial needs, Dawg Ltd. always has cash that isn't required for operations, it donates at least $100,000 per year to the Society For The Prevention of Cruelty To Animals (SPCA), a registered charity. The donations specify that the funds must be used for the protection, maintenance, and placement of mixed breen dogs.

For 2016, Simon estimates that he will need $50,000 in after tax cash to meet his personal needs. He expects Dawg LTd. will have taxable income of $350,000 before any payments to him, all of which will qualify for the small business deduction. The provincial tax rate on such income if 2.5 percent.

In Simon's province of residence, the provinical taxes on the first $45,282 of taxable income total $4,528. Additional income will be taxed at a provincial rate of 12 percent. Also in this province, the provincial dividend tax credit for non-eligible dividends is equal to 32 percent of the dividend gross up.

For the 2016 taxation year, Simon estimates that his person tax credits will total $3,260.

Required:

A. Determine the tax cost of providiing Simon with the required $50,000 in after tax cash using only salary payments.

B. Determine the tax cost of providing Simon with the required $50,000 in after tax cash using only dividend payments.

C. Given the information in this problem, do you believe that better results could be achieved with a combination of salary and dividends? Would your answer be different if Simon's personal tax credits totalled $12,000? Calculations are not required in answering this part C.

D. Simon would like to increase his donations to the SPCA and has asked your advice on the most tax advantageous way to do this. What factors should be considered when analyzing this issue?

Ignore CPP Contributions and Canada employment credit in your solution.

No CPP amount is given in this question.

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ACCT-224 Lecture Notes - Lecture 1: Income Splitting, Withholding Tax, Capital Cost Allowance

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