Deck 13: The Canadian-Controlled Private Corporation

Question 1

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

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

Answer 1

C

Question 2

Newz Inc.is a Canadian-controlled private corporation with a December 31 year-end and the controller has asked you to prepare the 2020 T2 tax return.The company reported a net income of $200,000 on its financial statements in 2020.Of this amount, $15,000 was from non-eligible dividend income received from a taxable Canadian corporation.The remaining income was from active business.
Additional information:
1) The non-eligible dividends were received from Snappy Ltd., a connected Canadian-controlled private corporation.Snappy has only one class of shares, and the total amount of non-eligible dividends paid in 2020 was $50,000 which resulted in a non-eligible dividend refund of $9,000.
2) Newz had a balance in its non-eligible RDTOH account of $3,000 at the end of 2019.The company did not receive a dividend refund in 2019.
3) Newz is associated with Golden Co.Golden used $220,000 of the small business deduction limit on its 2020 tax return.
4) Newz' 2020 financial net income includes a donation expense of $1,000.
5) Amortization of $30,000 was expensed on Newz income statement in 2020.CCA has been correctly calculated at $28,500 for 2020 and has not been transferred from the tax accounts to the financial statements.Newz utilizes the maximum CCA deduction each year.
6) Newz paid non-eligible dividends totaling $5,000 during 2020.
(None of the above is subject to rules pertaining to specified corporate income, excessive income from passive investments, or taxable capital in excess of $10 million.)
A.Determine Newz's net income for tax purposes.
B.Determine Newz's taxable income.
C.Determine the small-business deduction for Newz.In your answer, identify the values for
1) active business income
2) taxable income
3) annual limit.
D.Calculate Newz's
1) Part IV tax on non-eligible dividends
2) dividend refund from non-eligible RDTOH, if applicable.
(Round all amounts to zero decimal places.Work must be shown for marks to be awarded.)

Answer 2

Question 3

There are several benefits to incorporating a business.Which of the following is NOT a benefit of incorporating?

A)The small business deduction provides a tax reduction on the first $500,000 of active business income.
B)Dividends paid to shareholders are deductible business expenses.
C)There is greater flexibility to bring family members on board as owners.
D)The owner/employee may participate in a registered pension plan through the corporation.

Answer 3

B

Question 4

Tiger Co.had a non-eligible RDTOH (NERDTOH) balance of $15,000 at the end of 2019, and the dividend refund from the NERDTOH in 2019 was $7,000.The company's Part IV tax on non-eligible dividends for 2020 is $8,000.The company's active business income is $475,000 and its taxable income is $410,000.Tiger is associated with Lion Co., which has only active business income.Lion Co.was allocated $125,000 of the small business deduction in 2020.Tiger has investment income which remained at $45,000 in both 2019 and 2020.The total taxable capital of the two corporations is less than $10 million.Part I tax for 2020 was $47,283.What is Tiger's NERDTOH balance at the end of 2020? (Round all numbers)

A)$8,000
B)$16,000
C)$26,733
D)$65,623

Question 5

The General Rate Income Pool account accumulates the after-tax earnings that can be paid as

A)non-eligible dividends.
B)eligible dividends.
C)capital dividends.
D)exempt dividends.

Question 6

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

Question 7

With respect to shareholder loans, which of the following statements is true?

A)A loan by a corporation to a shareholder/employee to purchase shares in the corporation must be documented at the time the loan is made in order to meet one of the conditions necessary to avoid the inclusion of the loan principal as taxable income to the shareholder.
B)A shareholder/employee of a corporation who is granted a loan by the corporation to purchase shares in the corporation must hold the new shares for five years in order to meet one of the conditions necessary to avoid the inclusion of the loan principal as taxable income.
C)A shareholder/employee of a corporation who is granted a loan by the corporation to purchase shares in the corporation must repay the loan in one year in order to meet one of the conditions necessary to avoid the inclusion of the loan principal as taxable income.
D)A loan by a corporation to a shareholder/employee to purchase shares in the corporation must bear interest in order to meet one of the conditions necessary to avoid the inclusion of the loan principal as taxable income to the shareholder.

Question 8

Tanni Tamaki and Gerald Malada are a married couple and they equally own and operate Red Bird Inc.Tanni's sibling Marti is starting a new company, Flightseekers Co., and has asked Tanni to be a 35% common shareholder.Marti will own 45% of the shares, and the remainder will be owned equally by Marti and Tanni's two parents.
Required:
Determine if the two corporations are associated.If they are, identify the section of the Income Tax Act that applies.

Question 9

Which of the following scenarios does not describe two associated corporations (in a de jure context)? (There is no specified corporate income in any of the scenarios.)

A)ABC Co.owns 90% of the shares of XYZ Co.
B)Tiny Co.is wholly owned by Elsa Nyberg.Elsa's child, Charly, owns 65% of the shares of Creative Inc.
C)Bilal Chol owns 100% of the shares of Triad Ltd.Chol's parents, Jaden and Amna, each own 30% of the shares of Quid Co.A friend owns 10% of Quid Co., and Bilal owns the remaining shares.
D)Toni and Dorien are a married couple who each own 50% of the shares of Penn Co.Their children, Sal and Geri, each own 45% of Paya Co., and Toni owns the remaining 10% of the shares.

Question 10

Pontelle Inc.is a Canadian-controlled private corporation and has correctly calculated its net income for tax purposes to be $857,000 for the year ending December 31, 2020, as shown below:
A.Determine Pontelle's Part I tax for 2020.
B.Determine Pontelle's Part IV tax for 2020.
C.Determine Pontelle's ERDTOH and NERDTOH balances at the end of 2020.
D.Determine Pontelle's GRIP balance at the end of 2020.
E.Determine Pontelle's dividend refund for 2020.
Round all amounts to zero decimal places.

Question 11

A snapshot of a portion of Rancho Inc.'s T2 Summary shows the following:
$\begin{array}{|l|r|}\hline\text { Taxable income }\\ \hline \text { Net income for tax purposes } & 352,500 \\\hline \text { Charitable donations and gifts } & 70,000 \\\hline \text { Taxable dividends } & 12,500 \\\hline \text { Losses of prior years } & 0 \\\hline \text { Other adjustments } & 0 \\\hline \text { Taxable income }= & 270,000\\\hline \text { Part I tax } & \\\hline 38 \% \text { of taxable income } & 102,600 \\\hline \text { Surtax } & 0 \\\hline \text { Recapture of investment tax credit } &0\\\hline \text { Refundable tax on CCPC investment income } & 2,133 \\\hline\text { Active business income } 320,000\\\hline \text { Small business deduction } & 39,900 \\\hline \text { Federal tax abatement } & 27,000 \\\hline \text { Manufacturing and processing deduction } &0 \\\hline \text { Foreign tax credits } & 0 \\\hline \text { Investment tax credits } &0\\\hline \text { Other deductions and credits } & 5,200 \\\hline \text { Part I tax }= &32,633 \\\hline\end{array}$

Other information includes:
1) Rancho had a non-eligible RDTOH (NERDTOH) balance of $9,000 at the end of 2019.
2) The dividend refund from the NERDTOH in 2019 was $3,000.
3) The dividends received were non-eligible, and were paid by Greens Inc., a connected CCPC.Rancho owns 25% of Greens.Greens received a dividend refund of $40,000.
4) Rancho paid taxable non-eligible dividends of $15,000 in 2020.
5) Rancho is associated with Turtle Co., which has only active business income.
6) Rancho has aggregate investment income which remained at $20,000 for both 2019 and 2020.
7) The amount in 'Other deductions and credits' in the T2 Summary represents the General Rate Reduction.
(The total taxable capital of Rancho and Turtle is less than $10 million, and there is no specified corporate income.)
Required:
A.How much is Rancho's Part IV tax in 2020?
B.Calculate the amount of the small business deduction allocated to Turtle in 2020.
C.Determine Rancho's NERDTOH balance at the end of 2020.
D.Calculate Rancho's dividend refund in 2020.
E.Prove the amount shown in the T2 summary for the General Rate Reduction.
(Round all amounts to zero decimal places.Work must be shown for marks to be awarded.)