Question

Corporate Tax Payable with M&P

Zenox Ltd. is a Canadian controlled private corporation (CCPC) with all of its operations located in Saskatchewan. Sharon Zenox owns 100 percent of the outstanding shares of this Company. At the beginning of 2017, the Company has a non-capital loss carry forward of $54,000. The Company intends to deduct this carry forward during the year.

For the 2017 taxation year, Zenox has Net Income For Tax Purposes of $625,000. This is made up of $523,000 in income from business activity and $102,000 in dividends from various Canadian public companies. Using the formula from the Income Tax Regulations, it has been determined that $416,000 of the business income results from manufacturing and processing activity.

During 2017, the Company donated $46,000 to a registered Canadian charity.

Zenox Ltd. is associated with another CCPC. The two companies have agreed that each company will claim one-half of the annual business limit.

Determine the minimum Taxable Income and Part I federal Tax Payable for Zenox Ltd. for the year ending December 31, 2017. Show all calculations, whether or not they are necessary to the final solution. As the corporation operates in a province that has a reduced tax rate for M&P activity, a separate calculation of the federal M&P deduction is required.

Answer 1

Corporate Tax Payable by Zenox Ltd (A Canadian controlled private corporation – CCPC)

Net Income for Tax Purposes - $625,000

• Income from business activity - $523,000 (Of this, $416,000 is income from manufacturing and processing activity)
• Income from dividends from various public listed companies - $102,000

Other information:-

• Non-capital loss carried forward from previous year: $54,000
• Donation made to registered Canadian Charity: $46,000 (Of which Zenox and another associated company have agreed to claim one half each of the annual business limit allowed for deduction)

Note:

*Canadian corporations can claim on line 340 charitable deductions and gifts of up to 75 percent of their net income. In Zenox case, since 75% of net income is (75% of $625,000) $468,750, the entire $46,000 donated to charity can be deducted. Zenox’s 50% share in the claim will amount to $23,000.

  

*The general corporate tax rate in Canada is 15%. However, CCPC’s are able to claim a small business deduction. For year 2017, after deduction, the effective tax rate stood at 10.5%.

*Dividends received from public tax-paying companies in Canada are deductible for tax purposes.

*Effective tax rate at Saskatchewan (after 2% reduction in tax on profits from M&P activity for this province, from the actual tax rate of 11.5% for 2017) is 9.5%

Calculation of:-

1. Minimum Taxable Income

a) Net Income from M&P business activities $416,000

b) Net Income from other business activities $107,000

c) Income from dividends from Canadian public companies    $102,000

Net Income = a + b + c = $625,000

(-) Loss carried forward from previous year                            (-) $54,000

  $571,000

(-) Deduction for charity (-) $23,000

$548,000

(-) Dividend Income (-) $102,000

   Minimum Taxable Income =                                     $446,000

2. Part I Federal Tax payable for Zenox Ltd. For yr ending Dec 31, 2017

• Tax on business from M&P Activities in Saskatchewan = 9.5% of 416,000 = $39,520
• Tax on business from other activities = 10.5% for CCPC’s of [$107,000 - $54,000 (loss carried forward from prev. year) - $23,000 (deduction on charity made to regd Canadian charity)]

                                                                          =10.5% of $30,000 = $3,150

Total Part I Federal Tax payable = $39,520 + $3,150 = $42,670