Taxation 1: Homework 8 - Calculation of NITP Corporate Example PDF

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Shiraz Charania...

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CORPORATE EXAMPLE Malcolm’s Most Excellent Hot Bengal Chutney, Limited Net Income per Financial Statements – 9(1) $3,784,000 Provision for Income Taxes – ITA 18(1)(t)(i) Addition of $2,528,000 Explanation: Accounting Income taxes must be added back to calculate Business Income for TP, because Taxes Payable is not the same as Income Taxes. 1. Reserve for Inventory Obsolescence – ITA 18(1)(e) ~19:00min~ Subtract $1,285,000 No Change Explanation: Accountant has already deducted so the… Generic v. Specific reserve G: % S: $ (amount); Have to be able to identify inventory: “items that had not has a sale in the last 180 days” 2. Non-deductible Life Insurance – ITA 20(1)(e.2)(i) Addition of $3,500 Explanation: No banking requirement makes it an Addition because it means you’re doing it for personal reasons. If there were one, then it’d be a “No Change”. 3. ~24:00min~ Legal and accounting fees related to issuing shares (financing cost) – ITA 21(1)(e) Addition of $23,440 [$29,300 * 80%] Legal fees related to amending the articles of incorporation – ITA 18(1)(a)…~39:00min~ Addition $2,300 Costs incurred to regarding the renegotiating of bank loans – ITA … Addition $36,880 [$46,100 * 80%] Costs incurred to defend the company against wrongful dismissal charge – ITA … Addition $47,680 [$59,600 * 80%] No Change Costs related to the structuring of an agreement for the purchase of equipment from a foreign company – ITA …

Addition $38,700 Appraisal costs to determine value of equipment for bank loans – ITA … Addition $4,080 [$5,100 * 80%] 4. Repairs to Outside of Building – ITA 18(1)(a) No Change Explanation: If it was a “Building improvement” then that would be apart of CCA, however it is a “Repair”. Landscaping Costs – ITA 20(1)(aa) No Change Explanation: Landscaping is fully deductible under 20(1)(aa) 5. Amortization – ITA 18(1)(b) Addition of $4,560,000 Explanation: Accounting amortization has to be added back and replaced with CCA. Can never deduct Amortization. Interest on late tax payments – ITA 20(1)(c) ~49:00min~ Addition of $900 No Change Fed or Provincial: Any interest or penalties paid to federal and prov gov’t are not deductible to tax. Municipal: Only penalties are not allowed. Interest can be apart of business. Severance payments to four managers – ITA 18(1)(a) No Change Explanation: 18(1)(a) prohibits deductions that are not incurred to earn income.

Loss from theft of accounting clerk – ITA 18(1)(a) ~52:00min~ No Change Theft by lower level employees -> No problem Theft by Higher level employee -> Not deductible Charitable Donations – ITA 18(1)(a) Addition of $57,000

Explanation: Donations to charities cannot be deducted in the calculation of net business income. They will be the basis for a tax credit in the calculation of Tax Payable. Eligible for tax credit. It is apart of Division C not Division B, Subdivision b. 6. Early retirement allowances – ITA 18(1)(e) Addition of $672,000 Explanation: Assuming entire amount is a +, we don’t know how much has been paid within 180 days (= No Change). 7. Sponsoring local theatre – ITA 18(1)(a) No Change Explanation: Valid form of advertising Advertising in U.S. magazine that is not distributed in Canada – ITA 18(1)(b) Addition of $4,600 No Change Advertising in a Canadian edition of a U.S. magazine – ITA 18(1)(b) Addition of $5,300 Explanation: Cost of advertising in foreign media that is directed toward Canadian markets cannot be deducted for tax purposes. While there is an exception for foreign periodicals, it does not apply to foreign newspapers. Paying a U.S. to advertise in Canada. Cannot pay a foreign company to advertise in Canada. Advertising in a European edition of a Canadian magazine – ITA 18(1)(b) No Change Explanation: Advertising Cost for a Canadian magazine directed toward Canadian markets. Hockey tickets – ITA 67.1(1)(a) Addition of $4,000 [$8,000 * ½] Explanation: Meals & Entertainment are included in Tax purposes at 50% Meals & Entertainment – ITA 67.1(1)(a) Addition of $54,750 [$109,500 * ½] Staff Christmas Party and BBQ. – ITA 67.1(2)(f) No Change Explanation: Deductible Criteria: Up to 6 events a year All staff invited

Sponsoring local little league teams – ITA 18(1)(a) No Change Explanation: Any sort of sponsorship is “No Change” Golf club dues – ITA 18(1)(l)(ii) Addition of $12,700 8. Loss on Disposals of Fixed Assets – ITA 18(1)(b) Addition of $35,900 Explanation: Capital losses on depreciable assets aren’t deductible. 9. Interest Income – ITA 18(1)(b) No Change Explanation: Interest is income for both Accounting and Tax 10. CCA – ITA 20(1)(a) Subtract $5,835,000 Explanation: CCA is deducted from business income. Assume it has been calculated correctly. 11. Interest on late payment of instalments – ITA 20(1)(c) No Change Explanation: Just need to add back the “Provision for Income Taxes”...