Unit 1
Is the economic incidence of tax depends on the elasticities. What does that mean?
Where consumers are highly elastic, they will bear less of the tax burden and producers will bear more of the tax burden. Vice versa when consumers are highly inelastic.
The economic incident does not depend on who (consumers/producers) "pay" the tax.
Use the CPP as an example.
Instead of providing a small business deduction, what does the Technical Committee recommend instead?
Tax all corporations the same at a reduced rate
Why? What would this result?
Why is a corporation not synonymous with running a business?
Even though all business income is computed in accordance with s 9, running a business without incorporation may be called “self-employed”, "sole-proprietorship", "partnership", etc.
How many income tax returns does a sole proprietor prepare for themself and their business? Partnership? Corporation?
By owning shares that can increase in value and by receiving dividends.
What is a common share and a preferred share?
Common share participates in the growth of the company (ss 248(1))
Preferred shares are non-common shares (ss 248(1)). Their value does not grow and if they allow dividend, it must be a fixed percentage that is not more than the amount paid for the share.
How does the Gini coefficient and Lorez curve relate to theories on income redistribution?
Having a Lorenz curve close to 45 degrees and a Gini coefficient close to 0 means that income is well distributed across different income groups. That is, each of the 5 income groups hold approx 20% of society's income.
How do these graphs look in developed nations vs. developing nations?
Instead of raising taxes for corporations, what should we do instead and why?
We should instead tax workers directly because raising corporate tax because raising corporate tax can negatively affect workers more in the form of lower wages.
Calculate the corporate tax rate for a corporation in SK.
The corp is taxed at 38% (123(1)(a)) minus 13% general rate deduction (123.4(1)) plus 12% SK rate = $27%
What about for corporations that qualify for SBD?
Why is integration economically important?
(1) It creates neutrality between incorporated and non-incorporated businesses
(2) It decreases tax-induced decisions
(3) It removes incentives to retain earnings excessively
What is an estate freeze?
Estate freeze: Bringing the next generation into the business without triggering the parent's current tax liability.
How does an internal freeze work?
Name the 3 categories of market failures or market inefficiencies and the government's role to intervene.
1.) Market power: Enforce competition, supply the services instead of the public sector
2.) Non-existence of markets: Provide insurance that the public sector won't, enforce Pigouvian tax
3.) Supply public goods that otherwise would not be adequately supplied in an open market
What is the marginal effective tax rate (METR) and how does this affect business behaviours?
METRs are different rates of depreciation for different assets set by the government. It encourages people to make business decisions based on tax reasons rather than sound business reasons.
What kind of corporations qualify for the SBD?
Canadian-controlled private corporation (CCPC) - a private Canadian corporation that is (1) not controlled by non-residents (1) shares are not owned by non-residents or public corporation (2) not on the stock exchange
- Subsections 125(1), 125(7)
How is "private corporation" and "Canadian corporation" defined?
Donut Corp is a small business owned by Kat that made $150,000 in profit. Kat is deciding whether to give $150,000 to herself as either salary or dividends. What decision should she make if she only wants to pay personal income tax and not corporate tax?
Give herself a salary (and she'll get CPP). Issuing dividend will result in paying a mix of both personal and corporate tax.
Why are specified investment businesses and personal service businesses not eligible for SBD?
Because they are not considered an active business.
What are the exceptions in allowing SIB and PSB to be eligible for SBD?
What are 3 reasons for and 3 reasons against redistribution
Reasons for redistribution: (1) decrease social conflict, (2) poverty insurance, (3) the Constitution Act says so
Reasons against for redistribution: (1) Benefits who lobbies the best, (2) disincentive work, (3) incentivize evasion
Describe a perfect redistribution situation.
What is the difference between the statutory rate and the effective rate?
The statutory rate is the initial broad income tax rate for corporations (which is 27%). Effective rate considers interest deductions, depreciation, and inflation, making the corporate tax paid closer to 20%.
What is the difference between de jure and de facto control?
De jure control is when a someone (or another corporation) has influence over a corporation as a majority voting shareholder or through the corporation's constitutional document (Buckerfield's, Duha)
De facto control is when someone has direct/indirect control over a corporation in a relevant matter (ss 256(5.11)).
Why is it important to define control and association in respect to SBD?How do eligible and non-eligible dividends work?
All dividends are "grossed up" then provided with dividend tax credit to achieve integration and to avoid double taxation.
Eligible dividends are for small businesses, and they receive a smaller tax credit for dividends because they pay less corporate taxes.
Non-eligible dividends are the same but for large corporations but receive a greater tax credit for the dividend because these big corporations already pay the highest corporate tax rates.
When might PUC and ACB be the same amount and when may they be different?
Same amount if the shareholder purchased the share from the corporation.
Different amount if the shareholder purchased it on a secondary market or from a different shareholder at a different price than what it was originally purchased for.
Describe the relationships between PUC, ACB, POD, and FMV.
What are the 3 assumptions of utilitarianism?
(1) Everyone has identical utility (2) marginal utility is decreased as income increases (3) fixed societal income.
Critiques for these assumptions?
What is the Modigliani-Miller theorem?
It says the value of a firm is not affected by its capital structures in the absence of taxes, bankruptcy costs, etc. It supports that (1) choosing equity or debt financing and (2) taxes and bankruptcy costs shouldn't determine how a person structures their business. But this does not hold true in the real world.
Maddy owns 70% of Gelato Co and her husband owns 30%. Their son owns 50% of Smoothie Co and his friend owns 25%. Anu owns the last 25% of Smoothie Co.
Are Gelato Co and Smoothie Co associated under s 256(1)?
No because Anu is not related to the friend.
How could you change the facts to make the two corporations associated with each other?
What is the shareholder benefit rule?
When a corporation provides a benefit to a shareholder that have no or limited business purpose, the shareholder must include the value of the benefit into their personal income tax.
Why is this a good rule to have from a policy perspective?
What is one pro and one con of an owner-manager leaving money in the corporation?
Pro - Defer to pay taxes later
Con - Must be careful about AAII and losing SBD.