Chapter 11:

Computing Division B Income:

Starts with net income for accounting purposes then appropriate adjustments are made:
1. + income that is taxable but was not included in accounting income
 Income tax expenses - 18(1)(t)
 Income tax penalties for late filing and interest charges - 18(1)(t)
 Political contributions -18(1)(n)
 Automobile expenses in excess of maximum allowed -18(1)(r)
 Use of recreation facilities and club dues – 18(1)(l)
 Prepaid expenses – 18(9)
 Accrued bonuses unpaid within 180 days after y/e – S78(4)
 Reserve for contingencies (e.g. warranty, inventory, etc.) - 18(1)(e)
 50% of meals and entertainment - S67.1
 Fines and penalties - S67.6
 Amortization/depreciation - 18(1)(b)
 Accounting losses
 Donations (Division C deduction)
 Advertising in foreign media directed primarily to Canadians - S19
 Property taxes and interest on vacant land greater than rental income - 18(2) note
the excess may be added to the ACB of land
 Insurance premium on loans not required as collateral for financing
 Net taxable capital gains (i.e. taxable capital gains minus allowable capital losses (max
TCG))
 Reserves deducted in prior years
 Accounting and legal expenses that are capital in nature - 18(1)(b)
 Recapture on sale of depreciable properties
 Loss on sale of investment
2. – income that is not taxable but included in accounting income
 Capital Cost Allowance (CCA) - 20(1)(a)
 1/5 of expenses of issuing shares/borrowing money - 20(1)(e)
 Annual filing fee or similar fee for borrowing money - 20(1)(e.1)
 Interest paid/payable on funds borrowed to earn income - 20(1)(c)
 Premiums on Life insurance used as collateral - 20(1)(e.2)
 Allowable reserves (doubtful debt, other)
 Accounting gains
 Employers contribution to Deferred Profit Sharing Plan - 20(1)(y)
 Cancellation of lease – 20(1)(z), 20(1)(z.1)
 Landscaping fees for business income producing premises -20(1)(aa)
 Expenses of representation for licence, permit, etc. - 20(1)(cc)
 Site investigation - 20(1)(dd)
 Utilities service connection – 20(1)(ee)
 Disability-Related Modifications and Equipment – 20(1)(qq)/(rr)
 Convention expenses (max two per year) - 20(10)
  Terminal Losses – 20(16)
 Provincial Capital and Payroll taxes
 Gain on sale of land
3. + expenses not tax deductible but were deducted for accounting purposes
 Write-down of property to FMV
 Stock option expenses
 Deductions for amortization
 Environmental clean-up costs
4. – expenditures deductible for tax purposed but haven’t been deducted for acct
(deductions specifically permitted)
 Cancellation of lease
 Expenses of issuing shares/borrowing money
 Reserves
 Incorporation expenses
 Premiums on life insurance used as collateral
 CCA
 Capital amount interest
 Discounts on debt obligations
 Investigation of site
 Landscaping grounds
 employer’s contribution to RPP (registered pension plan)
 Convention expenses
 Expenses of representation
 employer’s contribution to deferred profit sharing plan
 utilities service connection
 disability to deferred profit sharing plan
= Division B Income
Div B Income
Less: Div C Deductions
Taxable Income

Division C Deductions
Dividends:
1. Who can deduct dividends
i. Taxable Canadian corporations
ii. Taxable subsidiary corporations residents in Canada;
iii. Non-resident corporations carrying on business in Canada, and hence taxable in
Canada
iv. Foreign affiliates which have been approximately taxed in a foreign jurisdiction
which has a treaty with Canada

Donations:
Total donations deducted in the year = carried forward within past 5 years + current year
* CANNOT EXCEED 75% OF DIV B INCOME *
Non-Capital Losses:
Can be deducted against any source of income
Carried back 3 years and forward 20 years

Business investment loss (BIL)

Can be deducted against any source of income
Carried back 3 years or forward 10 years
If exceeds this time, it is added to new capital losses (against TCG)
Loss that arises from the disposition of shares or debt from small business
Must be from arm’s length disposition

Net capital losses:

Max capital loss deductible: TCG
Allowable capital losses
Less: TCG
Add: ABIL used in 10th year carry forward as non-capital loss
= Net capital loss

Carried over:
Carried back 3 years and forward indefinitely
Net capital losses carried over = Inclusion rate x (TCG – capital losses in that year)
Inclusion rates:
Prior to 1988 ½
1988-1989 2/3
1990 – Feb 27, 2000 ¾
Feb 28, 2000 – October 17, 2000 2/3
After October 17, 2000 ½

Tax rates:
General federal tax rate to be paid by all corporations under part I is 38%; this is subject to
modification depending on type of corporation
 10% reduction from federal tax payable, in recognition of provincial income taxes
o Only applicable for Canadian provinces and must prove permanent
establishment
o If more than one province, must calculate % of taxable income allocated to each
province
= [ [ ( GR ¿ X ¿¿ Total GR )+ ( S∧W ¿ X ¿¿ Total S∧W ) ] x 50 % x TI ] x 10 %= Abatement
 19% small business deductions (for CCPC on active income of up to $500,000)
 1) 13% general rate reduction on certain business income; OR
2) 13% manufacturing and processing profits deductions for certain corporations (M&P)
 o Perks of M&P deduction is that the Ontario income tax rate is 10% rather than
11.5%
Tax Deductions & Credits:
Manufacturing and Processing Profits Deduction
 How is it computed: 13% of lesser of:
i. Manufacturing and processing profits, and
ii. Taxable income less 4 times the foreign business tax deduction (computed without
reference to the section 123.4 rate reduction) in respect of the business income

Foreign Tax Credit

Only available on income taxable in Canada & foreign country and foreign tax must be PAID not
payable

Non-Business Income Tax Deduction (i.e. interest income)

Lessor of: (i) the foreign non-business-income tax paid in respect of that foreign income; and
foreign non−business income (¿ B)
(ii) x tax o/w payable(1)
Income (¿ B) for the year + ¿−certain amounts

The credit against Canadian tax cannot exceed estimated Canadian tax paid on foreign income
Amounts to be subtracted from Div B in the denominator:
 Net capital losses deducted in the year (can be carried over) as they directly offset
capital gains (max TCG)
 Amount of taxable dividend received + deductible and amount of dividends received
form a foreign affiliate (partner) + deductible as they’re not taxed under Part I

(1)
Taxes ($) otherwise payable = federal taxes less:
(1) 10% abatement; and
(2) general tax reduction (other than CCPC) OR + ART (CCPC)
i.e. (Div B x 38%) – (Div B x 10%) – (Div B x 13%)

Determined before small business deduction; no unused carryovers, separate calculation for
each country

Business Income Tax Deduction (i.e. income from foreign branch)

Lessor of:
(i) Total foreign business income tax paid in the year by all businesses carried on
through an unincorporated branch by taxpayer in a country + unused foreign tax
credits from other years for the same country as taxpayer
foreign business income
(ii) x
Income (¿ B) for the year plus/minus certain amounts
tax o/w payable before abatement minus general tax reduction (2)
(iii) The tax o/w payable for the year before abatement minus general rate reduction
less any non-business income tax deduction
(2)
Tax otherwise payable = federal taxes less:
 (1) general tax reduction (other than CCPC) OR + ART (CCPC)
i.e. (Div B x 38%) – (Div B x 13%)