Tax Calculation and Adjustments

Here's an overview of the key components related to Part I tax calculation, including base tax, additional taxes, recapture of investment tax credit (ITC), refundable tax on CCPC's investment income, federal tax abatement, and deductions for manufacturing and processing profits:

 

Base Amount of Part I Tax (Line 550):

Calculate 38% of taxable income from line 360 of page 3.

Enter this base amount on line 550.

 

Additional Tax on Personal Services Business Income (Line 560)

Add 5% of taxable income from a personal services business to Part I tax payable.

Reference: Section 123.5

 

Additional Tax on Banks and Life Insurers (Line 565)

For tax years ending after April 7, 2022, a 1.5% additional tax on taxable income for bank and life insurer groups.

Use Schedule 68 to allocate the $100 million taxable income exemption among group members.

Enter the additional tax amount on line 565.

Reference: Section 123.6

 

Recapture of Investment Tax Credit (ITC) (Line 602)

Report recapture for SR&ED property disposition or conversion to commercial use.

Two scenarios for disposition: ITC earned for the property or a formula based on percentage used and proceeds of disposition.

Recapture period for ITCs is 20 years.

Use Schedule 31 to calculate the recapture of ITC.

Enter the recapture amount on line 602.

References: Subsections 127(27) to (35)

 

Refundable Tax on CCPC's Investment Income (Line 604)

A 10 2/3% additional refundable tax on CCPC's investment income.

Calculated on page 8 and entered on line 604.

Added to the NERDTOH pool and refunded when taxable dividends (other than eligible dividends) are paid to shareholders.

References: Section 123.3, Subsections 129(1) and 129(4)

 

Federal Tax Abatement (Line 608)

Equal to 10% of taxable income earned in a Canadian province or territory.

Reduces Part I tax payable.

Enter the federal tax abatement amount on line 608.

Reference: Section 124

 

Manufacturing and Processing Profits Deduction (Line 616)

Available for corporations deriving at least 10% of gross revenue from manufacturing or processing goods in Canada.

Deduction at 13% on income not eligible for the small business deduction (SBD).

Applies to Canadian manufacturing and processing profits.

Reference: Temporary measure for zero-emission technology manufacturing deduction.

 

ax Credits, Deductions, and Reductions - Lines 620 to 652

This section outlines various tax credits, deductions, and reductions that corporations may be eligible for, covering investment tax credits, general tax reduction, federal foreign non-business income tax credit, federal foreign business income tax credit, qualifying environmental trust (QET) tax credit, and more.

 

Manufacturing and Processing Profits Deduction (Line 616)

Use Schedule 27, Calculation of Canadian Manufacturing and Processing Profits Deduction, to calculate the manufacturing and processing profits deduction.

Small manufacturing corporations complete Part 1 of Schedule 27, while others complete Part 2.

Eligible activities include manufacturing of energy conversion equipment and manufacturing activities around zero-emission vehicles.

The reduced tax rate for zero-emission technology applies only to profits from zero-emission technology manufacturing.

On line 616, enter the amount of the manufacturing and processing profits deduction determined in Part 9 of Schedule 27.

References: Sections 125.1 and 125.2, Regulation 5200, S4-F15-C1, Manufacturing and Processing

 

Investment Corporation Deduction (Lines 620 and 624)

Canadian public corporations categorized as investment corporations can claim a deduction equal to 20% of taxable income exceeding taxed capital gains.

Enter the taxed capital gains on line 624 and the deduction amount on line 620.

Reference: Section 130

 

Federal Foreign Non-Business Income Tax Credit (Line 632)

Prevents double taxation of non-business income earned in a foreign country and taxed by that foreign country.

Use Schedule 21 to calculate the credit separately for each country.

Enter the total allowable credit or a lesser amount on line 632.

References: Subsection 126(1), S5-F2-C1, Foreign Tax Credit

 

Federal Foreign Business Income Tax Credit (Line 636)

For corporations paying foreign tax on income earned from operating a business in a foreign country.

Complete Part 2 of Schedule 21 for each country and enter the total allowable credits on line 636.

References: Subsection 126(2), S5-F2-C1, Foreign Tax Credit

 

General Tax Reduction (Lines 638 and 639)

Calculate this reduction on page 5.

Line 638 for CCPCs, and line 639 for other corporations not falling under specific categories.

See General Tax Reduction for details.

 

Federal Logging Tax Credit (Line 640)

Claimed by corporations with income from logging operations in Quebec or British Columbia.

Complete Part 5 of Schedule 21 to calculate this credit.

Enter the credit amount on line 640.

References: Subsection 127(1), Regulation 700

 

Eligible Canadian Bank Deduction under Section 125.21 (Line 641)

A Canadian parent bank can claim a deduction for non-resident withholding tax paid on interest to its non-resident affiliate.

Reference: Subsection 95(2.43), Section 125.21

 

Federal Qualifying Environmental Trust (QET) Tax Credit (Line 648)

Beneficiaries under a qualifying environmental trust can claim a tax credit equal to Part XII.4 tax payable by the trust.

Use Schedule 27 to calculate this credit and enter it on line 648.

Reference: Section 127.41

 

Investment Tax Credit (Line 652)

Claimed to reduce Part I tax or may be fully or partially refundable.

Use Schedule 31, Investment Tax Credit – Corporations, to calculate the ITC.

Apply specified percentages to eligible investments or expenditures.

 

Investment Tax Credit (ITC) and Available-for-Use Rule

The Investment Tax Credit (ITC) is a mechanism that allows corporations to earn credits on specific investments and expenditures. The available-for-use rule is a critical aspect in determining when a property or capital expenditure qualifies for the ITC.

 

Available-for-Use Rule:

A corporation is considered to have acquired a property or made capital expenditures for the purpose of earning an ITC only when the property becomes available for use.

References: Subsections 13(26) to 13(32) and 127(11.2)

 

Investments and Expenditures Qualifying for ITC:

Qualified Property (Class 53): - Definition: New prescribed buildings, prescribed machinery, equipment, or prescribed energy and conservation property acquired mainly for use in designated activities in the Atlantic region. - Designated Activities: Manufacturing or processing goods for sale or lease, logging, farming or fishing, storing grain, harvesting peat. - ITC Rate: 10% - Eligible Machinery and Equipment acquired after 2015 and before 2026 for manufacturing and processing are included in Class 53. - Available-for-use rule applies.

 

A.1. Qualified Resource Property (Expired): - Definition: Expired as of December 31, 2015. Transitional measures expired on December 31, 2016. - Only unused credits not expired can be carried forward for up to 20 tax years following the investment year.

 

SR&ED Qualified Expenditure Pool: - Definition: Scientific research and experimental development qualified expenditures. - Available-for-use rule applies.

 

Pre-production Mining Expenditure (Expired): - Definition: Expired as of December 31, 2015, with expired transitional measures. - Only unused credits not expired can be carried forward for up to 20 tax years following the investment year.

 

Apprenticeship Expenditure: - Definition: Expenditure related to apprenticeship programs. - Available-for-use rule applies.

 

Eligible Childcare Spaces Expenditure (Expired): - Definition repealed as of March 31, 2017. Transitional measures expired on December 31, 2019. - Only unused credits not expired can be carried forward for up to 20 tax years following the investment year.

 

ITC for Qualified Property and Leasing Rules:

Designated activities, including manufacturing or processing goods, logging, farming or fishing, storing grain, and harvesting peat, are eligible for ITC.

Certain rules apply to corporations leasing qualified properties.

For corporations primarily leasing property, property acquired for leasing in the ordinary course of business in Canada is considered qualified.

For manufacturing corporations, qualified property is considered only if manufactured and leased in the ordinary course of business.

For corporations selling or servicing property, qualified property is considered only if it aligns with the type of property the corporation sells or services and is leased in the ordinary course of business in Canada.

Understanding the specific definitions, rules, and expiry dates is crucial for corporations to accurately claim ITC and comply with regulations. Consult the relevant tax documentation for detailed guidance.