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15TaxationPDF.pdf-Centre for Management of Technology andshowing page 1-7 out of 35

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Centre for Management of
Technology and Entrepreneurship
University of Toronto
Copyright:
Joseph C. Paradi, 1996-2007
Yuri Lawryshyn, 2008-2010
Course: CHE374
Taxa$on


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2
Note that Tax avoidance is NOT the same as tax evasion!


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3
Corpora$ons and Tax
There are essen$ally two types of corpora$ons, public
and private. There are rigorous defini$ons of what
each of these are, but for our purposes, these will do:
Public
companies have shares that have been
distributed to the public, have more than 50
shareholders  a subsidiary is also a public company for
taxa$on purposes
Private
companies are Canadian resident firms
incorporated under Federal or provincial laws, called
CCPCs (Canadian Controlled Private Corpora$ons).
There are about 2,500,000 companies registered in
Canada, most of them are private and very small.
There are taxes other than income taxes but we will
not deal here with these (GST, excise, PST, property,
etc.))


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4
Introduc$on to Taxa$on
In Canada, both the Federal and Provincial
Governments levy taxes on Corpora$ons.
The tax treatment can have a significant impact on a
proposed project.
Tax considera$ons are a vital component of the
investment decision making process.
A new investment affects the firm's cash flow both
ways, out for the investment and in from sales or
savings.
If an investment makes a net profit, it will be taxed.
Since taxes reduce the returns from an investment,
they are treated as a form of disbursement or expense.
Taxes paid represent a
real cost
of doing business


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5
Income Statement
Revenue
12,200
Cost of sales
6,000
Gross margin
6,200
Selling and Admin (SG&A)
4,200
EBITDA
2,000
Depreciation
60
EBIT
1,940
Interest expense
30
Income Before Taxes
1,910
Provision for Taxes
764
Net Income
1,146
Dividends
1,000
Addition to Equity
146
Income Statement


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Some Tax Effects
Since taxes affect cash flows, it is necessary to
perform
economic analysis on an a.ertax basis
Therefore, we have to first, calculate the effects
of taxes before doing any discounted cash flow
calcula$ons
Both deprecia$on (capital cost allowance or CCA)
and other tax incen$ves are important
In Canada corporate tax rates are generally
3560% of net income.
Taxes such as property taxes, employment
related taxes, taxes on emission or other
produc$on related items are simply treated as
expenses


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7
Corporate Taxa$on
CCPCs enjoy a 21% reduc$on from the top tax rate for
income not exceeding $150,000 per year up to an
aggregate amount of $750,000. There are some other
restric$ons here also.
Tax losses can be carried forward to offset future
earnings, but they are lost aXer 7 years.
Corpora$ons can refile tax returns aXer the fact to
create or use tax losses already incurred.
CCA does not have to be taken in any year, so these
credits can be held for future years indefinitely.
The tax authori$es have a sec$on of the law "General
Avoidance Provision" (GAP) which allows them to
negate any transac$on that was done
solely
for tax
purposes.


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