CORPORATE TAXES DEDUCTIONS
Depreciation/Depreciation for tax purposes (capital cost allowance) is computed on a pool basis with relatively few separate classes (pools) of property. Annual allowances are generally determined by applying a prescribed rate to each class on the declining-balance basis. For example, the prescribed annual rate on most machinery and equipment is
20%, on automotive equipment 30% and on most buildings 4%. In the year of acquisi-tion, only one-half of the amount otherwise allowable may be claimed on most classes of property Generally; a capital cost allowance may not be claimed until the taxation year when the property is available for use. The taxpayer may claim any amount of capital cost allowance up to the maximum. Capital cost allowance previously claimed may be recaptured if assets are sold for proceeds that exceed undepreciated cost.
Tax depreciation is not required to conform to book depreciation.
However, generally accepted accounting principles require deferred taxes to be set up for the timing differences between accounting and taxable income.
Mining and oil and gas activity/Mining and oil and gas companies are generally allowed a 100% deduct ion for exploration costs. Development costs are deductible at the rate of 30% on a declining-balance basis.
Capital property costs are subject to the depreciation rules noted above under “Depreciation.”
Provinces levy mining taxes and royalties on mineral extraction and on oil and gas production. Although these levies are not deductible for tax purposes, a special deduc-tion is allowed, for federal tax purposes, equal to 25% of resource profits calculated before the deduction of interest and exploration/development costs. Some provinces parallel the
federal 25% deduction, while others permit the deduction of mining taxes in computing provincial taxable income or provide a partial rebate in certain circumstances.
Net operating losses/Net operating losses generally may be carried back three tax years and forward seven tax years. Special rules may prohibit the use of losses from other years when there has been an acquisition of control of the corporation.
Payments to foreign affiliates/Royalties, management fees and similar payments to affili-ated nonresidents are deductible expenses to the extent that they are incurred to earn income of the Canadian company and do not exceed a reasonable amount (in most cases, this is fair market value).
Interest/Interest on borrowed money used for earning business or property income or interest in respect of an amount payable for property acquired to earn income is deductible, provided the interest is paid pursuant to a legal obligation and is reasonable in the circumstances. Draft legislation that was introduced in 1991 to further codify interest deductibility has not been finalized and should not be relied on.
Thin capitalization rules may limit interest deductions where debt owing to certain nonresident shareholders exceeds three times the corporation's equity.
Taxes/Neither federal nor provincial income taxes are deductible in determining income
subject to tax. The tax treatment of federal capital taxes and provincial payroll and capital taxes is discussed above.
Scientific research/Current and capital expenditures on scientific research in Canada aredeductible (expenditures on buildings acquired after 1987 are excluded, however).Similarly, current expenditures on scientific research outside Canada are deductible.
Any unclaimed expenditures for research in Canada can be carried forward indefinitely.
Capital expenditures claimed may be subject to recapture upon the disposition of the research properties.
A federal investment tax credit of 20% is provided for research
expenditures incurred in Canada (35% for qualifying Canadian-controlled private corporations). Several provinces also provide tax incentives to taxpayers that carry on research and development activities.
Other significant Items/New reporting requirements apply to taxpayers with offshore investments. The new rules impose a significant compliance burden for taxpayers with foreign affiliates. Failure to comply could result in substantial penalties.
For taxation years beginning after 1997, Canadian taxpayers dealing with nonresident related parties arc required to follow the arm's-length principle to determine any amount needed for Canadian tax purposes. New documentation requirements and new transfer pricing penalties apply for
taxation years beginning after 1998.
Transfers of losses and other deductions between unrelated corporate taxpayers are severely limited after an acquisition of control.
Three-quarters of capital expenditures for goodwill and certain other intangible properties may be amortized at a maximum annual rate of 7% on a declining-balance basis.Up to three-quarters of proceeds m
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