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Gobeil’s Collection of 1,000 Questions™ - Income Tax Planning - Question 36 of Proprietorships, Partners and Corps

Posted by David Gobeil on

The formula to calculate the amount of a corporation’s federal income tax liability is wrong. The amount in bold is the correction.

 Concepts

 The amount of a corporation’s federal income tax liability is calculated as:

  •  ((the taxable income eligible for the small business deduction × the federal income tax rate on qualifying small business income after the small business deduction) + (the taxable income not eligible for the small business deduction × the federal general corporate income tax rates after the 10% abatement for income earned in a province); or
  • (((the lesser of (Reduced Business Limit and active business income))  × the federal income tax rate on qualifying small business income after the small business deduction of 9%) + ((taxable income of (active business income + passive investment income) - (the lesser of (Reduced Business Limit and active business income))) × the federal general corporate income tax rates after the 10% abatement for income earned in a province)).

 Solution

 The expected amount of the corporation’s federal income tax liability is $39,750, calculated as:

  • (((the lesser of (Reduced Business Limit of $175,000 and active business income of $220,000))  × the federal income tax rate on qualifying small business income after the small business deduction of 9%) + ((taxable income of (active business income of $220,000 + passive investment income of $115,000) - (the lesser of (Reduced Business Limit of $175,000 and active business income of $220,000))) × the federal general corporate income tax rates after the 10% abatement for income earned in a province of 15%)); or
  • (((the lesser of ($175,000 and $220,000))  × 9%) + ((($220,000 + $115,000) - (the lesser of ($175,000 and $220,000))) × 15%)); or
  • (($175,000  × 9%) + (($335,000 - $175,000) × 15%)); or
  • (($175,000  × 9%) + ($160,000 × 15%)); or
  • ($15,750 + $24,000).

I should have checked that the total income subject to tax was $335,000, calculated as (active business income of $220,000 + passive investment income of $115,000).


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