To paraphrase the Canada Income Tax Act, Section 181.2, taxable capital (for companies that are not financial institutions) is the excess capital a company has in its possession that exceeds its investment allowance for the year. Taxable capital includes capital stock, retained earnings, long term debt, advances received, surpluses, reserves, etc. The exact definition can be found in the full text of the Income Tax Act available online at http://laws.justice.gc.ca/en/frame/cs/I-3.3//20090714/en or http://www.iijcan.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html. Historically, taxable capital has been used to identify and tax “large corporations” that hold excess cash. Because the tax on capital is often viewed as a punitive tax, Canada and its provinces are phasing it out. While some provinces still levy this tax, the federal government has administered a 0% rate beginning in 2008. Despite the 0% tax rate of taxable capital, taxable capital remains an important parameter because it is a determinant for tax deductions and tax […]
SR&ED
Individual IT consultants developing software for clients on a subcontract basis that also develop their own proprietary software regularly approach us at MCN. Quite often the proprietary software they develop is of an experimental nature and qualifies as SRED eligible work. The amounts owners-managers can claim is limited by their company’s structure, or the manner in which they compensate themselves. While the selection of a particular business structure as well as the choice of a given compensation arrangement are often seen as a tax planning exercise, SRED is rarely factored into the equation. Here are some things you may want to consider: Incorporate. As a Canadian Controlled Private Corporation (CCPC) your business can take advantage of substantially higher SRED return rates. As a CCPC, your SRED benefits may be refundable whereas as a sole proprietor you are only eligible for a non-refundable tax credit. Pay yourself a salary. In 2008, an […]
“Your third SR&ED claim has to be less than the second claim, but more than the first….” “You aren’t supposed to claim all of your SR&ED eligible work in the first year….” “If my first claim is audited, they won’t accept any subsequent claims….” Over the years, we have heard all sorts of different reasons as to why companies have had their SR&ED claims audited. However, in our experience, it is safe to say that these arcane reasons are not why a claim is audited. MCN consultants have attended dozens of SR&ED audits, and have had the chance to ask CRA reviewers why claims are audited. Consistently they respond with the following answers: “The technical report did not demonstrate a good understanding of SR&ED eligible work….” “There were some mistakes or misunderstandings in the financial components….” “Every year a certain number of clients are selected for audit at random….” The […]