Tax Planning for Corporations
Generally, the benefits and drawbacks of a corporation investing in flow-through shares are similar to those of an individual doing so.
As described in the prospectus, when the limited partnership allocates CDE to a limited partner, the limited partner will be entitled to add the amount allocated to its "cumulative CDE account". A corporate taxpayer with a balance in its cumulative CDE account can use, at the taxpayer’s option, annually up to 30% of that balance to reduce its taxable income in a given year on a declining balance basis. Similarly, when the limited partnership allocates CEE to a limited partner, the limited partner will be entitled to add the amount allocated to its "cumulative CEE account". A taxpayer with a balance in its cumulative CEE account can use, at the taxpayer’s option, up to 100% of that balance in the year of allocation, and carry that balance forward for use in the next or future years. An amount can be carried forward in a cumulative CEE or CDE account indefinitely and will not disappear when the taxpayer sells its limited partnership units.
When the limited partnership units or any mutual fund or other corporation shares received in exchange for the limited partnership units are sold, the taxpayer will realize a capital gain equal to the sale price of the units or shares, as the case may be, less the adjusted cost base thereof and any costs of disposal. Half of any such capital gain will be taxable to a corporate taxpayer and the other half will be added to the corporation's capital dividend account, which can be paid out to Canadian resident shareholders tax free.
| || |
Tax Planning Option For British Columbia Corporations
Using a $25,000 Investment Example
For example, consider a British Columbia corporation with income in 2012
in excess of the small business limit. Such income would otherwise be
subject to tax at a combined federal and B.C. rate of 25%. The
corporation might invest $25,000 in limited partnership units and have
$3,500 in CEE and $21,500 in CDE that year. It would then be entitled to
deduct the entire $3,500 balance in its cumulative CEE account from its
income in 2012, thereby generating tax savings of $875. It would also
be entitled to deduct $6,450 of the $21,500 balance in its cumulative
CDE account from its income in 2012, thereby generating tax savings of
$1,613. The remaining $15,050 in its cumulative CDE account could be
deducted in 2013 and beyond, leading to further tax savings of $3,763.
Total tax savings in this scenario would be $6,251. The actual benefit
realized by a corporation will accrue over a number of years (based on
2012 tax rates) and depend on the applicable tax rates in the years the
deductions are claimed. The actual benefit will also be lower to the
extent a corporation's income in the year the deductions are claimed is
less than the small business limit.
For investment examples related to other provinces, please scroll down.
There are other ways a corporation could reduce its taxable income, such as by paying additional salary to its shareholder-manager(s). Also, there may be negative tax consequences to a corporation holding too many investment assets. In particular, this may be a problem if there is a possibility that an owner-manager might sell the business in the foreseeable future by way of a share sale. Both of these issues amongst other things should be discussed with the corporation's tax advisor before investing in units of the limited partnership.
As with all investment decisions, the decision to invest in a resource limited partnership should be based primarily on the merits of the investment rather than on the expected tax benefits.
Provincial Tax Planning Examples
To download tax examples specific to your province please select your province from the examples below:
The information on this page is not to be considered tax advice. Maple Leaf reminds you that each individual's tax and investment planning situation is unique and professional advice should always be received from a qualified tax and/or investment advisor. We strongly recommend that you consult with your tax advisor to determine the optimal use of these tax deductions as well as the impact to you, if any, with respect to either alternative minimum tax or cumulative net investment losses.
About Energy Income
Looking for your Tax Slip?
Maple Leaf T5013A Tax Slips (or RL-15 Tax Slips for Quebec Residents) are mailed to investors directly from their investment dealers back office on or before March 31st of each tax reporting year. If you require a reprint of your Tax Slip, please
contact your investment dealers office and have them contact their back
office for a reprint of your slip.
More on Tax Reporting