49 Part I corporate tax – the ‘lesser of’ calculations
Sam Newton
When calculating Part I and Part IV tax you will encounter a series of ‘lesser of’ calculations. Here is a quick walkthrough of the basic elements of these calculations (Note, these are simplified, refer to the ITA for further details):
Small Business Deduction (SBD) is 19% of the lesser of the following:
- Canadian Active Business Income – 125(1)(a)
- Taxable Income less taxed foreign income – 125(1)(b)
- The corporation’s business limit for the year – 125(1)(c)
Additional Refundable Tax (ART) is 10 2/3% of the lesser of the following:
- Aggregate Investment Income – 123.3(a)
- Taxable income less the amount eligible for the SBD – 123.3(b)
General Rate Reduction (GRR)
Although not a ‘lesser of’ calculation, it is important to understand that the GRR (13%) will typically be applied to taxable income not impacted by the SBD or ART. i.e. you would take your taxable income and deduct the amount eligible for the SBD and ART, the remaining amount would be eligible for the GRR.
Foreign Tax Credits (FTC)
The foreign tax credit calculations are complicated, and you are encouraged to review ITA 126(1) and (2) for further details. The basic calculations, however, are as follows:
- Business FTC is the lesser of
- Foreign income tax paid on foreign business income – 126(2)(a)
- Tax that would be (“otherwise”) payable in Canada on that foreign business income – 126(2)(b) & 126(2.1)
- Basic federal tax less the GRR – 126(2)(c)
- Non-Business FTC is the lesser of
- Foreign income tax paid on foreign non-business income – 126(1)(a)
- Tax that would be (“otherwise”) payable in Canada on that foreign non-business income – 126(1)(b)
Here is a brief video walkthrough of these calculations
March, 2020
