Capital Tax - Numerical Example

Bulletin 3016
Published: March 2004
Content last reviewed: November 2010
ISBN: 0-7794-2161-2 (PDF), 978-1-4249-3150-7 (HTML)

Publication Archived

Notice to the reader: Capital Tax was fully eliminated on July 1, 2010. It was eliminated effective January 1, 2007 for Ontario corporations primarily engaged in manufacturing or resource activities.

This publication was archived and kept for historical purposes. Use caution when you refer to it, since it reflects the law in force at the time it was released and may no longer apply.

References: Part III of the Corporations Tax Act (Ontario) and Interpretation Bulletins 3011, 3012, 3013, 3015 and 3017.

Application

This bulletin replaces Interpretation Bulletin Number L-11 originally published January 22, 1979.

The bulletin sets out the policy of the Corporations Tax Branch regarding the calculation of capital tax. It is provided as a guide to taxpayers and is not intended as a substitute for the relevant legislation. The example applies to a hypothetical “ordinary” Ontario corporation with share capital, such as a manufacturer, wholesaler, retailer or service corporation. It does not apply to non-resident corporations, financial institutions or exempt corporations. The example does not demonstrate the $5,000,000 capital deduction announced in the May 9, 2001 Ontario Budget. Any references to legislation are to the provisions of the Corporations Tax Act (Ontario) (CTA) and its Regulations, unless otherwise noted.

Introduction

This bulletin provides a numerical example to illustrate the method of calculating Paid-Up Capital (PUC), Taxable Paid-Up Capital (TPUC) and Capital Tax as outlined in Interpretation Bulletins 3011, 3012, 3013, 3015 and 3017.

As described in section 59, the PUC of a corporation shall be measured as at the close of its taxation year. Generally, the balance sheet of a corporation is used as the base on which the items of PUC are measured. From PUC, certain deductions are allowed in the calculation of TPUC. Capital tax is then computed at the rate of 3/10 of 1% of TPUC.

Facts

In this example, ABC Inc. is preparing the capital tax portion of its CT23 Corporations Tax Return for its taxation year ended December 31, 2000. ABC Inc. operates principally in Ontario, but has permanent establishments in other provinces. ABC’s Ontario provincial allocation portion is 62.7% according to the applicable formula in Regulation 183, section 320 [Refer to Interpretation Bulletin 3008]. To demonstrate the computation of capital tax, the following information is provided: the balance sheet of ABC Inc., certain analytical notes identifying relevant amounts for accounting and capital tax purposes, and tables showing the calculation of PUC, TPUC and capital tax.

ABC INC.
Balance Sheet
as at December 31, 2000
  Assets
Current assets    
Cash and term deposits Note 1 118,800
Accounts Receivable Note 2 1,745,400
Inventories Note 3 2,494,700
Prepaid rent expense Note 4 43,900
    4,402,800
Investments Note 5 1,981,000
Fixed assets Note 6 9,094,600
Goodwill Note 7 144,000
TOTAL ASSETS   $15,622,400
  Liabilities and Shareholders Equity
Current liabilities    
Bank loan   805,000
Accounts payable Note 8 2,185,100
Income taxes payable   186,200
Current portion of long-term debt Note 9 749,200
    3,925,500
Long-term debt Note 9 7,930,700
Future income taxes   443,600
    12,299,800
Shareholders equity    
Share capital   1,200,000
Retained earnings   2,122,600
    3,322,600
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY   $ 15,622,400
 

Analytical Notes

  Accounting Amounts Capital Tax Amounts
1. Cash and term deposits    
  Petty cash $           200  
  Current account: Cash/(overdraft) (a) (85,000) $      85,000
  Bank term deposits       203,600  
    $    118,800  
  (a) Cash/(overdraft): Bank reconciliation    
  Cash/(overdraft) per bank statement $  ( 35,000) $      35,000
  + outstanding cheques ( 105,000)  
  - outstanding deposits         55,000  
  Cash/(overdraft) per books $    ( 85,000) $      85,000
       
2. Accounts Receivable    
  Trade receivables $ 1,228,000  
  Less: Reserve based on specific accounts      189,200  
    1,038,800  
  Advance to customer: LDK Canada Ltd.      706,600 $      706,600
    $ 1,745,400  
3. Inventories    
  Materials, work-in-process, finished goods $ 2,545,600  
  Less: General reserve @ 2% of gross inventory        50,900 $        50,900
    $ 2,494,700  
4. Prepaid Rent Expense    
  Rent is paid to BLT Inc., a taxable Canadian Corporation   $        43,900
       
5. Investments    
  Investment in Shares, at cost (market $1,506,600) $ 1,005,200 $ 1,005,200
  Investment in wholly-owned subsidiary, at equity 225,800  
  (Cost $1,200,000, less equity   $ 1,200,000
  reduction of $ 974,200)   $     974,200
  15% interest XYZ Partnership, at cost    
    750,000 $   750,000
  (financial statements below)                   
    $ 1,981,000  
 
  XYZ PARTNERSHIP
  Balance sheet at November 30, 2000
    ASSETS     LIABILITIES  
  Cash 200,000   Accounts payable 710,000  
  Building 10,039,400   Mortgage payable 10,506,000 $ 10,506,000
  Land     5,976,600   Partners' capital     5,000,000  
    $ 16,216,000     $ 16,216,000 $ 16,216,000
 

The partnership was formed in November 2000. There are no differences between accounting and tax treatment of transactions during the current start-up phase. Business operations are expected to commence in 2001.

6. Fixed Assets    
  Land $  634,200  $   634,200
  Building and Equipment 14,937,700  
    15,571,900  
  Less: Accumulated Depreciation   6,477,300  
    $ 9,094,600 $ 9,094,600
  Ontario Undepreciated Capital Cost (UCC) as of December 31, 2000 is $ 3,478,900.   $ 3,478,900
7. Goodwill    
  Goodwill, at cost $ 160,000  
  Less: Accumulated Amortization (10% straight-line)     (16,000)      $16,000
      $ 144,000  
  Goodwill was acquired during the year. The goodwill is being given treatment as an Eligible Capital Expenditure for tax purposes. The CECA deduction for the year is $ 8,400.        $ 8,400
8. Accounts Payable    
  Trade payables - inventory (a)    $ 1,110,900  
  Other payables - supplies and services (b)       1,074,200  
    $ 2,185,100  
  (a) Trade payables - include amounts totalling $ 120,300 due to the wholly-owned subsidiary that have been outstanding longer than 120 days.   $ 120,300
  (b) Other payables - includes an estimate of warranty claims expected to be made in the future in the amount of $100,000 and an estimate of $ 150,000 for damages in a lawsuit against ABC Inc.   $ 100,000
        $ 150,000
9. Long Term Debt    
  8.3%    Convertable debentures due June 6, 2003 $ 4,200,000 $ 4,200,000
  3.85%   Term loan due April 27, 2002 3,355,300 $ 3,355,300
  5.7%     Mortgage due October 12, 2002   1,124,600 $ 1,124,600
    8,679,900  
    Less: Current Position    749,200  
    $ 7,930,700  

Paid-Up Capital

(Section 61, Interpretation Bulletins 3011, 3012, 3013 and 3017)

Paid-up Capital Item Explanation/Source $ Amount
Paid up capital stock Per balance sheet   $ 1,200,000
Retained earnings (if deficit, deduct) Per balance sheet   2,122,600
Loans & advances Loan per note 9: $3,355,300  
  Inter-company trade payable per note 8(a): 120300 3,475,600
Bank loans Loan per balance sheet: 805,000  
  Overdraft per note 1(a): 35,000 840,000
Bonds and debentures payable Per note 9   4,200,000
Mortgages payable Per note 9   1,124,600
Deferred credits Future income taxes per balance sheet   443,600
Contingent, investment, Inventory reserve per note 3: $ 50,900  
inventory & similar reserves Equity reduction per note 5: 974,200  
[Total asset reference (i), below] Estimated warranty per note 8(b): 100,000  
  Accrued damages per note 8(b): 150,000 1,275,100
Share of partnership(s) and joint venture(s) paid-up capital XYZ Partnership mortgage payable per note 5:    
  $10,506,000 × 15%   1,575,900
Sub-total     16,257,400
Amounts deducted for Fixed assets per note 6: $ 9,094,600  
income tax purposes in - land included therein: 634,200  
excess of amounts booked - Ontario UCC per note 6: 3,478,900  
  (A) 4,981,500  
  Amortization per note 7: 16,000  
  - CECA deduction per note 7: 8,400  
[Total asset reference (ii), below] (B) 7,600 -4,973,900
  (A) - (B)    
Paid-Up Capital     $11,283,500

Eligible Investments

(Subsections 62(1), (1.1), (1.2), (7), (8) and Interpretation Bulletin 3015)

Eligible Investment Item Explanation/Source $ Amount
Shares in other corporations Investments per note 5:    
  Shares: $1,005,200  
  Wholly-owned subsidiary: 1,200,000 $ 2,205,200
Loans and advances to corporations Advance to customer per note 2: $ 706,600  
  Prepaid rent expense per note 4: 43,900 750,500
Total Eligible Investments     $2,955,700

Total Assets

(Subsections 62(3), 62(7), 62(8) and Interpretation Bulletin 3015)

Total asset item Explanation/Source $ Amount
Total assets per balance sheet Per balance sheet   $ 15,622,400
Mortgages or other liabilities deducted from assets Book overdraft per note 1   85,000
Share of partnership(s) or joint venture(s) total assets XYZ Partnership total assets per note 5: $16,216,000 × 15%   2,432,400
Subtract: Investment in partnership(s)/joint venture(s) 15% interest in XYZ Partnership per note 5   - 750,000
Sub-total     17,389,800
Amounts in (i), See Paid-Up Capital Table, Contingent, investment, inventory & similar reserves Inventory reserve, note 3: $ 50,900  
  Equity reduction, note 5: 974,200 1,025,100
Subtract: Amounts in (ii), Paid-Up Capital Table, Amounts deducted for income tax purposes in excess of amounts booked Same as Paid-Up Capital amount   - 4,973,900
Total assets     $13,441,000

Calculation of Capital Tax

Paid-Up Capital, above   $11,283,500
     
Less: Investment Allowance    
Eligible Investments, above $ 2,955,700 × $ 11,283,500 2,481,262
Total Assets, above $ 13,441,000  
     
Capital deduction (does not apply to taxation years ending in 2000) NIL
     
Taxable paid-up capital   $  8,802,238
Capital tax thereon @ .3% × 62.7% Ontario allocation factor $      16,557
 
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