Capital Tax: Numerical Example

Interpretation Bulletin 3016R, March 2004

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 to 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, 3014 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 x 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 x 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

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	Calculation of Capital Tax
	Paid-Up Capital, above   $11,283,500       Less: Investment Allowance     Eligible Investments, above $ 2,955,700 x $ 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% x 62.7% Ontario allocation factor $      16,557

For More Information

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