Assignment task:
AP 20-9 (Taxation of Foreign Affiliate Dividends)
CTP is a Canadian public corporation that owns 15% of the shares of FTP, a corporation that was created in a foreign country. During the taxation year ending December 31, 2021, FTP earns $20,000 in investment income, $70,000 from an active business, and $20,000 of capital gains from the sale of investments.
In early 2022, FTP distributes all of its 2021 after-tax income as a dividend proportionately to all of its shareholders. FTP has no income in 2022.
In both 2021 and 2022, assume that CTP is subject to a Canadian federal income tax rate of 25%.
In the following six cases the information above is modified to some degree with additional or alter native assumptions that principally address the Canadian income tax impact of dividends received by residents of Canada from non-resident corporations.
Required: Provide the information that is requested in each of the following cases.
Case 1- FTP is a foreign affiliate (FA) of CTP but not a controlled foreign affiliate (CFA). Assume that it is located in a country that does not have an income tax treaty or TIEA with Canada, that this country does not assess income taxes on corporations and does not assess withholding taxes on dividend payments to non-residents. What are the income tax consequences for CTP resulting from its investment in FTP for 2021 and 2022? Include the increase in net income and taxable income and the total federal income tax payable for both years in your solution.
Case 2 Assume the same facts as in Case 1, except that FTP is a CFA of CTP. How would the income tax consequences for CTP differ from the income tax consequences described in Case 1 for 2021 and 2022?
Case 3 Assume the same facts as in Case 1, except that CTP does not own sufficient shares such that FTP is not a foreign affiliate. How would the income tax consequences for CTP differ from the income tax consequences described in Case 1 for 2021 and 2022?
Case 4 Assume the same facts as in Case 1, except that FTP is located in a country that has an income tax treaty with Canada. How would the income tax consequences for CTP differ from the income tax consequences described in Case 1 for 2021 and 2022?
Case 5 FTP is an FA but not a CFA of CTP. Assume that FTP is located in a country that has an income tax treaty with Canada, that this country charges income taxes on active business income at a rate of 10% and does not charge any withholding tax on dividend payments to non-residents. The income taxes paid by FTP in the foreign country total $7,000 [(10%) ($70,000)]. What are the income tax consequences for CTP resulting from its investment in FTP for its 2021 and 2022 taxation years?
Case 6 Assume the same facts as in Case 5, except that the foreign country levies the 10% income tax on all of FTP's 2021 income. This income tax would total $11,000 (10%) ($110,000)]. In addition, a further 8% withholding tax of $7,920 [(8%) ($110,000-$11,000)] was charged on the dividend paid in 2022. The resulting dividend payment was $91,080 ($110,000-$11,000-$7,920). What are the income tax consequences for CTP for its 2021 and 2022 taxation years?