Inter-connected corporations and estate wind-up processes

Overview of Corporations as Shareholders: Modeling Complex Ownership Structures with Parent and Subsidiary Corporations

Corporation as a shareholder

Conquest supports the ability to model complex corporate structures, including scenarios where a parent corporation owns shares in a subsidiary corporation. This feature is particularly useful for modeling investment corporations that own operating companies, providing a comprehensive view of corporate ownership.

How to Add a Corporation as a Shareholder

• To include a corporation as a shareholder, ensure the plan contains at least two corporations that are not already designated as parent or child entities.
• Within the subsidiary corporation, navigate to the Corporation Structure card and select Add Shareholder. Once added, the parent corporation will be recognized as a shareholder across all share classes in the plan.

Dividends from Child to Parent Corporation

Dividends issued from a child corporation to a parent corporation are treated as dividends from a connected corporation, ensuring proper classification within corporate structures.

Corporation Tax – Schedule 3:
Schedule 3 is used to calculate the Part IV tax on dividends received from all Canadian corporations, whether “connected” or “non-connected.” For dividends from a connected corporation, the Part IV tax is calculated based on the pro-rata share of the dividend refund received by the dividend-paying corporation. This tax is then added to the total Part IV tax calculation on Schedule 3 – Part 1 and Part 2.

Where applicable, related tax adjustments are applied to the recipient corporation’s ERDTOH (Eligible Refundable Dividend Tax on Hand) and NERDTOH (Non-Eligible Refundable Dividend Tax on Hand). Additionally, any relevant GRIP (General Rate Income Pool) calculations are reflected on Schedule 53.

Associated Corporations

In the Associated Corporations section, corporations can be designated as "associated" in accordance with subsection 256(1) of the Income Tax Act. This feature allows for the inclusion of multiple groups of associated corporations within a plan, providing flexibility and accuracy in modeling corporate relationships.

Key Features:

• Small Business Deduction Limit: Associated corporations share a combined annual small business deduction limit, ensuring alignment with tax regulations.
• Pooled Investment Income: Aggregate investment income is pooled across associated corporations for calculating the grind on the small business limit, streamlining tax calculations and compliance.

Passive Income Business Limit Reduction for Associated Corporations

• We now support pooling the adjusted aggregate investment income of all associated corporations to calculate any applicable grind on the small business deduction limit. This ensures accurate determination of reductions stemming from passive income.
• The calculation is outlined in the corporate tax form Schedule 7 – Part 2 – Adjusted Aggregate Investment Income, facilitating precise tax reporting.

Other Assumptions

• When a corporation is added as a shareholder or designated as associated, it is assumed that the corporations share a common fiscal year-end.
• If the corporations do not already have matching fiscal year-ends, a notification will appear indicating the updated date. The most recent fiscal year-end can be modified within the Corporation Structure card, under the Corporation Details area.

Private corporation - 'Wind-up' estate option

The wind-up estate option models the full dissolution of a corporation at the last death, using a 100% Capital Dividend Account (CDA) solution and distributing remaining funds as taxable dividends to optimize RDTOH and dividend refunds. It also applies the allowable 164(6) capital loss on the terminal tax return, subject to stop-loss rules. This option adds flexibility for post-mortem estate strategies for private corporations.

Accessing the Wind-up option

To enable the wind-up feature for a corporation, navigate to the Corporation structure card under the Corporation details – Estate options tab.

The wind-up toggle is clearly identified within this section. Switching the toggle to Yes activates the wind-up option, which models a full wind-up of the corporation at the last death. This process incorporates a 100% CDA (Capital Dividend Account) solution with §164(6) capital loss carry-back, subject to stop-loss rules.

Wind-up steps and assumptions

Estate summary report

The Estate Summary Reports provide a comprehensive overview of the financial and tax implications of the corporate wind-up. Key components include:

1. Income Tax Payable (Client)
   Displays the income tax payable on the terminal T1 personal tax return, factoring in any allowable 164(6) capital loss carryback applied to reduce taxes on death.

2. T3 Trust Tax Payable (Client)
   Reflects the estate trust tax owing, including taxes on taxable dividends received by the estate as a result of the corporate wind-up.

3. Income Tax Payable (Corporation)
   Summarizes the corporate income tax due on the final T2 corporate tax return, accounting for:

   • Taxes from the disposition of corporate assets during the wind-up.
   • Net taxes after applying the maximum dividend refund available.