Managerial tax planning A Canadian perspective.doc

3managerial tax planning: a canadian perspectivedaniel b. thorntoncontents of diskette - 1999 updatethe text you are reading is contained in the microsoft word file read.me, which is on the diskette. the spreadsheet files mentioned in the text can be found in the directory a:text. most of them were prepared using lotus 1-2-3 version 2.0 but they can be read using almost any spreadsheet software. some were also done in excelmany of the problems mention additional spreadsheet files, which may be useful in getting started with the solutions to the problems. these additional spreadsheets are contained in the directory a:problems.spreadsheet files in the text directory (by chapter)chapter 2flows.wk1: computes the after tax accumulation per dollar invested in the following instruments: mm (equation 1), oc (equation 2), dpa (equation 4), rrsp or homemade pension (equation 9), and a tax exempt instrument (equation 10). if the tax rate in the nth year is different from the rates in the other years, the modification in equation (11) is made in the mm formula. plots the graphs in figure 3. the user inputs the interest rate and the tax rates. the spreadsheet does the rest.plan.wk1: compares the five types of investment vehicles at different times in ones career; generates figure 2. user can change the tax rates and the interest rates.chapter 3margtax.wk1: tax calculation with exact federal and provincial rates. can be used to ascertain an effective personal marginal tax rate on an additional dollar (or $1,000) of income. chapter 4c3irr.wk1: illustrates tax neutral depreciation and capital cost allowance (cca), reproducing table 3. calculates present value of after tax cash flows. user inputs tax rate and discount rate.karen.wk3: detailed tax calculation with numerous sources of income and deductions, dividend gross-up-and-credit, using exact federal and provincial tax rates. can be used as a template for several problems. chapter 4 appendixgamma.wk1: can be used to experiment with different cca rates and marginal tax rates, to see how the parameters affect the present value of cca tax shields under restrictive assumptions.chapter 5corpar.wk1 - computes an entrepreneurs after tax accumulation per dollar invested in a corporation and a p-firm (proprietorship, partnership or pass-through company), given corporate and personal tax rates; graphs the accumulations as in figures 1(a) and 1(b).corpdup.wk1 - computes the pretax corporate rate of return, rc that would be required to duplicate an after tax accumulation per dollar invested, which would arise from earning the pretax rate of return rp in a p-firm, given corporate and personal tax rates and a certain time to liquidation. implicit tax rates can be calculated by comparing the two pretax rates of return.ccpc.wk1 - gives after tax accumulations per dollar invested in a ccpc for active business income, sibi, portfolio dividends and capital gains; compares these with the accumulations that would result from similar investments held on personal account or through a p-firm; and graphs the accumulations (not reproduced in the chapter). user can change the part iv tax rate (33-1/3% at the time the diskette was updated in 1995; 25% when the text was written in 1993). chapter 7pref40.wk1: reproduces figure 2 except the arrows, which the user supplies. plots curves on which borrowers and lenders are indifferent between preferred shares and bonds, assuming the issuer makes the 40/0 election for advance corporation tax. issuers favor preferred shares in the area below their lines because the financing cost is cheaper. lenders favor preferred shares in the area above their lines because the after tax return is higher. for a feasible preferred share issue, one looks for a region where the two areas overlap, so at least one party is better off with preferred shares than bonds and the other is not worse off. figure 2 is predicated on a 10% pretax bond interest rate, but the user can change this parameter with one keystroke.pref25.wk1: reproduces figure 3 except the arrows. same as above, assuming the issuer makes the 25/10 election for advance corporation taxchapter 8compen.wk1 - the basis for figure 2 in chapter 8.chapter 9penass.wk1: the basis for the figures in the table on corporate pension arbitrage and the accompanying figure plotting net benefit per dollar arbitraged against the companys equity income inclusion rate. user inputs five values of t (marginal corporate tax rates). spreadsheet computes the instantaneous increases in wealth per dollar arbitraged (pareto improvements), as functions g (equity income inclusion rate). notice that the gains are independent of the interest rate. there is no interest rate involved in the calculations.inandout.xls: the basis for the tables on page 34 of chapter 9. how should you divided your debt and equity investments between inside your rrsp and outside your rrsp.chapter 10hdivs20.wk1, hdivs45.wk1: each spreadsheet computes the hnfactor described in the text, under the assumption that a liquidating dividend is paid at the end of the nth year. when hn is positive, debt is paretopreferred to equity. the first file assumes tc = 20% and the second one 45%; but you can choose any corporate tax rate you like. hn represents the pareto improvement per dollar financed, as at the nth year. the second round of tax, gdtp, is computed for taxable personal investors (ignoring surtaxes); it is forced to zero for the exempt investor.hcg20.wk1, hcg45.wk1: same as the two files above, except capital gains are realized by selling the shares at the end of the nth year. you do not have to force gtp to zero for an exempt investor; simply set tp = 0.debtdiv.wk1, debtcg.wk1: compute the break-even corporate tax rate, above which debt is paretopreferred to equity, given a pretax rate of return debt r and the marginal investors marginal tax rate. the first file assumes a liquidating dividend and the second one a capital gain at year n.chapter 12adtreaty.wk1: computes the advantage abroad per dollar invested in a treaty country (table 2), in com