Tax Midterm

Chapter 1: Taxation- Its role in decision making

Taxation and the financial decision process * Taxation is a controllable cost * Tax cost = cost of doing business * Analyzed to determine which actions or activities have a greater/lesser impact on the resulting tax cost * Each alternative= different impact on the amount of tax and the timing of the payment of tax * Even if marketing decision = direct effect on the long term tax cost of the firm → thus on profits and value * Tax= important on any decision making * Tax costs are relevant when alternative strategies are being considered * Cash flow (CF) exists only on an after-tax basis * All CF= after tax * NPV compared and ranked * Shows the actual value of the individual/corporation * Analysis can’t be of value unless the real tax impact is included * Alternative action to minimize the tax impact * After tax = % of interest x (1 – Tax rate) * 5% dividend on the equity of a “public corporation” = not deductible to the business → after tax = 5% (real cost) * Net value to individual investor subject to 45% tax rate = 3.6% (after applying dividend tax credit)

The fundamental income tax structure and its complexity

Taxpayers * Individuals * Corporations * Trusts | Business & investment structures * Proprietorship * Corporation * Partnership * Limited partnership * Joint venture * Income trusts | Types of income * Employment * Business * Property * Capital gain * Others | Tax jurisdictions * Provincial * Federal * Foreign | * Important = interaction among these major variables * When variables change = alternative tax structures are created * Equity capital is serviced by DIVIDENDS * Not deductible by the payer *