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CHAPTER 1:

Taxation Its Role in


Decision Making

Prepared by

Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint

Copyright 2016 McGraw-Hill Education Limited

CHAPTER ONE
Taxation Its Role in Decision Making
I.

Taxation and the Financial Decision Process


A. Taxation a Controllable Cost
B. Cash Flow after Tax

II. The Fundamental Income Tax Structure and its


Complexity
III. Conclusion
T
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I. Taxation and the


Financial Decision Process
Businesses are subject to many forms of taxation from:
Municipal, provincial, federal governments
Income tax is levied at the federal and provincial levels
It is the most significant form of taxation
Based on profits

I. Taxation and the


Financial Decision Process
Return on Investment measured by cash-flows.
Cash flows are after tax
Every decision has a tax impact,
That tax impact affects cash flows.

Ultimate Goal Maximization of shareholder wealth


decisions that:
Reduce, or
postpone the payment of tax.

will increase overall shareholder wealth.


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I. Taxation and the


Financial Decision Process
Decision-making process involves:
Identifying alternative courses of action and analyzing:
the short-range costs,
long-range costs, and
benefits for each alternative.

Amount and timing of tax payable can vary significantly


between alternatives.

I. Taxation and the


Financial Decision Process
Decision making process
Determine possible courses of action
Short-range
Costs and benefits

Long-range
Costs and benefits

Tax implications
of each
alternative.
Leads to improved cash flows and long-term maximization of value.

I. Taxation and the


Financial Decision Process
A. Taxation A Controllable cost
Considered a cost of doing business.
Similar to other relevant costs.

Decision makers must


Attempt to understand and
Control tax costs

Should be considered a Controllable cost.

I. Taxation and the


Financial Decision Process
B. Cash Flow after Tax:
All cash flow should be considered after tax.
Analysis cannot be of value without considering the tax
impact.
Positive after-tax cash flow is considered favourable.
Managers should consider alternatives that will
minimize tax.
Failure to take an after-tax approach:
May impose a permanently inefficient tax structure, or
May result in an unfavourable decisions that appeared
favourable on a pre-tax basis.
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I. Taxation and the


Financial Decision Process
Consider the cost of a 8% wage increase pre-tax value:
Employer:
Employee:
25% tax rate
45% tax rate
6% after tax cost 4.4% after tax value

The real cost to one party is different from the real


benefit to the other.

II. Fundamental Income Tax


Structure and its Complexity
Major variable in decision making:
1. Taxpayer three entities:
i. Individuals,
ii. Corporations, and
iii. Trusts.

2. Types of income:
i.
ii.
iii.
iv.

Business,
Property,
Employment, and
Capital Gains.

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II. Fundamental Income Tax


Structure and its Complexity
Major variable in decision making (contd):
3.

Business and
Investment
Structures:
i.
ii.
iii.
iv.

Proprietorship,
Corporation,
Partnership,
Limited
Partnership,
v. Joint Venture, and
vi. Income trusts.

4. Tax Jurisdictions:
i. Provincial,
ii. Federal, and
iii. Foreign.

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II. Fundamental Income Tax


Structure and its Complexity
Business Income
Alternative Structure

Partnership

Corporation

Joint
Venture

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Conclusion
Taxation is a major variable that must be included in all
financial decisions
Cannot be ignored simply because
it seems too complex.

Taxation as part of the formal


decision making process will
improve cash flows.

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