Tax Law Questions

[Nnejad]

Some tax questions which would be useful to know:

 

What would a Canadian corporation pay on dividends from a Canadian corporation (not a trust)?

What would a US corporation pay on dividends from a US corporation?

- i know on preferred stocks, they pay taxes on only 15% of the interest.  But no clue on dividends

 

And then:

Let's say Berkshire Hathaway bought out Wells Fargo.  Would it have to pay taxes on the gains from its existing stake in Wells (what is currently its deferred tax liability)?  And would subsequent income earned at wells fargo have to pay a tax when its dividend'ed to the holding company?

 

[Uccmal]

Hi Nick, re: part 1 about dividends.  I searched high and low for the answer to this question but couldn't find it.  In Canada an individual pays an adjusted amount according to the dividend gross up calculation.  I am thinking that a corporation records it as income the same as any other income.  I have never seen any note to prove otherwise on any balance sheet I have read. 

 

Dont know about the US - however, I would say that the same applies given I see no evidence to the contrary.

 

Dont know about part ll of your question.

 

I did learn that if an individual in Canada can make up to 60000 from dividend income before paying any income taxes at all, providing that is ones only income stream.  Convenient information.  This is based on a personal exemption of about 40 k and the dividend gross up formula. 

[beerbaron]

And then:

Let's say Berkshire Hathaway bought out Wells Fargo.  Would it have to pay taxes on the gains from its existing stake in Wells (what is currently its deferred tax liability)?  And would subsequent income earned at wells fargo have to pay a tax when its dividend'ed to the holding company?

 

Maybe someone should verify my statement but that is what I understood from reading various financial reports. It hink it depends on the on the % of ownership Berkshire owns. Passed 50% and BRK would have to account it on the balance sheet, with minority interest as a liability. Passed 80%, the income gets sent to BRK and the taxes are paid on the holding level.

 

BeerBaron

 

 

[Nnejad]

Ya, this was difficult to find.  Here's what I got:

 

"Taxation of dividends is often used as justification for retaining earnings, or for performing a stock buyback, in which the company buys back stock, thereby increasing the value of the stock left outstanding. In contrast, corporate shareholders often do not pay tax on dividends because the tax regime is designed to tax corporate income (as opposed to individual income) only once. The shareholder will pay a tax on capital gains (which is often taxed at a lower rate than ordinary income) only when the shareholder chooses to sell the stock. If a holder of the stock chooses to not participate in the buyback, the price of the holder's shares should rise, but the tax on these gains is delayed until the actual sale of the shares."

 

I imagine its similar in Canada, but that's been impossible to find through google.

 

And then, I think what Baron said is correct.  I remember the whole issue with the ORH taxes and whether it was put to hold co or not.

 

I want to say that you do not pay the deferred liability tax on capital gains of a stock you buyback, because I don't remember any additional taxes by Fairfax for the ORH or NB buyouts.

[jollyjumper324]

I have a tax question which is probably quite a bit easier to answer than Nick's:

 

I followed Pabrai into Delta Financial Corp (DFC) in April 2007 and the company declared bankrupcy and was delisted in December.  I never claimed a capital loss, and I have the shares held at 0.00$ in my account.

 

Question:  Can I claim a capital loss now?  If so, how do I go about it?

 

I found some information online, but nothing detailed enough for me to use in practice.

 

Thanks!

 

-JJ

[Cardboard]

It has happened to me once before.  :-[

 

In Canada, what you have to do is to "give" the shares to your broker. There is a name for this, but I can't recall. Then you will be able to claim your capital loss in the year when it is completed. I assume it is similar in the U.S., but I could be wrong. In any case, your broker should be able to help.

 

Cardboard

[Rabbitisrich]

I have a tax question which is probably quite a bit easier to answer than Nick's:

 

I followed Pabrai into Delta Financial Corp (DFC) in April 2007 and the company declared bankrupcy and was delisted in December.  I never claimed a capital loss, and I have the shares held at 0.00$ in my account.

 

Question:  Can I claim a capital loss now?  If so, how do I go about it?

 

I found some information online, but nothing detailed enough for me to use in practice.

 

Thanks!

 

-JJ

 

 

 

Pabraiiiiiiiiii!!!!!!!

 

You can treat a worthless security as a sale for tax purposes.

 

http://www.irs.gov/publications/p17/ch14.html

[woodstove]

Cdn term is "Deed of Gift", I believe.  Broker should be able to provide form for it.

[jollyjumper324]

Thanks for the help guys!

 

I will talk to my broker.

 

-JJ

[jollyjumper324]

Oh, one more question!

 

Can I claim the fees I paid for the CFA as some kind of education expense or tuition?

 

-JJ

[Guest Bronco]

Didn't check any replies, so excuse if I am redundant.

 

BRK would not have to pay capital gains on its existing stake.

 

No dividend is taxes from a wholly owned subsidiary paid to parent.  There are different rules on the amount of what the IRS calls the dividends received deduction.  I will say that the "DRD" is 100% for dividends from subs.  Look at Form 1120, Schedule B (page 2 of the corporate tax returns) if interested.  Corps in general get at least a 70% deduction on dividends all the way to 100% for wholly owned.

 

Hope this is helpful.