C. F. Jordon Management Services has operated for the last 26 years in a northern province where the provincial income tax on corporate revenue is 6% per year. C. F. Jordon pays an average federal tax of 23% and reports taxable income of $7 million. Because of excessive labor cost increases, the president wants to move to another province to reduce the total tax burden. The new province may have to be willing to offer tax allowances or an interest-free grant for the first couple of years to attract the company. You are an engineer with the company and you are asked to do the following:

Question

(a) Determine the effective tax rate for C. F. Jordon.
(b) Estimate the provincial tax rate that would be necessary to reduce the overall effective tax rate by 10% per year.
(c) Determine what the new province would have to do financially for C. F. Jordon to move and to reduce its effective tax rate to 22% per year.

Answer 1

(a) Te = 0.06 + (1 – 0.06)(0.23)
= 0.2762

(b) Reduced Te = 0.9(0.2762)
= 0.2486

Set x = required provincial rate
0.2486 = x + (1 - x)(0.23)
x = 0.0186/0.77
= 0.0242 (2.42%)

(c) Since Te = 22% is lower than the current federal rate of 23%, no provincial tax could be levied, plus an interest-free grant of 1% of TI, or $70,000, would have to be made available.