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CHAPTER 1

:
Taxation – Its Role in
Decision Making

Prepared by
Nathalie Johnstone
University of Saskatchewan

Electronic Presentations in Microsoft® PowerPoint®

Copyright © 2015 McGraw-Hill Ryerson, Limited.
1 All rights reserved.

2 . The Fundamental Income Tax Structure and its Complexity III. Conclusion T R U S r po r ate? Inco T ? Copyright © 2015 McGraw-Hill Ryerson. Cash Flow after Tax II.CHAPTER ONE Taxation – Its Role in Decision Making I. Taxation – a Controllable Cost B. Taxation and the Financial Decision Process A. All rights reserved. Limited.

and – business acquisitions and divestitures.I. Copyright © 2015 McGraw-Hill Ryerson. 3 . are all influenced by their tax treatments. All rights reserved. Limited. – wage and salary. • Business Decisions on: – the form of business. – raising of capital. Taxation and the Financial Decision Process • Has an important effect on all financial decisions.

– Every decision has a tax impact. or • postpone the payment of tax. • Return on Investment measured by cash-flows. – That tax impact affects cash flows. Limited.I. will increase overall shareholder wealth. Copyright © 2015 McGraw-Hill Ryerson. Taxation and the Financial Decision Process • Ultimate Goal – Maximization of shareholder wealth – decisions that: • Reduce. All rights reserved. 4 .

Taxation and the Financial Decision Process • Decision-making process involves: – Identifying alternative courses of action and analyzing: • the short-range costs. 5 . Limited.I. Copyright © 2015 McGraw-Hill Ryerson. All rights reserved. • Amount and timing of tax payable can vary significantly between alternatives. and • benefits for each alternative. • long-range costs.

Taxation and the Financial Decision Process Including taxation in the decision-making process leads to: – improved cash flows. All rights reserved. I. 6 . Limited. Copyright © 2015 McGraw-Hill Ryerson. and – the long-term maximization of shareholder wealth.

Limited. I. Copyright © 2015 McGraw-Hill Ryerson. Taxation and the Financial Decision Process Decision making process Determine possible courses of action Short-range Long-range Costs and benefits Costs and benefits Tax implications of each alternative. Leads to improved cash flows and long-term maximization of value. 7 . All rights reserved.

– Similar to other relevant costs. I. All rights reserved. – Decision makers must – Attempt to understand and – Control tax costs – Should be considered a Controllable cost. 8 . Copyright © 2015 McGraw-Hill Ryerson. Taxation and the Financial Decision Process Taxation – A Controllable cost – Considered a cost of doing business. Limited.

Copyright © 2015 McGraw-Hill Ryerson. Limited. I.  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.  Positive after-tax cash flow is considered favourable.  Analysis cannot be complete without considering the tax costs. Taxation and the Financial Decision Process  Cash Flow after Tax:  All cash flow should be considered after tax. All rights reserved.  Managers should consider alternatives that may minimize tax. 9 .

10 . Limited. 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. All rights reserved.4% after tax value The real cost to one party is different from the real benefit to the other. Copyright © 2015 McGraw-Hill Ryerson.

and iv. iii. Taxpayer – three entities: i. Fundamental Income Tax Structure and its Complexity Major variable in decision making: 1. ii. Employment. Copyright © 2015 McGraw-Hill Ryerson. Individuals. 2. All rights reserved. II. Limited. Business. 11 . Trusts. Property. and iii. Types of income: i. Capital Gains. Corporations. ii.

12 . Limited. ii. Federal. and vi. Limited Partnership. Forms of Business 4. iii. All rights reserved. Corporation. v. Joint Venture. Copyright © 2015 McGraw-Hill Ryerson. iv. i. Partnership. Income trusts. Fundamental Income Tax Structure and its Complexity Major variable in decision making (cont’d): 3. iii. Proprietorship. Tax Jurisdictions: Structures: i. and ii. II. Provincial. Foreign.

Limited. 13 . Fundamental Income Tax Structure and its Complexity Business Income Alternative Structure Partnership Joint Corporation Venture Copyright © 2015 McGraw-Hill Ryerson. All rights reserved. II.

Limited. 14 . All rights reserved. • Taxation as part of the formal decision making process will improve cash flows. Copyright © 2015 McGraw-Hill Ryerson.Conclusion • Taxation is a major variable that must be included in all financial decisions – Cannot be made in a vacuum.