Question

If PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pre-tax income potentially exposed to?

1) No taxation
2) Single taxation
3) Double taxation
4) Triple taxation

Answer 1

MNO's pre-tax income could potentially be subject to double taxation, with taxes applied at both the corporate and individual shareholder levels when dividends are distributed.

Step-by-step explanation:

When PST Corporation is a shareholder of MNO Corporation, MNO's pre-tax income is potentially exposed to double taxation. The term double taxation typically refers to the situation where corporate income is taxed at two different levels. Initially, the income earned by MNO Corporation is taxed at the corporate level. Then, when these earnings are distributed to shareholders as dividends, they are taxed again at the individual level on the shareholders' personal income tax returns.

It is important to note that the structure of the corporation, the jurisdiction in which it operates, and the applicable tax laws and treaties can affect how double taxation is managed. In some cases, systems are in place to provide tax relief or credits to mitigate the impact of double taxation.