Glenn Feltham


The optimal payment of corporate income tax installments

This thesis examines the taxpayer's decision as to the amount and timing of the payment of federal corporate income tax instalments (also known as estimated taxes) for Canadian corporations. The corporation's payment decision is made under uncertainty as instalment payments must normally be paid throughout the year even though an important determinant of the amount owing in instalments is the corporation's tax liability for the year. The problem is formulated as one of dynamic optimization under uncertainty in which that uncertainty is reduced as the financial results for the year become known.

The primary contribution of this thesis is the development of the First theory for any country of the optimal pattern of tax instalment payments. A further contribution, which relates more to the Canadian context, is the mathematical formulation of features of the law which were previously only known through general description and numerical example. As the objective function of the corporation is non-differentiable, analytic optimization methods used previously in static models of decision-making are extended to dynamic optimization under uncertainty. To demonstrate applicability of the results to tax practice, numerical optimization using linear programming is also used to solve the optimization problem. Finally, this thesis contributes to tax policy through the development of a methodology to incorporate instalment structures into marginal effective tax rate analysis and average effective tax rate analysis.