Fluent Essays

Advance Canadian Corporate Tax  expert are required AP 5 Chapter 13, AP 5 Kristie and BCD Inc. Shareholder Loans Benefits on share purchase loan: Bonafide arrangment have been outlined , repayment of loan terms are reasonable,this is an exception under 15(2) Interest Benefit under ITA 80.4 should be calculated as follows: Page 358 edition 141 YEAR 1 Total benefit ((150000*0.3)*275/365)) 3390 Prescribed rate Less: Actual interest paid 2260 Loan rate Tax benefit 1130 T4 Slip YEAR 2 Total benefit (125000*0.3) 3750 Less: Actual interest paid 2500 Tax benefit 1250 T4 Slip YEAR 3 Total benefit (10000*0.3) 3000 Less: Actual interest paid 2000 Tax benefit 1000 T4 Slip *The loan was made for investment purposes therfore… the actual interest is deductible t1sch4 Benefits on the other loan: loan on personal items is not an exception under 15(2) the full amount will be included in income after it has been outstanding for 1 year In year 3, she will be able to deduct the amount she is pay which 25,000 she repaid under ITA(1)(j) Sheet1 Assess the situation Chapter 15- Problem 1 Karen, a resident of White Rock.. *Read through the study guide page xxv - Problem-Solving Process for Tax - A case analysis Framework *Note: 2019 Capital Gains Deduction limit is $866,912 we will use this number in the course. 2020 Capital Gains Deduction limit is $883,384 indexed each year. Assess the situation STEP 1: Draw a diagram identyfing all stakeholders eg. Corporate organization charts Karen (Cdn resident/CGE available) FMV $1.8 MIL related, affiliated 100\% ACB/PUC $1,000 Distribution business CYBER CORP CCPC 25\% connected Others Distribution business 100\% ABAs after business assests CYBER 75\% SUB CCPC Dec 31 year end STEP 2: Identify the relationships amoung the stakeholders, e.g, related, affiliated, associated, connected * review chapter 12 paragraphs 12,170 - 12,200, these paragraphs review the Associated Corporation rules, Relationships Involving Corporations and the concept of control) karen controls cyber Corp so she is related and affiliated Cyber corp is connect to cyber sub ( 25\% ownership ) STEP 3: Identify the profile of each stakeholder e.g. tax features, risk profile Karen 1. Karen is individual , has LCGE (Lifetime capital Gain excemption) available 2.She is Candian residence through our this year Cyber Corp FMV is 1.8 mil. Paid Up Capital PUC $1000 Vaule of the assest have reamined stable over the past three years Marketable securities not part of active business. Own 25\% of Sub. Cyber Sub Uses all of its assests in active business STEP 4: Understand the decision maker and their objectives Karen is the decision maker detemine is she can use LCGE Potentially sell the shares of cyber Corp what action can be taken to rectify the problem that the share do not qualify as QSBC shares STEP 5: Identify the relevant past transaction/events or planned future transactions/events and create a timeline 2003 incorporated Past three years - Vaules have been stable Potentially goting to sell shares of Cyber Corp that she owned for more than 24 months Identify the Issues Identify the Issues 1.       Identify all of the major tax issues and any non-tax issues Is She elligble to use the LCGE? Are the shares is QSBC Is Cyber Corp a SBC Has the holding period met ? Does Cyber Corp meet the basic asses test 2.       Identify missing information or assumptions made assumed that she has not used any of her LCGE in the past Analyze the Major Issues Analyze the Major Issues 1.       Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act Does Karen qualify to claim the CGE? YES she qualifies , she is candiain resident and it is assumed she has not use her LCGE in the past Are the shares of Cyber Corp QSBC shares? These three test have to be met 1. SBC Test 2.Holding Period Test 3.The basic assest of modified assest test ( if (BAT) basic assest test is not met (1) SBC Test AT THE time of sale it must be SBC Cyber Corp is a ccpc and shares owned by canadian resident Cyber corp is a SBC AS all assests used in AB (active Business ) Is Cyber Corp a small business corporation? SBC is defined as a CCPC Having 90\% or more of the FMV of its assests either used principally in active business on 50\% or more of the time in Canada, or share of a connected SBC , OR Comination Cyber Corp does not meet the definition as it does not meet the 90\% test , since the marketable securities are not active business assests SO Cyber Corp is not an SBC (2) Holding Period Test This test is met because she has owend the share since 2003 which is grater than 24 months (3) Basic Asset Test in order to meet this test , Cyber corp has to have more than 50\% of the FMV Of the assests used in active business that is carried on primarly in canada 24 months preceding the sale This test is met 2.       Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format Do the shares of Cyber Corp meet the 90\% and 50\% tests? Small Business Corporation Test FMV cash 4,500 Markeable Securities (passive) 700,000 24.5\% Account Receivable 780,000 Inventory 920,000 Prepaid Expenses 1,000 Investment in Cyber Sub 100,000 3.5\% Fixed Assests 150,000 GoodWill 200,000 2,855,500 100\% Active Business Assets 72.0\% Shares of Connected SBC 3.5\% 75.5\% 3.       Identify risks including missing information, assumptions and uncertain research positions The active business assests in Cyber corp are below the 90\% level required assume Karen has not used the CGE Assume that karen has not claimed on ABIL ( ACTIVE BUSINESS INVESTMENT LOSSES ) 4.       Reach a conclusion on each issue See test abobe for conculsion on each test 5.       Evaluate the strengths/weaknesses/risks of your conclusions No strenght or weakness in my opion somehow white and black whether or not the test is met. Analyze the Major Issues cont If the shares of Cyber Corp are not QSBC shares then determine if there are steps that could be taken to have them qualify 1.       Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act Cyber Corp has to meet the 90\% threshold of active business assets to active this they need to sell appox. $ 460 k of investments or they could set up a holding co and transfer the investments to avoid CG on the sale of securities 2.       Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format How much in marketable securities need to be sold to purify Cyber Corp? total assests including 2,155,500 of active business assest and Cyber sub shares and divide that by the 90\% ( 2,155,000/90\%) 2,395,000 less: Active business assets and the subs shares 2,155,500 Maximum value 239,500 currrent Marketable securities 700,000 maximum value of the securites - 239,500 Sell marketable securities 460,500 Results from Purification POD ( Process of disposition) on sale 1,800,000 ACB Of shares 1,000 Capital Gain ( CG ) 1,799,000 TCG ( Taxable capital Gain) 899,500 Life time capital gain exemption (LCGE) 441,692 Value of the exmption in 2020 is 883384 multipy by inclusion rate Net TCG 457,808 Tax at 50\% ( assumed) 228,904 Tax savings from purification 220,846 3.       Identify risks including missing information, assumptions and uncertain research positions Be cautious of the calcutation of securities to dispose of due to fluctuation vaules of the other assets , ie Goodwill the fair market of the share can be falcuate 4.       Reach a conclusion based on your analysis of each major issue it is also possible to use cash to paydwon debt or sell securities and use that cash to pay down debts. if capital losses are availabe in the corp , it may be benificial to sell securities to shelter the CG on sale. 5. Evaluate the strengths/weaknesses/risks of your conclusions No risk in the proposed solution Advise&Recommend Advise the decision maker, integrating your conclusions on each of the issues with their objectives, giving priority to the most important issues we would advis them to sell that amount of securities , pay the debts down and they will meet all pre test and can use her CGE Which was her objective PART A CH 13 AP 9 Mrs. Edwards… *(Federal 2020 Personal Tax Rates on TB Page 537) *(Provincial 2019 Personal Tax Rates TB Page 541) input cells *Fed & Prov combined Corporate Tax Rate is 13\% PART A - Calculate the tax she would pay personally, then calculate tax the corp would pay plus her tax on a $50K salary Tax on income earned as a proprietorship Business Income A 210000 T2125 Tax 77185 Tax credit(given) -4600 Net Tax Payable B 72585 After-Tax Cash (A-B) 137415 Tax on Income earned through a Corporation when the company pays her a $50K salary Business Income 210000 Salary paid (50k) -50000 Taxable Income C 160000 Corprate tax Payable (38\%-10\%-19\%+4\%) 13\% Net Tax Payable D 20800 After Tax Retained Earnings (C-D) 139200 Tax on the $50k salary paid to her salary E 50000 Tax on the $50k salary paid to her 12610 tax credit -4600 Net Tax Payable F 8010 After-Tax Cash (E-F) 41990 Comparison of Alternatives Tax Cash Personal Tax paid now on$ 210000 G 72585 137415 Tax if Incorporated: corporate tax 20800 139200 Personal tax on salary 8010 41990 H 28810 181190 Annual cash-flow advantage from tax deferral (G-H) (H-G) 43775 43775 PART B PART B - Determine how much Personal Tax will be deferred each year by keeping the after-tax retained earnings in the corporation Salary 50000 Dividend (balance of RE) 139200 Gross up (15\%) 20880 Taxable Income 210080 Tax 77222 Tax Credits (given) -4600 Dividend Tax Credit -20880 Total Tax Payable 51742 Less: Tax Paid on Salary (in Part A) -8010 Total Tax Deferred on Dividend 43732 PART C PART C - Calculate the income tax cost or savings for her if she incorporates Comparison: Personal Tax on $210000 72585 Tax if incorporated: Corporate Tax 20800 Personal Tax on $50000 8010 Personal Tax on deferred dividend 43732 72542 Tax cost (savings) of Incorporating -43 PART D PART D - Discuss ways can we implement a plan to effectively Income Split Issue shares to family members ( exercise caution) watch for the implication of tax on split income ( TOSI) RE: age of famaily memebers,must work> 20 hrs per week (18-24 yrs old) family memebers can invest in the company and purchasing shares pay dividends on shares issued to trigger RDTOH refunds advantage if family owns the shares: Qualifyed samll business corporation shares (QSBC), multiply access to the lifetime captial gain exemption (LCGE) $ 883 K AP 5 Chapter 13, AP 5 Kristie and BCD Inc. Shareholder Loans Benefits on share purchase loan: Bonafide arrangment have been outlined , repayment of loan terms are reasonable,this is an exception under 15(2) Interest Benefit under ITA 80.4 should be calculated as follows: Page 358 edition 141 YEAR 1 Total benefit ((150000*0.3)*275/365)) 3390 Prescribed rate Less: Actual interest paid 2260 Loan rate Tax benefit 1130 T4 Slip YEAR 2 Total benefit (125000*0.3) 3750 Less: Actual interest paid 2500 Tax benefit 1250 T4 Slip YEAR 3 Total benefit (10000*0.3) 3000 Less: Actual interest paid 2000 Tax benefit 1000 T4 Slip *The loan was made for investment purposes therfore… the actual interest is deductible t1sch4 Benefits on the other loan: loan on personal items is not an exception under 15(2) the full amount will be included in income after it has been outstanding for 1 year In year 3, she will be able to deduct the amount she is pay which 25,000 she repaid under ITA(1)(j) Sheet1 Sheet1 Chapter 13, AP 13 Samantha Greene Purchase of a Business, Compensation *(Federal 2020 Personal Tax Rates on TB Page 537) *(Provincial 2020 Personal Tax Rates TB Page 541) input cells *Fed & Prov combined Corporate Tax Rate is 13\% PART I Proprietorship 2002 Green Dental Purchase Personally Incorporate Business income A 400,000.00 400000 CPP DEDUCTION ( max 2020 -2898 PRSP Deduction ( max 2020 B -27230 Taxable Income 369872 400000 tax 156947 52000 CPP (Both portion 5796 basic personal amount (15\%federal+10\% prov. (12298*0.25 -3057 reduced BPA Pg 544 cPP (15\% fed+10\% prov. -725 Net Tax Payable C 158961 52000 After-Tax Cash (A-B-C) 213809 348000 Repay Debt -100000 -100000 Net Cash Available 113809 248000 PART II Incorporation Options All Salary All Dividends CORPORATION business incom 400,000.00 400000 Salary Note 1 -282159 CPP ( Company portion ) -2898 Taxable Income 114943 400000 tax at 13\% 14943 52000 After-Tax Cash 100000 348000 repayment of debt -100000 -100000 cash available 0 248000 SAMANTHA salary/dividened 282159 C 248000 Gross up at 15\% 37200 RSP Deduction max -27230 Taxable Income A 254929 285200 tax 99475 114611 (49644)+((285200-214369)*(0.33))+(29551)+((285200-214369)*(0.17)) cpp 2898 basic personal amount credit -3075 -3075 cpp -725 employment credit -311 dividend tax credit -37200 Net Tax Payable B 98263 D 74336 After-Tax Cash (A-B) 156666 (C-D) 173664 Note 1 - max salary required 100000 aftrer tax cashreqyired to pay the loan will give you pre tax income 114943 take 400000+cppmax to be remitted 397102 Salary required 282159 CONCLUSION: she should incorprate there is a significant after tax advantage she can use the additional cash to repay debt if she wanted to invest in PRSP WE WOULD pay her salary instead dividened if she wanted to collect CPP at retirment we would have to pay salay at least up to Yearly Maximum Pension earning