Reference no: EM132386374

ACCT 423 - Advanced Taxation Assignment - Haskayne School of Business - University of Calgary, Canada

QUESTION 1 -

On September 1, 2019, Klaw Ltd. acquired the shares of Lebron Ltd., a Canadian public corporation. Lebron Ltd., a manufacturer of shoes was incorporated on October 1, 2016 and has not been profitable since. The management of Klaw Ltd. purchased Lebron Ltd. to expand the shoe branding segment of its business into the brand name shoe market. Both Lebron and Klaw Ltd. have September 30 year-ends.

The balance sheet of Lebron Ltd as of August 31, 2019 was as follows:

Assets	Book Value
Accounts Receivable (FMV $ 250,000)	$500,000
Inventory (at cost) (FMV $ 125,000)	250,000
Machinery and Equipment (at UCC)	2,500,000
(Capital Cost $ 2,500,000) (FMV $780,000)
Building (at UCC)	1,250,000
(Capital Cost  $1,500,000) (FMV $1,625,000)
Land (at ACB) (FMV $787500)	500,000
Shares in non-controlled Canadian-controlled private corporations (at ACB) (FMV $50,000)	250,000
Prepaid Expenses (at Cost) (FMV $44,000)	88,000
Total Assets	$ 5,337,500
Liabilities and Capital Stock
Liabilities	$ 5,337,500
Share Capital	1,820,000
Deficit	(1,820,000)
Total Liabilities and Capital Stock	$ 5,337,500

Lebron Ltd 's tax losses were as follows:

September 30, 2017 non-capital loss (including a capital loss of $ 100,000)	$875,000
September 30, 2017 net capital loss	$50,000
September 30, 2018 non-capital loss	$187,500
September 1 to 30, 2019 business loss	$ 5,000
August 31, 2019 business loss, including $(31250) allowable business investment loss	$807500

Klaw Ltd had forecasted taxable income (losses) as follows:

September 30, 2020	$375,000
September 30, 2021	$ (325,000)
September 30, 2022	$ (125,000)
September 30, 2023	$125,000
September 30, 2024	$300,000

One of Klaw Ltd's many divisions, Postup, a manufacturer of sports apparel, was transferred to Lebron Ltd immediately following the acquisition. Klaw Ltd has forecasted taxable income for its Postup division as follows:

September 1, 2019 to September 30, 2019	$375,000
Year Ended September 30, 2020	$500,000
Year Ended September 30, 2021	$700,000
Year Ended September 30, 2022	$775,000
Year Ended September 30, 2023	$800,000
Year Ended September 30, 2024	$250,000

Based on your research, you are comfortable that the Postup division earns income from the sale of products similar to those sold by Lebron Ltd 's ergonomic products' business for tax purposes.

Required:

(a) Discuss and summarize all of the income tax implications to Lebron Ltd of the acquisition of the company by Klaw Ltd. Consider whether the pre-acquisition losses will be deductible in the future. Perform calculations where necessary to assist in describing the implications.

(b) Recommend the appropriate election strategy for Lebron Ltd . Calculate the taxable income for Lebron Ltd for years ending in the 2019 calendar year, if the optimal amounts were elected under paragraph 111(4)(e). Assume that Lebron Ltd will retain its September 30 year-end following the acquisition of control.

Calculate the tax cost (and capital cost of depreciable assets) of Lebron Ltd 's assets immediately following the acquisition by Klaw Ltd. Also calculate its non-capital loss carryforward balances at the end of each of the company's 2019 taxation year-ends.

(c) As noted above, immediately following the acquisition of control, the Postup division was transferred to Lebron Ltd . What non-tax considerations may have been at issue in the decision to transfer this division?

QUESTION 2 -

Mohamed Rashid Inc. (MRI) is a Canadian-controlled private corporation wholly owned by Ms. Samson. The company's most recent fiscal year ended December 31, 2019. The schedule below outlines its net income for income tax purposes (by source). The Calgary-based company is a wholesale company with corporate and public clients.

Mohamed Rashid Inc. Net Income for Income Tax Purposes (by Source) for the Year Ended December 31, 2019
Income from Wholesale sales net of all capital cost allowance	$150,000
Interest income	50,000
Dividend income	47,000
Taxable capital gain (non-active)	40,000
Net income for income tax purposes	$287,000

Additional Information:

1. Interest income is derived from the following sources:

(a) 10-year bond in Nadia Ltd., a Canadian company $34,000

(b) Interest on a term loan to Poline Limited a Canadian company 16,000

$50,000

Note: MRI owns 65% of Poline Limited. The other 35% is owned by a Canadian friend of Ms. Samson's.

2. Dividend income is derived from the following sources:

(a) Poline Limited(non-eligible) $46,100

(b) Can Public Corp. (Canada) Ltd.(eligible) 400

(c) DEF Investment Co. (1% shareholder eligible) 500

$47,000

3. Sale of non-active assets during the year resulted in the taxable capital gain of $40,000

4. Poline Limited (Poline) had taxable income of $800,000 for the year ending March 31, 2019, all of which was active business income.

Poline was allocated a Business Limit of $250,000 for the year

Poline received a dividend refund of $25,000 when it paid out dividends of $70,923 on its shares.

5. During the year, MRI paid non-eligible dividends to Ms. Samson totalling $55,000 of which $5,000 was a capital dividend. (Election forms were already filed.)

6. For the fiscal year ended December 31, 2019, MRI made the following expenditures:

Charitable donations not yet deducted $5,000

Federal tax instalments $9,000

7. Balances in the tax accounts as at the beginning of fiscal 2019 are as follows:

Charitable donations made in 2018, unused in that year $2,000

Refundable dividend tax on hand (non-eligible dividends) $5,000

Dividend refund in 2018 (non eligible dividends) $2,000 Nil

Net capital losses realized in 2012, unused to date $1,500

Capital dividend account $5,000

Required:

(a) Compute the net taxes payable by (refundable to) Mohamed Rashid Inc. for its 2019 taxation year making use of all credits, refunds and payments. Show all your calculations. The provincial tax rate is 12 per cent.

(b) Compute the Refundable Tax on Hand showing all your work including the dividend refund and Part 1V Tax.

(c) Compute the capital dividend account as at December 31, 2019.

QUESTION 3 -

Part (i) As the director of the tax department of Overbaked Ltd., a Canadian controlled private corporation, you are responsible for ensuring that corporate tax installments are correctly calculated as well as paid in a timely manner. The corporation has a December 31 year-end and operates only in Canada. In 2017, the corporation paid $95,000 in income tax on $387,500 of active business income. In 2018, it paid $112,500 on $462,500 of active business income. At the beginning of 2019, you expected active business income to be a little lower than last year, at $450,000, and this would result in income tax of $107,500 for the year. (10 Marks)

Required:

(a) By showing your calculations for all of the options, indicate

• the minimum amount that should be paid in instalments for 2019 to be sure of not having to pay any interest on a deficiency of instalments, and
• the specific dates on which these instalments must be paid.

(b) Assume that your estimate of the income tax for 2019 was inaccurate because the actual income tax amount turns out to be $125,000 for 2019. Also, assume that the corporation paid the minimum monthly (not quarterly) required instalments computed in (a) on time. How much is the balance due and on what specific date must it be paid?

(c) Assume that, at the end of November, it looked to you like the corporation had overpaid its monthly tax by instalments for 2019, because income was a little lower than expected in the preceding two months, so the corporation paid no instalments for November and December. Assume, however, that it turns out that even your original estimate of income tax for the year was too low, because actual income tax owing was $125,000 for 2019. Also, assume that the corporation pays the full amount owing on the balance-due date. How much interest is payable on that date, if the prescribed rate for the first two quarters of 2019 was 20%; for the second two quarters of 2019, 18%; and for all of 2020, 16%? What is the amount due on that date?

(d) If the CRA issues a Notice of Assessment for the 2019 corporate tax return on September 10, 2020, and the interest on the deficient instalments was incorrectly calculated by the CRA, what is the specific date deadline for filing a Notice of Objection?

(e) What is the specific date deadline for the CRA to issue a Notice of Reassessment for the 2019 corporate return?

Part (ii) Mr. Miyagi is one of your valuable clients. His 66 year-old mother, Mrs. LaRusso, passed away on October 31, 2019. Mr. Miyagi is the sole beneficiary of his mother's estate.

You received the following information from Mr. Miyagi with respect to his mother's income from January 1, 2019 to the date of her death.

(1) Salary - $10,000 a month for January through October, paid on the last day of the month.

(2) Mrs. LaRusso was owed a bonus by her employer amounting to $8,000. This was received by the estate on November 30, 2019.

(3) Bond interest - interest of $2100 was accrued on a bond that doesn't mature until June 30, 2020; interest is payable only upon maturity of the bond.

(4) Bank account interest - interest of $500 was accrued on his chequing account from January 1 through October 31, 2019.

(5) Dividend income - dividends of $600 were declared on his shares in Mandarin Ltd.; the dividends were payable October 30, 2019, but had not been paid as of the date of Mrs. LaRusso's death.

(6) The shares in Mandarin Ltd. were purchased for $23 in 2013. The fair market value of the shares, on October 31, 2019, was $83. Mandarin Ltd. is a public company.

(7) Mrs. LaRusso had made RRSP contributions of $2,500 monthly for the months of January through October 2019. These total contributions of $25,000 were to be towards her 2019 RRSP contribution limit. Her earned income for 2019 was $210,000 and he had no pension adjustment for 2019.

(8) The fair market value of Mrs. LaRusso's RRSP at October 31, 2019 was $156,000. This includes the contributions mentioned in (7), above.

Required:

a) What is the due date of Mrs. LaRusso's 2019 personal income tax return?

b) What are the tax implications of each of the above items assuming that no elective returns are utilized?

c) Which of the above items are eligible to be included on an elective return? Identify the name of the elective return. What is the filing deadline for this return?

QUESTION 4 -

Project forward Ltd. is a Canadian-controlled private corporation started by Curtis's father, Bill about 40 years ago. His initial investment in the common shares of the corporation was $30,000. Bill would like to retire while his business is at a peak. He is the only shareholder of the corporation and to help finance his retirement, he is considering his alternatives for the sale of the business.

The following is a projected balance sheet with estimated fair market values (FMV) at the expected date of disposition, late in December of 2019.

PROJECT FORWARD LTD. BALANCE SHEET December 31, 2019
Assets
Current assets:
Cash	$45,000
Marketable securities, at cost (FMV: $30,000)	45,000
RDTOH	70,000
Accounts receivable (net of $11,000 reserve; FMV: $99,000)	100,000
Inventory, at cost (FMV: $131,000)	110,000
	$370,000
Fixed assets:
Land, at cost (FMV: $920,000)	350,000
Building, at UCC (FMV: $2,240,000, cost: $645,000)	310,000
Equipment, at UCC (FMV: $58,000, cost: $161,000	80,000
Intangibles, at CEC a/c balance (FMV: $ 980,000; cost: $736,000)	400,000
	$1,510,000
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable	$ 50,000
Bank indebtedness	95,000
	145,000
Future income taxes	180,000
Shareholder's equity:
Common share paid-up capital	25,000
Capital dividend account	60,000
Other retained earnings	1,100,000
	$1,510,000

The corporation is taxable at a total corporate rate of 15% on active business income eligible for the small business deduction and an initial 40% rate for investment income, plus 10?% additional refundable tax on investment income. Assume that business operations broke even for the fiscal year ended December 31, 2019, before a sale of assets takes place. The corporation will have a Nil balance in the General Rate Income Pool at the time of a winding-up. The projected balance in the non-eligible RDTOH at December 31, 2019 is $70,000 and the projected Capital Dividend Account is $60,000.

Required:

(a) If Bill sells the assets on the open market (i.e., no single buyer) in 2019 and winds up the corporation early in 2020, what would be the net amount available for distribution to him after paying all liabilities?

(b) If the funds are distributed to Bill, determine the amount and nature of the components of the distribution to him for tax purposes.

(c) Determine the amount that Bill would retain from this distribution after tax. Assume that Bill's marginal tax rate on income from this transaction is 50% (including provincial tax) on income other than taxable dividends and 41.5% (net) on actual dividend income from CCPC income taxed at the low rate (including the effect of the dividend gross-up and tax credit and of provincial tax).