Calculating the federal income tax consequences

Reference no: EM132273584 , Length: 8 pages

You, CPA, work for My Accounting Inc. (MAI) an accounting professional corporation. It is now April 2019 and you have just finished meeting with Marge Kay, the president of MAI, and your client Robert Moore.

Robert is a 63 year-old resident of Canada who is considering doing an estate freeze. Additional information about your client is provided in the Exhibit. Marge wants you to draft a memo to her describing and calculating the federal income tax consequences to your client from the proposed estate freeze. Make sure you describe all the income tax consequences to both Robert and to Holdco and show your calculations. You should give Income Tax Act (ITA) section, subsection and paragraph (where applicable) references in order to support your answer. Do not list multiple ITA references. You can ignore Division E.1 of the ITA (Minimum tax). Marge reminds you that the capital gains exemption limit in 2019 has increased, based on inflation, and she suggests you look this up.

Separate from this proposed estate freeze, another client of MAI's, Ralph, is considering incorporating his sole proprietorship. Ralph deal's at arm's length with Robert Moore. Ralph's sole proprietorship earns $200,000 of Canadian business income each year and he wants to know if there will be any tax savings or tax cost in 2019 from earning $200,000 of Canadian business income personally versus earning it in a new Canadian corporation (Newco). See the Exhibit for additional details.

Marge wants you to add your answer to Ralph's question to your memo. Marge will then discuss the issues with the clients after hearing from you. She says that you should assume that Newco will pay the maximum amount of dividends to Ralph in 2019. Show all relevant calculations and round to the nearest dollar. You can ignore the basic personal tax credit. You do not need to give ITA references for this question but you must consider federal and provincial income taxes (and provincial tax rates are given in the Exhibit). Marge reminds you to look up federal personal tax rates. Note: you will lose 1 mark for each incorrect item included in your analysis of income tax savings or cost.
Marge asks you to look into one final issue for her, relating to another client, Mr. Bee. Mr. Bee is a long-time client of MAI and for his 2018 personal income tax return, he has asked you to do the following:

"When you prepare my tax return, which you file electronically, I would like you to deduct $25,000 of rental loss from my income. I don't own any rental properties, and did not actually lose money, but I want the rental losses to minimize my tax. Since we file tax returns electronically we may not need any supporting documents. If I get audited then I'll pay any extra tax owing but I'd like to take the chance.

I'm fine with the risk. If you help with this, in addition to my regular fees, I'll also pay your firm one-quarter of any tax savings that I get with regards to this. This way we can both benefit."

Marge wants your advice on what specifically should be done in this situation and why? No calculations and no ITA references are needed.

Exhibit- Additional information

- Robert currently owns all of the shares of Robert's Inc. (RI), a CCPC with a March 31st year-end. RI has 1,000 common shares issued and outstanding
- RI is a manufacturer operating in Canada and it is a small business corporation (SBC). Robert's shares are QSBC shares and he has never used any of his capital gains exemption and wants to use this now, if possible
- RI was incorporated in 1994 by a person who deals at arm's length with Robert. In 1994, the initial shareholder subscribed for 1,000 common shares of RI and paid $4,000, in aggregate, into the company to buy the shares. In 2007, Robert bought the 1,000 common shares from the initial shareholder for $200,000, in aggregate, which was the fair market value (FMV) at the time
- Robert wants to transfer the future growth of RI to his adult child (who is mature and good with money) now, i.e., in 2019. Robert is not married and both Robert and his child work full-time at RI
- As part of the estate freeze, Robert will incorporate a new company (Holdco) and have his child subscribe for new common shares of Holdco
- Robert wants to receive the maximum amount of boot (as a note receivable) and preferred shares for the balance of consideration when he sells his RI shares to Holdco in 2019 as part of the estate freeze
- Robert wants to use subsection 85(1) of the Act and, if possible, does not want to incur any income tax
- RI is not associated with any other company and its taxable capital has always been less than $10 million
- The RI common shares are currently worth $1,500 per share (i.e., $1,500,000 in aggregate)
- Robert wants to minimize income tax at death and wants to keep control of the business while he is alive
- Robert earns more than $250,000 per year in income
- Ralph also earns more than $250,000 per year in income before considering the $200,000 of business income that he also earns
- Both Robert and Ralph live in a province with the following provincial tax rates:
o Top marginal personal tax rate on income over $100,000 20%
o Personal tax rate on income equal to and below $100,000 12%
o Dividend tax credit on grossed up amount of eligible dividends 10%
o Dividend tax credit on grossed up amount of non-eligible dividends 4.3%
o The dividend gross-up equals the federal dividend gross-up
o Corporate tax rate on active business income equal to and below $500,000 4.5%
o Corporate tax rate on all other income 11%
- If Ralph incorporates a new corporation (Newco) he will be the sole-shareholder and its only employee. Newco will have a December 31st year-end
- You can assume that Newco will be incorporated on January 1, 2019, it will not be associated with any other companies and its taxable capital will be less than $10M
- Robert and Ralph are not active traders of securities and they do not have any specialized knowledge about stocks or bonds
- Assume that the prescribed interest rate for all periods is 2%

Reference no: EM132273584

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Reviews

len2273584

4/3/2019 12:18:25 AM

Marge wants you to add your answer to Ralph’s question to your memo. Marge will then discuss the issues with the clients after hearing from you. She says that you should assume that Newco will pay the maximum amount of dividends to Ralph. Show all relevant calculations and round to the nearest dollar. You can ignore the basic personal tax credit. You do not need to give ITA references for this question but you must consider federal and provincial income taxes (and provincial tax rates are given in the Exhibit). Marge reminds you to look up federal personal tax rates. Note: you will lose 1 mark for each incorrect item included in your analysis of income tax savings or cost.

len2273584

4/3/2019 12:18:18 AM

Separate from this proposed estate freeze, another client of MAI’s, Ralph, is considering incorporating his sole proprietorship. Ralph deal’s at arm’s length with Robert Moore. Ralph’s sole proprietorship earns $200,000 of Canadian business income each year and he wants to know if there will be any tax savings or tax cost from earning $200,000 of Canadian business income personally versus earning it in a new Canadian corporation (Newco). See the Exhibit for additional details.

len2273584

4/3/2019 12:18:10 AM

Marks will be deducted if any of the above instructions are not followed Note: you can ignore the 19 federal budget (which may announce tax changes) You, CPA, work for My Accounting Inc. (MAI) an accounting professional corporation. It is now and you have just finished meeting with Marge Kay, the president of MAI, and your client Robert Moore. Robert is a 63 year-old resident of Canada who is considering doing an estate freeze. Additional information about your client is provided in the Exhibit. Marge wants you to draft a memo to her describing and calculating the federal income tax consequences to your client from the proposed estate freeze. Make sure you describe all the income tax consequences to both Robert and to Holdco and show your calculations. You should give Income Tax Act (ITA) section, subsection and paragraph (where applicable) references in order to support your answer. Do not list multiple ITA references. You can ignore Division E.1 of the ITA (Minimum tax). Marge reminds you that the capital gains exemption limit in has increased, based on inflation, and she suggests you look this up.

len2273584

4/3/2019 12:18:00 AM

Your answers, including calculations and appendices, must: • not exceed 8 pages (maximum). Note: the coversheet does not count in the page limit but all other pages do count. You should number your pages; • be double spaced; • be Times New Roman (or an equivalent sized) font; • have 12 point font (minimum); • have normal margins (i.e., margins of at least one inch on the top, bottom and each side); • be written in sentences for your qualitative discussion(s); and • have “Portrait” as the page layout (and not “Landscape”).

len2273584

4/3/2019 12:17:54 AM

Late assignments will not be accepted and will receive a 0. Note: you cannot apply for a Deferred Standing Agreement (DSA) for a missed assignment; i.e., if you do not hand in assignment 2 by the deadline you will get a 0.

len2273584

4/3/2019 12:17:47 AM

You must attach this coversheet to your solution Your assignment solution can be prepared individually or in groups of up to five students. You must identify group members on this coversheet. Please list names alphabetically by last name. You can form a group with students in any section. Each group must work independently from other groups. Assignments can be submitted (prior to the deadline) in class or to Atkinson room 282. Follow the directions otherwise you will lose marks.

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