Reference no: EM131731979

Taxation Assignment

Stephen Saunders earned $150,000 this year in profits from his proprietorship, which placed him in a 45% tax bracket. The rate of tax for Canadian-controlled private corporations in his province is 15% on the first $500,000 of income. Personal tax rates (federal plus provincial) in Stephen's' province are:

On the first $44,000	24%
On the next $44,000	32%
On the next $48,000	40%
On income over $136,000	45%

(All tax rates are assumed for this assignment question.)

Stephen requires $3,000 of after-tax withdrawals per month for his personal living expenses. All remaining profits are used to pay taxes and to expand the business. Stephen expects the same profits before living expenses next year.

Stephen is considering incorporating his business next year. If he incorporates, he will pay himself a gross salary of $48,000.

Required (answer all questions below):

1. Determine the increase in Stephen's cash flow if he incorporates his company? Show all calculations:

a. Excess cash as a proprietorship (after-tax cash flow).

b. Excess cash as a corporation (after-tax cash flow).

c. Increase / (decrease) in cash flow if Stephen incorporates his business.

2. Why will Steve set his new salary at $48,000?

3. Name the type of tax planning that Stephen would be engaging in if he incorporated his company.