Don Cameron operates Hockey Facilities as a sole proprietorship. The operations consist of two retail outlets that sell all types of hockey equipment, as well as a separate manufacturing facility that manufactures the famous Slap Shot hockey stick. Financial information for the most recent 12-month period is outlined in Exhibits I and II on the following pages. In addition to the income derived from Hockey Facilities, Cameron has substantial investments that generate high returns. The investment income by itself has put Cameron in the top marginal tax bracket of 45%.That income consists of dividends from shares of public corporations and interest on bonds.

As the proprietor, Cameron draws funds from Hockey Facilities to pay his personal expenses and income taxes. He usually requires $40,000 annually for living expenses exclusive of any income taxes. You have recently met with Cameron to discuss the possibility of incorporating Hockey Facilities’ business operations. At the meeting, Cameron provided you with the following additional information:

1.   Expected profits from Hockey Facilities are as follows:

20X2 …………………………………..	$475,000
20X3 …………………………………..	520,000
20X4 …………………………………..	570,000

2.   The assets described in the attached balance sheet have the following current fair market values:

Current assets …………………………………..	$300,000
Land …………………………………..	150,000
Buildings …………………………………..	400,000
Equipment …………………………………..	100,000
Licence …………………………………..	120,000
Goodwill …………………………………..	200,000

3.   The undepreciated capital cost of depreciable property at December 31, 20X1, after current capital cost allowance, is as follows:

Buildings …………………………………..	$240,000
Equipment …………………………………..	90,000
Licence …………………………………..	70,000

4. The cumulative eligible capital account at December 31, 20X1, amounted to $22,000 after the 20X1 deduction.

5. The financial statements include amortization at an amount equal to the available capital cost allowance.

6. Cameron does not have a detailed breakdown of manufacturing profits and retail profits, although he estimates the retail profits to be $100,000. 

Cameron is confused about how a corporate structure would be worthwhile and is concerned that, according to what he had heard, double taxation might result in certain circumstances.

Cameron’s son Eric is 23 years old and is actively involved in the business, earning a salary of $20,000 annually. Eric has spent most of his time at the manufacturing plant but intends to become involved in the retail operations as well. Cameron looks at the manufacturing activity as a separate business from the retail operation.

The meeting ended with you agreeing to provide a report to Cameron on the issues discussed.

Required:

Prepare the report, together with any supporting calculations and analyses you feel are necessary.

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EXHIBIT I HOCKEY FACILITIE Balance Sheet December 31, 20X1 Assets Current assets Fixed assets (at cost) $300,000 Land Buildings Equipment $100,000 300,000 600,000 Accumulated amortization 380,000 80,000 60.000 $820.000 Slap Shot manufacturer's licence (at cost) Goodwill, at cost Liabilities and Equity Liabilities Proprietor's equity $600,000 220.000 $820,000 EXHIBIT II HOCKEY FACILITIE Statement of Income Year Ended December 31, 20x1 Sales retail and manufacturing) Cost of sales $1,600,000 Opening inventory Purchases and manufacturing costs S 300,000 800.000 1,100,000 Closing inventory -400700,000 Gross profit General administrative and selling expenses 250.000 Net income