Lemon Ltd. provides management services for Toys-4-U Limited (Toys), a retailer of educational toys, and for certain other corporations described below. Les Lemon is the sole shareholder and only employee of Lemon Ltd. Prior to this year, Les had been employed by Toys as vice-president of financial and administrative services.
Les owns all of the common shares of Rental Ltd. (Rental), which is in the business of renting commercial properties. Rental has no employees, except for Les, and subcontracts all maintenance and administrative services. Rental's income for tax purposes can be broken down as follows:
Lemon Ltd .................................................................................. 10%
Cheap Leasing Ltd. (see below) ......................................................... 25%
Arm's length parties ........................................................................ 65%
............................................................................................... 100%
Les is also involved with Cheap Leasing Limited (Cheap), which is in the business of leasing educational equipment. The ownership of the common shares of Cheap is as follow:
Les Lemon ............................................................................. 25 shares
Lucy Lemon, Les' wife ............................................................... 20 shares
Lemon Ltd ............................................................................. 30 shares
Larry Lemon, Les' uncle ............................................................. 10 shares
Arm's length parties .................................................................. 15 shares
Cheap derives approximately 80% of its income from the educational equipment leasing business. The balance of its income is interest from a loan to Toys. Cheap has four employees in addition to Les.
All of the above corporations are Canadian-controlled private corporations and have December 31 year-ends.
REQUIRED
Identify the various sources of income for the above corporations indicating the reasoning behind your conclusions. Also indicate the federal tax rate and any refundable taxes applicable to each income source.