Assignment 1 Spring 2018 Question 2

IBM Ltd. is a Canadian-controlled private corporation whose fiscal period coincides

with the calendar year. For the year 2017, the company's taxable income was calculated as follows:

Income from distributing net of CCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $621,000

Dividends from taxable corporations:

(a) connected corporation, dividend payment triggering a dividend refund

of $7,000 to the wholly owned subsidiary . . . . . . . . . . . . . . . ........... . . . . . . 21,000

(b) non-connected corporation (portfolio dividends) . . . . . . . . . . .. . . . . . 25,000

Taxable capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,000

Allowable capital losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,00022,000

Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25,000

Recapture of CCA on disposal of sales equipment . . . . . . . . . . . . . . . . .. . . 15,000

Income from rental of an apartment building (no full-time employees and

tenants provide virtually all of their own services) . . . . . . . . . .. . . . . . . . 29,000

Foreign non-business income (i.e., interest income) (foreign tax credit

of $8,250 equal to foreign tax withheld) . . . . . . . . . . . . . . . . . . . . . . 33,000

Foreign business income (foreign tax credit of $4,800 equal to foreign tax

paid) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . 16,000

Interest charged on accounts receivable . . . . . . . . . . . . . . . .. . . . . . . . . . . . 9,000

Net income for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $816,000

Less: net capital losses carried over . . . . . . . . . . . . . . . .$ 17,000

non-capital losses carried over . . . . . . . . . . . . . . . . . . . . . 30,000

donations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000

dividends from taxable Canadian corporations . . . . . . . 46,000119,000

Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . $697,000

At December 31, 2016, there was a balance of $30,000 in the refundable dividend tax on hand account. The company subsequently thereafter received a dividend refund of $19,000 on their 2016 T2 return.The company paid $120,000 in dividends during 2017 to individual shareholders.

It has been agreed that $360,000 of the business limit for small business deduction will be claimed

by the parent, IBM Ltd., leaving the remainder for the subsidiary.

The company has a permanent establishment in Ontario and in the United States. Its gross

revenue, net of dividends and net of rentals, and its salaries and wages are attributed to its permanent

establishments as follows:

Gross Salaries

Revenue& wages

Ontario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,576,000 $586,000

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 186,000

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,296,000 $772,000

In the United States a salesman worked out of his home in which he kept a small stock of merchandise

from which he filled orders.

REQUIRED

(A) Compute the federal Part I tax and assumed provincial tax at a 14% rate on federal taxable

income payable by the company for 2017. Show in detail the calculation of all deductions in the

computation, using a separate schedule for each special deduction. In calculating the small business

deduction list all ineligible items of income, if any, and indicate the amount of the business limit

available for the subsidiary.

(B) Compute the refundable dividend tax on hand balance as at December 31, 2017, showing, in

detail, your calculations and compute the dividend refund for 2017.