Question
Aunt Annie has two sons, 15 and 20 years old; her husband is currently unemployed. Auntie Annie has prepared Note 1 which estimates DLC's Balance
Aunt Annie has two sons, 15 and 20 years old; her husband is currently unemployed.
Auntie Annie has prepared Note 1 which estimates DLC's Balance Sheet as of December
31, 2019 for her company De La Cruz Law Inc (DLC). Auntie Annie wants to incorporate it since she will pay fewer taxes.
Annie currently operates DLC in the unincorporated form and needs to know what issues she should
consider in deciding whether or not the business should be incorporated. She anticipates that the
business will earn $150,000 for the year ended December 31, 2019 and assumes that the same
income will be earned in 2020 within a corporation that will have a December 31 year-end.
If the assets of the business are transferred on January 1, 2020 (as per the information presented in
Note 1), Annie wants to know how the transfer can be accomplished and the relevant tax
implications to ensure that the transfer will be tax-free. She has heard about the ITA 85(1) election.
She also needs to know what issues to consider in determining the value at which the assets
should be transferred for tax purposes and any other pertinent advice regarding his decision.
Finally, she needs you to recommend a great compensation package that would be mutually
beneficial from a tax point of view for his company and his family. They need about $60,000 cash per year.
Note 1 as follows:
ESTIMATED BALANCE SHEET
AS AT DECEMBER 31,2019
Bank $ 3,400
Accounts receivable (FMV $21,000) 25,000
Less allowance for doubtful accounts 3,000 22,000
Inventory at cost (FMV $5,000) 4,000
Shares of Public Co., at cost (FMV $2,000) 5,000
LandLot 1 at cost (FMV $45,000) 20,000
LandLot 2 at cost (FMV $80,000) 60,000
Truck at net book value (Cost $20,000; FMV $13,000) 12,000
Equipment at net book value (Cost $12,000; FMV $6,000) 8,600
$ 135 000
Accounts payable $ 6,000
Proprietor's equity 129,000
$ 135,000
Notes:
1.Annie acquired lots of land in 2015. His intention is to sell Lot 1 as soon as the FMV exceeds
$50,000 and to erect a building for his business on Lot 2. She recently received the building
permit and plans to commence construction in the summer of 2020.
2.The undepreciated capital cost is the same as the net book value of the depreciable assets.
3.Annie was recently offered $200,000 for all the assets, including the cash, in her business and
believes that this is an acceptable value as at January 1, 2020.
4.Annie's pension and investment income is sufficient to ensure that any additional income will be
subject to the 29% federal tax rate. She also has a $2,000 net capital loss carried forward from
2015 which she would like to utilize as soon as possible.
Please note that there are no other information missing. That's all I got for this question.
Please least all the advantages and disadvantages of incorporating for DLC
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