Case II: Taxable Income and Taxes Payable

Shermont Ltd$.$ is a Canadian controlled private corporation $($CCPC$)$ that operates a retail business selling safety equipment for the oil and gas industry. Shermont Ltd$.$ is operated out of Calgary, Alberta and all of the corporation$$s revenue and expenses are incurred in Alberta. The following information is available for the current year ending December $31$:

Shermont Ltd$.$

December $31$

$3($a$)$ Positive Sources of Income

Canadian Source Interest Income $ $45,350\mathrm{.}00$

Net Business Income $ $727,500\mathrm{.}00$

Canadian Source Dividend Income $ $62,750\mathrm{.}00$

$3($b$)$ Net Taxable Capital Gains

Taxable Capital Gains $ $43,400\mathrm{.}00$

Net Income for Tax Purposes $ $879,000\mathrm{.}00$

Less Division $"$c$"$ deductions:

Dividends from Taxable Canadian Corporations $ $(62,750\mathrm{.}00)$

Net Capital Loss Carryover from Previous Year $ $(22,500\mathrm{.}00)$

Taxable Income $ $793,750\mathrm{.}00$

Other Information:

$1.$ Shermont Ltd$.$s business income is a result of retail sales operations, and therefore does not partake in any manufacturing or processing activities and does not qualify for the Manufacturing and Processing Profits Deduction.

$2.$ Shermont Ltd$.$ owns $100\%$ of the outstanding shares of Bronston Holdings Ltd$.,$ therefore these two corporations are associated for tax purposes in current taxation year. Bronston Holdings Ltd$.$ does not earn active business income, therefore it does not require any of the small business deduction limit$.$ Therefore, Shermont Ltd$.$ is able to utilize the full amount of the annual limit for purposes of calculating the small business deduction.

$3.$ For simplicity purposes, assume that the corporation$$s net business income $($provided above$)$ is considered active business income for purposes of the small business deduction.

$4.$ The taxable capital gains were incurred from the disposition of vehicles and office equipment used in the active business.

$5.$ Shermont Ltd$.$ had a closing Non$-$eligible RDTOH balance from the previous year of $$35,000$ and a closing Eligible RDTOH balance of $$40,000.$ The corporation received a dividend refund from the Non$-$eligible RDTOH account for the previous year of $$15,000.$

$$

$6.$ The Canadian source dividend income included in the corporation$$s net income is comprised of the following:

$$ Ineligible dividends received from Bronston Holdings Ltd$.$ of $$30,000($as a result of paying this dividend, the wholly owned subsidiary received a dividend refund of $$10,000)$

$$ Eligible dividends received from unconnected corporations, whose shares are owned by Shermont Ltd$.$ in its portfolio of investments of $$32,750$

$7.$ Shermont Ltd$.$ had a GRIP balance at the end of the previous taxation year of $$34,375.$ In the previous year the corporation designated a portion of the dividends declared as eligible, in the amount of $$95,000.$

$8.$ Shermont Ltd$.$ has paid the following taxable dividends during the current year:

$$ Eligible dividends of $$100,000$

$$ Ineligible dividends of $$18,350$

$9.$ Last year, Shermont Inc. had ADJUSTED Aggregate Income of $$78,100.$ Its Taxable Capital Employed in Canada was $$3,600,000.$

Required:

$1.$ Calculate $($using Excel template on D$2$L$)$ the amount of $2022$ Federal Taxes Payable under Part I of the Income Tax Act for Shermont Inc.

$2.$ Determine the amount of Part IV Tax Payable by Shermont Inc.

$3.$ Compute the closing Eligible and Non$-$Eligible RDTOH balance for Shermont Inc. for the year ended December $31$ as well as the company$$s dividend refund for the year. Has the corporation maximized its dividend refund in the current year? Why or why not?

$4.$ Calculate the GRIP balance at the end of the current year for Shermont Inc.

$5.$ Define GRIP and LRIP. Why is this distinction important?

When finished, upload your Excel workbook into Case Study II in D$2$L$.$ Obtain solution from the instructor. Grade your answer and explain why you made the errors. Was it a calculation error, misunderstanding of the concept, etc.? Upload graded Excel work with your reflection into Case Study II in D$2$L to receive reflection marks.