CHAPTER 15: 18%; 35 minutes Mr. Hines has inherited $5,000,000 in cash. It is Mr. Hines's intent to invest his $5,000,000 in a one-year guaranteed investment certificate on January 1, 2019 that will pay interest at the rate of 4% per annum, that is, $200,000 per year. He has come to you for advice as to whether he should own the investment personally or incorporate a Canadian controlled private corporation (CCPC) in which he would be the sole shareholder. Mr. Hines has substantial income from employment and therefore his combined federal and provincial marginal tax rate is 51%. If he owns the investment as an individual, his after-tax retention of the interest income will be $98,000 (calculated as $200,000 x (100% -51%). He is wondering if he should incorporate a CCPC to hold this investment. The provincial dividend tax credit on eligible dividends is 30% and on non-eligible dividends is equal to 20% of the gross up. The provincial tax rate on investment income earned by a CCPC is 12%. The Refundable Portion of Part I Tax Payable has been correctly calculated to be $61,340. Required: (Show all calculations including those for which the answer is nil.) 1. Determine the after-tax retention of income that will accrue to Mr. Hines during 2019 if he incorporates a CCPC to hold this investment. Assume the corporation will pay out all available income to him in dividends at the end of 2019 (17 marks) 2. Would Mr. Hines be better off if he incorporates a CCPC to earn this interest income or if he receives it personally? (1 mark) CHAPTER 15: 18%; 35 minutes Mr. Hines has inherited $5,000,000 in cash. It is Mr. Hines's intent to invest his $5,000,000 in a one-year guaranteed investment certificate on January 1, 2019 that will pay interest at the rate of 4% per annum, that is, $200,000 per year. He has come to you for advice as to whether he should own the investment personally or incorporate a Canadian controlled private corporation (CCPC) in which he would be the sole shareholder. Mr. Hines has substantial income from employment and therefore his combined federal and provincial marginal tax rate is 51%. If he owns the investment as an individual, his after-tax retention of the interest income will be $98,000 (calculated as $200,000 x (100% -51%). He is wondering if he should incorporate a CCPC to hold this investment. The provincial dividend tax credit on eligible dividends is 30% and on non-eligible dividends is equal to 20% of the gross up. The provincial tax rate on investment income earned by a CCPC is 12%. The Refundable Portion of Part I Tax Payable has been correctly calculated to be $61,340. Required: (Show all calculations including those for which the answer is nil.) 1. Determine the after-tax retention of income that will accrue to Mr. Hines during 2019 if he incorporates a CCPC to hold this investment. Assume the corporation will pay out all available income to him in dividends at the end of 2019 (17 marks) 2. Would Mr. Hines be better off if he incorporates a CCPC to earn this interest income or if he receives it personally? (1 mark)
