Donny Tee (the Donny) was an unemployed tour guide when lady luck showed up and blessed him with a tax-free Lotto 6/49 winnings of $2 million. After prudently paying off the $500,000 mortgage on his home, he went crazy and spent $300,000 on a used Ferrari Testa Rosa and took a year-long lavish world cruise family vacation for $200,000.

Realizing that his remaining million would not last forever at his current rate of spending, he decided to invest it in something that could provide a sustainable source of income for him and his family. To that end, he wants to acquire Deadly Death Tours (a niche market unincorporated business) for $1,000,000. Given his expertise in the tour business, he expects that this business will earn $200,000 in taxable income every year.

The Donny says that he needs a $100,000 gross amount annually from the tour business in order to fund what he promises to be a more austere lifestyle. Since he does not know much about tax, other than he wants to pay as little as possible, he has asked you for advice as to whether he should hold the tour business personally or through a corporation.

Assume that the following combined federal and provincial tax rates in his province are correct:

• Corporate rate-20% on income eligible for the SBD
• Personal rate-40% on ordinary income
• Personal rate-35% on non-eligible dividends received (this rate is inclusive of all applicable dividend tax credits)
• Personal rate-30% on eligible dividends received (this rate is inclusive of all applicable dividend tax credits)

Required:

Part A. In a brief point form format, describe to the Donny, at least 5 advantages and 5 disadvantages of incorporating a company to hold his tour business. (5 marks)

Part B. If the Donny decides to incorporate, he would like to know if the gross amount of $100,000 that he requires annually from the Company, should be paid in the form of a salary or a dividend. Assuming that the estimated $200,000 taxable business income for a 12-month period will occur, in a concise schedule format, compute the after-tax cash that can be available pursuant to receiving a salary versus receiving a dividend, on a combined basis for the Company and the Donny. Your concise schedule should use the corporate and personal all-inclusive tax rates provided above and ignore payroll taxes.

Based on your schedule that shows the after-tax results of the two options, recommend to the Donny, the most tax-efficient option from a combined personal and corporate after-tax perspective. (7 marks)