FINA27198

Tax Strategies for Financial Planning 2

Assignment 1 - 20%

Case Study - Graham Consulting Inc.

Due Week 5 (October 16

th

)

Graham, his wife Mary and their 2 children, Bob (age 15) and Rick (age 19) live in

Smalltown, Ontario. Graham operates a profitable computer consulting business as a sole

proprietorship. The business currently generates $150,000 of active business income before

income tax and after Graham being paid $90,000 and Mary's salary of $25,000 per year.

Assume Graham's marginal tax rate is currently at 39% and he has no RRSP

carryforward room available from 2018. Graham would like to be able to structure the

ownership of the business to pass the business on to his children when he retires next year.

Graham wants the future growth of the value of the business to go to his sons but he

requires regular income of $90,000 from the business each year for the next 5 years.

Although Rick is interested in taking over the business from his dad, Bob currently has no

interest in the being involved with the day-to-day business activities.

Graham has come to see you about how he could minimize the taxes that he pays on his

business income and how to best structure the ownership of the business in anticipation of

giving the business to the children to operate in the future. Assume the CCPC tax rate is

14%. Graham's marginal tax rate on CCPC dividend income is 24%.

Required:

a.

Discuss the advantages and disadvantages of continuing to structure the business

ownership as a sole proprietor compared to incorporating the business as Graham

Consulting Inc. a CCPC with Graham owing 100% of the company's common

shares.

b.

If Graham incorporates the business as a CCPC, discuss the following tax issues:

Calculate the current amount of

personal

income taxes Graham pays operating

the company as a:

(i)

sole proprietor

(

1

)

(ii)

and the amount of income taxes he and company would pay if the

business was incorporated, receiving income in the form of:

salary

(

2

)

or

dividend

.

(

3

)

Give a brief concluding explanation relating to the income tax liability resulting

from the three

(3)

potential forms of taxation.