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.

The advantages of changing the business to corporate, is Graham is going to be able to have limited liabilities in grahams business. Also, the ownership process is going to way easier to transfer when you have corporation. Theirs a separate account from business and Graham personal assets. Graham will be able to issue stocks to the public and raise more capital from there for his business. The disvantages of having a corporation is you have less time for yourself as the business owner. There are more laws and regulations that you will have to follow when you become corporate.  

 

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) 

Income tax = 90,000 x 0.39= 35,100

 

(ii) 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)

 

Salary= 0.14 x 150,000 = 21,000

 

Dividend = 0.24 x 

 

Give a brief concluding explanation relating to the income tax liability resulting from the three potential forms of taxation.