It is October 2019 and you have just come out of a meeting with your tax partner, Ashley, and her

clients, Mark and Hilary Miller. Ashley has asked you to assess the situation to identify the issues and

develop a research plan. She would then like to meet with you to review your work. After that meeting

she wants you to analyze the major issues, reach a conclusion and propose the advice she should give to

Mark and Hilary.

Facts:

Mark and Hilary have been married for 35 years. They have lived in Wellesley, Ontario for many

years and work in the technology sector in Waterloo. They have two children who are both married and

living in Waterloo. Both Mark and Hilary plan to retire in about five years and expect to have retirement

income of $130,000 each at that time.

They set up Hilmar Investments Inc. (HII) 15 years ago to manage their investment capital. The

company earns Canadian interest income, realizes capital gains and losses and earns dividend income

from publicly-traded companies. Based on their salaries, they are both in the top marginal tax bracket

and expect to remain there until they retire. Since they have enough personal cash from their salaries

they have left any income earned by HII in the corporation. Since the company earns dividends from

publicly-traded companies it has a GRIP balance of $60,000 as at August 31, 2019.

At this point in their lives they would like your advice on how much money they can take out of the

corporation without paying any corporate or personal tax. Then they would like to know if it makes

sense for them to take more money out of the corporation as salary or dividend. Hilary would also like

advice on the $40,000 she borrowed from HII given that she will repay it in October. They both agree

that they want to minimize their risk of reassessment by the CRA.

The following is the balance sheet of HII.

Hilmar Investments Inc.

BALANCE SHEET

Year ended August 31, 2019

Current Assets Notes:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000

Term deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,000 (1)

Due from shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 (2)

215,000

Long-term Investments

Investments (at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 (3)

$615,000

Current Liabilities

Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000

8,000

Shareholders Equity

Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 (4)

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507,000 (5)

$615,000

Notes:

(1) The term deposits are due on October 6, 2019.

(2) The loan to the shareholder represents $40,000 borrowed by Hilary on July 1, 2018 to buy a car.

She signed a note payable at the time she borrowed the money. The note does not specify any

repayment terms or interest rate. Hilary plans to repay the loan in October when she receives her bonus

at work.

(3) The long-term investments have a fair market value of $760,000.

(4) Hilary and Mark each paid $50,000 for 50 common shares of the company on incorporation 15

years ago.

(5) The company has a non-eligible RDTOH balance of $25,000 and an eligible RDTOH balance of

$23,000. It also has a capital dividend account balance of $30,000, which all relates to prior year net

capital gains and a net capital loss carry forward balance of $10,000.

(6) The provincial corporate tax rates for income eligible for the small business deduction and

income above the small business limit are 4% and 12% respectively.