Jamal Uppal, graduated last year in computer engineering at the University of Waterloo. While a student, for his last work term he opted to start his own business developing a new web-based platform for corporate tax information collection and preparation with his father who is a CPA. For its first year of operations, the pre-tax profit for Jamal’s incorporated business, TaxIntel Ltd. will be $50,000 for the December 31, 2021 year-end. Jamal would like to receive all of the after-tax profits as either a dividend or salary before the end of the year to pay for his personal expenses. Jamal did not have any other source of income in 2021.

In December 2021, TaxIntel Ltd entered into a contract with two major accounting firms. He projects his business income will be significantly higher for 2022 and would like to increase his salary to $180,000 starting January 1, 2022, and also pay a salary of $40,000 to his father for some of the work he will be doing. Jamal expects to have $600,000 of business income in the corporation at the end of the year after the salary payment. If so, he would like to plan to leave a minimum of $435,000 of after-tax cash in the corporation for reinvestment in the business after either declaring a bonus or paying out a dividend. He would like you to explain the pros and cons of the bonus option (ignoring CPP payroll costs) relative to the dividend option. He is also wondering if it would be better to retain all of the business income after salary payments in the corporation.

The provincial corporate tax rate on active business income is 4% if it is eligible for the small business deduction and 12% if it is not.

— REQUIRED

(A) Assess the situation.

(B) Identify the issues.

(C) Analyze the issues.

(D) Advise/recommend.