Part A You have successfully graduated Conestoga College and have joined a public accounting firm in their tax department You have been assigned to work on a project with Emily Wilson, one of the firm's newest clients Ms Wilson is a wealthy individual and has come to the firm seeking tax advisory services Ms Wilson works full time as a CFO of a large Canadian grocery store and has annual employment income in excess of $500,000 Because of this, any additional income that she receives will be subject to a combined federal provincial income tax rate of 53 5 In addition, several years ago she began to carry on a business as a sole proprietor selling organic smoothies at small local grocery retailers Sales have been growing each year, and she is forecasting additional growth in the future Ms Wilson anticipates business income of $62,000 for the 2023 taxation year In her province of residence the corporate income tax rate is 3 7 on income eligible for the small business deduction and 11 5 on other corporate income the dividend tax credit is 14 1 of the dividend gross up for non eligible dividends and 10 for eligible dividends Ms Wilson was recently at a social gathering where she spoke with a friend who recently incorporated their sole proprietorship Her friend said that as a result of incorporating her business she is saving thousands of dollars of tax each year Ms Wilson has asked your advice as to whether she should incorporate the business and has setup a meeting with you on Monday next week In anticipation of the meeting your boss has asked you to prepare the following calculations and analysis in order to give to Ms Wilson Prepare memo to present to Ms Wilson, with reference to the exhibits containing your calculations as needed Required Advise her with respect to any income tax deferral that will be available on income retained by the corporation, assuming that 100 of the after tax funds are retained within the corporation and are not paid out to her personally Determine any income tax savings that will be available if all the after tax income is distributed as taxable dividends Consider the tax implications if Ms Wilson were to receive $12,000 after tax Determine the amount that would be required in the way of a salary and in the way of a taxable dividend in order to provide her with after tax cash of $12,000 Which alternative would have the lowest income tax cost to Ms Wilson and the corporation Briefly describe any other factors that Ms Wilson should consider in deciding whether to receive taxable dividends or salary Part B You had a successful meeting with Ms Wilson this past Monday She has decided to incorporate her business, as incorporating creates a separate legal entity and should provide her limited liability Her new corporation is called Clean Smoothies, Ltd ( CL ) While you were in the mee ng with Ms Wilson she brought up a few new items that you believe require some tax analysis Notes from the Monday mee ng with Ms Wilson Ms Wilson is looking for advice on how to acquire a vehicle CL owns a vehicle that Ms Wilson would like to use personally In order to save money, she is considering having CL sell her the vehicle for 50 of its fair market value Ms Wilson thinks this would be a good way for her to obtain a vehicle, but only at a fraction of the cost compared to if she were to go and buy a vehicle directly from a car dealership Ms Wilson is considering purchasing an interest in Powder Strength, Ltd (PS), a company that manufactures and distributes protein powder PS is currently owned 100 by Jerry Li, Ms Wilson's brother in law (i e Jerry is married to Ms Wilson's sibling) Ms Wilson wants to purchase a 30 interest in PS from Jerry at a fair market value price PS has been quite successful in the protein powder industry, generating over $700,000 of active business income last year Ms Wilson thinks the acquisition in PS would be a good investment, but she does not want to do anything that would impact CL Your boss has asked you to draft a response to Ms Wilson which should address the following Required Do you agree with Ms Wilson that having the company sell her the vehicle at 50 of its fair market value is a good idea Explain the relevant tax rules and your conclusion Ms Wilson with thoughts regarding the tax implications of acquiring a 30 interest in PS Describe the tax implications to CL (if any), and why the rules would apply

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Posted on Jul 09, 2024

Part A: You have successfully graduated Conestoga College and have joined a public accounting firm in their tax department. You have been assigned to work

Part A:

You have successfully graduated Conestoga College and have joined a public accounting firm in their tax department. You have been assigned to work on a project with Emily Wilson, one of the firm's newest clients. Ms. Wilson is a wealthy individual and has come to the firm seeking tax advisory services.

Ms. Wilson works full-time as a CFO of a large Canadian grocery store and has annual employment income in excess of $500,000. Because of this, any additional income that she receives will be subject to a combined federal/provincial income tax rate of 53.5%. In addition, several years ago she began to carry on a business as a sole proprietor selling organic smoothies at small local grocery retailers. Sales have been growing each year, and she is forecasting additional growth in the future. Ms. Wilson anticipates business income of $62,000 for the 2023 taxation year.

In her province of residence:

the corporate income tax rate is 3.7% on income eligible for the small business deduction and 11.5% on other corporate income the dividend tax credit is 14.1% of the dividend gross up for non-eligible dividends and 10% for eligible dividends.

Ms. Wilson was recently at a social gathering where she spoke with a friend who recently incorporated their sole proprietorship. Her friend said that as a result of incorporating her business she is saving thousands of dollars of tax each year.

Ms. Wilson has asked your advice as to whether she should incorporate the business and has setup a meeting with you on Monday next week.

In anticipation of the meeting your boss has asked you to prepare the following calculations and analysis in order to give to Ms. Wilson. Prepare memo to present to Ms. Wilson, with reference to the exhibits containing your calculations as needed.

Required:

Advise her with respect to any income tax deferral that will be available on income retained by the corporation, assuming that 100% of the after-tax funds are retained within the corporation and are not paid out to her personally.
Determine any income tax savings that will be available if all the after-tax income is distributed as taxable dividends.
Consider the tax implications if Ms. Wilson were to receive $12,000 after-tax:
1. Determine the amount that would be required in the way of a salary and in the way of a taxable dividend in order to provide her with after tax cash of $12,000.
2. Which alternative would have the lowest income tax cost to Ms. Wilson and the corporation?
3. Briefly describe any other factors that Ms. Wilson should consider in deciding whether to receive taxable dividends or salary.

Part B:

You had a successful meeting with Ms. Wilson this past Monday. She has decided to incorporate her business, as incorporating creates a separate legal entity and should provide her limited liability. Her new corporation is called Clean Smoothies, Ltd. ("CL"). While you were in the mee????ng with Ms. Wilson she brought up a few new items that you believe require some tax analysis.

Notes from the Monday mee????ng with Ms. Wilson:

Ms. Wilson is looking for advice on how to acquire a vehicle. CL owns a vehicle that Ms. Wilson would like to use personally. In order to save money, she is considering having CL sell her the vehicle for 50% of its fair market value. Ms. Wilson thinks this would be a good way for her to obtain a vehicle, but only at a fraction of the cost compared to if she were to go and buy a vehicle directly from a car dealership.
Ms. Wilson is considering purchasing an interest in Powder Strength, Ltd. (PS), a company that manufactures and distributes protein powder. PS is currently owned 100% by Jerry Li, Ms. Wilson's brother-in-law (i.e. Jerry is married to Ms. Wilson's sibling). Ms. Wilson wants to purchase a 30% interest in PS from Jerry at a fair market value price. PS has been quite successful in the protein powder industry, generating over $700,000 of active business income last year. Ms. Wilson thinks the acquisition in PS would be a good investment, but she does not want to do anything that would impact CL.

Your boss has asked you to draft a response to Ms. Wilson which should address the following.

Required:

Do you agree with Ms. Wilson that having the company sell her the vehicle at 50% of its fair market value is a good idea? Explain the relevant tax rules and your conclusion.

Ms. Wilson with thoughts regarding the tax implications of acquiring a 30% interest in PS. Describe the tax implications to CL (if any), and why the rules would apply.