Part A:

You have successfully graduated Conestoga College and have joined a public accoun$$ng 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$-$me as a CFO of a large Canadian grocery store, and has annual employment

income in excess of $$500,000.$ Because of this, any addi$$onal income that she receives will be subject to

a combined federal$/$provincial income tax rate of $53\mathrm{.}5\%.$ In addi$$on$,$ 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 forecas$$ng addi$$onal growth in the future. Ms$.$ Wilson

an$$cipates business income of $$62,000$ for the $2023$ taxa$$on year.

In her province of residence:

$-$ the corporate income tax rate is $3\mathrm{.}7\%$ on income eligible for the small business deduc$$on and

$11\mathrm{.}5\%$ on other corporate income the dividend tax credit is $14\mathrm{.}1\%$ 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 incorpora$$ng 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

mee$$ng with you on Monday next week.

In an$$cipa$$on of the mee$$ng your boss has asked you to prepare the following calcula$$ons and analysis

in order to give to Ms$.$ Wilson. Prepare a memo to present to Ms$.$ Wilson, with reference to the exhibits

containing your calcula$$ons as needed.

Required:

$1.$ Advise her with respect to any income tax deferral that will be available on income retained by

the corpora$$on$,$ assuming that $100\%$ of the a$$er$-$tax funds are retained within the corpora$$on$,$

and are not paid out to her personally.

$2.$ Determine any income tax savings that will be available if all the a$$er$-$tax income is distributed

as taxable dividends.

$3.$ Consider the tax implica$$ons if Ms$.$ Wilson were to receive $$12,000$ a$$er$-$tax:

a$.$ 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 a$$er tax cash of $$12,000.$

b$.$ Which alterna$$ve would have the lowest income tax cost to Ms$.$ Wilson and the

corpora$$on$?$

c$.$ 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 mee$$ng with Ms$.$ Wilson this past Monday. She has decided to incorporate her

business, as incorpora$$ng creates a separate legal en$$ty and should provide her limited liability. Her

new corpora$$on is called Clean Smoothies, Ltd$.($CL$).$ While you were in the mee$$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 frac$$on 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, genera$$ng over $$700,000$ of ac$$ve business income

last year. Ms$.$ Wilson thinks the acquisi$$on 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 dra$$ a response to Ms$.$ Wilson which should address the following.

Required:

$4.$ 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.

$5.$ Provide Ms$.$ Wilson with your thoughts regarding the tax implica$$ons of acquiring a $30\%$ interest

in PS$.$ Describe the tax implica$$ons to CL $($if any$),$ and why the rules would apply