Practice Case Assignment

Case Information:

A long-time Windsor Ontario business acquaintance, Doug James, who is 50 years old, has come to see you on November 1, 2021, for tax advice. Although he has heard about business incorporation, the possibility of double taxation has been a major deterrent to his incorporation to date.

Doug James is the President of and operates Football Accessories as a sole proprietorship. The operation consists of three retail outlets that sell all types of football equipment. The business services both individual and corporate accounts. The business has produced profit before income tax from sales over the past three years in the amounts of $470,000 (2018), $530,000 (2019), and $580,000 (2020).

In addition to his sports stores, Doug James generates substantial investment income which by itself has placed Doug James in the 53.53% personal income tax bracket. That annual investment income comes from dividends from Canadian public corporations ($150,000 annual cash dividends) and bond interest ($100,000). Due to a need to finance business growth, Doug and his spouse, Linda James (also 50 years old), have not saved any funds for retirement currently although they plan to retire at age 65.

Doug James maintains a modest lifestyle and draws $ 60,000 per year from his proprietorship for personal expenses, not including his personal income tax obligation.

Dougs son, Marc James, is 26 years old and is actively involved in the business based in Windsor, and earns an annual salary of $ 40,000. Marc plans to carry on the family business after graduation from the Odette School of Business. Dougs daughter, Michelle James, who is 21 years old, lives in Dallas, Texas, and is not actively involved in the business. Michelle James is the Controller for a family-owned business in Dallas and earns an employment income of $ 90,000 (Cdn) per year. Dougs wife, Linda James, does the bookkeeping and administration work for the business on a full-time basis and is paid $ 35,000 per year as a salary for her office services.

Linda James loaned Doug $200,000 interest-free from her personal funds, provided by inheritance, to start the business 20 years ago. The loan remains outstanding at the current time.

Doug and Linda James would like to purchase a retirement home in Dallas, Texas that would cost $ 350,000 (Cdn). Although it was a significant temptation, Doug James recently turned down an offer from an unrelated person to buy the net assets of his business for $ 3,000,000. A summary of the offer is below:

Assets at Fair Market Value	Current Tax Value of assets	Current Tax Value of Assets
Cash	$ 300,000	-
Accounts receivable	100,000	-
Inventory	200,000	100,000 (cost)
Land	200,000	50,000 (ACB)
Buildings	600,000	250,000 (UCC) (cost 400,000)
Equipment	100,000	40,000 (UCC) (cost 80,000)
Goodwill	1,500,000	0 (cost)

Required:

1. Prepare a list to Doug James on the tax planning issues that need to be addressed based on the above information. Include any supporting calculations and analyses you feel are necessary to assist in presenting your report. Include a bibliography for all referenced material.