Problem If Ergold Ltd. is a Canadian subsidiary of a vedish company. The company is a distributor of automated milking machines to dairy farmers in Canada. Its sole supplier is the Swedish parent company. The current transfer pricing policy between Ergold Ltd. and its parent company has resulted in losses in Canada for its years of operation since incorporation as follows: Year Ended Taxable Gross December 01 Loss Revenue 2014 0 200,000 $ 0,000,000 2015 0 400,000 $ 0,500,000 2010 0 050,000 $ 0,500,000 The company does not appear to have any internal or external uncontrolled comparable transac- tions that would allow you to apply a traditional transaction method. In discussions with some of your colleagues in your Toronto office transfer pricing group, you have discovered that recent transfer pricing studies have concluded, using the transactional net margin method, that similar distributors operating in Canada earn an operating margin percentage of 5'30 of sales. You mention this to the controller. He indicates that he does not believe that there is much of a concern as he has heard that because of the company's small size there would not be any penalties applicable if the CRA were to audit. Ergold's effective tax rate is approximately 2090. How would you respond to the controller? How can you convince the controller that he should consider having your firm prepare a transfer pricing report to provide it with documentation to support its transfer pricing? Problem 0 Witmold Ltd., a subsidianr of a US. corporation, received a loan from the U0. parent company of $0 million on December 2, 2015 to purchase manufacturing equipment. The company started maldng loan payments of $12,500 per month on January 2, 2010. On July 15, due to a problem collecting from its major customer, the company borrowed an additional $000,000 from the U.0. parent. This loan was a 2'30 loan and was repaid 14 days after receipt when the customer paid the accounts receivable. Because of the above problem, the company did not make its August to lIClctober payments on the loan but began maldng payments again in November. Witmold Ltd. plans to catch up and make its August to October payments sometime in 201?. The total interest expense booked to the financial statements for 2010 was $450,000 for both loans. In November 2010, Witmold's controller realized that, due to thin capitalisation restrictions, the interest deduction on the loan for tax purposes would be limited. As a result, on November 00, 2010, $500,000 of the loan balance was converted to paid-up capital of the conunon shares held by the [1.0. parent company. There were no other share capital transactions during the year. Witmold's comparative balance sheet for its December 01, 2010 taxation year was as follows: 2010 2015 Assets Cash 0 250,000 $ 0,200,000 AIR 000,000 500,000 Inventory 1,200,000 000,000 Fixed assets 0,000,000 400,000 Total assem 0 0,050,000 0 '1,000,000 Liabilities Ch. 19/Study Guide - Assignment Problems Accounts payable 450,000 $ 300,000 Loan to parent 5,345,300 6,039,452 Equity Retained earnings 1,754,700 1,260,548 Common stock 800,000 300,000 Total liabilities & equity $ 8,350,000 $7,900,000 The details of the loan balance after each payment for 2016 was as follows: Loan Date Balance 02-Dec-15 $6,000,000 02-Jan-16 5,966,952 02-Feb-16 5,933,687 02-Mar-16 5,900,203 02-Apr-16 5,866,499 02-May-16 5,832,573 02-Jun-16 5,798,424 02-Jul-16 5,764,051 02-Aug-16 5,801,951 02-Sep-16 5,840,101 02-Oct-16 5,878,502 02-Nov-16 5,844,655 30-Nov-16 5,380,524 02-Dec-16 5,310,382 02-Jan-17 5,272,800 Compute the amount of interest that the company will be able to deduct for tax purposes for its December 31, 2016 taxation year end