Question 1 - 25 marks

Ms. Dundastard, a Canadian resident, has owned all of the shares of Dundas Distributors Inc. (DDI) for over 10 years. She is also the president and the key employee of the corporation which carries on a wholesale distribution business in the Niagara Peninsula of Ontario. The corporation's asset mix has been quite stable for the past three years. The corporate Balance Sheet at September 30, 2020, and appraised fair market values (FMV), shows the following:

Assets Balance Sheet FMV

Cash $ 3,600 $ 3,600

Accounts receivable (net of $1,500 allowance) 13,400 12,700

Inventory 190,000 200,000

Term deposits 155,000 155,000

Shares in Trading Spaces Suppliers Ltd. (TSSL) 23,000 18,700

Land 140,000 215,000

Building, fixtures and equipment (net of amortization) 215,000 305,000

$740,000 $910,000

Liabilities

Accounts payable $ 18,000

Future income taxes 45,000

Long-term debt 325,000

388,000

Capital

Common shares 1,000

Retained earnings 351,000

$740,000

When the above assets were appraised, a valuation of the corporation's customer lists and goodwill, due to location and management, determined that they were worth $90,000.

The term deposits represent a build-up of surplus funds that have not been required in DDI's business over the last several years.

The shares owned by DDI in TSSL are common shares and amount to 18% of the total FMV of TSSL common shares. TSSL, which has no investment assets, is a CCPC carrying on its business across southern Ontario and is a supplier to DDI.

Ms. Dundastard is considering a transaction that will realize her capital gains exemption, none of which she has used to date.

Required:

1. Advise Ms. Dundastard on whether her shares in DDI can be considered to be qualified small business corporation shares (QSBCS). If not, advise her on the most tax effective steps that should be taken to ensure that the shares qualify.

1. As part of the plan that she is considering and ignoring any steps recommended in Part (A), Ms. Dundastard will transfer her shares to a holding corporation which she will incorporate with her husband, so that she and her husband will each own 50% of the common shares of the holding corporation. In return for her shares in DDI, she will receive preferred shares with a FMV of $657,000, which is equal to the FMV of her common shares in DDI. The preferred shares will pay a 3% dividend annually. Her husband stays home to look after the couple's three young children and is a part-time PhD student in socialist philosophy. If DDI builds up too much in non-active investment assets in future years, explain why section 74.4 would apply and show the results of its application. Assume a prescribed interest rate of 4%.

Question 2- 50 Marks

BC Enterprises Ltd. is a Canadian-controlled private corporation located in Vancouver, British Columbia. For its fiscal year ended December 31, 2020, the corporation had correctly calculated its income for tax purposes under Division B and some of the federal Part I tax as follows:

Domestic sources

Retail income $ 160,000

Advertising agency loss (80,000)

Rental income from unused warehouse fully rented on a five-year lease 25,000

Retailing income 330,000

Interest on outstanding accounts receivable in retailing business 15,000

Recapture of CCA from sale of fixtures used in retailing business 10,000

Interest income from five-year bonds 20,000

Taxable capital gains net of losses (from active assets) 70,000

Dividends from non-connected taxable Canadian corporations (eligible dividend) 12,000

Foreign sources

Foreign business income in C$ earned through unincorporated branch in

United States before C$11,500 in income tax paid in United States 45,000

Foreign non-business income in C$ before C$6,000 withheld 40,000

Division B net income for tax purposes $647,000

Division C deductions: charitable donations ($12,500 + $3,000) (15,500)

dividends (Canadian-source) (12,000)

non-capital losses (50,000)

net capital losses (14,000)

Taxable income $555,500

Federal tax @ 38% $211,040

Federal abatement (Note 1) (48,000)

Partial Part I tax correctly computed $163,090

Notes with additional information

(1) The corporation has permanent establishments in British Columbia and the state of Washington in the United States. The federal abatement has been correctly computed based on its gross revenue and salary and wages information.

(2) BC Enterprises Ltd. made the following selected payment during the year:

Charitable donations 12,500

(3) Four quarterly dividends of $30,000 (non-eligible dividend) were declared at the end of each quarter of the 2020 fiscal year and were paid within two weeks of their declaration. The dividend for the last quarter of 2020 was paid in January 2021. A dividend of $25,000 (non-eligible dividend)declared in the last quarter of 2019 was paid in January 2020.

(4) BC Enterprises Ltd. had allocated all but $40,000 of its business limit to other associated corporations. Taxable capital does not exceed $10,000,000 within the associated group. The only scientific research and experimental development expenditures of the associated group were made by BC Enterprises Ltd.

(5) The balances in the tax accounts on December 31, 2019 were:

Charitable donation carryforward $ 3,000

Unused business foreign tax credit 3,500

Non-capital losses from 2015 50,000

Net capital losses from 2016 14,000

Refundable dividend tax on hand (Non-eligible Dividend) 20,000

Dividend refund for 2019 (Non eligible Dividend) 9,000

Required:

Determine, by clearly presenting all component parts and their calculations,

1. total federal Part I tax payable for 2020, assuming that the foreign tax credits are equal to the foreign taxes paid, without recalculating the parts of the Part I tax already computed or assumed correctly above, and

1. the amount of the dividend refund for 2020.

Show all calculations whether or not necessary to the final answer.