You have joined a public accounting firm in the tax department. You have been assigned to work on a project with John Peter, one of the firm$$s newest clients. Mr$.$ Peter is a wealthy individual and has come to the firm seeking tax advisory services. Mr$.$ Peter works full$-$time as an engineer and has an annual employment income in excess of $$300,000.$ Because of this, any additional income that he receives will be subject to a combined federal$/$provincial income tax rate of $51\%.$ In addition, several years ago he began to carry on a business as a sole proprietor selling personalized mugs and apparel. Sales have been growing each year, and he is forecasting additional growth in the future. Mr$.$ Peter anticipates a business income of $$142,000$ for the $2023$ taxation year.

In his province of residence:

$$ the corporate income tax rate is $2\mathrm{.}5\%$ on income eligible for the small business deduction and $13\%$ on other corporate income.

$$ the dividend tax credit is $20\%$ of the dividend gross$-$up for non$-$eligible dividends and $30\%$ for eligible dividends.

Mr$.$ Peter was recently at a gathering where he spoke with a friend who recently incorporated their sole proprietorship. His friend said that because of incorporating his business he is saving thousands of dollars on tax each year.

Mr$.$ Peter has asked your advice on whether he should incorporate the business and has set up 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 to give to Mr$.$ Peter. Prepare a memo to present to Mr$.$ Peter, with reference to the exhibits containing your calculations as needed.

Requirements:

$1.$ Advise him 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 him personally.

$2.$ Determine any income tax savings available if all the after$-$tax income is distributed as taxable dividends.

$3.$ Consider the tax implications if Mr$.$ Peter were to receive $$25,000$ after$-$tax

a$.$ Determine the amount that would be required in the way of a salary and in the way of a taxable dividend to provide him with after tax cash of $$25,000.$

b$.$ Which alternative would have the lowest income tax cost to Mr Peter and the corporation.

c$.$ Briefly describe any other factors that Mr$.$ Peter should consider in deciding whether to receive taxable dividends or salary.

You had a successful meeting with Mr$.$ Peter this past Wednesday. He has decided to incorporate his business, as incorporating creates a separate legal entity and should provide him limited liability. His new corporation is called Hands Free, Ltd$.($HF$).$ While you were in the meeting with Mr$.$ Peter he brought up a few new items that you believe require some tax analysis. Notes from the Wednesday meeting with Mr$.$ Peter:

$$ Mr$.$ Peter is looking for advice on how to pay for a new swimming pool he plans to put in this summer. He was thinking it would be a good idea to have the company pay for a swimming pool at his personal residence. Mr$.$ Peter thinks having the company directly pay for the pool would be better than paying himself sufficient salary to construct the pool with his own funds.

$$ Mr$.$ Peter is considering acquiring a corporation, Loss Boss, Ltd$.$ He thinks it would be a good acquisition as Loss Boss, Ltd$.$ has tax preferences items that HF may be able to utilize. HF has recently recognized significant capital gains, as well as growth in taxable income. Mr$.$Peter sees the acquisition of Loss Boss, Ltd$.$ as a strategic move so that their carryover items can offset the taxable items of income of HF$.$ Loss Boss, Ltd$.$ is in the business of selling DVDs$,$ which Mr$.$ Peter considers an obsolete industry. His plans would be to discontinue the business operations post acquisition.

Your boss has asked you to draft a response to Mr$.$ Peter which should address the following.

Required:

$1.$ Do you agree with Ms$.$ Wu that having the company directly pay for the pool would be better than paying himself sufficient salary to construct the pool with his own funds? Explain the relevant tax rules and your conclusion.

$2.$ Provide Mr$.$ Peter with your thoughts regarding the acquisition of Loss Boss, Ltd$.$ Has Mr$.$ Peter considered all the tax implications of the proposed acquisition? Comment on what would happen to the net capital loss carryovers and non$-$capital loss carryovers.