You have successfully graduated College and have joined a public accounting firm in their tax department. You have been assigned to work on a project with Alice Wu$,$ one of the firm$$s newest clients. Ms$.$ Wu is a wealthy individual, and has come to the firm seeking tax advisory services. Ms$.$ Wu works full$-$time as a graphic designer, and has annual employment income in excess of $$300,000.$ Because of this, any additional income that she receives will be subject to a combined federal$/$provincial income tax rate of $51\%.$ In addition, several years ago she began to carry on a business as a sole proprietor selling personalized t$-$shirts and apparel. Sales have been growing each year, and she is forecasting additional growth in the future. Ms$.$ Wu anticipates business income of $$142,000$ for the $2023$ taxation year. In her 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 Ms$.$ Wu 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 incorporating her business she is saving thousands of dollars on tax each year. Ms$.$ Wu has asked your advice as to whether she should incorporate the business and has setup 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 in order to give to Ms$.$ Wu$.$ Prepare a memo to present to Ms$.$ Wu$,$ with reference to the exhibits containing your calculations as needed. Required:

$1.$ Advise her 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 her personally.

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

$3.$ Consider the tax implications if Ms$.$ Wu 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 in order to provide her with after tax cash of $$25,000.$

b$.$ Which alternative would have the lowest income tax cost to Ms$.$ Wu and the corporation.

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

Part B:

You had a successful meeting with Ms$.$ Wu this past Monday. She has decided to incorporate her business, as incorporating creates a separate legal entity and should provide her limited liability. Her new corporation is called Apparel$-4-$You, Ltd$.($A$4$Y$).$ While you were in the meeting with Ms$.$ Wu she brought up a few new items that you believe require some tax analysis. Notes from the Monday meeting with Ms$.$ Wu: $-$ Ms$.$ Wu is looking for advice on how to pay for a new swimming pool she plans to put in this summer. She was thinking it would be a good idea to have the company pay for a swimming pool at her personal residence. Ms$.$ Wu thinks having the company directly pay for the pool would be better than paying herself sufficient salary to construct the pool with her own funds. $-$ Ms$.$ Wu is considering acquiring a corporation, Loss Boss, Ltd$.$ She thinks it would be a good acquisition as Loss Boss, Ltd$.$ has tax preferences items that A$4$Y may be able to utilize. A$4$Y has recently recognized significant capital gains, as well as growth in taxable income. Ms$.$ Wu sees the acquisition of Loss Boss, Ltd$.$ as a strategic move so that their carryover items can offset the taxable items of income of A$4$Y$.$Loss Boss, Ltd$.$ is in the business of selling DVDs$,$ which Ms$.$ Wu considers an obsolete industry. Her plans would be to discontinue the business operations post acquisition. Your boss has asked you to draft a response to Ms$.$ Wu which should address the following.

Required:

$4.$ Do you agree with Ms$.$ Wu that having the company directly pay for the pool would be better than paying herself sufficient salary to construct the pool with her own funds? Explain the relevant tax rules and your conclusion.

$5.$ Provide Ms$.$ Wu with your thoughts regarding the acquisition of Loss Boss, Ltd$.$ Has Ms$.$ Wu 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.