Your friend Keara Taylor runs a small hat manufacturing company. The business is currently being operated as a sole proprietorship. The business has been in operation for at least 5 years and is starting to make a significant amount of income. The estimated manufacturing income for 2019 is $250,000. Keara has heard that you have taken a tax course at Ryerson and has come to you for advice.

She provides you with the following information:

She lives in a province where the tax on active business income is 5% and 14% on ABI in excess of the small business limit. Further Keara herself (i.e. her personal tax rate) is taxed at the top marginal rate of 50%.

Required:

1. a)Based on the theory and a conceptual understanding of incorporation, determine whether Keara can save and/or defer income tax through incorporation of her hat manufacturing business (Keara Taylor Inc.)
2. b)What would be the impact on your conclusions in part a if the province of residencedeclared a tax holiday for CCPC's with income eligible for small business deduction.
3. c)Keara says she has heard that dividends from taxable Canadian corporations are deductible in a corporation under Division C and so are not taxed in the receiving

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corporation. As a result, Keara would like to transfer some of her investments into her new corporation Keara Taylor Inc. to take advantage of tax deferral. She is particularly interested in transferring her 15% ownership in Fuzzy Inc., a manufacturer of fuzzy pillows for kids because she sees that she will receive a large amount of dividends from this corporation. Advise Keara as to whether her understanding is true and any impact this might have on the taxation of active business income.