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Income Tax Payable of Mr. Rich

1. A.

Statement showing Income Tax Payable of Mr. Rich

Particulars

Amount

Amount

Business Income

 $ 584,000.00

Interest Income

 $   50,000.00

Dividend on Universal corporation

 $  10,000.00

Gross up amount

 $    1,700.00

Total Dividend from UC

 $   11,700.00

Dividend on Public companies

 $  15,000.00

Gross up amount

 $    5,700.00

Dividend from Public company Shares

 $   20,700.00

Foreign Business Income

 $    5,000.00

Add: Tax withheld

 $    2,500.00

Gross foreign business income

 $     7,500.00

Foreign Dividend

 $    3,000.00

Add: Tax withheld

 $       750.00

Gross foreign dividend

 $     3,750.00

Taxable income

 $ 677,650.00

Combined Federal and provincial tax rate

51%

Tax payable

 $ 345,601.50

Tax credits:

Tax credit on eligible dividend

 $   (2,850.00)

Tax credit on Non eligible dividend

 $      (340.00)

Tax Credit for foreign business income

 $   (2,500.00)

Tax credit for foreign dividend

 $      (562.50)

Total credit

 $   (6,252.50)

Net Tax Payable

 $ 339,349.00

 Table 1: Income Tax calculation

(Source: Created by Author)

 The income tax that is payable by Mr. Rick is calculated based on the provisions of Income Tax Act 1985. The calculation shows that the net tax payable is $339349.

B.

Statement showing Income Tax Payable of  Rich Ltd

Particulars

Amount

Amount

Business Income

 $  584,000.00

Interest Income

 $    50,000.00

Dividend income

 $    25,000.00

Foreign business income

 $      7,500.00

Foreign non business income

 $      3,750.00

Net Income For tax purpose

 $  670,250.00

Division C deductions:

Portfolio dividend

 $   (20,700.00)

Net Taxable Income

 $  649,550.00

Tax Payable

Basic Federal tax Rate (6490000X38%)

 $  246,829.00

Federal Tax Abatement

 $   (65,900.00)

Small business deduction minimum of the following

17.5% of Active Business Income (A)

 $  102,200.00

Taxable Income

 $  659,000.00

Less: 10/2.8X FTCNBI

 $     (2,678.25)

3.776X FTCBI

 $     (9,440.00)

Net taxable income (B)

 $  646,881.75

Lower of the above (A or B)

 $ (646,881.75)

Net Tax payable

 $ (465,952.75)

 Table 2: Tax payable

(Source: Created by Author)

C. The dividend is often regarded as one of the best way of providing remuneration to the owner manager. It is because dividend does not attract much personal tax as salary.

Statement showing Income Tax Payable of Mr. Rich

Particulars

Amount

Amount

Business Income

 $  584,000.00

Interest Income

 $    50,000.00

Dividend on Public companies

 $   15,000.00

Gross up amount

 $     5,700.00

Dividend from Public company Shares

 $    20,700.00

Foreign Business Income

 $      5,000.00

Add: Tax withheld

 $      2,500.00

Gross foreign business income

 $      7,500.00

Foreign Dividend

 $      3,000.00

Add: Tax withheld

 $         750.00

Gross foreign dividend

 $      3,750.00

Taxable income

 $  665,950.00

Combined Federal and provincial tax rate

51%

Tax payable

 $  339,634.50

Tax credits:

Tax credit on eligible dividend

 $     (2,850.00)

Tax Credit for foreign business income

 $     (2,500.00)

Tax credit for foreign dividend

 $        (562.50)

Total credit

 $     (5,912.50)

Net Tax Payable

 $  333,722.00

 Table 3: Tax payable

(Source: created by Author)

D. In the taxation system of Canada it is so designed that an individual should be indifferent to earning from corporation in the nature of salary or dividend. In order to avoid the double taxation on the amount of income the gross up and the dividend credit mechanism is conducted with the intention of integrating the taxation system. In this system, the corporate tax already paid is recognized on the amount of dividend received from the companies. There are two types of dividends eligible or non-eligible. In case of dividend, the actual figures are grossed up and the tax credit reflects the corporate tax paid. Therefore, it can be said that the system is perfectly integrated.  

E. The individual tax rate can be reduced by availing following deductions and credits:

  • Donor deduction;
  • Child care expense;
  • Accounting fees or fess for preparing return;
  • The car expenses if it is used for the purpose of employment;
  • The contributions made to RRSP;
  • The tax free saving is an important way of reducing taxes is Canada;
  • The loan taken from super and the payment of interest on that amount can help an individual taxpayer in reducing the tax payable.
  • The tax credit for children fitness;
  • The amount related to public transport;

Based on the above discussion it can be said that an individual can use the above-mentioned method for reducing the tax liability. In this case, some of the above suggestions can be applied for reducing the tax liability of the company. For example Mr. Rich can deduct the amount of car expenses and donor contribution for reducing the tax liability.

The corporations can reduce the tax liability by applying the following:

  • The document related to business expenses should be properly maintained;
  • The Registered Retirement Savings Plan (RRSP) should be managed properly;
  • The non-capital losses should be managed effectively;
  • The income tax credit for charitable contribution should be increased.
  • The capital cost allowance and the income tax claim should be maximized;
  • The income should be split;

In this case, if the business applies the following method then the tax payable by the corporation can be reduced. 

2. A. The section 85 allows the tax-free rollover of the property by an individual to a corporation.  The main purpose of the sub section 85(1) is to allow the taxpayer a defer gain on the assets transferred to the Canadian corporation. The properties that are not allowed for transfer under section 85(1) are cash, prepaid and real properties like land and building. 

B. The assets that can be transferred but are not an ideal option of transferring are:

  • The accounts receivable should not be transferred under section 85(1) as the section 22 is the better option for receivables.
  • The shares that qualify for QSBC deduction should not be transferred.
  • The depreciable assets that have terminal losses should not be transferred.
  • The non-depreciable assets that have accrued losses should not be transferred.

C. The elected price must be between the UCC (for depreciable assets) or ABC for non-depreciable properties and the fair market value.

D. The subsection 85(1) states that if a property is transferred to a corporation then as per the section 85(2.1) the class of share can be reduced as the consideration. In this case Joes cost on consideration is $295000.00.

E. The interest amount that is paid on debt is less taxable. Hence, if the corporation uses maximum debt then it will be helpful in saving taxes.

 3. 

Statement showing tax liability on selling of Assets

Particulars

Amount

Cash

 $      54,500.00

Accounts Receivable

 $    372,250.00

Inventories

 $    976,000.00

Land

 $    405,000.00

Building

 $ 2,061,000.00

Equipment

 $    171,250.00

Fair Market Value of assets (A)

 $ 4,040,000.00

Current Liabilities

 $    697,000.00

Loan From Shareholder

 $    137,500.00

Common Stock

 $    265,000.00

Retained Earnings

 $    862,250.00

Liabilities taken over

 $ 1,961,750.00

Amount received on selling of business (B)

 $ 2,078,250.00

Cost of business

 $    265,000.00

Capital Gain

 $ 1,813,250.00

Inclusion rate

 $    906,625.00

Taxable capital gain

 $    906,625.00

Tax liability

Federal Tax

 $    299,186.25

Provincial Rate

 $    163,192.50

Total Tax Liability

 $    462,378.75

Table 4: Tax liability

(Source: Created by Author)

Statement showing tax liability on selling shares

Particulars

Amount

Amount received from Share

 $ 3,508,000.00

Less:

Cost of share purchased

 $    265,000.00

Capital Gain

 $ 3,243,000.00

Inclusion rate

 $ 1,621,500.00

Taxable Capital Gain

 $ 1,621,500.00

Tax liability

Federal Tax

 $    535,095.00

Provincial Rate

 $    291,870.00

Total Tax Liability

 $    826,965.00

Table 2: Tax liability

(Source: Created by Author)

Based on the above discussion it can be seen that the tax liability is minimum for the selling of business assets. Though the tax liability is less in the selling of assets at market value but the net amount that is received from selling assets at market value is $444246.25. On the other hand, the net amount received on selling the shares is $749535. Therefore, based on the above discussion it can be said that the option of selling shares should be selected. 

Reference

Bujaki, M. L., Gaudet, S., & Iuliano, R. M. (2017). Governmentality and identity construction through 50 years of personal income tax returns: The case of an immigrant couple in Canada. Critical Perspectives on Accounting.

Parajuli, R., Sarangi, S., Chang, S. J., & Hill, R. C. (2016). The United States-Canada softwood lumber trade: An actual versus optimal export tax. Forest Policy and Economics, 73, 112-119.

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