AYB250 Lecture Notes - Lecture 10: Income Tax Assessment Act 1936, Client Confidentiality, Laptop

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lemonotter502

5 Jul 2013

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Lecture 10 taxation of investments and year end tax planning. If the company pays company tax, the dividend is then franked. Shareholders receive a credit for the tax paid and only pay the difference on their marginal tax: unfranked dividends do not receive a credit and are taxed at the full marginal rate. A recipient of a franked dividend includes the franking credit in their assessable income and receives an offset to reduce tax payable: this is called the gross up and credit (or gross up and offset) mechanism. If the dividend is not fully franked then the shareholder grosses up and credits only to the extent of the franking percentage. Franked dividend x imputation rate/(100 - imputation rate) Interest is taxed at the taxpayer"s marginal rate. Interest on borrowings can be offset against the interest earned when the money is invested. Securities when transferred may have capital gains and losses.

Related Questions

Simon Fahrquest is the sole shareholder of Dawg Ltd., a very successful business that was incorporated a number of years ago. The company has always qualified as a CCPC and uses a December 31 year end.

Simon has never been particularly fond of peopl, but has always loved dogs, particularly those of mixed breed. While he has no family, he currently owns 12 dogs, none of which are purebred.

While Dawg LTd. has always been very profitable, Simon has chosen to live modestly in a dog firendly residential property that he has owned for many years. Each year, he estimates the amount of cash that he will need for his living expenses which vary year to year and looks to his corporation to provide the needed cash.

Since after meeting Simon's financial needs, Dawg Ltd. always has cash that isn't required for operations, it donates at least $100,000 per year to the Society For The Prevention of Cruelty To Animals (SPCA), a registered charity. The donations specify that the funds must be used for the protection, maintenance, and placement of mixed breen dogs.

For 2016, Simon estimates that he will need $50,000 in after tax cash to meet his personal needs. He expects Dawg LTd. will have taxable income of $350,000 before any payments to him, all of which will qualify for the small business deduction. The provincial tax rate on such income if 2.5 percent.

In Simon's province of residence, the provinical taxes on the first $45,282 of taxable income total $4,528. Additional income will be taxed at a provincial rate of 12 percent. Also in this province, the provincial dividend tax credit for non-eligible dividends is equal to 32 percent of the dividend gross up.

For the 2016 taxation year, Simon estimates that his person tax credits will total $3,260.

Required:

A. Determine the tax cost of providiing Simon with the required $50,000 in after tax cash using only salary payments.

B. Determine the tax cost of providing Simon with the required $50,000 in after tax cash using only dividend payments.

C. Given the information in this problem, do you believe that better results could be achieved with a combination of salary and dividends? Would your answer be different if Simon's personal tax credits totalled $12,000? Calculations are not required in answering this part C.

D. Simon would like to increase his donations to the SPCA and has asked your advice on the most tax advantageous way to do this. What factors should be considered when analyzing this issue?

Ignore CPP Contributions and Canada employment credit in your solution.

No CPP amount is given in this question.

fuchsiatrout235

Question: Reading Federal Income Taxation of Corporations andShareholders Text: Study Chapters 7 & 8 o...

Reading

Federal Income Taxation of Corporations andShareholders

Text: Study Chapters 7 & 8of the Bittker & Eustice text.

Penalty Taxes on Undistributed CorporateIncome, Dividends and Other NonliquidatingDistributions

LESSON 6, PROBLEM #1

In not less than 1,000 words discuss "earnings and profits".Your discussion should include major differences between computingcurrent earnings and profits and current taxable income as well aswhy earnings and profits should be calculated before a corporationdecides to make a distribution to its shareholders.

LESSON 6, PROBLEM #2

Allan owns all of the stock of CadyCo. The stockâs basis is$100,000. CadyCo has a total of current and accumulated earningsand profits of $50,000. CadyCo distributes $200,000 cash to Allanâwith respect to his stockâ (i.e., as a state law âdividendâ). Howis the $200,000 taxed? What is Allanâs stock basis after thedistribution? Alternatively, CadyCo distributes to Allan his noteto CadyCo for $200,000 borrowed from CadyCo.

LESSON 6, PROBLEM #3

Assumptions: The stock of ChadCo is owned equally bytwo shareholders: SecondCo (a corporation) and Arnold (anindividual). ChadCo and SecondCo use the accrual method, Arnolduses the cash method. All use a calendar taxable year. Assume Â§1059 does not apply. Use a 34 percent corporate tax rate in thisproblem. During the current year, ChadCo accrued income andexpenses as follows:

Gross income from business	$500,000
Dividends on AT&T stock (consider Â§ 243)	100,000
Interest on municipal bonds (Â§ 103)	100,000
Capital gain	100,000
Total	$800,000
Deductible Â§ 162(a)(l) business expenses	$430,000
Noncapital expenses not deductible under Â§ 162(e)	90,000
Capital losses (see Â§ 1211(a))	146,000
Total	$666,000
Net	$134,000

(1) On December 24 of the preceding year, SecondCo and Arnoldincorporated ChadCo and capitalized ChadCo with cash of $100,000each. On December 31 of that preceding year, SecondCo and Arnoldreceived distributions from ChadCo of $5,000 each; ChadCo did notearn any income for that year. In addition, SecondCo and Arnoldreceived distributions of $5,000 each, in the current year.

Which distributions should be gross income to SecondCo andArnold, in what amounts, and why? What does E&P have to do withthis?

(2) Alternative: Arnold just bought the ChadCo shares onDecember 30 of the current year from another shareholder for FMV of$145,000, before the declaration and payment of a

$5,000 distribution to Arnold on December 31 of the currentyear.

Should the distribution be taxable income to Arnold?Why?

(3) Now assume that SecondCoâs basis in its ChadCo stock is$100,000 and Arnoldâs basis in his ChadCo stock is $40,000. OnJanuary 2 of the current taxable year, ChadCo distributes $100,000in cash to SecondCo and $100,000 in cash to Arnold. As of the endof the preceding taxable year, ChadCoâs accumulated E&P waszero.

What are the tax consequences of this distribution toChadCo, SecondCo, and Arnold? [Hint: First compute ChadCoâscurrent-year taxable income and then compute current- year E&Pbefore reducing the E&P for the distribution (âinterimE&Pâ); after reducing for the distribution, compute finalaccumulated E&P.]

(4) Variation: Assume Arnoldâs shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly?

How much dividend would SecondCo and the holders of Arnoldâsshares receive?

(5) Suppose under the basic facts in (3) above that ChadCo hadan accumulated de?cit of

$100,000 in its E&P account as of December 31 of thepreceding taxable year.

(6) If, on December 1 of the current year (the declarationdate), ChadCoâs board of directors voted to pay the $200,000distribution by mailing the checks on December 31 of the currenttaxable year (the payment date, the identi?cation of which is apractice generally used only by widely held corporations) toshareholders of record on December l5 of the current taxable year(the record date), such checks actually being received by SecondCoand Arnold in the mail on January 2 of the next year? Assume thatSecondCo and Arnold are the public and that they are the onlyshareholders (as in the basic facts).

How would your answer to (3) above change?

(7) Suppose that SecondCo is an individual and that ChadCo hasalways been an S corporation.

What is ChadCoâs E&Pâ? How is each shareholderâspersonal income tax return affected for the current year by the taxitems ofChadCo? How will ChadCo distribution of

$100,000 to each shareholder in the current year affectshareholders?

AYB250 Lecture Notes - Lecture 10: Income Tax Assessment Act 1936, Client Confidentiality, Laptop

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