You, CPA, work for Fair Accounting Inc. (FAI) an accounting professional corporation in Canada. It is now July 2018 and you have just finished meeting with Joe Kari, the president of FAI, and your client Ann Stanley.
Ann is a 65 year-old resident of Canada who is considering doing an estate freeze. Additional information about your client is provided in the Exhibit. Joe wants you to draft a memo to him describing and calculating the federal income tax consequences to your client from the proposed estate freeze. Make sure you describe all the income tax consequences to both Ann and to Newco and show your calculations. You should give Income Tax Act (ITA) section, subsection and paragraph (where applicable) references in order to support your answer. Do not list multiple ITA references. You can ignore Division E.1 of the ITA (Minimum tax). Joe reminds you that the capital gains exemption limit in 2018 has increased, based on inflation, and he suggests you look this up.
Separate from this proposed estate freeze, another client of FAI, Ronaldo, is considering making a large investment in capital gains earning investments. Ronaldo deal's at arm's length with Ann Stanley. If Ronaldo makes this investment he expects to earn $200,000 of capital gains each year and wants to know if there will be any tax savings or tax cost in 2018 from earning $200,000 of capital gains personally versus earning it in a new holding corporation (Holding Co.) See the Exhibit for additional details on this potential investment.
Joe wants you to add your answer to Ronaldo's question to your memo. Joe will then discuss the issues with the clients after hearing from you. He says that you should assume that Holding Co. will pay the maximum amount of dividends to Ronaldo. Assume any dividend refund related to 2018 will also be paid to Ronaldo in 2018 as a dividend. Show all relevant calculations and round to the nearest dollar. You can ignore the basic personal tax credit. You do not need to give ITA references for this question but you must consider federal and provincial income taxes (and provincial tax rates are given in the Exhibit). Joe reminds you to look up federal personal tax rates. Note: you will lose 1 mark for each incorrect item included in your analysis of income tax savings or cost.
Joe asks you to look into one more issue for him, relating to a third client, Mr. Batista. Mr. Batista is a long-time tax client of FAI and for his 2018 personal income tax return, he has asked you to do the following:
"When you prepare my personal tax return, which you file electronically, I would like you to deduct $25,000 of interest expense from my income as a carrying charge. I did not incur any interest expense but I want a larger tax deduction to minimize my tax. Since we file tax returns electronically we may not need any supporting documents. If I get audited then I'll pay any extra tax owing but I'd like to take the chance. I am fine with this risk. If you help with this, in addition to my regular fees, I'll also pay your firm one-quarter of any tax savings that I get with regards to this additional deduction. This way we can both benefit."
Joe wants your advice on what specifically should be done in this situation and why? No calculations and no ITA references are needed.
Attachment:- Exhibit.rar