Corporate Tax Term Paper
Your answers, including calculations and appendices, must:
- not exceed 7 pages (maximum). Note: the coversheet does not count in the page limit but all other pages do count. You should number your pages;
- be double spaced;
- be Times New Roman (or an equivalent sized) font;
- have 12 point font (minimum);
- have normal margins (i.e., margins of at least one inch on the top, bottom and each side);
- be written in sentences for your qualitative discussion(s); and
- have "Portrait" as the page layout (and not "Landscape").
Marks will be deducted if any of the above instructions are not followed
It is now April 2018 and Jade, a client of your accounting firm, has just finished meeting with you, CPA, and Mr. Hat, a partner at your firm. Jade owns all the shares of J Inc. and additional information about Jade and J Inc. is provided in Exhibit I.
J Inc. owns all of the shares of two subsidiaries: Sub A Inc. and Sub B Inc. Additional information about these two subsidiaries is provided in Exhibit I.
Jade wants to know the income tax consequences if J Inc.: (a) exercises its conversion option with respect to its Sub A Inc. shares in 2018; or (b) has Sub A Inc. undertake a reorganization of share capital in 2018.
Mr. Hat wants you to draft a memo to him which he will then discuss with the client. Mr. Hat reminds you to calculate the ACB and PUC of J Inc.'s new Sub A Inc. shares. Give section, subsection and paragraph (where applicable) references from the Income Tax Act to support your answer.
With respect to Sub B Inc., which has had some financial difficulty, Mr. Hat wants you to discuss the income tax consequences, if any, related to Sub B Inc.'s non-payment of debt payable. Mr. Hat says you do not need to look into the possibility of amalgamating or winding up Sub B Inc. since he will look into this issue. You do not have to provide ITA references for this question.
Mr. Hat also has another client, Mrs. Thomas who is considering starting up a new Canadian business. Mrs. Thomas will own 100% of this new business and it is expected to earn $100,000 of Canadian active business income each year. Mrs. Thomas wants to know if there will be any income tax savings or cost in 2018 from earning $100,000 of Canadian active business income personally versus earning it in a new Canadian corporation (CanCo.) See Exhibit II for additional details.
Mr. Hat wants you to answer this question in your memo and he will then discuss the issue with the client. Mr. Hat says you should assume that CanCo. will pay all after-tax cash out to Mrs. Thomas as a dividend in 2018. 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 but you must consider federal and provincial income taxes (provincial tax rates are given in the Exhibit) and you need to show all your calculations. Note: you will lose 1 mark for each incorrect item included in your analysis of income tax savings or cost.
Mr. Hat also wants you to look into one more issue for him, relating to another client Mr. Simpson. You prepare Mr. Simpson's tax returns and handle other tax compliance and tax planning matters.
Mr. Simpson owns all the shares of M Inc., a CCPC, and he is a risk taker. Mr. Simpson recently said: "I realize that what I'm about to propose is risky but I'm willing to take the risk. Also, if you say no I may take my business to another accounting firm. I've personally invested $3M with an offshore company and I don't want to report any of this foreign income on my Canadian tax return. I also don't want to fill out any foreign reporting forms. I'm aware that there's a chance I'll be audited and there could be trouble, but I'm fine with this risk. If you help with this, in addition to my regular fees, I'll also pay your firm 30% of any tax savings that I get with regards to this foreign income. This way we can both benefit from the extra cash."
Mr. Hat wants your advice with respect to Mr. Simpson. What specifically should be done in this situation and why? You do not need to do any calculations or give ITA references for this issue.
Attachment:- Exhibit.rar