W16 ADMS 4562 Assignment 2

8/19/2019 W16 ADMS 4562 Assignment 2

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ADMS 45 62Winter 2016

Assignment 2Worth: 10%

Due: by Monday, Apri 4, 2016 at 5:00pm

!and in to At"inson room 2#2 $Attention: ason & eming'

Please use this coversheet. The assignment question is after the coversheet.

Se(tion $M,),*' +ast )ame &irst )ame Student

-ou must atta(h this (o.ersheet to your so ution

Your assignment solution can be prepared individually or in groups of up to fivestudents. You must identify group members on this coversheet. Please list namesalphabetically by last name. You can form a group with students in any section. /a(hgroup must or" independent y rom other groups Assignments can be submitted(prior to the deadline) in class or to Atkinson room ! .

"ate assignments will not be accepted and will receive a #. $ollow the directionsotherwise you will lose marks.


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-our ans ers, in( uding (a (u ations and appendi(es, must:

• not e3(eed 6 pages $ma3imum' %ote& the coversheet does not count in thepage limit but all other pages do count. You should number your pages'

• be doub e spa(ed '• be Times %ew oman (or an equivalent si ed) font'• have * point font (minimum)'• have normal margins (i.e.+ margins of at least one inch on the top+ bottom and

each side)' and• have ,Portrait- as the page layout (and not ,"andscape-).

Mar"s i be dedu(ted i any o the abo.e instru(tions are not o o ed

It is now March 2016 and you, CPA, work at an accounting frm in Canada.

You and your partn r, !au", ha# $ust fnish d a m ting with your c"i nt,Mrs. %ai".

Mrs. %ai" is a &2 y ar'o"d r sid nt o( Canada who p"ans to s "" h r %ai" Inc.)%I* shar s that sh inh rit d s # ra" y ars ago (rom h r (ath r. Mrs. %ai" ishoping to minimi+ incom ta on this sa" . Additiona" in(ormation a-out Mrs.%ai" and h r %I shar s is pro#id d in th hi-it.

!au" wants you to d scri- and ca"cu"at th ( d ra" incom tacons /u nc s to Mrs. %ai" and to th purchas r (rom th propos d sa" o( %Ishar s. !how a"" your ca"cu"ations. You shou"d gi# Income Tax Act )I A*

s ction, su-s ction and paragraph )wh r app"ica-" * r ( r nc s in ord r tosupport your answ r. o not "ist mu"tip" I A r ( r nc s. !au" says you do notha# to discuss th ac/uisition o( contro" ru" s.

As part o( your ana"ysis o( th propos d shar sa" !au" wants you to p"ainin d tai" why s ction 3.1 wi"", or wi"" not, app"y to th shar sa" . !au" wantsyou to discuss a"" o( th conditions o( s ction 3.1 in your answ r. A"so, # nthough Mrs. %ai" do s not want to us su-s ction &)1*, !au" wants you tostat how s. &)1* wou"d - - tt r (or Mrs. %ai" and th purchas r in thissituation. 45ot s. &)1* is not - ing us d. !au" $ust wants to know how s.

&)1* wou"d - - tt r, in this cas , i( it w r us d. A"so, gi# I A r ( r nc s,i( app"ica-" , to support your answ r.7

A(t r s ""ing a"" o( h r %I shar s, Mrs. %ai" wi"" consid r starting up a n wCanadian -usin ss. Mrs. %ai" wi"" own 1008 o( this n w -usin ss. his n w-usin ss wi"" op rat s parat "y (rom %I and this n w -usin ss is p ct d to

arn 9100,000 o( Canadian acti# -usin ss incom ach y ar. Mrs. %ai"wants to know i( th r wi"" - any incom ta sa#ings or cost in 201: (rom


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arning 9100,000 o( Canadian acti# -usin ss incom p rsona""y # rsusarning it in a n w Canadian corporation );p rating Company*. ! th

hi-it (or additiona" d tai"s. !au" wants you to answ r this /u stion (or Mrs.%ai" and h says that you shou"d assum that ;p rating Company wi"" pay a""a(t r'ta cash out to Mrs. %ai" as a di#id nd. !au" a"so r minds you that thtop ( d ra" p rsona" incom ta rat has - n incr as d (rom 2


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$xhibit

%dditional &nformationMrs# 'ail

• Mrs. %ai" a"r ady arns mor than 92&0,000 p r y ar in incom - (orconsid ring th 9100,000 o( additiona" -usin ss incom that sh maya"so arn. Mrs. %ai" is marri d and has two adu"t chi"dr n

• Mrs. %ai" curr nt"y owns 10,000 common shar s o( %I 1 . Mrs. %ai" s(ath r, Pau", origina""y incorporat d %I in ;ntario in 1MG o( Mrs. %ai" s %I shar s is 93,:&0,000 in aggr gat

• GP Inc. )GPI*, a pri#at company incorporat d in ;ntario, is int r st din -uying a"" o( Mrs. %ai" s %I shar s

o Mrs. %ai" and GPI d a" at arm s " ngth prior to th shar sa"

o GPI has a c m- r =1st y ar' nd

o GPI is contro"" d -y th !mith rs >ami"y rust which owns 1008o( th #oting common shar s o( GPI

1 %I curr nt"y has 10,000 common shar s issu d and outstanding. %I has not issu d anyoth r shar s.


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o h curr nt >MG o( GPI is 920,000,000 in aggr gat

o h ACD and PFC o( th !mith rs >ami"y rust s GPI commonshar s is 9=0,000 in aggr gat

o Mrs. %ai" and th !mith rs >ami"y rust d a" at arm s " ngth at a""tim s

• GPI wi"" purchas a"" o( Mrs. %ai" s shar s in 2016 and it wi"" pay -yissuing 3,:&0,000 non'#oting pr ( rr d shar s o( GPI to Mrs. %ai" achr d ma-" and r tracta-" (or 91

• A(t r th 2016 sa" o( Mrs. %ai" s %I shar s, th on"y shar s that Mrs.%ai" wi"" own ar

o th non'#oting pr ( rr d shar s o( GPI and

o

i( sh incorporat s a n w company in 201: )ca"" d ;p ratingCompany* sh wi"" a"so own th ;p rating Company shar s

• 5o on r "at d to Mrs. %ai" owns any shar s o( GPI

• Mrs. %ai" do s not want to f" a su-s ction &)1* " ction

• Mrs. %ai" has a"r ady us d up a"" o( h r H!DC capita" gains mptionroom on a past sa" o( YJ Inc. shar s )a H!DC*

• I( Mrs. %ai" incorporat s a n w Canadian corporation, ;p ratingCompany, sh wi"" - th so" 'shar ho"d r and th company wi"" ha#

a c m- r =1st y ar' nd. You can assum that th corporation wi"" -incorporat d on Kanuary 1, 201:. ;p rating Company wi"" ha# ta a-"capita" o( " ss than 910M

• Mrs. %ai" "i# s in a pro#inc with th (o""owing !ro(incial ta rat sE cti# (or 2016 and 201:

o P rsona" ta rat on incom o# r 9100,000218

o P rsona" ta rat on incom /ua" to and - "ow 9100,000

118o i#id nd ta cr dit on ta a-" amount o( "igi-" di#id nds

108

o i#id nd ta cr dit on ta a-" amount o( non' "igi-" di#id nds 3.=8

o h di#id nd gross'up /ua"s th ( d ra" di#id nd gross'up


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o Corporat ta rat on acti# -usin ss incom o( 9&00,000 or " ss 3.&8

o Corporat ta rat on a"" oth r incom11.&8

• Mrs. %ai" is not an acti# trad r o( s curiti s and sh do s not ha#any sp cia"i+ d know" dg a-out stocks or -onds

• Assum that th pr scri- d int r st rat (or a"" p riods is 28

W16 ADMS 4562 Assignment 2

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