John Molson School of Business
Specialized Topics in Taxation
Date: August 6, 2011
Time: 9:00am – 12:00pm
-This is a closed book exam.
-You are allowed dictionaries.
-Use of regular calculators are allowed.
Calculators which store text are NOT allowed
-This exam consists of 7 questions.
-Total number of pages including cover sheet: 11
-Answer all questions in your exam booklet.
THIS EXAMINATION MUST BE RETURNED
Question 1(12 marks – 22 minutes)
The Baloney Co. is a Canadian controlled private corporation. The company reports the following information for its December 31, 2010 fiscal year-end:
Active Business Income (all earned in Canada)$245,000
Dividend from Salami Co., a connected corporation60,000
Dividends from non-connected corporations24,000
1.Baloney Co. paid the following dividends:
Year 2009:$ 140,000
Year 2010:$ 57,000
2.Baloney Co. has the following available losses carried forward as reported in its 2009 tax return:
Net Capital losses: $50,000
Non Capital Losses: $12,000
3.Baloney Co. is associated with other corporations. Its’ share of the Annual Business Limit is $270,000.
4.Salami Co. paid $160,000 in dividends in 2010 and received a dividend refund of $20,000.
5.Baloney Co.’s Taxable Capital for purposes of computing its Small Business Deduction is $11,800,000.
6.Baloney Co. had a balance of $32,000 in its RDTOH account at 31/12/09.
Compute Baloney Co.’s 2010:
a)Minimum Part I Tax
b)Part I Refundable Tax
c)Part IV Tax
d)RDTOH account balance at December 31, 2010
e) The Dividend Refund
Question 2 (5 marks - 9 minutes)
Johnny Ego is also the sole shareholder of Know It All Ltd., a CCPC which generates solely Active Business Income, all of which is eligible for the Small Business Deduction (SBD). In 2010 he received a $20,000 dividend from his company.
He also received a $20,000 dividend from CNR Ltd., a taxable Canadian public corporation.
His neighbour has advised him that he will have to pay the same amount of taxes for both dividends. Johnny Ego is skeptical of his neighbour’s advice and has decided to consult with you as you have given him excellent tax advice in the past.
Johnny Ego’s combined Federal & Provincial marginal rate of tax is 48%. Assume the Provincial dividend tax credits are computed as 50% of the Federal dividend tax credits.
Compute the after tax retention of each of the dividends. In the event that the amount of taxes will differ, Mr. Ego would like you to explain to him why there is such a difference.
Question 3 (15 marks - 27 minutes)
In 2010, Joseph sold to his sister Maria a piece of land that had cost him $15,000 in 2001. The land was sold to Maria for $28,000, at a time when its’ fair market value was estimated at $40,000.
Joseph also earns $800 annually from the land from a number of individuals who like to use his lakefront for camping and fishing.
Joseph consults with you and asks you the following questions:
A.What would be the current and future tax ramifications to both Joseph and Maria ? (3 marks)
B.Assume that he had gifted the property to his spouse Louise, and had not elected out of subsection 73(1) of the ITA, what would be the current and future tax ramifications to both Joseph and Louise? (6 marks) C.Assume that he had sold the property to Frank, his 17 year old son, for $25,000 what would be the current and future tax ramifications to both Joseph and Frank? (6 marks)
Question 4 (17 marks - 31 minutes)
Denis Farias has come to you for tax advice. His motto with respect to speculating on the stock...