MANAGEMENT 4151A

FALL 2015

SMALL GROUP CASE

SOPHIA AND COMPANIES TAXES 2015

DUE: BEGINNING OF CLASS, DECEMBER 2ND, 2015

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MANAGEMENT 4151A

FALL 2015

SMALL GROUP CASE

Personal Information

Sophia is thirty-five years old and single with no dependents.

Employment Information

She is an employee of a Canadian controlled private corporation (CCPC) from which she earned

an annual gross salary of $95,000 in 2015. Her employer deducted CPP and EI payments totally

$3,411. Income tax deducted was $25,000.

Sophia sold her shares in the CCPC in 2015 for $15 per share. The shares were purchased under

a stock option plan four years ago. She originally purchased 1000 shares for $8.00 per share, when

the market value of the shares was $10.00. The company is a qualified small business corporation.

Other Information

Some of Sophias other income and contributions for the year include:

Receipt of a $2,000 non-eligible dividend from ABC Ltd., and a $300 eligible dividend from 123Ltd.

$1,000 contribution to a registered charity which she has donated to every year for the past ten years, and a $1,000 contribution to a provincial political party

Receipt of $200 interest on guaranteed investment certificates she purchased five years ago $2,000 winnings from a lottery ticket that she received for her birthday A capital gain of $4,000 on the sale of her shares in Public Corp. XY

m.smiddySticky NoteDone

m.smiddySticky NoteBenefit - DoneCapital Gain - Done - put as a qualified small business corp

m.smiddySticky NoteDone

m.smiddySticky NoteCharity - DonePolitical Party - done

m.smiddySticky NoteDone

m.smiddySticky NoteNon-taxable do not include

m.smiddySticky NoteDone

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Education

Sophia is pursuing a second degree, and received a T2202A stating that her tuition paid in 2015

was $2,500, and the number of part-time months attended was eight.

Capital Investments from Previous Years

Sophia sold several assets in 2014 and recognized a loss of $2,000 on her antique furniture and a

loss of $1,000 on shares in Public Corp. AB. She did not report any capital gains last year, or in

any other previous years. Sophia has never used her capital gains exemption.

Business Investments

Sophia has a ten percent partnership interest in a small business. She invested $5,000 five years

ago to become a limited partner. The business earned $12,000 of income in 2015.

Sophia owns twenty percent of the shares in her brothers CCPC, Z Ltd. Her parents each own ten

percent of the shares, and her brother owns the remaining shares. Sophia receives a non-eligible

dividend cheque from Z Ltd. for $10,000 at the end of each year. Her parents have suggested

selling their shares in Z Ltd. to Sophia or her brother as they are preparing to retire. None of the

shares are from a specified class.

Sophias parents, George and Sandra, would like Sophia to work for their CCPC, B Ltd., next year.

They hope to pass the business on to Sophia when they retire in two years. (Sophias brother

wishes to focus his efforts and money on Z Ltd., and is happy to see Sophia carry on their parents

company.) The business was recently valued based on normalized earnings (which just happen to

equal this years earnings shown in Exhibit I), with an expected rate of return of 10%. The industry

is very promising, and income projections for the next five years show steady growth. The fair

market value of the companys assets are listed in Exhibit II.

m.smiddySticky NoteDone

m.smiddySticky NoteDoneANd Done

m.smiddySticky NoteCouldnt get the 10% to stay in t5013, Income would be 12000 not 1200

m.smiddySticky NoteDone

m.smiddySticky NoteThese are connected (I BELIEVE), if she becomes the owner of her parents company. They will share the 500,000 SBD

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Exhibit I:

B Ltd. Income Statement

For the Year Ended December 31st, 2015

Revenue: $900,000 Expenses: Costs of Good Sold $330,000

Salaries: George 80,000 Sandra 80,000 Staff 120,000 Amortization 15,000 Administrative costs 10,000

Advertising 20,000 Interest 30,000

Net income before taxes $215,000

Exhibit II:

B Ltd.s Assets FMV ACB/UCC Cash $ 20,000 Inventory $ 50,000 Investment $400,000 $300,000 Furniture/Small Equipment $200,000 $120,000 (Class 8) Large Equipment $500,000 $320,000 (Class 29) Building $800,000 $580,000 (Class 1 6%)

Total Assets $1,970,000

There is currently a $300,000 mortgage on the building. All of the companys assets other than

the long-term investment are used in active business. The fair market values of the assets have

remained constant for the past three years. Only George and Sandra have held shares in the

company.

m.smiddySticky NoteADMIN ADDED TO SALARIES AND WAGES FOR 290,000

m.smiddySticky NoteAll CCA in sheet but class 29 has issues

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Although Sophia has a considerable amount of savings, she does not have sufficient cash to

purchase B Ltd., so would like to know if and how the plan to acquire the business can be

implemented. Sophia is also curious to know if her ownership of shares in her brothers company

will affect the tax liability of B Ltd. if she were to own all of the shares of B Ltd.

REQUIRED:

PART I

Tax Returns:

1. Prepare a paper copy of Sophias T1 tax return for 2015. Hand in the T1 and all relevant

schedules and forms. (Sophia minimizes and defers taxes whenever possible.)

2. Prepare a paper copy of B Ltd.s tax return for 2015. Hand in the T2 and all relevant

schedules and forms.

(Attach labelled tabs to the various forms.)

PART II

Professional Report:

Prepare a short report for Sophia, Sandra, and George, based on the following:

1. Calculate the purchase price of B Ltd. using the earnings method of valuation. (Show all

calculations.)

2. Explain how the business can be transferred to Sophia. (Maximum 500 words, typed,

double-spaced)

3. Discuss the tax implications of Sophias ownership of shares in Z Ltd. (Maximum 250

words, typed, double-spaced)