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ACCT3817 – Assignment #1

Due:  Wednesday, July 5 @ 9 am

Question 1:   Federal Taxes                                                  (80 marks)

OTOH Ltd. is a Canadian-controlled private corporation located in Moncton, New Brunswick.

For its fiscal year ended December 31, 2022, the corporation had correctly calculated its income for tax purposes under Division B as follows:

Domestic sources:

Advertising agency loss $(73,000)

Dividends from non-connected taxable Canadian corporations (eligible) 16,000

Interest income from five-year bonds 22,000

Interest income on outstanding accounts receivable in retailing business 14,000

Wholesale income 187,000

Profit on the sale of excess land (Note 1) 105,000

Recapture of CCA (Note 2) 10,000

Rental income (Note 3) 36,000

Retailing income 410,000

Royalty income from the sale of a trade name 6,000

Taxable capital gains net of losses (from active assets) 63,000

Division B net income for tax purposes $796,000

Notes:

(1) The land had been held for approximately two years. It had been held vacant in order to realize a profit on its sale at the right time.

(2) The recapture resulted from the sale of some fixtures used in the retailing business.

(3) The rental income was derived from leasing the entire space on a five-year lease in an unused warehouse.

Additional information:

(A) OTOH Ltd. made the following selected payment during the year:

Charitable donations                                                               12,000

(B) Four quarterly dividends of $45,000 (non-eligible) were declared on the last day of each calendar quarter of 2022 and paid two weeks later. A dividend of $30,000, (non-eligible) declared in the last quarter of 2021, was paid in January 2022. Additionally, a separate eligible dividend was declared and paid in 2022 of $10,000.

(C) OTOH Ltd. had allocated $50,000 of its business limit to other associated corporations. The taxable capital of the associated group was less than $10,000,000.

(D) The balances in the tax accounts on January 1, 2022 were:

Charitable donation carryforward $ 2,500

Non-capital losses from 2016 46,500

Net capital losses from 2017 12,000

Refundable dividend tax on hand (non-eligible) 20,500

Dividend refund for 2021 (non-eligible) 8,500

Required:

(a) Compute the taxable income of OTOH Ltd. For the December 31, 2022 year end.   Then calculate the federal Part I tax on federal taxable income payable by the corporation for the 2022 taxation year. Show in detail the calculation of all tax deductions, using a separate schedule for each, as needed.

Where applicable, assume 2021 income is the same as 2022 income.

(b) Compute the Eligible and Non-Eligible refundable tax on hand balance as at December 31, 2022, showing in detail your calculation. Compute the dividend refund for the 2022 taxation year.

A template has been provided.  You do not have to use it.  If you do, you can modify as you want.  

Question 2: Association                                                            (18 marks)

Consider the following unrelated fact situations in which all individuals are at least 18 years of age.

(a) Jennifer owns 100% of the common shares of Khalid Co, Ltd. (KCL), and Rodney owns 70% of the common shares of Yi Co. Ltd. (YCL). The other 30% of the common shares of YCL are owned by KCL. Rodney is married to Jennifer’s granddaughter.

(b) Kamen owns all of the common shares of Christopher James Retailing Ltd. (CJRL), and 75% of the common shares of Tomasaburo Investments Ltd. (TIL). The other 25% of TIL common shares are owned by unrelated persons. Also, TIL owns all of the common shares of Karen Mfg. Ltd. (KML). Geoff owns 65% of the common shares of Sherrie Wholesalers Ltd. (SWL). The other 35% of the common shares of SWL are owned by CJRL. Geoff is married to Kamen’s niece. The 35% ownership of CJRL in SWL was to provide SWL with some needed start-up financing.

Required:

Indicate whether the corporations are associated.

Explain in your own words the reasoning behind your conclusion, based on the conditions for association contained in any provision of the legislation that you choose to apply.  You should cite the appropriate provisions.  Be very thorough in your analysis.