Solution to Assignment Problem 15-9
Ms. Morgan is the sole shareholder in her own CCPC
The company qualifies for the SBD and its total tax rate is 15% Ms. Morgan’s tax rates are 29% Federal plus 12% provincial (= 41% total tax) Any dividends paid out by Ms. Morgan’s company are non-eligible dividends The provincial dividend tax credit is 25% of the gross-up
NIFTP of the business is $170,000, after deducting her salary of $84,000
Ms. Morgan wishes to receive $20,000 after-tax from her corporation for a vacation
If Ms. Morgan is to receive salary exclusively:
After tax retention = $20,000 desired after-tax funds
(1 - .41)
= $33,898 salary required from the company
If Ms. Morgan is to receive dividends exclusively:
Her personal tax rate is:
(1.25)(41%) – (2/3 + 25%)(25%) = 28.33% total taxes payable
After tax retention rate = $20,000 desired after-tax funds (1 - .2833)
= $27,906 dividend required from the company
(after corporate taxes have been paid)
The corporation must earn pre-tax income of $32,831
($27,906 [1- .15]) in order to pay Ms. Morgan a dividend of $27,906.
The dividend option requires that the corporation forfeit less of its earnings to meet Ms. Morgan’s request for vacation money:
$33,898 salary vs $32,831 dividend
This situation can also be examined by looking at which option has the highest tax cost:
Under the Salary Option:
The Corporation saves tax on the salary expense:
Ms. Morgan pays taxes on the salary:
The net Tax Cost of the salary alternative
Under the Dividend Option:
The corporation is already paying tax
on all income, therefore there is no change
Ms. Morgan pays tax on the dividend
The net Tax Cost Of the Dividend alternative
Therefore, from a tax cost perspective, the salary option is $907 more expensive Solution to Assignment Problem 15-10
Robert Lucas is the sole shareholder of Speelburg Films Ltd., a CCPC with a December 31 year-end. For 2013, Speelburg’s Taxable Income before salaries or dividends is $123,000 – all active business income.
Due to large capital expenditures, the total cash available for payment of income taxes, dividends or salaries is only $49,000.
Mr. Lucas spends all his effort on Speelburg and, therefore, has no other source of income. He has tax credits of $3,900 available.
His province levies 6% income taxes on personal income up to $43,561.
His province provides a tax credit equal to 35% of the gross-up on eligible dividends and 30% on ineligible dividends.
All of the company’s activities are in a province that levies 3% tax on income eligible for the small business deduction.
Determine the after-tax amount of cash that Mr. Lucas will retain if all of the company’s cash is used to pay taxes and salary.
The combined federal/provincial tax rate applicable to Speelburg Films Ltd. would be 14% = (38% - 10% - 17% + 3%).
The amount of cash available ($49,000) must pay the taxes on $123,000 corporate taxable income and the rest will be Mr. Lucas’s salary. Therefore, let χ be the maximum amount of salary that can be paid. Solving for χ:
χ = $49,000 - [(14%)($123,000 - χ)]
χ = $36,953.
This can be verified by the following calculation:
Corporate Taxable Income Before Salary
Corporate Taxable Income After Salary
Corporate Tax @14% = $12,047
This leaves $36,953 ($49,000 - $12,047) available for payment of salary.
Mr. Lucas would have the following amount of after tax cash:
Tax Before Credits [(15% + 6%)($36,953)]
Personal Tax Credits (Given)
After Tax Cash Retained (All Salary)
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