12-21
(Text: Problem Ch. 12)
The schedule below outlines the net income for income tax purposes (by source) of Moon Ray
Inc. (MRI), a Canadian-controlled private corporation wholly owned by Ms. Sun, for its fiscal
year ended December 31, 2011. The Toronto-based company develops and manufactures
software for use in aeronautical instrument panels.
Moon Ray Inc.
Net Income for Income Tax Purposes (by source)
For the year ended December 31, 2011
Income from manufacturing, net of all capital cost allowance
Interest income
Dividend income
Taxable capital gain
$150,000
10,000
8,000
3,000
Net income for income tax purposes
$171,000
Additional Information:
1.
Interest income is derived from the following sources:
(a)
(b)
(c)
(d)
Note:
2.
10-year bond in Neptune Ltd., a Canadian company
Bank interest from seasonal investment of cash
Interest from loan to Pluto Limited
Interest on a long-term loan to Saturn U.S. Limited
in Canadian dollars (before foreign tax paid of $900)
$
1,000
1,000
2,000
6,000
$ 10,000
MRI owns 65% of Pluto Limited. The other 35% is
owned by a Canadian friend of Ms. Sun's.
Dividend income is derived from the following sources:
(a)
(b)
(c)
Pluto Limited
$7,100
Can Public Corp. (Canada) Ltd.
400
DEF Investment Co. (1% shareholder of this Canadian company)
500
$8,000
3.
Sale of manufacturing equipment during the year resulted in the taxable capital gain of
$3,000.
4.
Pluto Limited (Pluto) had taxable income of $125,000 for the year ending March 31,
2011, all of which was active business income.
Pluto was allocated a Business Limit of $125,000 for the year and $1,000,000 of the
Expenditure Limit the for year.
Pluto received a dividend refund of $2,500 when it paid out dividends of $10,923 on its
shares.
5.
During the year, MRI paid dividends to Ms. Sun totalling $5,000 of which $1,000 was a
capital dividend. (Election forms were already filed.)
Problem 12-21 (Cont.)
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6.
For the fiscal year ended December 31, 2011, MRI made the following expenditures:
Current qualified research and development expenditures
(already deducted in computing income from manufacturing)
New equipment purchased for qualified scientific research purposes
(CCA already deducted in computing income from manufacturing)
$25,000
New equipment purchased for manufacturing purposes
(CCA already deducted in computing income from manufacturing)
$30,000
Charitable donations not yet deducted
$ 5,000
Federal tax instalments
7.
$92,000
$ 9,000
Balances in the tax accounts as at the beginning of fiscal 2011 are as follows:
Charitable donations made in 2010, unused in that year
Refundable dividend tax on hand
Dividend refund in 2010
Net capital losses realized in 2006, unused to date
Capital dividend account
8.
For their 2010 tax years, the companies had the following taxable incomes:
Moon Ray
Pluto Limited
9.
$ 2,000
$ 500
Nil
$ 1,500
$ 5,000
$ 2,000
$10,000
For MRI, Canadian M&P profits are $150,000.
Required:
(a)
Compute the net federal taxes payable by (refundable to) Moon Ray Inc. for its 2011
taxation year making use of all credits, refunds and payments. Show all your
calculations. Ignore provincial taxes.
(b)
Compute the change to the capital dividend account as at December 31, 2011.
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