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Unformatted text preview: Chapter 13 - Solution 2 (A) Deductibility of Expenses (a) Salary deductible if considered reasonable in the circumstances [sec. 67], and paid by June 28, 2008, which is 179 days after Skimmed Limiteds year-end [ssec. 78(4)]; (b) To be deductible in 2007, and not added back in 2010, the royalty must be paid by December 31, 2009, (i) if it is not paid by that date, it must be added to the corporations income for the 2010 taxation year [par. 78(1)( a )], this would leave the amount payable as a legal liability, (ii) alternatively, Mr. Skimmer and the corporation can jointly elect by June 30, 2011 (which is the date on which the 2010 return is due); the effect of the election is [par. 78(1)( b )]: the royalty is deemed to have been paid by the corporation and received by Mr. Skimmer at the beginning of 2010, the royalty is deemed to have been lent back to the corporation such that when the corporation repays the amount there will be no further tax consequences, if the election is filed late (i.e., after June 30, 2011), then 25% of the royalty will be added back to the corporations 2010 income [ssec. 78(3)], but Mr. Skimmers position will remain unchanged; (c) A contribution made to a money purchase RPP by an employer is deductible, as long as it was made in accordance with the plan as registered [par. 147.2(1)( a )], in this case, the overall limit of employer and employee contributions of $20,000 for 2007 is not exceeded since the sum of the matching contributions is $6,000. (B) Treatment of shareholder loans Since the Skimmers are shareholders, the application of subsection 15(2) must be considered in respect of the inclusion of the principal amounts of the loans. (a) Share purchase loan (i) paragraphs 15(2.4)( c ) and ( f ) would exclude the principal amount of this loan from income because of its purpose and because bona fide arrangements were made, when the loan was granted, for repayment within a reasonable time. However, paragraph 15(2.4)( e ) further requires that Mr. Skimmers son must receive the loan in his capacity as an employee, not as a shareholder. Therefore, the loan must be included in the sons income, (ii) if, however, the son received the loan in his capacity as an employee, there would be no subsection 15(2) inclusion, but subsection 80.4(1) would apply to impute an interest benefit to the son for 2007, computed as follows: 61*/365 .05 $180,000 = $ 1,504 92 /365 .05 $180,000 = 2,268 $ 3,772 however, section 80.5 deems this imputed interest to be interest paid pursuant to a legal obligation and, therefore, it will be deductible, since the shares can be expected to produce income from property [spar....
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- Summer '08