Unformatted text preview: Active Business Income:
Active Business Income eligible for the Small Business Deduction is taxed at the low federal rate,
13.12%. It is calculated as follows:
Basic federal rate
Small Business Deduction 38.00
13.12 A maximum of $200,000 annually of active business income earned by associated corporations
qualifies for the Small Business Deduction. Since Spreads Inc. was allocated $120,000 of the
business limit for 2001, $80,000 of active business income earned by Quality Foods Inc. is the
maximum amount that will qualify for the Small Business Deduction and thus be taxed at 13.12%.
The remainder of the active business income will be taxed at the high federal rate of 29.12%.
Gain on sale of assets used in the active business:
One-half of the gain is taxable. The taxable capital gain is included in investment income.
Investment income is taxed at the high federal rate of 29.12%. Investment income earned by a
Canadian-controlled private corporation is subject to an additional refundable tax of 6 2/3%. Thus
the federal rate is 35.79%.
26 2/3% of the investment income is added to a memo account called “Refundable Dividend Tax On
Hand” (“RDTOH”) and is refunded to Quality Foods Inc. in the year dividends are paid to the
shareholders. The refund rate is $1 refund for each $3 taxable dividend paid. 65 QUESTION 6 (6 Marks)
Part 1:Federal tax credits claimable by Robert:
Spouse [$6,294 – ($5,050 - $629)]
Tuition & education transfer
Education $400 x 4 = 1,600
Required by Ian
(Below the $5,000 limit transferable) $ 7,412
$ 2,190 Maximum federal credits Part 2:The taxable capital gain is ¼ x ($100,000 - $20,000) = $20,000. The inclusion rate for listed
shares donated to charities is ¼.
The donation credit is $28,974 calculated as follows:
$ 200 x 16% =
99,800 x 29% =
$100,000 $ 32
$28,974 Part 3:Agassi Ltd. and the subsidiary are connected corporations. Agassi Ltd. will pay Part IV tax
of $13,500 on the dividend received.
(dividend received $90,000/total dividend $120,000) x Dividend refund $18,000 = $13,500 66 SECTION B – LAW
QUESTION 7 (7 marks)
The claim names Telly, Tizzy and Tunny (TTT) as plaintiffs. To sue for breach of contract you
require privity of contract. The contract would be with TPI and not the shareholders directly.
TTT are minors and therefore may lack legal capacity. Therefore, the appointment of Terrance as
president may not be valid and the transaction may not be valid. When dealing with a capacity issue
such as with a person under the age of 18, the contract generally can only be voidable by the minor
and not by Rocky.
Defences put forward by Rocky:
The contract may be voidable by Rocky because he was suffering from alcohol poisoning which
suggests “intoxication” (non est factum/capacity). Rocky must have the contract set aside as soon as
possible if he was aware that he was intoxicated.
For a claim of fraudulent misrepresentation there must be a deliberate misrepresentation of a
material fact that induces a party to enter into a contract. As Rocky has not made any
misrepresentations, there has not been fraudulent misrepresentation in this case.
Rocky could argue there was no breach since there was no contract. There was no offer or
acceptance, only negotiation of the contract. Terrance mentioning $240K could be considered an
offer, and Rocky’s statement that “it was a go” could be considered acceptance. The Statute of
Frauds is a possible defence for Rocky.
The transaction relates to land and must be in writing to be enforceable by action. There must be
certainty of terms with, for example, the assignment of value between land and equipment value.
Consideration should be given to whether equipment is a fixture in which case it would be included
with the land.
Based on these possible defences Terrance should consider negotiating a settlement with Rocky. A
trust should be considered for the shares held by TTT. 67 QUESTION 8 (5 marks)
In a limited partnership, the limited partner has no liability beyond the amount they have invested in
the partnership. A limited partnership is not appropriate as a limited partner cannot participate in the
management of the business without losing their limited status. Both Richard and Thomas are active
in the business. LLP’s are currently only available to law and accounting professionals. The option
of an LLP is not available to a courier business.
Types of business entities:
1) Sole Proprietorship
Each individual could be a sole proprietor. Since Richard and Thomas want to act together this
option would likely not be appropriate.
2) General partnership
The advantages of a partnership are that it is simple to form and inexpensive due to minimal filings.
Disadvantages include joint and several liability for the actions of other partners, unlimited liability,
and in the absence of an agreement the partnership will cease upon a partner leaving.
The advantages o...
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