Heather is excited about the future but she has come to you concerned that her corporate
is not what it should be for her situation. She would like you to propose a structure that you think will
work for her.
Heather lives in Saskatoon and she started her operating company, Heath Inc., sixteen years ago
and it is performing very well. On incorporation she paid $100 for 100 common shares. Heath Inc. is
currently generating an after-tax operating profit of $300,000 and Heather expects the business to
continue to grow over the foreseeable future. Out of the after-tax profit, $100,000 is needed for
reinvestment in the business and the remaining $200,000 is available to be reinvested elsewhere. She
would like to get this $200,000 out of the company to provide some creditor protection. Her advisors
have estimated the current value of the company at $2.0 million.
Last year she had an opportunity she could not refuse. Land and building offered for sale at $1.2
million were perfect for her business, so she incorporated a company, Real Inc., to buy the property. She
did this to protect the real estate from any creditor issues that may arise in the future in Heath Inc.
Heather paid $100 for 100 common shares. She then loaned Real Inc. $400,000 of personal capital, at an
interest rate of 5%, and Real Inc. took out a mortgage for a further $800,000 to buy the property. Real
Inc. is charging Heath Inc. market rent to cover the interest and operating expenses, although Real Inc.
is still operating at a loss. The value of the real estate has not increased since it was purchased.
This year she had an idea for a new business that she thinks is a sure winner. Again, Heather
incorporated a company, New Inc., with her investment of $100 for 100 common shares. This new
business will need capital to get started. Her problem is that she does not have any free capital
personally but there is extra cash flow in Heath Inc. that she could use.
Also, she is the President of all three companies and is being paid from each. This results in Canada
Pension Plan premiums being paid in all three companies and general confusion for her controller.
Heather would like to simplify this and, if possible, only be paid from one company.
Heather is in the top personal tax bracket and has never used her capital gains exemption.
Before your next meeting with Heather you want to:
(A) Assess the situation.
(B) Identify the issues:
(a) Propose an efficient structure for the corporations.
(C) Analyze the issues:
(a) Develop the details needed to support the steps taken to implement the proposed structure.
Recently Asked Questions
- Grassroots Corp shares, which have a beta of 1.3, are currently trading at $35. T-bills are currently yielding 2.8%, and the return on the market is
- Which one of the following is an alternative to the purchasing long term care policy? A. Life insurance rider. B, IRA account C. The affordable care act d.
- The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (Market value = book value) $3,000,000 EBIT