ACCT226 Chapter 13 Problem 4 PDF

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ACCT226 Chapter 13 Problem 4...

Description

Medtech Inc. is a Canadian controlled private corporate. It uses a taxation year which ends on December 31. At the end of the 2018 taxation year, the Company had a balance in its Refundable Dividend Tax On Hand of $26,330. The dividend refund for 2018 was $8,885. On December 31, 2018, Medtech had no balance in its GRIP. During the taxation year ending December 31, 2019, Medtech had Taxable Income of $456,250. The Part I Tax Payable for the year was correctly calculated to be $82,506. Net Income For Tax Purposes does not include any foreign source income. No net capital losses were deducted in determining Taxable Income. The Company’s Net Income For Tax Purposes includes the following amounts of non-operating income:

Capital Gains

$87,460

Eligible Dividends From Canadian Public Companies

26,560

Net Rental Income From Residential Properties

14,760

Dividends From Connected Company (See Note)

77,700

Note These dividends, none of which were designated as eligible, were received from Medcare, another CCPC. Medtech owns 42 percent of this company’s voting shares. As a consequence of paying this dividend, Medcare received a dividend refund of $20,386.

Medtech is associated with four other companies. The annual business limit for the small business deduction is shared equally by Medtech and these companies. The $100,000 allocation is significantly less than the Company’s active business income for 2019. Medtech Inc. paid taxable dividends of $66,560 during the year. It is the policy of the corporation to designate dividends as eligible only to the extent that a dividend refund will be available on their payment. For 2018, Medtech and its associated companies had combined ADJUSTED Aggregate Investment Income of $32,400. Their Taxable Capital Employed In Canada totalled $2,300,000 for 2018.

Required:

A. Determine the transitional balances for Medtech’s Eligible RDTOH and its Non-Eligible RDTOH.

B. Determine the refundable portion of Medtech’s Part I Tax Payable for 2019.

C. Determine Medtech’s Part IV Tax Payable for 2019.

D. Determine the December 31, 2019 balances in Eligible RDTOH and its Non-Eligible RDTOH.

Medtech’s

E. Determine Medtech’s 2019 dividend refund, providing separate amounts for refunds on eligible dividends and refunds on non-eligible dividends.

Part A - Transitional Balances The base for the transitional balances is $17,445 ($26,330 - $8,885). As the corporation did not have a GRIP balance on December 31, 2018, none of this amount can be allocated to the Eligible RDTOH. This will leave the transitional Non-Eligible RDTOH at $17,445, and the transitional Eligible RDTOH at nil.

Part B - Refundable Part I Tax The refundable portion of the Part I tax would be the least of the following amounts:

Taxable Capital Gain [(1/2)($87,460)] Net Rental Income Aggregate Investment Income Rate

$43,730 14,760 $58,490 30-2/3%

ITA 129(4)(a)(i)

$17,937

Taxable Income

$456,250

Amount Eligible For Small Business Deduction (See Note) Total Rate

( 100,000) $356,250 30-2/3%

ITA 129(4)(a)(ii)

$109,250

ITA 129(4)(a)(iii) Part I Tax Payable - Given

$ 82,506

Note The problem states that Medtech’s $100,000 share of the annual business limit is less than active business income. In addition, it is less than the Company’s Taxable Income. These facts establish that the amount eligible for the small business deduction is Medtech’s share of the annual business limit.

The refundable portion of Part I tax is equal to $17,937, which is the least of the preceding three amounts.

Part C - Part IV Refundable Tax The Part IV Tax Payable for Medtech Inc. would be calculated as follows:

Dividend Refund Received By Medcare

$20,386

Medtech’s Percentage Of Ownership

42%

Part IV Tax Payable On Non-Eligible Medcare Dividends

$ 8,562

Part IV Tax On Eligible Portfolio Investment Dividends [(38-1/3%)($26,560)] Part IV Tax Payable

10,181 $18,743

Part D - RDTOH Balances The December 31, 2019 balance in the Eligible RDTOH would be as follows: Transitional Balance

$ Nil

Part IV Tax On Eligible Dividends Eligible RDTOH - December 31, 2019

10,181 $10,181

The December 31, 2019 balance in the Non-Eligible RDTOH would be as follows:

Transitional Balance

$17,445

Part I Refundable Tax

17,937

Part IV Tax On Non-Eligible Medcare Dividends Non-Eligible RDTOH - December 31, 2019

8,562 $43,944

Part E - Dividend Refunds The maximum amount of dividends that can be designated as eligible is limited by Medtech’s GRIP. We know

that the initial 2019 balance here was nil and that the $26,560 of eligible dividends received from Canadian public companies would be added. There is also the possibility that there would a further amount added as a result of some of the corporation’s income not being eligible for the small business deduction. (This amount cannot be determined based on the information in the problem.) However, given Medtech’s policy of designating dividends as eligible only when a dividend refund is available, a further addition to the GRIP would not be relevant in this problem. This is because a dividend refund will only be available for the balance in the Eligible RDTOH, an amount of $10,181. Based on this, the eligible dividend designation will be for $26,560, the amount of the eligible dividends received. The refund on these dividends will be $10,181 [($26,560)(38-1/3%)]. The remaining $40,000 ($66,560 - $26,560) will be non-eligible. The refund on these non-eligible dividends would be $15,333, the lesser of: •

$15,333 [(38-1/3%)($40,000)]; and

•

$43,944, the balance in the Non-Eligible RDTOH. The

total dividend refund would be as follows:

Dividend Refund On Eligible Dividends Dividend Refund On Non-Eligible Dividends Total Dividend Refund

$10,181 15,333 $25,514...