BUSI 4005 B Winter 2025 Assignment Three -Taxation II

Question 1 (13 marks)

All shares of TechVibe Inc. are owned by Ms. Sofia Chen. TechVibe Inc. is a Canadian controlled private corporation with a taxation year ending December 31. Besides being the sole shareholder, Sofia serves as the company's Chief Technology Officer. TechVibe Inc. has implemented innovative employee benefit policies to attract top tech talent.

All employees with more than 12 months of service are eligible for interest-free loans as follows: 

• The Company offers loans up to $200,000 to help employees purchase homes in the high-cost tech corridor. The principal must be repaid after five years.
• The Company provides loans up to $25,000 for electric vehicles that will be used for work-related travel. These loans must be repaid within three years.

During the year ending December 31, 2024, Sofia received the following loans from her Company:

1. On February 28, Sofia borrows $200,000 to purchase a condo near the company's headquarters. The loan is interest-free. Repayment will be in two annual installments of $100,000, starting March 1, 2025.
2. On May 1, Sofia borrows $185,000 to acquire a luxury electric vehicle for personal use only. The loan has a 1% annual interest rate, repayable on May 1, 2029.
3. On July 1, Sofia borrows $40,000 for specialized AI certification training in Singapore. The program isn't available in Canada. The interest-free loan will be repaid on June 30, 2025.
4. On August 1, Sofia borrows $100,000 to outfit her home office with high-end tech equipment. The interest-free loan will be repaid on August 1, 2026.
5. On October 1, Sofia borrows $18,000 for a tech wellness retreat in California. Given her previous borrowing, she agrees to a 3% interest rate. Repayment is due September 1, 2025.

All repayments and interest payments are made as scheduled. For all years under consideration, assume the relevant prescribed rate is 2%.

Required: Indicate the tax consequences for Sofia resulting from these loans. Explain your conclusions for each loan during its outstanding period. Base interest calculations on the number of months the loans are outstanding

Question 2 (11 marks)

The following situations are independent of each other. All of the corporations involved are Canadian controlled private corporations and have only one class of shares.

A. Ms. Rivera, Ms. Singh, and Ms. Thompson are three unrelated individuals. 

• Ms. Rivera owns 50% of GreenTech Solutions Inc. and 25% of BioInnovate Ltd. 
• Ms. Singh owns 50% of BioInnovate Ltd.
• Ms. Thompson owns 50% of GreenTech Solutions Inc. and 25% of BioInnovate Ltd.

B. Mr. Park and Mr. Rodriguez each own 50% of CloudSync Inc. Mr. Park owns 70% of DataFlow Ltd. Mr. Rodriguez owns the remaining 30% of this Company's shares. Mr. Park and Mr. Rodriguez are not related.

C. Emma and Oliver Wright are siblings. Emma owns 100% of EW Digital Inc. and 31% of Wright Innovations Ltd. Her brother Oliver owns 60% of OW Systems Inc., with the remaining 40% held by his mother. Oliver also owns 39% of Wright Innovations Ltd. The remaining shares of Wright Innovations Ltd. are held by an unrelated party. 

D. Ms. Chen owns 90% of Chen Robotics Inc. She also owns 10% of NextGen Ltd. Her 13- year-old daughter Sophie owns 10% of NextGen Ltd. While the remaining shares of NextGen Ltd. are owned by Sophie's father, Mr. Watson, Ms. Chen has options to acquire up to 40% of the NextGen shares from him. Ms. Chen and Mr. Watson have never been married or lived in a common-law relationship. They are, however, close business associates.

E. Ms. Kumar owns 70% of Quantum Inc. and 24% of FutureTech Ltd. Quantum Inc. owns 40% of FutureTech Ltd. Required: For each situation, indicate whether the corporations are associated and explain your conclusion with reference to the Income Tax Act.  Why is this page out of focus?

Question three (18 marks)

Maya Patel is the only shareholder of InnovatePro Inc., a Canadian controlled private company. For the taxation year ending December 31, 2024, the Company has Taxable Income, before any consideration of salary to Maya or payment of dividends, of $135,000. All of this income qualifies for the small business deduction.

Despite its Taxable Income of $135,000, recent investments in cloud infrastructure have left InnovatePro Inc. with only $54,000 in cash that can be used to pay taxes, salaries, or dividends.

Maya's only source of income is either dividends or salary from InnovatePro Inc. For 2024, she has available tax credits of $5,200 (combined federal and provincial).

• Relevant information for her current province of residence is as follows:
  The tax rate for individuals on the first $48,535 of taxable income is 8%
• The provincial dividend tax credit equals 32% of the gross up on non-eligible dividends All company activities are confined to a province with a 3% corporate tax rate on income eligible for the small business deduction. The province does not levy a payroll tax.

A. Determine the after-tax amount of cash Maya will retain if all of the company's cash is used to pay taxes and salary.
B. Determine the after-tax amount of cash Maya will retain if the Company pays the maximum possible dividend.
C. Can Maya improve her after-tax cash retention by using a combination of salary and dividends? If yes, determine the combination that will produce the maximum after-tax cash retention for Maya. Calculate the amount of this after-tax cash retention.