taxation II Notes
Solution to Assignment Problem 15-9
Facts:
Ms. Morgan is the sole shareholder in her own CCPC
The company qualifies for the SBD and its total tax rate is 15%
Ms. Morgan’s tax rates are 29% Federal plus 12% provincial (= 41% total tax)
Any dividends paid out by Ms. Morgan’s company are non-eligible dividends
The provincial dividend tax credit is 25% of the gross-up
NIFTP of the business is $170,000, after deducting her salary of $84,000
Objective:
Ms. Morgan wishes to receive $20,000 after-tax from her corporation for a vacation
If Ms. Morgan is to receive salary exclusively:
After tax retention = $20,000 desired after-tax funds
(1 - .41)
= $33,898 salary required from the company
If Ms. Morgan is to receive dividends exclusively:
Her personal tax rate is:
(1.25)(41%) – (2/3 + 25%)(25%) = 28.33% total taxes payable
After tax retention rate = $20,000 desired after-tax funds
(1 - .2833)
= $27,906 dividend required from the company
(after corporate taxes have been paid)
The corporation must earn pre-tax income of $32,831
($27,906 [1- .15]) in order to pay Ms. Morgan a dividend of $27,906.
In Conclusion:
The dividend option requires that the corporation forfeit less of its earnings to meet Ms. Morgan’s request for vacation money:
$33,898 salary vs $32,831 dividend
This situation can also be examined by looking at which option has the highest tax cost:
Under the Salary Option:
The Corporation saves tax on the salary expense:
[(15%)($33,898)] ( 5,085)
Ms. Morgan pays taxes on the salary: [(41%)($33,898)] $ 13,898
The net Tax Cost of the salary alternative $ 8,813
Under the Dividend Option:
The corporation is already paying tax on all income, therefore there is no change Nil
Ms. Morgan pays tax on the dividend $ 7,906
The net Tax Cost Of the Dividend alternative $ 7,906
Therefore, from a tax cost perspective, the
Facts:
Ms. Morgan is the sole shareholder in her own CCPC
The company qualifies for the SBD and its total tax rate is 15%
Ms. Morgan’s tax rates are 29% Federal plus 12% provincial (= 41% total tax)
Any dividends paid out by Ms. Morgan’s company are non-eligible dividends
The provincial dividend tax credit is 25% of the gross-up
NIFTP of the business is $170,000, after deducting her salary of $84,000
Objective:
Ms. Morgan wishes to receive $20,000 after-tax from her corporation for a vacation
If Ms. Morgan is to receive salary exclusively:
After tax retention = $20,000 desired after-tax funds
(1 - .41)
= $33,898 salary required from the company
If Ms. Morgan is to receive dividends exclusively:
Her personal tax rate is:
(1.25)(41%) – (2/3 + 25%)(25%) = 28.33% total taxes payable
After tax retention rate = $20,000 desired after-tax funds
(1 - .2833)
= $27,906 dividend required from the company
(after corporate taxes have been paid)
The corporation must earn pre-tax income of $32,831
($27,906 [1- .15]) in order to pay Ms. Morgan a dividend of $27,906.
In Conclusion:
The dividend option requires that the corporation forfeit less of its earnings to meet Ms. Morgan’s request for vacation money:
$33,898 salary vs $32,831 dividend
This situation can also be examined by looking at which option has the highest tax cost:
Under the Salary Option:
The Corporation saves tax on the salary expense:
[(15%)($33,898)] ( 5,085)
Ms. Morgan pays taxes on the salary: [(41%)($33,898)] $ 13,898
The net Tax Cost of the salary alternative $ 8,813
Under the Dividend Option:
The corporation is already paying tax on all income, therefore there is no change Nil
Ms. Morgan pays tax on the dividend $ 7,906
The net Tax Cost Of the Dividend alternative $ 7,906
Therefore, from a tax cost perspective, the