Reference no: EM132482960

You, CPA, work for Accounting Inc. (AI) a professional corporation. It is now April 1, 2020 and you have just finished meeting with Mrs. Moller, the vice-president of AI, and your client Roger Moore.

Roger is a 65-year-old resident of Canada who is considering doing an estate freeze. Additional information about your client is provided in Exhibit I. Mrs. Moller wants you to draft a memo to her describing and calculating the federal income tax consequences to both your client, and to the new Holdco, re: the estate freeze. You should give Income Tax Act (ITA) section, subsection and paragraph (where applicable) references in order to support your answer. Do not list multiple ITA references. You can ignore Division E.1 of the ITA (Minimum tax). Mrs. Moller reminds you that the capital gains exemption limit in 2020 has increased (due to inflation) and she suggests you look this up and think about what elected amount should be chosen.

Separate from this estate freeze, another client of AI's, Mr. Zheng, is considering incorporating his sole proprietorship. Mr. Zheng deal's at arm's length with Roger Moore. Mr. Zheng's sole proprietorship earns $200,000 of Canadian business income each year. Mr. Zheng wants to know if there will be any tax savings or tax cost in 2020 from earning $200,000 of Canadian business income personally versus earning it in a new Canadian corporation (Newco). See Exhibit I for additional details.

Mrs. Moller wants you to add your answer to Mr. Zheng's question to your memo. Mrs. Moller will then discuss the issues with the clients after hearing from you. She says that you should assume that Newco will pay the maximum amount of dividends to Mr. Zheng in 2020. Show all relevant calculations and round to the nearest dollar. You can ignore the basic personal tax credit. You do not need to give ITA references for this question but you must consider federal and provincial income taxes (and provincial tax rates are given in Exhibit I). Mrs. Moller reminds you to look up federal personal tax rates. Note: you will lose 1 mark for each incorrect item included in your analysis of income tax savings or cost.

Separate from these issues, Mrs. Moller wants you to answer another client, Ms. Smith's, tax questions. See exhibit II for information related to Ms. Smith. You can add your answers to your memo to Mrs. Moller. You do not need to give ITA references for this.

Mrs. Moller asks you to look into one final issue for her, relating to another client, Jerome. Jerome is another client of AI and for his 2020 personal income tax return, he has said:

"When you prepare my tax return I would like you to deduct $30,000 of rental losses from my income. I don't own any rental properties, and did not actually lose this money, but I want the rental losses to help lower my tax. Since we file tax returns electronically we may not need any supporting documents. If I get audited then I'll pay any extra tax owing but I'm fine with the risk. If you help with this, in addition to my regular fees, I'll also pay your firm half of any tax savings that I get with regards to this. This way we can both benefit."

Mrs. Moller wants your advice on what specifically should be done in this situation and why? No calculations and no ITA references are needed.

Attachment:- Work for Accounting.rar