Reference no: EM133170599
Question - Linda's cross is the sole shareholder of cross Ltd., a CCPC incorporated in Alberta in 2011. The company taxation year end is December 31. The company business is conducted in Edmonton, Alberta, where Linda resides.
All of the income earned by cross Ltd. Is from an active business and is eligible for the small business deduction. The taxable Income of the company has never exceeded its annual small business Limit of $500,000 and this trend will continue into 2021. In 2021 the company will be subject to a provincial tax rate on income eligible for the small business deduction of 2.0percent, which when combined with Federal rate on that same income of 9.0percent will equal 11.0 Percent.
The Income of cross LTD began to stabilize at the end of 2018 due to solid customer base, and as result Linda purchased a new home and re-evaluated her future cash needs. Working with her accountant, she decided that an annual salary of $158,000 would provide her sufficient after-tax cash to meet all of her personal needs. The company began to pay her an annual salary of $158,000 in 2019 with no plan to make any changes to that amount in 2021.
In the spring of 2021 Linda decided that ii was time to put in Pool since the summers seemed to becoming warmer each year.
She obtained a number of Quotes and has decided on an in-ground pool that will cost her $25,000. She spoke to her accountant about the additional cash she would need and the best way to draw the funds from the company as either additional salary dividends.
Additional Information:
I. Assume that Linda's salary is her only income and that it also equals her taxable income.
II. Cross Ltd.'s GRIP account at the beginning of 2021 is nil and no amount will be added to it in 2021.
III. The Alberta personal income tax rate in 2021 is 13.0 percent for taxable income between $157,464 and $209,952 and 14.0 Percent for taxable income between $209,953 and $314,928.
IV. The federal personal income tax rate in 2021 is 29.0 Percent for taxable income between $151,978 and $216,511 and 33.0 Percent for taxable income in excess of $216,511.
V. In 2021 Alberta Provide a dividend tax credit on non-eligible dividends of 16.7 percent and 29.5 Percent on eligible dividends.
Required - As the Linda's accountant, determine the additional amount that would be required if Linda were to receive sufficient salary or dividends to leave her with the $25,000 cash, she needs to put in the an in-ground pool. Provide all supporting calculations and determine which of the two alternatives is most cost effective considering the income tax consequences to both Linda and Cross Ltd.
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