Reference no: EM133627870

You are an accounting technician for a small accounting firm and you are assigned to prepare the corporate tax return for the closely held Canadian Private Corporation. You are also responsible for preparing the shareholder's personal tax return including his spouse.

During your review for the year-ended December 31, 2021, you noted the following facts:

The remaining redeemable preferred shares held by the shareholder's spouse were redeemed for 100,000 on March 31, 2021. Upon further review of the corporate minute books and share register, you determined that the preferred shares were received on a previous rollover under 85(1) and had a Tax PUC of $1,000 and an ACB of $5,000. The shareholder's spouse held no other shares of the corporation after the redemption.

During your review of loans outstanding at year-end, you noted that on January 1, 2020, the corporation loaned $100,000 to the shareholder's spouse in order to buy a luxury car. The shareholder's spouse is an employee of the company and the car is not used for employment purposes. This type of loan is not made available to other employees of the corporation. This loan was not repaid as of December 31, 2021. You also note that the loan bears interest at the prescribed rate, and the interest for the period from January 1, 2021 to December 31, 2021 was paid on January 30, 2018.

During your review of travel expenses, you noted an expenditure of $25,000 recorded as "trip to Florida". Upon further review, it was determined that the trip to Florida was a family trip to Disney World and was deducted as a corporate travel expense. Also, it was determined that the shareholder had purchased a pool table for $5,000 that was deducted as advertising & promotion expenses. The pool table is located at the shareholder's personal residence.

Fact 1:

Outline the tax consequences for the shareholder's spouse in respect to the redemption of preferred shares. Provide supporting calculations to justify your answer.

Fact 2:

Briefly explain the tax consequences relating to the loan to the shareholder's spouse and if applicable, who is required to report the income. Make sure to describe the exceptions that were met or not met to justify your answer.

Fact 3:

Explain the tax consequences for the corporation and for the shareholder showing supporting calculations where applicable. If corrections can be made in the books and records to mitigate or defer the tax consequences, state the appropriate recommendations.