Reference no: EM132582330 , Length: 12 pages

Income Tax Consulting Case

Facts:

A long-time Windsor Ontario business acquaintance, Doug James, who is 50 years old, has come to see you for tax advice. Although he has heard about business incorporation, the possibility of double taxation has been a major deterrent to his incorporation to date.

Doug James operates "Football Accessories" as a sole proprietorship. The operation consists of three retail outlets that sell all types of football equipment. The business services both individual and corporate accounts. The business has produced profit before income tax from sales over the past three years in the amounts of $470,000 (2015), $530,000 (2016) and $580,000 (2017).

In addition to his sports stores, Doug James generates substantial investment income which by itself has placed Doug James in the 53.53% personal income tax bracket. That annual investment income comes from dividends from Canadian public corporations ($150,000 annual cash dividends) and bond interest ($100,000). Due to a need to finance business growth, Doug and his spouse, Linda James, have not saved any funds for retirement currently although they plan to retire at age 65.

Doug James maintains a modest life-style and draws $50,000 per year for personal expenses not including his personal income tax obligation.

Doug's son, Marc James, is 22 years old and is actively involved in the business based in Windsor and earns an annual salary of $40,000. Marc plans to carry on the family business after graduation from the Odette School of Business. Doug's daughter, Michelle James, who is 21 years old, lives in Dallas, Texas and is not actively involved in the business. Michelle James is the Controller for a family owned business in Dallas and earns employment income of $80,000 (Cdn) per year. Doug's wife, Linda James, does the bookkeeping and administration work for the business on a full-time basis and is paid $25,000 per year as a salary for her office services.

Linda James loaned Doug $200,000 interest-free from her personal funds, provided by an inheritance, to start the business 10 years ago. The loan remains outstanding at the current time.

Doug and Linda James would like to purchase a retirement home in Dallas, Texas that would cost $250,000 (Cdn). Although it was a significant temptation, Doug James recently turned down an offer from an unrelated person to buy his business for $ 2,000,000. A summary of the offer is below:

Assets at Fair Market Value Current Tax Value of assets

Cash                                      $  300,000

Accounts receivable               100,000

Inventory                                  200,000                                100,000 (Cost)

Land                                           200,000                                  50,000 (ACB)

Building s                                  600,000 250,000  (UCC)

Equipment                                100,000 90,000  (UCC)

Goodwill                                    500,000                                  20,000   (CEC)  

Required:

Prepare a written report to Doug James on the tax planning issues that need to be addressed. Include any supporting calculations and analyses you feel are necessary to assist in presenting your report. Your report should not exceed 12double-spaced pages font 12 excluding exhibits and cover sheet. Include a bibliography for all referenced material.