What is the tax liability

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Question - The voting common shares of Shelby Inc. are owned 35% by Mitchell Inc., 25% by Taylor Inc., and 40% by an individual, Shelby. Mitchell Inc. and Taylor Inc. are 100% owned by Mitchell and Taylor, respectively. Their spouses are sisters. Shelby Inc. derives all of its income from a ladies' wear retailing business carried on in Toronto on a property owned by Mitchell Inc. Shelby Inc. pays $120,000 in annual rent to Mitchell Inc., deducting this amount as a business expense. Shelby Inc. also pays annual dividends of $30,000 to each of Mitchell Inc. and Taylor Inc. The dividend income of $30,000 is the only other income of Mitchell Inc. and the only income of Taylor Inc.

Required -

(a) Determine if Mitchell Inc. and Shelby Inc. are associated and substantiate your answer by reference to specific conditions of the Act supported by case facts.

(ii) What is the Part IV tax liability, if any, for Mitchell Inc. and/or Taylor Inc. on the dividends from Shelby Inc.? Substantiate your answer.

Reference no: EM132982709

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