MGAD65H3 Lecture Notes - Lecture 9: Dividend Tax, Capital Account, Life Insurance

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ceruleanraccoon960

4 Apr 2020

School

UTSC

Department

Financial Accounting

Course

MGAD65H3

Professor

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Document Summary

Only 50% of capital gains are taxed and the non-taxed portion (i. e. other 50%) is kept track in cda of a private corporation and can be returned to shareholder without any tax consequence to the shareholder. A public corporation does not have cda. Note that a capital dividend will not trigger dividend refund. To get a dividend refund, have to pay taxable dividends. 83(2) to treat the dividend as capital dividend. Cda balance is determined at a point in time (not a continuity). Amount distributed as capital dividend should not exceed the balance in that account. Excess payment will trigger a penalty tax of 60% on the excess amount. Untaxed portion of net capital gains plus. Capital dividends received from another corporation plus. Untaxed portion of net gains from cumulative eligible capital account (for pre- Puc is the amount paid by investors for shares from the corporation from after tax money.

Related Questions

Part I And Part IV Refundable Taxes

Warron Inc. is a Canadian controlled private corporation. It hasa December 31 year end. The following information relates to its2017 taxation year.

1. At the end of 2016, the CompanyâsRefundable Dividend Tax On Hand balance was $19,400. The 2016dividend refund was $7,100.

2. Warron Inc. paid taxable dividends of$53,250 during the year.

3. Warron Inc. owns 35 percent of the votingshares of Delux Inc., another CCPC with a December 31 year end.During 2017, Delux Inc. paid taxable dividends of $48,600. As aconsequence of paying these dividends, Delux Inc. received adividend refund of $14,400.

4. Warron Inc. is associated with severalother corporations. Warron has been allocated $64,000 of theassociated groupâs annual business limit. This amount issignificantly less than the Companyâs active business income for2017.

5. During 2017, Warron Inc. has Taxable Incomeof $365,100. Assume that Part I Tax Payable for the year wascorrectly calculated to be $69,440. These totals do not include anyforeign source income and no net capital losses were deductedduring the year.

6. Other income that was reported by WarronInc. consisted of the following amounts:

CapitalGain $71,200

Eligible Dividends From Power Corporation PreferredShares 19,200

Net Rental Income From ResidentialProperties 13,200

Required: For the taxation year ending December31, 2017, determine the Part IV and refundable Part I taxes thatwill be payable by Warron Inc. In addition, determine the balancein the Refundable Dividend Tax On Hand account at December 31,2017, and any dividend refund available. Show all of thecalculations used to provide the required information, includingthose for which the result is nil.

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1.Which of the following statements about conversion of income is correct?

converting ordinary income into capital gain is a beneficial tax planning strategy

converting capital gain income into ordinary income is a beneficial tax planning strategy

converting qualifying dividends into interest income is a beneficial tax planning strategy

holding assets that will generate a capital gain inside a retirement plan is a beneficial tax planning strategy

2. Which of the following statements is NOT a true statement regarding long-term capital assets?

capital assets that are held for more than one year are treated as long-term

no distinction is made between capital losses and ordinary losses

with few exceptions, the maximum capital gains tax rate is 15%

the benefit of holding a capital asset long enough to garner long-term capital gain treatment must be weighed against the financial risk associated with a possible decline in value during the holding period

3. Which of the following statements about the taxation of dividends is correct?

all dividends are taxed at the same rate as applicable to capital gains

dividends paid by credit unions and mutual insurance companies qualify for the lower tax rate

qualifying dividends are taxed at a maximum 15% rate

d. there is no tax benefit to changing some of an individual's funds from a lower-yielding fixed income investment into a dividend-paying stock

4. Which of the following is an advantage of making an IRC Section 83(b) election with respect to restricted stock?

an 83(b) election can be made any time within the tax year of the transfer of shares from the company to the employee

if the stock is forfeited, the compensation recognized and the taxes paid are deductible as losses

any future appreciation would be taxed as capital gain instead of taxable compensation

d. the employee does not receive any cash at the time of the stock award to pay the tax on the compensation recognized under the election

5.The maximum alternative minimum tax rate for individuals is:

less than the maximum regular federal income tax rate for individuals

equal to the maximum regular federal income tax rate for individuals

greater than the maximum regular federal income tax rate for individuals

d. going to decrease each year by 1% until it reaches 20% in 2010

6. How is alternative minimum taxable income (AMTI) for individuals computed?

AMTI = taxable income + adjustments + preferences - exemptions

AMTI = taxable income - adjustments + preferences - exemptions

AMTI = taxable income +/- adjustments + preferences - exemption

d. AMTI = taxable income +/- adjustments - preferences - exemptions

7. Which of the following statements regarding the calculation of alternative minimum taxable income (AMTI) for corporations versus the calculation of AMTI for individuals is accurate?

	a.	AMTI is calculated the same for both corporations and individuals
	b.	an additional step is required for corporations based on their adjusted current earnings
	c.	the exemption amount for corporations is not subject to phaseout to phaseout while the exemption amounts for individuals are
	d.	thethere is no adjustments to taxable income for corporations, only preferences

22) Boxer Corporation buysequipment in January of the current year with a 7-year class lifefor $15,000. The corporation expensed the $15,000 under Sec. 179.The deduction in the year of purchase for E&P purposes due tothe acquisition and expensing of the equipment is

	A. $14,000
	B. $15,000
	C. $1,500
	D. $3,000

23) Maxwell Corporation reportsthe following results:

Year	CurrentE&P	Distributions
2005	$6,000	$4,000
2006	5,000	1,000
2007	1,000	-0-

Maxwell's dividends-received deduction is

	A. $5,000
	B. $12,000
	C. $0
	D. $7,000

24) Identify which of thefollowing statements is false.

	A. At formation, acorporation's E&P depends on the amount of capital contributedby the shareholders.
	B. Adjustments totaxable income when computing E&P do not include tax exemptinterest.
	C. For E&Pdividend distribution purposes, property as defined in Sec. 317(a)includes money.
	D. The function ofE&P is to provide a measure of a corporation's economic abilityto pay dividends.

25) Exit Corporation hasaccumulated E&P of $24,000 at the beginning of the current taxyear. Current E&P is $20,000. During the year the corporationmakes the following distributions to its sole shareholder who has a$22,000 basis for her stock.

Date	AmountDistributed
April 1	$20,000
June 1	20,000
August 1	15,000
November 1	5,000

The treatment of the $15,000 August 1 distribution would be

	A. $4,000 is taxableas a dividend from accumulated E&P, and $11,000 is tax-free asa return of capital
	B. $5,000 is taxableas a dividend from current E&P and $10,000 is tax-free as areturn of capital
	C. $15,000 is taxableas a dividend; $5,000 from current E&P and the balance fromaccumulated E&P
	D. $15,000 is taxableas a dividend from accumulated E&P

26) Current E&P does notinclude

	A. tax-exemptinterest income
	B. life insuranceproceeds where the corporation is the beneficiary
	C. federal income taxrefunds from prior years
	D. All of the theseare included

27) Identify which of thefollowing statements is true.

	A. Section 179property must be expensed ratably over a 5-year period whencomputing E&P.
	B. Losses on propertysales to related parties are not deductible when computingE&P.
	C. Distributions madeout of accumulated E&P are allocated ratably between multipledistributions made during the tax year.
	D. All arefalse.

28) Crossroads Corporationdistributes $60,000 to its sole shareholder Harley. Crossroads hasearnings and profits of $55,000 and Harley's basis in her stock is$20,000. After the distribution, Harley's basis is

	A. $20,000
	B. $60,000
	C. $5,000
	D. $15,000

29) Hogg Corporation distributes$30,000 to its sole shareholder, Ima. At the time of thedistribution, Hoggs' E&P is $14,000 and Ima's basis in herstock is $10,000. Ima's gain from this transaction is

	A. $20,000 capitalgain
	B. $30,000 capitalgain
	C. $6,000 capitalgain
	D. $14,000 capitalgain

30) One consequence of aproperty distribution by a corporation to a shareholder is

	A. the amount of thedistribution is increased by any liability assumed by theshareholder
	B. any liabilitiesassumed by the shareholder do not reduce the shareholder'sbasis
	C. the shareholder'sbasis in the distributed property is the same as the distributingcorporation's basis
	D. the holding periodof the distributed property includes the holding period of thedistributing corporation

31) Identify which of thefollowing statements is true.

	A. The distributingcorporation's E&P must be reduced by the FMV of nontaxablestock rights distributed to shareholders.
	B. A stock redemptioncan be used to withdraw some assets from a corporation prior to asale of the business.
	C. A shareholder canredeem part of his stock and recognize a capital gain if thecorporation has only one shareholder.
	D. All arefalse.

32) Which of the following isnot a reason for a stock redemption?

	A. desire byremaining shareholders to retain control
	B. No outside marketexists for the stock.
	C. Redemption ofshares is a good corporate investment.
	D. desire byshareholders to reduce the corporate tax liability

33) Elijah owns 20% of ParkCorporation's single class of stock. Elijah's basis in the stock is$8,000. Park's E&P is $28,000. If Park redeems all of Elijah'sstock for $48,000, Elijah must report dividend income of

	A. $0
	B. $48,000
	C. $40,000
	D. $28,000

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MGAD65H3 Lecture Notes - Lecture 9: Dividend Tax, Capital Account, Life Insurance

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