Simon Fahrquest is the sole shareholder of Dawg Ltd., a very successful business that was incorporated a number of years ago. The company has always qualified as a CCPC and uses a December 31 year end.
Simon has never been particularly fond of peopl, but has always loved dogs, particularly those of mixed breed. While he has no family, he currently owns 12 dogs, none of which are purebred.
While Dawg LTd. has always been very profitable, Simon has chosen to live modestly in a dog firendly residential property that he has owned for many years. Each year, he estimates the amount of cash that he will need for his living expenses which vary year to year and looks to his corporation to provide the needed cash.
Since after meeting Simon's financial needs, Dawg Ltd. always has cash that isn't required for operations, it donates at least $100,000 per year to the Society For The Prevention of Cruelty To Animals (SPCA), a registered charity. The donations specify that the funds must be used for the protection, maintenance, and placement of mixed breen dogs.
For 2016, Simon estimates that he will need $50,000 in after tax cash to meet his personal needs. He expects Dawg LTd. will have taxable income of $350,000 before any payments to him, all of which will qualify for the small business deduction. The provincial tax rate on such income if 2.5 percent.
In Simon's province of residence, the provinical taxes on the first $45,282 of taxable income total $4,528. Additional income will be taxed at a provincial rate of 12 percent. Also in this province, the provincial dividend tax credit for non-eligible dividends is equal to 32 percent of the dividend gross up.
For the 2016 taxation year, Simon estimates that his person tax credits will total $3,260.
Required:
A. Determine the tax cost of providiing Simon with the required $50,000 in after tax cash using only salary payments.
B. Determine the tax cost of providing Simon with the required $50,000 in after tax cash using only dividend payments.
C. Given the information in this problem, do you believe that better results could be achieved with a combination of salary and dividends? Would your answer be different if Simon's personal tax credits totalled $12,000? Calculations are not required in answering this part C.
D. Simon would like to increase his donations to the SPCA and has asked your advice on the most tax advantageous way to do this. What factors should be considered when analyzing this issue?
Ignore CPP Contributions and Canada employment credit in your solution.
No CPP amount is given in this question.
