Question

Identify the tax planning technique employed in each of the following cases (No explanation is necessary):

1. Rory has run a successful proprietorship for the past four years and has now decided to incorporate the business.
2. The sole shareholder of ABC Co. purchased the shares of the company in 2016 for $25,000, and has recently valued the shares at $150,000. In preparation to sell the company to an arm's-length party, the shareholder decided not to issue the usual annual dividend of $20,000.
3. XYZ Inc. has chosen to delay the recognition of a discretionary reserve until the following year.

Answer 1

1)

A corporation's capital can be expanded at any time in a private offering by issuing and selling additional shares of stock.a seperate legal entity created by a state filling . Corporate tax is applied. Corporation income is also subject to what is called"double taxation", when the income of the business is distributed to the owners in form of dividend , because dividend is taxable.

2) if the taxpayer and the purchasing corporation were not dealing at arm's length. The income tax act would apply and the disposition of the shares would be deemed a dividend received by the taxpayer rather than a capital transaction.

3) carried back from the year of reversal to offset.. the objective of such planning is to accelerate or delay the reversal of the income taxes special areas,and for deposits in statutory reserve funds of rhe company.