Question

(Flow Through Of Dividend Income)

As the result of receiving a substantial inheritance from an uncle, Ms. Karen Fallow has $400,000 in funds to invest. On January 1, 2017, she intends to invest these funds in preferred shares that feature a cumulative dividend of 3.75 percent. These dividends will be designated by the payor as eligible.

Because of income generated by her unincorporated business, she is in the maximum federal tax bracket of 33 percent. Her province uses the same income brackets as found in federal legislation. This means that any additional income that Karen receives will be taxed at a provincial rate of 18 percent.

Other information related to provincial taxation is as follows:

Corporate Tax Rates The provincial corporate tax rate on investment income is 13 percent.

Dividend Tax Credits The provincial dividend tax credit is equal to 40 percent on eligible dividends and 25 percent on non-eligible dividends.

As her unincorporated business has required all of her available funds for expansion, Karen has no investments other than the new investment in debt securities.

Required:

Prepare calculations that will compare the after-tax retention of income that will accrue to Karen for 2017 if:

A. The investment is owned by her as an individual.

B. The investment is owned by a CCPC in which she is the sole shareholder, and which pays out all available income in eligible dividends.

Answer 1

Ans A) After Tax Retention Income of Karen when investment is owned by her is as follows:

Funds Invested $400,000

Dividend Received(400,000*3.75%) $15,000

Dividend Tax Credits 40% for eligible

shares $6,000

Federal tax 18% $2,700

After Tax Retention Income of Karen $6,300

Ans B) After Tax Retention Income of Karen when investment is owned by CCPC is as follows:

Funds Invested $400,000

Dividend Received(400,000*3.75%) $15,000

Corporate Tax Rate 13% $1,950

After Tax Retention Income of Karen $13,050