MANAGEMENT 4151A

FALL 2015
SMALL GROUP CASE

SOPHIA AND COMPANIES

TAXES 2015
DUE: BEGINNING OF CLASS, DECEMBER 2ND, 2015

MANAGEMENT 4151A
FALL 2015
SMALL GROUP CASE

Personal Information
Sophia is thirty-five years old and single with no dependents.

Employment Information
She is an employee of a Canadian controlled private corporation (CCPC) from which she earned
an annual gross salary of $95,000 in 2015. Her employer deducted CPP and EI payments totally
$3,411. Income tax deducted was $25,000.
Sophia sold her shares in the CCPC in 2015 for $15 per share. The shares were purchased under
a stock option plan four years ago. She originally purchased 1000 shares for $8.00 per share, when
the market value of the shares was $10.00. The company is a qualified small business corporation.

Other Information
Some of Sophias other income and contributions for the year include:

Receipt of a $2,000 non-eligible dividend from ABC Ltd., and a $300 eligible dividend
from 123Ltd.

$1,000 contribution to a registered charity which she has donated to every year for the past
ten years, and a $1,000 contribution to a provincial political party

Receipt of $200 interest on guaranteed investment certificates she purchased five years ago

$2,000 winnings from a lottery ticket that she received for her birthday

A capital gain of $4,000 on the sale of her shares in Public Corp. XY

Education
Sophia is pursuing a second degree, and received a T2202A stating that her tuition paid in 2015
was $2,500, and the number of part-time months attended was eight.

Capital Investments from Previous Years

Sophia sold several assets in 2014 and recognized a loss of $2,000 on her antique furniture and a
loss of $1,000 on shares in Public Corp. AB. She did not report any capital gains last year, or in
any other previous years. Sophia has never used her capital gains exemption.

Business Investments
Sophia has a ten percent partnership interest in a small business. She invested $5,000 five years
ago to become a limited partner. The business earned $12,000 of income in 2015.
Sophia owns twenty percent of the shares in her brothers CCPC, Z Ltd. Her parents each own ten
percent of the shares, and her brother owns the remaining shares. Sophia receives a non-eligible
dividend cheque from Z Ltd. for $10,000 at the end of each year. Her parents have suggested
selling their shares in Z Ltd. to Sophia or her brother as they are preparing to retire. None of the
shares are from a specified class.
Sophias parents, George and Sandra, would like Sophia to work for their CCPC, B Ltd., next year.
They hope to pass the business on to Sophia when they retire in two years. (Sophias brother
wishes to focus his efforts and money on Z Ltd., and is happy to see Sophia carry on their parents
company.) The business was recently valued based on normalized earnings (which just happen to
equal this years earnings shown in Exhibit I), with an expected rate of return of 10%. The industry
is very promising, and income projections for the next five years show steady growth. The fair
market value of the companys assets are listed in Exhibit II.

Exhibit I:
B Ltd.
Income Statement
For the Year Ended December 31st, 2015
Revenue:
Expenses:
Costs of Good Sold
Salaries:
George
Sandra
Staff
Amortization
Administrative costs
Advertising
Interest
Net income before taxes

$900,000
$330,000
80,000
80,000
120,000
15,000
10,000
20,000
30,000
$215,000

Exhibit II:
B Ltd.s Assets

FMV

ACB/UCC

Cash
Inventory
Investment
Furniture/Small
Equipment
Large Equipment
Building

$ 20,000
$ 50,000
$400,000

$300,000

$200,000
$500,000
$800,000

$120,000 (Class 8)
$320,000 (Class 29)
$580,000 (Class 1 6%)

Total Assets

$1,970,000

There is currently a $300,000 mortgage on the building. All of the companys assets other than
the long-term investment are used in active business. The fair market values of the assets have
remained constant for the past three years. Only George and Sandra have held shares in the
company.

Although Sophia has a considerable amount of savings, she does not have sufficient cash to
purchase B Ltd., so would like to know if and how the plan to acquire the business can be
implemented. Sophia is also curious to know if her ownership of shares in her brothers company
will affect the tax liability of B Ltd. if she were to own all of the shares of B Ltd.

REQUIRED:
PART I
Tax Returns:
1. Prepare a paper copy of Sophias T1 tax return for 2015. Hand in the T1 and all relevant
schedules and forms. (Sophia minimizes and defers taxes whenever possible.)
2. Prepare a paper copy of B Ltd.s tax return for 2015. Hand in the T2 and all relevant
schedules and forms.
(Attach labelled tabs to the various forms.)
PART II
Professional Report:
Prepare a short report for Sophia, Sandra, and George, based on the following:
1. Calculate the purchase price of B Ltd. using the earnings method of valuation. (Show all
calculations.)
2. Explain how the business can be transferred to Sophia. (Maximum 500 words, typed,
double-spaced)
3. Discuss the tax implications of Sophias ownership of shares in Z Ltd. (Maximum 250
words, typed, double-spaced)