Mr. Humphries, a resident of a province with a 41% effective corporate tax rate (before the additional refundable tax), has just won a lottery prize of $750,000. He is considering the following investment of these funds: $200,000 of bonds yielding 8% and $550,000 of common shares of Growth Unlimited Limited (a CCPC earning active business income less than the business limit), which pay a dividend to yield 5%. Having taken a course in security analysis, Mr. Humphries can predict with great confidence that he will realize a 10.5% capital gain on the shares within the year. Mr. Humphries currently has taxable income of $30,000. He has federal personal tax credits of $2,100, and provincial personal tax credits of $1,400.
REQUIRED
(A) Advise Mr. Humphries on whether he should use an investment corporation with a permanent establishment in the province of which he is a resident to hold the securities he proposes to purchase. Include in your analysis the realization of the predicted capital gain. Use 2012 personal tax rates also, consider any non-quantitative factors that may be relevant to the decision.
(B) Do the above analysis again, using a 40% effective corporate tax rate before the additional refundable tax.