AP 3-7 Loans to Employees Because of her outstanding performance, Tricia Fox is negotiating a significant...
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AP 3-7 Loans to Employees Because of her outstanding performance, Tricia Fox is negotiating a significant increase in her annual compensation. After considering various alternatives, she has decided her preferable increase would be in the form of a $300,000 interest-free loan. She will use the proceeds of the loan to purchase income-producing investments. This means any interest on the loan, either amounts paid or amounts imputed as a taxable benefit, will be fully deductible. Other information that is relevant to this decision is as follows: ● ● Her investments are expected to provide a pre-tax return of 11%. She can acquire a similar-term $300,000 loan at an annual rate of 4.6%. Her employer, a Canadian public company, is subject to tax at a combined federal and pro- vincial rate of 28%. The company has alternative investment opportunities that earn a pre- tax rate of 5%. . Her various sources of income are such that any additional income will be taxed at a rate of 49%. • Assume that the relevant prescribed rate for all periods under consideration is 2%. Required: Evaluate, from the point of view of the cost to the employer, Ms. Fox's suggestion of providing an interest-free loan in lieu of sufficient salary to carry a commercial loan at the rate of 4.6%. AP 3-7 Loans to Employees Because of her outstanding performance, Tricia Fox is negotiating a significant increase in her annual compensation. After considering various alternatives, she has decided her preferable increase would be in the form of a $300,000 interest-free loan. She will use the proceeds of the loan to purchase income-producing investments. This means any interest on the loan, either amounts paid or amounts imputed as a taxable benefit, will be fully deductible. Other information that is relevant to this decision is as follows: ● ● Her investments are expected to provide a pre-tax return of 11%. She can acquire a similar-term $300,000 loan at an annual rate of 4.6%. Her employer, a Canadian public company, is subject to tax at a combined federal and pro- vincial rate of 28%. The company has alternative investment opportunities that earn a pre- tax rate of 5%. . Her various sources of income are such that any additional income will be taxed at a rate of 49%. • Assume that the relevant prescribed rate for all periods under consideration is 2%. Required: Evaluate, from the point of view of the cost to the employer, Ms. Fox's suggestion of providing an interest-free loan in lieu of sufficient salary to carry a commercial loan at the rate of 4.6%.
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Evaluating Ms Foxs InterestFree Loan Proposal Cost to Employer There are several factors to consider ... View the full answer
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
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