Background on Individuals Mr. Maranello Smith is a 56-year-old entrepreneur that has been in the winery...

    

Transcribed Image Text:

Background on Individuals Mr. Maranello Smith is a 56-year-old entrepreneur that has been in the winery business for many years and has recently ventured successfully into the restaurant industry. Currently, Maranello resides in Pelham, Ontario which is near Niagara Falls with his immediate family. His immediate family consists of his wife Elana Smith (58 years old), his son Michael Smith (20 years old), and his daughter Gabriella Smith (21 years old). His son and daughter are both in University and Maranello pays the majority of their tuition and rent fees. Maranello decided to venture into the restaurant industry in 2018 due to the slow decline in the income generated by the winery. Background on Winery The winery is in Niagara-on-the-Lake and is known as Maranello Estates Winery. The winery was opened by Maranello in 2002. The business was incorporated at the time of opening and there was a total of 1,000 shares issued at $50 each that Maranello purchased for a total of $50,000. The business focuses on the production of wine and the distribution of wine directly on the winery's own premises as well as distribution through the LCBO in Ontario. The winery also offers wine tasting and wine tours which helps generate profits. The entity's division B income consists of wine sales, wine tours, and wine tastings net of manufacturing costs, distribution costs, and operating costs. The winery used to perform very well, however, recently due to increasing competition the winery's revenues have very slowly started to decline. Maranello believes that this is specifically due to newer wineries having a nicer atmosphere for wine tastings. Furthermore, Maranello has hired an effective management team that runs the winery and takes care of day-to-day business activities. Background on Restaurant Due to the increasing popularity of upscale dining, Maranello decided to enter the restaurant market. The business was incorporated and opened in late 2016 and Maranello purchased all 1,000 shares of the corporation for $75 each. The company is controlled by a Canadian Resident and is privately controlled. Thus, the corporation is considered a CCPC. The restaurant quickly rose in popularity due to its location in Downtown Toronto, its upscale atmosphere as well as the quality of food and service. The Pizzeria generates revenues primarily from dine-in food sales as well as alcohol sales, but not as much from take- out sales. The majority of the wine selection at the restaurant is from Maranello's own winery. The Restaurant's Division B income consists of the sales from food and alcohol net of operating expenses such as salaries for chefs, salaries for waiters, supplies, ingredients, and maintenance of kitchen appliances. Furthermore, the entity earns investment income in the form of dividends from securities it holds in Taxable Canadian Public Companies. Moreover, when the restaurant was opened, Maranello was able to get a good deal on a building and decided to purchase it instead of renting a location. The building has two units and only one unit is used by the restaurant. The other unit is rented out by Maranello to a coffee shop and thus it generates rental income. Relationship between the Corporation: At the time of incorporation of the restaurant, Maranello's accountant advised him that it would be considered as associated with the winery by the CRA and that this would have various implications. He noted that the two would be associated due to section 256(1)(b) of the income tax act which states that if the two corporations are controlled by the same individual or group (which in this case would be Maranello), then they would be seen as associated corporations. This would mean that the two corporations would share the business limit of $500,000. Furthermore, he explained that deemed active business income would apply to the situation which means that if the restaurant purchases wine from the winery and deducts it as expenses then the winery would need to include it as active business income for tax purposes. The Issue at Hand Maranello lives in Pelham, Ontario and he drives to Toronto daily to manage operations at the restaurant. Driving this distance daily has become extremely draining and Maranello had planned to move closer to Toronto for a few years, however, the COVID-19 pandemic altered his plans. Maranello is now planning on moving to Toronto. However, he used the majority of his savings during COVID to keep the restaurant afloat and thus he wants his accountant's advice regarding whether there is a way to use his businesses as an advantage to help him purchase a house. For 2022, Maranello requires approximately $300,000 for a downpayment on a home and requires $150,000 for general expenses such as mortgage, auto expenses, children's tuition and rent, etc. (1) Maranello received a recent offer for a total of $2,700,000 to purchase all the shares of Maranello Estates Winery. As noted above, Maranello purchased all his shares in the winery at the time of incorporation for $50,000. The Winery has the following assets used for active business carried on in Canada. You are asked to inform him of the tax consequences of selling all shares and in which way he can maximize after-tax cash. Asset cash land buildings machinery furniture investment total Cost 10000 800,000 500,000 250,000 120,000 400,000 2,080,000 UCC 420,000 20,000 60,000 500,000 FMV 10000 1,000,000 900,000 340,000 100,000 450,000 2,800,000 (2) Analyze the following three options to meet Maranello's cash needs other than selling the shares of the Winery, A. First pay the full PUC and CDA balance and pay the remaining income as ineligible dividends. B. Pay full PUC and CDA first, pay the entire house downpayment using loans on the virtue of employment (2 years tax-free), and ineligible dividends for the rest. Assume that the prescribed interest rate is 6.25%, pro-rated for 65 days in 2022. C. Pay full PUC and CDA first. Pay the entirety of the remaining balance needed as a shareholder loan (1 year tax-free). Assume that the prescribed interest rate is 6.25%, pro-rated for 65 days in 2022. The total cash required: downpayment regular expenditure 300000 150000 2018 sold fire-burning decks for $20000 2019 capital loss on sale of furniture $8000 2020 life insurance proceeds of $25000 2021 bond disposition for $8250 2021 received a capital dividend of $2000 2022 capital gain on sale of truck $10000 NERDTOH balance: $11408 ERDTOH balance: $ 2300 total non-eligible dividends to pay in order to use full refund: $35763 $450000 3. Provide your overall recommendations based on your calculations and comparisons of (1) and (2). Background on Individuals Mr. Maranello Smith is a 56-year-old entrepreneur that has been in the winery business for many years and has recently ventured successfully into the restaurant industry. Currently, Maranello resides in Pelham, Ontario which is near Niagara Falls with his immediate family. His immediate family consists of his wife Elana Smith (58 years old), his son Michael Smith (20 years old), and his daughter Gabriella Smith (21 years old). His son and daughter are both in University and Maranello pays the majority of their tuition and rent fees. Maranello decided to venture into the restaurant industry in 2018 due to the slow decline in the income generated by the winery. Background on Winery The winery is in Niagara-on-the-Lake and is known as Maranello Estates Winery. The winery was opened by Maranello in 2002. The business was incorporated at the time of opening and there was a total of 1,000 shares issued at $50 each that Maranello purchased for a total of $50,000. The business focuses on the production of wine and the distribution of wine directly on the winery's own premises as well as distribution through the LCBO in Ontario. The winery also offers wine tasting and wine tours which helps generate profits. The entity's division B income consists of wine sales, wine tours, and wine tastings net of manufacturing costs, distribution costs, and operating costs. The winery used to perform very well, however, recently due to increasing competition the winery's revenues have very slowly started to decline. Maranello believes that this is specifically due to newer wineries having a nicer atmosphere for wine tastings. Furthermore, Maranello has hired an effective management team that runs the winery and takes care of day-to-day business activities. Background on Restaurant Due to the increasing popularity of upscale dining, Maranello decided to enter the restaurant market. The business was incorporated and opened in late 2016 and Maranello purchased all 1,000 shares of the corporation for $75 each. The company is controlled by a Canadian Resident and is privately controlled. Thus, the corporation is considered a CCPC. The restaurant quickly rose in popularity due to its location in Downtown Toronto, its upscale atmosphere as well as the quality of food and service. The Pizzeria generates revenues primarily from dine-in food sales as well as alcohol sales, but not as much from take- out sales. The majority of the wine selection at the restaurant is from Maranello's own winery. The Restaurant's Division B income consists of the sales from food and alcohol net of operating expenses such as salaries for chefs, salaries for waiters, supplies, ingredients, and maintenance of kitchen appliances. Furthermore, the entity earns investment income in the form of dividends from securities it holds in Taxable Canadian Public Companies. Moreover, when the restaurant was opened, Maranello was able to get a good deal on a building and decided to purchase it instead of renting a location. The building has two units and only one unit is used by the restaurant. The other unit is rented out by Maranello to a coffee shop and thus it generates rental income. Relationship between the Corporation: At the time of incorporation of the restaurant, Maranello's accountant advised him that it would be considered as associated with the winery by the CRA and that this would have various implications. He noted that the two would be associated due to section 256(1)(b) of the income tax act which states that if the two corporations are controlled by the same individual or group (which in this case would be Maranello), then they would be seen as associated corporations. This would mean that the two corporations would share the business limit of $500,000. Furthermore, he explained that deemed active business income would apply to the situation which means that if the restaurant purchases wine from the winery and deducts it as expenses then the winery would need to include it as active business income for tax purposes. The Issue at Hand Maranello lives in Pelham, Ontario and he drives to Toronto daily to manage operations at the restaurant. Driving this distance daily has become extremely draining and Maranello had planned to move closer to Toronto for a few years, however, the COVID-19 pandemic altered his plans. Maranello is now planning on moving to Toronto. However, he used the majority of his savings during COVID to keep the restaurant afloat and thus he wants his accountant's advice regarding whether there is a way to use his businesses as an advantage to help him purchase a house. For 2022, Maranello requires approximately $300,000 for a downpayment on a home and requires $150,000 for general expenses such as mortgage, auto expenses, children's tuition and rent, etc. (1) Maranello received a recent offer for a total of $2,700,000 to purchase all the shares of Maranello Estates Winery. As noted above, Maranello purchased all his shares in the winery at the time of incorporation for $50,000. The Winery has the following assets used for active business carried on in Canada. You are asked to inform him of the tax consequences of selling all shares and in which way he can maximize after-tax cash. Asset cash land buildings machinery furniture investment total Cost 10000 800,000 500,000 250,000 120,000 400,000 2,080,000 UCC 420,000 20,000 60,000 500,000 FMV 10000 1,000,000 900,000 340,000 100,000 450,000 2,800,000 (2) Analyze the following three options to meet Maranello's cash needs other than selling the shares of the Winery, A. First pay the full PUC and CDA balance and pay the remaining income as ineligible dividends. B. Pay full PUC and CDA first, pay the entire house downpayment using loans on the virtue of employment (2 years tax-free), and ineligible dividends for the rest. Assume that the prescribed interest rate is 6.25%, pro-rated for 65 days in 2022. C. Pay full PUC and CDA first. Pay the entirety of the remaining balance needed as a shareholder loan (1 year tax-free). Assume that the prescribed interest rate is 6.25%, pro-rated for 65 days in 2022. The total cash required: downpayment regular expenditure 300000 150000 2018 sold fire-burning decks for $20000 2019 capital loss on sale of furniture $8000 2020 life insurance proceeds of $25000 2021 bond disposition for $8250 2021 received a capital dividend of $2000 2022 capital gain on sale of truck $10000 NERDTOH balance: $11408 ERDTOH balance: $ 2300 total non-eligible dividends to pay in order to use full refund: $35763 $450000 3. Provide your overall recommendations based on your calculations and comparisons of (1) and (2).

Answer rating: 100% (QA)

1 Tax Consequences of Selling Shares of Maranello Estates Winery If Maranello decides to sell all the shares of Maranello Estates Winery for a total o... View the full answer