Cornerstone Appliances Limited (“Cornerstone”) is a Canadian-controlled private corporation (“CCPC”) with a December 31year-end. The company is a Canadian distributor of large appliances operating from its head office in Hanover, Ontario. Today is December 25, 2019 and Mr. Cook, the sole shareholder and president of the company, has requested a meeting with you to discuss various tax issues related to the company’s December 31, 2019 taxation year-end. At the meeting he provided you with the following information.

1. Mr. Cook is considering accruing a $150,000 bonus payable to himself in the December 31, 2019 financial statements for Cornerstone.
2. Mr. Cook’s spouse, Betty, provided a personal guarantee of $400,000 to the bank to cover their operating line of credit. In a written agreement with the company it was agreed that Cornerstone would pay her a guarantee fee of 2% per year on the $400,000 guaranteed starting on January 1, 2016. To date, Cornerstone has not paid any part of the guarantee fee. The fee that will have been accrued in the December 31, 2019 financial statements and deducted for tax purposes will be $32,000 ($8,000 per year).
3. Mr. Cook received a $90,000 3% loan, dated July 1, 2019 to enable him to purchase a new home for his own occupancy. Other senior employees of Cornerstone are eligible for, and have received, loans on similar terms. The loan was repayable over 10 years in equal instalments of principal payable on the anniversary date, but with interest payable monthly.
4. Mr. Cook holds 1,000 common shares of Cornerstone that were issued to him for $10 per share on incorporation of the company. Mr. Cook’s daughter, Belinda, the vice-president of the company, plans to purchase 200 of the 1,000 shares from her father on December 31, 2019. She will receive a $100,000 non-interest bearing loan, dated December 31, 2019, from Cornerstone to cover the full purchase price of the shares. Under the loan agreement, Belinda is required to make principal repayments on the loan starting December 31, 2020 of $20,000 per year. Belinda plans to follow this repayment schedule. Consider the tax implications on the sale of shares by Mr. Cook.

5) The balance sheet for Cornerstone on November 30, 2019 was as follows.

	Book Value
Assets (FMV)
Cash ($4,000)	$ 4,000
Accounts Receivable ($15,000)	15,000
Term Deposits ($150,000)	150,000
Loan Receivable — Mr. Cook ($90,000)	90,000
Inventory ($125,000)	125,000
Land ($250,000)	150,000
Building & Equipment ($350,000)	250,000
Shares in Y Ltd. ($25,000)	15,000
Total Assets ($1,009,000)	$ 799,000

Liabilities
Accounts Payable	$ 20,000
Loan Payable Mrs. Cook	224,000
Total Liabilities	$ 244,000
Capital
Common Shares	10,000
Retained Earnings	545,000
Total Liabilities and Share Capital	$ 799,000

Mr. Cook indicated that there has not been a substantial change in the proportionate fair market value of the assets of the company for several years. A recent valuation of the company showed that the company’s customer lists and goodwill are worth $100,000.

Cornerstone owns 13% of the shares of Y Ltd. Y Ltd. is a CCPC that manufactures most of the stoves and fridges sold by Cornerstone. All of the assets of Y Ltd. have been used in its active business operated in Owen Sound, Ontario, since it began operations in 2015.

6) Mr. Cook has used up all but $500,000 of his capital gains exemption.

Required:

Provide Mr. Cook with a detailed summary of the tax consequences to him, his daughter, and Cornerstone for the above for the year ending December 31, 2019, with calculations where necessary.

Assume that the prescribed interest rate for the first quarter of 2019 was 4%, for the second quarter it was 3%, for the third quarter it was 4%, and for the fourth quarter it was 5%.

Answer rating: 100% (QA)

Detailed Summary CornerStone The small business deduction can be claimed by the company which lowers the overall business taxes The demand should have ... View the full answer