Mr. A is the sole shareholder and manager of ABC Consulting Ltd. (ABC) ABC has a June
Question:
Mr. A is the sole shareholder and manager of ABC Consulting Ltd. (ABC) ABC has a June 30 fiscal year-end. On July 1, Year 1, Mr. A borrowed $150,000 from ABC to purchase a motor home for his personal use. Mr. A did not pay ABC any interest on the loan. Mr. A repaid the full $150,000 amount of the loan on July 1, Year 3. The prescribed rates of interest for Year 1, 2 and 3 are: Q1 = 4%, Q2 = 4%, Q3 = 5% and Q4 = 5%. On January 1, Year 2, Ms. A borrowed $150,000 from ABC Inc. (ABC).
Ms. A borrowed the funds to acquire newly issued shares of ABC that will increase her ownership of the company from 11% to 21%. Ms. A is also employed by ABC. The loan is being repaid evenly each year from December 31 until December 31, Year 6. Ms. A pays ABC 1% interest on the loan (payable at the end of each year). Fort has a December 31 year-end. The prescribed rates of interest for Year 1, 2 and 3 are: Q1 = 4%, Q2 = 4%, Q3 = 5% and Q4 = 5%.
REQUIRED:
Determine the full impact on Mr. A’s taxable income (for all years applicable) because of the loan. Ensure you support your conclusions based on the tax guidance. Also, determine the full impact on Ms. A’s taxable income (for all years applicable) because of the loan.
Financial Accounting
ISBN: 978-1259103285
5th Canadian edition
Authors: Robert Libby, Patricia Libby, Daniel Short, George Kanaan, M