Nicholas Douklias is a Fund Manager for a Halifax-based hedge fund, where he earns over $300,000/year in employment income. Nick also has a large personal investment portfolio of publicly traded stocks which provides him with eligible dividend income. Finally, Nick operates ANJ Wholesale, a sole proprietorship and distributor of imported goods for Dollar Stores in Halifax. Nick's employment income is sufficient to absorb all of his available personal tax credits. As such, his business and investment income are taxed at the highest federal and provincial personal marginal tax rates (33% federal + 21% provincial). Nick has sought your advice to determine whether he should incorporate his business and his personal investments in a new corporation called ND Incorporated.

Your analysis of Nick's records has provided you with the following information: Eligible dividends from personal investment portfolio: $80,000 Current forecasted profits from active business income (ANJ Wholesale): $95,000 (assume no reconciliation adjustments are necessary) ND Incorporated would be eligible for the 19% Small Business Deduction Provincial corporate (CCPC) tax rate on active business income: 2% Provincial dividend tax credits on: o Eligible dividends: 40% of dividend gross up o Non-eligible dividends: 23% of dividend gross-up

Required: A. Assume that the business and investments are not incorporated and will be included in Nick's personal income, i.e., the status quo. Calculate Nick's personal tax payable, showing separately the income tax payable on the active business income and the eligible dividends.

B. Assume that the business and investments are incorporated within ND Incorporated. Calculate the corporate income tax payable, the after-tax income available for a dividend distribution, and the personal income tax that would be payable on the dividend distribution. Assume the maximum eligible dividend distributions are made. Your calculations should show separately the income tax payable on the active business income and any eligible and/or non-eligible dividends.

C. Compare the tax payable with or without the use of ND Incorporated and explain why the tax payable amounts are different. Advise Nick on whether he should make the proposed transfers to a new corporation (ND Incorporated).