PROBLEM THREE

Conquest Enterprises is a partnership that operates a wholesale firm. The partners are Cameron Traders Ltd$.$ and

Kando Construction Ltd$.$ They share profits equally.

The partnership business has improved this year, and it is anticipated that by year$-$end, profits before capital cost

allowance will amount to $$620,000($compared with $$290,000$ the previous year$).$ During the year, the partner$-$

ship acquired an additional delivery vehicle for $$26,000.$ At the end of the previous year, the partnership held the

following property.

Cameron Traders is a Canadian$-$controlled private corporation owned by Jamie Cameron. The company oper$-$

ates an import$/$export business and earns trading commissions from a wide range of customers. For years, it has

earned a modest profit $($ $$30,000$ last year, after a reasonable salary to Jamie$).$ However, his years of hard work

establishing international contacts have finally paid off, and he expects this year's profits to be $$300,000$ and

future years' profits to continue at least at this level.

Kando Construction is owned by Suzanne Kando. Kando Construction has suffered major losses over the past

years even after earnings have been allocated from the partnership. Currently the company has unused non$-$

capital losses of $$600,000,$ of which $$300,000$ will expire in two years. The company appears to have its losses

under control and is not in serious financial difficulty, although cash flow has been tight.

The partnership has been seeking to acquire a new warehouse building. Coincidentally, Suzanne personally

owns a warehouse property, which will be vacated by its tenant in six months. The property has appreciated in

value and is worth $$80,000$ more than its original cost. Suzanne has claimed capital cost allowance of $$30,000$

over the years. She is willing to sell the property to the partnership, as she could use the cash to strengthen

Kando Construction. However, she needs all the cash she can get and is not anxious to pay tax on the sale.

The partnership and the two partners have December $31$ fiscal year$-$ends.

Required:

Determine the minimum and maximum business income for tax purposes that might be earned by the part$-$

nership $($Conquest Enterprises$)$ for the current year and allocated to the partners.

Which amount of income from the partnership would Cameron Traders and Kando Construction prefer?

Explain.

Estimate the tax liability of Cameron Traders for the current year.

If you owned Cameron Traders, would you recommend that Conquest Enterprises be incorporated? Explain.

How would the incorporation of the partnership affect Kando Construction?

What can Suzanne do to avoid tax on the sale of the warehouse property to the partnership and generate

the maximum amount of cash to help Kando Construction?