You are the tax partner in your own small accounting firm and youhave just finished a meeting with a new client, who also happens to be your long-time friend, Susan Richie. You have known Susan a long time and she has always been a very health-conscious person. While you were completing a Bachelor of Commerce degree with an accounting major in University, Susan studied nutrition and completed a Culinary Arts program. Therefore, it only seems natural that Susan has decided to start her own business, a vegan bakery. Susan came to you for taxation advice related to her new business venture.
During your meeting, you gather the following information about Susan and her proposed business:
·        Susan is married to Frank Richie. Frank is a lawyer who works at Richie & Sons LLP, a very successful law firm where his brother, Fred, and his parents are all lawyers.
·        Frank earns approximately $200,000 per year in employment income from the law firm.
·        Susan and Frank have one child, a five-year-old daughter named Lucy.
·        Frank's brother, Fred, is a vegan and always complained that there was no place where he could satisfy his sweet tooth while staying true to his vegan diet. After tasting Susan's vegan baking, Fred suggested that Susan start her own vegan bakery.
·        Fred has promised a $1,000,000 loan to help Susan start her business. As a condition of the loan, Fred would like some say in the operation of the bakery.
·        Susan is happy to have Fred's assistance as he has experience in drafting contracts and other legal agreements for various small businesses.
Required:
1.      Prepare a memo to Susan indicating the best organizational structure for her new business. For each type of organizational structure (proprietorship, partnership, joint venture, corporation) include tax related advantages and disadvantages as well as other (legal, financial, etc.) advantages and disadvantages related to Susan's personal situation (described above). Provide a conclusion on which alternative is best for Susan and why.
2.      Five years have passed since your initial meeting with Susan. She decided to operate her vegan bakery business as a corporation, called Sweet Vegan Treats Inc. The business has been very successful and the following information is available for Sweet Vegan Treats Inc.:
a.      Sweet Vegan Treats Inc. is a Canadian controlled private corporation that earns approximately $600,000 of taxable income (consisting solely of active business income) annually. The corporation claims the small business deduction every year on its corporate tax return;
b.      Susan owns 75% of the voting common shares of Sweet Vegan Treats Inc., with 12% of the voting shares each being held by Frank and Fred Richie. The last 1% of the voting common shares are owned by Lucy (Susan and Frank's daughter). Susan does all of the baking, operates the store front and does some of the administrative work for the bakery. Frank and Fred assist with the bookkeeping and administrative operations for the bakery.
c.      Each year, the corporation pays Susan a small salary of $50,000 and distributes a dividend of $10,000 to Fred and Frank;
d.      Due to the financial success of the business, Susan and Fred are considering purchasing a larger building for the bakery. Currently, Sweet Vegan Treats Inc. operates out of a leased building that includes a small commercial kitchen and store front. For legal liability purposes, Fred thinks the building should be purchased by a separate corporation, jointly owned by Fred and Susan.
Based on the above information, prepare a memo for Susan answering the following questions:
                                                              i.           Sweet Vegan Treats Inc. earns a large amount of active business income each year. Provide Susan with some tax planning advice with regard to the active business income earned by Sweet Vegan Treats Inc. each year. Be sure to include tax planning advice related to Susan and Fred's idea to purchase a new building for the business in a separate corporation and how this might impact active business income and claiming the small business deduction for Sweet Vegan Treats Inc.
                                                            ii.           Currently, Susan receives a salary from the corporation and Fred and Frank receive dividends from the corporation. Provide Susan, Frank and Fred with an analysis of the general considerations, advantages and disadvantages of salary versus dividend remuneration.
                                                          iii.           Susan, Frank and Fred have heard of a special type of tax-free dividend called Capital Dividends, which they would all like to receive in the current taxation year. Provide your clients with a brief definition of the Capital Dividend Account for private corporations, including an explanation of the purpose of the account and how it is calculated. It is always easier to explain a computation to a client using numbers and figures, therefore utilize the following hypothetical information to compute the balance in a corporation's Capital Dividend Account. Compute the Capital Dividend Account balance as at December 31 of the current year for a private corporation that was incorporated on January 1 of the current year and incurred the following transactions:
·        The corporation sold some land on March 1 of the current year for proceeds of disposition of $123,500. The land was originally purchased for $167,000 on January 15 of the current year;
·        The corporation sold some securities on August 15 for proceeds of $65,000 and the securities have an adjusted cost base of $47,500; and
·        The corporation received capital dividends of $23,500 and paid capital dividends to its shareholders of $1,750 during the current year

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The detailed answer for the above question is provided below 1 Memo To Susan Richie From Tax Partner Subject Best Organizational Structure for Your New Business Dear Susan I am writing this memo to pr... View the full answer