Exam 7: Income From Property

Correct Answer:

Verified

A) Rental income: $9,750 - ($40,000 × .04 × 1.5) - ($60,000 × .04 × 1.5) = $3,750
Interest income: $0 (Does not have to be included in income until the year of the first anniversary.)
Dividend income: $700 × 1.38 = $966
Minimum property income = $3,750 + $0 + $966 = $4,716

B) Rental properties: Net rents (pre - CCA) $9,750/($85,000 + $110,000) = 5% + Capital growth of 5% = 10%
Bond: as stated: 10%
Shares: Dividends $700/$10,000 = 7% + Capital growth of 3% = 10%

C) Rental Property: (.05[1 - .45] + .05[1 - .23]) = 6.6%
Bond: (.1[1 - .45]) = 5.5%
Shares: (.07[1 - .3] + .03[1 - .23]) = 7.21%


D) By paying off the mortgage, Gurpreet would have eliminated the non-deductible interest payments.Borrowing against the home and reinvesting the funds would have allowed Gurpreet to deduct the interest payments from property income, thereby increasing cash flow and return on investment.(However, factors such as interest rates and penalties, etc., would all need to be considered.)

Correct Answer:

Verified

A)
$\begin{array}{|l|r|r|}\hline \text { 1) Corporation } & & \\\hline \text { Corporate income } & & \$ 500,000 \\\hline \text { Less Tax } & 27.50 \% & \$ 137,500 \\\hline \text { Net earnings available for dividend } & & \$ 362,500 \\\hline \text { 2) Shareholder } & & \\\hline \text { Taxable dividend }(\$ 362,500 \times 1.38) & & \$ 500,250 \\\hline \text { Tax } & 50 \% & \$ 250,125 \\\hline \text { Less dividend tax credit } & 27.50 \% & \\\hline(\$ 500,250 \times .275) & & -\$ 137,569 \\\hline \text { Net personal tax } & & \$ 112,556 \\\hline \text { Total tax on corporate profits: } & & \\\hline \text { 1. Paid by corporation } & & \$ 137,500 \\\hline \text { 2. Paid by shareholder } & & \$ 112,556 \\\hline & & \$ 250,056 \\\hline\end{array}$


B) (Note: This concept is explained at greater length in Chapter 11.)
The total tax paid by the corporation and the shareholder on the corporate profits of $500,000 is $250,056 which is roughly equal to 50% of $500,000. The shareholder is in a 50% tax bracket and would have paid $250,000 in tax if the profits had been received directly ($500,000 × 50%). Therefore, the total tax paid by the two entities is virtually the same due to the optimal combination of the corporate tax rate, the gross-up rate, and the dividend tax credit.