Danny and Marianne are high school sweethearts and are now happily married. They are still relatively young at 28 years old. They recently inherited...

Danny and Marianne are high school sweethearts and are now happily married. They are still relatively young at 28 years old. They recently inherited $10 million cash from one of their relatives. They both decided to quit their respective CPA jobs at Bert & Ernie LLP and pursue their dream. They want to open a restaurant in the Point Grey area that serves ramen in a one-person sound-proof isolation booth. The concept is to free the diners from all distractions so they can truly enjoy the rich soothing broth and perfectly cooked hand-cut ramen. They have decided on the name "Ichi".

They estimate that it would cost $500,000 of capital to start up the restaurant. Due to advertising costs, they expect a loss of $14,000 per month in the first year. However, in the second year and beyond, they expect the restaurant to net $25,000 per month. They have no plans to expand the restaurant or franchise the concept as they feel that this would compromise the quality of their product. They are committed to the restaurant for at least three years and will make an assessment of their plans with the restaurant beyond this date.

Personally, Danny and Marianne have a variable rate mortgage at 2.85% on their home of $650,000 and credit card debt of $15,000 at 20% interest. Their current personal spending after the inheritance is $20,000 per month. They have maximized their RRSP and TFSA. Currently, they have no plans on having any children; however, they want to leave $5 million of the inheritance to their children if they decide to have any children in the future. Their financial adviser recommends for them to invest in a lower risk balanced portfolio that earns 5% per year.

Required:

A. Please write a memo advising Marianne and Danny regarding the above facts. Make appropriate assumptions, but do not assume away the problem. The memo should not exceed one page.

B. If the corporate tax rate for business income is 12% and the individual tax rate is 49.8%, what should be the inclusion rate on the tax on dividend income to make integration work perfectly? (e.g. the individual is indifferent between running a business as a sole proprietorship or corporation from a fully-distributed basis).

C. If the corporate tax rate for investment income is 50.67% and the individual tax rate for non-eligible dividend is 43.73% and eligible dividend is 34.20%, what should be the rate on the refundable dividend tax on hand (RDTOH) to make integration work perfectly? (e.g. the individual is indifferent between setting up a holding company and holding the investment individually from a fully-distributed basis). Note that the current RDTOH rate is 30 2/3%. We need to compute a new rate for the RDTOH to make integration work perfectly.