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It is now late May 2018 and you, CPA, have just finished meeting with your partner, Ms. Hong. Garden Supplies Co.
It is now late May 2018 and you, CPA, have just finished meeting with your partner, Ms. Hong. Ms. Wong wants your help with a client of hers.
Garden Supplies Co. (GSC) has had a new shareholder buy shares. Ms. Wong wants you to tell her if GSC is a resident of Canada for tax purposes in 2018 and describe the personal tax consequences that Mrs. Gardiner will have from her 2018 share sale. You can ignore the acquisition of control rules. Also, given the list of GSC's 2018 expenditures in Exhibit I, calculate the total 2018 expenses that are deductible in 2018 when computing net income for tax purposes. GSC is very profitable and wants to claim the maximum amount of deductions possible. You do not need to comment on non-deductible items.
Note: you will lose 1 mark for each incorrect amount included in your calculation of Mrs. Gardiner's personal tax consequences on her share sale and on the total 2018 expenses that GSC can deduct from net income for tax purposes. Additional information about GSC is provided in Exhibit I.
Exhibit I
Garden Supplies Co.
· Garden Supplies Co (GSC) is a private company that was incorporated in Canada in 1963 by Mr. Taft. Mr. Taft subscribed for 1,000 common shares in return for $100 (in aggregate). GSC does not have any other shares outstanding
· GSC has a December 31st year-end and its board of directors meetings are typically held in the United States (U.S.)
· GSC operates gardening supply stores in Canada and it started with one store in Toronto in 1963. Now it has 10 stores throughout Canada
· In 2005, Mr. Taft sold his shares to Mrs. Gardiner for $1M in aggregate (which was their FMV at the time)
· In late January 2018, Mrs. Gardiner sold 600 of her GSC common shares for $3,000 per share to Marcus Jones, an arm's length person (she still owns 400 common shares of GSC)
o In January 2018, Mrs. Gardiner paid $3,500 to a chartered business valuator to value her GSC shares and paid $2,500 in legal fees related to her sale of GSC shares
o The FMV of GSC was determined to be $3M
o Mrs. Gardiner incurred $300 of safety deposit box rental fees in 2018 and she keeps her GSC share certificates in her safety deposit box
o Assume GSC is not a qualified small business corporation
· Marcus Jones is a non-resident of Canada
· In 2018 GSC incurred the following expenditures:
o Income taxes paid of $124,500
o Salary and wages expense paid of $390,000
o In addition, GSC accrued a bonus payable to Mrs. Gardiner of $70,000 for work performed in 2018. This bonus will not be paid until May 31, 2019
o Interest expense paid of $5,000 on a bank loan used to finance business operations
o Dividends paid to shareholders of $55,000
o Warranty expense accrued of $25,000 (based on estimated warranty costs). The actual cost in 2018 of servicing warranties was $20,000
o Purchased new shelving units to display merchandise on April 1, 2018 for $200,000
o Purchased new computer software for $3,000 on January 1, 2018
o Purchased goodwill for $40,000 as part of a business acquisition on January 1, 2018
o Purchased a patent, with an 18-year legal life remaining on December 31, 2018 for $10,000
o Accrued office supply expenses of $12,000, for supplies purchased (and used) in late 2018. Payment of this account payable was made in early 2019
o Paid $7,000 for Toronto Blue Jays (baseball) tickets used to take large customers out to games
o Incurred $4,000 of legal fees related to obtaining bank financing, and
o Incurred lobbying expenses of $1,300 for matters related to the business
· Assume all expenditures are reasonable unless otherwise indicated
· Assume the prescribed interest rate is 1% at all times
