Skip Hop Inc. (SHI) is a Canadian Controlled Private Corporation that manufactures playground equipment. For the year ending December 31, 2020, SHI reported net income, calculated in accordance with ASPE, of $1,000,000. Included in net income:
1. Warranty expense of $100,000. The December 31, 2019 warranty provision reported in the balance sheet was $500,000. The balance was $480,000 on December 31, 2020.
2. Depreciation expense of $200,000. CCA for 2020 was correctly calculated to be $300,000.
3. Gain on sale of manufacturing equipment of $30,000. The original cost of the equipment was $100,000 and it was sold for $80,000. The CCA class this equipment belonged to had a January 1, 2020 UCC balance of $75,000.
4. Dividend income of $2,000. These dividends were received from a taxable Canadian corporation.
5. Charitable donations of $3,000 which were included with selling and administration expenses.
6. Management bonuses of $500,000. The bonuses were paid on February 1, 2021.
Other relevant information:
a. SHI reported the following carryforward balances at the beginning of 2020:
|Charitable donations (from 2019)||$4,000|
|Non-capital loss (from 2019)||$15,000|
|Net capital loss (from 2012)||$10,000|
b. SHI is associated with Blue Oyster Inc. (BOI), because BOI owns 100% of the common shares of SHI. BOI is a CCPC, and SHI and BOI share the annual business limited equally. Taxable capital employed in Canada and Adjusted Aggregate Investment Income of these corporations in 2019 were reported as follows:
c. All of SHI’s income is active business income earned in Canada through its permanent establishments in Canadian provinces.
Part A. Calculate minimum net income for tax purposes for SHI for 2020.
Part B. Calculate minimum taxable income for SHI for 2020.
Part C. Calculate federal taxes payable for SHI for 2020. Ignore the M&P deduction, as explained in the video lectures.
Part D. Assume now that BOI is a public company. Calculate federal taxes payable for SHI for 2020. Again, ignore M&P.
Show all supporting calculations and explanations.
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