Follow outline very closely Summer 2020 – D65 Assignment
David Wang, a Canadian resident, is an owner of a successful chain of furniture stores that imports high
quality furniture from China. He operates this business through his corporation, China 10 Imports Inc., of
which he owns 100% of the shares. The company was incorporated in Ontario in 2002 and has a December
31st taxation year end. On June 30, 2018, David withdrew $500,000 from China 10 Imports Inc. to pay for
his cottage renovations. On January 1, 2020, David’s adult daughter, Julia Wang, borrowed $300,000 from
the corporation and used the money to purchase a new condo in the Toronto downtown core. David met
with you a couple of days ago and told you that he recently received a large inheritance from his deceased
grandmother. He now has over $1,000,000 sitting in his personal chequing account, but has no immediate
need to use the money personally and has yet to decide what to do with it.
On April 15, 2020, David called you and advised that he received a letter of intent from his larger
competitor to purchase his 100 issued and outstanding common shares of China 10 Imports Inc. for
$1,600,000. Although the shareholder’s equity at this time is only $880,000, the prospective purchaser is
willing to pay another $720,000 for ‘goodwill’ attributed to the existing solid client base and the
company’s excellent reputation. David advised that he is happy with the offer and wants to close it ASAP,
so he asked you to advise him on the most tax efficient way to sell his company. He also told you that he
never personally invested in any marketable securities, other than owing shares in China 10 Imports Inc.,
and he’s glad all his sweat equity grew the company value to what it is now. To expedite the sale, it was
agreed that the mutual funds do not need to be liquidated or removed from the corporation and will be
acquired by the purchaser as part of the share deal. However, the purchaser requested that the $800,000
due from David and his daughter is “cleared” from the balance sheet prior to the closing date. Assume
the corporation does not require more than $100,000 of cash for its operations at any given time. David’s
personal combined federal & provincial marginal tax rates are 50% for ordinary income, 25% for capital
gains and 45% for non‐eligible dividends. Assume any taxable dividends distributed to David from China
10 Imports Inc. will be non‐eligible dividends. Refer to Appendix I for some excerpts from the financial
Julia, David’s daughter, has an environmental consulting corporation called Enviromatters Inc. Her
business was running smoothly until COVID19 stalled the business starting in April 2020, which impacted
her cash flow and borrowing capacity. Julia is the sole shareholder of Enviromatters Inc., which has no
other employees. Enviromatters Inc. is a CCPC with a December 31st year‐end. It claims the small business
deduction every year as its annual taxable income is less $500,000 and it is not associated with any other
Unfortunately, Enviromatters Inc. has not filed its corporate tax returns for 2018 and 2019 taxation years
or paid any tax instalments or taxes owing starting in the 2018 taxation year as Julia’s old accountant left
Canada abruptly and never completed this work. The tax senior assigned to the file correctly computed
Enviromatters Inc.’s combined federal & provincial taxes payable to be $50,000 for 2018 and $40,000 for
2019. Julia has asked you to get her corporate tax filings up to date and advise her of any tax issues she
should be aware of. You agreed to file the 2018 federal and provincial tax returns by April 30, 2020 but
need more time for the 2019 tax returns.
To make matters worse, Enviromatters Inc.’s 2017 corporate tax return was audited with a notice of reassessment
issued on February 1, 2020, requesting a payment of $8,000 consisting of taxes owing and
interest. The explanation stated that the Canada Revenue Agency (CRA) has not received the supporting
invoices for the legal fees claimed by Enviromatters Inc., which they requested a few months ago. After
carefully reviewing the invoices, you advised Julia that these legal fees were correctly deducted as
business expenses on Enviromatters Inc.’s 2017 tax return. Julia does not want to get in trouble with the
CRA, so she wants you to advise her on what she should do. Although Enviromatters Inc. is strapped for
cash, Julia has some personal funds she is willing to lend on a non‐interest bearing basis to Enviromatters
Inc., so it can make the required payments. Any comments and advice with respect to any COVID‐19 relief
from the CRA that may be available to Enviromatters Inc. are most welcome too.
It is now April 15, 2020. You are a tax manager at the accounting firm XYZ and your tax partner has asked
you to prepare a memorandum addressed to David and Julia to assist them with their tax situations. Make
sure to provide details (including both quantitative and qualitative analysis), discuss alternatives and
recommend the best solution based on their situations. Make any reasonable assumptions, as necessary.
You should research and apply contents from Chapters 11 to 20 and CRA publications and announcements
published up to June 30, 2020 on the CRA website to guide you with your response.
Note that this is an individual assignment and each student has to submit their own response.
Submit your memorandum by 7:10 p.m. on Thursday, July 30, 2020. Students are expected to spend
sufficient time to complete this assignment. If clarification is required, the teaching assistant (“TA”) is
available to address your questions via email. Please direct all your questions related to the assignment
to the TA only via e‐mail at [email protected].
All your assignment questions must be emailed to the TA no later than Monday, July 27, 2020. After this
date, the TA will not offer any response for clarification of the assignment.
The total pages of your assignment should not exceed 5 pages (no exceptions). You need five 8.5” x 11”
sheets of paper for the body of your response. Appendix pages, if required, could be used only for
calculations and does not count towards the 5 page limit.
Your assignment should be double‐spaced. The formatting for your response must be Font Type ‐ Times
New Roman; Font Size ‐ 12; Margin – standard (1”). In addition, there must be a title page included as part
of the submission, which is not counted towards the page limit specified above, clearly identifying your
name and student number. It is important that you use headings to separate different issues and clearly
state your recommendations.
Your assignment must be submitted electronically via Quercus. Turnitin will be used to check for
plagiarism. Please provide references where needed in footer or in appendix. Further instructions will be
provided on a later date.