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Problem 8 Nancy Ball presently operates a retailing proprietorship with a December 31,...

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Accounting

Problem 8
Nancy Ball presently operates a retailing proprietorship with a December 31, year end and makes
$150,000 of net income for tax purposes annually. She is thinking of incorporating her business and has
asked for your advice. She lives in a province where the provincial corporate tax rate is 3% of this type
of federal taxable income. She has $2,400 of federal personal tax credits, $1,600 of provincial personal
tax credits, and no other income.
You have agreed that you will do the following:
(A) Estimate the personal taxes that Nancy would pay currently on $150,000 of business income
compared with the amount of corporate and personal taxes that would be paid if she incorporated her
business and only took out a salary of $50,000. Ignore all payroll taxes (e.g., Canada Pension Plan
premiums) when making your estimates.
(B) Based on your calculations in (A), estimate the amount of personal tax that Nancy defers by
keeping the remaining after-tax retained earnings in her company this year. [Hint: compute the
additional personal tax that she would pay on a dividend equal to the corporation's after-tax retained
earnings.]
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