Anthony Is the Sole Shareholder of Glass Co

question 5

Essay

Anthony is the sole shareholder of Glass Co.He would like to lend $500,000 to his company by way of a shareholder loan.He is not sure whether to issue an interest free loan or a loan with an interest rate of 10%.Anthony does not pay himself a salary,but rather issues all after-tax profits to himself in the form of a dividend.
Required:
A)Calculate the total combined tax liability for Anthony and Glass Co.under both alternatives.(Assume that the CRA's prescribed rate of interest is 2%; Anthony's personal tax rate is 45%; his marginal tax rate on dividends is 35%; and Glass Co.has income of $200,000,and is subject to a 15% tax rate.)
B)Briefly explain the reason for the tax differential in your results.

• A)Calculate the total combined tax liability for Anthony and Glass Co.under both alternatives.(Assume that the CRA's prescribed rate of interest is 2%; Anthony's personal tax rate is 45%; his marginal tax rate on dividends is 35%; and Glass Co.has income of $200,000,and is subject to a 15% tax rate.)
• B)Briefly explain the reason for the tax differential in your results.

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Definitions:

Absorption Costing

A calculation technique in which the cost of a product is determined by including all costs associated with manufacturing, including direct materials, direct labor, as well as variable and fixed overhead costs.

Cost-plus Pricing

A pricing strategy where a fixed percentage is added to the total cost of producing a product to determine its selling price.

Return on Investment

A measure of performance that evaluates the efficiency or profitability of an investment relative to its cost.

Selling Price

The amount of money a buyer pays to purchase a product or service.