BUSINESS FINANCE TAXATION BMT644 CASE ASSIGNMENT (JOHN MONALILO & RR BUSINESS)

You have just been hired by John Monalilo as a part time tax specialist for his new business located in province of Ontario, Keswick. In 2011, John graduated from McMaster University with a bachelor degree in mechanical engineering and immediately got a permanent full-time job with QR Ltd. Three years later, John started his own sole proprietorship “RR Business” along with his full-time job. RR Business designs and produces sports tools for competitive athletes. Over the past few years, it has built a strong reputation for itself by producing effective products. It is now February 15, 2018, and it’s your first day working for John. He calls you into his office to explain what he needs your help with.

John: “Welcome aboard! I’m so glad to have your help. As you know, I currently have a small growing business, and up to now my accountant Eva has been doing all my record keeping using an accounting software”. Could you also highlight any tax issues related to 2017 taxation year that I should be aware of?”

You: “I can take a look at that.”

John: “Also, I’ve got a private loan several years ago when I was having some cash flow issues, and the bank insists that I submit financial statements that are compliant with ASPE, and that have been done properly by Eva. However, I have been told that the accounting income should be adjusted to be in accordance with Canadian Income Tax Act, whatever that means. I was wondering if you could help by explaining the tax implications and issues. I read an article about “Section 3 of the Income Tax Act” the other day, it sounded very relevant but was all Greek to me. By the way, I’ll email me the latest financial statements of my business (Exhibit I).

You: “No worries John, I would love to help and explain that for you.”

John: “Oh … one other thing. I would like your assistance in filing my 2017 personal income tax return. Here are my records (Exhibit II). Believe me or not, I am not familiar with the Canadian tax rules and for this reason I have not filed a return yet. Lastly, my own sole proprietorship “RR Business” is not currently incorporated. The article said that any good business owner should be thinking about the tax advantages of incorporating. They are including an article on this topic in next month’s issue, but I thought you might be able to tell me more. Incorporating never made sense to me and just sounds like a big administrative nightmare. How does incorporating differ from just including the income on my personal tax return? Do I really get tax advantages? Does the tax filing, assessment, instalment, payment deadline defer, how? Could you give me estimates of due amounts and when? What are the ways to minimize my tax payable?

You: “Sure, once I have completed my analysis of your tax information, I’ll write a memo explaining all tax implications and issues you have mentioned and determine your income for tax purposes in accordance with section 3 of the Income Tax Act including RR’s net income from business for tax purposes for 2017. Furthermore, I’ll recommend you a new strategy to minimize your tax payable.”