Andy Griffin would like to invest $150,000 in his friend Ernie's company, which was founded and operates in a foreign country. This investment would give Andy 25% ownership of the company. An annual dividend of $15,000 (Canadian
funds) is anticipated.
Andy's personal marginal tax rate is 45% on regular income, 28% on eligible
dividends, and 36% on non-eligible dividends. The foreign company is subject to a tax rate of 38% on all business income. Any dividends received by Andy,
personally, will be subject to a 15% withholding tax. Required:
1) Determine a) the total tax liability (foreign and Canadian) that Andy will be subject to upon receiving dividends from the foreign company, and b) the
after-tax proceeds.
2) How would your answer in part 1 change if Andy established a Canadian holding company to purchase the shares, (subject to a 5% withholding tax on dividends received)?
3) What would Andy's after-tax proceeds be if he received eligible dividend income from the holding company?

Question

Quizplus · Accepted Answer

The Answer is 1. The combination of foreign and Canadian taxes that Andy will be subject to is $6,750.
a)

1. The combination of foreign and Canadian taxes that Andy will be subject to is $6,750. a) b) 2. Ernie's corporation would qualify as a foreign affiliate, therefore, there is no tax on the dividends received by Andy's corporation. The only tax liability is the withholding tax at source. 3.

b)

2. Ernie's corporation would qualify as a foreign affiliate, therefore, there is no tax on the dividends received by Andy's corporation. The only tax
liability is the withholding tax at source.
1. The combination of foreign and Canadian taxes that Andy will be subject to is $6,750. a) b) 2. Ernie's corporation would qualify as a foreign affiliate, therefore, there is no tax on the dividends received by Andy's corporation. The only tax liability is the withholding tax at source. 3.

3.

Andy Griffin Would Like to Invest $150,000 in His Friend