Mr. Smith, the sole shareholder and employee of Smithco Ltd. since its incorporation in 1976, has decided to sell the corporation and retire in 2020. He has never belonged to a pension plan, and wishes to maximize his RRSP. Which one of the following amounts represents the largest retiring allowance from Smithco that Mr. Smith can transfer to his RRSP in the year he retires?

Question

Quizplus · Accepted Answer

The retiring allowance that Mr. Smith can transfer to his RRSP is calculated as $2,000 per year of service before 1996 and $1,500 per year of service after 1995.

Mr. Smith has been the sole employee and shareholder of Smithco Ltd. since its incorporation in 1976, which means he has 44 years of service before 1996.

Therefore, the retiring allowance for his years of service before 1996 is calculated as:

44 years x $2,000/year = $88,000

For his years of service after 1995, we need to calculate the average of his highest salaries for the past three years. As he is the sole shareholder and employee, we can assume that his salary was consistent and did not change significantly in the past three years.

Let's assume his salary for the past three years has been $100,000.

Then, the retiring allowance for his years of service after 1995 is calculated as:

3 years x $1,500/year = $4,500

The total retiring allowance is:

$88,000 + $4,500 = $92,500

However, the maximum retiring allowance that can be transferred to an RRSP in 2020 is $59,500. Therefore, the correct answer is C) $59,500.

Mr Smith, the Sole Shareholder and Employee of Smithco Ltd