Jacquie is the sole shareholder of Holdings Ltd., which has a January 31 year end. On January 1, 2020, Jacquie borrowed $10,000 on an interest-free basis from Holdings Ltd. She used $8,000 of this amount to acquire shares of Arrow Inc. and the remaining $2,000 for personal purposes. Arrow Inc. is a small Canadian controlled private company that manufactures cross-bows. In March 2020, Arrow Inc. paid a non-eligible dividend of $1,100 to Jacquie. Jacquie repaid her $10,000 loan to Holdings Ltd. on June 30, 2020. Assume that these were her only transactions with Holdings Ltd. and the prescribed interest rate was 4 percent for the first quarter of 2020 and 3 percent for the second quarter. Which one of the following represents Jacquie's 2020 Taxable Income as a result of these transactions?

Question

Quizplus · Accepted Answer

To calculate Jacquie's taxable income for 2020, we need to consider the following:

1. The $1,100 dividend she received from Arrow Inc.
2. The imputed interest on her interest-free loan from Holdings Ltd.

Since the loan was interest-free, the full amount of the loan is considered to be a taxable benefit and imputed interest must be calculated. The imputed interest for the first quarter of 2020 (January 1 to March 31) is calculated as follows: $10,000 x 4% x 3/12 = $100. The imputed interest for the second quarter of 2020 (April 1 to June 30) is calculated as follows: $10,000 x 3% x 3/12 = $75. Therefore, the total imputed interest for 2020 is $100 + $75 = $175.

Jacquie used $8,000 of the loan to acquire shares of Arrow Inc. Since she received a $1,100 dividend from Arrow Inc., only 8,000/10,000 x $1,100 = $880 of the dividend is subject to the dividend gross-up and tax.

Therefore, Jacquie's taxable income for 2020 is:

$1,100 (dividend income) + $175 (imputed interest) + $880 x 1.38 (dividend gross-up) = $1,299.68

The correct answer is choice C.

Jacquie Is the Sole Shareholder of Holdings Ltd