Martin held 2 percent of the outstanding shares of a Canadian public corporation. The corporation issued an eligible stock dividend in 2020 and capitalized $800,000 of its retained earnings. By how much will Martin's Taxable Income increase as a result of the dividend?

Question

Quizplus · Accepted Answer

First, we need to determine the value of the dividend that Martin will receive. Since the corporation capitalized $800,000 of its retained earnings, we can multiply this by Martin's ownership percentage to get his share:

$800,000 x 0.02 = $16,000

Now we need to calculate Martin's taxable income increase. Eligible dividends receive a gross-up of 38%, which means that Martin will need to include 138% of the $16,000 in his taxable income:

$16,000 x 1.38 = $22,080

Therefore, Martin's taxable income will increase by $22,080 as a result of the dividend. The answer is D.

Martin Held 2 Percent of the Outstanding Shares of a Canadian