Question

As an employee of a public company, John Smith has an annual salary of $175,000.

After years of purchasing losing tickets, John wins $600,000 in the lottery.

As his employment income is more than adequate for his current needs, he plans to invest all of these winnings in preferred shares for the year ending December 31, 2019.

These securities pay eligible dividends of 5 percent each year.

The following information is applicable to the province in which John is a resident:

_ The maximum tax rate for individuals is 14 percent.

_ The provincial dividend tax credit on eligible dividends is 24 percent of the gross up.

_ The provincial tax rate on the investment income of CCPCs is 13 percent.

Other than the preferred share dividends, John has no other source of investment income.

Required:

Prepare calculations that will compare the after-tax retention of income that will

accrue to John in 2019 if:

A. The investment is owned by his as an individual.

B. The investment is owned by a CCPC in which he is the sole shareholder, and which pays out all available income in eligible dividends.