Question

HAPPY FEET INCORPORATED

 

Happy Feet Incorporated (HFI) is a small publicly-listed Canadian company that manufactures high quality fashion footwear in Dundas, Ontario. The company prides itself and has been built on being 100% Canadian. The entire manufacturing process is located in Canada.

 

HFI has different lines of shoes for men, women, and children respectively. The market and environment that HFI operated in has changed significantly over the last ten years. Lower operating costs overseas, and changing regulations have allowed foreign companies to enter the Canadian market, selling their products at significantly lower prices than those offered by HFI. This has had a severe impact on the output and overall profit of HFI.

 

During 2019, the board of directors met and decided that action needed to be taken or else the future of HFI would be in question. The board decided to terminate the current CEO and hired Rebecca Scott as the new CEO. Rebecca began with HFI in February 2020. During her first month as CEO, Rebecca made a public announcement to HFI’s shareholders outlining her plans to turn the company around.

 

It is now November 15, 2020. You, Graham O’Neill, CPA, CA, work for Ludlow, Mulligan (LM) LLP. A couple of weeks ago, Rebecca has asked LM to give her some advice on some of her personal tax issues (Exhibit I). Jim Grey, the partner of LM, asked you to take a look at the lists and discuss the tax consequences on them.

 

 

 

EXHIBIT I

 

REBECCA’S PERSONAL TAXATIONI ISSUES

Hi Jim,

 

Please find below a list of taxation issues I would like some input on:

 

1.      HFI granted me a stock option to purchase 20,000 of HFI shares at $3.5/share at the time I was hired. The value of the shares at the date of the issue of the option was $3.5/share. I have not yet exercised the option.

 

2.      My husband and I were provided with the company’s condo in Colorado for a one-week vacation during the winter. We had to pay HFI $1,500 for accommodation that would otherwise have cost us $3,400 during this peak season. In addition, on my 10-year marriage anniversary, HFI gave me a cash gift of $450.

 

3.      Here are several additional benefits I enjoyed when I worked at HFI. The company allowed me to eat lunch once per month in the executive dining room at no charge. In addition, HFI has a private swimming pool, which can be accessed by all senior managers and executives. Lastly, HFI paid my membership at the Dundas Golf and Curling club since the company thought it was a good way to network with directors and officers from other firms. Are there any taxable benefits?

 

4.      Meanwhile, my husband just accepted a six-month job in Mexico starting in July 2021. The boys and I will not be moving with him, and he plans to return to Canada when the year is up. Can you explain to me some of the factors that will impact the determination of his residency status for Canadian tax purposes? I would also like to know how the income he earned in Mexico will be taxed in Canada.

 

Thanks Jim!

 

Rebecca