In 2020, Mango Inc.earned $150,000 of pre-tax income.The tax rate for the company is 13%.The sole shareholder received all of the net earnings in the form of a non-eligible dividend during the year.The shareholder has a personal tax rate of 50%.Supposing the shareholder is entitled to a total (federal + provincial) dividend tax credit equal to $20,000, what is the net personal tax liability on the dividend (ignoring all other tax implications)? (Round all numbers to zero decimal places.)
A)$19,500
B)$20,000
C)$55,038
D)$75,038

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of tax paid by Mango Inc. on its pre-tax income:
Tax paid by Mango Inc. = $150,000 x 13% = $19,500

The remaining earnings available for distribution as dividends are:
Earnings after tax = $150,000 - $19,500 = $130,500

As the dividend is non-eligible, the shareholder is not entitled to the dividend tax credit on the gross dividend received. Therefore, the gross dividend received by the shareholder is:
Gross dividend received = $130,500

The personal tax liability on the dividend is calculated as follows:

Gross dividend received                                       = $130,500
Less: Federal dividend tax credit                        = $9,000 (15% of $60,000)
Less: Provincial dividend tax credit (assumed) = $11,000 (20% of $55,000)
Net dividend received                                            = $110,500

Taxable dividend income = Gross dividend received - Dividend tax credits = $110,500 - $20,000 = $90,500

Personal tax liability on the dividend = Taxable dividend income x Personal tax rate
= $90,500 x 50%
= $45,250

Therefore, the net personal tax liability on the dividend is:
Net personal tax liability on the dividend = Personal tax liability on the dividend - Provincial dividend tax credit
= $45,250 - $11,000
= $34,250

Adding the federal dividend tax credit back to the net personal tax liability will give us the total tax liability on the dividend:

Total tax liability on the dividend = Net personal tax liability on the dividend + Federal dividend tax credit
= $34,250 + $9,000
= $43,250

Therefore, the correct answer is C) $55,038.