Samantha is the president and sole shareholder of Toucan Corporation. She is paid an annual salary of $500,000, and her son, Aaron, the company’s chief financial officer, is paid a salary of $290,000. Aaron works for Toucan on a part-time basis and spends most of his time training for triathlons. Toucan advances $85,000 to Samantha as an interest-free loan. What are the tax issues?

Samantha is the president and sole shareholder of Toucan Corporation. She is paid an annual salary of $500,000, and her son, Aaron, the company's chief financial officer, is paid a salary of $290,000. Aaron works for Toucan on only a part-time basis and spends most of his time training for triathlons. Toucan advances $85,000 to Samantha as an interest-free loan.

Help Toucan by classifying the following questions as either "Yes", a tax issue or "No", not an issue.

a. Are the salary payments to Samantha and Aaron reasonable? How do the salary payments compare to industry norms?

b. What are Samantha's and Aaron's qualifications?

c. Could any of the transactions described trigger a constructive dividend to Samantha and/or Aaron?

d. Regarding the advance to Samantha, was it a bona fide loan?

e. What is the amount of imputed interest on the loan to Samantha?

f. What is Samantha's financial capacity to repay the loan?

g. Does Aaron receive any sponsorship for his triathlon training?

h. Does Samantha have any other loans with other entities?

Answer with its Explanation:

A. Are the salary payments to Samantha and Aaron reasonable? How do the salary payments compare to industry norms?

Yes, the salary payments are reasonable because the top level management are paid an industry average payments which it makes to its top management. Here the salary can be compared to a proxy company which has a similar business and size.

B. What are Samantha's and Aaron's qualifications?

Samantha is the only shareholder of the company and both the shareholder and the Cheif executive are high band tax payers so both qualify for such payments

C. Could any of the transactions described trigger a constructive dividend to Samantha and/or Aaron?

Yes, because the amount paid would be deducted from the future dividend payments made so the loan borrowed by the Samantha is the constructive dividend.

D. Regarding the advance to Samantha, was it a bona fide loan?

Yes the loan was the bona fide loan because the borrower will repay it to the company. If the intention of Samantha was not to repay loan then she might had approved increased dividends.

E. What is the amount of imputed interest on the loan to Samantha?

The imputed interest here is $85000. The interest rate on which the tax will be computed will be market interest rate.

F. What is Samantha's financial capacity to repay the loan?

The Samantha financial capacity are managed by the company which means she is capable of paying back her loan

G. Does Aaron receive any sponsorship for his triathlon training?

No, Aaron will not receive any sponsorship for his triathlon training as it is not given to every employee

H. Does Samantha have any other loans with other entities?

No, because the question says that she is the sole shareholder of the Toucan corporation which means no other company other than banks are going to lend her.