Question

Nigel Broadhouse, age 45, is a successful dermatologist. His medical practice is conducted through a professional corporation, Nigel Broadhouse MD Professional Corporation (“PC”). Nigel owns all the shares of NBPC. Nigel’s wife Beatrice is 42. They have two children – Harry age 20 and Diana age 15. A number of years ago Nigel incorporated NB Management Inc (“Management”). Management is owned as follows: Beatrice Harry Diana 100 Class A common shares 100 Class B common shares 100 Class C common shares Beatrice and Harry used their own money to buy their shares for $100. However, as Diana did not have money of her own, Nigel gifted her the $100 needed to buy her shares. Management handles all the administrative tasks for PC and receives a management fee from PC for this of approximately $350,000 per year. Beatrice works in Management, at least 20 hours per week on average. Harry and Diana do not work in the business. PC’s net income is at least $1,000,000 annually after deducting the management fee to Management. Mr. Partner would like you to provide him with an analysis of the following: 1. 2. 3. How is the income in PC taxed? How is the income in Management taxed? What are the tax implications to each of Beatrice, Harry and Diana if they are paid dividends from Management?

          Nigel Broadhouse, age 45, is a successful dermatologist. His medical practice is conducted
through a professional corporation, Nigel Broadhouse MD Professional Corporation (“PC”). Nigel
owns all the shares of NBPC. Nigel’s wife Beatrice is 42. They have two children – Harry age 20
and Diana age 15.
A number of years ago Nigel incorporated NB Management Inc (“Management”). Management is
owned as follows:
Beatrice Harry Diana 100 Class A common shares
100 Class B common shares
100 Class C common shares
Beatrice and Harry used their own money to buy their shares for $100. However, as
Diana did not have money of her own, Nigel gifted her the $100 needed to buy her
shares.
Management handles all the administrative tasks for PC and receives a management
fee from PC for this of approximately $350,000 per year. Beatrice works in
Management, at least 20 hours per week on average. Harry and Diana do not work in
the business. PC’s net income is at least $1,000,000 annually after deducting the
management fee to Management.
Mr. Partner would like you to provide him with an analysis of the following:
1. 2. 3. How is the income in PC taxed?
How is the income in Management taxed?
What are the tax implications to each of Beatrice, Harry and Diana if they are
paid dividends from Management?

Added by Jeremy M.

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