Canadian Tax Principles 2017-2018. Study Guide Questions

Self Study And SSS Problems For Chapters 1 to 10

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Self Study And SSS Problems For Chapters 1 to 10 To provide practice in problem solving , these are the Self Study Problems for Volume 1 which includes Chapters 1 to 10. The detailed solutions to these problems are available in both the print and online Study Guide. For additional practice in problem solving , there are Supplementary Self Study Problems with detailed solutions available for each chapter. These problems and solutions are available in this file after the Self Study problems for each Chapter.

Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)

Chapter 1 Self Study Problems

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Self Study Problem One - 2

Chapter 1 Self Study Problems Self Study Problem One - 1 (Regressive Taxation) A regressive tax can be described as one which is assessed at a lower rate as income levels increase. Despite the fact that the Harmonized Sales Tax (HST) is based on a single rate, it is referred to as a regressive form of taxation. Required:

Explain how a tax system with a single rate can be viewed as regressive. SOLUTION available in printed and online Study Guide.

Self Study Problem One - 2 (Flat Rate Tax) At a recent cocktail party, Mr. Right was heard complaining vehemently about the lack of progress towards tax simplification. He was tired of spending half of his time filling out various CRA forms and, if the matter were left to him, he could solve the problem in 10 minutes. “It is simply a matter of having one tax rate and applying that rate to 100 percent of income.” Required:

Discuss Mr. Right’s proposed flat rate tax system. SOLUTION available in printed and online Study Guide.



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Self Study Problem One - 3 (Qualitative Characteristics) The Conservative government introduced several tax measures in 2014 and 2015. A selected group of these measures can be described as follows: Family Tax Cut This provision provided a tax reduction based on a limited amount of income splitting . Specifically, a separate calculation of Tax Payable was based on the assumption that up to $50,000 of Taxable Income was transferred from a higher income spouse to a lower income spouse. It was only available to couples with a child under the age of 18. This provision was repealed in 2016. Lifetime Capital Gains Deduction An increase in the provision to remove from Taxable Income, capital gains on the disposition of a qualified farming or fishing property from $813,600 (2015 limit) to $1,000,000. Home Accessibility Tax Credit A new credit against Tax Payable equal to 15 percent of up to $10,000 in expenditures made by seniors and disabled people to gain access to, be more mobile within, or reduce the risk of harm within, their home. Small Business Rate A reduction scheduled for 2016 (2 years in the future) in the federal tax rate on active business income earned by Canadian Controlled Private Companies. The rate was reduced from 11 percent of Taxable Income to a new rate equal to 10.5 percent of Taxable Income. Increase In Tax Free Savings Account (TFSA) Limits The TFSA provision allows non-deductible contributions to be made to a registered account where earnings accumulate on a tax free basis. Withdrawals from these accounts are not taxed. The annual limit on contributions to Tax Free Savings Accounts (TFSAs) was increased from $5,500 to $10,000 for 2015. This increase was reversed in 2016. Required: Analyze each of the described changes using two of the qualitative characteristics of tax systems that are listed in your text. For your convenience, the list of qualitative characteristics presented in the text is as follows: • • • • • • • • •

equity or fairness neutrality adequacy elasticity flexibility simplicity and ease of compliance certainty balance between sectors international competitiveness SOLUTION available in printed and online Study Guide.



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Self Study Problem One - 4 (Sources Of Tax Information) The principal source of Canadian income tax information is the Income Tax Act. There are, however, other sources that are of considerable significance in the application of these rules. Required: List and briefly describe these other sources of information on Canadian income tax matters. SOLUTION available in printed and online Study Guide.

Self Study Problem One - 5 (Residential Ties) Paul Brossard accepts an offer to move to the U.S. from Canada to become a manager for a revitalized Black Hills Gold Savings and Loan branch in South Dakota. Paul has resigned from his Canadian federal government position, and severed his professional association ties. Further, he purchased a home in South Dakota. However, his daughter is nearing completion of an elite French immersion secondary school program in Ottawa, so Paul’s wife and daughter intend to remain in Canada for two years. They continue to live in the family home in Ottawa. After six months in South Dakota, the Savings and Loan branch closed. Paul then sold the U.S. home and moved back to Canada. Required: Assess whether or not Paul became a non-resident of Canada, and if Paul will be taxed in Canada for the period during which he was living and working in the U.S. SOLUTION available in printed and online Study Guide.



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Self Study Problem One - 6 (Part Year Residency Of Individuals) The following facts relate to three individuals who spent a part of the current year in Canada: Mr. Aiken Mr. Aiken is a businessman and a U.S. citizen who moved to Canada and established residence in the middle of June. After the move, he spent the remaining 192 days of the year in Canada. Mr. Baker Mr. Baker is a businessman and a Canadian citizen who moved out of Canada in the middle of July and established residence in the U.S. Prior to his move, he spent the preceding 192 days of the year in Canada. Mr. Chase Mr. Chase is a professional athlete and a U.S. citizen. His residence is located in Nashville, Tennessee, and during most of the year his wife and children live in that city. Mr. Chase plays for a Canadian team and, during the current year, his work required him to be in Canada for a total of 192 days. Required: All of the preceding individuals were in Canada for a total of 192 days. Explain their residence status for income tax purposes in the current year and their liability for Canadian income taxes. SOLUTION available in printed and online Study Guide.

Self Study Problem One - 7 (Residency Of Individuals) Determine whether the following persons are Canadian residents for the current year. Explain the basis for your conclusion. Ignore any possible implications related to tax treaties. A. Jane Smith was born in Washington, D.C., where her father has been a Canadian ambassador for 15 years. She is 12 years old, has no income of own, and has never been to Canada. B. Marvin Black lives in Detroit, Michigan. He works on a full time basis throughout the year in Windsor, Ontario. C. John Leather was born in Canada and, until September 12 of the current year, he has never been outside of the country. On this date, he departed from Canada and established a home in Savannah, Georgia. D. Francine Donaire is a citizen of France and is married to a member of the Canadian armed forces stationed in France. She has been in Canada only on brief visits since she and her husband have been married, and had never visited the country prior to that time. She is exempt from French taxation because she is the spouse of a member of the Canadian armed forces. E. Robert Green lived most of his life in Texas. In January of the current year, he moved to Edmonton to take a high paying job with a local oil exploration company. As he found the weather to be too cold in Edmonton, he resigned during September and returned to Texas before having to suffer through another winter. F.

Susan Allen is a Canadian citizen who has lived in New York City for the past 7 years. SOLUTION available in printed and online Study Guide.



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Self Study Problem One - 8 (Residency Of Corporations) Determine whether the following corporations are Canadian residents for the current year. Explain the basis for your conclusion. A. AMT Ltd. was incorporated in New Brunswick in 1964. Until 1992, all of the directors’ meetings were held in that province. However, since that time, the directors have met on a regular basis in Portland, Maine. B. UIF Inc. was incorporated in the state of Montana in 1968. However, until four years ago all of the directors’ meetings were held in Vancouver, British Columbia. Four years ago, the president of the Company moved to Helena, Montana and since that time all of the directors’ meetings have been held in that city. C. BDT Ltd. was incorporated in Alberta in 1994. However, it is managed in North Dakota, where all directors’ and shareholders’ meetings have been held since incorporation. D. QRS Inc. was incorporated in New York state. However, all of the directors are residents of Ontario and all meetings of the Board of Directors have been held in that province since incorporation. SOLUTION available in printed and online Study Guide.

Self Study Problem One - 9 (Residency Of Individuals And Corporations) For each of the following persons, indicate how they would be taxed in Canada for the current year. Your answer should explain whether the person is a Canadian resident, what parts of their income would be subject to Canadian taxation, and the basis for your conclusions. A. Molly London was born in Salmon Arm, British Columbia. On October 31, after a very serious dispute with her fiancé, she quit her job, left Salmon Arm and moved all her belongings to San Diego, California. She has vowed to never set foot in Canada again. B. Daryl Bennett is a Canadian citizen living and working in Sault Ste. Marie, Michigan. He has a summer cottage in Sault Ste. Marie, Ontario, where he spent July and August. As his only sister lives in Sault Ste. Marie, Ontario, he spent a total of 27 days during the year staying with her in her home. C. Tweeks Inc. was incorporated in Vermont in 1980 by two U.S. citizens who were residents of Quebec. All of the directors are residents of Quebec and all meetings of the Board of Directors have been held in Montreal since incorporation. D. Bordot Industries Ltd. was incorporated in British Columbia on September 29, 1973. However, the directors of the corporation have always lived in Blaine, Washington. All of their meetings have been held at a large waterfront property just south of Blaine. SOLUTION available in printed and online Study Guide.



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Self Study Problem One - 10 (Net Income For Tax Purposes) The following two Cases make different assumptions with respect to the amounts of income and deductions of Mr. Morris Dorne for the current taxation year: Case A Mr. Dorne had employment income of $50,000 and interest income of $12,000. His unincorporated business lost $23,000 during this period. As the result of dispositions of capital property, he had taxable capital gains of $95,000 and allowable capital losses of $73,000. His Subdivision e deductions for the year totalled $8,000. He also experienced a loss of $5,000 on a rental property that he has owned for several years. Case B Mr. Dorne had employment income of $45,000, net rental income of $23,000, and a loss from his unincorporated business of $51,000. As the result of dispositions of capital property, he had taxable capital gains of $25,000 and allowable capital losses of $46,000. His Subdivision e deductions for the year amounted to $10,500. Fortunately for Mr. Dorne, he won $560,000 in a lottery on February 24. Required: For both Cases, calculate Mr. Dorne’s Net Income For Tax Purposes (Division B income). Indicate the amount and type of any loss carry overs that would be available at the end of the current year, or state that no carry overs are available. SOLUTION available in printed and online Study Guide.

Self Study Problem One - 11 (Net Income For Tax Purposes - Four Cases) The following four Cases make different assumptions with respect to the amounts of income and deductions of Karl Marks for the current year: Case A Employment Income Income (Loss) From Business Rental Income (Loss) Taxable Capital Gains Allowable Capital Losses Subdivision e Deductions

$73,300 ( 14,700) 8,300 42,400 ( 18,600) ( 6,200)

Case B $41,400 4,700) 5,900 7,800 ( 11,600) ( 2,800) (

Case C $89,400 ( 112,600) 5,300 23,700 ( 21,200) ( 22,400)

Case D $34,300 ( 47,800) ( 20,100) 24,700 ( 26,300) ( 6,400)

Required For each Case, calculate Mr. Marks' Net Income For Tax Purposes (Division B income). Indicate the amount and type of any loss carry overs that would be available at the end of the current year, or state that no carry overs are available. SOLUTION available in printed and online Study Guide.



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Self Study Problem One - 12 (Net Income For Tax Purposes - Four Cases) The following four Cases make different assumptions with respect to the amounts of income and deductions of Mr. Knowlton Haynes for the current year: Case A Employment Income Income (Loss) From Business Income From Property Taxable Capital Gains Allowable Capital Losses Subdivision e Deductions

$45,000 ( 20,000) 15,000 25,000 ( 10,000) ( 5,000)

Case B 17,000 ( 42,000) 12,000 22,000 ( 8,000) ( 6,000)

Case C

Case D

$24,000 ( 48,000) 47,000 22,000 ( 73,000) ( 4,000)

$18,000 ( 20,000) 7,000 13,000 ( 18,000) ( 12,000)

Required For each Case, calculate Mr. Haynes’ Net Income For Tax Purposes (Division B income). Indicate the amount and type of any loss carry overs that would be available at the end of the current year, or state that no carry overs are available. SOLUTION available in printed and online Study Guide.


Chapter 1 Supplementary Self Study (SSS) Problems

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SSS Problem One - 1

Chapter 1 Supplementary Self Study (SSS) Problems The solutions to these Chapter 1 SSS Problems can be found following the SSS Problems for this Chapter.

SSS Problem One - 1 (Qualitative Characteristics) With the growing importance of free trade and e-commerce, Canada is contemplating increased harmonization of the Canadian tax system with other major tax regimes in the world. Harmonization with the United States is the first priority, with harmonization with other major economic groups being secondary. Assume the following changes are proposed: A. Taxing all e-commerce transactions based on where the goods and services are delivered. B. Full deduction of mortgage interest related to principal residences, combined with taxation of capital gains arising on dispositions of these residences. Currently in Canada, the capital gains on the disposition of principal residences are not taxed and mortgage interest related to principal residences is not deductible. C. Requiring corporations that are under common control to file a single consolidated tax return for all of the corporations in the group. D. Conversion of the GST system into a national sales tax to be applied to the sale of goods and services at the retail level. Required: Indicate a significant tax advantage, other than the benefits associated with international harmonization, that would result from introducing each of the proposed changes. In addition, analyze each proposed change using two of the qualitative characteristics of tax systems that are listed in your text. For your convenience, the list of qualitative characteristics presented in the text is as follows: • • • • • • • • •

equity or fairness neutrality adequacy elasticity flexibility simplicity and ease of compliance certainty balance between sectors international competitiveness



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SSS Problem One - 2

SSS Problem One - 2 (Residency Of Individuals And Corporations) For each of the following persons, indicate how they would be taxed in Canada for the year ending December 31, 2017. Your answer should explain whether the person is a Canadian resident and the basis for your conclusions. A. Martin Judge was born in Kamloops, British Columbia in 1987. In 1992, Martin’s family moved to southern California and, until October 1, 2017, Martin did not return to Canada. On October 1, 2017, Martin accepted a position with an accounting firm in London, Ontario. He returned to Canada and began working at his new job on this date. B. Ms. Gloria Salinas is a Canadian citizen who, on November 1, 2017, is appointed as Canada’s new ambassador to Mexico. While Ms. Salinas was born in, and grew up in, Nova Scotia, she has resided in Mexico for the last 15 years. She anticipates that she will continue to live in Mexico subsequent to her appointment as the Canadian ambassador. C. Roberto Salinas is the 12 year old son of Ms. Gloria Salinas (see Part B). Roberto has lived with his mother in Mexico since his birth. D. Kole Ltd. was incorporated in Alberta in 1962 and, until December 31, 2012, carried on most of its business in that province. However, on January 1, 2012 the head office of the corporation moved to Oregon and the Company ceased doing business in Canada in all subsequent years. E. Forman Inc. was incorporated in Syracuse, New York during 2015. However, the head office of the corporation is in Smith Falls, Ontario and all meetings of the Board of Directors are held in that city.



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SSS Problem One - 3

SSS Problem One - 3 (Residency/Dual Residency - Individuals) Determine the residency status of the two individuals in the following Cases. Use the tie-breaker rules found in the Canada/U.S. tax treaty where appropriate. Case A Brad is a U.S. citizen who has been living in Seattle, Washington. Through an online dating service, he meets Sarah in 2016. She is a Canadian citizen who lives and works in Vancouver. After several face-to-face meetings they conclude that they should marry and, after much discussion, they decide that they will live in Seattle after the marriage. Since Sarah is committed to remaining in her position in Vancouver until September, 2017, in December, 2016, Brad takes a 10 month leave of absence from his job and gives up his apartment in Seattle. On January 1, 2017, they move in together sharing an apartment in Vancouver which is leased on a month-to-month basis. On September 15, 2017, they get married, terminate the Vancouver lease, and move to a newly purchased house in Seattle. Case B Helen is a single individual who makes her living painting portraits of wealthy individuals. She is a U.S. citizen and has, in recent years, worked in Burlington, Vermont. Of late, business has dropped off and, as a consequence, she decided to try working in Montreal. Because of the uncertainty involved in her line of work, she does not sell her Burlington residence, asking a friend to watch it while she is absent. On April 15, 2017, she moves to Montreal. She lives in various Montreal hotels until January 15, 2018. At this time she concludes that the work situation is no better in Montreal than it was in Burlington. Given this, she returns to Burlington.



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SSS Problem One - 5

SSS Problem One - 4 (Net Income For Tax Purposes - Two Cases) The following two Cases make different assumptions with respect to the amounts of income and deductions for the current year for Christophe Szabo, a Canadian resident. Case A Christophe has employment income of $46,700, interest income of $3,500, a net rental loss of $22,250, and a net business loss of $37,260. Dispositions of capital property during the current year had the following results: Taxable Capital Gains Allowable Capital Losses

$13,470 10,540

Christophe paid deductible spousal support of $500 per month. His cash position was significantly improved when he won a provincial lottery prize of $450,000 during the year. Case B Christophe had employment income of $75,400, interest income of $4,560, and a net rental loss of $12,200. Dispositions of capital property during the current year had the following results: Taxable Capital Gains Allowable Capital Losses

$8,725 9,460

Subdivision e deductions for the current year were child care costs of $4,520, RRSP contributions of $6,570, and spousal support payments of $3,600. Required: For both Cases, calculate Christophe’s Net Income For Tax Purposes (Division B income). Indicate the amount and type of any loss carry overs that would be available at the end of the current year.

SSS Problem One - 5 (Net Income For Tax Purposes - Four Cases) The following four Cases make different assumptions with respect to the amounts of income and deductions of Jonathan Oakley for the current year: Case A Employment Income Income (Loss) From Business Rental Income (Loss) Taxable Capital Gains Allowable Capital Losses Subdivision e Deductions

$83,000 ( 22,000) 12,000 81,000 ( 35,000) ( 15,000)

Case B $92,000 ( 22,000) 16,000 18,000 ( 32,000) ( 12,000)

Case C

Case D

$46,000 21,000 ( 42,000) 22,000 ( 53,000) ( 16,000)

$57,000 16,000 ( 92,000) 31,000 ( 35,000) ( 17,000)

Required For each Case, calculate Mr. Oakley ’s Net Income For Tax Purposes (Division B income). Indicate the amount and type of any loss carry overs that would be available at the end of the current year, or state that no carry overs are available.


Chapter 1 Supplementary Self Study (SSS) Solutions

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SSS Solution One - 1

Chapter 1 Supplementary Self Study (SSS) Solutions SSS Solution One - 1 Given the subject matter of this question, there are many answers that would satisfy the requirements of the problem. Those listed below should only be considered as examples of possible solutions. A. A big advantage here would be the likelihood that Canadian tax revenues would increase. In terms of qualitative characteristics, two possibilities would be: • •

More neutrality, as businesses would no longer make location decisions based on the tax status of the shipping point. Complexity would be added in terms of finding a mechanism to enforce collections.

B. A possible advantage would be economic development in that the deductibility of interest could encourage real estate purchases. In terms of qualitative characteristics, two possibilities would be: • •

Vertical equity in the sense that high income taxpayers benefit most from the non-taxation of capital gains on the disposition of a principal residence. Balance between sectors would be improved as the tax relief on interest payments would reduce taxes on individuals.

C. A major advantage would likely be increased revenues as the ability to use multiple corporate structures for tax planning purposes would be reduced. In terms of qualitative characteristics, two possibilities would be: • •

More neutrality, as it would remove the incentive to make investment decisions on the basis of multiple corporate structures. There would be greater ease of compliance as only one tax return would be required.

D. The major advantage here would likely be greater ease of compliance for business. In terms of qualitative characteristics, two possibilities would be: • •

Simplicity and ease of compliance would be improved. Certainty would be improved, in that taxpayers would be more aware of the amounts to be paid, without having to do the additional calculations required for input tax credits.



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SSS Solution One - 2 Case A Martin Judge would be considered resident in Canada for the part year beginning October 1, 2017 and would be taxed on his worldwide income for this period. This conclusion is based on the assumption that he did not become a resident of Canada until he returned to Canada and began working at his new position.

Case B Ms. Gloria Salinas would not be considered a Canadian resident. As a result, none of her income would be subject to Canadian taxes. ITA 250(1)(c)(i) indicates that an ambassador of Canada will be deemed to be a Canadian resident only if she was resident in Canada immediately prior to her appointment to the position.

Case C Roberto Salinas would not be considered a Canadian resident. As a result, none of his income (if any) would be subject to Canadian taxes. While ITA 250(1)(f) indicates that a child of an ambassador who is a deemed resident under ITA 250(1)(c)(i) is also a deemed resident, Roberto’s mother is not such a deemed resident. Therefore, Roberto would not be considered a Canadian resident.

Case D Kole Ltd. would be considered resident in Canada based on ITA 250(4)(c), which indicates that a corporation is resident in Canada if it was incorporated in Canada prior to April 27, 1965 and carried on business, or was resident in Canada, in any year ending after April 26, 1965. Based on the location of its mind and management, it would also be considered a resident of the U.S. Given this dual residency, the tie breaker rule in the Canada/U.S. tax treaty would resolve the situation by making the Company a resident of its country of incorporation. This would result in Kole Ltd. being considered a resident of Canada, the country of incorporation.

Case E Forman Inc. would be considered resident in Canada because of the location of its mind and management. However, as Forman was incorporated in the U.S., it would also be considered a resident of that country. Given this dual residency, the tie breaker rule in the Canada/U.S. tax treaty would resolve the situation by making the Company a resident of its country of incorporation. This would result in Forman being considered a resident of the U.S., and a non-resident of Canada.



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SSS Solution One - 3 Case A As Brad was in Canada for more than 183 days in 2017, he is a deemed resident through the application of the sojourner rule, and therefore a dual resident. In applying the tie-breaker rules, the first factor that is considered is in which country the individual has a permanent home. With respect to this criterion, Brad would not be considered to have a permanent home in either country. He gave up his lease on the Seattle property and, given that he only planned to stay for a short period of time, the Vancouver apartment would not be considered a permanent home. In the absence of a permanent home in either country, the next factor to consider would be the location of Brad’s “centre of vital interests”. This would appear to be the U.S. and, given this, the tie-breaker rules would make Brad a resident of the U.S. and a non-resident of Canada. Sarah is a resident of Canada until September 15, 2017. Assuming she severs all residential ties with Canada on her departure, she would become a non-resident of Canada on that date.

Case B Because Helen is temporarily in Canada for more than 183 days in 2017, she would be considered a deemed resident of Canada under the sojourner rules. As this makes her a dual resident of the U.S. and Canada, the tie-breaker rules would come into play. Since it appears that Helen has a permanent home in Burlington, the tie-breaker rules would indicate that she is a resident of the United States. The hotels would not be considered to be a permanent home given that Helen never intended to stay for a long period of time.



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SSS Solution One - 4 Case A The Case A solution would be calculated as follows: Income Under ITA 3(a): Employment Income Interest Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses

$46,700 3,500

$50,200

$13,470 ( 10,540)

Balance From ITA 3(a) And (b) Spousal Support Payments [(12)($500)]

2,930 (

Balance From ITA 3(c) Deductions Under ITA 3(d): Net Rental Loss Business Loss

$53,130 6,000) $47,130

( 22,250) ( 37,260)

Net Income For Tax Purposes (Division B Income)

Nil

In this Case, Christophe has rental and business loss carry overs of $12,380 ($47,130 $22,250 - $37,260). The provincial lottery winnings would not be included in Christophe’s Net Income For Tax Purposes as they are not subject to tax.

Case B The Case B solution would be calculated as follows: Income Under ITA 3(a): Employment Income Interest Income

$75,400 4,560

Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses

$8,725 ( 9,460)

Balance From ITA 3(a) And (b) Child Care Costs RRSP Contributions Spousal Support Payments Balance From ITA 3(c) Deduction Under ITA 3(d): Net Rental Loss Net Income For Tax Purposes (Division B Income)

$79,960

Nil ( ( (

$79,960 4,520) 6,570) 3,600) $65,270

( 12,200) $53,070

In this Case, Christophe has an allowable capital loss carry over of $735 ($8,725 - $9,460).



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SSS Solution One - 5 Case A The Case A solution would be calculated as follows: Income Under ITA 3(a): Employment Income Rental Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses

$83,000 12,000

$ 95,000

$81,000 ( 35,000)

Balance From ITA 3(a) And (b) Subdivision e Deductions

46,000 (

$141,000 15,000)

Balance From ITA 3(c) Deduction Under ITA 3(d): Business Loss

$126,000


$104,000

( 22,000)

In this Case, Mr. Oakley has no loss carry overs at the end of the year.

Case B The Case B solution would be calculated as follows: Income Under ITA 3(a): Employment Income Rental Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses

$92,000 16,000

$108,000

$18,000 ( 32,000)

Balance From ITA 3(a) And (b) Subdivision e Deductions

Nil (

$108,000 12,000)

Balance From ITA 3(c) Deduction Under ITA 3(d): Business Loss

$ 96,000


$ 74,000

( 22,000)

In this Case, Mr. Oakley has a carry over of $14,000 ($32,000 - $18,000) in unused allowable capital losses.



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Case C The Case C solution would be calculated as follows: Income Under ITA 3(a): Employment Income Business Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses

$46,000 21,000 $22,000 ( 53,000)

Balance From ITA 3(a) and (b) Subdivision e Deductions

$67,000 Nil $67,000 ( 16,000)

Balance From ITA 3(c) Deduction Under ITA 3(d): Rental Loss

$51,000 ( 42,000)


$ 9,000

In this Case, Mr. Oakley would have an allowable capital loss carry over in the amount of $31,000 ($53,000 - $22,000).

Case D The Case D solution would be calculated as follows: Income Under ITA 3(a): Employment Income Business Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses

$57,000 16,000 $31,000 ( 35,000)

Balance From ITA 3(a) And (b) Subdivision e Deductions Balance From ITA 3(c) Deduction Under ITA 3(d): Rental Loss Net Income For Tax Purposes (Division B Income)

$73,000 Nil $73,000 ( 17,000) $56,000 ( 92,000) Nil

Mr. Oakley would have a carry over of unused business losses in the amount of $36,000 ($92,000 - $56,000) and of unused allowable capital losses in the amount of $4,000 ($35,000 - $31,000).



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Self Study Problem Two - 2

Chapter 2 Self Study Problems Self Study Problem Two - 1 (Individual Tax Instalments) The following information relates to Ms. Shannon Birch for tax years ending December 31:

2015 2016 2017 (Estimated)

Federal And Provincial Income Taxes Payable

Income Taxes Withheld By Employer

$23,000 $27,000 $21,200

$21,500 $15,000 $18,000

Required: A. Indicate whether Ms. Birch has an obligation to make instalment payments during the 2017 taxation year. Explain your conclusion. B. If Ms. Birch is required to make instalment payments, indicate the minimum amounts that should be paid and the dates on which the amounts are payable. Your answer should include the calculations for all the alternatives that are available to Ms. Birch, as well as an indication as to which alternative is preferable. C. Ms. Birch would like your advice as to whether or not she should make the recommended instalment payments. Explain your conclusion. SOLUTION available in printed and online Study Guide.

Self Study Problem Two - 2 (Corporate Tax Instalments And Balance Due Date) Amalmor Inc. is a publicly traded company. For its fiscal year ending December 31, 2015, the Company had Taxable Income of $250,000 and paid taxes of $62,500. In 2016, the corresponding figures were $320,000 and $80,000. It is estimated that for the current year ending December 31, 2017, the Company will have Taxable Income of $380,000 and taxes payable of $95,000. Required: Show all required calculations. A. Determine the amount of the minimum instalments that must be made by Amalmor Inc. during 2017 and when they would be due. Your answer should include the calculations for all the alternatives that are available to Amalmor Inc., as well as an indication as to which alternative is preferable. B. How would your answer to Part A differ if Amalmor Inc. was a small CCPC? C. Indicate when any final payment of tax is due in both Part A and B. SOLUTION available in printed and online Study Guide.



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Self Study Problem Two - 3 (Individual And Corporate Tax Instalments) For the three years ending December 31, 2017, the taxpayer’s combined federal and provincial tax payable was as follows: Year Ending December 31 2015 2016 2017 (Estimated)

Taxes Payable $72,300 89,400 78,300

Case One

The taxpayer is an individual whose employer withholds combined federal and provincial taxes of $73,700 in 2015, $83,200 in 2016, and $75,000 in 2017.

Case Two

The taxpayer is an individual whose employer withholds combined federal and provincial taxes of $65,100 in 2015, $90,100 in 2016, and $71,900 in 2017.

Case Three The taxpayer is a small CCPC with a taxation year that ends on December 31. Case Four

The taxpayer is a publicly traded corporation with a taxation year that ends on December 31. Assume that its combined federal and provincial taxes payable for the year ending December 31, 2016 were $74,500, instead of the $89,400 given in the problem.

Required: For each of the preceding independent Cases, provide the following information: 1. Indicate whether instalments are required during 2017. Provide a brief explanation of your conclusion. This explanation should be provided even if the amount of the required instalments is nil. 2. If instalments are required, calculate the amount of instalments that would be required under each of the acceptable methods available. 3. If instalments are required, indicate which of the available methods would best serve to minimize instalment payments during 2017. If instalments must be paid, indicate the date on which they are due. SOLUTION available in printed and online Study Guide.



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Self Study Problem Two - 4 (Individual And Corporate Tax Instalments) For each of the following independent Cases, the taxpayer’s combined federal and provincial taxes payable amounted to $18,000 for the year ending December 31, 2015, while for the year ending December 31, 2016, the amount payable was $14,400. At the beginning of 2017, it is estimated that federal and provincial taxes payable for the year ending December 31, 2017 will be $13,500. The actual federal and provincial taxes payable for 2017, calculated in March, 2018, is $16,000. A. The taxpayer is an individual whose only income is rental income. B. The taxpayer is an individual whose employer withholds combined federal and provincial taxes of $7,000 in 2015, $15,000 in 2016, and $9,000 in 2017. C. The taxpayer is a small CCPC with a December 31 year end. D. The taxpayer is a publicly traded corporation with a December 31 year end. Assume that its combined federal and provincial taxes payable for the year ending December 31, 2017 are estimated to be $16,000, instead of the $13,500 given in the problem. Required: For each of the Cases, state whether instalments are required for the 2017 taxation year, even if one of the methods results in required instalments of nil. Explain your conclusion. If instalments are required, indicate: • • • •

the best alternative for calculating the instalments, the amount of the instalments under that alternative showing all calculations, even if the optimum solution is obvious, the dates on which the payments will be due, and any consequences of the 2017 estimated taxes being lower than the actual taxes payable. SOLUTION available in printed and online Study Guide.

Self Study Problem Two - 5 (Canadian Taxable Entities) List the three types of entities that are subject to federal income taxation in Canada and, for each, state: • • • •

how their taxation year is established; the filing deadlines for their respective income tax returns; how frequently income tax instalments must be made; and the dates on which the instalment payments must be made. SOLUTION available in printed and online Study Guide.



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Self Study Problem Two - 6 (Assessment Disputes) Mr. Norman Coffee has been one of your major clients for years. He is extremely wealthy and has paid his very sizable tax payable (and your fees) for decades without complaint. On August 15th of the current year, Mr. Coffee receives a Notice of Reassessment indicating that he owes $5,000 of additional taxes, plus interest, for the preceding taxation year. Since you filed the tax return in dispute, Mr. Coffee expects you to deal with the matter quickly. Required: Indicate the procedures that may be used in dealing with this dispute between the CRA and Mr. Coffee. SOLUTION available in printed and online Study Guide.

Self Study Problem Two - 7 (Tax Preparer’s Penalty) For each of the following independent cases, indicate whether you believe a penalty would be assessed against the tax return preparer under ITA 163.2. Explain your conclusion. A. Joan Bridge, a recently qualified CPA, has several clients that have been reassessed with respect to deductions related to their investment in the Large Partners tax shelter. In each case, the CRA has denied loss deductions, claiming that they are based on an overvaluation of the organization's assets. One of these clients has taken the case to the Tax Court of Canada which confirmed the CRA's reassessment. No further appeal was undertaken. Joan has a new client who also has an interest in this same Large Partners tax shelter. Joan prepares this new client's return claiming the same deductions that were disallowed for her other clients. B. Jack Hodge, a CPA, is paid to EFILE the tax return of Barbra Hicks, a very close friend of his mother. Barbra provides him with a T4 slip indicating that she has $31,000 in employment income. She also indicates that she made a $22,000 contribution to a registered charity, but forgot to bring the receipt to the meeting with Jack. In actual fact, she did not make the donation. Jack files the tax return without questioning her claim after his mother assures him that Barbra is completely trustworthy. C. Marian Flexor, a CPA, is asked by Jason March to prepare and file his tax return. Jason provides a financial statement for his business activities which shows a significant profit. Included in the statement provided to Marian is a large amount of travel costs, all of which are supported by receipts. After the return is filed, the CRA audits Jason's business activities and finds that more than one-half of the travel costs were personal, rather than business related. SOLUTION available in printed and online Study Guide.



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SSS Problem Two - 2


SSS Problem Two - 1 (Individual Tax Instalments) In January, 2017, you are asked to provide tax advice to Ms. Leslie Garond. She has provided you with the following information about her combined federal and provincial taxes payable and the income taxes withheld by her employer for the 2015 and 2016 taxation years: Year 2015 2016

Taxes Payable $22,000 18,000

Taxes Withheld $9,500 9,700

For 2017, she estimates that her combined federal and provincial taxes payable will be $14,000 and that her employer will withhold a total of $9,850 in income taxes. She has asked you whether it will be necessary for her to pay instalments in 2017 and, if so, what the minimum amounts that should be paid are, and when they are due. Required: Advise Ms. Garond as to whether or not she is required to make instalment payments for 2017. If instalments are required, calculate the alternative amounts that could be paid. Indicate which alternative would be best and the dates on which the payments should be made.

SSS Problem Two - 2 In January, 2017, you are asked to provide tax advice to Mr. Lester Gore. For the three years 2015, 2016, and 2017, he provides the following information on his combined federal and provincial taxes payable, along with information on withholdings by his employer: Year 2015 2016 2017 (Estimated)

Taxes Payable

Taxes Withheld

$15,000 10,800 17,000

$11,500 11,750 13,000

He has asked you whether it will be necessary for him to pay instalments in 2017 and, if so, what is the minimum he has to pay and when. Required: Provide the information requested by Mr. Gore. Your answer should include a conclusion on whether or not instalments are required. If instalments are required, indicate the alternative amounts that could be remitted, the best alternative to use, and the dates on which the instalments should be paid.



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SSS Problem Two - 3

SSS Problem Two - 3 (Individual And Corporate Tax Instalments) For the year ending December 31, 2015, the taxpayer’s combined federal and provincial taxes payable amounted to $93,000, while for the year ending December 31, 2016, the amount payable was $108,000. It is estimated that federal and provincial taxes payable for the year ending December 31, 2017 will be $82,500. Case A The taxpayer is an individual whose employer withholds combined federal and provincial taxes of $86,700 in 2015, $109,500 in 2016, and $79,200 in 2017. Case B The taxpayer is an individual whose employer withholds combined federal and provincial taxes of $91,500 in 2015, $98,700 in 2016, and $78,300 in 2017. Case C

The taxpayer is a small CCPC with a December 31 year end.

Case D The taxpayer is a publicly traded corporation with a December 31 year end. Assume that its combined federal and provincial taxes payable for the year ending December 31, 2015 are estimated to be $78,100, instead of the $93,000 given in the problem. Required: For each of the preceding independent Cases, provide the following information: 1. Indicate whether instalments are required during the year ending December 31, 2017, including a brief explanation of your conclusion. This explanation should be provided even if the amount of the required instalments is nil. 2. Calculate the amount of instalments that would be required under each of the acceptable methods available. 3. Indicate which of the acceptable methods would best serve to minimize instalment payments during 2017. If instalments must be paid, indicate the date on which they are due.



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SSS Problem Two - 5

SSS Problem Two - 4 (Instalments, Interest And Penalties For Corporations) The fiscal year of the Sloan Company, a public company, ends on October 31. During the year ending October 31, 2015, its federal taxes payable amounted to $168,000, while for the year ending October 31, 2016, the federal taxes payable were $153,000. It is estimated that federal taxes payable for the year ending October 31, 2017 will be $144,000. Required: A. Calculate the instalment payments that are required for the year ending October 31, 2017 under each of the alternative methods available. Indicate which of the alternatives would be preferable. B. If the Company did not make any instalment payments towards its 2017 taxes payable, and did not file its corporate tax return or pay its taxes payable on time, indicate how the interest and penalty amounts assessed against it would be determined (a detailed calculation is not required).

SSS Problem Two - 5 (Tax Preparer’s Penalty) For each of the following independent cases, indicate whether you believe a penalty would be assessed against the tax return preparer under ITA 163.2. Explain your conclusion. A. Accountant X is asked by Client A to prepare a tax return including a business financial statement to be used in the return. In response to a request by Accountant X for business related documents, Client A supplies information to Accountant X, which includes a travel expense receipt. Accountant X relies on this information provided by Client A and prepares the business statement that is filed with the return. The CRA conducts a compliance audit and determines that Client A's travel expense was a non-deductible personal expense. B. Accountant X has several clients that have been reassessed in respect of a tax shelter. Accountant X knows that the CRA is challenging the tax effects claimed in respect of the tax shelter on the basis that the shelter is not a business, is based on a significant overvaluation of the related property and is technically deficient in its structure. The Tax Court of Canada, in a test case (general procedures), denies deductions claimed in respect of the tax shelter in a previous year by Client B (a client of Accountant X). Client B's appeal is dismissed. The case is not appealed and Accountant X is aware of the Court's decision. Accountant X prepares and files a tax return on behalf of Client C that includes a claim in respect of the same tax shelter that the Tax Court denied deductions for. C. Taxpayer Z approaches Tax-preparer X to prepare and EFILE Z's tax return. Taxpayer Z provides X with a T4 slip indicating that Z has $32,000 of employment income. Taxpayer Z advises X that he made a charitable donation of $24,000 but forgot the receipt at home. Z asks that X prepare and EFILE the tax return. In fact, Z never donated anything to a charity. X prepares Z’s tax return without obtaining the receipt.



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SSS Solution Two - 1

Chapter 2 Supplementary Self Study (SSS) Solutions SSS Solution Two - 1 Need For Instalments Instalments are required when an individual’s “net tax owing” exceeds $3,000 in the current year and in either of the two preceding years. In somewhat simplified terms, “net tax owing” is defined as the combined federal and provincial taxes payable, less amounts withheld under ITA 153. Ms. Garond’s net tax owing figures are as follows: 2015 = $12,500 ($22,000 - $9,500) 2016 = $ 8,300 ($18,000 - $9,700) 2017 = $ 4,150 ($14,000 - $9,850) Estimate As Ms. Garond’s net tax owing in all three of the years exceeds $3,000, she is required to make instalment payments.

Alternative Amounts There are three possible alternatives for remitting instalments. These are as follows: •

Quarterly instalments of $1,037.50 ($4,150 ÷ 4) based on the current year estimate.

•

Quarterly instalments of $2,075.00 ($8,300 ÷ 4) based on the first preceding year.

•

Two quarterly instalments of $3,125.00 ($12,500 ÷ 4) based on the second preceding year, followed by two instalments of $1,025.00 {[$8,300 - (2)($3,125)] ÷ 2}.

Best Alternative The best alternative would be four instalments of $1,037.50.

Payment Dates The quarterly payments would be due on March 15, June 15, September 15, and December 15.



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SSS Solution Two - 2 Need For Instalments Instalments are required when an individual’s “net tax owing” exceeds $3,000 in the current year and in either of the two preceding years. In somewhat simplified terms, “net tax owing” is defined as the combined federal and provincial taxes payable, less amounts withheld. Mr. Gore’s estimated net tax owing for the three years under consideration is as follows: 2015 = $3,500 ($15,000 - $11,500) 2016 = Nil ($10,800 - $11,750) 2017 = $4,000 ($17,000 - $13,000) Estimate As Mr. Gore’s net tax owing in 2017 (the current year) and his net tax owing in 2015 (one of the two preceding years) is greater than $3,000, he is required to make instalment payments.

Alternative Amounts There are three possible alternatives for remitting instalments. These are as follows: •

Quarterly instalments of $875 ($3,500 ÷ 4) based on the current year estimate.

•

Quarterly instalments of Nil based on the first preceding year.

•

Two quarterly instalments of $875 ($3,500 ÷ 4) based on the second preceding year. No further instalments will be required.

Best Alternative The best alternative would be four instalments of Nil, i.e. no instalments being paid.

Payment Dates If payments were required, they would be due on March 15, June 15, September 15, and December 15. However, since the prior year's net tax owing was nil, no instalments are required.



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SSS Solution Two - 3 Case A 1. The individual’s net tax owing for the relevant three years is as follows: 2015 2016 2017

$6,300 ($93,000 - $86,700) Nil (Withholdings Exceed Tax Payable) $3,300 ($82,500 - $79,200)

As the net tax owing exceeds $3,000 in the current year and one of the two preceding years, instalments are required. 2. The three alternatives would be: • • •

Quarterly instalments of $825 ($3,300 ÷ 4) based on the current year estimate. Quarterly instalments of Nil based on the first preceding year. Two quarterly instalments of $1,575 ($6,300 ÷ 4) based on the second preceding year. No further instalments will be required.

3. The best alternative would be quarterly instalments of nil, based on the first preceding year. There was no net tax owing for that year.

Case B 1. The individual’s net tax owing for the relevant three years is as follows: 2015 2016 2017

$1,500 ($93,000 - $91,500) $9,300 ($108,000 - $98,700) $4,200 ($82,500 - $78,300)

As the net tax owing exceeds $3,000 in the current year and one of the two preceding years, instalments are required. 2. The three alternatives would be: • • •

Quarterly instalments of $1,050 ($4,200 ÷ 4) based on the current year estimate. Quarterly instalments of $2,325 ($9,300 ÷ 4) based on the first preceding year. Two quarterly instalments of $375 ($1,500 ÷ 4) based on the second preceding year, followed by two instalments of $4,275 {[$9,300 - (2)($375)] ÷ 2}.

3. The best alternative would be quarterly instalments of $1,050, for a total of $4,200. This is much lower than the total of $9,300 required under the other two alternatives. The instalments are due on March 15, June, 15, September 15, and December 15.

Case C 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, quarterly instalments can be used. 2. The three acceptable alternatives would be as follows: • • •

Quarterly instalments of $20,625 ($82,500 ÷ 4) based on the current year estimate. Quarterly instalments of $27,000 ($108,000 ÷ 4) based on the first preceding year. One quarterly instalment of $23,250 ($93,000 ÷ 4) based on the second preceding year, followed by three instalments of $28,250 [($108,000 - $23,250) ÷ 3], a total of $108,000.



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3. The best alternative would be quarterly instalments of $20,625 based on the current year Tax Payable estimate. The total would be $82,500, significantly less than the $108,000 total under the other two methods. The instalments are due on March 31, June 30, September 30, and December 31.

Case D 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. 2. The three acceptable alternatives would be as follows: • • •

Monthly instalments of $6,875 ($82,500 ÷ 12 based on the current year estimate. Monthly instalments of $9,000 ($108,000 ÷ 12) based on the first preceding year. Two monthly instalment of $6,508.33 ($78,100 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $9,498.33 {[$108,000 (2)($6,508.33) ÷ 10]}, a total of $108,000.

3. The best alternative would be monthly instalments of $6,875, based on the current year Tax Payable estimate. The total would be $82,500, significantly less than the $108,000 total under the other two methods. The instalments would be due on the last day of each month, beginning in January.



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SSS Solution Two - 4 Part A Under ITA 157(1), the Sloan Company would have three alternatives with respect to the calculation of its instalment payments. The alternatives and the relevant calculations are as follows: Current Year Base The instalment payments could be 1/12th of the estimated taxes payable for the current year. In this case the resulting instalments would be $12,000 per month ($144,000 ÷ 12). Preceding Year Base The instalment payments could be 1/12th of the taxes payable in the immediately preceding taxation year. The resulting instalments would be $12,750 ($153,000 ÷ 12). Preceding And Second Preceding Years The third alternative would be to base the first two instalments on 1/12th of the taxes payable in the second preceding year and the remaining 10 instalments on 1/10th of the taxes payable in the preceding year less the total amount paid in the first two instalments. In this case, the first two instalments would be $14,000 ($168,000 ÷ 12) and the remaining 10 instalments would be $12,500 [($153,000 - $28,000) ÷ 10]. The total instalments under this approach would be $153,000. As the Company has been experiencing a decline in its taxes payable over this three year period, the payments based on the current year’s estimated taxes payable would be the most favorable in terms of minimizing cash outflows.

Part B If the Company failed to make instalment payments towards the 2017 taxes payable, it would be liable for interest from the date each instalment should have been paid to the balance due date, December 31, 2017. Assuming the actual 2017 taxes payable are $144,000, it would be the least of the amounts described in ITA 157(1), and interest would be calculated based on this instalment alternative. The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular rate plus 4 percentage points. There is a penalty on large amounts of late or deficient instalments. This penalty is specified in ITA 163.1 and is equal to 50 percent of the amount by which the interest owing on the late or deficient instalments exceeds the greater of $1,000 and 25 percent of the interest that would be owing if no instalments were made. While detailed calculations are not required, we would note that this penalty would be applicable in this case. Interest on the entire balance of $144,000 of taxes payable would be charged beginning on the balance due date, December 31, 2017. The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular rate plus 4 percentage points. There is also a penalty for late filing . If no return is filed by the filing date, the penalty amounts to 5 percent of the tax that was unpaid at the filing date, plus 1 percent per complete month of the unpaid tax for a maximum period of 12 months. This penalty is in addition to any interest charged due to late payment of instalments or balance due. In addition, interest would also be charged on any penalties until such time as the return is filed or the instalments (balance due) paid. The late file penalty could be doubled to 10 percent, plus 2 percent per month for a maximum of 20 months for a second offence within a three year period.



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SSS Solution Two - 5 Part A Accountant X is not liable for participating in an understatement of Client A's taxes payable because Accountant X did not know the expense receipt was personal in nature, and would not be reasonably expected to know, but for circumstances amounting to culpable conduct, that this was the case. This is because X relied in good faith on the information provided by A.

Part B Based on these facts, Accountant X would be liable for a third party penalty. However, if Accountant X had determined that there was a reasonable basis upon which the Tax Court decision could be overturned by a higher court, the penalty would not apply.

Part C Based on these facts, if X were to prepare and EFILE Z's return without obtaining the charitable donation receipt, X would be liable for a third party penalty. Given that the size of the donation is so disproportionate to Z's apparent income as to defy credibility, to EFILE the return without verifying the amount of the receipt would show an indifference as to whether the Act is complied with or would show a wilful, reckless, or wanton disregard of the law.



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Self Study Problem Three - 2

Chapter 3 Self Study Problems Self Study Problem Three - 1 (Bonus Arrangements) Empire Inc. has an October 31 year end. On October 31, 2017, the Company accrues a bonus of $250,000, payable to Joan Betz, the president of the Company. Required: For each of the following cases, indicate the taxation year in which the Company could deduct the bonus, as well as the taxation year in which Ms. Betz would have to include it in her taxable income. Case A

The bonus is paid on November 1, 2017.

Case B

The bonus is paid on January 1, 2018.

Case C

The bonus is paid on June 30, 2018.

Case D

The bonus is paid on January 1, 2021. SOLUTION available in printed and online Study Guide.

Self Study Problem Three - 2 (Employee Vs. Self-Employed) Farnham Ltd. is interested in acquiring the services of a highly qualified engineering professional. This individual has agreed to become an employee at a salary of $250,000 per year. For employees, the cost of providing benefits (pension plan and extended health care) is about 8 percent of gross wages. In addition to CPP and EI, the province levies a 2 percent payroll tax to provide for health care. The tax applies to all wages and salaries with no upper limit. This individual’s work is such that a contract could be arranged that would make him an independent contractor. However, because he likes the security and benefits associated with being an employee, the contract would have to provide income of $280,000 in order for him to find it acceptable. Required

Advise the company as to the preferable alternative. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 3 (Taxable Automobile Benefits) Ms. Tamira Vines is a salesperson for Compudata Ltd., a Regina based software company. As her work requires her to travel extensively throughout southern and central Saskatchewan, the Company provides her with an automobile. Saskatchewan does not participate in the HST program and has a provincial sales tax which is assessed at a rate of 5 percent. From January 1, 2017 through May 31, 2017, the Company provided her with an Acura TLX. This car was purchased by the Company on January 1, 2017 at a cost of $39,000, plus $1,950 in provincial sales tax and $1,950 in GST. During the period January 1, 2017 through May 31, 2017, the car was driven 38,800 kilometers for employment related purposes and 3,400 kilometers for personal use. The Company paid all operating costs during the period, an amount of $3,656, including applicable provincial sales tax and GST. On June 1, 2017, following a late evening sales conference at the Shangri La Hotel in Moose Jaw, Ms. Vines was involved in an accident in which the Acura was destroyed. Ms. Vines was hospitalized and was not able to return to work until July 1, 2017. Compudata’s insurance company paid $27,500 to the Company for the loss of the car. When she returned to work on July 1, 2017, the Company provided Ms. Vines with a Ford Taurus. The Company leased this vehicle at a monthly cost of $699 per month, including applicable provincial sales tax and GST. This monthly payment also includes a $100 per month charge for insurance. For the period July 1, 2017 through December 31, 2017, operating costs, other than insurance, totaled $3,456, including applicable provincial sales tax and GST. These were paid for by the Company. During this period, Ms. Vines drove the car 15,600 kilometers for employment related purposes and 14,600 kilometers for personal use. Ms. Vines paid to the Company $0.10 per kilometer for the personal use of the cars owned or leased by the Company for the year. Required: Calculate the minimum taxable car benefit that will be included in Ms. Vines’ employment income for the year ending December 31, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 4 (Taxable Automobile Benefits) During the current year, the Carstair Manufacturing Company provides automobiles for four of its senior executives, with the value of the cars being in proportion to the salaries which they receive. While each of the individuals uses their car for employment related travel, they also use them for personal matters. The portion of personal use varies considerably among the four individuals. When the car is not being used by the employee, the Company requires that it be returned to the corporate premises. The details related to each of these cars, including the amount of personal and employment related travel recorded by the executives, are as follows: Mr. Sam Stern Mr. Stern is the president of the Company and is provided with a Mercedes which has been purchased by the Company at a cost of $78,000. The car was new last year and, during the current year, it was driven a total of 38,000 kilometers. Of this total, only 6,000 kilometers were for employment related purposes, while the remaining 32,000 were for personal travel. Operating costs totaled $.50 per kilometer and, because Mr. Stern made an extended trip outside of North America, the car was used by Mr. Stern for 8 months during the current year. During the period when he was outside North America, the Company required Mr. Stern to return the car to the Company garage. Ms. Sarah Blue Ms. Blue is the vice president in charge of marketing and has been provided with a Corvette. The Company leases this vehicle at a cost of $900 per month. During the current year, the car was driven a total of 60,000 kilometers, with all but 5,000 of these kilometers being for employment related purposes. The car was used by Ms. Blue throughout the current year, and total annual operating costs amount to $18,000. Mr. John Stack Mr. Stack is the vice president in charge of finance and he has been provided with an Acura that was purchased by the Company in the preceding year at a cost of $48,000. During the current year, Mr. Stack drove the car 42,000 kilometers for employment related purposes and 10,000 kilometers for personal travel. Operating costs for the year were $20,800, and the car was used by Mr. Stack throughout the current year. In order to reduce his taxable benefit, Mr. Stack made a payment of $7,000 to the Company for the use of this car. Mr. Alex Decker Mr. Decker, the vice president in charge of industrial relations, chose to drive a Lexus. This car was leased by the Company at a cost of $500 per month. The lease payment was significantly reduced by the fact that the Company made a refundable deposit of $10,000 to the leasing Company at the inception of the lease. During the current year, Mr. Decker drove the car 90,000 kilometers for employment related purposes and 8,500 kilometers for personal use. The operating costs were $0.35 per kilometer and, because of an extended illness, he was only able to use the car for the first 10 months of the year. During the period when he was ill, the Company required Mr. Decker to return the car to the Company garage. Required: Calculate the minimum amount of the taxable benefit for the current year that will accrue to each of these executives as the result of having the cars supplied by the Company. In making these calculations, ignore GST/HST/PST considerations. From the point of view of tax planning for management compensation, provide any suggestions for the Carstair Manufacturing Company with respect to these cars. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 5 (Employer Provided Vs. Employee Owned Car) John Rush is a key employee of Megan Ltd. (ML), a Canadian public company. He is not required to use an automobile in carrying out his employment duties. In 2015 and 2016, ML has provided John with a car with ML paying all of the operating costs of the car. John uses the car exclusively for personal travel. On January 2, 2017, ML has indicated to John that, as an alternative to continuing to provide the car for him, they will sell the car to him at its current fair market value of $20,000. If he chooses to purchase the car, ML will no longer pay the operating costs. John expects that, whether he chooses to purchase the car or not, he will use the car for two more years, 2017 and 2018. If he purchases the car, the estimated sales price at the end of these two years would be $12,000. He expects to drive the car about 40,000 kilometers in each of the two years. Assume that operating costs will be $0.20 per kilometer and the prescribed operating cost benefit will be $0.25 per kilometre throughout both years. John's combined federal/provincial marginal tax rate is 48 percent. Required: On the basis of undiscounted cash flows, advise John as to whether he should purchase the car assuming: A. ML purchased the car for $35,000. B. ML purchased the car for $70,000. Ignore GST/HST considerations. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 6 (Loans To Employees) Mr. Thomas Malone is employed by Technocratic Ltd. in a management position. Because of an outstanding performance in his division of the Company, he is about to receive a promotion accompanied by a large increase in compensation. He is discussing various possible ways in which his compensation might be increased without incurring the same amount of taxation as would be assessed on an increase in his salary. He has suggested that it might be advantageous for the Company to provide him with a five year interest free loan in the amount of $200,000 as part of any increase in compensation. The funds will either be used to purchase a cottage in which case any interest on related loans will not be deductible to Mr. Malone, or used to purchase investments in which case any interest on related loans will be deductible to Mr. Malone. Other relevant information is as follows: • • • •

Given Mr. Malone’s present salary, any additional income will be taxed at 51 percent. Technocratic Ltd. is able to invest funds at a before tax rate of 18 percent. It is subject to taxation at a 25 percent rate. Mr. Malone can acquire a similar term, $200,000 loan at an annual rate of 5 percent. Assume that the relevant Regulation 4301 rate for imputing interest on various tax related balances is 2 percent.

Required: Evaluate Mr. Malone’s suggestion of providing him with an interest free loan in lieu of salary from the point of view of the cost to the Company. How will the deductibility of the interest affect your conclusion? SOLUTION available in printed and online Study Guide.

Self Study Problem Three - 7 (Employee Stock Options) During 2015, Ms. Sara Wu’s employer, Imports Ltd., granted her stock options that allowed her to acquire 12,000 shares of the Company ’s common stock at a price of $22 per share. At this time, the shares have a fair market value of $20 per share. On June, 1, 2016, Ms. Wu exercises all of these options. At this time, Imports Ltd. shares have a fair market value of $31 per share. On January 31, 2017, Ms. Wu sells the 12,000 Imports Ltd. shares at a price of $28 per share. Required: For each of the following Cases, calculate the tax consequences of the transactions that took place during 2015, 2016, and 2017 on both the Net Income For Tax Purposes and the Taxable Income of Ms. Wu. Where relevant, identify these effects separately. Case A

Imports Ltd. is a public company.

Case B

Imports Ltd. is a Canadian controlled private corporation. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 8 (Employee Stock Options) During 2015, her first year as an employee of Borden Ltd., Ms. Marcia Balzac was granted options to purchase 2,500 of the Company ’s shares at a price of $8.00 per share. When Ms. Balzac exercises the options, the shares are trading at $8.30 per share. On November 1, 2017, Ms. Balzac sells all of her shares at a price of $8.55 per share. Required: Indicate the tax effect on Ms. Balzac of the transactions that took place during 2015, 2016, and 2017 under each of the following independent Cases. Your answer should include the effect on both Net Income For Tax Purposes and Taxable Income. Where relevant, identify these effects separately. A. Borden Ltd. is a Canadian controlled private corporation. At the time the options were granted, the Company’s shares had a fair market value of $7.50 per share. The options were exercised on October 1, 2016. B. Borden Ltd. is a Canadian public company. At the time the options were granted, the shares were trading at $7.50 per share. The options were exercised on October 1, 2016. C. Borden Ltd. is a Canadian public company. At the time the options were granted, the shares were trading at $8.25 per share. The options were exercised on October 1, 2016. D. Borden Ltd. is a Canadian controlled private corporation. At the time the options were granted, the Company’s shares had a fair market value of $9.00 per share. The options were exercised on October 1, 2015. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 9 (Employment Income - No Commissions) For the last three years, Sam Jurgens has been employed in Halifax as a loan supervisor for Maritime Trust Inc. Maritime Trust is a large public company and, as a consequence, Mr. Jurgens felt that he did not have the opportunity to exhibit the full range of his abilities. To correct this situation, Sam decided to accept employment in Toronto effective July 1, 2017 as the general manager of Bolten Financial Services, a Canadian controlled private corporation specializing in providing financial advice to retired executives. In April, 2017, prior to leaving Maritime Trust, Mr. Jurgens exercised options to purchase 5,000 shares of the public company ’s stock at a price of $15 per share. At the time the Maritime Trust options were granted, the shares were trading at the option price of $15 per share. At the time that he exercised these options, the shares were trading at $16 per share. He is still holding these shares on December 31, 2017. Mr. Jurgens had an annual salary at Maritime Trust of $105,000, while in his new position in Toronto, the salary is $90,000 per year. However, he has the option of acquiring 1,000 shares per year of Bolten stock at a price of $20 per share. On July 1, when he was granted the option, Bolten stock had a fair market value of $14 per share. On December 1, 2017, when the Bolten stock has a fair market value of $22 per share, Mr. Jurgens exercises these options and acquires 1,000 shares. It is his intent to hold these shares for an indefinite period of time. Because there is extensive travel involved in the position with Bolten Financial Services, the Company has provided Mr. Jurgens with a $40,000 company car. Between July 1 and December 31, 2017, Mr. Jurgens drove this car a total of 25,000 kilometers, of which 15,000 kilometers were clearly related to his work with Bolten Financial Services. The operating costs associated with the car for this period, all of which were paid for by the Company, amount to $5,000. Because of extensive repairs resulting from a manufacturer’s recall, the car had to be returned to the Company for the months of October and November, 2017. At the time of his move to Toronto, Bolten Financial Services provided Mr. Jurgens with a $200,000 home relocation loan to purchase a personal residence near the center of town. No interest was charged on this loan. During the year, Mr. Jurgens earned $15,000 in interest and received $45,000 in dividends from taxable Canadian corporations. Assume that the relevant prescribed rate through all of 2017 is 2 percent. Required: Compute Sam Jurgens’ minimum net employment income for the year ending December 31, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 10 (Employment Income - Simple) Ms. Sarah Kline is a copy editor for a major Canadian publisher. Her gross salary for the year ending December 31, 2017 is $73,500. For the 2017 taxation year, Ms. Kline’s employer withheld the following amounts from her income: Federal And Provincial Income Taxes Registered Pension Plan Contributions Contributions To Group Disability Plan

$26,000 2,400 175

Ms. Kline’s employer made a $2,400 matching contribution to her registered pension plan and a $200 matching contribution for the group disability insurance. Other Information: 1. During 2017, Ms. Kline is provided with an automobile that has been leased by her employer. The lease payments are $700 per month, an amount which includes a $50 monthly payment for insurance. The car is used by her for 11 months of the year and, during the month of non-use, she is required to return the vehicle to her employer's premises. During 2017, she drives it a total of 40,000 kilometers. Of this total, 37,000 kilometers were for travel required in pursuing the business of her employer, and the remainder was for personal use. The operating costs of the car totaled $5,200 for the year and were paid by her employer. She reimbursed her employer $.30 per kilometer for her personal use of the automobile. 2. During 2017, Ms. Kline was hospitalized. The disability plan which provides periodic benefits to compensate for lost employment income paid her benefits of $1,800 during this period. Ms. Kline began making contributions to this plan in 2016 and paid $225 for that year. 3. Ms. Kline paid dues to her professional association in the amount of $1,650 for the year. 4. Ms. Kline was given options to buy 200 shares of her employer’s publicly traded stock at a price of $50 per share 2 years ago. At the time the options were issued, the shares were trading at $50 per share. On June 6, 2017, Ms. Kline exercises the options. At the time of exercise, the shares are trading at $70 per share. She is still holding the shares on December 31, 2017. Required: Calculate Ms. Kline’s minimum net employment income for the year ending December 31, 2017. Ignore all GST and PST considerations. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 11 (Employment Income With Commissions) Ms. Sandra Firth is a commission salesperson who has been working for Hadley Enterprises, a Canadian public corporation, for three years. During the year ending December 31, 2017, her gross salary, not including commissions or allowances, was $72,000. Her commissions for the year totalled $14,000. The following amounts were withheld by Hadley Enterprises from Ms. Firth’s gross salary: Federal and provincial income taxes Registered pension plan contributions (Note One) Payments for group disability insurance (Note Two) Payments for personal use of company car (Note Three) Payments for group term life insurance (Note Four) Interest on home purchase loan (Note Five) Purchase of Canada Savings Bonds

$22,000 3,200 250 2,400 450 3,000 2,060

Note One Hadley Enterprises made a matching $3,200 contribution to Ms. Firth’s registered pension plan. Note Two Ms. Firth is covered by a comprehensive disability plan which provides periodic benefits during any period of disability to compensate for lost employment income. Prior to 2017, Hadley Enterprises paid all of the $500 per year premium on this plan. However, as of 2017, Ms. Firth is required to pay one-half of this premium, the $250 amount withheld from her gross salary. During 2017, Ms. Firth was hospitalized for the month of March. For this period, the disability plan paid her $500 per week, for a total of $2,000. Note Three Hadley Enterprises provides Ms. Firth with a Lexus that was purchased in 2016 for $58,000. During 2017, she drove the car 92,000 kilometers, 7,000 of which were personal in nature. Ms. Firth paid all of the operating costs of the car, a total of $6,200 for the year ending December 31, 2017. However, the Company provides her with an annual allowance of $7,200 to compensate her for these costs. While Ms. Firth was hospitalized during the month of March (see Note Two), her employer required that the car be returned to their premises. Note Four Ms. Firth is covered by a group term life insurance policy that pays her beneficiary $160,000 in the event of her death. The 2017 premium on the policy is $1,350, two-thirds of which is paid by her employer. Note Five On January 1, 2017, the Company provided Ms. Firth with a $400,000 loan to assist with the purchase of a new residence. The loan must be repaid by December 31, 2017. All of the interest that is due on the loan for 2017 is withheld from Ms. Firth’s 2017 salary. This loan does not qualify as a home relocation loan. Assume that during all of 2017, the prescribed rate was 2 percent. Other Information: 1. At Christmas, the Company gives all of its employees a mini iPad. Each mini iPad costs the Company $350, including all applicable taxes. The Company deducts this amount in full in its corporate tax return. 2. During 2016, Ms. Firth received stock options from Hadley to acquire 1,000 shares of its common stock. The option price is $5.00 per share and, at the time the options are issued, the shares are trading at $4.50 per share. In June, 2017, the shares have increased in value to $7.00 per share and Ms. Firth exercises her options to acquire 1,000 shares. She is still holding them at the end of the year and has no intention of selling them.



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3. The Company provides Ms. Firth with a membership in the Mountain Tennis Club. The cost of this membership for the year is $2,500. During the year, Ms. Firth spends $6,500 entertaining clients at this club. The Company does not reimburse her for these entertainment costs. 4. Ms. Firth had travel costs related to her employment activities as follows: Meals Lodging

$1,300 3,500

Total

$4,800

Her employer provides her with a travel allowance of $300 per month ($3,600 for the year) which is included on her T4 for the year. Required: Calculate Ms. Firth’s minimum net employment income for the year ending December 31, 2017. Provide reasons for omitting items that you have not included in your calculations. Ignore any GST or PST implications. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 12 (Employment Income With Commissions, Car CCA) Mr. Jones is a salesman handling a line of computer software throughout Western Canada. During 2017, he is paid a salary of $25,800 and receives sales commissions of $47,700. He does not receive an allowance from his employer for any of his expenses. During the year, Mr. Jones made the following employment related expenditures: Airline Tickets Office Supplies And Shipping Costs Purchase Of Laptop Computer Client Entertainment Cost Of New Car Operating Costs Of Car

$ 2,350 415 2,075 1,750 24,000 7,200

The new car was purchased on January 5, 2017, and replaced a car which Mr. Jones had leased for several years. During 2017, Mr. Jones drove the car a total of 50,000 kilometers, of which 35,000 kilometers were for employment related purposes. The maximum capital cost allowance for the car (100 percent) is $3,600. In addition to expenditures to earn employment income, Mr. Jones has the following additional disbursements: Alberta Blue Cross Medical Insurance Premiums Group Life Insurance Premiums

$435 665

Mr. Jones indicates that he regularly receives discounts on his employer’s merchandise and, during the current year, he estimates that the value of these discounts was $1,300. One of the suppliers of his employer paid $2,450 to provide Mr. Jones with a one week vacation at a northern fishing lodge. Required: Determine Mr. Jones’ net employment income for the 2017 taxation year. Ignore all GST and PST implications. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 13 (Commission Income And Work Space In Home) Mr. Worthy is a commissioned salesman and has asked for your assistance in preparing his income tax return for the current year. He has provided you with the following information: Employment Income Salary Commissions Telephone Charges Monthly Charge For Residential Line Long Distance To Clients From Work Space In Home Cellular Phone Airtime To Clients

$65,000 $11,000 $ 250 400 800

$ 1,450

Office Supplies And Postage At Home Office

$

Cost of Tickets To Basketball Games With Clients

$ 2,550

Travel Expenses Car Operating Costs Meals Hotels

$ 6,450

$2,700 900 2,850

Capital Cost Allowance On Car (100%) Cost Of Maintaining Work Space In The Home (Based On A Proportion Of Space Used) House Utilities House Insurance House Maintenance Capital Cost Allowance - House Capital Cost Allowance - Office Furniture Mortgage Interest Property Taxes Interest On Loan To Buy Office Furniture On Loan To Buy Car

295

$ 2,450

$485 70 255 750 475 940 265

$ 3,240

$1,700 2,300

$ 4,000

Mr. Worthy ’s car was purchased, used, several years ago for $28,000. Twenty percent of the milage on the car is for personal matters. He is required by his employer to maintain an office in his home and is eligible to deduct work space in the home costs. Mr. Worthy has received no reimbursement from his employer for any of the amounts listed. Required:

Ignore GST and PST implications in your solutions.

A. Calculate Mr. Worthy’s minimum net employment income for the current year. B. Assume Mr. Worthy had only $4,000 in commission income in addition to his $65,000 salary. Calculate Mr. Worthy’s minimum net employment income for the current year. SOLUTION available in printed and online Study Guide.



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Self Study Problem Three - 14 (Comprehensive Employment Income) Mitch Lesner graduated from the University Of Alberta in early 2017 at the age of 28. He immediately applied for a number of jobs and accepted a position as a financial planner in the Ottawa office of Oxford Associates Ltd. Oxford Associates Ltd. is a large Canadian controlled private corporation (CCPC) employing more than two hundred people. Prior to accepting employment with Oxford Associates, Mitch had lived in Red Deer, Alberta. Once he had signed the contract with Oxford Associates, plans were made to sell the house he owned in Red Deer. Unfortunately, the home remained unsold when he moved on March 8, 2017. It was sold in late May, 2017 for $125,000. He had purchased the home several years before for $147,000. He arrived in Ottawa on March 16 and moved into an apartment he had rented on a monthly basis until he could arrange to purchase a home. Rent payments were required from April 1. Mitch began work on April 1, 2017 and eagerly awaited the arrival of his long-time girlfriend Janice Masters from Alberta. Shortly after her arrival in Ottawa, Mitch and Janice were married on November 29, 2017. Mitch had purchased a house just outside of Ottawa for $235,000 that they moved into on December 1, 2017. Mitch’s new job requires him to meet with existing and prospective clients outside of regular office hours and, at times, on weekends. As a result, Oxford Associates will sign form T2200 stating Mitch is required to pay for certain employment expenses without reimbursement and use a portion of his home for work. He has set aside a small room in his rented apartment which is used exclusively to meet with clientele. Mitch is also provided with an automobile to use in his work. Mitch is compensated by salary with a bonus and stock option arrangement. The bonus is based on overall company profits. The stock option is available to all employees depending upon level of service and overall job evaluation. Other Information: 1. Given Mitch’s high grades at the University Of Alberta, Oxford Associates offered Mitch $10,000 to convince him to sign a five year employment contract. After Mitch accepted, he received the cheque in February, 2017. During the period April 1, 2017 through December 31, 2017, Mitch earned salary of $63,700. Of these earnings, $62,550 was paid during this period as Oxford Associates holds back one week’s pay. The Company withheld the following amounts from his salary: Income Taxes CPP EI RPP Contributions Payment For Personal Use Of Automobile

$11,400 2,564 836 1,200 600

2. On December 16, 2017, a bonus of $7,450 was accrued for Mitch. Mitch received $2,000 of this bonus on December 21, 2017, with the remainder being paid on February 17, 2018. 3. A few months into the new job Mitch became quite depressed. His employer suggested he take advantage of the company assistance program. He went to four appointments in October and November and felt much better. Oxford Associates paid $700 for Mitch’s counselling services.



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4. Oxford Associates provides group medical coverage to all of its employees. The premiums paid by Oxford Associates on Mitch’s behalf cost $410. 5. Oxford Associates contributed $1,200 on Mitch’s behalf to the Company’s RPP. 6. Mitch is a Certified Financial Planner and paid $785 in professional dues in 2017. Oxford Associates’ policy is to reimburse 80 percent of such annual professional dues. Oxford Associates reimbursed him $628 in November 2017. 7. When Mitch was married in November he received non-cash wedding gifts valued at $850. Half of the amount was contributed by his employer and the balance from other employees. 8. Oxford Associates discovered years ago that many existing clients frequent certain recreational and sporting clubs. To encourage contacts with potential clients, employees have their choice among five such clubs. Since Mitch enjoys squash, he chose a free membership at a local squash club. The annual membership fee is $915. 9. Oxford Associates reimbursed Mitch for 80 percent of the $22,000 ($147,000 $125,000) loss that he experienced on the sale of his Red Deer home. 10. Mitch had $35,000 for a down-payment on his new Ottawa home. Since he had no previous work experience, the banks were reluctant to provide him a mortgage at favourable terms. His employer stepped in and agreed to an interest-free housing loan of $200,000 beginning on December 1, 2017. Mitch agreed to reduce his salary slightly with respect to this benefit. The loan requires annual payments of $7,500 due at the end of November beginning in 2018. The loan is required to be paid if Mitch dies, sells the home or terminates his employment. Assume that the prescribed interest rates for such benefits are 2 percent in each of the first two quarters of 2017 and 1 percent in the third and fourth quarters. 11. Oxford instituted a stock option plan for its employees in 2016. The plan eligibility requires six months of service. Employees are permitted to acquire a limited number of option shares at 20 percent below their fair market value on either May 1 or November 1. The company hires valuators to determine the fair market value at each of those dates. Mitch acquires 200 shares November 1, 2017 for $12,800. Low on cash and wanting to buy Janice a nice wedding ring, he is forced to sell 80 of the shares. He sells them on December 16, 2017 for $8,960. 12. Oxford Associates has an arrangement with a local dealership to lease a minimum number of new automobiles each year at favourable rates. Mitch receives his leased automobile May 1, 2017. It has 162 kilometers on it when it is received. The odometer reads 19,414 kilometers on December 31, 2017. Mitch estimates that he drove 5,198 kilometers for personal purposes, including drives to and from home to the office. Oxford Associates pays monthly lease payments (including HST) of $430. The cost of gas, oil, insurance, repairs and maintenance and other charges total $2,175 for 2017. Oxford Associates requires each employee provided with an automobile to pay $75 each month for the personal use of the automobile which is withheld directly from their pay.



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13. Mitch prepared a separate room in his apartment to be used exclusively for a home office. He used the office space between June 1 and November 30, 2017. A home office was not ready in his newly purchased home until February, 2018. The apartment office space is exactly 100 square feet. The total apartment space is 1,176 square feet. Home office related costs are as follows: Monthly Rent $ 960 Monthly Phone Line Charge (April to November) 41 Employment Related Long Distance Calls (June to November) 74 Total Electricity Charge (March 16 to November 30) 870 Property Insurance (March 16 to November 30) 175 Paint For Apartment 253 Office Furniture 1,344 Computer Purchase 1,739 Stationery And Office Supplies Purchased 129 14. Mitch received an allowance of $250 per month for six months to cover the costs of maintaining an office in his home. Required: Determine Mitch’s net employment income for the year 2017. Provide explanations for all amounts including reasons for omitting items not included in your calculations. SOLUTION available in printed and online Study Guide.



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SSS Problem Three - 2


SSS Problem Three - 1 (Bonus Arrangements) Mr. Carl Lange is the president of Lange Enterprises Inc., a Canadian controlled private company. The Company has a September 30 year end. On September 30, 2017, the Company declares a bonus of $175,000, payable to Mr. Lange. Required: For each of the following cases, indicate the taxation year in which the Company can deduct the bonus, as well as the taxation year in which Mr. Lange will have to include it in his taxable income. Case A

The bonus is paid on October 1, 2017.

Case B


Case C

The bonus is paid on July 30, 2018.

Case D


SSS Problem Three - 2 (Taxable Automobile Benefits) Three employees of the Cancar Company were given the use of company cars on January 1 of the current year. The three cars are identical. Each car was driven 16,000 kilometers during the year and the operating costs were $2,400 for each car during the year, all of which were paid by the company. When the car is not being used by the employee, the Company requires that it be returned to its premises. Required: Ignore all GST/PST/HST implications. For each of the following cars, calculate the minimum taxable benefit to the employees for the current year ending December 31. Car A is purchased for $30,000. It is used by Aaron Abbott for the whole year. He drives it for personal purposes for a total of 9,000 kilometers. Car B is leased for $635 per month. It is used by Babs Bentley for 11 months of the year. She drives it for personal purposes for a total of 6,000 kilometers and pays Cancar Company $500 for the use of the car. Car C is purchased for $30,000. It is used by Carole Cantin for 10 months of the year. She drives it for personal purposes for a total of 7,000 kilometers.



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SSS Problem Three - 3 (Loans To Employees) Eileen Lee is an extremely successful computer salesperson living and working in Hearst, Ontario, who is unhappy with her current employer. She is discussing a compensation package with her future employer, HER Ltd., a very profitable Canadian controlled private corporation. As Ms. Lee’s current and anticipated investment income place her in the 51 percent income tax bracket, she is very interested in finding ways in which she can be compensated without incurring the same amount of taxation as would be assessed on an equivalent amount of salary. Ms. Lee is contemplating a major cash outlay. She plans to completely renovate a commercial property that she owns. She had been planning to obtain a loan of $100,000 at a 5 percent rate in order to finance the renovations. She has suggested that it might be advantageous for the Company to provide her with an interest free loan of $100,000 as part of her compensation. Because she will be using the loan for income producing purposes, any interest on the loan will be deductible to Ms. Lee. HER Ltd. is able to invest funds at a before tax rate of 10 percent. It is subject to taxation at a 28 percent rate. Assume that the relevant prescribed rate is 2 percent. Required: Evaluate, from the point of view of the cost to the Company, Ms. Lee’s suggestion of providing her with an interest free loan in lieu of sufficient salary to carry a commercial loan at the rate of 5 percent. Assume that the cost of the renovations will be fully deductible in the year in which they are made.

SSS Problem Three - 4 (Employee Stock Options) Ms. Marian Bytech is an employee of Merlin Industries Ltd. During 2015, Ms. Bytech was granted options to acquire 200,000 of her employer’s shares at a price of $15 per share. On August 1, 2016, all of the options are exercised. On this date, the Merlin Industries shares have a fair market value of $22 per share. On November 1, 2017, Ms. Bytech sells all of her Merlin Industries shares at $28 per share. Required: Indicate the tax effect on Ms. Bytech with respect to the granting of the options, their exercise, and the sale of the shares under each of the following independent assumptions. Your answer should include the effect on both Net Income For Tax Purposes and Taxable Income. Where relevant, identify these effects separately. A. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the options were granted, the Company’s shares had a fair market value of $14 per share. B. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the options were granted, the Company’s shares had a fair market value of $18 per share. C. Merlin Industries Ltd. is a Canadian public company. At the time the options were granted, the shares were trading at $15 per share. D. Merlin Industries Ltd. is a Canadian public company. At the time the options were granted, the shares were trading at $18 per share.



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SSS Problem Three - 5 (Employment Income) Mrs. Vera Smiles is a sales representative for a Canadian controlled private corporation that manufactures office furniture. Her gross salary for the year ending December 31, 2017 is $53,000 and, in addition, she earned commissions of $34,500. For the 2017 taxation year, Mrs. Smiles’ employer withheld the following amounts from her income: Federal And Provincial Income Taxes Registered Pension Plan Contributions Contributions To Group Disability Plan EI Premiums CPP Contributions

$22,400 3,200 212 836 2,564

Mrs. Smiles’ employer made a $3,200 matching contribution to her registered pension plan and a $236 matching contribution to her group disability insurance. Other Information: 1. During 2017, Mrs. Smiles is provided with an automobile that has been leased by her employer. The lease payments are $1,220 per month, an amount which includes a $127 per month payment for insurance. The car is used by her for ten months of the year and, during the period of non-use, she is required to return the car to her employer's premises. During 2017, she drives it a total of 67,000 kilometers. Of this total, 63,000 kilometers were for travel required in pursuing the business of her employer, and the remainder was for personal use. She reimbursed her employer $1,400 for her personal use of the automobile. 2. During 2017, Mrs. Smiles was hospitalized for a month. The disability plan which provides periodic benefits to compensate for lost employment income paid her benefits of $2,650 during this period. Mrs. Smiles began making contributions to this plan in 2016 and paid $260 for that year. 3. On July 1, 2017, Mrs. Smiles received a $50,000 loan from her employer. The loan requires annual interest payments at a rate of 1 percent and Mrs. Smiles pays the interest for 2017 on January 18, 2018. Assume that at the time the loan was granted and for the remainder of the year, the prescribed rate was 2 percent. The loan is still outstanding at the end of the year. 4. Mrs. Smiles was given options to buy 200 shares of her employer’s stock at a price of $32 per share 3 years ago. At the time the options were issued, the shares had a fair market value of $30 per share. On June 1, 2017, Mrs. Smiles exercises the options. At the time of exercise, the shares had a fair market value of $45 per share. She does not plan to sell the shares for at least 2 years. 5. During the year, Mrs. Smiles traveled extensively on business. She had travel costs of $3,365 in air fares, $4,880 in travel lodging, and $2,450 in meals while on the road. She also spent $2,720 to entertain clients. Her employer reimbursed her fully for these costs on presentation of the receipts. Required: Calculate Mrs. Smiles’ minimum net employment income for the year ending December 31, 2017. Provide reasons for omitting items that you have not included in your calculations. Ignore all GST and PST considerations.



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SSS Solution Three - 1

Chapter 3 Supplementary Self Study (SSS) Solutions SSS Solution Three - 1 The required information for the four Cases included in this problem is as shown in the following table:

Case Case Case Case

A B C D

Deduction Lange Enterprises Inc. Year Ending September 30

Inclusion Carl Lange Calendar Year

2017 2017 2018 2017

2017 2018 2018 2017

In Case A, the bonus is deducted when accrued because it is paid within 180 days of Lange Enterprises’ 2017 year end. It is taxed when received. In Case B, the bonus is deducted when accrued because it is paid within 180 days of Lange Enterprises’ 2017 year end. It is taxed when received. In Case C, the bonus is not paid within 180 days of Lange Enterprises’ year end. As a consequence, it cannot be deducted until the year ending September 30, 2018. However, as it is paid within 3 years of Lange Enterprises’ 2017 year end it is not a salary deferral arrangement. This means it does not have to be included in Mr. Lange’s Taxable Income until 2018. In Case D, the bonus is not paid until more than 3 years after the end of the calendar year in which Mr. Lange rendered the services. This makes it a salary deferral arrangement, resulting in Mr. Lange having to include it in his 2017 Taxable Income. Lange Enterprises will deduct the bonus in the fiscal year ending September 30, 2017.



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SSS Solution Three - 2 With respect to Cars B and C, employment related usage was more than 50 percent of total usage and, as a consequence, there is an available reduction in the standby charge, as well as an alternative calculation of the operating cost benefit. For Car A, the employment related use is less than 50 percent and, as a consequence, there is no alternative calculation of either the standby charge or the operating cost benefit. Car A Standby Charge [(2%)($30,000)(12)] Operating Cost Benefit [(9,000)($0.25)]

$7,200 2,250

Total Taxable Benefit

$9,450

Car B Standby Charge [(2/3)(11)($635)(6,000/18,337*)] Operating Cost Benefit - Lesser Of: • [(6,000)($0.25)] = $1,500 • [(1/2)($1,524)] = $762 Payment For Personal Use Total Taxable Benefit

$1,524

(

762 500) $1,786

*[(11)(1,667)] Car C Standby Charge [(2%)($30,000)(10)(7,000/16,670*)] Operating Cost Benefit - Lesser Of: • [(7,000)($0.25)] = $1,750 • [(1/2)($2,519)] = $1,260

$2,519

Total Taxable Benefit

$3,779

1,260

*[(10)(1,667)]



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SSS Solution Three - 3 Approach The appropriate comparison in evaluating the interest free loan arrangement would be to determine the cost to the Company of providing the loan, and then to compare this amount with the cost of providing an equivalent benefit in the form of straight salary. The following analysis calculates the Company ’s lowest cost route to providing Ms. Lee with the financing required, assuming she is not a shareholder.

Cost Of Providing For Interest Payments On Commercial Loan Ms. Lee can borrow on a loan at a rate of interest of 5 percent. This means that the annual interest payments on $100,000 would amount to $5,000. Because the interest on the loan can be deducted, there would be no tax consequences associated with receiving this amount of additional salary. Given this, a $5,000 increase in salary will be sufficient to carry the loan. The cost of the additional salary to the company would be calculated as follows: Salary Increase Reduction In Corporate Taxes (At 28 Percent)

$5,000 ( 1,400)

Net Cost To Company - Additional Salary

$3,600

Cost Of Providing Interest Free Loan Ms. Lee would be assessed a taxable benefit on the loan of $2,000 [(2%)($100,000)] for the first year. However, under ITA 80.5, this would be deemed interest paid. As she is using the funds provided to produce rental income, the full amount would be deductible, resulting in no net change in taxes. Given this, the analysis of this alternative only requires looking at the cost of the loan to the company: Lost Earnings On Funds Loaned (At 10 Percent) Corporate Taxes On Imputed Earnings (At 28 Percent) Net Cost To Company - Loan

(

10,000 2,800) $ 7,200

Conclusion On the basis of the preceding analysis, it can be concluded that the Company should provide an additional $5,000 in salary rather than providing Ms. Lee with an interest free loan of $100,000. This alternative results in a net cost to the Company which is $3,600 ($7,200 $3,600) lower. The major factor that pushed the outcome in this direction is the high rate of return that HER expects on invested funds.



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SSS Solution Three - 4 Case A The required information under the assumption that Merlin Industries Ltd. is a Canadian controlled private corporation is as follows: • • •

Year Of Granting - No tax effect. Year Of Exercise - No tax effect. Year Of Sale - - As the option price was greater than the fair market value of the shares at the time the options were issued, the ITA 110(1)(d) deduction can be taken. The results for this year would be as follows: Fair Market Value At Exercise [(200,000)($22)] Cost of Shares [(200,000)($15)]

$4,400,000 ( 3,000,000)

Employment Income Taxable Capital Gain [(200,000)($28 - $22)(1/2)] Increase In Net Income For Tax Purposes Deduction Under ITA 110(1)(d) [(1/2)($1,400,000)] Increase In Taxable Income

$1,400,000 600,000 (

$2,000,000 700,000) $1,300,000

Case B As the option price at the time of the grant is less than the fair market value of the shares on that date, no deduction is available under ITA 110(1)(d). Further, as Ms. Bytech has not held the shares for two years, no deduction is available under ITA 110(1)(d.1). Given this, the required information under the assumption that Merlin Industries Ltd. is a Canadian controlled private corporation is as follows: • • •

Year Of Granting - No tax effect. Year Of Exercise - No tax effect. Year Of Sale - The tax effects would be as follows: Fair Market Value At Exercise [(200,000)($22)] Cost of Shares [(200,000)($15)]

$4,400,000 ( 3,000,000)

Employment Income Taxable Capital Gain [(200,000)($28 - $22)(1/2)]

$1,400,000 600,000

Increase In Net Income For Tax Purposes Deduction Under ITA 110(1)(d) Deduction Under ITA 110(1)(d.1)

$2,000,000 N/A N/A

Increase In Taxable Income

$2,000,000



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Case C The required information under the assumption that Merlin Industries Ltd. is a Canadian public company is as follows: • •

Year Of Granting - No tax effect. Year Of Exercise - As the option price was greater than the fair market value of the shares at the time the options were issued, the ITA 110(1)(d) deduction can be taken. The results for this year would be as follows: Fair Market Value At Exercise [(200,000)($22)] Cost of Shares [(200,000)($15)]

$4,400,000 ( 3,000,000)

Employment Income = Increase In Net Income For Tax Purposes Deduction Under ITA 110(1)(d) [($1,400,000)(1/2)]

(

Increase In Taxable Income •

$1,400,000 700,000) $ 700,000

Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax Purposes and the increase in Taxable Income for the year. The taxable capital gain would be calculated as follows: Proceeds Of Disposition [(200,000)($28)] Adjusted Cost Base [(200,000)($22)]

$5,600,000 ( 2,800,000)

Capital Gain Inclusion Rate

$1,200,000 1/2

Taxable Capital Gain

$ 600,000

Case D As the option price at the time of the grant is less than the fair market value of the shares on that date, no deduction is available under ITA 110(1)(d). Further, as Merlin Industries Ltd. is a public company, no deduction could have been available under ITA 110(1)(d.1). Given this, the required information is as follows: •

Year Of Granting - No tax effect.

•

Year Of Exercise - The tax effects would be as follows: Fair Market Value At Exercise [(200,000)($22)] Cost of Shares [(200,000)($15)]

•

$4,400,000 ( 3,000,000)

Employment Income = Increase In Net Income For Tax Purposes Deduction Under ITA 110(1)(d)

$1,400,000 N/A

Increase In Taxable Income

$1,400,000

Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax Purposes and the increase in Taxable Income for the year. The taxable capital gain would be calculated as follows: Proceeds Of Disposition [(200,000)($28)] Adjusted Cost Base [(200,000)($22)]

$5,600,000 ( 2,800,000)


$1,200,000 1/2


$ 600,000



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SSS Solution Three - 5 Mrs. Smiles’ net employment income for the year would be calculated as follows: Gross Salary Commissions Registered Pension Plan Contributions Contributions To Group Disability Plan (Note One) Disability Insurance Benefit (Note One) Automobile Benefit (Note Two) Loan Benefit (Note Three) Stock Option Benefit (Note Four) Reimbursed Travel Costs (Note Five) Net Employment Income

$53,000 34,500 ( 3,200) Nil 2,178 1,222 250 Nil Nil $87,950

Note One The contributions to the group disability plan are not deductible, but can be applied against the $2,650 received under the plan during the year. Since the employer’s contributions to this plan are not a taxable benefit, the $2,650 in benefits received must be included in employment income. However, this benefit can be reduced by the $472 ($260 + $212) in total contributions that she has made in 2016 and 2017. Note Two Based on the fact that Mrs. Smiles’ employment related usage is more than 50 percent, the automobile benefit is calculated as follows: Standby Charge [(2/3)(10)($1,220 - $127)(4,000/16,670*)] Operating Cost Benefit - Lesser Of: • [(4,000)($0.25)] = $1,000 • [(1/2)($1,748)] = $874 Total Before Payments Payments For Personal Use Taxable Benefit

$1,748 874 $2,622 ( 1,400) $1,222

*[(10)(1,667)] Note Three

The benefit on the low interest loan would be calculated as follows: [($50,000)(2% - 1%)(2/4)] = $250

While most students will use the quarterly calculation, the use of actual days would result in the following acceptable alternative: [($50,000)(2% - 1%)(184 ÷ 365)] = $252 Note Four As a Canadian controlled private corporation is involved and she is still holding the shares, Mrs. Smiles does not recognize an employment income inclusion in 2017. Note Five Since all of her travel and entertainment costs were reimbursed based on actual receipts, there is no effect on her income. Her employer will have to apply the 50 percent limit on meals and entertainment to the reimbursed costs.



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Self Study Problem Four - 1

Chapter 4 Self Study Problems Self Study Problem Four - 1 Tax Payable At Alternative Rates Barbra and Sally Hines are common-law partners. Neither person has any tax credits other than the personal or common-law partner credit. This problem will consider three different Cases involving alternative levels of 2017 Taxable Income for each individual as follows: Case One

Case Two

Case Three

Barbra's Taxable Income Sally's Taxable Income

$ 42,000 180,000

$111,000 111,000

$222,000 Nil

Combined Taxable Income

$222,000

$222,000

$222,000

Required: For each Case, determine the combined federal Tax Payable for Barbra and Sally Hines for the 2017 taxation year. SOLUTION available in printed and online Study Guide.



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Self Study Problem Four - 2 (Personal Tax Credits - 5 Cases) In each of the following independent Cases, determine the maximum amount of 2017 personal tax credits, including transfers from a spouse or dependant, that can be applied against federal Tax Payable by the taxpayer. Ignore, where relevant, the possibility of pension income splitting . A calculation of Tax Payable is NOT required, only the applicable credits. 1. Leonard Wilkins has Net Income For Tax Purposes of $104,300, all of which is rental income. His spouse has Net Income For Tax Purposes of $8,720. Their daughter is 13 years old, lives with them, and has Net Income For Tax Purposes of $3,240. Their son is 24 years old and, because of a physical disability, continues to live with them. He has no income of his own. His disability is not severe enough to qualify for the disability tax credit. 2. Pete Webb has Net Income For Tax Purposes of $74,200 all of which is employment income. His employer withheld the maximum EI premium and CPP contribution. He is married to Eva Aguilar whose Net Income For Tax Purposes is $3,920. They have three children aged 6, 10, and 12. All of the children are in good health and none of them have income of their own. 3. Candace Hall is 78 years old and has Net Income For Tax Purposes of $69,420. This total is made up of OAS payments of $7,000 and pension income from her former employer. Her husband is 62 years old and has Net Income For Tax Purposes of $5,130. 4. Gladys Crawford has Net Income For Tax Purposes of $126,470, all of which is rental income. Her husband has Net Income For Tax Purposes of $2,600. They have three children, ages 10, 14, and 20. All of these children are in good health and continue to live at home. The 20 year old child has Net Income For Tax Purposes of $9,130. During the current year, Ms. Crawford pays the following medical expenses: Gladys Her Spouse 10 Year Old Child 14 Year Old Child 20 Year Old Child

$ 5,150 4,240 2,040 3,220 8,840

Total

$23,490

5. Austin Schneider was divorced from his wife several years ago. He has custody of their four children, ages 5, 8, 11, and 14. The children are all in good health. His Net Income For Tax Purposes consists of spousal support payments totaling $62,000. Only the 14 year old child had any income for the year. The 14 year old had Net Income For Tax Purposes of $10,350 during the year. SOLUTION available in printed and online Study Guide.



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Self Study Problem Four - 3 (Individual Tax Payable - 5 Cases) Ms. Wanda Sykes is 42 years old. The following five independent Cases make varying assumptions for the 2017 taxation year with respect to Ms. Sykes’ marital status, number of dependants, and type of income. In all Cases, Ms. Sykes had Net Income For Tax Purposes and Taxable Income of $78,000. In all Cases where Ms. Sykes earned employment income, her employer withheld the maximum EI premium and CPP contribution. Case A Ms. Sykes is a single mother. She has a son, John, who is 10 years old and lives with her. All of Ms. Sykes’ income is from spousal support payments. During 2017, Ms. Sykes attends university for 10 months of the year on a part time basis. Her tuition fees total $5,640. Case B Ms. Sykes is not married and has no dependants. All of her income is from employment. In December, she wins $2,000,000 in the provincial lottery. She donates $150,000 of this amount to the church where she prayed for a winning lottery ticket. She plans to claim $35,000 of this donation for a tax credit in 2017. She is not eligible for the first-time donor's super credit. Case C Ms. Sykes is married and her husband, Buff has Net Income For Tax Purposes of $7,600. All of her income is from rental properties. They have one child, Martin. He is 10 years old, has no income of his own, and qualifies for the disability tax credit. Buff’s 73 year old father, Harry, lives with them. His Net Income For Tax Purposes was $17,600. He is not mentally or physically infirm. Case D Ms. Sykes is married and her husband, Buff has Net Income For Tax Purposes of $2,540. All of her income is employment income. Wanda and Buff have two children, Janice who is 10 years of age, and Mark who is 20 years of age. Both children are in good health. As Mark has been unable to find full-time employment, he still lives at home. Mark had Net Income For Tax Purposes of $2,460 from part-time employment. Janice had no income during the year. During 2017, Ms. Sykes paid for the following medical expenses: Wanda Buff Janice Mark

$ 2,100 360 3,645 4,520

Total

$10,625

Case E Ms. Sykes is married and her husband, Buff is 66 years old. All of her income is from employment. Wanda and Buff have two children, a son aged 12 and a daughter aged 14. Both children are in good health and have no income of their own. Buff is disabled and qualifies for the disability tax credit. His Net Income For Tax Purposes consists of $9,600 in pension income from his former employer. He is not eligible for OAS. He attends university on a full time basis for 8 months of the year and his tuition costs for 2017 are $8,450. Required: In each Case, calculate Ms. Sykes’ minimum federal Tax Payable for 2017. Indicate any carry forwards available to her and her dependants and the carry forward provisions. Ignore any tax amounts that Ms. Sykes might have had withheld or paid in instalments. SOLUTION available in printed and online Study Guide.



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Self Study Problem Four - 4 (Individual Tax Payable - Simple) Mr. Dennis Lane has been a widower for several years. For 2017, both his Net Income For Tax Purposes and Taxable Income were equal $70,000, all of which is net employment income. Mr. Lane’s employer withheld $10,100 in federal income taxes, $836 for Employment Insurance premiums and $2,599 in Canada Pension Plan contributions. Because of an error by his employer, an over contribution of $35 was made for the Canada Pension Plan. Other Information: 1. Mr. Lane made political contributions to federal political parties in the amount of $450. 2. Mr. Lane has three children, aged 10, 12, and 15. They all live with him in his principal residence. His 15 year old son had Net Income For Tax Purposes of $8,200 during the 3. Mr. Lane paid $4,400 for hospital care for his 15 year old son. He paid no other medical expenses during the year. Required:

Calculate Mr. Lane’s federal tax payable (refund) for 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Four - 5 (Comprehensive Tax Payable) Mr. John Barth has been employed for many years as a graphic illustrator in Kamloops, British Columbia. His employer is a large publicly traded Canadian company. During 2017, his gross salary was $82,500. In addition, he was awarded a $20,000 bonus to reflect his outstanding performance during the year. As he was in no immediate need of additional income, he arranged with his employer that none of this bonus would be paid until 2022, the year of his expected retirement. Other Information: For the 2017 taxation year, the following items were relevant. 1. Mr. Barth’s employer withheld the following amounts from his income: Federal Income Tax Employment Insurance Premiums Canada Pension Plan Contributions United Way Donations Registered Pension Plan Contributions Payments For Personal Use Of Company Car

$16,000 836 2,564 2,000 3,200 3,600

2. During the year, Mr. Barth is provided with an automobile owned by his employer. The cost of the automobile was $47,500. Mr. Barth drove the car a total of 10,000 kilometers during the year, of which only 4,000 kilometers were related to the business of his employer. The automobile was used by Mr. Barth for ten months of the year. During the other two months, he was out of the country and he was required to leave the automobile with one of the other employees of the corporation. 3. During the year, the corporation paid Mega Financial Planners a total of $1,500 for providing counseling services to Mr. Barth with respect to his personal financial situation. 4. In order to assist Mr. Barth in purchasing a ski chalet, the corporation provided him with a 5 year loan of $150,000. The loan was granted on October 1 at an interest rate of 1 percent. Mr. Barth paid the corporation a total of $375 in interest for 2017 on January 20, 2018. Assume that, at the time the loan was granted and throughout the remainder of the year, the relevant prescribed rate was 2 percent. 5. Mr. Barth was required to pay professional dues of $1,800 during the year. 6. On June 6, 2017, when Mr. Barth exercised his stock options to buy 1,000 shares of his employer’s common stock at a price of $15 per share, the shares were trading at $18 per share. When the options were issued, the shares were trading at $12 per share. During December, 2017, the shares were sold at $18 per share. 7. Mr. Barth lives with his wife, Lynda. Lynda is blind and qualifies for the disability tax credit. She has Net Income For Tax Purposes of $1,250. 8. His 22 year old dependent daughter, Marg, is a full time student for 8 months of the year. She has Net Income For Tax Purposes and Taxable Income of $15,300. She had withheld from her employment income EI premiums of $249 [(1.63%)($15,300)] and CPP contributions of $584 [(4.95%)($15,300 - $3,500)]. Mr. Barth paid Marg’s tuition for 2017 of $6,300. She has agreed to transfer the maximum tuition amount to her father.



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9. Mr. Barth paid the following medical costs during the year: For Himself For His Wife For Marg

$ 200 3,550 720

Total

$4,470

10. Because of donations in previous years, he does not qualify for the first-time donor's super tax credit. Required:

Calculate, for the 2017 taxation year:

A. Marg’s minimum federal Tax Payable and any carry forward amounts available to her at the end of the year. B. Mr. Barth’s minimum Taxable Income and federal Tax Payable (Refund). SOLUTION available in printed and online Study Guide.

Self Study Problem Four - 6 (Tax Payable - Simple) Mr. Samuel Kern is an administrator for a publicly traded Canadian manufacturing company. His gross salary for the year ending December 31, 2017 is $67,600. Mr. Kern’s employer withheld the following amounts from his income: Federal Income Tax Employment Insurance Premiums Canada Pension Plan Contributions Registered Pension Plan Contributions Contributions To Group Disability Plan

$7,200 836 2,564 1,800 150

Mr. Kern’s employer made a matching contribution of $1,800 to his registered pension plan and a $150 matching contribution for the group disability insurance. Other Information: 1. Mr. Kern is provided with an automobile that has been leased by his employer. The lease payments are $815 per month, an amount which includes all taxes and an $89 monthly payment for insurance. The total operating costs of the car were $4,600 for the year and they were paid by the employer. The car is used by him for 9 months of the year and, during the months of non-use, it must be returned to the premises of his employer. During 2017, he drives it a total of 32,000 kilometers. Of this total, 29,000 kilometers were for travel required in pursuing the business of his employer and the remainder was for personal use. He reimbursed his employer $50 per month of use for his personal use of the automobile. 2. During 2017, the disability plan provided him with benefits of $1,650 after he was injured. Mr. Kern began making contributions to this plan in 2016 and paid $200 for that year. The plan provides periodic benefits that compensate for lost employment income. 3. Mr. Kern was required to pay 2017 dues to his professional association in the amount of $1,233. 4. Mr. Kern was given options to buy 200 shares of his employer’s stock at a price of $75 per share 2 years ago. At the time the options were issued, the shares were trading at $70 per share. On June 1, 2017, Mr. Kern exercises the options. At the time of exercise, the shares are trading at $83 per share. He is still holding the shares at the end of the year.



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5. Mr. Kern donated $500 to the Canadian Cancer Society in 2016, but forgot to claim the donation in 2016. He has found the donation receipt in his files. He is not eligible for the first-time donor's super credit. 6. Mr. Kern lives with his wife and 23 year old son, David. His wife has Net Income For Tax Purposes of $3,660. David is a full time student at university for 8 months of the year and has Net Income For Tax Purposes of $5,780. Mr. Kern has paid David’s tuition for 2017 of $6,700, and in return, David has agreed to transfer the maximum tuition amount to his father. 7. Mr. Kern paid the following medical costs: For Himself For His Wife For David

$2,100 770 3,260

Total

$6,130

Required: Calculate, for the 2017 taxation year, Mr. Kern’s minimum Taxable Income and federal Tax Payable (Refund). Indicate any carry forwards available to him and his dependants and the carry forward provisions. Ignore all GST considerations. SOLUTION available in printed and online Study Guide.

Self Study Problem Four - 7 (Comprehensive Tax Payable) Mr. Lance Strong is a skilled carpenter who has been employed by a large public company for 2 years. For 2017, his annual salary is $72,000. He is required to pay for his own tools, but is reimbursed for out-of-pocket travel costs when he is required to work away from his employer’s municipality for more than 12 hours. His disability plan provides periodic benefits that are designed to compensate for lost employment income. During 2017, Mr. Strong’s employer withheld the following amounts from his compensation: EI Premiums CPP Contributions RPP Contributions Contributions To Disability Plan (Employer Makes Matching Contribution)

$ 836 2,564 4,200 430

Mr. Strong is married and has two children aged 14 and 16. Neither child has any income during 2017. His spouse has 2017 income of $5,600. Mr. Strong’s 67 year old mother lives with the family. Her Net Income For Tax Purposes of $8,500 consists of OAS payments and investment income. She is not mentally or physically infirm. Other Information: 1. Mr. Strong is provided with an automobile by his employer. During 2017, it is driven 32,000 kilometers, of which 15,000 are employment related. The automobile is leased by the employer at a monthly rate of $565, including HST of $65. The monthly rate also includes a payment for insurance of $40 per month. The automobile was used by Mr. Strong for 10 months during 2017. During the 2 months that he did not use the automobile, he was required to return it to his employer's garage. 2. During 2017, Mr. Strong was required to buy $2,000 in carpentry tools in order to carry out his employment duties.



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3. Mr. Strong’s employer encourages its employees to take university courses by paying their tuition fees. During 8 months of 2017, Mr. Strong was in part time attendance for two university courses. The first course was devoted to 16th century liturgical chants and the second was a course in spoken French. The tuition for each course was $600, with the employer paying the full amount. The employer was particularly interested in the French course as it would allow Mr. Strong to deal more effectively with francophone clients. 4. Mr. Strong incurred $4,600 in travel costs during 2017, all of which were reimbursed by his employer. 5. When Mr. Strong began working for his employer in the previous year, he put his house on the market. Due to a major rezoning issue, his house did not sell until 2017. Mr. Strong purchased a heritage home that was 50 kilometers closer to his employer’s main office. To assist with the relocation, on April 1, 2017, his employer provided an interest free loan of $150,000. It must be repaid in full on April 1, 2020. Assume that during the first two quarters of 2017 the prescribed rate was 2 percent and that during the last two quarters it declined to 1 percent. 6. During 2017, Mr. Strong pays for the following eligible medical costs: For For For For

Himself His Spouse His Two Children His Mother

Total Medical Costs

$1,250 2,300 850 1,960 $6,360

7. During 2017, Mr. Strong donates cash of $1,200 to his church. He also donates carpenter services with a market value of $1,500. He does not qualify for the first-time donor's super tax credit. Required: A. Determine Mr. Strong’s minimum Net Income For Tax Purposes for the 2017 taxation year. B. Determine Mr. Strong’s minimum Taxable Income for the 2017 taxation year. C. Based on your answer in Part B, determine Mr. Strong’s federal Tax Payable for the 2017 taxation year. Ignore any amounts that might have been withheld by his employer or paid in instalments. SOLUTION available in printed and online Study Guide.



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Self Study Problem Four - 8 (Comprehensive Tax Payable) Mr. Andrew Bosworth works for a publicly traded company. During 2017, his base salary was $180,000. In addition, he received commissions totaling $11,500 and a bonus of $38,000. None of the bonus will be paid until January, 2018. During 2017, his employer withholds the following amounts from his salary: Registered Pension Plan Contributions EI Premiums CPP Contributions Contributions To The Local United Way Life Insurance Premiums (Employer Makes Matching Contribution)

$5,200 836 2,564 2,400 460

Mr. Bosworth is married and has two children. Mr. Bosworth’s daughter is 12 years old and has been blind since birth. As Mr. Bosworth’s spouse is responsible for her care, she has not taken a full-time position of employment. She has Net Income For Tax Purposes of $6,450 resulting from part-time employment. His 19 year old son attends a local university and lives at home. His tuition for the 8 months of attendance during 2017 was $7,650. His father paid the tuition and, in addition, paid $560 in ancillary fees and $425 for textbooks. The ancillary fees were charged to all students attending the university. The son had 2017 Net Income For Tax Purposes of $12,450 resulting from investments he inherited from his grandfather. The son’s only tax credit is the basic personal credit for single persons. He has agreed to transfer the maximum tuition amount to his father. Other Information 1. Mr. Bosworth’s employer provides him with an automobile that is leased for $925 per month, including a $75 per month payment for insurance. During 2017, the automobile is driven a total of 62,000 kilometers, of which 41,000 involve employment related activities. Mr. Bosworth paid all of the $10,300 in 2017 operating costs and is not reimbursed by his employer. The automobile was used by Mr. Bosworth throughout 2017. 2. In 2016, Mr. Bosworth received options to acquire 5,000 shares of his employer’s common stock at a price of $9.75 per share. This was the market price of the shares at the time the options were granted. On July 1, 2017, when the shares were trading at $12.35, Mr. Bosworth exercises all of these options. He is still holding the acquired shares at the end of 2017. 3. Mr. Bosworth is not reimbursed for advertising, entertainment or travel costs. In addition to the operating costs for his vehicle, he paid for the following employment related costs: Meals While Traveling Hotels Advertising Entertainment

$ 6,420 10,350 12,400 6,500

Total

$35,670

4. Mr. Bosworth’s employer provides all employees with a luxury weekend at a local resort. The cost of the gift is $2,500 for each employee.



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5. Mr. Bosworth pays for the following medical expenses during 2017: For For For For

Himself His Spouse His Son His Daughter (including $9,000 in attendant care)

Total

$ 1,200 2,250 2,340 11,250 $17,040

6. Because of his ongoing interest in Elizabethan drama, Mr. Bosworth enrolls in a course on Shakespeare’s tragedies at the local university. His tuition was $1,670 and his required textbooks cost $165. The duration of the course was 4 months. 7. Mr. Bosworth is not eligible for the first-time donor's super credit. Required: A. Determine Mr. Bosworth’s minimum Net Income For Tax Purposes for the 2017 taxation year. B. Determine Mr. Bosworth’s minimum Taxable Income for the 2017 taxation year. C. Based on your answer in Part B, determine Mr. Bosworth’s federal Tax Payable for the 2017 taxation year. Ignore any amounts that might have been withheld by his employer, any amount paid in instalments and any considerations related to HST, GST, or PST.



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SSS Problem Four - 1


SSS Problem Four - 1 (Personal Tax Credits - 5 Cases) In each of the following independent Cases, determine the maximum amount of 2017 personal tax credits, including transfers from a spouse or dependant, that can be applied against federal Tax Payable by the taxpayer. A calculation of Tax Payable is NOT required, only the applicable credits. 1. Jack Brown has Net Income For Tax Purposes of $97,000, all of which is employment income. His employer has withheld and remitted the required EI and CPP amounts. He is married to Janice Brown whose Net Income For Tax Purposes is $7,250. They have three children aged 7, 9, and 11. All of the children are in good health. None of them have income of their own. 2. Marion Barkin was divorced from her husband several years ago. She has custody of their three children, ages 9, 12, and 15. The children are all in good health. Her Net Income For Tax Purposes consists of spousal support payments totaling $48,000 per year. Only the 15 year old child had any income for the year. The 15 year old had Net Income For Tax Purposes of $9,500 during the year. 3. John Appleton has Net Income For Tax Purposes of $86,500, none of which is employment income or income from self-employment. His spouse has Net Income For Tax Purposes of $5,650. Their daughter is 15 years old, lives with them, and has Net Income For Tax Purposes of $1,550. Their son is 22 years old and, because of a physical disability, continues to live with them. He has no income of his own. His disability is not severe enough to qualify for the disability tax credit. 4. Sarah Pale is 67 years old and has Net Income For Tax Purposes of $52,500. This total is made up of OAS payments and pension income from her former employer. Her husband is 62 years old and has Net Income For Tax Purposes of $4,840. Ignore the possibility of splitting Sarah's pension income. 5. Martin Land has Net Income For Tax Purposes of $126,420, all of which is rental income. His wife has Net Income For Tax Purposes of $1,200. They have three children, ages 14, 16, and 19. All of these children are in good health and continue to live at home. The 19 year old child has Net Income For Tax Purposes of $7,240. During the current year, Mr. Land pays the following medical expenses: Himself His Spouse 14 Year Old Child 16 Year Old Child 19 Year Old Child

$ 2,450 3,240 2,620 1,450 4,560

Total

$14,320



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SSS Problem Four - 2 (Individual Tax Payable - 7 Cases) There are seven independent cases which follow. Each case involves various assumptions as to the amount and type of income earned by Mr. Bob Barnes during 2017, as well as to other information that is relevant to the determination of his Tax Payable. Bob's Net Income For Tax Purposes is equal to his Taxable Income in all Cases. In those cases where we have assumed that the income was from employment, the employer withheld the maximum EI premium and CPP contribution. Case 1 Bob Barnes is 52 years old, has employment income of $75,000, and makes contributions of $4,500 to registered charities. Bob qualifies for the first-time donor's super credit. He is not married and has no dependants. Case 2 Bob Barnes is 58 years old and has employment income of $75,000. His common-law partner is 53 years old and has income of $6,480. They have an adopted son who is 19 years old and lives at home. Bob and his partner have medical expenses of $4,300. Medical expenses for the son total $5,600. The son has Net Income For Tax Purposes of $4,200. Case 3 Bob Barnes is 58 years old and has income from investments of $95,000. He is divorced and has been awarded custody of his 21 year disabled son. The son qualifies for the disability tax credit. He has Net Income For Tax Purposes of $8,000, and is dependent on his father for support. Case 4 Bob and his wife Gabrielle are both 67 years of age. Gabrielle is sufficiently disabled that she qualifies for the disability tax credit. The components of the income earned by Bob and Gabrielle are as follows: Bob Interest Canada Pension Plan Benefits Old Age Security Benefits Income From Registered Pension Plan

$

750 8,600 7,000 34,500

Total Net Income

$50,850

Gabrielle $

750 Nil 7,000 1,450 $9,200

Case 5 Bob Barnes is 46 years old and has employment income of $162,000. His wife Gabrielle is 48 years old and has Net Income For Tax Purposes of $8,400. They have a 20 year old son who lives at home. He is dependent because of a physical infirmity. However, he is able to attend university on a full time basis for 8 months during 2017. Bob pays his tuition fees of $7,900, as well as $725 for the textbooks that he requires in his program. The son has Net Income For Tax Purposes of $10,000. He agrees to transfer the maximum tuition amount to his father. Case 6 Bob Barnes is 43 years old and has rental income of $95,000. His wife died last year. He has two children. Summer is 12, is in good health, and has no income during the year. His son, Martin is 15 and is physically infirm, but not sufficiently to qualify for the disability tax credit. He has income from part time work designing websites of $7,250.



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Case 7 Bob Barnes is 45 years old and has employment income of $75,000. His wife Gabrielle is 37 years old and has Net Income For Tax Purposes of $4,600. They have no children. However, they provide in home care for Gabrielle's father who is 62 years old, dependent because of a physical infirmity and has no income of his own. His disability is not severe enough to qualify for the disability tax credit. Also living with them is Bob's 67 year old father. He is in good physical and mental health and has Net Income For Tax Purposes of $18,300. Required: In each Case, calculate Bob Barnes' minimum federal Tax Payable for 2017. Indicate any carry forwards available to him and his dependants and the carry forward provisions. Ignore any amounts Bob might have had withheld or paid in instalments.

SSS Problem Four - 3 (Comprehensive Tax Payable) Ms. Angelina Bradmore is a very successful salesperson for a large publicly traded company. For 2017, her base salary is $250,000. In addition, she received commissions totaling $12,000 during the year. For 2017, she also received a bonus of $32,000, one-half of which was paid during 2017, with the remainder due on January 31, 2018. During 2017, her employer withholds the following amounts from her salary: Registered Pension Plan Contributions EI Premiums CPP Contributions Contributions To The Local United Way Life Insurance Premiums (Employer Makes Matching Contribution)

$7,500 836 2,564 1,200 460

Ms. Bradmore is divorced and has custody of her 12 year old son and 10 year old daughter, both of whom live with her. Her daughter, who is legally blind, has no income of her own during 2017. Her son has summer job employment income of $2,350. Other Information 1. Ms. Bradmore’s employer provides her with an automobile that has a cost of $47,460, including applicable HST. During 2017, the automobile is driven 53,000 kilometres, of which 48,000 were for employment related activities. Ms. Bradmore pays all of the operating costs for the car. For 2017, these totaled $7,950, with no reimbursement from her employer. The automobile was used by Ms. Bradmore’s throughout 2017. 2. Because of the high level of her salary, Ms. Bradmore is required to pay her own advertising and travel costs. In addition to the operating costs for her vehicle, she paid for the following employment related costs: Meals While Travelling Hotels Advertising Entertainment

$ 4,500 9,000 11,000 5,000

Total

$29,500



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3. Ms. Bradmore received options to acquire 2,500 shares of her employer’s common stock 2 years ago. The option price was $50 per share, the market value of the common shares at the time the options were granted. During July, 2017, after the market price of the shares reaches $72 per share, Ms. Bradmore exercises all of these options. She is still holding the shares at the end of the year. 4. Her employer provides all employees with gifts on their birthday. For 2017, Angelina received a $250 certificate for a massage and facial at a local spa along with $200 in cash. 5. Ms. Bradmore contributes $5,000 to the Save The Children Fund, a registered Canadian charity. As Ms. Bradmore makes some amount of charitable contributions each year, she is not eligible for the first-time donor's super credit. 6. Ms. Bradmore pays for the following medical expenses during 2017: For Herself For Her Son For Her Daughter (All Attendant Care)

$ 4,800 3,200 2,400

Total

$10,400

7. In order to improve her ability to deal with people, Ms. Bradmore enrolled in a part time, human resources program at a local university. Her 2017 tuition totalled $1,890 and she was required to purchase textbooks with a cost of $220. The duration of the course was 4 months. Required: A. Determine Ms. Bradmore’s minimum Net Income For Tax Purposes for the 2017 taxation year. B. Determine Ms. Bradmore’s minimum Taxable Income for the 2017 taxation year. C. Determine Ms. Bradmore’s federal Tax Payable for the 2017 taxation year. Ignore any amounts that might have been withheld by her employer or paid in instalments.



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SSS Solution Four - 1

Chapter 4 Supplementary Self Study (SSS) Solutions SSS Solution Four - 1 The amount of the personal tax credits would be as follows: 1. Mr. Brown will qualify for the following credits: Basic Personal Amount Spousal ($11,635 - $7,250) EI (Maximum) CPP (Maximum) Canada Employment

$11,635 4,385 836 2,564 1,178

Total Credit Base Rate

$20,598 15%

Total Credits

$ 3,090

2. Ms. Barkin will qualify for the following credits: Basic Personal Amount Eligible Dependant

$11,635 11,635


$23,270 15%

Total Credits

$ 3,491

Note The eligible dependant credit can be taken for any child. It should not be claimed for the 15 year old as the amount of the credit would be reduced due to his income. 3. Mr. Appleton will qualify for the following credits: Basic Personal Amount Spousal ($11,635 - $5,650) Canada Caregiver - 22 Year Old Son

$11,635 5,985 6,883


$24,503 15%

Total Credits

$ 3,675



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4. Ms. Pale will qualify for the following tax credits: Basic Personal Amount Spousal ($11,635 - $4,840) Age [$7,225 - (15%)($52,500 - $36,430)] Pension Income

$11,635 6,795 4,815 2,000


$23,245 15%

Total Credits

$ 3,487

Note that, because her income is below the income threshold, there will be no clawback of Ms. Pale’s OAS receipts. 5. Mr. Land will qualify for the following tax credits:

Note

Basic Personal Amount Spousal ($11,635 - $1,200) Medical Expenses (See Note)

$11,635 10,435 11,835


$33,905 15%

Total Credits

$ 5,086

The claim for medical expenses is determined as follows:

Expenses For Martin, His Spouse, And Under 18 Dependants ($2,450 + 3,240 + $2,620 + $1,450) Reduced By The Lesser Of: • [(3%)($126,420)] = $3,793 • 2017 Threshold Amount = $2,268 19 Year Old’s Medical Expenses Reduced By The Lesser Of: • [(3%)($7,240)] = $217 • $2,268 Total Medical Expense Claim

$9,760

( 2,268) $4,560 (

217)

4,343 $11,835



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SSS Solution Four - 2 Case 1 The solution for this Case would be as follows: Tax On First $45,916 Tax On Next $29,084 ($75,000 - $45,916) At 20.5 Percent

$ 6,887 5,962

Federal Tax Before Credits Basic Personal Amount EI CPP Canada Employment

$12,849 ($11,635) ( 836) ( 2,564) ( 1,178)

Credit Base ($16,213) Rate 15% Charitable Donations - Including FDSC (Note) [(15%)($200) + (29%)($4,500 - $200) + (25%)($1,000)]

(

2,432)

(

1,527)

Federal Tax Payable

$ 8,890

Note As none of his income is taxed at 33 percent, this rate will not be applicable to the calculation of the charitable donations tax credit.

Case 2 The solution for this Case is as follows: Tax On First $45,916 Tax On Next $29,084 ($75,000 - $45,916) At 20.5 Percent

$ 6,887 5,962

Federal Tax Before Credits Basic Personal Amount Spousal ($11,635 - $6,480) EI CPP Canada Employment Medical Expenses (See Note)

$12,849 ($11,635) ( 5,155) ( 836) ( 2,564) ( 1,178) ( 7,524)

Credit Base Rate

($28,892) 15%

(

Federal Tax Payable Note

4,334) $ 8,515

The base for the medical expense tax credit would be calculated as follows:

Bob And His Partner Reduced By The Lesser Of: • [(3%)($75,000)] = $2,250 • 2017 Threshold Amount = $2,268 Son’s Medical Expenses Reduced By The Lesser Of: • [(3%)($4,200)] = $126 • $2,268 Total Credit Base

$4,300 ( 2,250) $5,600 (

126)

5,474 $7,524



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Case 3 The solution for this Case can be completed as follows: Tax On First $91,831 Tax On Next $3,169 ($95,000 - $91,831) At 26 Percent

$16,300 824

Federal Tax Before Credits Basic Personal Amount Eligible Dependant Including Infirm Amount ($11,635 + $2,150 - $8,000) Additional Caregiver Amount (Note) Transfer Of Son's Disability

$17,124 ( ( (

Credit Base Rate

($26,631) 15%

($11,635) 5,785) 1,098) 8,113) (

Federal Tax Payable

3,995) $13,129

Note As the income adjusted eligible dependant amount is less than the regular Canada caregiver amount, there is an additional amount of $1,098 ($6,883 - $5,785).

Case 4 The solution for this Case is as follows: Tax On First $45,916 Tax On Next $4,934 ($50,850 - $45,916) At 20.5 Percent

$6,887 1,011

Federal Tax Before Credits Basic Personal Amount Spousal Including Infirm Amount ($11,635 + $2,150 - $9,200) Additional Caregiver Amount (Note) Age [$7,225 - (15%)($50,850 - $36,430)] Pension Spouse’s Age Spouse’s Disability Spouse’s Pension (= RPP Payments)

$7,898 ( ( ( ( ( ( (

Credit Base Rate

($42,368) 15%

($11,635) 4,585) 2,298) 5,062) 2,000) 7,225) 8,113) 1,450)

Federal Tax Payable

(

6,355) $ 1,543

Note As the income adjusted spousal amount is less than the regular Canada caregiver amount, there is an additional amount of $2,298 ($6,883 - $4,585). The Old Age Security and Canada Pension Plan receipts are not eligible for the pension income credit, only the Registered Pension Plan income is eligible. As Gabrielle’s income is below the income threshold, there is no reduction in her age credit.



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Case 5 The solution for this Case can be completed as follows: Tax On First $142,353 Tax On Next $19,647 ($162,000 - $142,353) At 29 Percent

$29,436 5,698

Federal Tax Before Credits Basic Personal Amount Spousal ($11,635 - $8,400) Canada Caregiver - Son EI CPP Canada Employment Transfer From Son (Note)

$35,134 ($11,635) ( 3,235) ( 6,883) ( 836) ( 2,564) ( 1,178) ( 5,000)

Credit Base Rate

($31,331) 15%

(

Federal Tax Payable

4,670) $30,464

Note: The transfer from the son is as follows: Tuition Fees Maximum Transfer

$ 7,900 ( 5,000)

Carry Forward (For Son’s Use Only)

$ 1,900

The son's Tax Payable is completely eliminated by his basic personal credit. He can transfer a maximum of $5,000 of his tuition amount to his father. The remaining $1,900 can be carried forward indefinitely, but must be used by the son.

Case 6 The solution for this Case is as follows: Tax On First $91,831 Tax On Next $3,169 ($95,000 - $91,831) At 26 Percent

$16,300 824

Federal Tax Before Credits Basic Personal Amount Eligible Dependant - Summer Canada Caregiver For Child

($11,635) ( 11,635) ( 2,150)

$17,124

Credit Base Rate

($25,420) 15%

Federal Tax Payable

(

3,813) $13,311

Note Bob has claimed Summer as his eligible dependant because her income is less than Martin's. This means that there is no erosion of the base for the eligible dependant credit.



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Case 7 The solution for this Case can be completed as follows: Tax On First $45,916 Tax On Next $29,084 ($75,000 - $45,916) At 20.5 Percent

$ 6,887 5,962

Federal Tax Before Credits Basic Personal Amount Spousal ($11,635 - $4,600) Canada Caregiver - Gabrielle's Father Canada Caregiver - Bob's Father EI CPP Canada Employment

$12,849 ($11,635) ( 7,035) ( 6,883) Nil ( 836) ( 2,564) ( 1,178)

Credit Base Rate

($30,131) 15%

Federal Tax Payable

(

4,520) $ 8,329

Because he is infirm, Gabrielle's father is eligible for the Canada caregiver credit. However, as Bob's father is in good health, he is not eligible for this credit.



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SSS Solution Four - 3 Part A Ms. Bradmore’s minimum Net Income For Tax Purposes would be calculated as follows: Salary $250,000 Additions: Commissions 12,000 Bonus (Note 1) 16,000 Life Insurance Premiums (Employer’s Contribution) 460 Automobile Benefit (Note 2) 2,847 Gift (Cash Gifts Create A Taxable Benefit) 200 Stock Option Benefit (Note 3) 55,000 Deductions: RPP Contributions ( 7,500) Employment Expenses (Note 4) ( 18,450) Net Income For Tax Purposes

$310,557

Note 1 Only the $16,000 [(1/2)($32,000)] of the bonus that was received during the year is included in her income for the current year. Note 2

The standby charge would be calculated as follows: [(2%)($47,460)(12)(5,000 ÷ 20,004)] = $2,847

There would be no operating cost benefit as Ms. Bradmore paid for all of the operating costs. Note 3 The total employment income inclusion would be $55,000 [(2,500)($72 $50)]. As the option price was equal to the market price at the time the options were issued, one-half of this amount can be deducted in the determination of Taxable Income (Part B). Note 4

Potentially deductible expenses are as follows: Car Operating Costs [(48,000 ÷ 53,000)($7,950)] Meals [(50%)($4,500)] Hotels

$ 7,200 2,250 9,000

Subtotal for ITA 8(1)(h) and (h.1) Advertising Entertainment [(50%)($5,000)]

$18,450 11,000 2,500

Total for ITA 8(1)(f) - Limited To Commissions

$31,950

All of these costs can be deducted under ITA 8(1)(f). However, the total deduction is limited to her commission income which is only $12,000. Alternatively, the car operating costs, meals, and hotels, can be deducted under ITA 8(1)(h) and (h.1). As shown above, this total would be $18,450. As Angelina cannot simultaneously use ITA 8(1)(f) and the combination of ITA 8(1)(h) and (h.1), she will minimize her Net Income For Tax Purposes by deducting $18,450 under the latter provisions.



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Part B Ms. Bradmore’s minimum Taxable Income would be calculated as follows: Net Income For Tax Purposes Stock Option Deduction [(1/2)($55,000)]

(

Taxable Income

$310,557 27,500) $283,057

Part C Based on the Taxable Income calculated in Part B, Ms. Bradmore’s federal Tax Payable would be calculated as follows: Tax On First $202,800 Tax On Next $80,257 ($283,057 - $202,800) At 33 Percent

$46,966 26,485

Federal Tax Before Credits

$73,451

Basic Personal Amount Eligible Dependant ($11,635 + $2,150) (Note 5) Transfer Of Daughter’s Disability Disability Supplement (Note 6) EI Premiums CPP Contributions Canada Employment Tuition Medical Expenses (Note 7)

( 13,785) ( 8,113) ( 4,733) ( 836) ( 2,564) ( 1,178) ( 1,890) ( 8,132)

Credit Base Rate

($52,866) 15%

Charitable Donations (Note 8) Federal Tax Payable

($11,635)

(

7,930)

(

2,010) $63,511

Note 5 Ms. Bradmore will designate her daughter as her eligible dependant because if she designated her son, the base for credit would be eroded by his income. As the daughter is infirm, she is eligible for the extra infirm amount of $2,150. This latter point, however, is not a factor in choosing her as the eligible dependant. If she had not been designated as the eligible dependant, the same $2,150 would have been available as the Canada caregiver for an infirm minor child. Note 6 Since the attendant care costs claimed as medical expenses are less than the threshold, there is no reduction in the disability supplement. Note 7 The base for Ms. Bradmore’s medical expense credit can be calculated as follows: Eligible Medical Expenses Lesser Of: • [(3%)($310,557)] = $9,317 • 2017 Threshold Amount = $2,268

$10,400

Allowable Medical Costs

$ 8,132

( 2,268)

Note 8 The charitable donations credit for the total donations of $6,200 ($5,000 + $1,200) would be calculated as follows:



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[(15%)(A)] + [(33%)(B)] + [(29%)(C)], where A =$200 B =The Lesser Of: • $6,200 - $200 = $6,000 • $283,057 - $202,800 = $80,257 (Note Taxable Income is used here) C = Nil [$6,200 - ($200 + $6,000)] The charitable donation credit would be equal to $2,010, calculated as [(15%)($200)] + [(33%)($6,000)].



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Self Study Problem Five - 1

Chapter 5 Self Study Problems Self Study Problem Five - 1 (CCA And Tax Planning) For its taxation year ending December 31, 2017, Northcote Inc. has determined that its Net Income For Tax Purposes, before any deduction for CCA amounts, is equal to $328,000. The Company does not have any Division C deductions, so whatever amount is determined as Net Income For Tax Purposes will also be the amount of Taxable Income for the taxation year. On January 1, 2017, the Company has the following UCC balances: Class 1 (Building Acquired In 2005) Class 8 Class 10

$2,597,000 718,000 524,000

During 2017, the cost of additions to Class 10 amounted to $374,000, while the proceeds from dispositions in this class totalled $234,000. In no case did the proceeds of disposition exceed the capital cost of the assets retired and there were still assets in Class 10 on December 31, 2017. There were no acquisitions or dispositions in either Class 1 or Class 8 during 2017. Required: A. Calculate the maximum CCA that could be taken by Northcote Ltd. for the taxation year ending December 31, 2017. Your answer should include the maximum that can be deducted for each CCA class. B. As Northcote’s tax advisor, indicate how much CCA you would advise the Company to take for the 2017 taxation year, and the specific classes from which it should be deducted. Provide a brief explanation of the reasons for your recommendation. In providing this advice, do not take into consideration the possibility that losses can be carried either forward or back. SOLUTION available in printed and online Study Guide.



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Self Study Problem Five - 2 (CCA Calculations) Mr. Marker has been the sole proprietor of Marker Enterprises since its establishment 10 years ago. This business closes its books on December 31 and, on January 1, 2017, the following information on its assets was contained in the records of the business: Type Of Asset Building (Class 1) Equipment (Class 8) Vehicles (Class 10) Equipment (Class 53)*

Undepreciated Capital Cost

Original Capital Cost

$115,000 96,000 6,700 75,000

$190,000 130,000 30,000 100,000

CCA Rate 4 20 30 50

Percent Percent Percent Percent

*The manufacturing and processing equipment was acquired in 2016. Other Information: 1. During the year ending December 31, 2017, Mr. Marker’s business acquired additional Class 8 equipment at a total cost of $52,000. This new equipment replaced equipment that had an original cost of $75,000, which was sold during the year for total proceeds of $35,000. 2. During the year ending December 31, 2017, Mr. Marker acquired a used automobile to be used in his business for a total cost of $8,000. Also during this year, Mr. Marker sold one of the trucks that was used in his business for proceeds of $25,000. This truck, which had an original capital cost of $20,000, had achieved a high value as the result of its extra features, which were no longer available on later models. 3. As the result of a decision to lease its premises in future years, Mr. Marker sold his building for total proceeds of $260,000. Of the $260,000 received, $150,000 is for the land on which the building is situated. The adjusted cost base of the land was equal to the $150,000 proceeds of disposition. Required: Calculate the total effect of all of the preceding information on Mr. Marker’s Net Income For Tax Purposes for the year ending December 31, 2017. Your answer should include the maximum CCA that can be deducted by Mr. Marker for each class. In addition, calculate the January 1, 2018 UCC balance for each Class. SOLUTION available in printed and online Study Guide.



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Self Study Problem Five - 3 (CCA Calculations Over 5 Years) Golden Dragon Ltd. begins operations in Vancouver on September 1, 2012. These operations include an elegant sit down restaurant specializing in northern Chinese cuisine, as well as a take out operation that provides home delivery throughout the city. To facilitate this latter operation, on October 12, 2012, the Company acquires 20 small cars to be used as delivery vehicles. The cost of these cars is $12,000 each and, for purposes of calculating CCA, they are classified as Class 10 assets. During the first year of operations, the Company establishes a fiscal year ending on December 31. In the fiscal periods 2013 through 2017, the following transactions take place with respect to the Company ’s fleet of delivery cars: 2013 The Company acquires five more cars at a cost of $12,500 each. In addition, three of the older cars are sold for total proceeds of $27,500. 2014 There are no new acquisitions of cars during this year. However, four of the older cars are sold for total proceeds of $38,000. 2015 In December, 2015, 13 of the original cars and 3 of the newer cars are sold for $128,000. It was the intent of the Company to replace these cars. However, because of a delay in delivery by the car dealer, the replacement did not occur until January, 2016. 2016 In January of 2016, the Company takes delivery of 25 new delivery cars at a cost of $16,000 each. No cars are disposed of during 2016. 2017 In March, 2017, there is a change in management at Golden Dragon Ltd. They conclude that the Company ’s take out operation is not in keeping with the more elegant image that the sit down restaurant is trying to maintain. As a consequence, the take out operation is closed, and the 27 remaining delivery cars are sold. Because of the large number of cars being sold, the total proceeds are only $268,000. Golden Dragon Ltd. takes maximum CCA in each of the years under consideration. Required: For each of the fiscal years 2012 through 2017, calculate CCA, recapture, or terminal loss for Golden Dragon’s fleet of cars. In addition, indicate the January 1 UCC for each of the years 2013 through 2018. SOLUTION available in printed and online Study Guide.



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Self Study Problem Five - 4 (CCA Calculations) Opening Balances The taxation year of Burton Steel Ltd. ends on December 31. On January 1, 2017, the UCC balances for the various classes of assets owned by the Company are as follows: Class Class Class Class Class Class

3 - Building 8 - Office Furniture And Equipment 10 - Vehicles 13 - Leasehold Improvements 50 - Computer Hardware 53 - Manufacturing Equipment*

$1,562,000 278,000 204,000 106,250 11,000 126,000

*The manufacturing equipment was acquired in 2016. Acquisitions During the year ending December 31, 2017, the following acquisitions of assets were made. Class Class Class Class Class

1 - Building (Note 1) 8 - Office Furniture And Equipment 10 - Vehicles (Note 2) 13 - Leasehold Improvements 50 - Computer Hardware

$258,000 72,000 63,000 58,000 17,000

Note 1 The $423,000 total cost of the Building was allocated $258,000 to the building itself, and $165,000 to the land. The Building is new and will be used 100 percent for non-residential activity, none of which involves manufacturing and processing activity. It will be allocated to a separate Class 1. Note 2 The addition to Class 10 was made up of three passenger vehicles, with a cost of $21,000 each. Dispositions

During this same period, the following dispositions occurred:

Class 8 - Office furniture and equipment were sold for cash proceeds of $42,000. The original cost of these assets totalled $38,000. Class 10 - A delivery truck with an original cost of $37,000 was sold for $12,000. Class 53 - Since Burton Steel Ltd. will only be involved in retail operations in the future, all of the manufacturing equipment was sold for total proceeds of $89,000. The original cost of the equipment was $168,000. Other Information: 1. The Company leases its main office building for $47,000 per year. The lease was negotiated on January 1, 2015 and had an original term of eight years. There are two renewal options on the lease, each for a period of two years. The Company made $125,000 of leasehold improvements immediately after signing the lease. No further improvements were made until the current year. 2. During the year ending December 31, 2017, some of the Company’s office furniture and equipment was destroyed in a small fire. At the time of the accident, the fair market value of the destroyed property was $19,000. However, proceeds from the Company’s insurance policy amounted to only $11,000. The original cost of the destroyed property was $18,000. 3. Maximum CCA has always been taken by Burton Steel.



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Required: Calculate the maximum CCA that can be taken by Burton Steel Ltd. on each class of assets for the year ending December 31, 2017, and calculate the UCC for each class of assets on January 1, 2018. In addition, determine the amount of any capital gain, recapture, or terminal loss that arises. Ignore GST/HST/PST considerations. SOLUTION available in printed and online Study Guide.

Self Study Problem Five - 5 (Purchase And Sale Of Goodwill) Traxit is a Canadian public company with a taxation year that ends on December 31. It is the policy of Traxit Ltd. to claim maximum CCA for all Classes. On January 1, 2017, Traxit had no balance in its Class 14.1. What follows is two independent cases involving payments for goodwill and receipts for goodwill. In each case assume that Traxit has no other transactions during 2017 or 2018 that involve Class 14.1. Case One During 2017, Traxit acquires two businesses. With the first acquisition, a payment is made for goodwill of $56,000. With the second, a payment of $124,000 is made for goodwill. Both businesses are absorbed into the other operations of Traxit. During 2018, Traxit sells a portion of its business and, as a consequence, receives a payment for goodwill of $97,000. Case Two During 2017, Traxit acquires two businesses. With the first acquisition, a payment is made for goodwill of $34,000. With the second, a payment of $47,000 is made for goodwill. Both businesses are absorbed into the other operations of Traxit. During 2018, Traxit sells a portion of its business and, as a consequence, receives a payment for goodwill of $85,000. Required: Determine the tax consequences for the years 2017 and 2018 in each of these two cases. Your answer should include the January 1, 2019 UCC balance for Class 14.1. SOLUTION available in printed and online Study Guide.



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Self Study Problem Five - 6 (CCA And Tax Planning) On January 1, 2017, Kars Ltd. has the following UCC balances: Class Class Class Class Class

8 10 12 13 14.1 (See Note)

$163,000 112,000 42,000 204,000 153,000

Note On December 31, 2016, Kars Ltd. had a CEC balance of $153,000. This balance resulted from the purchase, several years ago, of an unlimited life franchise. As of January 1, 2017, this balance was transferred to Class 14.1. For the taxation year ending December 31, 2017, Kars Ltd. has determined that its Net Income For Tax Purposes, before any deduction for CCA, amounts to $43,000. As the Company does not have any Division C deductions, Taxable Income, before any deduction for CCA, would also amount to $43,000. In previous years, the Company has always deducted the maximum amount of CCA. Other information related to the Company's depreciable assets is as follows: 1. All of the Class 12 assets were acquired in 2016. 2. The leasehold improvements were made in 2015 at a cost of $240,000. 3. During 2017, the cost of additions to Class 10 amount to $52,000, while the proceeds from dispositions in this class totaled $29,000. In no case did the proceeds of disposition exceed the capital cost of the assets retired, and there were still assets in the class as of December 31, 2017. 4. There were no 2017 acquisitions or dispositions in Classes 8, 12, 13, or 14.1. Required: A. Calculate the maximum CCA write-off that could be taken by Kars Ltd. for the taxation year ending December 31, 2017. B. As Kars’ tax advisor, indicate how much CCA you would advise them to take for the 2017 taxation year and the specific classes from which it should be deducted. Provide a brief explanation of the reason for your recommendation. In providing this advice, do not take into consideration the possibility that losses can be carried either back or forward. SOLUTION available in printed and online Study Guide.



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Self Study Problem Five - 7 (CCA Calculations) The following information relates to Bartel Ltd. for its fiscal year that ends on December 31, 2017: 1. The Company has UCC balances on January 1, 2017 for its tangible assets as follows: Class 1 (All Buildings Acquired In 2005) Class 8 Class 10

$590,000 570,000 61,000

2. During 2017, the Company purchased office furniture for $14,000. 3. During 2017, the Company purchased a truck from its majority shareholder for $22,000. The truck was four years old, had a fair market value of $22,000, and the shareholder’s UCC for the truck was $26,000. 4. On January 1, 2015, the Company expanded its operations by purchasing another business. The purchase price for this business included a payment of $92,000 for goodwill, $120,000 for a franchise with a six year life, and $28,000 for a franchise with an unlimited life. The business was absorbed into Bartel's operations and was not maintained as a separate entity. 5. During 2017, one of the Company’s buildings was sold for proceeds of $440,000, of which $150,000 represented the value of the land on which the building was situated. The Building had a capital cost of $475,000, of which $175,000 represented the value of the land at the time of the acquisition. The building was replaced during 2017 with a new building that cost $500,000, of which $125,000 represented the value of the land. The use of this building is 100 percent office space and it is allocated to a separate Class 1. 6. During 2016, the Company sold the unlimited life franchise that it acquired in 2015 for $59,000. 7. Bartel Ltd. has always deducted the maximum CCA and the maximum write-off of cumulative eligible capital allowable in each year of operation. Required: A. Calculate the maximum total CCA that can be deducted for 2017. Your answer should include the maximum that can be deducted for each CCA class. B. Determine the capital cost for the goodwill in Class 14.1 on January 1, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Five - 8 (CCA Calculations) The fiscal year of the Atlantic Manufacturing Company, a Canadian public company, ends on December 31. On January 1, 2017, the UCC balances for the various classes of assets owned by the Company are as follows: Class Class Class Class Class Note 1

1 - Building (Note 1) 8 - Office Furniture And Equipment 10 - Vehicles 13 - Leasehold Improvements 53 - Manufacturing Equipment

$625,000 155,000 118,000 61,750 217,000

The Class 1 building was acquired in 2005.

During the year ending December 31, 2017, the following acquisitions of assets were made: Class Class Class Class Class

8 - Office Furniture And Equipment 10 - Vehicles (Note 2) 12 - Tools (Note 3) 13 - Leasehold Improvements 50 - Computer Hardware

$ 27,000 33,000 34,000 45,000 28,000

Note 2

The acquired vehicle was a delivery truck.

Note 3

None of the tools that were acquired during the year cost more than $500.

During this same period, the following dispositions occurred: Class 8 - Used office furniture and equipment was sold for cash proceeds in the amount of $35,000. The original cost of these assets was $22,000. Class 10 - A delivery truck with an original cost of $23,000 was sold for $8,500. Class 53 - Since the manufacturing operations will be done by subcontractors in the future, all of the manufacturing equipment was sold for total proceeds of $188,000. Its original cost was $752,000. Other Information: 1. The Company leases a building for $27,000 per year that houses a portion of its manufacturing operations. The lease was negotiated on January 1, 2014 and has an original term of eight years. There are two renewal options on the lease. The term for each of these options is four years. The Company made $78,000 of leasehold improvements immediately after signing the lease. No further improvements were made until the current year. 2. On February 24, 2015, one of the Company’s cars was totally destroyed in an accident. At the time of the accident, the fair market value of the car was $12,300. The proceeds from the Company’s insurance policy amounted to only $8,000. The original cost of the car was $17,000. 3. The Atlantic Manufacturing Company was organized in 2012 and has no balance in its cumulative eligible capital account on December 31, 2016. During March, 2017, the Company granted a manufacturing licence for one of its products to a company in southern Ontario. This licensee paid $87,000 for the right to manufacture this product for an unlimited period of time. 4. It is the policy of the Company to deduct maximum CCA in all years.



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Required: Calculate the maximum 2017 CCA that can be taken on each class of assets, the January 1, 2018 UCC balance for each class, and any other 2017 income inclusions or deductions resulting from the information provided in the problem. SOLUTION available in printed and online Study Guide.



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SSS Problem Five - 1


SSS Problem Five - 1 (CCA Calculations Over 4 Years) Barbara’s Messenger Service begins operations on November 1, 2014. It operates an intra-city service which guarantees delivery of important documents within 3 hours. Barbara Good is the sole owner of this unincorporated business. The business will have a taxation year that ends on December 31. Barbara indicates that she plans to take maximum CCA every year. On November 15, 2014, the business acquires 10 small cars to be used for deliveries. These vehicles have a cost of $18,000 each. During the year ending December 31, 2015, the business acquires 5 additional cars at a cost of $22,000 each. In addition, 4 of the original cars are sold for proceeds of $5,000 each. During the year ending December 31, 2016, 8 additional cars are acquired at a cost of $25,000 each. The remaining 6 cars that were purchased in 2014 are sold for $2,000 each. Barbara has found that when particularly important, high value packages are involved, some of her clients require the package to be hand delivered in an awe-inspiring style. These clients are willing to pay a very hefty surcharge for this service. In order to accommodate this, the business acquires two S Class Mercedes at a cost of $160,000 each. Early in 2017, Barbara receives a proposal of marriage from her wealthiest client. Barbara accepts this proposal and, because she will be moving to a different city, she decides to terminate her business on March 31, 2017. The 13 remaining small cars are sold for $6,000 each. The S Class Mercedes are sold for $95,000 each. Required: For each of the taxation years 2014 through 2017, calculate the maximum available CCA deduction. In addition, determine the amount of any capital gain, recapture, or terminal loss that arises on any of the transactions that occurred during these years. Ignore GST/HST/PST considerations.



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SSS Problem Five - 2

SSS Problem Five - 2 (CCA And Tax Planning) For its taxation year ending December 31, 2017, Brownlee Inc. has determined that its Net Income For Tax Purposes, before any deductions for CCA, amounts to $23,500. The Company does not have any Division C deductions, so whatever amount is determined as Net Income For Tax Purposes will also be the amount of Taxable Income for the 2017 taxation year. On January 1, 2017 the Company has the following UCC balances: Class 3 Class 8 Class 10

$263,000 72,000 52,000

During 2017, the cost of additions to Class 10 amounted to $38,000, while the proceeds from dispositions in this class totalled $23,000. In no case did the proceeds of disposition exceed the capital cost of the assets retired, and there were still assets in the class as of December 31, 2017. There were no acquisitions or dispositions in either Class 3 or Class 8 during 2017. Required: A. Calculate the maximum CCA that could be taken by Brownlee Company for the taxation year ending December 31, 2017. Your answer should include the maximum that can be deducted for each CCA class. B. As Brownlee’s tax advisor, indicate how much CCA you would advise them to take for the 2017 taxation year and the specific classes from which it should be deducted. Provide a brief explanation of the reason for your recommendation. In providing this advice, do not take into consideration the possibility that losses can be carried either back or forward.



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SSS Solution Five - 1

Chapter 5 Supplementary Self Study (SSS) Solutions SSS Solution Five - 1 2014 Solution The required calculations are as follows: Additions To Class 10 [(10 Cars)($18,000)] One-Half Net Additions [(1/2)($180,000)] CCA Base CCA [(30%)($90,000)(61/365)] One-Half Net Additions

( (

Class 10 UCC For January 1, 2015

$180,000 90,000) $ 90,000 4,512) 90,000 $175,488

As the business was established on November 1, 2014, its operations were carried out for 61 days in 2014, and only a proportionate share of the annual CCA charge may be taken. We would call your attention to the fact that it is the length of the taxation year, not the period of ownership of the assets, that establishes the fraction of the year for which CCA is to be recorded.

2015 Solution The required calculations are as follows: Opening Balance For Class 10 Additions [(5 Cars)($22,000)] Dispositions - Lesser Of: • Capital Cost = 4 @ $18,000 = $72,000 • Proceeds Of Disposition = 4 @ $5,000 = $20,000 One-Half Net Additions [(1/2)($110,000 - $20,000)] CCA Base CCA [(30%)($220,488)] One-Half Net Additions Class 10 UCC For January 1, 2016

$175,488 110,000 ( (

20,000) 45,000)

(

$220,488 66,146) 45,000 $199,342



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2016 Solution With respect to Class 10 cars, the required calculations are as follows: Opening Balance For Class 10 Additions [(8 Cars)($25,000)] Dispositions - Lesser Of: • Capital Cost = 6 @ $18,000 = $108,000 • Proceeds Of Disposition = 6 @ $2,000 = $12,000 One-Half Net Additions [(1/2)($200,000 - $12,000)] CCA Base CCA [(30%)($293,342)] One-Half Net Additions

$199,342 200,000 ( (

12,000) 94,000)

(

$293,342 88,003) 94,000

Class 10 UCC For January 1, 2017

$299,339

With respect to the two S Class Mercedes, each would have to be allocated to a separate Class 10.1. Further, the addition to each Class 10.1 would be limited to $30,000. The required calculations would be as follows: Mercedes 1 Class 10.1

Mercedes 2 Class 10.1

Acquisitions One-Half Net Additions

$30,000 ( 15,000)

$30,000 ( 15,000)

CCA Base CCA [(30%)($15,000)] One-Half Net Additions

(

UCC For January 1, 2017

$15,000 4,500) 15,000

(

$25,500

$15,000 4,500) 15,000 $25,500

2017 Solution The required calculations for the Class 10 vehicles are as follows: Opening Balance For Class 10 Dispositions - Lesser Of: • Capital Cost [(5)($22,000) + [(8)($25,000)] = $310,000 • Proceeds Of Disposition [(13)($6,000)] = $78,000

(

Ending Balance With No Remaining Assets In Class Terminal Loss

$221,339 ( 221,339)

UCC For January 1, 2018

$299,339 78,000)

Nil

After all of the assets in Class 10 have been retired there is still a $221,339 balance in the UCC. This results in a terminal loss that will be deducted in full from the other income of Barbara’s Messenger Service. The terminal loss will also be deducted from the UCC balance. With respect to the two Class 10.1 assets, no recapture or terminal losses can be recorded on these assets. However, in the year of disposal, taxpayers are allowed to deduct one-half year of CCA. Given the short fiscal final year, this means that on each of the Class 10.1 vehicles there would be a CCA deduction of $943 [(1/2)(30%)($25,500)(90/365)] for a total of $1,886.



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SSS Solution Five - 2 Part A The required calculation of the maximum CCA is as follows: Class 3

Class 8

Class 10

Opening Balance Additions Proceeds Of Disposition One-Half Net Additions

$263,000 Nil Nil Nil

$72,000 Nil Nil Nil

$52,000 38,000 ( 23,000) ( 7,500)

CCA Base CCA Rate

$263,000 5%

$72,000 20%

$59,500 30%

Maximum CCA

$ 13,150

$14,400

$17,850

This gives a maximum amount for CCA of $45,400 for the taxation year ($13,150 + $14,400 +$17,850).

Part B Since the Company only has Net and Taxable Income before CCA of $23,500 and the problem states that loss carry overs should not be considered, maximum CCA would not be deducted as this would produce a loss. Only $23,500 in CCA should be taken in order to reduce the Taxable Income to nil. With respect to the classes from which it should be taken, the usual procedure is to deduct the required amount from the classes with the lowest rates. By leaving the classes with higher rates untouched, larger amounts of CCA can be deducted in later periods as required. Taking this approach, the recommended CCA deductions would be as follows: Class 3 (Maximum Available) Class 8 (Required Balance)

$13,150 10,350

Total CCA

$23,500

The deduction of this amount of CCA would serve to reduce Taxable Income to nil. Note that if there were immediate plans to sell the building for more than its opening UCC, this could affect the choice of Classes to deduct CCA from as any additional CCA taken on Class 1 would have to be added to income as recaptured CCA when the building is sold.



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Self Study Problem Six - 1

Chapter 6 Self Study Problems Self Study Problem Six - 1 (Bad Debts) Dr. Allworth is a dentist with an office in one of the less prosperous sections of Vancouver. While he has very large gross billings, his patients are such that he often has trouble collecting the amounts that are due to him. As a consequence, he takes great care in keeping track of outstanding balances in accounts receivable and in making estimates of the amounts that he expects will not be collectible. At the end of 2016, his accounts receivable balance was $104,000 and, for tax purposes, he deducted a reserve for doubtful debts of $11,500. The corresponding balances at the end of 2017 were $208,000 in total receivables, with a reserve for doubtful debts of $15,900. Both of the reserves were established on the basis of a detailed aging schedule, applied on a receivable by receivable basis. During 2016, there were recoveries of amounts written off as uncollectible in 2015 in the amount of $190. During 2017, $8,800 in accounts receivable were written off as uncollectible. However, $700 of this amount related to a patient where there was some hope of collecting the amount due. As the patient was a personal friend of Dr. Allworth, no real effort had been made to collect the amount and further dental services had been extended on a credit basis. In addition, accounts totalling $1,500 that had been written off in 2016 were recovered during 2017. Required: How would the preceding information affect the calculation of Dr. Allworth’s business income for 2017?

SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 2 (Reserves) Olivia Smith is the owner of an unincorporated business that does landscaping . The business began operations on January 2, 2017 and will have a December 31 year end. The 2017 and 2018 results for the business can be described as follows: 2017 During its first year, the business had sales of delivered merchandise and services totaling $185,000. Of this total, $65,000 had not been collected on December 31, 2017. Olivia anticipates that $5,000 of these sales will be uncollectible. In addition to these sales of delivered merchandise and services, she received $23,000 in advances for merchandise to be delivered in 2018. Olivia purchased a large supply of landscaping materials from the trustee of a bankrupt landscaping business at a very good price. Since she is unlikely to use them in the next few years, she has arranged to sell these materials for $50,000. These materials have a cost of $40,000, resulting in a total gross profit of $10,000. Because of the size of this sale, she has agreed to accept a down payment of $$30,000, followed by two annual instalments of $10,000. The instalments are due on December 31, 2018 and December 31, 2019. 2018 During 2018, $5,500 of accounts receivable had to be written off. All of the merchandise for which advances had been received was delivered, and the $10,000 instalment on the large project was received. Sales of delivered merchandise and services totaled $240,000. Of this total, $50,000 was still on account at December 31, 2018. Olivia anticipates that $3,500 of this amount will be uncollectible. In addition to the 2018 sales of delivered merchandise and services, she receives $13,400 in advances for merchandise to be delivered in 2019. Required: How would the preceding information affect the calculation of Olivia Smith’s business income for the 2017 and 2018 taxation years? Include the full details of your calculations, not just the net result for each year. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 3 (Work Space In The Home Costs And CCA) Veronica Hart is employed in retail sales with a large department store. Because of the expertise in sports clothing that she has gained as an employee, she has decided to start a sports clothing mail order business in order to supplement her employment income. The business commences on January 20, 2017. On that date, she acquires office furniture and display racks at a total cost of $14,000, a computer for $1,350, and software appropriate to her business activities for $795. She also has a separate telephone line installed for dealing exclusively with the mail order business. The business will be run out of her home, making exclusive use of 15 percent of the total available floor space. The business will have a December 31 year end. During the period January 20, 2017 through December 31, 2017, her mail order sales total $89,000. Costs associated with these sales are as follows: Cost Of Merchandise Sold Unsold Merchandise (Lower Of Cost And Market) Packaging Materials Shipping Costs Miscellaneous Office Supplies Telephone Charges (Total For The Period) Printing Of Brochures Distributed

$46,000 23,500 1,547 3,216 825 210 156

Her home was purchased several years ago for $355,000 of which $80,000 was allocated to the land. Costs accrued with respect to the home for the year ending December 31, 2017 are as follows: Utilities For Home (Heat, Light, And Water) Mortgage Interest Paid House Insurance Property Taxes Repairs And Maintenance For Home

$2,850 4,183 400 1,230 1,125

Total

$9,788

Required: A. Can Ms. Hart deduct work space in the home costs? Briefly explain your conclusion. B. Compute the minimum net business income or loss that Veronica must report in her 2017 personal income tax return. C. Briefly describe any issues that should be discussed with Veronica concerning the work space in her home costs and business costs. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 4 (Business Income - Employee Vs. Self-Employed) Ms. Wise is a very successful salesperson. She pays all of her own business expenses and provides the following information related to her taxation year ending December 31, 2017. 1. Travel costs, largely airline tickets, food, and lodging on trips outside the area in which she resides, totaled $23,000. Included in this amount is $8,000 of business meals. 2. During the year, she used 40 percent of her personal residence as an office. She has owned the property for two years. It is her principal place of business and it is used exclusively for meeting clients on a regular basis throughout the year. Interest payments on the mortgage on this property totalled $13,500 and property taxes for the year were $4,700. Utilities paid for the house totalled $3,550 and house insurance paid for the year was $950. Other maintenance costs associated with the property amounted to $1,500. The January 1, 2017 UCC of the 40 percent portion of the residence that is used for business is $140,000. 3. For business travel, Ms. Wise drove a car that she purchased for $53,000 on October 15, 2016. During 2017, she drove a total of 50,000 kilometers, 35,000 of these being for business purposes. The business usage of her car varies from 60 to 80 percent each year. The total operating costs for the year were $6,000. In addition, there were financing costs of $2,500 on a bank loan used to purchase the car. She has always taken maximum CCA on her car. 4. She paid dues to the Salesperson’s Association (a trade union) of $600. 5. She was billed a total of $12,000 by a local country club. Of this amount, $2,500 was a payment for membership dues and the remaining $9,500 was for meals and drinks with clients. Required: A. Calculate the maximum amount of expenses that would be deductible by Ms. Wise for 2017 assuming: i.

She is an employee of a manufacturing company. $137,000 includes $15,000 in commissions.

Her employment income of

ii. She represents a group of manufacturers with a diversified product line. During 2017, she earned total commissions of $137,000. In making these calculations, ignore GST and PST considerations. B. Comment on the desirability of taking CCA on Ms. Wise’s personal residence. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 5 (Deductible Automobile Costs And Taxable Benefit) Borris Industries is a Canadian controlled private corporation with a taxation year that ends on December 31. Mr. John Borris is the president of the Company and an employee of Borris Industries. On December 1, 2016, Borris Industries leases a new Mercedes to be used by Mr. Borris. The lease calls for monthly payments of $1,800 per month, payable on the first day of each month for a period of three years. At the time the lease is signed, the Company is required to make a refundable deposit of $10,000. The manufacturer’s suggested list price for the car is $85,000. Mr. Borris will pay the Company $500 per month for his personal use of the car. This is the only automobile that is leased by Borris Industries. During December, 2016, Mr. Borris drives the car a total of 2,500 kilometers, none of which are related to his Company ’s business activities. Operating costs for this period, all of which are paid by the Company, totaled $1,100. During 2017, Mr. Borris drives the car 45,000 kilometers, of which 23,000 were related to his Company ’s business. Operating costs for this period, all of which are paid by the Company, totaled $10,200. During the period December 1, 2016 through December 31, 2017, the automobile was always available to Mr. Borris. Assume that the prescribed rate is 2 percent for the period December 1, 2016 through December 31, 2017. Required: Determine the following: A. The maximum deduction for automobile lease payments that Borris Industries can take in each of the two years 2016 and 2017. B. The minimum amount of the taxable benefit that Mr. Borris will have to include in his Net Income For Tax Purposes for each of the two years 2016 and 2017 as a result of having the Mercedes available for his personal use. Note that the prescribed operating cost benefit per kilometer is equal to $0.26 in 2016 and $0.25 in 2017. Ignore GST and PST considerations in both parts of this question. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 6 (Employer Owned Vs. Employee Owned Vehicle) Jerry Reid will become an employee of Margo Ltd. as of January 1, 2017. His employment contract is for a period of three years and his annual salary will be in excess of $250,000 per year in each year. Given this, his combined federal/provincial tax rate on additional income will be 51 percent. His employment duties are such that he will require an automobile. It is anticipated that he will drive the automobile a total of 55,000 kilometers in each year of his three year employment contract, with 40,000 of this total being employment related travel. The automobile will be a Lexus ES that will cost $48,000. At the end of the employment contract, its estimated fair market value will be $20,000. Margo Ltd. has offered him the following two alternatives with respect to the Lexus. Margo is indifferent as to which alternative he chooses. 1. The Company will provide the automobile to Jerry and will pay all of the operating costs, including those related to Jerry's personal use of the vehicle. The automobile will be available to Jerry for 12 months in each year. 2. If Jerry provides his own Lexus and pays all of its operating costs, the Company will provide an allowance of $18,000 per year to cover the costs of using the automobile for employment purposes. Operating costs are expected to be $0.24 per kilometer throughout this period. If Jerry chooses the second alternative, he will finance the purchase with funds borrowed from his margin account at a rate of 5 percent. He will repay the funds at the rate of $16,000 per year, payable on December 31, 2017, 2018, and 2019. He will sell the automobile at the end of the 3 year employment contract. Assume that the prescribed rate for the operating cost benefit is $0.25 per kilometre in all of the years 2017 through 2019. Required: Advise Jerry as to which of the alternatives he should accept. Base your decision on the undiscounted cash flows associated with the two alternatives. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 7 (Valuation Of Business Inventories) Halley Martin has designed a new skirt that proves to be particularly popular with men who are cross-dressers. Based on the initial success of her product, she has decided to open a boutique in downtown Toronto. She will have a December 31 year end. The skirts are manufactured by a local clothing manufacturer to her specifications. During her first year of operations, she has purchases as follows: Date

Quantity

February 1 April 3 July 12 September 5 November 12

5,000 10,000 8,000 2,000 3,000

Totals

28,000

Price

Total Cost

$42 $45 $43 $48 $52

$ 210,000 450,000 344,000 96,000 156,000 $1,256,000

On December 31, the end of her first year of operation, the inventory on hand amounts to 6,000 units. It is estimated that these units have a replacement cost of $51 per unit and a net realizable value of $58 per unit. Required: Calculate the various closing inventory values that could be used to determine business income for tax purposes. Your answer should indicate the valuation method being used, as well as the resulting value. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 8 (Proprietorship - Comprehensive Business Income) Yossarian Tools is a successful proprietorship that John Yossarian has owned and operated for five years. It sells and services power tools of all types. The accountant for the business has calculated a Net Income for the year ending December 31, 2017 of $298,000 using generally accepted accounting principles. The following information relates to this calculation: 1. The increase in the reserve for warranties during the year was $14,500. This amount is based on a self-insurance warranty program. 2. Parking tickets received by Mr. Yossarian and his employees totalled $980. Since they were incurred in the course of deliveries and meetings with clients, they were paid for by Yossarian Tools and deducted in the accounting records. 3. During the year, Yossarian Tools spent $15,600 landscaping the grounds of its retail store. This amount was deducted as an expense in the determination of Net Income. 4. The Net Income figure was after the deduction of Amortization Expense of $53,750. CCA has been correctly calculated to total $62,000. 5. Because of a failure to pay its municipal property taxes on their due date, Yossarian Tools was charged interest of $975. 6. A contribution of $4,300 was made to a registered charity during the year. 7. Included in revenues was a payment of $31,200 from an insurance company to compensate for loss of profits when Yossarian Tools was closed for two weeks because of a fire. 8. Yossarian Tools follows a policy of providing various types of volume discounts to its regular customers. During the year, such discounts amounted to $21,250. 9. Yossarian Tools paid $1,400 for membership in a local golf and country club. The total of all meals charged at the club by Mr. Yossarian and paid by Yossarian Tools during the fiscal year was $3,400. These meals were all business related and his guests were always important clients or suppliers. 10. Yossarian Tools incurred and expensed appraisal costs of $7,400 in order to determine the current market value of certain capital assets that it intends to sell. 11. As Mr. Yossarian’s 6 year old son is very popular with his peers at his school, he was paid a monthly fee of $1,000 ($12,000 for the year) to promote Yossarian Tools to the students in his school. This fee was deducted in the accounting records. 12. As a firm believer in the universal right to bear arms, Mr. Yossarian buys guns from various sources and sells them to special clients. Although this business is illegal, Mr. Yossarian insists that his accountant include his gun sale profits of $28,500 in the Net Income of Yossarian Tools as Mr. Yossarian believes he will have a large loss in the next year which he plans to deduct. 13. Yossarian Tools leased a car in 2016 that Mr. Yossarian uses 100 percent for business purposes. The car was available to him throughout 2017. The lease payments were $650 per month, the manufacturer’s suggested list price was $35,000 and no refundable amounts were paid on the lease. The car was driven 30,200 kilometers during 2017. Operating costs averaging $0.73 per kilometer, or $22,046 were paid. 14. As the business is unincorporated, no taxes were deducted in calculating Net Income. Required: Calculate the minimum net business income for Yossarian Tools that will be included in Mr. Yossarian’s tax return for the year ending December 31, 2017. Indicate why



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you have not included any of the preceding items in your calculations. Ignore GST and PST considerations. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 9 (Comprehensive Business Income) Barnes Industries Ltd. is a Canadian private company located in Nova Scotia. Mike Barnes, the majority shareholder of the Company, devotes all of his time to managing the operations of this enterprise. Over the years, the business has consistently shown a profit and, for the taxation year ending December 31, 2017, Mike has determined that the Company ’s Net Income After Income Taxes is $340,000. In determining this income figure, Mike has used generally accepted accounting principles. Other information with respect to the determination of accounting income before taxes for 2017 is as follows: 1. The Income Tax Expense deducted by Barnes Industries Ltd. for the year is $86,000, including $13,000 in future income taxes. 2. During the year, the Company has deducted donations to various registered charities in the amount of $3,500. 3. The Company recorded amortization expense for the year of $241,000. 4. The maximum CCA for the year has been correctly determined to be $389,000. 5. After attending a seminar on the tax advantages of income splitting among family members, Mike hires his unemployed cousin to do filing in the office. She proves to be totally incapable of doing the job and is asked to leave after only one day. In the interests of family harmony, he pays her $10,000, which is deducted in the accounting records of the Company. 6. The Company has deducted $23,000 for advertising in newspapers in the New England states. The advertising is directed towards selling the Company’s products in that region. 7. The Company provides warranties on several of the products that it sells. For its accounting records, it estimates the cost of providing these warranties and records a liability on the basis of these estimates. The liability at the beginning of the year was $18,000 and the corresponding figure at the end of the fiscal year was $27,000. 8. At the end of 2016, the Company estimated that its bad debts on ending accounts receivable would total $31,000. Actual write-offs during 2017 amounted to $35,000. At the end of 2017, the estimate of bad debts on ending accounts receivable was $33,000. The accounting estimates are considered appropriate for tax purposes. 9. On December 31, 2017, the Company issued new common shares. The legal and accounting fees related to this issue of shares were $8,000. For accounting purposes, these costs were added to the intangible asset, organization costs. As the issue of shares was on December 31, there was no 2017 amortization of this amount for accounting purposes. 10. In January, 2017, the Company paid landscaping costs of $11,000 that were expected to have a useful life of 10 years. These costs were capitalized for accounting purposes and are being amortized on a straight line basis over a period of ten years. (This amortization is included in the amortization expense of $241,000 listed in Part 3.) 11. As a result of Mike’s business travel, the Company incurred costs for meals and entertainment in the amount of $13,500. All of these costs were deducted in the determination of accounting income. 12. Amortization of bond discount for the year was $1,800. 13. On January 1, 2017, the Company leases a Mercedes for five years for Mike to use in his business travels. The total 2017 lease payments amount to $18,000 and, in addition, the Company pays all of the operating costs. These operating costs total $6,200 for the year.



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There are no refundable deposits associated with the lease and the lease payments do not include any amounts for insurance or licensing. All of these amounts are expensed in the determination of the Company’s accounting income. The manufacturer’s suggested list price for the car is $128,000. Mike has use of the car throughout the year. He drives it a total of 92,000 kilometers, of which 38,000 kilometers were employment related. Required: For Barnes Industries Ltd.’s 2017 taxation year, determine Net Income For Tax Purposes. Indicate why you have not included any of the preceding items in your calculations. Ignore any GST/HST implications. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 10 (Business Income With CCA) Darlington Inc. has a fiscal year ending December 31. For the year ending December 31, 2017, the Company ’s accounting Net Income, determined in accordance with generally accepted accounting principles, was $596,000. Other information related to the preparation of its 2017 tax return is as follows: 1. The income tax expense was $55,000, including $7,000 in future income tax expense. 2. The Company spent $95,000 on landscaping for its main office building. This amount was recorded as an asset in the accounting records and, because the work has an unlimited life, no amortization was recorded on this asset. 3. The Company spent $17,000 on advertisements in Fortune Magazine, a U.S. based publication. Approximately 90 percent of its non-advertising content is original editorial content. The advertisements were designed to promote sales in Canadian cities located on the U.S. border. 4. The amortization expense was $623,000. At the beginning of 2017, the Company has a balance in Class 1 of $1,000,000, representing the UCC of its headquarters buildings. The Company has owned this building since 2001. In general, other buildings are leased. However, in February, 2017, a policy change results in the acquisition of a new store building at a cost of $650,000, of which $125,000 is allocated to land. This building is used 100 percent for non-residential purposes and is allocated to a separate Class 1. None of the usage is for manufacturing and processing . The January 1, 2017 balance in Class 8 was $4,200,000. During 2017, there were additions to this class in the total amount of $700,000. In addition, Class 8 assets with a cost of $400,000 were sold for proceeds of $550,000. The net book value of these assets in the accounting records was $325,000, and the resulting gain of $225,000 was included in the accounting income for the year. There are numerous assets remaining in the class at the end of the 2017 taxation year. At the beginning of 2017, the UCC in Class 10 was $800,000, reflecting the Company’s fleet of cars. As the Company is changing to a policy of leasing its cars, all of these cars were sold during the year for $687,000. The capital cost of the cars was $1,200,000, and their net book value in the accounting records was equal to the sale proceeds of $687,000. 5. Included in travel costs deducted in 2017 for accounting purposes was $12,000 for airline tickets and $41,400 for business meals and entertainment. 6. The Company paid, and deducted, for accounting purposes, a $2,500 initiation fee for a corporate membership in the Highland Golf And Country Club. 7. The Company paid, and deducted, property taxes of $15,000 on vacant land that was being held for possible future expansion of its headquarters site. Required: Calculate Darlington Inc.’s minimum Net Income For Tax Purposes for the 2017 taxation year. In addition, calculate the January 1, 2018 UCC balances for each CCA class. Indicate why you have excluded some items from your calculations. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 11 (Partnership - Business Income, Employee vs. Self-Employed) The Montpetit Fashion Group is a partnership that custom designs and retails high-fashion clothing in Calgary. The partnership commenced operations on February 1, 2017. Part I The three partners have sought your advice on a number of issues related to the tax procedures to be used by their business. Provide the requested advice on each of the following issues: A. Explain to the partners how business income from partnerships is taxed in Canada. B. The partners have not picked a partnership year end and would like to know what options they have. C. Designer gowns, for which there are no production economies of scale, are designed and made by private seamstresses who work in their own homes. Montpetit supplies the fabric and accessories, and pays a previously agreed fixed amount upon satisfactory completion of each gown. The partners are uncertain as to the need for source deductions (income tax, EI and CPP contributions) on these amounts. Part II The partners would like you to review the following transactions that occurred during their first fiscal year of business ending on December 31, 2017. Advise the partners on the taxability of income amounts in the calculation of net business income for the year. Similarly, for expenditures, provide advice on the specific deductions (with amounts) that can be claimed. A. Legal fees of $2,400 were paid for the drafting of a partnership agreement. B. Five industrial sewing machines were acquired at the beginning of the year at a cost of $2,500 each. Sewing accessories (thread, needles, scissors, etc.) were also acquired for a total of $8,500. C. Each partner contributed $10,000 to get the business off the ground. On July 1, 2017, each partner loaned the partnership $15,000. Interest of 4 percent per year on the loans was paid by the partnership for the last six months of the year. In addition to the interest, the partners are planning to deduct the $10,000 payments on their personal income tax returns for the current year. D. At year-end, designer clothes with a retail price of $260,000 are held on consignment by boutiques throughout the city. The cost of making these clothes was $50,000 in labour and $45,000 in fabric. E. Montpetit paid $15,000 for the exclusive right to distribute Dali sweaters for five years. F.

During 2017, payments totalling $3,250 were made to the Champs Elysee Club. Of this amount, $1,100 was for the annual membership fee and the remaining $2,150 was for charges in the Crepe Suzette Diner. Of the dining charges, $1,500 was spent for entertaining clients and the remainder was for the personal use of the three partners. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 12 (Proprietorship - Business Income With CCA) Christine Powell is a visual designer. Until May, 2017, she worked as an employee for a printing supply firm. In June, she became self-employed when she started up “Design Power”. Through this business, Christine works with several advertising agencies in the design and desktop publishing of promotional materials. In January, 2017, she comes to you for tax advice. Being vaguely aware of the complexity of the tax laws, she has kept meticulous track of all business related costs for the period from June 1 to December 31, 2017. Christine’s fiscal year end for the business is December 31. Christine works out of her home. Her studio occupies 20 percent of the useable space in the house. Christine does not intend to claim any CCA on the house. The total operating costs related to the house during the period June 1, 2017 through December 31, 2017 are: Utilities Home Insurance Mortgage Interest Property Taxes

$1,500 700 1,600 2,600

Total Home Operating Costs

$6,400

On June 1, 2017, Christine bought a used car for business and personal use. The total purchase price of the car was $18,000, financed with a $3,000 cash down-payment and a $15,000 term loan. Her detailed records show that she uses the car 70 percent for business. The automobile costs include: Down Payment On Car Purchase Gasoline And Oil Licence And Registration Insurance Interest On Car Loan

$3,000 1,100 200 800 700

Total Automobile Costs

$5,800

On July 15, 2017, Christine purchased computer equipment for $5,000 and various applications software for $1,200. On August 1, she purchased several pieces of office furniture for $2,000. All of these assets were acquired solely for business use. Her revenues and other costs for the period June 1, 2017 to December 31, 2017 were as follows: Revenues Collected $22,000 Billed, but not collected 4,000 Unbilled work-in-progress 1,500 Costs Legal and business licence fees Business meals and entertainment with clients Office and computer supplies Printing sub-contract fees

$1,000 500 650 1,800

Required: Calculate the minimum net business income Christine would include in her 2017 personal income tax return. In preparing your solution, ignore GST/HST/PST implications. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 13 (Proprietorship - Business Income With CCA) Carla Jensen is Chartered Professional Accountant who is employed as an internal auditor by a Canadian public company. The constant, unrelenting stress of her employment has resulted in a dependency on recreational drugs. This, in turn, has resulted in the need for additional funds. Because of this need for additional income, she operates an unincorporated tax and accounting services business. This business has a December 31 year end and has been in operation for several years. The business operates out of a building which Carla purchased, new, in 2014. She uses this building exclusively for non-residential purposes. It has been allocated to a separate Class 1. On January 1, 2017, Carla had unbilled work-in-progress of $28,000, along with billed receivables of $37,000. During 2017, her cash receipts total $105,000. On December 31, 2017, the unbilled work-in-progress has increased to $35,000 and the billed receivables have increased to $42,000. On January 1, 2017, the business has the following UCC balances: Class 1 Building Class 8 Furniture And Fixtures Class 10 Vehicle (Purchased For $20,300)

$226,000 46,500 17,255

During January 2017, Carla acquires a new computer for $1,800, along with applications software for $725. During March, 2017, the Class 10 vehicle is involved in a serious accident, requiring it to be permanently taken off the road. The insurance proceeds are $12,300. On April 1, Carla replaces it with a vehicle with a manufacturer’s list price of $32,000 that is leased for $475 per month. Both vehicles are used exclusively for business purposes. During July, 2017, Carla replaces some of the furniture in her office. The old furniture has a capital cost of $18,000, while the new items cost $34,000. Carla receives a trade in allowance for the old furniture of $6,000. During September, 2017, Carla acquires a client list from an accountant who is retiring . The cost of this list is $47,000. During 2017, the various costs of operating her business, determined on an accrual basis, are as follows: Building Operating Costs Costs Of Operating Leased Vehicle Payments To Assistants Miscellaneous Office Costs Meals With Clients

$24,500 7,200 13,500 3,750 4,200

Required: Calculate the minimum net business income Carla would include in her 2017 personal income tax return. In preparing your solution, ignore GST and PST implications. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 14 (ITA 22 Accounts Receivable Election) George Pentel is the owner of George’s Geodes, an unincorporated business that provides distribution at the wholesale level of collectable mineral specimens. The business has a December 31 year end. While the business has been very successful, George would like to return to his first love, research related to plate tectonics. To accomplish this goal, he intends to sell George’s Geodes to an unrelated party, Ms. Molly Stone. The transaction will take place on August 1, 2017 and will involve all of the assets of the business. Ms. Stone does not anticipate incorporating the business and will continue to use the December 31 year end. On the date of the sale, the Accounts Receivable of the business have a face value of $352,000. George and Molly agree that the current fair market value of these receivables is $335,000. In 2016, George deducted a reserve for doubtful debts under ITA 20(1)(l) of $12,000. Between August 1, 2017 and December 31, 2017, $337,000 of the Accounts Receivable are collected, with the remaining $15,000 being written off as uncollectible. Both George and Molly have heard of an election under ITA 22 that may have some influence on the tax treatment of the transfer of accounts receivable. They would like to have your advice on this matter. George notes that he did not have any capital gains in the previous three years. Further, he does not expect to have capital gains in 2017 or any subsequent year. Required: A. Indicate the tax effects, for both George Pentel and Molly Stone, of the disposition of the accounts receivable and the subsequent 2017 collections and write-offs, assuming: • •

that no election is made under ITA 22. that they make an election under ITA 22.

B. Indicate, from the point of view of each taxpayer, whether making the election would be a desirable course of action. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 15 (Comprehensive Case Covering Chapters 1 to 6) Ms. Lacy Compton is a 45 year old widow with two children: John Her son John is 22 years old and, because he has been blind since birth, he lives with her in a residence that she owns. He qualifies for the disability tax credit and has no income of his own during 2017. Allison Her 17 year old daughter Allison has just started university and, during 2017, she attended on a full time basis for 4 months. Her tuition fees that were paid during 2017 were $2,850. As she is attending a local university, Allison lives in her mother’s home throughout 2017. Allison has no income of her own and she intends to transfer her tuition credit to her mother. During 2017, her family ’s qualifying medical expenses are as follows: Lacy John Allison

$ 4,220 11,500 2,180

Total

$17,900

During 2017, Ms. Compton makes donations to registered charities of $1,250, as well as contributions to registered federal political parties in the amount of $350. Because Lacy makes such contributions on a regular basis, she is not eligible for the first-time donor's super credit. Ms. Compton is employed as a salesperson by a large Canadian public company. For 2017, her salary is $68,000. In addition, she earns $13,500 in commissions during the year. For the year ending December 31, 2017, her employer withholds the following amounts from her income: RPP Contributions* EI Premiums CPP Contributions Professional Association Dues Payments For Personal Use Of Employer’s Car

$2,800 836 2,564 250 1,800

*Ms. Compton’s employer makes a matching contribution of $2,800 to her RPP. The car that she used during 2017 cost her employer $32,000. During 2017, it was used by her for 11 months of the year. It was driven a total of 27,000 kilometres, of which 22,500 was for employment related activities. During the 1 month that she did not use the car, her employer required that she return it to the company garage. She is required by her employer to maintain an office in her home. During 2017, this office occupied 15 percent of the floor space in her home. The cost of the house (excluding the land) is $335,000. Her 2017 costs for 100 percent of the floor space were as follows: Mortgage Interest Property Taxes Utilities And Maintenance Insurance

$5,800 2,450 1,100 425

Total

$9,775



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In conjunction with her sales activities, she incurred costs for meals and entertainment of $4,350. These were not reimbursed by her employer. In addition to her employment activities, Ms. Compton owns and manages an unincorporated retail business. The fiscal year of the business ends on December 31 and, for 2017, the business had accounting Net Income of $53,500. Other information related to the business is as follows: 1. As the business is unincorporated, no taxes were deducted in calculating Net Income. 2. During 2017, the business spent $8,600 landscaping its premises. For accounting purposes, this amount is being amortized over 10 years on a straight line basis. 3. At the beginning of 2017, Ms. Compton owned depreciable assets used in the business with the following UCC balances: January 1, 2017 UCC

Class 1

Class 8

Class 10

$233,000

$41,500

$27,000

The Class 1 building was acquired in 2005. In March, 2017, Class 8 assets with a cost of $12,000 were sold for $8,600. They were replaced by Class 8 assets with a cost of $13,400. 4. The Net Income figure is after the deduction of Amortization Expense of $12,800 and $6,000 in meals and entertainment with clients of the business. The Amortization Expense includes the amortization of the landscaping costs. Required: Calculate Ms. Compton’s 2017 Net Income For Tax Purposes, her 2017 Taxable Income, and her minimum 2017 federal Tax Payable without consideration of any income tax withheld by her employer. Ignore GST and PST considerations. SOLUTION available in printed and online Study Guide.



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Self Study Problem Six - 16 (Comprehensive Case Covering Chapters 1 to 6) Ms. Alicia Arden is 48 years old and lives with a common-law partner. Her common-law partner, Maria Blair has 2017 income of $9,800. Ten years ago, the couple adopted two children. Their 24 year daughter Helen is dependent on them because she is disabled. The disability is not severe enough to create a marked restriction in her daily activities. During 2017, Helen has income from various part time jobs of $7,200. The couple’s 18 year old son, Jeff, is in full time attendance at a Canadian university for 7 months during 2017. Jeff had 2017 Net Income For Tax Purposes of $6,400. Ms. Arden has paid his tuition fees of $7,200. In addition, Ms. Arden provided Jeff with $875 to pay for his textbooks. Jeff has agreed to transfer the maximum tuition credit to Ms. Arden. Ms. Arden works for Gowan Enterprises, a large Canadian public company. For 2017, her salary is $84,000. In addition, she earns commissions for the year of $39,000. During the year ending December 31, 2017, her employer withholds the following amounts from her income: RPP Contributions* EI Premiums CPP Contributions Parking Fees At Employer’s Lot United Way Contributions

$5,600 836 2,564 600 1,200

*Ms. Arden’s employer makes a matching contribution of $5,600 to her RPP. Ms. Arden’s work requires fairly extensive travel. To cover the costs of hotels and meals, her employer provides an allowance of $1,100 per month. Her actual costs during 2017 were as follows: Hotels Business Meals

$7,700 6,200

Ms. Arden uses her own car for her employment related travel. It was acquired on January 1, 2017 at a cost of $37,000 two years ago. During 2017, she drove the car a total of 38,000 kilometers, of which 32,500 were employment related. Her total operating costs for the year were $6,800. To assist her with these costs, her employer provided an allowance of $600 per month. Ms. Arden’s employer granted her options to acquire 2,200 shares of its common shares at a price of $4.25 per share two years ago. At the time the options were granted, the Gowan Enterprise shares were trading at $4.00 per share. In January, 2017, Ms. Arden exercises the options. At this time, the Gowan Enterprise shares were trading at $9.50 per share. Ms. Arden is still holding the acquired shares on December 31, 2017. Because of her interest in hockey, on January 1, 2017, Ms. Arden opened a retail operation to sell hockey related merchandise. Ms. Arden invests $320,000 of her savings in this unincorporated business. Of this amount $272,000 was used to purchase a new store building , with the remaining $48,000 invested in fixtures for the store. She estimates that $78,000 of the $272,000 paid for the store represents the value of the land. The business is called The Puck Place and, as the retail operation is only a few blocks from her residence, Ms. Arden makes no use of her car in this business.



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As Ms. Arden has had no formal training as an accountant, she keeps the records for The Puck Place on a cash basis. As at December 31, 2017, the business had accumulated total cash of $56,500. Ms. Arden’s informal records indicate that at December 31, 2017, the business had receivables from customers of $5,200, inventories with a cost of $18,700, and liabilities to suppliers of $8,240. The business had no other debt obligations on this date. During 2017, Ms. Arden paid medical expenses as follows: Alicia Maria Helen Jeff

$ 3,940 2,450 7,250 1,260

Total

$14,900

Required: Calculate Ms. Arden’s 2017 Net Income For Tax Purposes, her 2017 Taxable Income, and her minimum 2017 federal Tax Payable without consideration of any income tax withheld by his employer. Ignore GST and PST considerations. SOLUTION available in printed and online Study Guide.



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SSS Problem Six - 1


SSS Problem Six - 1 (Reserves) Olaf Swensen owns an unincorporated business that delivers specialty food products to individuals and businesses. In 2017, his first year of operation, he had total delivered sales of $215,000, of which $85,000 were on account. In addition, he received $14,500 in advances from customers for products to be delivered in 2018. Olaf does not include advances in his sales figures. Being unincorporated, he chooses a taxation year that ends on December 31. On December 31, 2017, he had uncollected receivables of $42,000. He estimates that $4,000 of these receivables will become uncollectible. In 2018, Olaf's cash sales total $145,000 (not including advances from customers) and account sales total $92,000. The $14,500 of 2017 orders for which advances were received were all filled in 2018. During 2018, additional advances of $15,300 were received for deliveries in 2019. During 2018, Olaf needed to write off $4,300 of the December 31, 2017 receivables. On December 31, 2018, the enterprise has uncollected receivables of $38,000. Olaf anticipates that $4,500 of these receivables will be uncollectible. The December 31, 2018 receivables contain a single large order for $12,000 of Olaf's products sold to a very important customer. Because of the size of this order, Olaf has agreed to allow the customer to defer payment until January 1, 2019. The order was received on September 1, 2018. Required: How would the preceding information affect the calculation of Olaf Swensen’s business income for the 2017 and 2018 taxation years? Include the full details of your calculations, not just the net result for each year.



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SSS Problem Six - 2

SSS Problem Six - 2 (Valuation Of Business Inventories) Holden’s Shirts began business on January 1 of the current year. Mike Holden, the owner of the business, has always had an interest in high end clothing . Based on this interest, his business involves purchasing shirts from exclusive manufacturers and reselling them at a significant mark up. The business has a December 31 year end. Purchases of shirts during the current year are as follows: Date

Quantity

January 27 April 3 August 15 October 31

400 1,200 1,500 800

Totals

3,900

Price

Total Cost

$120 130 125 128

$ 48,000 156,000 187,500 102,400 $493,900

On December 31, the end of the Company ’s taxation year, the inventory on hand amounts to 950 shirts. It is estimated that these units have a replacement cost of $126 per unit and a net realizable value of $142 per unit. Required: Calculate the various closing inventory values that could be used to determine business income for tax purposes. Your answer should indicate the valuation method being used, as well as the resulting value.



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SSS Problem Six - 3

SSS Problem Six - 3 (Simple Business Income) Swindex Inc. has a taxation year which ends on December 31. The condensed before tax Income Statement for Swindex Inc. for the current year, prepared from information included in its financial statements, is as follows: Sales Cost Of Sales

$3,000,000 ( 1,570,000)

Gross Margin Other Expenses (Not Including Taxes)

(

$1,430,000 755,000)

Operating Income Before Taxes Other Income And Losses

$ 675,000 275,000

Income Before Taxes

$ 950,000

Other Information: 1. During the year, the Company spent $5,200 for landscaping its head office grounds. For accounting purposes this was treated as a capital expenditure, but was not amortized during the current year. 2. The Other Expenses (Not Including Taxes) account included the following amounts: Bond Discount Amortization Interest On Deficient Corporate Tax Instalments Reserve For Future Inventory Declines Interest Paid On Bonds Issued Amortization Expense Cost Of Advertising In Magazine Distributed Only In Jamaica Charitable Donations Cost Of Sponsoring Local Hockey Teams Cost Of Advertising Circulars (One-Half Have Been Distributed)

$

500 1,700 96,300 22,000 36,500 18,000 19,100 3,200 15,000

3. The Other Income And Losses account contains the following items: Damages Paid For Breach Of Contract Loss From Theft Cost Of Appraisal Of Property To Be Sold

$18,000 2,800 3,800

4. Maximum CCA has been calculated to be $57,500 for the current year. The policy of the Company is to deduct maximum CCA in each taxation year. Required: Using the preceding information, calculate Swindex Incorporated’s Net Income For Tax Purposes for the current year. In addition, provide reasons for any items that were excluded from your calculations.



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SSS Problem Six - 4

SSS Problem Six - 4 (Corporate Business Income With CCA) For the taxation year ending December 31, 2017, Voxit Inc. recorded Net Income of $565,000. This amount was determined by an inexperienced accountant who was promoted when his supervisor suddenly quit. Other Information: 1. The following items were deducted (added) during the year: Current Income Tax Expense Future Income Tax Benefit Interest Expense (Includes $3,500 In Discount Amortization) Interest On Deficient Corporate Tax Instalments Reserve For Future Inventory Declines Amortization Expense Charitable Donations Cost Of Sponsoring Local Soccer Team Loss From Employee Theft Loss On The Sale Of Vehicles Cost Of Appraisal Of Building To Be Sold

(

$210,000 23,000) 22,000 1,250 12,600 51,500 14,500 4,600 5,200 36,200 2,600

2. On January 1, 2017, the Company has the following UCC balances: Class Class Class Class

1 (All Assets Acquired in 2005) 8 10 13

$325,236 226,964 87,468 29,322

During the year ending December 31, 2017, the Company acquired furniture and fixtures at a cost of $262,000. Furniture and fixtures with a cost of $275,000 and a fair market value of $189,000 were traded in on the new assets. The balance in Class 10 reflects the Company ’s fleet of delivery vehicles. In the accounting records, their net book value was $92,700. During the year ending December 31, 2017, all of these vehicles were sold and replaced with leased vehicles. The sale proceeds amounted to $56,500, with the amount received for each vehicle being less than its cost. The Class 13 assets relate to a lease that was signed on January 1, 2013. At that time, the cost of the improvements on the leased property was $36,400. The basic term of the lease is 10 years and there are two 4 year renewal options. Prior to 2017, all the computer equipment was leased. During 2017, computer equipment and systems software was purchased for $20,000. 3. On December 31, 2017, the Company acquired an unincorporated business. The purchase price included a $55,000 payment for goodwill. As the acquisition was late in the year, none of the acquired assets were amortized for accounting purposes. Required: Calculate Voxit Inc.’s minimum Net Income For Tax Purposes for the year ending December 31, 2017.



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SSS Problem Six - 5

SSS Problem Six - 5 (ITA 22 Accounts Receivable Election) Brownstone Enterprises is an unincorporated business that has operating successfully for a number of years under the direction of its owner, Samuel Brownstone. However, after receiving a large inheritance from his deceased father, he is in a position to sell the business and retire. All of the assets of the business will be sold to Ms. Heidi Pilsner, an unrelated party. Ms. Pilsner will continue to operate the business, using the same December 31 year end. At this time, she has no plans to incorporate the business. The assets change hands on July 2, 2017. With respect to the Accounts Receivable that are on the books at that date, the following information is available: Face Value Realizable Value Reserve Deducted In 2016 Taxation Year

$463,000 $427,000 $ 31,000

Between July 2, 2017 and December 31, 2017, $433,000 of the Accounts Receivable are collected, with the remaining $30,000 being written off as uncollectible. Both Mr. Brownstone and Ms. Pilsner have heard of an election under ITA 22 that may have some influence on the tax treatment of the transfer of accounts receivable. They would like to have your advice on this matter. They will both have significant capital gains in 2017. Required: A. Indicate the tax effects, for both Mr. Brownstone and Ms. Pilsner, of the disposition of the accounts receivable and the subsequent 2017 collections and write-offs, assuming: • •

that no election is made under ITA 22. that they make an election under ITA 22.

B. Indicate, from the point of view of each taxpayer, whether making the election would be a desirable course of action.



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SSS Problem Six - 6

SSS Problem Six - 6 (Comprehensive Case Covering Chapters 1 to 6) Mr. Allen Archer is employed by Global Inc., a Canadian public company. For 2017, his salary is $56,000. In addition, his commissions for the year total $48,000. For the year ending December 31, 2017, his employer withholds the following amounts from his income. RPP Contributions* EI Premiums CPP Contributions Parking Fees At Employer’s Lot

$4,200 836 2,564 600

*Mr. Archer’s employer makes a matching contribution of $4,200 to his RPP. Mr. Archer’s employer requires him to use his own car for traveling to clients. The car that Mr. Archer is currently using was acquired on January 1, 2017 at a cost of $28,500. During 2017, Mr. Archer drove the car a total of 21,000 kilometers, of which 18,500 were employment related. The other 2,500 kilometers involved personal use. His total operating costs for the year were $3,750. Global Inc. provided an allowance of $500 per month to reimburse him for the use of the car. His employment related travel did not require overnight stays and, as a consequence, he has no hotel expenses. However, he spent $7,200 during 2017 on meals and entertainment for clients. These amounts were fully reimbursed by his employer. Mr. Archer’s employer granted him options to acquire 1,000 shares of the Global Inc. stock for $12 per share a year ago. At the time the options were granted, the Global Inc. shares were trading at $10 per share. During 2017, Mr. Archer exercises the options. At the time of exercise, the Global Inc. shares were trading at $18.25 per share. He is still holding the shares at the end of the year. Mr. Archer has a spouse and two children. During 2017, his spouse, Jan, had Net Income For Tax Purposes of $7,500. His 22 year old son, Ron, is dependent on Mr. Archer because he is disabled. However, the disability is not severe enough to create a marked restriction in his daily activities. Ron has no income during 2017. His 18 year old daughter, Mona, was in full time attendance at a Canadian university for 8 months during 2017. While she has 2017 Net Income For Tax Purposes of $4,750, Mr. Archer paid her tuition fees of $9,200. Mona has agreed to transfer her tuition tax credit to Mr. Archer. During 2017, Mr. Archer paid medical expenses as follows: Allen Jan Ron Mona

$ 3,780 2,000 6,400 1,500

Total

$13,680

Because of his interest in antiques, Mr. Archer opened a retail operation to sell antiques on January 1, 2017. Mr. Archer invests $239,000 of his savings in this unincorporated business. Of this amount $183,000 was used to purchase a new store building , with the remaining $56,000 invested in fixtures for the store. He estimates that $42,000 of the $183,000 paid for the store represents the value of the land. The business is called Allen’s Oldies and, as the retail operation is only a few blocks from his residence, Mr. Archer makes no use of his car in this business.



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SSS Problem Six - 6

As Mr. Archer has had no formal training as an accountant, he keeps the records for Allen’s Oldies on a cash basis. As at December 31, 2017, the business had accumulated total cash of $32,800. Mr. Archer’s informal records indicate that at December 31, 2017, the business had receivables from customers of $2,600, inventories with a cost of $12,600, and liabilities to suppliers of $5,750. The business had no other debt obligations on this date. Required: Calculate Mr. Archer’s 2017 Net Income For Tax Purposes, his 2017 Taxable Income, and his minimum 2017 federal Tax Payable without consideration of any income tax withheld by his employer. Ignore GST and PST considerations.



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SSS Solution Six - 1

Chapter 6 Supplementary Self Study (SSS) Solutions SSS Solution Six - 1 The results for the 2 years would be as follows: 2017 Cash Sales ($215,000 - $85,000) Cash Sales (Given)

2018

$130,000 $145,000

Sales On Account

85,000

92,000

Advances From Customers Reserve For Undelivered Merchandise: Add Prior Year Reserve Deduct Current Year Reserve

14,500

15,300

Reserve For Doubtful Debts: Add Prior Year Reserve Deduct Current Year Reserve Deduct Actual Write-Offs Reserve For Unpaid Amounts (See Note) Net Effect

(

(

Nil 14,500)

(

14,500 15,300)

Nil 4,000) Nil

( (

4,000 4,500) 4,300)

N/A

Nil

$211,000

$246,700

Note: In order to deduct a reserve for unpaid amounts on sales that are not of land, some part of the proceeds must be due more than two years after the date of the related sale. In this case, the proceeds are due 4 months after the sale and, as a consequence, no reserve for unpaid amounts can be deducted.



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SSS Solution Six - 2 Valuation Basis For tax purposes, the Company can use either fair market value or lower of cost and market. The inventory rules under GAAP are more restrictive as inventories must be measured using the lower of cost and net realizable value.

Market Determination - Two Possible Values For tax purposes, the Company can measure market using either replacement cost or net realizable value. These values would be as follows: Replacement Cost [($126)(950)]

$119,700

Net Realizable Value [($142)(950)]

$134,900

While it is not an acceptable practice under GAAP, the CRA will accept the use of market values, without regard to their relationship to cost.

Cost Determination In the determination of cost, taxpayers are permitted to use specific identification (this would not appear to be practical here), a First In, First Out (FIFO) assumption, or Average Cost. Using the First In, First Out method, the appropriate value for the ending inventory would be determined as follows: 800 Units At $128 150 Units At $125

$102,400 18,750

950 Units At FIFO Cost

$121,150

Based on average cost, the ending inventory value would be calculated as follows: Number Of Units Average Cost [($493,900 ÷ 3,900)] 950 Units At Average Cost

950 126.64 $120,308

Lower Of Cost And Market - Four Possible Values For tax purposes, the possible values here would be as follows: Lower Lower Lower Lower

Of Of Of Of

Replacement Cost And FIFO Cost Replacement Cost And Average Cost Net Realizable Value And FIFO Cost Net Realizable Value And Average Cost

$119,700 119,700 121,150 120,308

For accounting purposes, only the last two values would be acceptable.



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SSS Solution Six - 3 The Net Income For Tax Purposes of Swindex Inc. for the year would be calculated as follows: Accounting Income Before Taxes Additions: Bond Discount Amortization Interest On Tax Instalments Reserve For Future Inventory Declines (Note 1) Amortization Expense Charitable Donations (Note 2) Prepaid Advertising [(1/2)($15,000)] Appraisal Fees (Note 3)

$ 950,000 $

500 1,700 96,300 36,500 19,100 7,500 3,800

165,400 $1,115,400

Deduction: Landscaping Costs CCA Net Income For Tax Purposes

( (

5,200) 57,500) $1,052,700

Note 1 Only those reserves that are specified in the Income Tax Act can be deducted for tax purposes. Reserve for inventory declines is not listed. Note 2 The corporate charitable donations can be deducted in the calculation of Taxable Income, but are not deductible in the calculation of Net Income For Tax Purposes. Note 3 While the problem states that this item was deducted in the calculation of accounting income, this would not be in compliance with generally accepted accounting principles. Generally accepted accounting principles would require that the appraisal costs on the property to be sold be added to the cost of the relevant property. Regardless of the treatment accorded to this item in the accounting records of Swindex, it is clear that it could not be deducted for tax purposes. These costs will be added to the adjusted cost base of the property and serve to reduce any gain (increase any loss) resulting from the sale of the property. Other Items Further explanation related to the items not included in the preceding calculation of Net Income For Tax Purposes is as follows: Bond Interest business.

The interest would be deductible as the bonds are a liability of the

Foreign Advertising Advertising in foreign periodicals is fully deductible provided the advertising is not directed at Canadians. Since the periodical is not distributed in Canada, these expenses would be deductible. Hockey Sponsorship

This would be deductible as a promotional expense.

Damages As the damages relate to a transaction that produces business income, they are considered a business expense. Loss From Theft Losses of this type, unless they result from the activity of senior officers, are considered to be deductible as a normal cost of doing business.



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SSS Solution Six - 4 The Net Income For Tax Purposes of Voxit Inc., would be calculated as follows: Accounting Income Additions: Current Income Tax Expense Bond Discount Amortization Interest On Tax Instalments Reserve For Future Inventory Declines (Note 1) Amortization Expense Charitable Donations (Note 2) Loss On The Sale Of Vehicles ($92,700 - $56,500) Appraisal Fees (Note 3) Subtotal Deductions: Future Income Tax Benefit CCA (Note 4) Terminal Loss On Class 10

$565,000 $210,000 3,500 1,250 12,600 51,500 14,500 36,200 2,600

332,150 $897,150

($ 23,000) ( 75,229) ( 30,968)

Net Income For Tax Purposes

( 129,197) $767,953

Note 1 Reserves are used in accounting statements to reflect anticipated future events. Such amounts are not deductible for tax purposes. Note 2 The corporate charitable donations can be deducted in the calculation of Taxable Income, but are not deductible in the calculation of Net Income For Tax Purposes. Note 3 Generally accepted accounting principles would require that the appraisal costs on the property to be sold be added to the cost of the relevant property. Regardless of the treatment accorded to this item in the accounting records of Voxit, it is clear that it could not be deducted for tax purposes and would be added to Class 1. Note 4

The required CCA calculations would be as follows: Class 1

Class 1 Opening Balance Additions - Appraisal Cost One-Half Net Addition

$325,236 2,600 ( 1,300)

CCA Base Rate

$326,536 4%

Class 1 CCA

$ 13,061



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Class 8 Class 8 Opening Balance Additions Disposal - Lesser Of: • Proceeds = $189,000 • Cost = $275,000 One-Half Net Addition

$226,964 $262,000 ( 189,000) (

73,000 36,500)

CCA Base Rate

$263,464 20%

Class 8 CCA

$ 52,693 Class 10

Class 10 Opening Balance Dispositions - Lesser Of • Capital Cost (Not Given) • Proceeds = $56,500

$87,468 ( 56,500)

Ending Balance With No Remaining Assets = Terminal Loss

$30,968

The cost of each individual vehicle was not provided in the problem. However, the problem did state that no vehicle had proceeds of disposition that was greater than its cost. Given this, the capital cost is not required. Class 14.1 The CCA calculation for this Class would be as follows: Class 14.1 UCC Opening Balance Acquisition Of Goodwill One-Half Net Additions

Nil $55,000 ( 27,500)

CCA Base Rate

$27,500 5%

Class 14.1 CCA

$ 1,375 Total CCA

The total CCA deductible would be as follows: Class Class Class Class Class Class

1 (Preceding Calculation) 8 (Preceding Calculation) 10 (Terminal Loss) 13 ($36,400 14) 14.1 (Preceding Calculation) 50 [(1/2)(55%)($20,000)]

Total CCA

$13,061 52,693 Nil 2,600 1,375 5,500 $75,229

Note that the January 1 Class 13 balance shows that less than the maximum CCA for this class has been claimed in the past.



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Notes On Excluded Items •

The cost of sponsoring the local soccer team is deductible for both tax and accounting purposes.

•

The cost of theft by employees who are not officers of the Company is deductible.



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SSS Solution Six - 5 Part A - No Election If the ITA 22 election is not made, the tax consequences for Mr. Brownstone would be as follows: Add: 2016 Reserve For Doubtful Debts Deduct Capital Loss: Proceeds Of Disposition Adjusted Cost Base Capital Loss Non-Deductible One-Half

$31,000 $427,000 ( 463,000) ($ 36,000) 18,000

( 18,000)

2017 Income Inclusion

$13,000

Note that the $18,000 allowable capital loss can only be deducted to the extent of Mr. Brownstone’s taxable capital gains. In the absence of such capital gains, the income inclusion would have been $31,000. If the ITA 22 election is not made, the tax consequences to Ms. Pilsner would be as follows: Proceeds Of Disposition (Amount Collected) Adjusted Cost Base

$433,000 ( 427,000)

Capital Gain Non-Taxable One-Half

(

2017 Income Inclusion

$

6,000 3,000)

$

3,000

Part A - Election If the ITA 22 election is made, the tax consequences for Mr. Brownstone would be as follows: Add: 2016 Reserve For Doubtful Debts Deduct: Business Loss ($463,000 - $427,000)

$31,000 ( 36,000)

2017 Deduction From Income

($ 5,000)

If the ITA 22 election is made, the tax consequences to Ms. Pilsner would be as follows: Add: Face Value - Price Paid ($463,000 - $427,000) Deduct: Actual Write-Offs ($463,000 - $433,000) 2017 Income Inclusion

$36,000 ( 30,000) $ 6,000

Part B For Mr. Brownstone, the ITA 22 election is clearly desirable, converting a $13,000 income inclusion into a $5,000 deduction. For Ms. Pilsner, the fact that actual collections ($433,000) exceed the estimated value of the Accounts Receivable on the date of the sale ($427,000), means that the ITA 22 election would not be desirable. It would double her income inclusion from $3,000 to $6,000.



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SSS Solution Six - 6 Net Employment Income The required calculations here are as follows: Salary Additions Commissions Car Allowance [($500)(12)] Stock Option Benefit [($18.25 - $12.00)(1,000)] Deductions RPP Contributions Car Operating Costs [($3,750)(18,500 ÷ 21,000)] Car CCA [($28,500)(30%)(1/2)(18,500 ÷ 21,000)]

$ 56,000 48,000 6,000 6,250 ( ( (

Net Employment Income

4,200) 3,304) 3,766) $104,980

Since the meals and entertainment expenses were fully reimbursed by his employer, they have no effect on Mr. Archer’s employment income. As it is not deductible for tax purposes, the amount withheld for parking has no effect on Mr. Archer’s employment income.

Net Business Income The required calculations here are as follows: Cash Basis Income (Given) December 31 Receivables December 31 Inventories December 31 Payables CCA On Building [($183,000 - $42,000)(6%)(1/2)]* CCA On Furniture And Fixtures [($56,000)(20%)(1/2)]

$32,800 2,600 12,600 ( 5,750) ( 4,230) ( 5,600)

Net Business Income

$32,420

*It would appear that the new building will be used exclusively for non-residential purposes. Given this it will be eligible for the 6 percent CCA rate, provided that it is kept in a separate Class 1.

Net Income For Tax Purposes The required calculation here is as follows: Net Employment Income Net Business Income

$104,980 32,420


$137,400

Taxable Income The required calculation is as follows: Net Income For Tax Purposes Stock Option Deduction [($6,250)(1/2)] Taxable Income

(

$137,400 3,125) $134,275



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Tax Payable The required calculations are as follows: Tax On First $91,831 Tax On Next $42,444 ($134,275 - $91,831) At 26 Percent

$16,300 11,035

Tax Before Credits Tax Credits: Basic Personal Amount (Mr. Archer) Spouse ($11,635 - $7,500) Canada Caregiver - Ron EI CPP Canada Employment Transfer Of Tuition - Lesser Of: • Absolute Limit Of $5,000 • Actual Tuition Of $9,200 Medical Expenses (Note)

$27,335 ($11,635) ( 4,135) ( 6,883) ( 836) ( 2,564) ( 1,178) ( 5,000) ( 11,269)


($43,500) 15%

(

Federal Tax Payable

6,525) $20,810

Note The medical expense credit base would be calculated as follows: Medical Expenses For Allen And Jan ($3,780 + $2,000) Reduced By The Lesser Of: • [(3%)($137,400)] = $4,122 • 2017 Threshold Amount = $2,268

$ 5,780 ( 2,268)

Balance Before Dependants 18 And Over

$ 3,512

Ron’s Medical Expenses Reduced By The Lesser Of: • $2,268 • [(3%)(Nil)] = Nil

$6,400

Mona’s Medical Expenses Reduced By The Lesser Of: • $2,268 • [(3%)($4,750)] = $143

$1,500

Total Medical Expense Claim

Nil

(

143)

6,400

1,357 $11,269



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Self Study Problem Seven - 1

Chapter 7 Self Study Problems Self Study Problem Seven - 1 (Interest Deductibility - 4 Cases) Each of the following independent Cases involves the payment of interest and the issue of whether the interest will be deductible for tax purposes. Case A John Artho owns 1,000 shares of Bee Ltd., a publicly traded company. He also owns a personal use condominium that was financed with borrowed money. Mr. Artho sells the 1,000 shares of Bee Ltd. and uses the proceeds to pay down the mortgage on the condominium. He subsequently borrows money to acquire another 1,000 shares of Bee Ltd. Would the interest on the new loan be deductible? Explain your conclusion. Case B Meridee Burns borrows $225,000 and acquires an income producing property for $225,000. She subsequently sells the property for $275,000 and, without repaying the funds borrowed to acquire the first property, uses the proceeds to acquire two other properties. The cost of property A is $50,000, while the cost of property B is $225,000. How will the $225,000 in borrowing be linked to the two new properties? Case C Meridee Burns borrows $225,000 and acquires an income producing property for $225,000. She subsequently sells the property for $190,000 and, without repaying the funds borrowed to acquire the first property, uses the proceeds to acquire two other properties. The cost of property A is $60,000, while the cost of property B is $130,000. How will the $225,000 in borrowing be linked to the two new properties? Case D Jason Bridges borrows $320,000 and invests the entire amount in the shares of Loser Inc. Six months later, he sells these shares for $175,000. The proceeds of the sale are used to pay off $175,000 of the loan, leaving an ongoing balance of $145,000. Can he continue to deduct the interest payments on this $145,000 balance? Explain your conclusion. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 2 (Rental Income) On March 1, 2016, Ms. Fox acquires a residential duplex for a total cost of $725,000. Of this total, it is estimated that the land has a value of $150,000 at the time of the acquisition. The two units are identical in size and, for purposes of allocation to a CCA Class, the property is considered to be a single unit. Before the end of March, 2016, both units were rented. The tenant occupying one of the units asked that, in return for an additional amount of rent, Ms. Fox furnish the unit. Furniture and appliances for the unit were acquired by Ms. Fox on April 1, 2016 at a cost of $18,500. During the year ending December 31, 2016, rents on the two units totaled $43,500. Expenses, other than CCA, totaled $28,000. Late in 2017, the tenants in the furnished unit moved out. As Ms. Fox did not wish to continue renting the unit on a furnished basis, she sold the furniture and appliances to the departing tenants for $14,000. During 2017, the two units generate total rent of $45,000. Ms. Fox incurred expenses, other than CCA, of $32,000. Ms. Fox deducts the maximum CCA allowable in both years. Required: Calculate Net Rental Income for each of the two years 2016 and 2017. Also, determine her UCC balances on January 1, 2018. Include in your solution any tax consequences associated with the sale of the furniture and appliances. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 3 (Property Income - Alternative Investments) Mr. Martin Forsythe, as the result of maintaining a modest lifestyle, has accumulated $582,000 in savings. The full amount of these savings is currently in a savings account where it earns a fairly nominal amount of interest. As the result of taking a basic finance course at a local college, he has become aware that better returns are available through making other types of investments. As a consequence, he intends to invest the full amount of his savings in some alternative investment as of January 1, 2017. He is considering the following alternatives: •

Investment of the full $582,000 in 12,000 shares of the common stock of a Canadian public company. The stock has been recommended by his broker and pays a regular annual eligible dividend of $2.25 per share. The stock, which is selling for $48.50 per share on January 1, 2017, is expected to increase in value to at least $49.50 per share by December 31, 2017, at which time he plans to sell the shares.

•

Investment of the full $582,000 in a guaranteed investment certificate that will pay annual interest at the rate of 3 percent for the year ending December 31, 2017.

•

Investment of the full $582,000 in a bond issued by a publicly traded Canadian company. The bond pays annual interest equal to 4 percent of the maturity amount on December 31 of each year. The bond matures on December 31, 2017, at which time the full maturity amount of $600,000 will be paid. The bond is selling at a discount because its annual interest rate is below the current market rate.

Mr. Forsythe has sufficient employment income that he is in the 29 percent federal tax bracket and the 13 percent provincial tax bracket. The provincial dividend tax credit on eligible dividends is equal to 28 percent of the gross up. Assume the common shares can be sold at the anticipated value on December 31, 2017. Required: For each investment alternative, determine the after tax return that Mr. Forsythe will earn during the year ending December 31, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 4 (Property Income - Alternative Investments) On January 1, 2017, Ms. Joan Bagley has $650,000 in a bank account. While the account has great flexibility in terms of deposits and withdrawals, it pays interest at an annual rate of only 1 percent. She would like to retain $50,000 of this balance as a contingency fund, while investing the $600,000 balance for a year. After consulting with her financial advisor, she is considering the following investment alternatives: •

A $600,000 guaranteed investment certificate that will mature on December 31, 2017. The certificate will pay annual interest at a rate of 4.5 percent on December 31.

•

Preferred shares of a Canadian public company with a stated value of $600,000. These shares pay an annual eligible dividend of 5.25 percent on December 15. Ms. Bagley anticipates selling these shares on December 31, 2017 for their stated value.

•

Shares of a public high tech company at a cost of $600,000. While these shares do not pay dividends, Ms. Bagley anticipates selling these shares on December 31, 2017 for $675,000.

Ms. Bagley has sufficient employment income that she is in the 29 percent federal tax bracket and the 12 percent provincial tax bracket. The provincial dividend tax credit on eligible dividends is equal to 28 percent of the gross up. Assume the preferred and common shares can be sold at the anticipated values on December 31, 2017. Required: For each investment alternative, determine the after tax return that Ms. Bagley will earn during the year ending December 31, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 5 (Property Income - Alternative Investments) During December, 2016, Ms. Holmes reaches a settlement with her former husband that requires him to make a lump sum payment to her of $100,000 on January 1, 2017. While Ms. Holmes has no immediate need for the funds, she will require them on January 1, 2018 in order to finance a new business venture that she plans to launch. As a consequence, she would like to invest the funds for the year ending December 31, 2017. She is considering the following alternatives: •

Investment of the full $100,000 in a one year, guaranteed investment certificate that pays annual interest of 5.5 percent.

•

Investment of the full $100,000 in the shares of Norton Ltd., a publicly traded Canadian company. Ms. Holmes expects that the Company will pay eligible dividends on these shares during 2017 of $5,000. She anticipates that by the end of 2017, the shares will be worth at least $106,000.

•

Investment of the full $100,000 in a rental property with a cost of $165,000. The property currently has a tenant whose lease calls for rental payments during 2017 of $13,200. Cash expenses for the year (interest, taxes, and condominium fees) are expected to be $9,600. Of the total cost of $165,000, an amount of $15,000 can be allocated to the land on which the building is situated. Ms. Holmes believes that the property can be sold on December 31, 2017, to net her $175,000.

Ms. Holmes expects to have employment income in excess of $250,000 during 2017. Her provincial tax rate on any additional income is 18 percent, while the provincial dividend tax credit on eligible dividends is equal to 27 percent of the gross up. Required: Write a brief memorandum providing investment advice to Ms. Holmes on the three alternatives. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 6 (Business And Property Income) Mrs. Norton is a lawyer who specializes in real estate. She has a well established practice located in Regina. During the taxation year ending December 31, 2017, she had professional fees of $169,500 and operating expenses associated with running her practice of $42,800. In addition to these operating expenses, Mrs. Norton spent $1,500 for accommodations and seminar fees attending a convention in Saskatoon, and $5,400 in travel costs (air fare, accommodations, and 50 percent of meals) attending a convention in Singapore on doing business in Asia. In addition to her professional income, Mrs. Norton received $1,000 in eligible dividends from a Canadian public company and $1,250 in interest on Canada Savings Bonds. Mrs. Norton also owns a rental property that generated revenues of $12,000 and incurred cash expenses of $8,000. The UCC of this property at the beginning of 2017 was $300,000 and it is subject to CCA at a rate of 4 percent. Required: Determine Mrs. Norton’s minimum Net Income For Tax Purposes for the year ending December 31, 2017. Ignore GST/HST/PST considerations and the need to make CPP contributions by Ms. Norton. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 7 (Income Trusts And Mutual Funds) On January 1, 2017, Ms. Natasha Boritz acquires the following investments: •

5,000 units of the Real Property Income Trust. The cost is $50.00 per unit for a total cost of $250,000.

•

10,000 units of the Infidelity Far East Fund, a mutual fund trust. The cost is $85.00 per unit for a total cost of $850,000.

During 2017, the Real Property Income Trust makes an annual distribution of $4.50 per unit, of which $1.25 is designated as a return of capital. The remaining $3.25 is ordinary income. Natasha has elected to use the Trust’s DRIP and, as a consequence, the distribution is reinvested in new trust units at a cost of $52.00 per unit. Also during 2017, the Infidelity Far East Fund makes a distribution of $7.00 per unit. This distribution is made up of capital gains of $2.00, eligible dividends of $2.75, and interest income of $2.25. The entire distribution is reinvested in Infidelity Far East Fund units at a cost of $83.00 per unit. Natasha has other investment income that places her in the 29 percent federal tax bracket. Taxes on this income are sufficient to use all of her available tax credits before considering the effects of the two investments described above. She lives in a province where the maximum rate is 11 percent and the tax credit on eligible dividends is 28 percent of the gross up. Required: Calculate the amount of Taxable Income and Tax Payable that will result from the distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of the two trust units on December 31, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 8 (Comprehensive Case Covering Chapters 1 to 7) Ms. Shelly Spring is a 48 year old widow. While her deceased husband left her financially secure, she continues to work as a course assistant at a local college. Her 2017 salary is $64,000, from which her employer withheld the following amounts: RPP Contributions EI Premiums CPP Contributions Disability Insurance Premium

$2,960 836 2,564 205

Ms. Spring pays one-half of the total disability insurance premium to the group plan, with her employer paying the balance. The plan provides periodic benefits that compensate for lost employment income. She started making payments in 2015 and made payments of $200 in that year, $250 in 2016, and $205 in 2017. During 2017, because of an extended illness, she received benefits of $5,600. In addition to her salary, her employer provides her with an allowance of $400 per month for maintaining an office in her home. This office is her principal work location. The office occupies 15 percent of her home and, for the year 2017, the costs of operating the home were as follows: Interest On Mortgage Property Taxes Electricity And Water Costs Maintenance And Repairs Home Insurance

$4,200 2,750 1,340 1,800 820

Ms. Spring has two children and they both live with her. Her daughter, Amy, is 19 years old and, during 2017, she was in full time attendance at the local university for 8 months of the year. Her tuition fees of $8,200 were paid by Ms. Spring . Amy has Net and Taxable Income of $7,300 for the year. She has agreed to transfer the maximum amount of her tuition credit to her mother. Her son, Mark, is 23 years old and is dependent because of a physical disability. The disability is not severe enough, however, to qualify for the ITA 118.3 disability tax credit. Mark had no income during 2017. The family ’s medical expenses, all of which have been paid by Ms. Spring , were as follows: Ms. Spring Amy Mark

$

962 2,450 8,600

Total Medical Expenses

$12,012

At the beginning of 2017, Ms. Spring owns two residential rental properties, both acquired in 1995. On January 1, 2017, the UCC of property A was $156,000. The cost of this property was $245,000, including $40,000 for the land. Property B had a cost of $426,000, including $100,000 for the land. Its January 1, 2017 UCC was $276,000. On June 1, 2017, property A was sold for $201,000, including $40,000 for the land. On that same date, a new residential rental property was acquired at a cost of $322,000, including $75,000 for the land. During 2017, Ms. Spring received rents of $42,000 and had rental expenses, other than CCA, of $32,500.



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Ms. Spring owns shares of Canadian public companies which paid eligible dividends of $9,300 during 2017. She also owns shares in a foreign company which paid dividends of $5,600 (Canadian). The government in the foreign country withheld taxes of $840, giving Ms. Spring a net receipt of $4,760. Required: Calculate Ms. Spring’s 2017 minimum Net Income For Tax Purposes, her 2017 minimum Taxable Income, and her 2017 minimum federal Tax Payable without consideration of any income tax withheld by her employer. Ignore GST/HST/PST considerations. SOLUTION available in printed and online Study Guide.



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Self Study Problem Seven - 9 (Comprehensive Case Covering Chapters 1 to 7) Mr. Derek Fontaine is married and has three children. His wife, Emily, works as a personal fitness trainer on a part time basis and, for 2017, her Net Income For Tax Purposes is $9,500. His two youngest children, Brad and Barbara are twins. They are 14 years old and, unfortunately, Brad has been blind since birth. Neither child has any income of their own. His other son, Bill, is 19 years old and attends university on a full time basis for 10 months of the year. His tuition fees total $8,500. Bill has income from part time jobs of $10,000 during 2017. Bill has agreed to transfer the maximum amount of the tuition credit to his father. Eligible medical expenses for Derek’s family, all of which were paid by Derek, are as follows: Derek Emily Brad (No attendant care included) Barbara Bill

$ 1,400 1,600 11,400 2,300 4,600

The Fontaines had always lived in rented premises. However, because the current level of mortgage rates makes purchasing a home attractive, they purchase a residence at a cost of $625,000. They move in on September 1, 2017. Derek has a management consulting business that he operates out of a building that he owns. For the taxation year ending December 31, 2017, the business has an accounting Net Income of $211,000. Other information about this business is as follows: 1. Expenses include $11,500 in business meals and entertainment. 2. Derek owns a car which is used in the business. It was purchased on January 1, 2017 for $46,000. Operating costs for 2017 totaled $4,800. All of these costs were deducted in determining the accounting Net Income of the business. During this year, the car was driven 32,000 kilometers of which 23,000 related to Derek’s business activities. 3. The building that is used in the business is a new building that was purchased in 2015. It has a January 1, 2017 UCC of $450,000. Derek’s business uses 100 percent of the space in the building. The furniture and fixtures in the building have a January 1, 2017 UCC of $42,000. During 2017, additional furniture was acquired at a cost of $12,000. It replaced furniture that had cost $10,000. Derek sold the used furniture for $3,000. 4. Amortization of $18,000 was deducted in determining accounting Net Income. This included amortization on the car, the furniture and fixtures, and the building. In addition to operating his business, Derek has been an active investor in various types of securities. Information on his holdings is as follows: Breax Common Shares On January 1, 2017, Derek holds 2,500 shares of this Company. They have an adjusted cost base of $130,000. On February 1, 2017, he sells 1,000 of these shares for $65 per share. On July 1, 2017, he acquires an additional 1,200 shares at $54 per share. During 2017 he receives eligible dividends on these shares totalling $8,000. Realco Income Trust On January 1, 2017, Derek holds 5,000 units of this income trust. The adjusted cost base of these units is $150,000. During 2017, these units have a distribution of $2.50 per unit. Of this total, $1.00 represents a return of capital, with the other $1.50 consisting of property income. Derek uses the entire distribution to acquire additional units in the trust at $32 per unit.



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Debt Security On July 1, 2016, Derek purchases a debt security with a maturity value of $100,000. The security matures on June 30, 2021 and bears interest at 8 percent per annum. Interest for the first 18 months is paid on December 31, 2017, with the remaining interest due when the security matures on June 30, 2021. Foreign Term Deposit On January 1, 2017, Derek owns a foreign currency term deposit with a maturity value of $250,000. During the year, the term deposit earns interest of $20,000. Taxation authorities in the foreign jurisdiction withhold $8,000 of this amount. All amounts are in Canadian dollars. Required: Calculate Mr. Fontaine’s 2017 minimum Net Income For Tax Purposes, his 2017 minimum Taxable Income, and his 2017 minimum federal Tax Payable. Ignore GST/HST/PST considerations and the need to make CPP contributions by Derek and Emily.



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SSS Problem Seven - 1


SSS Problem Seven - 1 (Interest Deductibility - 4 Cases) Each of the following independent Cases involves the payment of interest and the issue of whether the interest will be deductible for tax purposes. Case A Martin Duck borrows $300,000 and invests the entire proceeds of the loan in publicly traded securities. After 3 months, the value of the securities has fallen to $110,000. At this point, Mr. Duck sells the securities and uses the proceeds to reduce the loan to $190,000. Now that he no longer owns the securities, can he still deduct the interest on the loan? Explain your conclusion. Case B Janet Forest owns a portfolio of securities with a current value of $190,000. Using her margin balance available from her stockbroker, she borrows $30,000 to finance the purchase of a sailboat. During the period the margin loan is outstanding , she pays interest of $900. Can she deduct this interest against the $5,000 in income earned during this period on her portfolio of securities? Explain your conclusion. Case C Martin Brock borrows $42,000 and uses the funds to acquire an income producing property. He later sells the property for $110,000. He uses these proceeds to purchase two properties. Property A costs $45,000 and property B costs $65,000. How will the $42,000 in borrowing be linked to the two properties? Case D Chuck Masters borrows $100,000 and uses the funds to acquire an income producing property. He later sells the property for $80,000. He uses the $80,000 to purchase two properties. Property A costs $20,000 and property B costs $60,000. How will the $100,000 in borrowing be linked to the two properties?



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SSS Problem Seven - 2 (Rental Income) In the past few years, Mr. Stanton has invested his excess funds in various residential rental properties in Windsor. Given the economic situation in the city at the time, he was able to purchase several foreclosed properties at very low prices. At the beginning of 2017, he owned four properties, as well as some furnishings used in one of the older buildings. The relevant information on these rental properties for 2017 is as follows: Furniture The furniture was used in the building at 18 Prince Street. It had a capital cost of $15,000, a UCC of $8,000 at the beginning of the year, and was sold during the year for $5,000. 18 Prince Street This building had a capital cost of $42,000. It was sold on August 1. For CCA purposes, it was included in the same Class 1 pool as 4 McManus Street. Of the sale proceeds, $60,000 was allocated to the building . From January 1 to July 31, the building generated rents of $6,000 and incurred property taxes of $1,200, interest charges of $1,750, and other expenses (excluding CCA) of $1,000. 4 McManus Street This building has a capital cost of $45,000. At the beginning of the year, the UCC of this Class 1 pool, which included both 4 McManus Street and 18 Prince Street, was $50,000. During the year, it generated rents of $5,000 and incurred property taxes of $1,550, interest charges of $650, and other expenses (excluding CCA) of $2,500. 94 George Street This building has a capital cost of $650,000. Its UCC at the beginning of the year was $550,000. During the year, it generated rents of $42,000 and incurred property taxes of $5,200, interest charges of $7,800, and other expenses (excluding CCA) of $8,500. 125 West Street This building has a capital cost of $102,000. Its UCC at the beginning of the year was $98,000. During the year, the unit generated rents of $10,000 and incurred property taxes of $1,750, interest charges of $5,000, and other expenses (excluding CCA) of $4,000. Within the next year, Mr. Stanton expects to sell 4 McManus and 125 West for double what he paid for the properties. Required: Calculate Mr. Stanton’s net rental income for 2017. You should provide a separate calculation for each property. Specify how much CCA should be taken for each building .



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SSS Problem Seven - 3 (Dividend vs. Interest Income) Bill Martin, Dave Martin, and Charles Martin are three brothers living in the same province. They each have $20,000 that they wish to invest. Because of differences in their current employment situations, they are in different tax brackets. These brackets are as follows:

Bill Martin Dave Martin Charles Martin

Federal Tax Bracket

Provincial Tax Bracket

15.0 Percent 20.5 Percent 29.0 Percent

6.0 Percent 9.5 Percent 14.0 Percent

The provincial dividend tax credit on eligible dividends is equal to 30 percent of the dividend gross up. For a number of years, they have been interested in the securities of Moland Industries, a Canadian public corporation, and, on January 1 of the current year, they are considering two securities of the Company that are currently outstanding . These securities and their investment characteristics are as follows: Bonds The Company has a large issue of debenture bonds that has a coupon interest rate of 6 percent. They are selling at par value and mature in 18 years. Preferred Stock The Company has an issue of preferred shares that is offering an eligible dividend of 4 percent based on the current market price. The dividend is cumulative, but not participating . The income from these investments would not move any brother to a higher federal or provincial tax bracket. Each brother has sufficient income to use all of his available tax credits. Required: Advise each of the Martin brothers as to which investment they should make. As part of your recommendation, calculate the after tax income that would be generated for each of the brothers during the current year, assuming that they invested their $20,000 in: A. the Moland Industries bonds. B. the Moland Industries preferred stock.



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SSS Problem Seven - 4 (Income Trusts And Mutual Funds) On January 1, 2017, Mr. Irwin Mendez acquires the following investments: •

2,500 units of the Realty Income Trust. The cost is $35.00 per unit for a total cost of $87,500.

•

3,500 units of the Pickett Global Fund, a mutual fund trust. The cost is $54.00 per unit for a total cost of $189,000.

During 2017, the Realty Income Trust makes an annual distribution of $2.75 per unit, of which $.75 is designated as a return of capital. The remaining $2.00 is ordinary income. Irwin has elected to use the Trust’s DRIP and, as a consequence, the entire distribution is reinvested in new trust units at a cost of $36.00 per unit. Also during 2017, the Pickett Global Fund makes a distribution of $4.50 per unit. This distribution is made up of capital gains of $2.00, eligible dividends of $1.75, and a return of capital of $0.75. The entire distribution is reinvested in Pickett Global Fund units at a cost of $50.00 per unit. Irwin has other investment income that places him in the 29 percent federal tax bracket. Taxes on this income are sufficient to use all of his available tax credits before considering the effects of the two investments described above. He lives in a province where the maximum rate is 13 percent and the tax credit on eligible dividends is 24 percent of the gross up. Required: Calculate the amount of Taxable Income and Tax Payable that will result from the distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of the trust units on December 31, 2017.



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SSS Problem Seven - 5 (Foreign Property Income, Income Trusts And Mutual Funds) On January 1, 2017, Mr. Bradley Temrik acquires the following investments: Foreign Currency Term Deposit A £225,000 term deposit which pays interest at 5 percent per annum. On December 31, 2017, interest of £11,250 is paid on this term deposit. The taxation authorities in the U.K. withhold 25 percent of this payment, with the remaining 75 percent being remitted to Bradley. Assume that throughout 2017, £1 = $1.70. Income Trust Units cost is $252,000.

4,500 units of Canadian Realty Trust at $56 per unit. The total

Mutual Fund Units is $198,400.

6,200 units of Fidelitee Large Cap at $32 per unit. The total cost

During the year ending December 31, 2017, the following additional transactions occur: Canadian Realty Trust This trust has a distribution of $5.20 per unit. Of this total, $2.40 represents a return of capital, with the remainder being business income. Mr. Temrik reinvests the entire amount that he receives in additional units at a cost of $59 per unit. Fidelitee Large Cap This mutual fund has a distribution of $3.75 per unit. This is made up of capital gains of $1.00 per unit, interest of $1.25 per unit, and eligible dividends of $1.50 per unit. All of this distribution is reinvested to acquire additional units of Fidelitee at $28 per unit. Bradley has other investment income that places him in the 29 percent federal tax bracket. Taxes on this income are sufficient to use all of his available tax credits before considering the effects of the investments described above. He lives in a province where the maximum rate is 16 percent and the tax credit on eligible dividends is 30 percent of the gross up. Required: Calculate the amount of Taxable Income and Tax Payable that will result from the interest on the term deposit and the distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of the two trust units on December 31, 2017. Ignore any tax implications resulting from the Canada/U.K. tax treaty.



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SSS Problem Seven - 6 (Comprehensive Case Covering Chapters 1 to 7) Mr. Jean Benoit is 67 years of age, is married, and has two children. His spouse, Suzie, turned 65 during 2017. Her Net Income For Tax Purposes for the year is $6,250. This is made up of OAS benefits of $2,000 and $4,250 in pension income. During 2017, Suzie attends university on a full time basis for 10 months of the year. Jean paid her tuition fees of $7,800. Jean’s daughter, Sylvie, is 29 years of age and has a disability that qualifies her for the disability tax credit. For 2017, her Net Income For Tax Purposes is nil. She lives with Jean and is totally dependent on him. Jean’s son, Pierre, is 26 years of age. Because of difficulties with anger management, he has been unemployed for the last three years. During 2017, his Net Income For Tax Purposes is nil, he lives in the family residence, and is completely dependent on his father. The family ’s medical expenses, all of which have been paid by Jean, are as follows: Jean Suzie Sylvie Pierre

$ 3,240 1,850 10,550 4,320


$19,960

During 2017, Jean makes contributions to registered charities of $4,450 and contributions to the federal Conservative Party in the amount of $870. He is not eligible for the first time donor super credit. For many years Jean was employed as an engineer by a large Canadian public company. He retired when he turned 65 and, during 2017, receives income from this employer’s pension plan of $37,000. In addition, he has retained options to acquire 5,000 of his employer’s shares at a price of $12 per share. When the options were granted the shares were trading at $12 per share. On July 1, 2017, Jean exercises all of these options. At this time the shares are trading at $21 per share and Jean immediately sells the shares for that price. The employer did not deduct EI premiums or CPP contributions on behalf of Jean. Jean received CPP benefits of $10,000 in 2017. Since Jean has had income of over $150,000 for the last five years and anticipates income at this level for the rest of his life, he has not applied to receive OAS benefits. During 2017, Jean received the following dividends (all amounts in Canadian dollars): Eligible Dividends From Taxable Canadian Corporations Non-Eligible Dividends On Shares In His Brother’s CCPC Dividends On Foreign Shares - Net Of 10 Percent Withholding

$ 9,250 4,670 7,785

Total Dividends Received

$21,705

In addition to dividends, Jean had 2017 interest income of $8,742. Because of the continuing financial needs of his family, after his retirement from his employer, Jean started an engineering services business. In 2014 he acquired a new building to be used as an office for his business. The building cost $320,000 of which $80,000 was the estimated value of the land. It was allocated to a separate CCA Class 1. On January 1, 2017, the UCC of the building is $230,000.



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The building contains office furniture and fixtures that were acquired at a cost of $25,000. On January 1, 2017, they have a UCC of $22,579. During 2017, he spends $28,000 on improving and upgrading the building . In addition, he sells the old furniture and fixtures for $12,500 and acquires replacement furniture and fixtures for $42,100. As Jean has no reason to keep detailed accounting records, he records business income on a cash basis. For 2017, his net cash flow from operations was $67,500. Relevant figures for the beginning and end of 2017 are as follows: Billed Receivables Unbilled Work In Process Accounts Payable

January 1

December 31

$12,800 15,600 4,500

$15,400 17,800 5,250

Until 2017, Jean has used his personal vehicle for business purposes. However, as of January 1, 2017, he leases an automobile with a manufacturer’s list price of $47,000. The lease payment, which does not include any payment for insurance, is $810 per month. No down payment or security deposit is required on the lease and he is not required to purchase the car at the end of the lease term. The lease payments were deducted in the determination of his net cash flow from operations. The car is used 100 percent for business activity. Required: Calculate Mr. Benoit’s 2017 minimum Net Income For Tax Purposes, his 2017 minimum Taxable Income, and his 2017 minimum federal Tax Payable. Ignore GST/HST/PST considerations and the possibility of pension income splitting .



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SSS Solution Seven - 1

Chapter 7 Supplementary Self Study (SSS) Solutions SSS Solution Seven - 1 Case A Under ITA 20.1 (disappearing source provision), the $190,000 balance will be deemed to be used to produce income. Therefore, he can continue to deduct the interest.

Case B While the loan is secured by income producing assets, the direct purpose of the loan was not income producing . The interest cannot be deducted.

Case C Since the proceeds exceed the borrowings, Mr. Brock has complete flexibility with respect to linking . He could allocate all of the $42,000 to property A or B or alternatively, $21,000 to each. Any allocation totaling $42,000 would be acceptable.

Case D When the value of the replacement property is less than the amount borrowed, the taxpayer must use a pro-rata allocation of the borrowed money. In this case, the result would be an allocation of $25,000 [($20,000 ÷ $80,000)($100,000)] to property A and an allocation of $75,000 [($60,000 ÷ $80,000)($100,000)] to property B.



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SSS Solution Seven - 2 Rental And Other Income The required net rental income information can be calculated as follows: 18 Prince Street

4 McManus Street

Rental Revenues Property Taxes Interest Charges Other Expenses (Excluding CCA)

$6,000 ( 1,200) ( 1,750) ( 1,000)

$5,000 ( 1,550) ( 650) ( 2,500)

Rental Income (Loss) Before CCA

$2,050

$ 300

94 George Street ( ( (

125 West Street

$42,000 5,200) 7,800) 8,500)

( ( (

$10,000 1,750) 5,000) 4,000)

$20,500

($

750)

The terminal loss for Class 8 would be calculated as follows: Opening UCC Disposition - Lesser Of: • Cost = $15,000 • Proceeds Of Disposition = $5,000

$8,000 ( 5,000)

Balance With No Remaining Assets In The Class Terminal Loss On Class 8 Assets

$3,000 ( 3,000)

CCA Base

Nil

The calculation of net rental income would be as follows: Rental Income (Loss) Before CCA ($2,050 + $300 + $20,500 - $750) Terminal Loss On Class 8 Assets

$ 22,100 ( 3,000)

Income Before CCA CCA (See Following Discussion)

$19,100 ( 19,100)

Net Rental Income

Nil

CCA Deduction As 18 Prince and 4 McManus each cost less than $50,000, they can be grouped into a single CCA Class 1. The opening UCC in this Class 1 would be $50,000 and, when the $42,000 capital cost of 18 Prince is deducted, a balance remains. This means that there will be no recapture on the sale of 18 Prince. Maximum available CCA would be calculated as follows: 4 McManus [(4%)($50,000 - $42,000)] 94 George [(4%)($550,000)] 125 West [(4%)($98,000)]

$

320 22,000 3,920

Total Available

$26,240

As the deduction of CCA cannot be used to create a rental loss and, as a consequence, the actual deduction would be limited in this situation to $19,100, the net amount of rental income on the 4 properties. This is less than the maximum available of $26,240, resulting in a situation in which there are various possibilities with respect to how much of the $19,100 will be deducted from the buildings in each Class 1. In general, CCA should be taken on assets with a lower rate first in order to leave more flexibility in the future. However, in this case, all the rates are the same.



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Since Mr. Stanton intends to sell 4 McManus and 125 West in the near future for proceeds that are greater than the UCC in their respective Class 1 pools, he should not take CCA on those Classes this year as it would increase the recapture in the following year. Even if he did not plan on selling any of the properties, it would probably leave him more future flexibility if the $19,100 was taken from 94 George Street, the Class with the largest UCC. Note that even though 125 West generated a net rental loss of $750, CCA could still be taken on that Class as there was rental income before CCA when all rental properties were considered.

Taxable Capital Gain In addition to the rental income, there is a taxable capital gain on the sale of 18 Prince Street of $9,000 [(1/2)($60,000 - $42,000)].



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SSS Solution Seven - 3 Part A The combined tax rates for the three brothers are 21 percent (15% + 6%), 30 percent (20.5% + 9.5%), and 43 percent (29% + 14%). Given these rates, the after tax returns on the bonds would be calculated as follows:

Interest [(6%)($20,000)] Federal/Provincial Tax Payable At 21, 30, And 43 Percent After Tax Return

Bill (21%)

Dave (30%)

$1,200

$1,200

(

252) $ 948

(

360)

$

840

Charles (43%) $1,200 (

516) $ 684

Part B The after tax returns resulting from an investment in the Moland Industries Preferred Stock begins with the calculation of the federal and provincial Tax Payable: Bill (21%)

Dave (30%)

Dividends [(4%)($20,000)] Gross Up Of 38 Percent

$ 800 304

$ 800 304

$ 800 304

Taxable Dividend Combined Rate (See Part A)

$1,104 21%

$1,104 30%

$1,104 43%

Tax Before Dividend Tax Credit Dividend Tax Credit [(6/11 + 30%)($304)]

$ 232

$ 331

$ 475

(

(

(

Tax Payable (Tax Savings)

($

257) 25)

Charles (43%)

257) $ 74

257)

$ 218

Based on the preceding calculations of federal and provincial Tax Payable, the after tax returns on the preferred shares are calculated as follows: Bill (21%) Dividends [(4%)($20,000)] Tax Savings (Tax Payable)

$800 25

After Tax Return

$825

Dave (30%) (

Charles (43%)

$800 74)

$800 ( 218)

$726

$582

Comparison A comparison of the after tax rates of return can be made as follows: Bill (21%) After Tax Interest After Tax Dividends Advantage If Bonds Purchased

Dave (30%)

Charles (43%)

$948 ( 825)

$840 ( 726)

$684 ( 582)

$123

$ 114

$ 102

Recommendation For each of the brothers, the bonds are the preferable investment as the after tax return is higher. While the problem does not require comment on this, we would note that the bonds are also the lower risk alternative.



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SSS Solution Seven - 4 Taxable Income And Tax Payable The amount of taxable income and tax payable resulting from the two investments would be calculated as follows: Realty Distribution [($2.75)(2,500)] Return Of Capital [($0.75)(2,500)]

$6,875 ( 1,875)

$ 5,000

Pickett Capital Gain [($2.00)(3,500)] Non-Taxable One-Half

$7,000 ( 3,500)

3,500

$6,125 2,328

8,453

Pickett Eligible Dividends [($1.75)(3,500)] Dividend Gross Up [(38%)($6,125)] Pickett Return Of Capital [($.75)(3,500) = $2,625]

Nil

Taxable Income Tax Rate (29% + 13%) Tax Before Dividend Tax Credit Dividend Tax Credit [($2,328)(6/11 + 24%)] Tax Payable

$16,953 42% (

$ 7,120 1,829) $ 5,291

Adjusted Cost Base - Realty The reinvestment of the $6,875 distribution at $36.00 per unit would acquire an additional 190.97 units. After recognizing these changes, the adjusted cost base per unit would be as follows: $34.37 [($87,500 + $6,875 - $1,875) ÷ (2,500 + 190.97)]

Adjusted Cost Base - Pickett The reinvestment of the $15,750 [($4.50)(3,500)] distribution at $50.00 per unit would acquire an additional 315 units. After recognizing these changes, the adjusted cost base per unit would be as follows: $52.98 [($189,000 + $15,750 - $2,625) ÷ (3,500 + 315)]



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SSS Solution Seven - 5 Note This problem is somewhat unrealistic in that, under the Canada/U.K. tax treaty, it is unlikely that there would be any amounts withheld on interest payments between the two countries (see Chapter 20). Note that this problem does not contain enough information to do a complete calculation of the foreign tax credit which is not covered until Chapter 11. We have assumed that the credit is equal to the maximum 15 percent of the amount withheld.

Taxable Income And Tax Payable The amount of taxable income and tax payable resulting from the investments would be calculated as follows: Interest On Term Deposit [(£11,250)($1.70)] (Note) Excess Withholding [(25% - 15%)(£11,250)($1.70)]

(

$19,125 1,913)

$17,212

Canadian Realty Trust Distribution [($5.20)(4,500)] Return Of Capital [($2.40)(4,500)]

$23,400 ( 10,800)

12,600

Fidelitee Capital Gain [($1.00)(6,200)] Non-Taxable One-Half

(

$ 6,200 3,100)

3,100

Fidelitee Eligible Dividends [($1.50)(6,200)] Dividend Gross Up [(38%)($9,300)]

$ 9,300 3,534

12,834

Fidelitee Interest [($1.25)(6,200)]

7,750

Taxable Income Tax Rate (29% + 16%) Tax Before Credits Dividend Tax Credit [($3,534)(6/11 + 30%)] Foreign Tax Credit [(15%)(£11,250)($1.70)] (Note) Tax Payable

$53,496 45% ( (

$24,073 2,988) 2,869) $18,216

Note - Foreign Source Property Income As required, 100 percent of the foreign interest is included in Net Income For Tax Purposes. However, for individuals, the credit against Tax Payable that is provided under ITA 126(1) is limited to a maximum of 15 percent of the foreign source non-business income. Since the withheld amount exceeds 15 percent, the excess is deducted and does not qualify for treatment as a foreign tax credit.

Adjusted Cost Base - Canadian Realty Trust The reinvestment of the $23,400 [($5.20)(4,500)] distribution at $59 per unit would acquire an additional 396.61 units. After recognizing these changes, the adjusted cost base per unit would be as follows: $54.04 [($252,000 + $23,400 - $10,800) ÷ (4,500 + 396.61)]

Adjusted Cost Base - Fidelitee Large Cap The reinvestment of the $23,250 [($3.75)(6,200)] distribution at $28 per unit would acquire an additional 830.36 units. After recognizing these changes, the adjusted cost base per unit would be as follows: $31.53 [($198,400 + $23,250) ÷ (6,200 + 830.36)]



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SSS Solution Seven - 6 Employment Income While Jean is no longer an employee, he can claim the Canada Employment tax credit as the exercise of the options creates employment income calculated as follows: Fair Market Value Of Shares [(5,000)($21)] Exercise Cost [(5,000)($12)] Employment Income

(

$105,000 60,000) $ 45,000

Capital Gains While Jean sold the shares he acquired through stock options, they were sold immediately, resulting in no capital gain or loss on the disposition.

Property Income Jean's property income is calculated as follows: Eligible Dividends Received Gross Up Of Eligible Dividends (38%) Non-Eligible Dividends Received Gross Up Of Non-Eligible Dividends (17%) Gross Foreign Dividends ($7,785 ÷ 90%) Interest

$ 9,250 3,515 4,670 794 8,650 8,742

Property Income

$35,621

Net Business Income Jean's net business income is calculated as follows: Income On Cash Flow Basis December 31 Receivables January 1 Billed Receivables December 31 Work In Process (Note 1) January 1 Work In Process December 31 Accounts Payable January 1 Accounts Payable Accrual Based Income CCA ($7,476 + $14,640) (Note 2) Non-Deductible Lease Payments (Note 3) Net Business Income

$67,500 15,400 ( 12,800) 17,800 ( 15,600) ( 5,250) 4,500 $71,550 ( 22,116) 2,421 $51,855

Note 1 Since Jean is an engineer, he cannot use the “billed basis of income recognition”. As a result, he must include unbilled work in progress in his income. Note 2 The CCA for the furniture and fixtures (Class 8) would be calculated as follows:



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January 1, 2017 UCC Additions Disposals - Lesser Of: • Proceeds Of Disposition = $12,500 • Capital Cost = $25,000 One-Half Net Additions [(1/2)($42,100 - $12,500)]

$22,579 42,100 ( 12,500) ( 14,800)

Base For CCA Rate

$37,379 20%

CCA

$ 7,476

The CCA for the building (Class 1) would be calculated as follows: January 1, 2017 UCC Additions (Improvements) One-Half Net Additions

$230,000 28,000 ( 14,000)

Base For CCA Rate

$244,000 6%

CCA

$ 14,640

As the building was acquired new and was used 100 percent for non-residential purposes, it is eligible for the 6 percent CCA rate. The fact that it was the only building owned by the business would result in it automatically being allocated to a separate class, but it must remain in a separate Class 1 to continue to qualify for the 6 percent rate. Note 3 The total deductible car lease payment is the least of: •

$9,720 [(12)($810)] - the actual amount paid

•

$9,600 [($800)(12)] - the annual limit using the $800 monthly maximum

•

$7,299 {[($810)(12)] [$30,000 ÷ (85%)($47,000)]} - the deductible limit using the $47,000 manufacturer’s list price

Using the manufacturer’s list price limit, the amount that must be added back to income for the year is $2,421 ($9,720 - $7,299).

Net Income For Tax Purposes Mr. Benoit’s Net Income For Tax Purposes would be calculated as follows: Employment Income Property Income Net Business Income Pension Income CPP Benefits

$ 45,000 35,621 51,855 37,000 10,000


$179,476

Taxable Income Jean’s Taxable Income would be calculated as follows: Net Income For Tax Purposes Stock Option Deduction [(1/2)($45,000)] Taxable Income

(

$179,476 22,500) $156,976



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Tax Payable Tax Payable would be calculated as follows: Tax On First $142,353 Tax On Next $14,623 ($156,976 - $142,353) At 29 Percent

$29,436 4,241

Tax Before Credits Tax Credits: Basic Personal Amount (Jean Benoit) Spouse ($11,635 - $6,250) Canada Caregiver - Sylvie Jean’s Age Credit [$7,225 - (15%)($179,523 - $36,430)] Jean’s Pension Credit Canada Employment Transfer Of Spouse’s Age Credit [$7,225 - (15%)($6,250 - $36,430) Transfer Of Spouse’s Pension Credit Transfer Of Spouse’s Tuition - Lesser Of: • Actual Tuition Cost Of $7,800 • Absolute Maximum Of $5,000 Transfer Of Sylvie’s Disability Credit Medical Expenses (Note 4)

$33,677 ($11,635) ( 5,385) ( 6,883) Nil ( 2,000) ( 1,178) ( (

7,225) 2,000)

( 5,000) ( 8,113) ( 17,692)

Total Credit Base ($67,111) Rate 15% Charitable Donations (Note 5) [(15%)($200) + (29%)($4,450 - $200)] Dividend Tax Credit On: Eligible Dividends [(6/11)($3,515)] Non-Eligible Dividends [(21/29)(17%)($4,670)] Foreign Tax Credit (Amount Withheld = 10 Percent) Political Contributions [(3/4)($400) + (1/2)($350) + (1/3)($120)]

( 10,067)

Federal Tax Payable

(

1,263)

( ( ( (

1,917) 575) 865) 515) $18,475

Note 4 The claim for medical expenses is determined as follows: Expenses Of Jean And Suzie ($3,240 + $1,850) Reduced By The Lesser Of: • [(3%)($179,476)] = $5,384 • 2017 Threshold Amount = $2,268

$ 5,090

Balance Before Dependants 18 And Over

$ 2,822

Pierre’s Medical Expenses Reduced By The Lesser Of: • $2,268 • [(3%)(Nil)] = Nil Sylvie’s Medical Expenses Reduced By The Lesser Of: • $2,268 • [(3%)(Nil)] = Nil Total Medical Expense Claim

( 2,268)

$ 4,320 Nil

4,320

$10,550 Nil

10,550 $17,692

Note 5 As none of his income is taxed at 33 percent, this rate will not be applicable to the calculation of the charitable donations tax credit.



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Self Study Problem Eight - 1

Chapter 8 Self Study Problems Self Study Problem Eight - 1 (Identical Properties) Over the past few years, Mr. Hall has taken an interest in the common shares of Clarkson Industries Ltd., a Canadian public company. As he is approaching retirement age and anticipates moving to Florida, he sold his total holding of Clarkson shares on March 15, 2017, when the shares were trading at $174 per share. Over the years, Mr. Hall has had the following transactions in the shares of Clarkson Industries: •

On October 15, 2011, he purchases 5,500 shares at $40 per share.

•

On November 8, 2011, he sells 1,500 shares at $52 per share.

•

On December 12, 2013, he purchases 3,200 shares at $79 per share.

•

On February 3, 2014, he sells 2,600 shares at $94 per share.

•

On January 15, 2015, he receives a 10 percent stock dividend that has been paid by Clarkson Industries. As part of this transaction, the Company transfers retained earnings of $99 per share to contributed capital.

• • •

On June 15, 2015, he acquires 3,800 shares at $104 per share. On December 23, 2016, he receives a 10 percent stock dividend that has been paid by Clarkson Industries. As part of this transaction, the Company transfers $125 per share from retained earnings to contributed capital.

Required: Determine the amount of the taxable capital gain or allowable capital loss that would arise from: • • •

the sale on November 8, 2011, the sale on February 3, 2014, and the sale on March 15, 2017.

Ignore transaction costs in all of your calculations.




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Self Study Problem Eight - 2 (Warranties On Capital Assets) On May 1, 2016, Mr. Rowe sold a parcel of suburban land to a developer for $2,600,000. The land had cost Mr. Rowe $1,400,000 15 years ago, and no additions or improvements had been made to the land. He classifies any gain on the land sale as a capital gain. In order to convince the purchaser that he should pay the full $2,600,000 in cash, Mr. Rowe has agreed to refund a part of the purchase price if less than 100 lots are sold by December 1, 2017. Specifically, the agreement calls for a refund of $26,000 for each of the 100 lots that is not sold within the specified period. At the time of the sale, Mr. Rowe estimates that he will probably have to pay $104,000 to the purchaser on December 1, 2017. Over the next two years, a number of plants in the area are closed, substantially reducing the demand for the lots in the development. By December 1, 2017, only 60 lots have been sold and Mr. Rowe is obliged to pay the purchaser $1,040,000 [($26,000)(40 Lots)] as agreed. Required: Describe the tax effects associated with the sale of the land and the guarantee provided by Mr. Rowe at the time the land is sold and with the payment that he is required to make on December 1, 2017. Include the effects of this payment on the Tax Payable of other years.




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Self Study Problem Eight - 3 (Capital Gain Reserves) Ms. Fabrice purchased a tract of land 10 years ago for $430,000. It was sold during 2017 for consideration of $1,730,000. She receives a down payment of $519,000 and accepts a 14 year, 8 percent mortgage for the balance of $1,211,000. The payments on this mortgage begin in the second year and require the repayment of $86,500 per year in capital. Ms. Fabrice wishes to use reserves to defer the payment of taxes on capital gains for as long as possible. She classifies any gain on the land sale as a capital gain. Required: Calculate the capital gains taxation effects of this sale, assuming that Ms. Fabrice deducts the maximum capital gains reserve in 2017 and subsequent years.




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Self Study Problem Eight - 4 (Capital Gain Reserves) Ms. Gerhardt purchased a substantial parcel of land in northern Ontario 10 years ago at a cost of $600,000. During May, 2017, she sells it for $1,350,000. The terms of the sale call for a down payment at the time of closing , with Ms. Gerhardt accepting a 9 percent mortgage for the balance of the $1,350,000. The terms of the mortgage require annual payments beginning in the year subsequent to the sale. The payments are designed to include principal payments of 5 percent of the sales price, or $67,500, per year. Ms. Gerhardt wishes to use reserves to defer the payment of taxes on capital gains for as long as possible. Required: Compare the capital gains taxation effects of this sale for each of the years 2017 through 2021 assuming: A. The down payment was 45 percent of the sales price. B. The down payment was 15 percent of the sales price. Ignore the interest that would be received on mortgage.




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Self Study Problem Eight - 5 (Bad Debts On Capital Asset Sales) Marjory Simpkins has decided to wind down her business, Simply Simpkins. The proprietorship has a December 31 year end. During December, 2016, Mrs. Simpkins sold a non-depreciable capital asset which was used in her business for $25,000. She had purchased the asset for $15,000. Mrs. Simpkins accepted a down payment of $15,000 and a note for $10,000 due December 1, 2017. No interest payments were required on the note and, because Mrs. Simpkins had very little other income during 2016, she did not establish a capital gains reserve. Beginning in September, 2017, Mrs. Simpkins tried to locate the purchaser. She was not successful and it appeared the purchaser had disappeared without a trace. As a reflection of this fact, Mrs. Simpkins wishes to write off the bad debt in 2017. Required:

Determine the 2016 and 2017 tax effects resulting from the preceding events.




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Self Study Problem Eight - 6 (Warranties, Bad Debts, and Reserves) Lawrence Wallack owns a tract of undeveloped land near Perth, Ontario. It was acquired a number of years ago at a cost of $2,160,000. On November 1, 2017, an Ottawa developer made Lawrence an offer of $6,680,000 for the land which he accepts. In order to facilitate the transaction, Lawrence agrees to an initial payment of $2,180,000, followed by annual payments of $1,500,000 on December 31 in each of the years 2018, 2019, and 2020. Interest, calculated at an annual rate of 4 percent on the opening balance for the year, is also payable on December 31 of each of these years. Given this arrangement, Lawrence plans to use capital gains reserves to defer taxes to the maximum extent possible. To further facilitate the transaction, Lawrence agrees to share the developer's risk by providing a warranty against unsold lots. As the developer plans to divide the property into 200 individual lots, Lawrence has agreed to reimburse the developer an amount of $20,000 for each lot that is not sold by December 1, 2019. By December 1, 2019, only 150 lots have been sold. As agreed, Lawrence pays the developer $1,000,000 [(200 - 150)($20,000)] on December 30, 2019. The interest and principal payments for 2018 and 2019 are made as required by the agreement. During 2020, the developer is unable to sell any further lots and, on August 1, 2020, the developer declares bankruptcy. Lawrence does not anticipate being able to collect any of the remaining balance on the loan or the final interest payment. Required: Calculate the tax effects of the transactions that took place during 2017 through 2020 on Lawrence Wallack's Net Income For Tax Purposes.




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Self Study Problem Eight - 7 (Principal Residence Designation) Alice Stewart has owned a large country home near Toronto since 2002. It was acquired at a cost of $850,000. Because of her growing need to spend time in the city, in 2010 she acquired a Toronto condominium at a cost of $625,000. At the beginning of 2017, she concludes that she would like to move to the west coast and, to this end, she sells both of her Ontario properties. The country home is sold for $1,200,000 during June, 2017. The Toronto condominium is sold in July, 2017 for $900,000. Real estate commissions of 5 percent of the sales price were charged on both transactions. As Ms. Stewart has been the only individual to use these properties, either one could be designated as her principal residence for the relevant years. Ms. Stewart wishes to minimize any capital gains resulting from the sale of the two properties. Required: Describe how the residences should be designated in order to accomplish Ms. Stewart’s goal. In addition, calculate the total amount of the gain that would arise under the designation that you have recommended.




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Self Study Problem Eight - 8 (Personal Use Property) As the result of some very bad investment decisions, Ms. Rita Forest is in need of additional cash resources. In order to raise these funds, she has sold a number of assets during the current year. The description of these dispositions is as follows: 1. She sold an oil painting by Group of Seven artist A. Y. Jackson at auction for $780,000, with the auction house charging a commission of 10 percent of the sale price. It was acquired for $698,000. 2. At his death, her father left her with his large collection of miniature vehicles. While he had acquired these vehicles at a total cost of $4,500, at the time of his death, they were valued a $12,000. Ms. Forest sells the collection to a collector for $23,000. 3. Rita was given an antique doll house when she was a child. While it had only cost her parents $500, it had increased significantly in value. It was sold through a local antique store for $4,500. The store charged a commission of $450. 4. Rita has always loved sailing and, a number of years ago, she acquired a damaged boat for $23,000. She spent $38,000 restoring it to working order and has enjoyed is use for a number of years. It is sold for $48,000. No selling costs were involved. 5. Rita has a jewelry collection that is sold for $43,000. The total cost of the items in this collection is $61,000. 6. Rita owns a rare first edition of Virginia Woolf's To The Lighthouse. It was acquired at a cost of $12,500. It sells through a local bookstore for $14,200, with the bookstore charging a commission of $400. Required: Indicate the tax consequences of each of these dispositions. In addition, indicate the total amount that will be included in Rita's Net Income For Tax Purposes, as well as any carry over amounts that can be used in previous or subsequent years.




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Self Study Problem Eight - 9 (Capital Gains On Foreign Securities) Ms. Barbara Laval sometimes make investments on European stock exchanges that must be paid for in Euros (€, hereafter). She is a Canadian resident and makes her purchases through a Canadian brokerage account. In July, 2015, she acquires 3,500 shares of Euron Ltd. at a cost of €30 per share. She acquired the Euros to make this purchase at €1.00 = $1.46. In January, 2017, she sells the Euron Ltd. shares for €33.50 per share. The Euros resulting from this sale are left in her Euro trading account that is maintained with her Canadian broker. In November, 2017, she converts her €117,250 [(3,500)(€33.50)] balance into Canadian dollars, with the resulting balance being transferred to her Canadian dollar brokerage account. She closes her brokerage account and withdraws all the funds in December, 2017. Assume relevant exchange rates between the Euro and the Canadian dollar are as follows: July 2015 January, 2017 November, 2017 December, 2017

€1.00 €1.00 €1.00 €1.00

= = = =

$1.46 $1.49 $1.52 $1.60

Required: Calculate the minimum amount that will have to be included in Ms. Laval’s Net Income For Tax Purposes for 2017 as a result of these transactions.




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Self Study Problem Eight - 10 (Changes In Use - Depreciable Property) On January 1, 2015 Ms. Laci Detweiler opens a consulting business. As a headquarters for this new business, she acquires a property for $645,000, of which $120,000 is the estimated value of the land. While her business occupies all of this property, it is not a new building and, as a consequence, it does not qualify for the 6 percent enhanced CCA rate on buildings used for non-residential purposes. Laci has a large investment portfolio that generates more than $200,000 in income and capital gains each year. She lives in a large home on the outskirts of town. Since in its first year of operation, the business was not as successful as Laci had hoped, on January 1, 2016, she converts 25 percent of the floor space into an apartment for her own use. She plans to spend some nights there during the work week to save having to fight the traffic. As the neighborhood in which the building is located has earned a reputation as a drug dealer hangout, the estimated fair market value of the property by this date has fallen to $560,000, with $100,000 of this total being allocated to the land on which the building is situated. Near the end of 2016, a new upscale residential/retail complex opens near her building , resulting in both an increase in the number of clients for her business, as well as an increase in the fair market value of her property. Based on this, on January 1, 2017, Laci converts her apartment back to business usage, with her consulting business occupying the entire space during the year ending December 31, 2017. At the time of the conversion, the fair market value of the property is $690,000, with $130,000 of this value being allocated to the land on which the building is situated. Required: Determine the maximum CCA that can be deducted by Ms. Detweiler in 2015, 2016, and 2017 and the January 1, 2018 UCC of the building . In addition, indicate any other tax consequences that will result from the changes in use of this property.




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Self Study Problem Eight - 11 (Changes In Use And Rental Income With CCA) Mr. Blake purchased his family home for a total cost of $528,000. It was estimated that the fair market value of the land at this time was $249,000. On January 1, 2016 a portion of this property was converted to an apartment, and rented to a tenant at a rate of $2,550 per month, for a term of 18 months. At the time of this conversion, the fair market value of the total property was $759,000. At this time, it was estimated that the fair market value of the land was $318,000. The apartment was located in the back of the house, faced a busy parking lot, and occupied 32 percent of the total floor space of the property. On June 30, 2017, at the end of the lease term, Mr. Blake and the tenant agree to reduce the size of the area rented to 21 percent of the total floor space of the property. A new lease is signed with a reduced rent of $2,250 per month and a new term of 30 months. On June 30, 2017, the fair market value of the property is $834,000. At this time, it was estimated that the fair market value of the land was $330,000. Two months after the new lease is signed, Mr. Blake makes improvements in the rented area of the property at a cost of $37,050. During the year ending December 31, 2016, Mr. Blake made payments for insurance, hydro, and property taxes on his property in the amount of $16,800. The corresponding figure for the period January 1, 2017 through June 30, 2017 was $8,700. For the period July 1, 2017 through December 31, 2017, this amount was $9,600. There were no repair costs during either 2016 or 2017. Mr. Blake deducts maximum CCA in each year. Required: For each of the two taxation years 2016 and 2017, indicate the amounts that would be included in Mr. Blake’s Net Income For Tax Purposes as the result of the preceding transactions and events. Assume that Mr. Blake does not designate this property as his principal residence in any of the years under consideration.




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Self Study Problem Eight - 12 (Deemed Dispositions - Departure From Canada) For all of his adult life, Mr. Lange has been a resident of Canada. However, in recent years, the severity of the climate has begun to have an adverse influence on his health. As a consequence, on January 1 of the current year, he is planning to move to Sarasota, Florida. On this date, he owns the following assets:

Vacant land Automobile Coin collection Common Shares In Enbridge Inc. (a public company) Common Shares In BCE Inc. (a public company) Preferred Shares In Royal Bank (a public company) Common Shares In Nal Enterprises Ltd. (a Canadian controlled private corporation)

Adjusted Cost Base

Fair Market Value

$15,000 31,000 5,000 24,000 42,000 15,000

$ 46,000 18,000 11,000 38,000 35,000 23,000

26,000

153,000

Mr. Lange has come to you for advice just prior to moving to Florida. Required: Determine the amount of the taxable capital gain or allowable capital loss that Mr. Lange will report in his Canadian income tax return for the current year as a result of his departure from Canada. Assume that the usual rules apply, with no elections being made by Mr. Lange.




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Self Study Problem Eight - 13 (Deferral On Small Business Investments) The following two independent Cases involve dispositions of eligible small business corporation shares, with the proceeds being invested in replacement shares. In both Cases, the original shares have been held for more than a year. Case A On May 4, 2017, an individual sells his common shares in an eligible small business corporation for $2,200,000. The adjusted cost base of these shares was $1,400,000. On September 14, 2017, he invests $1,800,000 of these proceeds in common shares of a different eligible small business corporation. Case B In January, 2017, an individual sells his common shares in an eligible small business corporation for $1,900,000. The shares have an adjusted cost base of $1,200,000. In October, 2017, he invests $500,000 of these proceeds in Corporation A common shares. At the same time, he invests $900,000 of the proceeds in Corporation B common shares. Both Corporation A and Corporation B are eligible small business corporations. Required: For both Cases, determine the maximum permitted capital gains deferral, as well as the adjusted cost base of the replacement shares.




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Self Study Problem Eight - 14 (Replacement Properties - ITA 13(4) Election On UCC) Trail Resources Ltd. has a taxation year that ends on December 31. During 2017, its storage building was destroyed in a flash flood. This building was purchased for $500,000 and, on January 1, 2017, its UCC was $368,000. After negotiations with adjustors from the insurance company, a settlement of $490,000 was agreed upon and paid during 2017. A replacement building was contracted for, and started, in September, 2017. It was completed in January, 2018 for a cost of $650,000. As the building is used exclusively for non-residential purposes, it qualifies for the 6 percent CCA rate. Trail Resources Ltd. does not own any other buildings and always takes maximum CCA. The appropriate election is made by the Company to defer any recapture under ITA 13(4). Required: Explain how the preceding transactions will affect the balance in the Company ’s UCC during the period January 1, 2017 through January 1, 2019.




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Self Study Problem Eight - 15 (Voluntary Dispositions - With ITA 44(6) Election) The management of Voltec Ltd. has concluded that it would like to relocate to a less urban venue in order to provide for an improved lifestyle for their employees. To this end, on December 1, 2017, they sell their building and all of their depreciable assets. The proceeds for the land, building , and equipment, all of which are located in Vancouver, total $3,240,000. The details of the sale are as follows: Land The land was acquired for $325,000. Of the total proceeds, it is estimated that $1,720,000 represents a payment for the land. Building The building was constructed for a total cost of $1,100,000. Of the total proceeds, it is estimated that $1,200,000 represents a payment for the building . On January 1, 2017, the Class 1 UCC balance was $720,000. The Company has no other Class 1 assets. Equipment The equipment, all Class 8, was acquired at a cost of $620,000. It is estimated that $320,000 of the total sale proceeds represents a payment for this equipment. The UCC for Class 8 on January 1, 2017 was $240,000. In 2018, the Company acquires a property and equipment in Vernon at a total cost of $1,500,000. This cost is allocated as follows: Land Building Equipment

$ 950,000 1,350,000 475,000

Total

$2,775,000

The building is used more than 90 percent for non-residential use other than manufacturing and qualifies for the 6 percent CCA rate. The Company would like to minimize any capital gains or recapture resulting from the sale of the Vancouver property. The Company ’s tax year ends on December 31, 2017, and it does not own any buildings or equipment on this date. Required: A. For the disposition of each property, indicate the tax effects that would be included in the Company’s 2017 tax return. B. Indicate how the results in Part A could be altered through the application of ITA 44(1) (to defer capital gains) and ITA 13(4) (to defer recapture) in an amended 2017 return. Do not consider the use of the election under ITA 44(6) (to reallocate the proceeds of disposition). C. Determine the adjusted cost base and, where appropriate, the UCC of the replacement properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections. D. Indicate the maximum amount of any reduction in the amended 2017 Net Income For Tax Purposes that could result from the use of the ITA 44(6) election. Determine the adjusted cost base and, where appropriate, the UCC of the replacement properties, that would result from electing to use this amount. Should the Company make the election? Explain your conclusion.




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Self Study Problem Eight - 16 (Involuntary Dispositions - With ITA 44(6) Election) On January 1, 2017, a fire completely destroys Fraser Industries Ltd.’s Edmonton office building and all of its contents. An immediate settlement is negotiated with the Company ’s fire and casualty insurer. The insurer agrees to pay $4,800,000 for the building and an additional $1,256,000 for the contents of the building . These amounts represent the estimated fair market values of the destroyed assets and a cheque is received for these amounts on May 15, 2017. As the City has been acquiring adjacent land for the development of a park, the Company is notified on January 15, 2017 that the land on which the building was located will be expropriated in order to expand the park area. The expropriation takes place on April 30, 2017 and Fraser Industries Ltd. receives $723,000, which is the estimated fair market value of the land. Other information on the Edmonton property is as follows: Land

The land was acquired at a cost of $256,000.

Building The building was constructed for a total cost of $3,700,000. It is the only building owned by Fraser Industries Ltd. and, on January 1, 2017, the UCC in Class 1 was $1,856,000. Building Contents The contents of the building consisted entirely of Class 8 assets. These assets had a cost of $972,000 and the UCC of Class 8 was $72,000 on January 1, 2017. Fraser Industries Ltd. does not own any other Class 8 assets. In replacing the destroyed property, the Company decides to relocate to an area that has lower land costs. As a consequence, a replacement property is found in Hinton at a cost of $6,200,000. It is estimated that the fair market value of the land on which the building is located is $500,000. The remaining $5,700,000 is allocated to the building . As the building is not new, it does not qualify for the 6 percent CCA rate. The acquisition closes on November 1, 2018 and, during the following month, contents are acquired at a cost of $1,233,000. All of the contents are Class 8 assets. Fraser Industries has a December 31 year end. Required: A. For the disposition of each property, indicate the tax effects that would be included in the 2017 tax return of Fraser Industries Ltd. B. Indicate how the results in Part A could be altered through the application of ITA 44(1) (to defer capital gains) and ITA 13(4) (to defer recapture) in an amended 2017 return. Do not consider the use of the election under ITA 44(6) (to reallocate the proceeds of disposition). C. Determine the adjusted cost base and, where appropriate, the UCC of the replacement properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections. D. Indicate the maximum amount of any reduction in income in the amended 2017 Net Income For Tax Purposes that could result from the use of the ITA 44(6) election and determine the adjusted cost base and, where appropriate, the UCC of the replacement properties, that would result from electing to use this amount. Should the Company make the election? Explain your conclusion.




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Self Study Problem Eight - 17 (Comprehensive Case Covering Chapters 1 to 8) Laura Barnes is 37 years of age and lives with her 32 year old common-law partner, Julia Stinson. Julia’s 2017 Net Income For Tax Purposes is $4,600. Also living with the couple are two children that were born to Julia in two previous relationships. The daughter, Allison, is 8 years old and the son, Andrew, is 12 years old. During 2017, Laura formally adopts these two children. Due to stiff opposition from Andrew ’s father, she incurs legal costs of $16,400 to complete his adoption. The legal fees paid to adopt Allison total $4,000. Laura’s 62 year old mother, Alicia, also lives with her. While she does not qualify for the disability tax credit, she has a physical impairment that makes her totally dependent on Laura. She attends university on a full time basis for four months of the year and Laura pays her tuition fees of $2,400. Alicia has 2017 Net Income For Tax Purposes of $9,400. Laura pays the following medical expenses in 2017: Laura Julia Alicia Allison Andrew

$ 1,800 2,200 4,600 800 6,600


$16,000

During 2017, Laura makes contributions to registered charities in the amount of $1,600. She does not qualify for the first-time donor's super credit. During the first 6 months of 2017, Laura operated a successful retail business out of a building which she owned. She keeps her accounting records on a cash basis and, for the 6 month period ending June 30, 2017, her net cash inflow was $53,000. Information on inventories and accruals are as follows: January 1, 2017

June 30, 2017

$10,000 14,000 22,000

$ 8,000 16,000 18,000

Accounts Receivable Accounts Payable Inventories

Information on the capital assets used in the business is as follows:

Building Land (Building’s Location) Furniture And Fixtures Automobile (Used Exclusively In The Business)

Capital Cost

January 1 2017 UCC

June 30, 2017 Fair Market Value

$250,000 50,000 35,000

$211,000 N/A 12,900

$308,000 125,000 9,800

29,500

25,075

18,000

On July 1, 2017, the capital assets were sold for their fair market value, with Laura paying $17,320 in sales commissions on the disposition of the land and building . The Accounts Receivable and Inventories were sold for their carrying values, with part of the proceeds being used to pay off the Accounts Payable.



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On July 3, 2017, she is employed by a large public company as a sales consultant. Her salary for the period July 3, 2017 through December 31, 2017 is $56,000. In addition, because of her excellent performance she is awarded a $12,000 bonus. The bonus will be paid on April 30, 2018. During 2017, her employer withholds the following amounts from her income: RPP Contributions EI CPP

$2,500 836 2,564

Because her employer has withheld the maximum amount for 2017, Laura will not have to make CPP contributions on the income from her unincorporated business. Laura’s employer also contributes $2,500 to her RPP. In addition, the employer provides her with an automobile that cost $62,000. The car was used by her for the period July 3, 2017 through December 31, 2017 and, during this period she drives the car 22,000 kilometers, 18,000 of which were employment related. Information on Laura’s investments is as follows: Dividends Eligible dividends received during 2017 total $5,600. Interest 2017 interest on Laura’s GICs is $4,275. Income Trusts At the beginning of 2017, Laura had income trust units with an adjusted cost base of $56,000. During the year, she receives distributions of $6,800, of which $2,600 is designated as a return of capital with the remainder designated as property income. On December 15, 2017, she sells all of the trust units for $63,000. Mutual Funds In January, 2017, Laura acquires 1,000 units of the New World Equity Fund at $9.65 per unit. On June 30, 2017, the fund has a distribution of interest income of $0.50 per unit. At this time the units are trading at $9.40 and Laura chooses to have the distribution re-invested. On December 10, 2017, she sells all of the units for $9,000. To assist with her investment decisions, during 2017, Laura pays fees to a professional investment counsellor of $875. Required: Calculate Ms. Barnes’ minimum 2017 Net Income For Tax Purposes, her 2017 minimum Taxable Income, and her minimum 2017 federal Tax Payable. Ignore provincial income taxes, any instalments she may have paid during the year, any income tax withholdings that would be made by her employer, and GST/HST/PST considerations.




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Self Study Problem Eight - 18 (Comprehensive Case Covering Chapters 1 to 8) Employment Information Mr. Lorenzo Desoto is 39 years old and is employed by a large public corporation with a December 31 year end. In addition to his 2017 salary of $136,000, he earns commissions during the year of $43,000. Because of his excellent performance, he has been awarded a bonus of $22,000. One-half of this amount is payable in December, 2017, with the balance being paid on July 15, 2018. His employer withholds the following amounts from his 2017 income: RPP Contributions EI CPP Professional Association Dues Annual United Way Contributions

$4,200 836 2,564 1,500 2,400

Lorenzo’s employer makes a matching contribution to his RPP of $2,700. Lorenzo’s employer provides an allowance of $2,500 per month to cover all of his employment related expenses, including the use of his personally owned automobile. This automobile was acquired in 2016 at a cost of $46,500. In that year, he claimed CCA based on the car being used 60 percent for employment related activities. In 2017, his employment related usage increases to 80 percent. For 2017, Lorenzo’s employment related expenses are as follows: Automobile Operating Expenses Hotels Airline And Other Transportation Client Meals And Entertainment

$6,300 9,700 5,400 9,300

Lorenzo’s employer requires him to maintain an office in his home and has provided him with a signed Form T2200. The office occupies 12 percent of the floor space in his home. The 2017 costs of operating this property are as follows: Mortgage Interest Insurance Maintenance And Utilities Property Taxes

$7,200 1,250 1,300 5,600

Several years ago, Lorenzo’s employer granted him options to buy 500 shares of the company ’s stock at a price of $92 per share. This was the market value of the shares at the time the options were granted. In January, 2017, when the shares are trading at $108 per share, Lorenzo exercises all of the options. In December, 2017, the 500 shares are sold for $115 per share.

Family Information Lorenzo is married to Maria Desoto. She is 37 years old and has 2017 income of $6,300. Now that her children are in their teens, Maria attends university on a full time basis during 8 months of the year. Her tuition for 2017 was $9,300. The Desotos have two children, both born on April 1. Their son Gianni is 16 and has Net Income For Tax Purposes of $6,200, largely from part-time summer jobs. Their daughter Anita is 14 and is sufficiently disabled that she qualifies for the disability tax credit. Anita has no 2017 Net Income For Tax Purposes.



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The family ’s 2017 medical expenses are as follows: Lorenzo Maria Gianni Anita (No Attendant Care Costs)

$ 1,350 3,425 2,600 10,250

Total

$17,625

Other Information 1. Lorenzo owns a glass sculpture with an adjusted cost base of $800. During 2017, he sells this sculpture for $39,000. 2. Lorenzo owns a cottage on a local lake. It had cost $105,000, including an estimated value for the land of $42,000. While the family has made good use of the property, at the beginning of 2017, he decides to convert the cottage to a rental property. It is estimated that, at this time, the cottage is worth $350,000, with $100,000 of this amount attributable to the land. During 2017, net rental income before the deduction of CCA equals $12,000. Lorenzo does not intend to designate the cottage as his principal residence in any of his years of ownership. 3. Lorenzo owns 500 units of the Real Property Income Trust. The adjusted cost base of these units on January 1, 2017 is $56.00 per unit. During 2017, the trust distributions total $2.40 per unit, with all of this amount being property income. The entire distribution was reinvested in additional units on the basis of $58.50 per unit. During December 2017, all of these Trust units were sold for $60.25 per unit. 4. For several years, Lorenzo has owned a tract of land with an adjusted cost base of $78,000. His intent was to eventually construct a rental property on this site. However, with the conversion of the cottage to a rental property, he decides to reduce his real estate holdings. To this end, the land is sold for $180,000. The buyer provides an immediate payment of $54,000, with the balance payable in annual instalments of $18,000 beginning in 2018. 5. During 2017, Lorenzo received eligible dividends of $4,200. Required: Calculate Mr. Desoto’s minimum 2017 Net Income For Tax Purposes, his 2017 minimum Taxable Income, and his minimum 2017 federal Tax Payable. Ignore provincial income taxes, any instalments he may have paid during the year, any income tax withholdings that would be made by his employer, and GST/HST/PST considerations.




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SSS Problem Eight - 1


SSS Problem Eight - 1 (Identical Properties) Over the last ten years, Ms. Julie Ho has engaged in the following transactions in the shares of Alcor Ltd.: Type Of Transaction

Date May, 2007 June, 2008 April, 2011 July, 2013 October, 2015 July, 2017

Purchase Purchase Sale Purchase Purchase Sale

Number Of Shares

Cost (Proceeds) Per Share

200 150 ( 75) 125 180 (200)

$10.00 14.75 ( 16.25) 13.50 12.75 ( 14.00)

Required: Determine the amount of any taxable capital gain or allowable capital loss resulting from the 2017 sale of Alcor Ltd. shares.



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SSS Problem Eight - 2 (Warranties, Bad Debts, and Reserves) For a number of years, Ms. Marcia Hanson has owned a tract of undeveloped land near Regina. Ms. Hanson's adjusted cost base for the land is $1,350,000. At the beginning of 2017, a developer offers $4,200,000 for the land and Ms. Hanson accepts the offer. As the developer will need a large portion of her resources to undertake the development, Ms. Hanson agrees to accept a $1,200,000 down payment, with subsequent annual payments of $1,000,000 on December 31 of each of the years 2018, 2019, and 2020. Interest, calculated as 5 percent of the beginning of the year balance, is also payable on December 31 of each of these years. Ms. Hanson intends to use capital gains reserves to defer taxes to the greatest extent possible. It is the intent of the developer to divide the property into 105 individual lots. There is, however, considerable risk in the project as the lots are over 20 kilometers from downtown Regina. Given this, Ms. Hanson agrees to reimburse the developer an amount of $10,000 for each lot that is not sold by December 1, 2019. By December 1, 2019, only 65 of the lots have been sold, a result which requires Ms. Hanson to pay the developer $400,000 [($10,000)(40 Lots)] on December 20, 2019. In 2018, and 2019, the developer makes the required interest and principal payments. While the developer continues her efforts to market the lots through the first part of 2020, she is not successful and, on June 1, 2020, she declares bankruptcy. As the developer appears to have left the country, Ms. Hanson does not anticipate being able to collect any of the remaining balance on the loan or the final interest payment. Required: Calculate the tax effects of the transactions that took place during 2017 through 2020 on Ms. Hanson's Net Income For Tax Purposes.



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SSS Problem Eight - 3 (Principal Residence Designation) In early 2017, Miss Mary Stern advises you that it is her intention to sell both her Ottawa residence and her condominium at Mt. Tremblant. She acquired both of these properties in 2003 and has spent at least a part of each subsequent year in residence at each property. The cost of the Ottawa house was $173,000, while the Mt. Tremblant condominium was $131,000. She provides you with the following additional information: Estimated Selling Price Anticipated Selling Costs

City Home

Condo

$325,000 13,500

$304,000 12,240

She has asked you to determine the minimum taxable capital gain that would result from the sale of the two properties during 2017. Required: Describe how the residences should be designated in order to accomplish Miss Stern’s goal. In addition, calculate the amount of the taxable capital gain that would arise under the designation that you have recommended.



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SSS Problem Eight - 4 (Personal Use Property) During the current year, Mrs. Irene Vargo sold a number of personal assets, all of which she had acquired in the last five years. The relevant information on these sales is as follows: Cost Automobile Coin Collection Rare Manuscript Boat Painting Antique Clock

$25,000 1,600 1,700 4,500 700 800

Proceeds

Selling Costs

$27,000 1,300 800 3,500 1,100 1,700

$150 50 30 175 50 50

Required: Determine the net taxable capital gain that Mrs. Vargo will include in her income for the current year. Indicate any carry over amounts that can be used in previous or subsequent years.



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SSS Problem Eight - 5 (Capital Gains On Foreign Securities) Ms. Petra Nobel is a Canadian resident who, on occasion, purchases securities for her brokerage account in the Netherlands. In September of 2014, she acquired a large block of shares of Gardengrow for 53,000 euros (€, hereafter). She purchased these shares with euros acquired at a rate of €1.00 = $1.38. In March, 2017, the Gardengrow shares were sold for €97,000, with the funds remaining in her euro bank account until September. In September, the €97,000 was converted into Canadian dollars and transferred to her Canadian bank account. Assume relevant exchange rates between the euro and Canadian dollar are as follows: September, 2014 March, 2017 September, 2017

€1.00 = $1.38 €1.00 = $1.48 €1.00 = $1.52

Required: Calculate the minimum amount that will have to be included in Ms. Nobel’s Net Income For Tax Purposes for 2017 as a result of these transactions.



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SSS Problem Eight - 6 (Change In Use And Rental Income With CCA) Ms. Marnie Houston acquired a residence 10 years ago for a total cost of $235,000. At the time of purchase, it was estimated that the value of the land on which the house was situated was $85,000. Until January 1, 2017, Marnie and her two children occupied all of the house. Early in 2017, Marnie’s two children moved out, leaving a significant portion of the house unused. Because of this, Marnie decides to move to a small apartment and retain the former residence as a rental property. On April 1, 2017, a tenant moved into the house. Marnie does not make an election under ITA 45(2). The ITA 45(2) election deems that the change in use has not occurred. Marnie had the house appraised on April 1, 2017. The appraiser indicated that the total value of the property was $392,000, with $112,000 of this amount reflecting the value of the land on which the house was situated. For the period April 1, 2017 through December 31, 2017, Marnie’s expenses on the property were as follows: Property Taxes Insurance Maintenance And Operating Costs Mortgage Interest

$4,600 1,100 1,850 8,200

The monthly rent was set at $1,900 per month, payable at the beginning of each month. The tenant paid all amounts required during 2017. Required: For the year ending December 31, 2017, determine Ms. Houston’s minimum net rental income (loss). Your calculations should include the maximum available CCA, without regard to whether the full amount can be deducted. Indicate any other tax consequences that will result from the change in use.



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SSS Problem Eight - 7 (Deferral On Small Business Investments) The following two independent Cases involve dispositions of eligible small business corporation shares, with the proceeds being invested in replacement shares. In both Cases, the original shares have been held for more than a year. Case A On June 30, 2017, Jonathan sells his common shares in Corporation A, which is an eligible small business corporation. His proceeds of disposition are $585,000 and his adjusted cost base is $371,000. On September 13, 2017, Jonathan invests $472,000 in common shares of Corporation B, which is a new eligible small business corporation. Case B On December 12, 2016, Lorraine disposes of common shares in Corporation C, which is an eligible small business corporation. Her proceeds of disposition are $1,253,000 and her adjusted cost base is $722,000. On February 1, 2017, Lorraine acquires common shares in Corporation D, which is also an eligible small business corporation, at a cost of $1,346,000. Required: For both Cases, determine the maximum permitted capital gains deferral, as well as the adjusted cost base of the replacement shares.



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SSS Problem Eight - 8 (Replacement Properties - ITA 13(4) Election On UCC) Farnham Inc. has a taxation year that ends on December 31. The Company carries on its operations in a single building . This building has a capital cost of $850,000 and, on January 1, 2017, its UCC was $113,000. The building’s furniture and fixtures (all Class 8) have a capital cost of $220,000 and a January 1, 2017 UCC of $152,000. The Company has no other Class 8 assets. On February 12, 2017, the building and its contents were completely destroyed in a fire. The building was insured for its capital cost of $850,000 and the furniture and fixtures were insured for $180,000. As the fire completely destroyed all of these assets, on June 18, 2017, the Company received a payment from its insurer for $1,030,000 ($850,000 + $180,000). In 2018, Farnham Inc. acquires a replacement building for $925,000. As this replacement building is not a new building , it does not qualify for the 6 percent CCA rate. During the following month, furniture and fixtures are installed in this new building at a cost of $235,000. Required: Ignore land values in calculating your solution: A. Indicate the 2017 tax consequences that would result from the destruction of the building and its contents. B. Indicate the maximum amendments that could be made to the results described in Part A by filing an election under ITA 13(4). Assuming that these amendments have been made, determine the maximum CCA on the new building and the new Class 8 assets for the year ending December 31, 2018. In addition, calculate the January 1, 2019 UCC balance for each Class. C. Assume that, instead of having the building and contents destroyed by fire, the Company had sold the building and its contents for $1,030,000 in 2017 in order to voluntarily move to the new location in 2018. How would the results in Part B differ? D. Assume that the replacement building for the burned building had cost $700,000 instead of $925,000. How would the results in Part B differ?



Volume 1 Page 184


SSS Problem Eight - 9 (Voluntary Dispositions - With ITA 44(6) Election) Mr. Larson, the president of Larson Distributing Inc., was offered $1,875,000 for the land, building , and equipment used by his business at its suburban Toronto location. As he believed that his business could be operated at a less valuable rural location, he accepts the offer and sells the business property on October 15, 2017. The details relating to this sale are as follows: Land The land was acquired at a cost of $137,000. At the time of the sale, it was estimated that the fair market value of the land was $772,000. Building The building was constructed at a total cost of $605,000. At the time of the sale, its UCC was $342,000, while its estimated fair market value was $989,000. Equipment The equipment had an original cost of $452,000. On October 15, 2017, its UCC was $127,000 and its estimated fair market value was $114,000. In 2018, Mr. Larson acquires a replacement property in Barry ’s Bay at a total cost of $1,500,000. This cost is allocated as follows: Land Building Equipment

$ 253,000 1,042,000 205,000

Total

$1,500,000

As the building is not a new structure, it is not eligible for the 6 percent CCA rate for Class 1 assets. The Company would like to defer any capital gains or recapture resulting from the sale of the Toronto property. The Company ’s tax year ends on December 31, 2017, and it does not own any buildings or equipment on this date. Required: A. For the disposition of each property, indicate the tax effects that would be included in the Company’s 2017 tax return. In addition, indicate how these tax effects could be altered in an amended 2017 return by using the elections available under ITA 44(1) (to defer capital gains) and ITA 13(4) (to defer recapture), but without the use of the election under ITA 44(6) (to reallocate the proceeds of disposition). Also indicate the adjusted cost base and, where appropriate, the UCC of the replacement properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections. B. Indicate the maximum amount of any reduction in income in the amended 2017 Net Income For Tax Purposes that could result from the use of the ITA 44(6) election and calculate the UCC balance that would result from electing to use this amount.



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SSS Solution Eight - 1

Chapter 8 Supplementary Self Study (SSS) Solutions SSS Solution Eight - 1 The average cost of the shares sold in 2017 is calculated as follows: Acquisition (Sale) Date

Shares Acquired (Sold)

Cost Per Share

May, 2007 June, 2008

200 150

$10.00 14.75

April, 2011

350 ( 75)

$12.04

July, 2013 October, 2015

275 125 180

$13.50 12.75

Totals

580

Total Cost

Average Cost

$2,000.00 2,212.50 (

$4,212.50 903.00)

$12.04

$3,309.50 1,687.50 2,295.00 $7,292.00

$12.57

Given the preceding , the July, 2017 sale would result in a taxable capital gain calculated as follows: Proceeds Of Disposition [(200)($14.00)] Adjusted Cost Base [(200)($12.57)]

$2,800.00 ( 2,514.00)


$ 286.00 1/2


$ 143.00



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SSS Solution Eight - 2 2017 Results The only tax consequence in this year is the capital gain that occurs on the sale. The gain, along with the maximum deductible reserve, would be calculated as follows: Proceeds Of Disposition Adjusted Cost Base Capital Gain Reserve - Lesser Of: • [($2,850,000)($3,000,000 ÷ $4,200,000)] = $2,035,714 • [($2,850,000)(20%)(4 - 0)] = $2,280,000

$4,200,000 ( 1,350,000) $2,850,000 ( 2,035,714)


$ 814,286 1/2


$ 407,143

As no provision can be made for the estimated cost of the warranty, the total Net Income For Tax Purposes inclusion for 2017 would be $407,143.

2018 Results During this year, Ms. Hanson will include $150,000 [(5%)($3,000,000)] of interest in her Net Income For Tax Purposes. In addition, Ms. Hanson will include the 2017 reserve in income and deduct a new reserve for 2018. The calculations are as follows: 2017 Reserve Added To Income 2018 Reserve - Lesser Of: • [($2,850,000)($2,000,000 ÷ $4,200,000)] = $1,357,143 • [($2,850,000)(20%)(4 - 1)] = $1,710,000

$2,035,714 ( 1,357,143)


$ 678,571 1/2


$ 339,286

The total Net Income For Tax Purposes inclusion for 2018 would be $489,286 ($150,000 + $339,286).



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2019 Results During this year, Ms. Hanson will include $100,000 [(5%)($2,000,000)] of interest in her Net Income For Tax Purposes. Ms. Hanson will include the 2018 reserve in income and deduct a new reserve for 2019. She will also deduct the $400,000 required payment to the developer. As this payment is required by a warranty on a capital asset, this will be a capital loss. The calculations are as follows: 2018 Reserve Added To Income 2019 Reserve - Lesser Of: • [($2,850,000)($1,000,000 ÷ $4,200,000)] = $678,571 • [($2,850,000)(20%)(4 - 2)] = $1,140,000

$1,357,143 (

678,571)

Capital Gain Capital Loss On Warranty

(

$ 678,572 400,000)

Net Capital Gain Inclusion Rate

$ 278,572 1/2

Net Taxable Capital Gain

$ 139,286

The total Net Income For Tax Purposes inclusion for 2019 would be $239,286 ($100,000 + $139,286).

2020 Results With the bankruptcy of the developer, no interest will be collected in 2020 and the balance of the loan must be written off as a bad debt, resulting in a capital loss of $1,000,000. Ms. Hanson will include the 2019 reserve of $678,571 in income. Since the loan was to be paid off in 2020, there would have been no new reserve to be deducted, regardless of the bankruptcy. The net effect of these items is an allowable capital loss of $160,714 [(1/2)($678,571 $1,000,000)]. Note that this loss can only be deducted in 2020 to the extent of taxable capital gains in that year. However, it can be carried back to be applied to the capital gains that were recognized in previous years.

Summary (Not Required) The results can be summarized as follows: Year

Interest

Taxable Gain (Allowable Loss)

2017 2018 2019 2020

Nil $150,000 100,000 Nil

$407,143 339,286 139,286 ( 160,714)

Totals

$250,000

$725,001



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This result can be verified as follows: Capital Gain Warranty Payment Bad Debt Loss

$2,850,000 ( 400,000) ( 1,000,000)


$1,450,000 1/2


$ 725,000

An alternative verification calculation would be as follows: Down Payment Payments Received [(2)($1,000,000)] Warranty Cost

$1,200,000 2,000,000 ( 400,000)

Total Proceeds Of Disposition Adjusted Cost Base

$2,800,000 ( 1,350,000)


$1,450,000 1/2


$ 725,000

The extra $1 in the summary table is a rounding issue.



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SSS Solution Eight - 3 During the period 2003 through 2017 (15 years), the condo experienced the larger capital gain as shown in the following table. To minimize the total capital gain, it should be designated the principal residence for 14 years. This will completely eliminate the capital gain as the exemption formula adds an additional year. This will leave one year for the city home to be designated her principal residence. The minimum taxable capital gain for 2017 would be calculated as follows: City Home Estimated Proceeds Of Disposition Adjusted Cost Base Anticipated Selling Costs

$325,000 ( 173,000) ( 13,500)

Total Gain $138,500 Exemption: City Home [$138,500][(1 + 1) ÷ 15] ( 18,467) Condo [$160,760][(14 + 1) ÷ 15]

Condo $304,000 ( 131,000) ( 12,240) $160,760 ( 160,760)


$120,033 1/2

Nil N/A


$ 60,017

Nil

Note that, when both properties are owned for the same length of time (15 years in this example), there is no need to calculate an annual gain for each property.



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SSS Solution Eight - 4 Classification Of Property All of the items sold are personal use property. However, if they can be classified as "listed personal property", their tax treatment will be different. Under ITA 54, listed personal property consists of the following items. (i) (ii) (iii) (iv) (v)

print, etching, drawing, painting, sculpture, or other similar work of art, jewelry, rare folio, rare manuscript, or rare book, stamp, or coin.

Personal Use Property The automobile, boat, and antique clock would be classified as personal use property. As a consequence, the loss on the boat cannot be recognized. However, capital gains on the other items would be taxable and are calculated, taking into consideration the $1,000 floor rule, as follows: Auto Proceeds Of Disposition ACB - Auto ACB - Clock, Greater Of • $800 • $1,000 Floor Selling Costs

$27,000 ( 25,000)

(

Capital Gain

150) $ 1,850

Clock $1,700

( 1,000) ( 50) $ 650

As losses on personal use property are not deductible under any circumstances, no consideration is given to the sale of the boat.

Listed Personal Property The coin collection, rare manuscript, and painting would be classified as listed personal property. If a loss occurs on property in this category, it can be deducted against capital gains on property in this category. Given this, the relevant calculations are as follows: Coins Proceeds Of Disposition POD - Manuscript, Greater Of: • $800 • $1,000 Floor

Manuscript

$1,300

Painting $1,100

$1,000

Adjusted Cost Base ACB - Painting, Greater Of: • $700 • $1,000 Floor Selling Costs

( 1,600)

( 1,700)

(

(

Capital Gain (Loss)

($ 350)

50)

30)

($ 730)


( 1,000) ( 50) $

50


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Summary The total addition to Net Income For Tax Purposes would be as follows: Personal Use Property Gain On Automobile Gain On Clock Loss On Boat

$1,850 650 N/A

Listed Personal Property Gain On Painting Loss On Listed Personal Property (Note)

$ (

50 50)

$2,500

Nil

Net Capital Gains Inclusion Rate

$2,500 1/2

Addition To Net Income For Tax Purposes

$1,250

Note The losses on listed personal property total $1,080 ($350 + $730). However, they can only be deducted to the extent of the gain on listed personal property of $50. The remaining loss of $1,030 ($1,080 - $50) can be carried over to other years. As is discussed in Chapter 11, such losses can be carried back 3 years and forward for 7 years.



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SSS Solution Eight - 5 The taxable capital gain on the sale of securities and the conversion to Canadian dollars would be calculated as follows: Capital Gain On Sale Of Securities Proceeds Of Disposition (€97,000 @ $1.48) Adjusted Cost Base (€53,000 @ $1.38)

(

$143,560 73,140)

$70,420

Net Foreign Exchange Gain Converted Dollars - September (€97,000 @ $1.52) $147,440 Proceeds Of Disposition - March (€97,000 @ $1.48) ( 143,560) Capital Gain On Foreign Exchange ITA 39(1.1) Deduction

$ (

3,880 200)

3,680

Total Capital Gains Inclusion Rate

$74,100 1/2

Taxable Capital Gains

$37,050

There is a foreign exchange gain under ITA 39(1.1), resulting from the increase in the value of the euro between March and September. The amount would be $3,880. As Ms. Nobel is an individual, she is eligible to deduct the first $200 of foreign exchange gains under ITA 39(1.1). As the securities would be considered capital assets, this net foreign exchange gain of $3,680 would be a capital gain. Ms. Nobel’s income inclusion would be $37,050.



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SSS Solution Eight - 6 Minimum Net Rental Income Minimum net rental income would be calculated as follows: Rent [($1,900)(9)] Less: Property Taxes Insurance Maintenance And Operating Costs Mortgage Interest

$17,100 ($4,600) ( 1,100) ( 1,850) ( 8,200)

( 15,750)

Income Before CCA CCA (Note)

(

$ 1,350 1,350)

Net Rental Income Note

Nil

The maximum CCA would be calculated as follows:

Cost ($235,000 - $85,000) Bump Up {[1/2][($392,000 - $112,000) - ($235,000 - $85,000)]}

$150,000 65,000

Capital Cost For CCA Purposes Only One-Half Net Additions

$215,000 ( 107,500)

CCA Base Rate For Class 1

$107,500 4%

Maximum CCA

$

4,300

Since the problem requires that the minimum rental income (loss) be calculated, CCA has been deducted. While maximum CCA would be $4,300, a rental loss cannot be created through the deduction of CCA. As a consequence, the actual CCA deduction is limited to $1,350, the amount of net rental income before the deduction of CCA. For individuals, since the calendar year is considered the fiscal year for property income purposes, there is no adjustment for a short fiscal period in the year of acquisition.

Additional Tax Consequences As no election was made under ITA 45(2), the usual change in use procedures will be applicable. This will result in taxable capital gains calculated as follows: Land Proceeds Of Disposition Land Building ($392,000 - $112,000) Adjusted Cost Base/Capital Cost Land Building ($235,000 - $85,000)

Building

$112,000 $280,000 (

85,000) ( 150,000)

Capital Gains Inclusion Rate

$ 27,000 1/2

$130,000 1/2

Taxable Capital Gains

$ 13,500

$ 65,000

As it appears that the property was Ms. Houston’s only principal residence during all of the years that she owned the property, it is likely that this can eliminated through the use of the principal residence exemption.



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SSS Solution Eight - 7 In both Cases, since the common shares have been held for more than 185 days, the sales are qualifying dispositions. In both Cases, the eligible small business corporation common shares were purchased within 120 days after the end of the year in which the qualifying disposition took place. As a result, they can be designated as replacement shares.

Case A The capital gain on the disposition is $214,000 ($585,000 - $371,000). As the cost of the replacement shares is only $472,000, the permitted deferral would be $172,663 [($472,000 ÷ $585,000)($214,000)]. The adjusted cost base of the replacement shares would be $299,337 ($472,000 - $172,663).

Case B The capital gain on the disposition is $531,000 ($1,253,000 - $722,000). As the cost of the replacement shares is greater than the qualifying cost of the proceeds of disposition, the entire $531,000 capital gain can be deferred. This would leave the adjusted cost base of the replacement shares at $815,000 ($1,346,000 $531,000). Note that the deferral election can be made because the replacement shares were acquired within 120 days after the end of the year.



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SSS Solution Eight - 8 Part A As the insurance proceeds were equal to the capital cost of the building , there is no capital gain on the building . With respect to the furniture and fixtures, the insurance proceeds were less than the capital cost of the assets, again resulting in no capital gain. Given this, we can simply deduct the insurance proceeds from the UCC to arrive at the 2017 figures for recapture. Building

Furniture And Fixtures

UCC Insurance Proceeds

$113,000 ( 850,000)

$152,000 ( 180,000)

Terminal Loss (Recapture Of CCA)

($737,000)

($ 28,000)

The total income inclusion for 2017 would be $765,000 ($737,000 + $28,000). The $737,000 and $28,000 would be added back to the relevant CCA classes, leaving each of them with a January 1, 2018 balance of nil.

Part B For both types of assets, the replacement cost exceeded the amount of recapture recorded in 2017. Given this, the maximum amendment on the building would be the $737,000 in recapture that was recorded in 2017. Similarly, the maximum amendment on the furniture and fixtures would be the $28,000 that was recorded as recapture on that class in 2017. The maximum 2018 CCA figures and the January 1, 2019 UCC would be based on the capital cost of the new assets, reduced by the amount of the amended recapture. The first year rules would be applicable to both classes. The relevant calculations would be as follows:

UCC - January 1, 2018 Additions Building ($925,000 - $737,000) Furniture And Fixtures ($235,000 - $28,000) Deduct: One-Half Net Additions CCA Base CCA - Building [($94,000)(4%)] CCA - Class 8 [($103,500)(20%)] Add: One-Half Net Additions UCC - January 1, 2019

Building

Furniture And Fixtures

Nil

Nil

$188,000 (

94,000)

(

$ 94,000 3,760)

$207,000 ( 103,500) $103,500 (

94,000 $184,240

20,700) 103,500 $186,300

Part C The rules for voluntary dispositions differ from those for involuntary dispositions in two ways: •

In the case of voluntary dispositions, in order to elect under ITA 13(4), the replacement must occur within the first taxation year after the disposition took place. With involuntary dispositions, the taxpayer has two years to replace the property. As Farnham Inc. replaced both types of assets in the year following the disposition, this constraint would not alter the Part B results.



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•

In the case of voluntary distributions, ITA 13(4) is only available on real property. This means that Farnham Inc. would not be able to make the ITA 13(4) election on the Class 8 assets. Because of this, there would be no amendment of the $28,000 in 2017 recapture that was recorded on these assets.

Since there was no amendment of the recapture on the Class 8 assets, the 2018 CCA on these assets would be $23,500 [($235,000)(1/2)(20%)], rather than the $20,700 that was recorded in Part B when the ITA 13(4) election was available. This would result in a January 1, 2019 UCC of $211,500 ($235,000 - $23,500). There would be no change from the Part B results in the CCA or the UCC of the building .

Part D If the replacement cost had been $700,000 (less than the 2017 recapture), ITA 13(4) would not be able to reverse all of the recapture on the building . This is shown in the following calculation. January 1, 2017 UCC Of Building Deduction: Lesser Of: • Proceeds Of Disposition = $850,000 ($850,000) • Capital Cost = $850,000 Reduced By The Lesser Of: • Normal Recapture = $737,000 700,000 • Replacement Cost = $700,000

$113,000

( 150,000)

Amended 2017 Recapture On Building

($ 37,000)

The amendment of 2017 recapture would be limited to $700,000, leaving a balance of $37,000 in the amended 2017 return. In addition, it would leave the UCC of the new building at nil ($700,000 - $700,000). This means that the 2018 CCA on the building would be nil, as would be the January 1, 2019 UCC. In terms of the economics of these calculations, the Company received insurance proceeds of $850,000, an amount that was $737,000 greater than the $113,000 UCC of the old building . Since it only reinvested $700,000 of this amount in the new building , the excess $37,000 will remain in 2017 income as recapture.



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SSS Solution Eight - 9 Part A - Land In the Company ’s 2017 tax return a capital gain on the land would be reported as follows: Proceeds Of Disposition Adjusted Cost Base

$772,000 ( 137,000)


$635,000 1/2

Taxable Capital Gain - 2017 Tax Return Inclusion

$317,500

If the ITA 44(1) election is used in 2018, the amended 2017 capital gain would be $519,000, the lesser of: • •

$635,000 (regular capital gain); and $519,000 (the excess of the $772,000 proceeds of disposition for the old land over the $253,000 cost of the replacement land).

The taxable amount would be $259,500 [(1/2)($519,000)] and this would be included in the revised 2017 Net Income For Tax Purposes. The original gain of $635,000 would be eliminated in the revised return. If the ITA 44(1) election is used in 2018, the deemed adjusted cost base of the replacement land would be calculated as follows: Actual Cost Capital Gain Reversed By Election ($635,000 - $519,000) Deemed Adjusted Cost Base Of Replacement Land

$253,000 ( 116,000) $137,000

Note that the deemed adjusted cost base of the replacement land has been reduced to the adjusted cost base of the old land.

Part A - Building As reported in the Company ’s 2017 tax return, the capital gain and recapture on the building would be as follows: Proceeds Of Disposition Adjusted Cost Base

$989,000 ( 605,000)


$384,000 1/2

Taxable Capital Gain - 2017 Tax Return Inclusion

$192,000

Opening UCC Deduct Disposition - Lesser Of: • Proceeds Of Disposition = $989,000 • Capital Cost = $605,000

$342,000 ( 605,000)

UCC Balance = Recapture - 2017 Tax Return

($263,000)



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If the ITA 44(1) election is used in 2018, the amended 2017 capital gain would be nil, the lesser of: • •

$384,000 (regular capital gain); and Nil (reflecting the fact that there was no excess of the $989,000 proceeds of disposition for the old building over the $1,042,000 cost of the replacement building).

Based on this, the deemed capital cost of the replacement building would be calculated as follows: Actual Cost Capital Gain Reversed By Election Under ITA 44(1)

(

Deemed Capital Cost Of Replacement Building

$1,042,000 384,000) $ 658,000

This result reflects the capital cost of the old building ($605,000), plus the $53,000 ($1,042,000 - $989,000) of additional funds required to purchase the new building . If the ITA 13(4) election is used in 2018, the amended 2017 recapture would be calculated as follows: January 1, 2017 UCC Balance Deduction: Lesser Of: • Proceeds Of Disposition = $989,000 • Capital Cost = $605,000 Reduced By The Lesser Of: • Normal Recapture = $263,000 • Replacement Cost = $1,042,000

$342,000

$605,000 ( 263,000)

( 342,000)

Recapture Of 2017 CCA (Amended)

Nil

These new nil figures for the capital gain and the recapture on the disposition of the old building will replace the old figures of $384,000 and $263,000 that were included in the original 2017 return. If the ITA 44(1) and ITA 13(4) elections are made, the UCC of the replacement building would be calculated as follows: Deemed Capital Cost Recapture Reversed By Election Under ITA 13(4) UCC - Replacement Building

(

$ 658,000 263,000) $ 395,000

Note that the UCC for the new building is equal to the UCC of the old building ($342,000), plus the additional $53,000 ($1,042,000 - $989,000) in funds required for its acquisition.

Part A - Equipment As this is a voluntary disposition, the equipment does not qualify as “former business property ” and, as a consequence, neither the ITA 44(1) nor the ITA 13(4) election can be used. However, as there were no other assets in the class at the end of 2017, there will be a terminal loss of $13,000 ($127,000 - $114,000). The new equipment has a capital cost equal to its actual cost of $205,000. This is also equal to the UCC.



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Part B - The Election The preceding result can be improved by using ITA 44(6) to move some of the proceeds of disposition on the land to the building . However, this is transfer is only useful to the extent of the $53,000 excess of the $1,042,000 replacement cost of the building over the $989,000 proceeds of disposition on the old building . The results of this transfer would be as follows: Land Actual Proceeds Of Disposition Optimum Transfer Land To Building Adjusted Proceeds Of Disposition

(

Building

$772,000 53,000)

$ 989,000 53,000

$719,000

$1,042,000

Part B - Application To Land If both the ITA 44(1) and the ITA 44(6) elections are used, the capital gain on the land will be the lesser of: • •

$582,000 ($719,000 - $137,000); and $466,000 (the excess of the $719,000 adjusted proceeds of disposition for the old land over the $253,000 cost of the new land).

The adjusted cost base of the replacement land is calculated as follows: Actual Cost Capital Gain Reversed By Elections ($582,000 - $466,000)

$253,000 ( 116,000)

Deemed Adjusted Cost Base Of Replacement Land

$137,000

Part B - Application To Building If both the ITA 44(1) and the ITA 44(6) elections are used, the capital gain on the building will be nil, calculated as follows: • •

$437,000 ($1,042,000 - $605,000); and Nil (reflecting the fact that there was no excess of the $1,042,000 proceeds of disposition for the old building over the $1,042,000 cost of the replacement building).

Based on this, the deemed capital cost and UCC of the replacement property would be calculated as follows: Actual Cost Capital Gain Reversed By Elections Deemed Capital Cost Recapture Reversed By ITA 13(4) UCC - Replacement Building

(

$1,042,000 437,000) $ 605,000 ( 263,000) $ 342,000



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Part B - Comparison The table which follows compares the results of using only ITA 44(1) and ITA 13(4) with the results that arise when the ITA 44(6) election is also used. No ITA 44(6) Capital Gains Land Building Replacement Property Adjusted Cost Base Of Land Capital Cost Of Building UCC

With ITA 44(6)

$519,000 Nil

$466,000 Nil

$ 137,000 658,000 395,000

$137,000 605,000 342,000

Note that this election is not made without a cost. Had the $53,000 been left as a capital gain, tax would have applied on only one-half of the total. While we have eliminated this $26,500 in income, we have given up future CCA for the full amount of the $53,000. In other words, we have given up $53,000 in future deductions in return for eliminating $26,500 of income in 2017.



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Self Study Problem Nine - 1

Chapter 9 Self Study Problems Self Study Problem Nine - 1 (Moving Expenses) Mr. Leonard Ho has worked for Quality Construction Ltd. (QCL) for over 15 years. During this entire period he has been located in the employer’s Regina office. However, in 2017, he requests a transfer to the firm’s Kelowna office. QCL agrees to this transfer. For 2017, Leonard’s salary is $12,000 per month. Because he is a highly valued employee, QCL agrees to pay a moving allowance of $18,000 to cover his general moving costs. In addition, QCL agrees to negotiate additional payments for any housing loss that arises in Regina, as well as any additional costs associated with acquiring a new home in Kelowna. In August, Leonard flies to Kelowna to look for alternative housing . He spends three days in the city and, after two days, he locates and purchases a residence similar to his Regina property at a cost of $427,000. His costs for this trip are as follows: Airfare Rental Car Costs Hotel (3 Nights At $150) Food (3 Days - Total)

$ 872 326 450 175

On his return to Regina, he lists his residence at that location for sale. His original cost for this residence is $395,000. However, he is anxious to sell and, in early September, he accepts an offer of $360,000. The closing date is November 1. The new residence in Kelowna will not be available until December 1. After some discussion, the employer agrees to fully compensate him for the $35,000 loss on the sale of his Regina property and, in addition, provide him with an additional allowance of $15,000 to compensate him for the additional cost of the Kelowna property. The Regina office will pay the general moving allowance of $18,000. However, the Kelowna office will provide the additional $50,000 ($35,000 + $15,000) in housing related payments. All of these amounts will be paid during December, 2017. The costs associated with the housing transactions are as follows: Real Estate Commissions Legal Fees - Regina Property Unpaid Property Taxes To Date Of Sale Cost Of Cleaning And Minor Repairs Prior To Sale Legal Fees Kelowna Property Land Transfer Tax - Kelowna Property

$14,400 625 1,200 2,650 895 4,600

Leonard continues to work in Regina until November 10th. As his old residence is sold effective November 1, he, his wife and two children live in a hotel until their departure for Kelowna on November 11. Expenses during these 10 days were as follows: Hotel (10 Nights At $250) Food (10 Days - Total)

$2,500 1,750

The drive from Regina to Kelowna requires two days. The trip is 1,375 kilometers. Leonard and his family arrive in Kelowna on November 13th. As their new home will not be available until December 1, they live in a hotel until that date. Because of accumulated vacation time, Leonard does not begin working in Kelowna until December 1.



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His expenses for the period November 11 through December 1 are as follows: Gas For Trip Lodging For 2 Nights On The Trip ($225 + $250) Food On The Trip (2 Days - Total) Lodging In Kelowna (18 Nights At $300) Food In Kelowna (18 Days - Total)

$ 125 475 380 5,400 2,550

Leonard receives a bill from his moving company for $8,500. Of this total, $1,500 is for storage during the period November 1, 2017, through December 1, 2017. Leonard will use the simplified method of determining vehicle and food costs in calculating his moving expenses. Assume that the relevant flat rate for vehicle expenses is $0.455 for Saskatchewan and $0.475 for British Columbia, and the flat rate for meals is $51 per person per day. Leonard would like to take the maximum moving expense deduction for 2017. Required: Determine the amount of Leonard’s maximum 2017 deduction for moving expenses. In addition, indicate the amount of any carry forward that is available at the end of the year.




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Self Study Problem Nine - 2 (Child Care Expenses) Mr. and Mrs. Pleasant have three children who are 4, 10, and 15 years of age and live at home. All of the children enjoy good physical and mental health. In order to keep up with the costs of a family of this size, both Mr. Pleasant and Mrs. Pleasant are employed. During 2017, Mr. Pleasant had employment income of $99,000 and deductible employment expenses of $8,500. Mrs. Pleasant had employment income of $18,000 and interest income of $2,200. Payments for child care amounted to $100 per week, for a total of 48 weeks. The payments were made to Mrs. Pleasant’s mother, who issued a tax receipt for $4,800, the amount paid. Also during 2017, there was a period of six weeks during which Mrs. Pleasant was hospitalized for injuries suffered in a fall while rock climbing . This period was part of the 48 weeks for which child care payments were made. Required: Determine the maximum amount of child care expenses that can be deducted by Mr. Pleasant and by Mrs. Pleasant for the year ending December 31, 2017.




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Self Study Problem Nine - 3 (Child Care Expenses) Maureen Hadley and her common-law partner Sue Brendal have three adopted children. At the end of 2017, their ages are as follows: • • •

Their daughter Lori is 4 years old. Their son Jack is 8 years old and qualifies for the disability tax credit. Their son Bob is 14 years old.

None of the children have any income of their own. Maureen is a very successful accountant with net business income in 2017 of $216,000. Her partner, Sue Brendal, works on a part time basis in retail. Her 2017 gross employment income is $24,000. In addition, because she was previously married, she receives child support payments of $1,200 per month from the father of Lori. Both Maureen and Sue spend a considerable amount of time at their work and, because of this, they employ a full time person to care for the children. The cost for this care is $12,480 ($260 per week for 48 weeks). During the four week period in the summer when they do not employ the child care worker, the children attend a live-in camp. The cost for this camp is $2,000 per week, per child. In January, 2017, Maureen slipped on an icy sidewalk and broke both of her ankles. As a consequence of this accident, she spent three weeks in the hospital. Sue has always been concerned about her lack of formal education. To make progress in this area, she enrolls in an intensive 5 week accounting course at a designated educational institution. Class attendance and work in this course require nearly 60 hours per week of Sue’s time. Required: Determine the maximum amount that can be deducted by Maureen and Sue for child care costs for the year ending December 31, 2017.




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Self Study Problem Nine - 4 (Pension Income Splitting - No OAS) John Gupra is 57 years of age. As he began working at an early age for a company with a very generous pension plan, he retired at age 55. During 2017, he receives payments from this plan of $64,000. During 2017 he also has net rental income of $23,000. John has no other sources of income during 2017. John’s wife Fatima is 45 years of age. For 2017, her only income is $8,400 of interest on her savings account. Neither John nor Fatima have any tax credits other than the basic personal credit, spousal credit, and pension income credit. Further, they have no deductions that will be used in the determination of Taxable Income. Required: John would like to split his 2017 pension income with Fatima. Calculate the maximum amount of 2017 federal tax savings that would result from this tax planning strategy. SOLUTION available in printed and online Study Guide.



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Self Study Problem Nine - 5 (Pension Income Splitting - With OAS) Both Jean Belanger and his wife Carole are 66 years of age. During 2017, they each received OAS payments of $7,000. As a long-term employee of a Canadian public company, Jean receives an annual pension benefit. For 2017, the amount is $168,000. This payment, along with the OAS payment, are his only sources of income. Because she was blinded in work related accident, Carole qualifies for the disability tax credit. As the accident involved negligence on the part of her employer, Carole receives a monthly annuity payment of $3,500. This payment will continue as long as she lives. This is her only source of income other than the OAS payment. Neither Jean nor Carole are eligible for any tax credits other than the basic personal credit, the age credit, the pension income credit, and the disability tax credit. Further, they have no deductions that will be used in the determination of Taxable Income. Required: Compare the 2017 Amount Owing to the CRA, ignoring provincial income taxes, by Jean and Carole assuming: A. Jean does not split his pension income. B. Jean splits his pension income with Carole on a 50:50 basis.




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Self Study Problem Nine - 6 (Other Income And Deductions Including RESP) Harvey Masters is 36 years old. He has custody of his 9 year old son from a previous marriage and is currently married to a very successful trial lawyer. Her income regularly exceeds $200,000 per year. Although he did well selling real estate, Mr. Masters has decided to change careers and become an accountant. He has been told by trusted sources that it is a lucrative profession which will permit him to spend much more time with his family while earning an obscene amount of money. Mr. Masters commenced studies on a full-time basis at the University of Manitoba in Winnipeg on January 1, 2017. In June, 2017, after completing his first semester and extra catch up courses with an A+ average, Mr. Masters and his son moved from Winnipeg to a rented cottage at Pelican Lake, approximately 200 km from his Winnipeg home. For the summer, he worked for a real estate firm at Pelican Lake on a part time basis. The total cost of renting a van and loading it for his move to Pelican Lake was $350. In August, he returned to Winnipeg in preparation for the September semester. Due to the increased demand for moving vans, the total cost of renting a van and loading it for his move back to Winnipeg was $500. On receipt of an inheritance in February, 2017, Mr. Masters opened a Tax Free Savings Account (TFSA) and contributed $10,000. At the same time, his wife contributed another $10,000 to his TFSA. Mr. Masters did not have a TFSA prior to this time. During 2017, Mr. Masters received the following amounts: Wages from summer employment Scholarship granted by university for September 2017 semester Eligible dividends received from Canadian public corporations Child support received Inheritance TFSA withdrawal

5,400 3,500 2,000 6,000 25,000 13,000

On December 15, 2017, Mr. Masters contributed $5,300 to his 9 year old son’s Registered Education Savings Plan. Mr. Masters’ parents have contributed to the RESP in the past, but this is the first year that Mr. Masters has contributed. Required: A. Determine the minimum Net Income For Tax Purposes that Mr. Masters will have to report for his 2017 taxation year. Provide reasons for omitting items that you have not included in your calculations. B. Provide any advice you feel would assist him in planning future actions concerning his son’s RESP.




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Self Study Problem Nine - 7 (Non-Arm’s Length Transfer Of Land) Mr. Bryant Shaw owns a tract of land which he acquired several years ago at a cost of $275,000. An appraiser has indicated that it has a current fair market value of $400,000. As he is planning on moving to a warmer climate, Bryant would like to dispose of this property. His preference would be to have it transferred to a family member and, to this end, he is considering the following four alternatives: A. Gifting the property to his sister Sally. As she is currently living on welfare, it is likely that she would sell the property immediately to have access to the additional funds. B. Selling the property to his mother Sarah for its fair market value. She is not likely to sell the property in the foreseeable future. C. Selling the property to his younger brother Bob for $275,000. Bob is attending university on a full time basis and has no other source of income. Bob would likely sell the property immediately for its fair market value in order to take advantage of his current low tax bracket. D. Selling the property to his older brother Norman for $500,000. Norman would likely sell the property immediately for its fair market value. Norman plans to use the resulting loss to offset capital gains that he has realized in the current year. Required: For each of the alternatives under consideration, advise Bryant of the tax consequences that will result from the disposition. In addition, in those cases where the property is resold by the transferee, indicate the tax consequences of the sale to that individual.




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Self Study Problem Nine - 8 (Non-Arm’s Length Transfer Of Depreciable Asset) The following two scenarios involve a non-arm's length transfer of a depreciable asset. Scenario 1 - FMV Greater Than Capital Cost Martin Bolen owns a depreciable asset with a fair market value of $87,000. It has a capital cost of $52,000 and a UCC of $36,000. It is the only asset in its class. He sells the asset to his sister for cash of $87,000. Scenario 2 - FMV Less Than Capital Cost Marion Bolen owns a depreciable asset with a fair market value of $142,000. It has a capital cost of $212,000 and a UCC of $105,000. It is the only asset in its class. She sells the asset to her brother for cash of $142,000. Required: For each of the two scenarios, indicate the tax consequences for the transferor that result from the sale. In addition, indicate the tax values that will be used by the transferee subsequent to the transfer.




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Self Study Problem Nine - 9 (Deemed Dispositions At Death Including Disposition Of Land And Building) Ms. Samantha Kneebone lives with her common-law partner, Alice. She has a 36 year old son, Chester. Chester has annual employment income of over $65,000 a year, and has had taxable capital gains of at least $30,000 for the last three years. For a number of years, Ms. Kneebone has owned a small apartment building in Regina. The property was acquired for $452,000, with $122,000 of this amount being attributable to the land. The building’s cost of $330,000 ($452,000 - $122,000) was allocated to a separate Class 1. From its date of acquisition through 2016, the building was normally fully occupied. As of January 1, 2017, the UCC balance for this Class 1 was $234,000. On July 1, 2017, Ms. Kneebone died as the result of pancreatic cancer. It was estimated that, on this date, the rental property had a fair market value of $876,000. The estimate allocations were $425,000 for the land and $451,000 for the building . In March, 2018, the building is sold for a total price of $784,000, of which $376,000 is allocated to the land and $408,000 to the building . Required: A. For each of the following cases, indicate the tax effects to be included in Ms. Kneebone’s tax return as a result of the 2017 deemed disposition at her death, as well as the tax effects associated with the 2018 sale of the property. Case 1 Her will leaves the apartment building to Alice. During 2017, Alice continues to operate the building and takes maximum CCA for that year. Case 2 Her will leaves the apartment building to Chester. During 2017, he continues to operate the building and takes maximum CCA for that year. B. Assume that in Case 2, the proceeds of the 2018 sale of the property by Chester were allocated $435,000 to the land and $349,000 to the building. Calculate the tax effects associated with the sale of the property for Chester.




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Self Study Problem Nine - 10 (Income Attribution) Mr. John Tucker is 45 years old and married to Janet Tucker. On December 31, 2016, their son, Martin, is 23 years old, while their daughter, Doreen, is 12 years old. At the end of 2016, John is holding equity securities of a public company with an adjusted cost base of $85,000 and a fair market value of $123,000. He is considering transferring these securities to either his wife or to one of his two children. He seeks your advice as to the tax consequences, both to himself and to the transferee, that would result from such a transfer. During your discussions, Mr. Tucker has indicated the following: • • •

•

The transfer will take place on December 31, 2016. Any proceeds he receives from his family on the share transfer will not be invested in income producing assets. He wishes you to assume that the securities would pay eligible dividends during 2017 of $6,500. The gross up on these dividends will be $2,470 [(38%)($6,500)], resulting in a taxable amount of $8,970. The federal dividend tax credit would be $1,347 [(6/11)($2,470)]. Assume that the transferee would sell the securities on January 1, 2018 for $151,000.

Required: Each of the following independent Cases involves a transfer by Mr. Tucker to a member of his family. Indicate for both Mr. Tucker and the transferee, the 2016, 2017, and 2018 tax effects of: • • •

the transfer on December 31, 2016, the assumed 2017 receipt of the dividends, and the assumed 2018 disposition by the transferee.

Case A Mr. Tucker gives the securities to his wife and does not elect out of the provisions of the ITA 73(1) spousal rollover. Case B Mr. Tucker’s wife uses money from her savings account to purchase the securities for their fair market value of $123,000. Mr. Tucker does not elect out of the provisions of the ITA 73(1) spousal rollover. Case C Mr. Tucker’s wife uses money from her savings account to purchase the securities for $95,000. Mr. Tucker elects out of the provisions of the ITA 73(1) spousal rollover. Case D

Mr. Tucker gives the securities to his daughter, Doreen.

Case E Mr. Tucker’s son, Martin, uses funds from his stock trading account to purchase his father’s securities at their fair market value of $123,000.




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Self Study Problem Nine - 11 (Gifts And Income Attribution) Mrs. Sarah Long , a management consultant, is married with two children. Her son, Barry, is 27 years old and her daughter, Mary, is 13. Mrs. Long has not previously gifted or sold property to her husband or either of her children. On April 1 of the current year, Mrs. Long owns the following properties: Long Consulting Ltd. Mrs. Long owns 100 percent of the voting shares of Long Consulting Ltd., a Canadian controlled private corporation. These shares have a cost of $210,000 and a current fair market value of $475,000. Rental Property Mrs. Long owns a rental building . The building was acquired at a cost of $190,000. On April 1 of the current year, its UCC is $125,000 and its fair market value is estimated to be $275,000. Assume the fair market value of the land on which the building is situated has been $100,000 since the building’s acquisition and remains at this value for the next 3 years. Dynamics Inc. Mrs. Long owns 4,000 shares of Dynamics Inc., a Canadian public company. These shares have a cost of $212,000 and a current fair market value of $384,000. Farm Land Mrs. Long owns farm land with a cost of $80,000 and a current fair market value of $175,000. Mrs. Long’s son, Barry, uses the farm land on a full time basis to grow various crops. Mrs. Long is considering giving all or part of the properties to her spouse and/or her two children. Assume that each property is sold 2 years after being gifted for $50,000 more than its fair market value at the time of the gift. Also assume that the recipient of the rental property does not take CCA prior to the subsequent sale of the property. Required: 1. 2. 3. 4.

her her her her

For each of the assets, provide the tax consequences if the property is gifted to: husband and she does not elect out of ITA 73(1). husband and she does elect out of ITA 73(1). 13 year old daughter, Mary. 27 year old son, Barry.

The "tax consequences" should include: • • • •

the income that will be recognized by Mrs. Long at the time of the transfer; the tax cost of the asset in the hands of the transferee; the tax treatment of any income earned on the asset, including dividends, rental income or farm income; and the income that will be recognized by Mrs. Long and/or the recipient of the gift when the asset is sold 2 years after it was gifted.

Ignore the possibility that either the lifetime capital gains deduction or the tax on split income is applicable to any of these transactions. (These provisions are covered in Chapter 11 of the text.) SOLUTION available in printed and online Study Guide.



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Self Study Problem Nine - 12 (Comprehensive Case Covering Chapters 1 to 9) Carolyn Hadley is 29 years old and recently divorced. The terms of the 2016 divorce settlement require that her former spouse pay $1,000 per month in child support, as well as $500 per month in spousal support. Because he lost his job in 2017, payments during this year have totaled only $12,500. Carolyn has two children. Her younger child, Deborah, is 4 years old. Her older child Mark is 7 years old. Neither child has any income of their own. Prior to the divorce, the family had lived in property that Carolyn owned in Lethbridge, Alberta. Prior to 2017, Carolyn had been a stay at home mom with no source of income of her own. Because she knew her support payments would not provide an adequate amount of income for her family, she accepted a job in Edmonton, Alberta. Her employment contract calls for her to begin work on March 1, 2017. During January, 2017, Carolyn made several house hunting trips to Edmonton. The cost of these trips was $785. In February, she made an offer on an Edmonton home and it was accepted. The closing date for the sale is March 10, 2017. Her Lethbridge house was sold, with a closing date of February 15, 2017. After the closing on her Lethbridge home, she and her children spent 14 days in a Lethbridge hotel. The trip to Edmonton was 506 kilometers and took 2 days as she drove very slowly because she was pulling a trailer. Carolyn stayed overnight with family in Calgary en route. On arriving in Edmonton, she spent an additional 9 days in hotels prior to her new home becoming available. Carolyn will use the simplified method of calculating meal and vehicle costs for the trip to Edmonton. Assume that the 2017 vehicle rate for Alberta is $0.435 per kilometer and the 2017 rate for meals is $51 per day per person. The various other costs associated with the real estate transactions and the move to Edmonton are as follows: Selling Costs Of Lethbridge Property Legal Fees - Sale Of Lethbridge Property Legal Fees - Purchase Of Edmonton Property Storage Costs - February 15 Through March 10 Cost Of Moving Belongings Lodging In Lethbridge After Closing [(14 Days)($175)] Lodging In Edmonton Prior To Closing [(9 Days)($200)]

$12,500 600 450 1,400 7,250 2,450 1,800

After moving to Edmonton, Carolyn incurred child care costs of $175 per week for 38 weeks. Both children spent two weeks during the summer at a camp near Red Deer. The camp cost $500 per week for each child. The family ’s 2017 medical and dental expenses were as follows: Carolyn Deborah Mark

$1,200 4,200 2,200

Total

$7,600



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Carolyn’s new employer is a large Canadian public company. Her basic salary is $5,000 per month and, during 2017, her employer withheld the following amount from her earnings. RPP Contributions EI CPP United Way Contributions

$2,600 836 2,564 600

Her employer makes a matching contribution to her RPP of $2,600. As Carolyn makes regular contributions to the United Way, she is not eligible for the first-time donor's super credit. Her employer provides her with an automobile that the company acquired on April 1, 2017 at a cost of $42,000. During 2017, she drove the car a total of 46,000 kilometers, of which 38,000 were employment related. The company paid all of the operating costs of the vehicle, a total of $7,200 during 2017. The car was used by Carolyn from April 1, 2017, through December 31, 2017. Her employer provides an allowance for food and lodging while traveling on company business. The allowance is $600 per month, a total of $5,400 for the 9 months that Carolyn was traveling for her employer during 2017. Her actual cost for employment related food and lodging in 2017 totaled $5,700. Her employer also provides a moving cost allowance of $10,000. In addition, the employer is reimbursing Carolyn for the $4,000 loss on the sale of her Lethbridge home, as well as providing a $7,500 payment to assist with the higher housing costs she has encountered in Edmonton. During 2016, Carolyn is given a group of securities by her father. The adjusted cost base of these securities was $45,000 in the hands of her father. At the time of the gift, their fair market value was $62,000. During 2017, these securities pay eligible dividends of $5,800. In December, 2017, Carolyn sells these securities for $74,000. In June, 2017, Carolyn's mother dies, leaving her with a rental property that has a fair market value of $320,000, of which $50,000 represents the value of the land. At the time of her mother's death, the UCC of the building was $240,000 and it was not occupied by a tenant. Her mother had purchased the property several years ago for $400,000. At the time her mother acquired the property it was estimated that the value of the land was $100,000. Carolyn was not able to find a tenant and, in December, 2017, she sells the property for $340,000. An appraiser indicates that the value of the land at this time is unchanged at $50,000. Required: Calculate the following for Carolyn: • • •

her minimum 2017 Net Income For Tax Purposes, her minimum 2017 Taxable Income, her minimum 2017 federal Tax Payable.

Ignore GST and HST considerations and any amounts of income tax that would have been withheld by Carolyn’s employer.




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Self Study Problem Nine - 13 (Comprehensive Case Covering Chapters 1 to 9) Chantale Bergeron is 33 years old and has two children. Her son Marc is 5 years old and her daughter Michelle is 12 years old. Neither child has any income of their own. Chantale is employed as a technician by Pomme, a Canadian public company specializing in the creation of Apple accessories and applications. Her salary is $90,000 per year and, during 2017, Pomme withheld the following amounts from her earnings: RPP Contributions EI CPP Professional Dues

$4,500 836 2,564 1,200

Pomme makes a matching contribution to her RPP of $4,500. Pomme provides her with an automobile that the company acquired in 2016 at a cost of $28,000. During 2017 she drove the automobile a total of 52,000 kilometers, of which 34,000 were employment related. Operating costs totaled $7,400 during the year, all of which were paid for by the company. The automobile was used by Chantale throughout 2017. Pomme provides Chantale with an allowance for food and lodging while traveling on company business of $400 per month. Chantale’s actual travel costs during 2017 totalled $4,500. Until 2014, the family owned a home in Peterborough. Because of her husband’s work, the Peterborough home was sold and, in January, 2015, they moved into rented premises in Carleton Place. At this time, Chantale began her employment with Pomme in their Carleton Place office. In 2016, Chantale and her husband were divorced. The terms of their settlement require that her former husband pay $600 per month in child support and $200 per month in spousal support. During 2017, he made 10 monthly payments totaling $8,000. Prior to their divorce, Chantale’s husband had transferred to her securities with an adjusted cost base of $26,000. This was also the fair market value of the securities at that time. During 2017, these securities pay eligible dividends to Chantale of $1,500. In October 2017, Chantale sells these securities for $34,400. After their divorce, Chantale continued to live in the rented premises in Carleton Place for the remainder of 2016. However, as Chantale did not enjoy the rural atmosphere of Carleton Place, she asked to be transferred to her employer’s Ottawa office. This request was granted and, in early 2017, Chantale began looking for a home in Ottawa. Chantale made several house hunting trips into Ottawa, incurring travel costs of $260. In May she made an offer on a home near Pomme’s Ottawa office that was accepted (this home was 65 kilometres closer to the new work location). The closing date on the new home was September 3, 2017. In order to give her children time to adjust to their new neighbourhood before school started, on August 15th she moved her belongings out of the Carleton Place apartment. As the lease on this property had several months remaining , she was required to pay a penalty of $1,200. As she was not able to move into her new Ottawa home until September 3rd, it was necessary for her and her children to stay in a nearby Ottawa hotel from August 15th to September 3rd. The various costs associated with the move are as follows:



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Cost Of Storing Belongings Prior To September 3rd Cost Of Moving Belongings Legal Fees On Purchase Of New Home Food And Hotel In Ottawa (19 Days At $250)

$1,500 6,400 850 4,750

Pomme provided her with a $6,000 allowance to assist with her moving costs. The family ’s 2017 medical and dental expenses were as follows: Chantale Marc Michelle

$ 1,400 950 11,200

Total

$13,550

While living in Carleton Place, Chantale incurred child care costs of $300 per week for 32 weeks. After moving to Ottawa, these costs increased to $350 per week and were incurred for 16 weeks. The children spent four weeks during the summer at a camp near Montreal. The camp cost $400 per week for each child. In November, 2017, Chantale was overjoyed to find that she had won $1,500,000 in an Ontario provincial lottery. Because she had been praying for this result and felt that her prayers had been answered, she immediately donated $200,000 of this amount to her church. The balance was invested in GICs which pay no interest until 2017. Because she makes regular contributions to her church, she is not eligible for the first-time donor's super credit. Required: Calculate the following for Chantale: • • • •

her minimum 2017 Net Income For Tax Purposes, her minimum 2017 Taxable Income, her minimum 2017 federal Tax Payable. any carry over that is available to Chantale, indicating any rules that are applicable to claiming the carry over.

Ignore GST and HST considerations, as well as any amounts of income tax that would have been withheld by Chantale’s employer.




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SSS Problem Nine - 1


SSS Problem Nine - 1 (Moving Expenses) Yolanda has lived in Regina for most of her life. While she thought she was happily married, she has discovered that her husband of many years was having two affairs. One with her sister and the other with her brother. She immediately begins divorce proceedings. She also asks her employer, a large public company, to be transferred to their Calgary office. Her employer agrees to this move and, during October, 2017, Yolanda flies to Calgary in order to locate suitable housing . On her second day in that city, she finds a suitable apartment and leases it for $2,900 per month beginning December 1. She remains in Calgary for an additional three days in order to find furnishings for the unit. The costs associated with this trip are as follows: Air Fare - Return Rental Car Costs (5 Days) Hotel (5 Nights At $225) Food (5 Days - Total)

$765 385 1,125 280

As part of the divorce settlement, Yolanda received the family residence. She sells it in November, 2017 for $327,000. She uses $212,000 of the proceeds to pay off the existing mortgage on the property. Because of her desire for a very quick sale, she sells the house for $30,000 less than her cost. Costs associated with the sale are as follows: Real Estate Commissions Legal Fees Unpaid Property Taxes To Date Of Sale Cost Of Cleaning And Minor Repairs Prior To Sale

$16,350 425 1,100 2,750

In order to clean up various business and personal issues, she remains in Regina for 7 days subsequent to the sale of the house. On November 16, Yolanda leaves for Ottawa by air. As her new apartment does not become available until December 1, she spends the next 14 days in a hotel in Calgary. Her expenses for the period November 9 through December 1 are as follows: Hotel In Regina (7 Nights At $160) Food In Regina (7 Days - Total) Air Fare - One Way Hotel In Calgary (14 Nights At $215) Food In Calgary (14 Days - Total)

$9,100 410 400 3,010 950

Yolanda contracts a car moving company to transport her car to Calgary and it is delivered on November 17. The cost for this service is $500. A moving company takes care of moving Yolanda's personal belongings to Calgary. The invoice for this service is $2,800, In addition, there is a $900 charge for storing these belongings until the Calgary apartment becomes available.



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Yolanda begins working at the new location on December 1, 2017. Her salary is $7,500 per month, with the first 11 months of 2017 being paid by the Regina office, the remaining one month being paid by the Calgary office. Yolanda's employer has agreed to the following to provide assistance with the move: • •

They will provide her with a $12,000 allowance to cover her general moving costs. They will compensate her for $20,000 of the loss on the sale of her Regina home.

All of these amounts will be paid by the Calgary office during December, 2017. Yolanda will use the simplified method of determining food costs in calculating her moving expenses. Assume that the flat rate for meals is $51 per day. Required: Determine the amount of Yolanda’s maximum 2017 deduction for moving expenses. In addition, indicate the amount of any carry forward that is available at the end of the year.



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SSS Problem Nine - 2 (Child Care Expenses) Mr. and Mrs. Harris have four children and, at the end of 2017, their ages are 5, 10, 12, and 15. The 15 year old child has a prolonged physical handicap, which qualifies him for the disability tax credit. Mrs. Harris is a stockbroker and had 2017 salary and commissions of $263,500. Mr. Harris is involved in a travel business and, due to some bad strategic decisions, his share of the earnings of this business for the year ending December 31, 2017 amounts to only $4,200. In addition to his business earnings, Mr. Harris has interest income for 2017 of $12,500. As both spouses must spend considerable time at work, full time child care is required. As a consequence, their payments for child care amount to $250 per week for 49 weeks of the year. With respect to the other three weeks, all of the children attend a summer camp with a special program for the disabled during the month of June. The cost of this camp is $3,000 per child, or a total of $12,000 for the three weeks. In February, 2017, Mr. Harris fell off a chair lift while skiing and was in the hospital for a period of four weeks. In late September, 2017, Mrs. Harris is convicted of insider trading activities and sentenced to six months in prison. She immediately begins serving the sentence and spends the last 12 weeks of 2017 in jail. Required: Determine the maximum amount that can be deducted by Mr. and Mrs. Harris for child care costs for the year ending December 31, 2017.



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SSS Problem Nine - 3 (Pension Income Splitting - No OAS) Harry Cheung is 67 years of age. He was a long-term employee of a Canadian public company that sponsored a very generous registered pension plan. Now that he has retired, he is receiving an annual pension benefit of $92,000 per year. Since his retirement, he has continued to work on a part time basis as a consultant. For 2017, his net income from his consulting work was $41,000. Harry has not applied to receive OAS payments. Harry ’s wife Loretta is 63 years of age. She has never worked outside the home and, for 2017, her only income is interest of $2,800 on term deposits. Neither Harry nor Loretta have any tax credits other than the basic personal credit, spousal credit, age credit, and pension income credit. Further, they have no deductions that will be used in the determination of Taxable Income. Harry will split his 2017 pension income with Loretta on a 50:50 basis. Required: Calculate the amount of 2017 federal tax savings that would result from the pension income splitting .



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SSS Problem Nine - 4 (Non-Arm’s Length Transfer Of Shares) John Bolton owns 5,000 shares of Marker Manufacturing Ltd., a Canadian public company. These shares were purchased three years ago, at a price of $45 per share. They are currently trading at $105 per share. John is planning to transfer these shares to his 35 year old brother, Alex Bolton, who will immediately sell them at their fair market value of $105 per share. John is considering four alternatives for the transfer: A.

The 5,000 shares are sold to Alex Bolton at a price of $75 per share.

B.


C.


D.

The 5,000 shares are given to Alex Bolton as a gift.

Required: For each of these four alternatives, determine the effect on Net Income For Tax Purposes of John Bolton and Alex Bolton for the current year. Include in your solution the adjusted cost base that will apply for Alex Bolton.



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SSS Problem Nine - 5 (Non-Arm’s Length Transfer Of Depreciable Asset) The following two independent cases involve a non-arm's length transfer of a depreciable asset. Case One Jason Lasarge owns a depreciable asset with a fair market value of $255,000. It has a capital cost of $187,000 and a UCC of $145,000. It is the only asset in its class. He sells this asset to his brother for cash of $255,000. Case Two Christine Drummond owns a depreciable asset with a fair market value $320,000. It has a capital cost of $520,000 and a UCC of $240,000. It is the only asset in its class. She sells the asset to her sister for cash of $320,000. Required: For each of the two cases, indicate the tax consequences for the transferor that result from the sale. In addition, indicate the tax values that will be used by the transferee subsequent to the transfer.



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SSS Problem Nine - 6 (Deemed Dispositions At Death) Years ago, Mr. Forsyth purchased a small apartment building at a cost of $350,000. Of the total cost, $100,000 was allocated to the land with the $250,000 balance going to the building . At the beginning of 2017, the UCC of the building was $170,000. On October 10, 2017, Mr. Forsyth is killed in an automobile accident. At the time of his death, the fair market value of the land was $212,000 and the fair market value of the building was $325,000. In February of 2018, the building is sold for a total price of $600,000, of which $225,000 is allocated to the land and $375,000 to the building . Required: Indicate the tax effects to be included in Mr. Forsyth’s tax return as a result of the 2017 deemed disposition at his death and calculate the tax effects associated with the 2018 sale of the building in both of the following Cases: Case A His will leaves the apartment building to his 23 year old daughter, Eileen. During 2017, she continues to operate the building and takes maximum CCA for that year. Case B His will leaves the apartment building to his wife, Christine. During 2017, she continues to operate the building and takes maximum CCA for that year.



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SSS Problem Nine - 7 (Income Attribution - Use Of Loans) During the current year, Mr. Langdon makes a non-interest bearing loan of $100,000 to his wife, who acquires a $100,000 bond with the proceeds. He also makes a non-interest bearing loan of $100,000 to both of his children: •

Pat, aged 15, who uses the funds to acquire a $100,000 bond, and

•

Heather, aged 23, who uses the funds as a down payment on her principal residence. Without this loan she would have paid mortgage interest of $6,000 during the year.

During the year, the bonds acquired by Mr. Langdon’s spouse pay interest of $5,000. The bonds acquired by Pat pay interest of $5,500. Required: Determine the amount of income that will be attributed to Mr. Langdon for the current taxation year as the result of the non-interest bearing loans.



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SSS Problem Nine - 8 (Gifts And Income Attribution) Mr. Goodby, a self-employed contractor, is married and has two children. His son, Harry, is 25 years old and his daughter, Martha, is 14. Mr. Goodby has not previously gifted or sold property to his spouse or either of his children. At the end of the current year, Mr. Goodby owns the following property: Farm Land Mr. Goodby owns farm land that cost $160,000 and has a current fair market value of $350,000. Mr. Goodby ’s son, Harry, uses the farm land on a full time basis to grow various crops. DRC Ltd. Mr. Goodby owns 5,000 shares of DRC Ltd., a Canadian public company. These shares have a cost of $320,000 and a current fair market value of $573,000. Rental Property Mr. Goodby owns an apartment building . The building was acquired at a cost of $380,000, including an estimated value for the land of $124,000. At the end of the current year, the UCC of the building is $178,000 and its fair market value is $510,000, including an unchanged value for the land of $124,000. Goodby Construction Company Mr. Goodby owns 100 percent of the voting shares of Goodby Construction Company, a Canadian controlled private corporation. These shares have a cost of $227,000 and a current fair market value of $452,000. Goodby Construction is not a qualified small business corporation for purposes of the lifetime capital gains deduction. Mr. Goodby is in poor health and is considering giving all or part of the properties to his spouse and/or his two children. Required: You have been hired as a tax consultant to Mr. Goodby. He would like a report that would detail, for each of the four properties, the tax consequences to him of making a gift of the item to his wife or to either one of his children. Your report should include: • • • •

the tax consequences to Mr. Goodby at the time of the gift; the tax cost of the properties to the recipient of the gift; the tax treatment of any income on the property subsequent to the gift; and the tax consequences that would result from a subsequent sale of the gifted property at $40,000 more than its fair market value at the time of the gift (assume that there is still no change in the value of the land).

In preparing your answer, assume that Mr. Goodby does not elect out of ITA 73(1) when the gifts are made. Assume that the recipient of the rental property does not take CCA prior to the subsequent sale of the property.



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SSS Solution Nine - 1

Chapter 9 Supplementary Self Study (SSS) Solutions SSS Solution Nine - 1 Income At New Location As both the general moving allowance and the compensation for the housing loss were paid for by the Calgary office, these would likely be considered income at the new location. Given this view, Yolanda's employment income at the new location can be calculated as follows: General Moving Allowance Compensation For Loss On Regina Residence (Note 1) Salary At New Location (1 Month)

$12,000 2,500 7,500

Total Employment Income At New Location

$22,000

Note 1 Under ITA 6(20), one-half of any housing loss reimbursement in excess of $15,000 must be included in income. As the total reimbursement was $20,000, the inclusion would be $2,500 [(1/2)($20,000 - $15,000)].

Deductible Expenses Deductible moving expenses can be calculated as follows: Real Estate Commission - Regina Home Legal Fees - Regina Home Other Regina Home Costs (Not Deductible) Car Moving Costs Moving Company Costs ($2,800 + $900) Costs Of Lodging (Note 2): House Hunting Trip (3 Nights At $225) In Calgary (12 Nights At $215) Food - Maximum (15 Days At $51 Flat Rate) Costs Of Airfare On Move To Calgary

$16,350 425 Nil 500 3,700

Moving Expense Deductions Available

$25,395

675 2,580 765 400

Note 2 Costs for food and lodging at or near an old or new residence are limited to a maximum period of 15 days. As soon as the lease is signed (assuming that the person doesn’t back out before the lease actually begins) the premises is a new residence. Yolanda has a total of 24 days; 3 days after she signs the lease in Calgary at $225 per day, 7 days in Regina at $160 per day, and 14 days in Calgary at $215 per day. As they are the most expensive days, she will deduct the first 3 days in Calgary at $225 per day for a total of $675 [(3)($225)], followed by the remaining 12 days in Calgary at $215 per day. The total here is $2,580 [(12)($215)].

Actual Deduction The actual 2017 deduction will be limited to $22,000, the amount of income earned at the new location. This will leave a carry forward to 2018 of $3,395 ($25,395 - $22,000).



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SSS Solution Nine - 2 The deductible actual costs are as follows: Actual Costs Excluding Camp Costs (49 weeks At $250) Periodic Cost Limit For Camp Weeks [($125)(2)(3 weeks) + ($200)(1)(3 weeks) + ($275)(1)(3 weeks)]

$12,250

Deductible Actual Costs

$14,425

2,175

Generally, the spouse with the lower income must claim the deduction for child care expenses. However, under certain circumstances, the spouse with the higher income can claim the deduction. One of these circumstances is when the lower income spouse is hospitalized. In this case, the higher income spouse can claim the deduction for the period of hospitalization. Thus, for the four weeks that Mr. Harris was hospitalized, Mrs. Harris can claim child care costs. The relevant calculations for determining the deductible costs for each individual are as follows: Mrs. Harris

Mr. Harris

Actual Costs And Limited Camp Costs

$14,425

$14,425

Annual Expense Limit [($5,000)(2) + ($8,000)(1) + ($11,000)(1)]

$29,000

$29,000

2/3 Of Earned Income [(2/3)($263,500)] [(2/3)($4,200)] Periodic Expense Limit [($125)(2)(4 weeks) + ($200)(1)(4 weeks) + ($275)(1)(4 weeks)]

$175,667 $2,800 $2,900

N/A

The least of these amounts for Mrs. Harris is $2,900. You should note that there is no requirement that actual payments be allocated on the basis of the time that Mr. Harris was hospitalized. The lowest figure for Mr. Harris is $2,800, two-thirds of his earned income. As Mrs. Harris will be deducting $2,900, Mr. Harris will not be able to deduct any amount of child care costs. Note that the interest received is not included in Mr. Harris’ earned income.



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SSS Solution Nine - 3 Net And Taxable Income Harry's Income

No Split

With Split

Pension Receipt Consulting Fees Pension Income To Loretta

$ 92,000 41,000 N/A

$92,000 41,000 ( 46,000)

Net And Taxable Income

$133,000

$87,000

Loretta's Income

No Split

With Split

Interest Income Pension Income From Harry

$2,800 N/A

$ 2,800 46,000

Net And Taxable Income

$2,800

$48,800

Federal Tax Payable With No Pension Income Splitting Loretta Loretta's federal Tax Payable with no pension income splitting would be calculated as follows: Tax Before Credits [(15%)($2,800)] Basic Personal Credit [(15%)($11,635)]

$ 420 ( 1,745)

Federal Tax Payable - Loretta

Nil

Harry Harry's federal Tax Payable with no pension income splitting would be calculated as follows: Tax On First $91,831 Tax On Next $41,169 ($133,000 - $91,831) At 26%

$16,300 10,704

Total Before Credits Credits: Basic Personal Spousal ($11,635 - $2,800) Age [$7,225 - (15%)($133,000 - $36,430) Pension

$27,004 ($11,635) ( 8,835) Nil ( 2,000)

Total Rate

($22,470) 15%

Federal Tax Payable - Harry

(

3,371) $23,633



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Federal Tax Payable With Pension Income Splitting When pension income splitting is used, Loretta’s federal Tax Payable would be calculated as follows: Tax On First $45,916 Tax On Next $2,884 ($48,800 - $45,916) At 20.5%

$6,887 591

Tax Before Credits Credits: Basic Personal Pension

$7,478 ($11,635) ( 2,000)

Total Rate

($13,635) 15%

( 2,045)

Federal Tax Payable - Loretta

$5,433

With pension income splitting , Henry's federal Tax Payable would be calculated as follows: Tax On First $45,916 Tax On Next $41,084 ($87,000 - $45,916) At 20.5%

$ 6,887 8,422

Tax Before Credits Credits: Basic Personal Spousal Age [$7,225 - (15%)($87,000 - $36,430) Pension

$15,309 ($11,635) Nil Nil ( 2,000)

Total Rate

($13,635) 15%

Federal Tax Payable - Harry

(

2,045) $13,264

Comparison Federal Tax Payable Without Income Splitting (Harry Only) $23,633 Federal Tax Payable With Income Splitting ($5,433 + $13,264) ( 18,697) Savings With Pension Income Splitting

$ 4,936



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SSS Solution Nine - 4 A. Sale For $75 Per Share In this Case, the shares were transferred at a price that was below fair market value. However, John Bolton will have deemed proceeds under ITA 69(1)(b) equal to the fair market value of $525,000 [(5,000)($105)]. The result for John would be as follows: Deemed Proceeds Of Disposition - ITA 69(1)(b) Adjusted Cost Base [(5,000)($45)]

$525,000 ( 225,000)


$300,000 1/2


$150,000

From the point of view of Alex Bolton, his cost base for the shares will be limited to the actual price paid of $375,000 [(5,000)($75)]. This means that, when Alex Bolton sells these shares, the difference between his proceeds of disposition per share of $105 and the price per share he paid of $75 would be taxed in his hands. In effect, any gain arising from a sales price of up to $105 will be subject to double taxation. With respect to the subsequent sale by Alex, the results for him would be as follows: Proceeds Of Disposition (Actual) Adjusted Cost Base (Actual)

$525,000 ( 375,000)


$150,000 1/2


$ 75,000

B. Sale For $125 Per Share In this situation, the gain to be recorded by John Bolton would be based on $625,000 [(5,000)($125)], the actual amount received. The result for John would be as follows: Proceeds Of Disposition (Actual) Adjusted Cost Base

$625,000 ( 225,000)


$400,000 1/2


$200,000

From the point of view of Alex Bolton, ITA 69(1)(a) would limit his adjusted cost base to $525,000, the fair market value of the shares at the time of purchase, despite the fact that John had to record the actual proceeds of $625,000. With respect to the subsequent sale by Alex, the results for him would be as follows: Proceeds Of Disposition (Actual) Adjusted Cost Base - ITA 69(1)(a) Capital Gain

$525,000 ( 525,000) Nil

As was the situation in Case A, Case B involves double taxation. In this case it applies to the extra $100,000 ($625,000 - $525,000) in proceeds of disposition that is recognized in John's gain but not in Alex's adjusted cost base.



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C. Sale For $105 Per Share In this Case, both the proceeds to John Bolton and the adjusted cost base to Alex Bolton will be equal to the amount paid for the shares as it is the fair market value. No double taxation will arise. The result for John would be the same as for Case A as follows: Proceeds Of Disposition (Actual) Adjusted Cost Base [(5,000)($45)]

$525,000 ( 225,000)


$300,000 1/2


$150,000

With respect to the subsequent sale by Alex, the results for him would be as follows: Proceeds Of Disposition (Actual) Adjusted Cost Base (Actual)

$525,000 ( 525,000)

Capital Gain

Nil

D. Gift In this Case, John Bolton will be deemed to have received proceeds equal to the fair market value of $525,000 and the adjusted cost base to Alex Bolton will also be equal to the fair market value. No double taxation will arise. The results will be the same as in Case C. The result for John would be as follows: Deemed Proceeds Of Disposition - ITA 69(1)(b) Adjusted Cost Base [(5,000)($45)]

$525,000 ( 225,000)


$300,000 1/2


$150,000

With respect to the subsequent sale by Alex, the results for him would be as follows: Proceeds Of Disposition (Actual) Adjusted Cost Base - ITA 69(1)(c)

$525,000 ( 525,000)

Capital Gain

Nil

Summary These results can be summarized as follows: John A. B. C. D.

Sale For $75 (ACB = $375,000) Sale For $125 (ACB = $525,000) Sale For $105 (ACB = $525,000) Gift (ACB = $525,000)

$150,000 200,000 150,000 150,000

Taxable Capital Gain Alex $75,000 Nil Nil Nil

Total $225,000 200,000 150,000 150,000

The real economic gain on the two sales is $300,000 ($525,000 - $225,000), a taxable amount of $150,000. This is reflected in Cases C and D where John either sells the shares at fair market value or gifts them to his brother Alex. The preceding table reflects the fact that there was double taxation in Cases A and B, resulting in higher taxable capital gains.



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SSS Solution Nine - 5 Case One - FMV > Transferor's Capital Cost As a result of this disposition, Jason will have a taxable capital gain of $34,000 [(1/2)($255,000 - $187,000)]. In addition, there will be recapture of $42,000 ($187,000 - $145,000). Jason's Net Income For Tax Purposes will increase by $76,000 ($34,000 + $42,000). For capital gains purposes, the capital cost for his brother will be the transfer price of $255,000. However, because the fair market value of the asset was greater than its capital cost at the time of transfer, ITA 13(7)(e) will limit the capital cost for CCA and recapture purposes to the following amount: [$187,000 + (1/2)($255,000 - $187,000)] = $221,000

Case Two - FMV < Transferor's Capital Cost As a result of this disposition, Christine will have recapture of $80,000 ($320,000 - $240,000) and her Net Income For Tax Purposes will increase by this amount. As the capital cost of the asset was greater than the proceeds of disposition, there will not be a capital gain on the transfer. In this Case, where the fair market value of the asset is less than its capital cost, ITA 13(7)(e) deems the transferee's capital cost of the transferred asset to be equal to the transferor's capital cost, an amount of $520,000. This capital cost will be used for purposes of determining any capital gain and/or recapture on a future disposition. The $200,000 ($520,000 - $320,000) difference between this value and the transfer price will be considered deemed CCA. The resulting UCC balance of $320,000 ($520,000 deemed capital cost - $200,000 deemed CCA) will be used by Christine's sister for calculating future CCA.



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SSS Solution Nine - 6 Case A As the transfer was to his daughter, the deemed proceeds will be recorded at fair market value for the land and building . Based on this, the following calculations show the tax effects that will be included in Mr. Forsyth’s final return: Land

Building

Deemed Proceeds Adjusted Cost Base/Capital Cost

$212,000 ( 100,000)

$325,000 ( 250,000)


$112,000 1/2

$ 75,000 1/2


$ 56,000

$ 37,500

UCC Deduct Disposition - Lesser Of: • Capital Cost = $250,000 • Deemed Proceeds = $325,000

$170,000 ( 250,000)

Negative Closing UCC Balance = Recaptured CCA

($ 80,000)

A total of $173,500 ($56,000 + $37,500 + $80,000) would be added to Mr. Forsyth’s 2017 Net Income For Tax Purposes. With respect to his daughter’s tax records, the land will have an adjusted cost base of $212,000. In addition, the building will be a Class 1 asset with a capital cost of $325,000. In calculating the 2017 CCA, two things should be noted: •

ITA 13(7)(e) does not apply to deemed dispositions resulting from the death of a taxpayer. This provision normally limits the UCC for the acquiring taxpayer to the selling taxpayer's capital cost, plus one-half of the difference between the proceeds of disposition and the taxpayer's capital cost.

•

Since the acquisition of the building is a non-arm’s length transaction and its previous use was to produce income, it is exempt from the half-year rules.

Given these consideration, the 2017 CCA will be $13,000 [($325,000)(4%)], leaving a UCC of $312,000 ($325,000 - $13,000). Using this information, the 2018 tax effects associated with the sale of the building would be calculated as follows: Land Proceeds Of Disposition Adjusted Cost Base/Capital Cost

Building

$225,000 ( 212,000)

$375,000 ( 325,000)


$ 13,000 1/2

$ 50,000 1/2


$

$ 25,000

6,500

UCC Deduct Disposition - Lesser Of: • Capital Cost = $325,000 • Proceeds Of Disposition = $375,000

$312,000 ( 325,000)


($ 13,000)



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A total of $44,500 ($6,500 + $25,000 + $13,000) would be added to the 2018 Net Income For Tax Purposes of Mr. Forsyth’s daughter.

Case B Assuming that the transfer was to Mr. Forsyth’s spouse rather than to his daughter, his proceeds of disposition would be equal to the tax cost of the land and building . As a consequence, there would have been no tax effects to be included in Mr. Forsyth’s final return. The land, because it is a non-depreciable asset, would be recorded by Christine at its original adjusted cost base of $100,000. With respect to the building , for purposes of determining capital gains and losses, Christine would retain Mr. Forsyth's original capital cost of $250,000. However, for CCA and recapture purposes, Christine would use Mr. Forsyth's UCC of $170,000. During 2017, Christine will take CCA of $6,800 [(4%)($170,000)], leaving a January 1, 2018 UCC of $163,200. Using these figures, the tax consequences from Christine's sale of the land and building would be as follows: Land Proceeds Of Disposition Adjusted Cost Base/Capital Cost

Building

$225,000 ( 100,000)

$375,000 ( 250,000)


$125,000 1/2

$125,000 1/2


$ 62,500

$ 62,500

UCC At Sale Deduct Disposition - Lesser Of: • Capital Cost = $250,000 • Proceeds Of Disposition = $375,000

$163,200 ( 250,000)


($ 86,800)

A total of $211,800 ($62,500 + $62,500 + $86,800) would be added to the 2018 Net Income For Tax Purposes of Mr. Forsyth’s wife.

Comparison Case A And Case B (Not Required) The overall tax consequences in the two cases are the same as shown in the following table: Case A Mr. Forsyth 2017 2017 - CCA Taken 2018

$173,500


$173,500

Case A Eileen

Case B Mrs. Forsyth

Nil ($13,000) 44,500 $31,500

($

Nil 6,800) 211,800

$205,000

Mr. Forsyth and Eileen’s increase in Net Income For Tax Purposes total $205,000 ($173,500 + $31,500), the same amount as the total increase for Mrs. Forsyth.



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SSS Solution Nine - 7 The general income attribution rules in ITA 74.1 apply to spouses, common-law partners, and non-arm’s length individuals who are under 18 years of age. This means that the income on the bonds acquired by Mr. Langdon’s wife and his 15 year child Pat would be attributed to him. The total amount would be $10,500 ($5,000 + $5,500). A different income attribution rule, ITA 56(4.1) applies to loans made to any related party, if the loan is made for the purpose of producing property income. As the loan to Heather was not used to produce income, this attribution rule would not apply.



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SSS Solution Nine - 8 Farm Land - Gift To Spouse In the case of the farm land, if he does not elect out of ITA 73(1) there will be no tax consequences at the time of the transfer. The tax cost to his spouse will be unchanged from his tax cost of $160,000. Any income generated by the farm would be considered business income rather than property income. This means that it will not be subject to the income attribution rules and will be taxed in the hands of Mr. Goodby ’s spouse. In the event of a subsequent sale for $390,000 ($40,000 more than its fair market value at the time of the gift), the following taxable capital gain would be attributed to Mr. Goodby under ITA 74.1(1): Proceeds Of Disposition Adjusted Cost Base

$390,000 ( 160,000)


$230,000 1/2


$115,000

Farm Land - Gift To Children ITA 73(3) permits the transfer of farm property used by the taxpayer or his family to a child on a tax free basis. This means that Mr. Goodby would incur no taxation at the time of the gift to either child and the adjusted cost base to either child would be the cost of $160,000. Any income generated by the farm would be considered business income rather than property income. This means that it will not be subject to the income attribution rules and will be taxed in the hands of Mr. Goodby ’s children. If the property were later sold by Harry for $390,000, the resulting capital gain would not be attributed back to Mr. Goodby. However, if the property is transferred to Martha and she sells the property for $390,000 ($40,000 more than its fair market value at the time of the gift) prior to reaching age 18, a capital gain of $230,000 ($115,000 taxable amount) would be attributed back to Mr. Goodby. Note that, while there is usually no attribution of capital gains from minor children, there is an exception to this when farm property is transferred on a tax free basis.

DRC Ltd. - Gift To Spouse These shares could be given to Mrs. Goodby with no immediate tax consequences. The tax cost to his spouse will be unchanged from his tax cost of $320,000. Any dividends on the shares will be attributed back to Mr. Goodby. If his spouse sells the shares for $613,000 ($40,000 more than their fair market value at the time of the gift), the attribution rules of ITA 74.1(1) would require that the following be allocated to the income of Mr. Goodby: Proceeds Of Disposition Adjusted Cost Base

$613,000 ( 320,000)


$293,000 1/2


$146,500



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DRC Ltd. - Gift To Children In the case of a transfer to either of his children, ITA 69 would require that the gift be treated as a deemed disposition with the proceeds at the fair market value of $573,000. This would result in an immediate taxable capital gain of $126,500 [(1/2)($573,000 - $320,000)]. The tax base to either of the children would be the fair market value of $573,000. If the shares were gifted to his 14 year old daughter Martha, any dividends on the shares would be attributed back to Mr. Goodby. This would not be the case with a gift to his 25 year old son Harry. If the shares were sold by either child for $613,000, there would be no tax consequences for Mr. Goodby. However, the selling child would have a taxable capital gain of $20,000 [(1/2)($613,000 - $573,000)].

Rental Property - Gift To Spouse Here again, ITA 73(1) would permit a tax free transfer to Mrs. Goodby with no immediate tax consequences. The tax cost of the property would not be changed. The capital cost would remain at $256,000 ($380,000 - $124,000) and the UCC would be unchanged at $178,000. Any income on the property while it is held by his spouse would be attributed back to Mr. Goodby. At the time of the gift, the fair market value of the building was $386,000 ($510,000 $124,000). At the time of a subsequent sale of the property by Mrs. Goodby for $426,000 ($40,000 more than its $386,000 fair market value at the time of the gift), the income attribution rules of ITA 74.1(1) would apply. This would result in the following amounts being attributed to Mr. Goodby at that time: Land Proceeds Of Disposition Adjusted Cost Base Capital Gain Inclusion Rate Taxable Capital Gain Capital Cost UCC Recapture Of CCA

$124,000 ( 124,000)

Building $426,000 ( 256,000)

Nil N/A

$170,000 1/2

Nil

$ 85,000 $256,000 ( 178,000) $ 78,000

Rental Property - Gift To Children There is no exemption from the general rules of ITA 69 for transfers of depreciable property to children. As a consequence, Mr. Goodby would be subject to taxation based on a disposition of the property at its fair market value of $510,000. There would be no capital gain on the Land. However, there would be a taxable capital gain of $65,000 on the building [(1/2)($386,000 - $256,000)] The capital cost of the building to either of the children for capital gains purposes would be $386,000. For CCA and recapture purposes, the value would be limited to $321,000 [$256,000 + (1/2)($386,000 - $256,000)].



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Any rental income on the property while it is held by his 14 year old daughter would be attributed back to Mr. Goodby until she reached 18 years of age. This would not be the case if the gift were to his 25 year old son. There would be no attribution of capital gains on a gift to either child. If the children subsequently sold the property for $550,000 ($510,000 + $40,000), there would be a taxable capital gain of $20,000 [(1/2)($426,000 - $386,000)] that would be taxed in their hands. As the value of the land remained at $124,000, there would be no capital gain or loss on the land.

Goodby Construction Company - Gift To Spouse Here again, ITA 73(1) permits transfers of any capital property to a spouse without incurring taxation at the time of transfer. This means that the shares in Goodby Construction Company could be gifted to Mrs. Goodby with no immediate tax consequences. The tax basis for these shares would remain at his cost of $227,000. Any dividends on the shares will be attributed back to Mr. Goodby. Should Mrs. Goodby subsequently sell these shares for $492,000 ($40,000 more than its fair market value at the time of the gift), the following taxable capital gain would be attributed back to Mr. Goodby under the general rules of ITA 74.1(1): Proceeds (Fair Market Value) Adjusted Cost Base

$492,000 ( 227,000)


$265,000 1/2


$132,500

Goodby Construction Company - Gift To Children There is no exemption from the general rules of ITA 69 for transfers of shares in a Canadian controlled private corporation to children. As a consequence, Mr. Goodby would have a taxable capital gain on the transfer to either child of $112,500 [(1/2)($452,000 - $227,000)]. The adjusted cost base to the children would be the fair market value of $452,000. Note To Students On Gift To Martha Because dividends paid by private companies to individuals who are under 18 are subject to the tax on split income, such dividends would not be attributed back to Mr. Goodby. However, the tax on split income is not covered until Chapter 11 of the text. Given this, you would not have been expected to understand this issue at this point in the text. There would be no income attribution if the shares were gifted to his 25 year old son. If the shares were subsequently sold for $492,000 by the child receiving the gift, that child would have a taxable capital gain of $20,000 [(1/2)($492,000 - $452,000)] that would be taxed in their hands.



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Self Study Problem Ten - 1

Chapter 10 Self Study Problems Self Study Problem Ten - 1 (Calculation Of PAs And PSPAs) Each of the following four independent Cases involves the calculation of the Pension Adjustment (PA) or Past Service Pension Adjustment (PSPA) that would be reported by the employer. Case A Mrs. Anderson’s employer sponsors both a money purchase RPP and a DPSP. She is a member of both. During 2017, the employer contributes, on her behalf, $2,200 to the RPP and $1,500 to the DPSP. Mrs. Anderson contributes $1,800 to the RPP. Mrs. Anderson’s employment earnings for 2017 are $80,000. Calculate her 2017 PA. Case B Mr. Block’s employer sponsors a defined benefit RPP and, during 2017, contributes $2,900 on Mr. Block’s behalf. Mr. Block also contributes $2,900 to the plan in 2017. The plan provides a benefit equal to 1.75 percent of pensionable earnings for each year of service. Mr. Block’s pensionable earnings for 2017 are $45,000. Calculate his 2017 PA. Case C Miss Carr has worked for her current employer since 2015. In January, 2017, this employer institutes a defined benefit RPP, with benefits extended for all years of service prior to the inception of the plan. The benefit formula calls for a retirement benefit equal to 1.25 percent of pensionable earnings for each year of service. In the current and both previous years, Miss Carr’s pensionable earnings were $38,000. Calculate her 2017 PSPA and PA. Case D Ms. Dexter has worked for her current employer since 2015. She has been a member of her employer’s defined benefit RPP during all of this period. In January, 2017, the employer agrees to retroactively increase the benefit formula from 1.6 percent of pensionable earnings for each year of service, to 1.8 percent of pensionable earnings for each year of service. In the current and both previous years, Ms. Dexter’s pensionable earnings were $59,000. Calculate her 2017 PSPA and PA. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 2 (Excess RRSP Contributions) At the beginning of 2016, Mark Brody had unused RRSP Deduction Room of $25,000. His account also contains $27,000 in undeducted contributions as he was laid off in early 2016, shortly after he made the $27,000 contribution. As his inability to find employment continues, throughout 2016, he withdraws a total of $15,000 from his RRSP to cover living expenses. He had no Earned Income for RRSP purposes during 2015 or 2016 and does not make any RRSP deduction for 2016. In 2017, he finds a job and, based on this, he has Earned Income for RRSP purposes of $42,000. In addition, he wins $85,000 in the provincial lottery. On March 1, 2017, he deposits $50,000 of this amount in his RRSP. Required: A. Determine Mark's maximum RRSP deduction for 2017. B. Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would be assessed to Mark for the year ending December 31, 2017. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 3 (RRSP Contributions) During 2016 and 2017, Mr. Donald Barnes has the following income, loss and withholdings data: 2017 Gross Salary Taxable Benefits CPP Contributions EI Premiums Union Dues Profit From Tax Advisory Service Net Loss From Rental Property Spousal Support Received From Former Wife Taxable Dividends (Grossed Up Amount) Interest On Government Bonds

$57,000 1,250 ( 2,564) ( 836) ( 175) 12,220 ( 6,480) 2,400 2,900 2,110

2016 $55,000 1,150 ( 2,544) ( 955) ( 175) 4,150 ( 11,875) 2,400 3,210 3,640

At the end of 2016, Mr. Barnes had no Unused RRSP Deduction Room and no undeducted RRSP contributions. Required: For 2017, determine Mr. Barnes’ maximum allowable deduction for contributions to a Registered Retirement Savings Plan under the following assumptions: A. During 2016 and 2017, Mr. Barnes is not a member of a Registered Pension Plan or a Deferred Profit Sharing Plan. B. Mr. Barnes is a member of a Registered Pension Plan. His employer reports that his Pension Adjustment is $4,200 for 2016 and $4,300 for 2017, all of which reflects contributions made by his employer. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 4 (RRSPs, TFSAs And Tax Planning) Mr. Jonathan Beasley graduated from university in May, 2016 at the age of 30. He immediately began work as an industrial designer, earning gross employment income of $36,000 during the calendar year ending December 31, 2016. Prior to 2016, Mr. Beasley had no Earned Income and had made no contributions to either an RRSP or a TFSA. He had been training for the Olympics in weight lifting when an injury forced him to give up competing and go to university instead. Up until May, 2016, Mr. Beasley had been supported by his spouse, Samantha, a professional wrestler. However, they were separated on June 1, 2016. On July 1, 2016, Samantha was convicted of spouse abuse and was ordered by the court to pay spousal support to Jonathan in the amount of $1,500 per month (a total of $9,000 was received during 2016). In addition, she was required to pay damages to Jonathan in the amount of $100,000. Jonathan deposited this entire amount in his savings account, resulting in 2016 interest income of $1,500. Jonathan did not contribute to an RRSP during 2016. However, his employer sponsored an RPP to which Jonathan contributed $1,300 during 2016. This contribution was matched by a $1,300 contribution by Jonathan’s employer, resulting in a 2016 Pension Adjustment of $2,600. During 2016, Jonathan received royalties of $500 on a song written by his mother, eligible dividends from Canadian public corporations totaling $700, and a $50,000 separation gift from his parents. His parents also gave him a rental property in early 2016. This property experienced a net rental loss of $5,000 for the year ending December 31, 2016. For 2016, Mr. Beasley ’s income places him in the lowest federal income tax bracket. Further, he anticipates that his 2017 income will also be taxed at this rate. However, he expects to receive a significant promotion at the end of 2017 and, as a consequence, he is likely to be in the maximum federal income tax bracket in 2018 and subsequent years. Required: A. Calculate Mr. Beasley’s net employment income for 2016. B. Determine Mr. Beasley’s maximum deductible RRSP contribution for 2017. C. As Mr. Beasley’s personal financial consultant, what advice would you give him regarding his TFSA and RRSP contribution and deduction for 2017? SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 5 (Net Income With RRSP) At the end of 2016, Mr. Jonathan Detwiller had Unused RRSP Deduction Room of $10,000. In addition, he had undeducted contributions of $4,500. For the year ending December 31, 2016, Mr. Detwiller had the following amounts of income and deductions under the various subdivisions of Division B of the Income Tax Act: Net employment income Eligible dividends received Gross up [(38%)($7,800)] Subdivision e deductions (child care costs) Taxable capital gains Allowable capital losses Net rental loss

$56,000 7,800 2,964 ( 2,500) 5,400 ( 8,200) ( 9,000)

Required: A. Calculate Mr. Detwiller’s 2016 Net Income For Tax Purposes. In addition, indicate any carry overs available to him at the end of the year. B. For each of the following independent cases, calculate: • •

the maximum RRSP contribution that Mr. Detwiller can make for 2017 without incurring a penalty; Mr. Detwiller’s maximum RRSP deduction for 2017, assuming that he makes the maximum contribution that you have calculated.

Case 1 During 2016, he is a member of a money purchase Registered Pension Plan (RPP) in which he has contributed $1,500 and his employer has contributed $3,000. He is also a member of a Deferred Profit Sharing Plan (DPSP) to which his employer has contributed $1,000. Case 2 During 2016, he is a member of a DPSP in which his employer contributed $4,500 per employee. His employer does not sponsor a RPP. Case 3 During 2016, he is not a member of a RPP or DPSP. Assume that in addition to the preceding information, he also has net business income of $220,000. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 6 (Comprehensive Employment Income With RRSP - Plus Death Of Registrant) Mr. Frank Sabatini has been a salesman for a large, publicly traded Canadian corporation for the last 15 years. During the year ending December 31, 2017, he earned a base salary of $58,000 and commissions of $74,000. In addition, the corporation reimbursed him for invoiced travel costs of $12,300. Included in these travel costs were $5,600 in expenditures for meals while travelling and entertainment of clients. Other Information: 1. The corporation made a number of deductions from Mr. Sabatini’s salary. The amounts were as follows: Canada Pension Plan contributions $ 2,564 Employment Insurance premiums 836 Income taxes 39,000 Registered Pension Plan contributions 3,500 Contributions to a registered charity 600 Parking fees - company garage 240 Employee share of life insurance premium (See item #2) 1,500 Employee share of sickness and accident insurance premium (See item #3) 550 2. Mr. Sabatini is covered by a group life insurance policy that pays $150,000 in the event of his death. The total annual premium on this policy is $3,000, with one-half of this amount paid by the employer. 3. Mr. Sabatini is covered by a group sickness and accident insurance plan that he joined on January 1, 2017. The premium on this plan is $100 per month, one-half of which is paid by Mr. Sabatini’s employer. The plan provides periodic benefits that compensate for lost employment income. During 2017, Mr. Sabatini was hospitalized during all of November and received a benefit from the sickness and accident insurance plan in the amount of $4,500. Payment of the monthly premium was waived during the one month period of disability. 4. Mr. Sabatini’s employer provides him with an automobile that was purchased in 2016 for $68,000. During 2017 Mr. Sabatini drives this automobile 99,000 kilometers, 92,000 of which are employment related. All operating costs, amounting to $16,200 for 2017, are paid by the employer. During the period of his hospitalization, his employer required that the vehicle be returned to the company garage. Mr. Sabatini pays the company $1,000 for his personal use of the automobile during 2017. 5. As a result of his extensive employment related travel, Mr. Sabatini has accumulated over 300,000 points in a frequent flier program. All of Mr. Sabatini’s travel costs have been charged to his personal credit card and his employer has reimbursed him for all of these charges. On December 30, 2017, he uses 150,000 of these points for two first class tickets to Cancun. Mr. Sabatini is accompanied on this one week trip by his secretary and, while there is some discussion of business matters, the trip is primarily for pleasure. At the same time, Mr. Sabatini uses another 30,000 of the points to provide his wife with an airline ticket to visit her mother in Leamington, Ontario. The normal cost of the Cancun tickets is $11,000, while the normal cost of the Leamington ticket is $600.



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6. In 2014, Mr. Sabatini received options to purchase 1,000 shares of his employer’s stock at a price of $12.50 per share. At the time the options were granted, the shares were trading at $10.00 per share. During December, 2017, Mr. Sabatini exercises these options. At the time of exercise, the stock is trading at $23.50 per share. 7. Mr. Sabatini’s employer allows him to purchase merchandise at a discount of 30 percent off the normal retail prices. During 2017, Mr. Sabatini acquires such merchandise at a cost (after the applicable discount) of $6,790. 8. In addition to reimbursing him for invoiced travel costs, Mr. Sabatini’s employer pays a $5,000 annual fee for his membership in a local golf and country club. During 2017, Mr. Sabatini spends $6,800 entertaining clients at this club. None of these costs are reimbursed by Mr. Sabatini’s employer. 9. Mr. Sabatini’s employer contributes $2,400 to the company’s Registered Pension Plan on his behalf and, in addition, contributes $2,000 in his name to the company’s Deferred Profit Sharing Plan. 10. Mr. Sabatini has correctly calculated that his employment income added $116,000 to his 2016 Earned Income for RRSP purposes. This Earned Income figure has not taken into consideration the following items: 2017 Business Loss Taxable Dividends (After Gross Up) Interest Income Rental Income Taxable Capital Gains Child Support Received (For 8 Year Old Son)

($ 3,300) 600 1,100 2,000 7,900

2016 ($12,500) 800 660 7,500 3,800

6,000

6,000

11. Mr. Sabatini’s Unused RRSP Deduction Room carried forward from 2016 was nil and he had no undeducted RRSP contributions. His employer reports that his Pension Adjustment for 2016 was $6,800. 12. On May 18, 2017, Mr. Sabatini contributes $2,600 to his wife’s RRSP. His only contribution to his own RRSP in 2017 and 2018 was $10,000 in February, 2017. This contribution was deducted in full on his 2016 tax return. 13. In July, 2018, Mr. Sabatini drowns in his swimming pool. The police found receipts for the Cancun trip with his secretary floating beside him in the pool. Required: A. Determine Mr. Sabatini’s minimum net employment income for the year ending December 31, 2017, and indicate the reasons that you have not included items in your calculations. Ignore GST implications. B. Calculate Mr. Sabatini’s RRSP Deduction Limit for 2017 and determine his RRSP deduction in the calculation of his Net Income For Tax Purposes for 2017. C. Assume that Mr. Sabatini’s RRSP does not specify a beneficiary if he dies. Describe the tax consequences of his death on his RRSP. D. Assume Mr. Sabatini’s wife is the sole beneficiary of his RRSP. Describe the tax consequences of his death on his RRSP. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 7 (Retiring Allowance With RRSP) Mr. Colt, an employee of Jeffco Ltd., has agreed to accept early retirement in 2017, in return for a retiring allowance of $125,000. Mr. Colt began working for Jeffco Ltd. in 1977. He has been a member of the Company ’s Registered Pension Plan for only the last 10 years. At the beginning of 2017, Mr. Colt had Unused RRSP Deduction Room of $32,000. His 2016 Earned Income was $46,000 and his T4 for 2016 included a Pension Adjustment of $8,000. Mr. Colt plans to contribute $50,000 of the retiring allowance into a Registered Retirement Savings Plan (RRSP) in his name, and the remaining $75,000 into a newly established spousal RRSP. Required: A. Determine the maximum RRSP contribution that Mr. Colt can deduct in 2017. B. What are the tax implications for Mr. Colt in 2017 if he makes his planned contributions ($50,000 payment to his RRSP and the remainder to a spousal RRSP)? As Mr. Colt’s financial consultant, what advice would you give him regarding his RRSP contributions and deductions? SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 8 (Employment Compensation Tax Planning) Mr. Jones is 62 years old and his wife, Mabel, is 58 years old. Mabel has no income of her own as she spends most of her waking hours maintaining her supernatural phenomena blog . In January, 2017, he agreed to undertake a special project for the Martin Manufacturing Company, a company that produces large industrial use motors. The project is expected to take three years to complete. Mr. Jones was previously employed by the Martin Manufacturing Company for 11 years from 1985 to 1995. However, since then, he has operated his own consulting organization in Windsor. Accepting the special project for the Martin Manufacturing Company will require that Mr. Jones discontinue his consulting operation and move to Hamilton, where the head offices of the Company are located. This does not concern Mr. Jones as he plans to retire in three years under any circumstances. It will, however, require that he sell his home in Windsor and acquire a new residence in Hamilton. Mr. Jones anticipates that he will require a mortgage of approximately $100,000 in order to purchase a residence. Mr. Jones and the Company have agreed to a salary of $100,000 per year for the three year period, with no additional benefits other than the required payments for Employment Insurance and the Canada Pension Plan. However, the Company has indicated that it is prepared to be flexible with respect to the type of compensation that is given to Mr. Jones, subject to the condition that the total cost of providing the compensation does not exceed $300,000 over the three year period. The Martin Manufacturing Company is a Canadian public company and is subject to a combined federal and provincial tax rate of 30 percent. It currently has a Registered Pension Plan for its employees. However, this plan was not in place during the earlier 11 year period in which Mr. Jones was employed by the Company. Mr. Jones has other income and is concerned about the fact that his $100,000 per year salary will attract high levels of taxation. He is seeking your advice with respect to how his compensation arrangement with the Martin Manufacturing Company might be altered to provide some reduction or deferral of taxes. He indicates that, subsequent to retirement, his income is likely to be less than $60,000 per year. Required: Advise Mr. Jones with respect to alternative forms of compensation that could reduce or defer taxes on the $300,000 that he is to receive from the Martin Manufacturing Company. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 9 (Comprehensive Case Covering Chapters 1 to 10) Ms. Kerri Sosteric is 33 years of age. She is divorced from her former husband and has custody of the two children from that marriage. Her son Barry is 5 years old and her daughter Kim is 8 years old. Neither of her children have any income during 2017. The terms of Kerri’s 2015 divorce decree require that her former husband pay $1,500 per month in child support and an additional $500 per month in spousal support. During 2016 and 2017, all amounts were paid in a timely fashion. Because she works on a full time basis, Kerri sends her children to a commercially operated day care centre. During 2017, the cost of this care was $8,600. The day care centre provides receipts for this amount. During 2017, medical expenses for Kerri and her family are as follows: Kerri Barry Kim

$ 560 240 1,820

Total

$2,620

Kerri is employed by a large public company. Employment related information for the years 2016 and 2017 is as follows: Gross Salary Commissions Canada Pension Plan Contributions Employment Insurance Premiums RPP Contributions (Note)

2016

2017

$47,000 6,200 2,544 955 1,800

$53,000 7,800 2,564 836 1,950

Note Kerri’s employer makes a matching contribution to the money purchase RPP in each of the two years. Other than the RPP contributions, Kerri’s employer provides no other benefits. In addition, she is required to maintain an office in her home with no reimbursement provided. Her employer provides the required T2200 form. Kerri’s home had cost $420,000 on January 1, 2016, with $120,000 of this amount being the estimated value of the land. For 2016 and 2017, the total costs of owning and operating this home are as follows: Utilities And Maintenance Insurance Property Taxes Mortgage Interest

2016

2017

$ 1,850 625 4,200 12,000

$ 2,040 715 4,400 11,800

Kerri’s home office occupies 15 percent of the total floor space in the home. In January, 2016, Kerri acquires a residential duplex that she uses as a rental property. The cost of the property is $340,000, with $80,000 of this amount being the estimated value for the land. For the two years 2016 and 2017 rents and expenses other than CCA are as follows:



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Rents Expenses Other Than CCA

2016

2017

$ 8,400 10,300

$13,800 11,100

In January, 2016, Kerri acquired 5,000 shares of her employer’s stock at its fair market value of $12.00 per share. During 2016, these shares paid eligible dividends of $0.75 per share. During 2017, she receives eligible dividends of $0.60 per share. During December, 2017, Kerri sells all of her shares at their fair market value of $14.75 per share. Kerri has unused RRSP deduction room carried forward from 2016 of $6,200. In addition, her plan contains $5,800 in undeducted contributions. Based on the undeducted contributions in the plan, along with any additional contributions required to meet this goal, Kerri would like to deduct an amount in 2017 that would reduce her unused RRSP deduction room to nil at the end of the year. Required: Ignore GST/HST/PST considerations. A. Calculate the additional contribution Ms. Sosteric must make to her RRSP. B. Assume that Ms. Sosteric contributes the amount calculated in Part A to her RRSP. Calculate Ms. Sosteric’s 2017 minimum: • • •

Net Income For Tax Purposes, Taxable Income, and federal Tax Payable before consideration of any income tax that would have been withheld or paid in instalments. SOLUTION available in printed and online Study Guide.



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Self Study Problem Ten - 10 (Comprehensive Case Covering Chapters 1 to 10) At the beginning of 2017, Mr. Ahmed Sidi is 71 years old and has been retired for 5 years. Prior to his retirement, he had been a long-term employee of a large public company. During 2017, he receives payments from the employer’s RPP of $86,000. Both the employee and employer contributions to this RPP ended when Mr. Sidi retired. In addition to the pension income from his employer’s RPP, in 2017, Ahmed is entitled to $11,000 in Canada Pension Plan benefits. When Ahmed first began to receive CPP benefits, he elected to split these benefits with his wife, Adrianna. Because his income is consistently in excess of $100,000 per year, he has not applied for and does not receive OAS payments. Ahmed has a 45 year old son who has been blind since birth. The son lives with Ahmed and has no income of his own. Ahmed's wife Adrianna has provided all of the care required for their son. She is 66 years old at the beginning of the year and, during 2017, she received OAS payments of $7,000 in addition to the $5,500 in CPP benefits that Ahmed has elected to split with her. She has no other personal source of income. However, for 2017, Ahmed will split all of his qualifying pension income with Adrianna. The family ’s medical expenses are as follows: Ahmed Adrianna Son

$ 2,500 3,100 9,800

Total

$15,400

Ahmed makes an annual donation to the Canadian National Institute For The Blind of $4,000. He is not eligible for the first-time donor's super credit. While he was still employed, he was granted options to acquire 5,000 shares of his employer’s stock. The option price was $15 per share and, at the time the options were granted, this was also the fair market value of his employer’s shares. All of these options were exercised in February, 2017. At this time, the shares were trading at $21 per share. In November, 2017, all of the shares are sold for $23 per share. Ahmed had other investment income during 2017 as follows: Interest From Canadian Sources $18,000 Eligible Dividends Received 2,200 Foreign Source Interest (Net Of 10 Percent Withholding)* 2,700 Total

$22,900

*Assume that the foreign tax credit is equal to the amount withheld. On January 1, 2017, Ahmed owns three residential rental properties. They are all Class 1 properties. Relevant information on these properties is as follows:

Capital Cost - Building UCC On January 1 Rental Revenues Expenses (Other Than CCA)

Property A

Property B

Property C

$560,000 422,000 34,000 29,000

$685,000 571,000 42,000 37,000

$426,000 $385,000 26,000 23,000



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On December 31, 2017, property A is sold for $960,000. The value of the land for this property was $100,000 at the time of purchase and had increased to $340,000 at the time of sale. The vendor pays $96,000 in cash, with Ahmed taking back a mortgage for the $864,000 balance. The mortgage requires annual payments of $86,400 on the principal, beginning in 2018. When he turned 71 in 2016, Ahmed transferred his RRSP assets into a RRIF. On January 1, 2017, the fair market value of these assets is $1,250,000. As he has little need for current income, Ahmed would like to minimize his withdrawals from the plan. At the beginning of 2017, Ahmed opens an RRSP with his wife as the registrant. He has no unused RRSP deduction room carried forward from 2016. He would like to make the maximum deductible contribution to his wife’s RRSP during 2017. In calculating this amount, assume that his 2016 earned income is equal to his 2017 earned income. Required: Ignore GST/HST/PST considerations. A. Calculate Mr. Sidi’s maximum deductible spousal RRSP contribution for 2017. B. Assume that Mr. Sidi contributes the amount calculated in Part A to his wife’s RRSP. Calculate Mr. Sidi’s 2017 minimum: • • •

Net Income For Tax Purposes, Taxable Income, and federal Tax Payable before consideration of any income tax that would have been withheld or paid in instalments.

C. In general terms, without doing calculations, describe the factors that Mr. Sidi should consider when deciding how much pension income he should split with his spouse. SOLUTION available in printed and online Study Guide.



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SSS Problem Ten - 1


SSS Problem Ten - 1 (Calculation Of PAs, PSPAs, And PARs) Each of the following independent Cases involves calculations of the Pension Adjustment (PA), Past Service Pension Adjustment (PSPA), or Pension Adjustment Reversal (PAR) that would be reported by the employer. Case A Barbra Stressand has worked for her current employer since 2014. In January 2017, this employer implements a defined benefit RPP. The benefits of the plan are extended to all years of service prior to the inception of the plan. The plan provides a benefit equal to .75 percent of pensionable earnings for each year of service. Barbra's pensionable earnings in prior years were as follows: 2014 2015 2016 2017 Required:

$46,000 49,000 54,000 55,000 Calculate Barbra's 2017 PSPA and PA.

Case B Jane Fisher's employer sponsors both a defined contribution RPP and a DPSP. Jane is a member of both plans. During 2017, on Jane's behalf, her employer contributes $3,300 to the RPP and $1,500 to the DPSP. Jane contributes $2,400 to the RPP. Required:

Calculate Jane's 2017 PA.

Case C Mark Lanvin begins working for LTC Ltd. at the beginning of 2015. LTC sponsors a defined benefit RPP with benefits that do not become vested until after an employee has been with the corporation for five years. LTC has reported the following PAs for Mark: 2015 2016

$4,500 4,800

On January 1, 2017, Mark is offered a better position with a competing corporation and resigns at LTC Ltd. Required:

Calculate Mark's PAR for 2017.

Case D Victor Fortune's employer sponsors a defined benefit RPP. During 2017, Victor and his employer make matching contributions of $2,500 each. The plan provides a benefit of 1.3 percent of pensionable earnings for each year of service. Victor has 2017 pensionable earnings of $41,000. Required:

Calculate Victor's 2017 PA.



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SSS Problem Ten - 1

Case E Martin Davis has worked for his current employer since 2015. He has been a member of his employer's defined benefit RPP since his employment began. His pensionable earnings were $62,000 in 2015 and $65,000 in 2016. Because of worsening economic conditions in his employer's industry, the employees have agreed to have the benefit formula reduced from 1.5 percent of pensionable earnings for each year of service, to 1.3 percent of pensionable earnings for each year of service. The change will be applied retroactively for all prior years of service. Required:

Calculate Martin's 2017 PSPA.



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SSS Problem Ten - 2

SSS Problem Ten - 2 (Excess RRSP Contributions) On December 1, 2016, Mary Jo Bush, on the advice of her hairdresser, deposited her inheritance of $54,000 in her RRSP. She had made no RRSP contributions prior to this. Because she had very little Taxable Income in 2016, she did not deduct any portion of her RRSP contribution in that year. She has provided you with the following information: • • • •

Her Unused RRSP Deduction Room is $10,000 at the end of 2016. She made an additional RRSP contribution of $5,000 on February 1, 2017. Mary Jo withdraws $35,000 from the RRSP on December 1, 2017. For 2017, the annual increase in Mary Jo’s RRSP Deduction Limit is $9,000 (18 percent of her 2016 Earned Income of $50,000).

Required: Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would be assessed to Mary Jo for the year ending December 31, 2017.



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SSS Problem Ten - 3

SSS Problem Ten - 3 (RRSP Contributions) Carla Goodman has been employed by Army Brake Products (ABP), a Canadian controlled private corporation, since 2015. The following information pertains to her income over the past two years: 2017

2016

Salary Before Benefits Employee Stock Option Benefit Benefit On Interest Free Loan Registered Pension Plan Contributions Deductible Employment Expenses Interest Income Taxable Capital Gains Business Income Royalty Income Rental Loss Spousal Support Payments Non-Eligible Dividends On ABP Stock

$120,000 8,000 6,000 ( 4,000) ( 4,500) 1,800 15,000 34,000 7,000 ( 5,000) ( 15,000) 900

$120,000 5,000 5,000 ( 3,000) ( 4,000) 1,600 10,000 35,000 5,000 ( 10,000) ( 12,000) 1,000

Totals

$164,200

$153,600

The royalty income listed above is 2 percent of the sales of the “Handy Shopper,” a gadget Ms. Goodman invented three years ago. The business income listed above is earned from selling leather goods. Ms. Goodman had no Earned Income for RRSP purposes prior to 2014. While in 2014 and 2015, she had sufficient Earned Income to enable her to deduct the maximum allowable RRSP contribution for 2015 and 2016, she made no RRSP contributions in either of these years. Beginning in 2016, Ms. Goodman participates in ABP’s employee money purchase Registered Pension Plan. ABP contributes twice the amount contributed by an employee to the plan. Her Pension Adjustment for 2016 is $9,000. Required

Ignore all GST considerations.

A. Calculate Ms. Goodman’s Earned Income for the purpose of determining her maximum 2017 RRSP contribution by listing the items and amounts that would be included in her Earned Income. List separately the items that are not included in the Earned Income calculation. B. Calculate Ms. Goodman’s maximum deductible RRSP contribution for 2017.



Volume 1 Page 256

SSS Problem Ten - 4

SSS Problem Ten - 4 (Net Income With RRSP) During 2016 Ms. Alexis Akerfeldt had the following amounts of income and deductions under the various subdivisions of Division B of the Income Tax Act: Net Employment Income Net Rental Loss Eligible Dividends Received Taxable Capital Gains Allowable Capital Losses Subdivision E Deductions (Moving Expenses)

$71,000 ( 18,000) 8,000 10,300 ( 12,300) ( 3,000)

At the end of 2016, Ms. Akerfeldt’s Unused RRSP Deduction Room was $6,000. There were no undeducted contributions in her RRSP account. Required: A. Calculate Ms. Akerfeldt’s 2016 Net Income For Tax Purposes and any carry overs available to her. B. Calculate the maximum deductible contribution Ms. Akerfeldt can make to her RRSP for the 2017 taxation year for the following independent Cases: Case 1 During 2016, she is a member of a money purchase Registered Pension Plan (RPP) in which she has contributed $2,000 and her employer has contributed $2,500. Case 2 During 2016, she is a member of a Deferred Profit Sharing Plan (DPSP) in which her employer contributed $3,500 per employee. Case 3 During 2016, she is not a member of a RPP or DPSP. Assume that in addition to the preceding information, she also has net business income of $165,000. She has contributed $1,500 to her husband’s RRSP in August, 2017.



Volume 1 Page 257

SSS Problem Ten - 5

SSS Problem Ten - 5 (Comprehensive Case Covering Chapters 1 to 10) Mrs. Rhonda Sorenson is 44 years old and lives in Waterloo, Ontario. She is married to Martin Sorenson and they have one child. Martin is currently unemployed and his only 2017 income is $8,400 in Employment Insurance Benefits. Their 19 year old daughter Cissy is in full time attendance at the University Of Waterloo for 8 months during 2017. Ms. Sorenson pays Cissy ’s 2017 tuition of $7,800 and, because Cissy ’s 2017 income is only $6,500, she agrees to transfer to her mother the maximum tuition credit. Other Information: 1. Mrs. Sorenson is employed by a large publicly traded company, earning a gross salary of $67,000 in 2017. In addition, she received commissions of $3,150. During 2017, her employer withheld the following amounts from her salary. Canada Pension Plan Contributions Employment Insurance Premiums Registered Pension Plan Contributions Donations To United Way Professional Dues Contribution To Disability Insurance Plan

$2,564 836 2,750 600 350 1,000

Rhonda’s employer makes a matching contribution of $2,750 to her RPP, as well as a matching contribution of $1,000 to her disability insurance plan. The plan provides periodic benefits that compensate for lost employment income. Mrs. Sorenson began contributing to the disability insurance plan in 2016. Her contribution in that year was $900. 2. Mrs. Sorenson’s employer provides her with a car that was purchased in 2016 for $45,200. The car was used by Mrs. Sorenson throughout the year, except for a period of one month during which she was hospitalized for a nervous disorder. During this one month period, she was required to return the car to the company garage. During 2017, the car was driven a total of 62,000 kilometers, of which 51,000 were employment related. Her employer paid all of the operating costs which totaled $9,300 for 2017. 3. Her employer reimburses 100 percent of her airline tickets and meals, but only a portion of her lodging costs. As a result, she has unreimbursed employment related travel costs. For 2017, these totalled $4,200. She is required to maintain an office in her home without reimbursement from her employer. Her employer provides the required T2200 form. Based on the portion of her house that is used for this office, the related costs are as follows: Utilities And Maintenance Insurance Property Taxes Mortgage Interest

$ 850 725 1,340 960

4. During her one month hospitalization, Mrs. Sorenson received disability insurance benefits of $4,800. 5. During 2017 Mrs. Sorenson earned interest on term deposits of $3,200. In addition, she received eligible dividends of $1,500.



Volume 1 Page 258

SSS Problem Ten - 5

6. On May 1, 2017, Mrs. Sorenson sold a piece of land for $143,000, receiving a down payment of $43,000 in cash. The remaining balance will be paid in 5 annual instalments in the years 2018 through 2022. The adjusted cost base of the land was $87,000. 7. The family medical expenses were as follows: Rhonda Martin Cissy

$ 1,200 2,750 8,395

Total

$12,345

8. Mrs. Sorenson is not eligible for the first -time donor's super credit. 9. In 2016, Mrs. Sorenson’s had Net Income For Tax Purposes of $57,525. This was made up of net employment income of $55,000 (after the deduction of $2,400 of RPP contributions), a net business loss of $8,600, interest income of $2,000, grossed up dividends of $3,525, and royalties on a song she wrote eight years ago of $5,600. 10. At the end of 2016, Mrs. Sorenson’s Unused RRSP Deduction Room was $7,400 and she had no undeducted RRSP contributions. Her employer reported that she had a 2016 Pension Adjustment of $5,200. Required: Ignore GST considerations. A. Calculate Mrs. Sorenson’s maximum deductible RRSP contribution for 2017. B. Assume that Mrs. Sorenson contributes the amount calculated in Part A to her RRSP. Calculate Mrs. Sorenson’s 2017 minimum: • • •

Net Income For Tax Purposes, Taxable Income, and Federal Tax Payable before consideration of any income tax that would have been withheld or paid in instalments.



Volume 1 Page 259

SSS Solution Ten - 1

Chapter 10 Supplementary Self Study (SSS) Solutions SSS Solution Ten - 1 Case A The required PSPA would be calculated as follows: 2014 Amount [(.75%)(9)($46,000)] 2015 Amount [(.75%)(9)($49,000)] 2016 Amount [(.75%)(9)($54,000)]

$ 3,105.00 3,307.50 3,645.00

2017 PSPA

$10,057.50

In addition to the PSPA calculated above, there would be a 2017 PA of $3,713 [(.75%)(9)($55,000)].

Case B The required 2017 PA would be calculated as follows: Employer’s Contribution To RPP Employer’s Contribution To DPSP Jane’s Contribution To RPP

$3,300 1,500 2,400

PA

$7,200

Case C The required PAR would be calculated as follows: 2015 PA 2016 PA

$4,500 4,800

2017 PAR

$9,300

Case D The required 2017 PA would be calculated as follows: [(1.3%)(9)($41,000)] = $4,797 Note that the contributions made during 2017 have no influence on the PA for a defined benefit RPP.

Case E The required PSPA would be calculated as follows: 2015 Amount [(1.5% - 1.3%)(9)($62,000)] 2016 Amount [(1.5% - 1.3%)(9)($65,000)]

$1,116 1,170

2017 PSPA (Reduction In Benefits)

$2,286

Note that, in this case, the PSPA involves a reduction in benefits. This means that it would be added rather than deducted in the calculation of the RRSP Deduction Limit. There would also be a 2017 PA. However, this cannot be calculated as the problem does not provide the 2017 pensionable earnings.



Volume 1 Page 260


SSS Solution Ten - 2 The excess RRSP contributions amount at the end of each month of 2017 would be calculated as follows:

Undeducted Contributions At Beginning Of Month Add: 2017 Contribution Deduct: 2017 Withdrawal Undeducted Contributions At End Of Month Deduct: Unused Deduction Room Carried Forward Deduct: 2017 Increase In Unused Deduction Room Deduct: $2,000 Cushion

January

February

$54,000

$54,000 5,000

March To November

December

$59,000

$59,000 ( 35,000)

$54,000

$59,000

$59,000

$24,000

( 10,000)

( 10,000)

( 10,000)

( 10,000)

( (

( (

( (

( (

9,000) 2,000)

9,000) 2,000)

9,000) 2,000)

9,000) 2,000)

Monthly Cumulative Excess

$33,000

$38,000

$38,000

$ 3,000

Penalty At 1 Percent Per Month

$

$

$

$

330

380

380

30

The total penalty for 2017 is $4,160 [($330)(1) + ($380)(10) + ($30)(1)]. If the $35,000 excess contributions are withdrawn from the RRSP prior to the end of the year following the year in which an assessment is received for the year in which the contribution is made, an offsetting deduction is available.



Volume 1 Page 261


SSS Solution Ten - 3 Part A For purposes of determining her maximum 2017 RRSP contribution, 2016 Earned Income would be calculated as follows: Net Employment Income * Salary Employee Stock Option Benefit Benefit On Interest Free Loan Deductible Employment Expenses Business Income Royalty Income (Own Invention) Rental Loss Spousal Support Payments

$120,000 5,000 5,000 ( 4,000)

Earned Income

$126,000 35,000 5,000 ( 10,000) ( 12,000) $144,000

*

Note that, in calculating Earned Income for RRSP purposes, no deduction is made from net employment income for contributions made to an RPP. A listing of the items that are not included in the calculation of Earned Income is as follows: • • • •

Registered Pension Plan Contributions Interest Income Taxable Capital Gains Non-Eligible Dividends

Part B The calculation of Ms. Goodman’s maximum deductible RRSP contribution for 2017 is as follows: 2015 RRSP Dollar Limit 2016 RRSP Dollar Limit

$24,930 25,370

Opening Unused RRSP Deduction Room Annual Addition - Lesser Of: • 2017 RRSP Dollar Limit = $26,010 • 18 Percent Of 2016 Earned Income [(18%)($144,000)] = $25,920 2016 PA

$50,300

Maximum Deductible RRSP Contribution For 2017

(

25,920 9,000) $67,220



Volume 1 Page 262


SSS Solution Ten - 4 Part A Ms. Akerfeldt’s Net Income For Tax Purposes would be calculated as follows: Income Under ITA 3(a): Net Employment Income Income From Property [($8,000)(138%)] Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses (Maximum)

$71,000 11,040

$82,040

$10,300 ( 12,300)

Balance From ITA 3(a) And (b) Subdivision e Deductions Balance From ITA 3(c) Deductions Under ITA 3(d): Net Rental Loss

Nil (

$82,040 3,000) $79,040

( 18,000)


$61,040

Ms. Akerfeldt’s Net Income For Tax Purposes is $61,040 and she has a net capital loss carry over of $2,000 ($12,300 - $10,300).

Part B - Case 1 Ms. Akerfeldt’s 2016 Earned Income would be calculated as follows: Net Employment Income Add Back RPP Contributions Net Rental Loss

$71,000 2,000 ( 18,000)

Earned Income

$55,000

Given this, her maximum deductible RRSP contribution would be calculated as follows: Unused Deduction Room - End Of 2016 Annual Addition - Lesser Of: • 2017 RRSP Dollar Limit = $26,010 • 18% of 2016 Earned Income Of $55,000 = $9,900 Less 2016 PA ($2,000 + $2,500) Maximum Deductible RRSP Contribution

$ 6,000

(

9,900 4,500) $11,400

Part B - Case 2 Ms. Akerfeldt’s 2016 Earned Income would be calculated as follows: Net Employment Income Net Rental Loss Earned Income

$71,000 ( 18,000) $53,000

Given this, her maximum deductible RRSP contribution would be calculated as follows:



Volume 1 Page 263


Unused Deduction Room - End Of 2016 Annual Addition - Lesser Of: • 2017 RRSP Dollar Limit = $26,010 • 18% of 2016 Earned Income Of $53,000 = $9,540 Less 2016 PA

$ 6,000

(

Maximum Deductible RRSP Contribution

9,540 3,500) $12,040

Part B - Case 3 Ms. Akerfeldt’s 2016 Earned Income would be calculated as follows: Net Employment Income Net Rental Loss Business Income Earned Income

(

$ 71,000 18,000) 165,000 $218,000

Given this, her maximum deductible RRSP contribution would be calculated as follows: Unused Deduction Room - End Of 2016 Annual Addition - Lesser Of: • 2017 RRSP Dollar Limit = $26,010 • 18% of 2016 Earned Income Of $218,000 = $39,240 Less 2016 PA

$ 6,000

2017 RRSP Deduction Limit Less 2017 Contribution to Spousal RRSP

$32,010 ( 1,500)

Maximum Deductible RRSP Contribution

$30,510

26,010 Nil



Volume 1 Page 264



Part A - RRSP Contribution In order to determine Mrs. Sorenson’s maximum RRSP deduction for 2017, we need to calculate her Earned Income for 2016. The calculation is as follows: Net Employment Income Registered Pension Plan Contributions Net Business Loss Royalties 2016 Earned Income

$55,000 2,400 ( 8,600) 5,600 $54,400

Given the preceding calculation, her maximum deductible RRSP contribution for 2017 is as follows: Unused Deduction Room - End Of 2016 Annual Addition - Lesser Of: • 2017 RRSP Dollar Limit = $26,010 • 18% Of 2016 Earned Income Of $54,400 = $9,792 Less 2016 PA Maximum Deductible RRSP Contribution

$ 7,400

(

9,792 5,200) $11,992

Part B Net Employment Income Mrs. Sorenson’s net employment income for the year would be calculated as follows: Gross Salary Commission Income Registered Pension Plan Contributions Professional Dues Taxable Car Benefit (Note One) Employment Expenses (Note Two) Disability Insurance Benefits (Note Three) Net Employment Income Note One

$67,000 3,150 ( 2,750) ( 350) 8,715 ( 5,050) 2,900 $73,615

The taxable benefit on the car would be calculated as follows:

Standby Charge [(2%)(11)($45,200)][11,000 ÷ 18,337] Operating Cost Benefit - Lesser Of: • [(11,000)($0.25)] = $2,750 • [(1/2)($5,965)] = $2,983

$5,965

Total Benefit

$8,715

2,750

As Mrs. Sorenson’s employment related driving is more than 50 percent of the total, she is eligible for the reduced standby charge calculation. This also means that she is eligible to use the alternative operating cost benefit calculation based on one-half the standby charge. In this case, this approach does not produce the lower operating cost benefit and is not used.



Volume 1 Page 265


Note Two Mrs. Sorenson can deduct home office costs of $850 in utilities and maintenance under ITA 8(1)(i) which is available to all employees. As Mrs. Sorenson has commission income, she has the choice of deducting certain of her expenses under ITA 8(1)(f) or, alternatively under ITA 8(1)(h). As discussed in Chapter 3, she cannot use both ITA 8(1)(f) and ITA 8(1)(h). If she uses ITA 8(1)(h) and (i), she can deduct her non-reimbursed travel costs of $4,200 for a total of $5,050 ($850 + $4,200). Alternatively, under ITA 8(1)(f) and(i), she can deduct the following: Home Office Costs - Insurance Home Office Costs - Property Taxes Non-Reimbursed Travel Costs

$ 725 1,340 4,200

Total Under ITA 8(1)(f) $6,265 Limited To Commission Income of $3,150 Home Office Costs - Utilities And Maintenance

$3,150 850

Total Under ITA 8(1)(f) and (i)

$4,000

Unfortunately, if ITA 8(1)(f) is used, the deduction under ITA 8(1)f) is limited to the $3,150 of commission income. Clearly, Mrs. Sorenson would be better off using ITA 8(1)(h) and (i) and deducting a total of $5,050. Note Three As her employer contributes to the disability insurance plan, the $4,800 in benefits received must be included in income. However, this can be reduced by the cumulative contributions that she has made to this plan. These total $1,900 ($1,000 + $900), leaving a net income inclusion of $2,900 ($4,800 - $1,900).

Property Income Mrs. Sorenson’s property income would be calculated as follows: Interest Income Eligible Dividends Gross Up [(38%)($1,500)]

$3,200 1,500 570

Total Property Income

$5,270

Taxable Capital Gains Mrs. Sorenson’s sale of land resulted in a capital gain of $56,000 ($143,000 - $87,000). However, as the total proceeds were not collected in the year of sale, she can reduce her income inclusion through the use of a reserve. Total Capital Gain Reserve - Lesser Of: • [($56,000)($100,000 ÷ $143,000)] = $39,161 • [($56,000)(20%)(4 - 0)] = $44,800

$56,000 ( 39,161)

Remaining Gain Inclusion Rate

$16,839 1/2


$ 8,420

Net Income For Tax Purposes Mrs. Sorenson’s Net Income For Tax Purposes would be calculated as follows:



Volume 1 Page 266


Employment Income (See Preceding Calculations) Property Income Taxable Capital Gain RRSP Deduction (Part A)

$73,615 5,270 8,420 ( 11,992)


$75,313

Taxable Income As Mrs. Sorenson has no deductions applicable to the determination of Taxable Income, her Taxable Income is equal to her Net Income For Tax Purposes.

Tax Payable The required calculations here are as follows: Tax On First $45,916 Tax On Next $29,397 ($75,313 - $45,916) At 20.5 Percent

$ 6,887 6,026

Tax Before Credits Tax Credits: Basic Personal Amount Spousal ($11,635 - $8,400) Employment Insurance Canada Pension Plan Canada Employment Transfer Of Cissy’s Tuition - Lesser Of: • Absolute Limit Of $5,000 • Actual Tuition Of $7,800 Medical Expenses (Note Four)

$12,913 ($11,635) ( 3,235) ( 836) ( 2,564) ( 1,178) ( (


5,000) 9,891)

($34,339) 15%

Charitable Donations (Note Five) [15%)($200) + (29%)($600 - $200)] Dividend Tax Credit On Eligible Dividends [(6/11)($570)] Federal Tax Payable

(

5,151)

( (

146) 311) $ 7,305

Note Four The credit base for medical expenses would be calculated as follows: Rhonda And Martin’s Expenses ($1,200 + $2,750) Lesser Of: • [(3%)($75,313)] = $2,259 • 2017 Threshold Amount = $2,268 Subtotal Cissy’s Medical Expenses Reduced By The Lesser Of: • $2,268 • [(3%)($6,500)] = $195 Base For Credit

$3,950 ( 2,259) $1,691

$8,395 (

195)

8,200 $9,891

Note Five As none of her income is taxed at 33 percent, this rate will not be applicable to the calculation of the charitable donations tax credit.


Canadian Tax Principles 2017-2018. Study Guide Questions

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