Multiple Choice Exam Questions ( Q1 to Q139)
Part 1 1) Tybee lives in Detroit, Michigan, USA. She commutes daily to Waterloo, Ontario, Canada, where she is employed by Ford Motor Company of Canada Limited. She works 9 am to 5 pm, Monday through Friday. Which one of the following best indicates Tybee’s residency status for Canadian income tax purposes for 2023? (a) A full-time resident (b) A part-year resident (c) A non-resident (d) A deemed resident (sojourner) 2) XYZ Inc. provides Samantha Davis with a company car. The car is leased for $800/month (including 13% HST and excluding insurance) and was made available to her for ten months. ABC pays all of the operating costs which amounted to $3,500 in 2023. Samantha drove 13,000 kilometres in 2023 of which 8,000 were for business. What is the minimum taxable benefit that Samantha must include on her 2023 personal tax return? (a) $3,250 rounded (b) $2,400 rounded (c) $6,983rounded (d) $8,000 rounded 3) Which of the following is a taxable benefit? (a) A cash Christmas gift to an employee from the employer valued at $450. (b) Payment of the tuition for an employee completing a degree that will benefit the employer. (c) A 20% discount on the employer’s merchandise, available to all employees. (d) Subsidized meals offered to all employees of the company assuming the price is approximately equal to the cost. 4) Hulk Protein Supplements Ltd. is a CCPC. Bruce Lily, one of the employees, was granted a stock option on October 11, 2015 for 10,000 shares at $3 per share. Bruce exercised the stock option on September 30, 2018 when the market price was $6 per share. In February 2023, Bruce purchased a new home and sold the shares for $7 each. The fair market value on October 11, 2015 was $4. What is the effect of the above on Bruce’s income for tax purposes, assuming Bruce wants to minimize taxes? (a) $15,000 in 2018 (b) $20,000 in 2023 (c) $30,000 in 2018 (d) $35,000 in 2023
5) Cherizia Gold presents the following information with her 2023 tax return: Capital Gains: Shares Personal-use property Listed personal property
$1,600 850 900
Capital losses: Shares Personal-use property Listed personal property Listed personal property losses of prior years Net capital losses from 2020
$ 850 1,100 300 105 310
What is the minimum taxable capital gain (rounded to the nearest dollar) to be reported on Cherizia’s tax return? (a) $1,048 (b) $623 (c) $675 (d) $1,675 6)
River Rose, a sole proprietor, purchased an unlimited life franchise (arm’s length transaction) at a cost of $100,000 during 2023. The maximum amount of capital cost allowance that can be deducted in respect of the franchise for the taxation year ending December 31, 2023 is: (a) $2,500 (b) $3,750 (c) $7,500 (d) $8,475
7) On June 1, 2023, Beta Ltd, a CCPC, purchased a franchise for $115,000. The franchise has a limited life of 13 years. Assuming that this is the only asset purchased by Beta in the taxation year, which one of the following amounts represents the maximum amount of capital cost allowance that Beta can deduct for its year ended July 31, 2023? Ignore the leap year. (a) $115,000 (b) $13,269 (c) $2,218 (d) $7,780 8)
Lambda sold a capital property on October 31, 2023 for $200,000 with a cash down payment of $15,000. The balance of $185,000 is payable on October 31, 2027. The adjusted cost base of the property was $115,000 and the selling costs were $7,000. Which one of the following amounts represents the minimum taxable capital gain (rounded to the nearest dollar) in 2023? (a) $39,000 (b) $5,850 (c) $7,800 (d) $15,600
9) Scarpy Ltd. is a public company and a manufacturer with a December 31 year-end. On January 1, 2023, the undepreciated capital cost for Class 10.1 was $17,850. The Class 10.1 car was purchased in 2021 for $35,000. During 2023, it was sold for $21,000. A new automobile was purchased for $41,810, which included HST of $4,810. ABC Ltd. is registered to collect and remit HST. What is the maximum CCA allowed combined (rounded to the nearest dollar) for the two cars for 2023? (a) $18,306 (b) $18,878 (c) $20,984 (d) $17,798 10) Jonas Laliberte is a self-employed therapist. He meets with all of his clients in his 400 square foot home office. The entire house has a square footage of 2,400 square feet. Greg incurred the following costs: Utilities House insurance Business liability insurance House maintenance Mortgage interest Property tax Office supplies
$1,600 700 500 1,000 3,700 1,100 500
What are the total expenses deductible from business income? (a) $1,000 (b) $1,350 (c) $1,517 (d) $2,350 11) K Corporation Inc., a public company, owns a restaurant business that it carries on in rented premises. The lease was signed January 1, 2022 and expires on December 31, 2027 (six years in total), and has two successive renewal options for two years each. K Corporation Inc. had an opening balance in 2023 in Class 13 of $26,000 that resulted from $32,000 of leasehold improvements made during the 2022 taxation year. K Corp Inc. made an additional $14,000 of leasehold improvements to the same premises during its 2023 taxation year-end which ends December 31, 2023. What is the maximum CCA that K Corp. Inc. can claim in 2023 for its Class 13 assets? (a) $3,000 (b) $7,000 (c) $6,000 (d) $9,000 12) During the 12-month period ended December 31, 2022 ABC Co., a CCPC, purchased a $40,000 (excluding tax of HST of 13%) passenger vehicle for use by its salesperson in conducting his employment. What is the maximum capital cost allowance that ABC Co. can claim for 2022, assuming that the company is a HST registrant (i.e., the company remits HST)? (a) $16,200 (b) $40,680 (c) $20,340 (d) $36,000
13) In 2023, Alpha’s employer provided him with an employer-owned automobile costing $33,900 (including HST of $3,900) for 12 months. His kilometres for personal use were 5,000 out of a total of 20,000 kilometres. Operating costs paid by his employer during 2023 were $3,503 (including HST of $403). Which one of the following statements is true for 2023? (a) Alpha’s minimum operating cost benefit is $1,650. (b) Alpha’s minimum operating cost benefit is $1,017. (c) Alpha cannot elect to use ½ of his standby charge as his operating cost benefit. (d) Alpha’s minimum standby charge is $8,136. 14) Kappa Limited, a public company, paid $10,000 to purchase computer application software (before apply HST) on January 31, 2023. Kappa Limited has a December 31 year-end. What is the maximum tax deduction that Kappa Limited can claim in respect of the above expenditure for its taxation year ended December 31, 2023, assuming that Kappa is registered to collect and remit HST? (a) $8,250 (b) $10,000 (c) $11,300 (d) $15,000 15) Bauer Bikes Ltd. (BBL) sold a warehouse on the waterfront in Waterloo on March 15, 2023. The City of Waterloo purchased the property and intends to demolish the building and use the land as part of a waterfront bicycle trail. The total proceeds paid to BBL were $420,000. The adjusted cost base of the land is $80,000. The capital cost of the building was $90,000 and the UCC of the building was $12,000. BBL has allocated all of the proceeds to the land. What will be the impact on Division B income for BBL for the above sale? (a) $170,000 (b) $158,000 (c) $164,000 (d) $(12,000) 16) Jamal Ling made a permanent move to London England on August 15 of this year, after having lived in Canada all of his life. Jamal is 22 years old. Which one of the following best indicates Jamal’s residency status for Canadian income tax purposes for this year? (a) A full-time resident (b) A part-year resident (c) A non-resident (d) A deemed resident (sojourner) 17) Xi Limited was incorporated in Nova Scotia on May 21, 1959. The corporation has never carried on business in Canada, but held its annual directors’ meeting in Nova Scotia each year from 1959 through 1964. Which one of the following best describes Xi Limited’s residency status for Canadian income tax purposes for 2023? (a) A deemed resident (sojourner) (b) A full-time resident (c) A non-resident (d) A part-time resident
18) Pi has purchased a vacant lot. He hopes that someday, once he meets his future bride and settles down, he will build a home and raise his family on the property. This year, Pi paid $800 of property taxes and $1,000 of interest on the loan he obtained to purchase the lot. Which ONE of the following statements is TRUE? (a) Pi can deduct the $1,000 of interest but not the property taxes paid in this year on the basis that the land may generate a capital gain on the land some day. (b) Pi could deduct all of the above expenditures if he were to rent the land to a farmer for the year for $2,000. (c) The property is a personal-use property and, thus, none of the above expenditures can ever be deducted, even if the property is rented in the year. (d) Pi can claim the principal residence exemption on any future sale of the land if he decides to sell the land without building a home. 19) Rho Limited is in the midst of constructing a new building to house its administrative staff. The building began construction on December 4, 2022, and will be completed for occupancy on January 31, 2024. Which of the following expenditures made during 2023 is DEDUCTIBLE to Rho Limited in computing its income from business for its taxation year ended December 31, 2023? (a) CCA on new office furnishing in storage as of December 2023, pending occupancy of the building. (b) Cost paid to the security company to patrol and protect the property during 2023. (c) Interest on the construction loan, related to the cost of the land on which the building is significantly constructed. (d) The landscaping costs related to the building paid during 2023. 20) Clip Ltd.’s income statement for accounting purposes for its year ended December 31, 2023 shows a profit of $180,000 from the sale of widgets to a valued customer. The gross proceeds were $300,000 and the cost of sales was $120,000. The gross proceeds of $300,000 are payable in four equal instalments of $75,000, due on June 1 each year, commencing June 1, 2023. The deduction necessary to reconcile accounting income to income for tax purposes for 2023 in respect of this transaction is: (a) Nil (b) $135,000 (c) $144,000 (d) $45,000 21) On April 30, 2023, a personal residence owned by James Day, which originally cost $280,000, was converted into a rental property. At this time, the rental property had a fair market value of $340,000. What is the maximum capital cost allowance that could be claimed for 2023 on this rental property (assuming no restrictions)? (a) $20,400 (b) $13,600 (c) $18,600 (d) $12,400 22) On June 1, 2010, Sabrina purchased a condominium in Brandon, Manitoba, for $130,000. She lived in the condominium until she married in August 2014. At that time, she moved into a rented apartment in Winnipeg, Manitoba, with her new husband. She commenced to rent her condominium in late 2014, at which time it was valued at $145,000. In
December 2023, she sold the condominium for $180,000 to generate some cash to pay for a new house. Assuming that Sabrina elected under subsection 45(2) in respect of the condominium in 2014, what is the approximate minimum taxable capital gain that she will realize in 2023 on the sale? (a) $50,000 (b) $35,714 (c) $7,143 (d) $8,929 23) Mega Ltd., which has a May 31 year-end, had its factory vandalized in August 2023. The vandals managed to completely destroy a valuable piece of machinery. This was a custom-designed manufacturing asset included in class 53 and is the only asset in the class. The destroyed machinery had an original cost of $500,000 and a May 31, 2023 undepreciated capital cost of $187,500. Mega received insurance proceeds of $345,000 for the destroyed machinery. Due to advances in technology, a new machine cost only $280,000 and was in place for use by December 1, 2023. What is the impact on income for tax purposes to Mega for its taxation year ended May 31, 2024 in respect of the above machinery? (a) Recapture of $157,500 (b) CCA of $91,875 (c) CCA of $61,250 (d) CCA of $122,500 24) Mrs James died on September 30, 2023. At the date of her death, she had the following capital assets, which were left to the beneficiaries indicated. Asset Shares in publicly traded company Car Rental building
ACB/Capital Cost
UCC
Fair market value
Beneficiar y
$10,000
n/a
$100,000
Spouse
$40,000 $45,000
$40,000 $15,000
$10,000 $150,000
Spouse Daughter
What is the minimum amount that must be included in Mrs. James income for her final tax return in respect of the above assets? (a) $190,000 (b) $127,500 (c) $135,000 (d) $82,500 25) An auditor reviewing French Corporation discovered that $100,000 of corporate revenue was being deliberately recorded in the books as a debit to Bank and a credit to shareholders loan. Which of the following statements is true? (a) This transaction is an example of tax planning. (b) This transaction is an example of tax avoidance. (c) This transaction is an example of tax evasion. (d) This transaction does not fit any the above categories.
26) Western Corporation and Eastern Corporation are both owned by the same sole shareholder. An auditor reviewing Western Corporation discovers that the sole shareholder took steps to direct income earned by Eastern Corporation to Western Corporation to prevent losses from expiring in Western Corporation. Which of the following statements is true: (a) This transaction is an example of tax planning. (b) This transaction is an example of tax avoidance. (c) This transaction is an example of tax evasion. (d) This transaction does not fit any the above categories. 27) An auditor reviewing Mary's personal tax return sees that she purchased an RRSP to lower her personal taxes. Which of the following statements is true: (a) This transaction is an example of tax planning. (b) This transaction is an example of tax avoidance. (c) This transaction is an example of tax evasion. (d) This transaction does not fit any the above categories. 28) Francis moved to Canada from India on April 30, 2023. Which of the following accurately describes Francis' tax status for 2023? (a) Francis will be taxed in Canada on all her worldwide income earned in 2023 because the time she spent in Canada exceeds 183 days. (b) Francis will be taxed in Canada on all her worldwide income earned in 2023, multiplied by the number of days spent in Canada and divided by 365. (c) Francis will be taxed in Canada on all her worldwide income earned from April 30, 2023 to December 31, 2023, except for gains or losses on the sale of capital property owned prior to entering Canada. (d) Francis will be taxed in Canada on all his worldwide income earned from April 30, 2023 to December 31, 2023. 29) Mountain Company is a company incorporated in the United States. It employs salespeople who live in Canada but does not have an office or any establishment bearing the company name in Canada. The salespeople visit Canadian customers, who then order from Mountain Company and receive goods directly from the United States. Which of the following best describes the tax status in Canada of Mountain Company? (a) Mountain Company is not taxable in Canada, because it does not have a permanent establishment in Canada. (b) Mountain Company is subject to a withholding tax under Part XIII of the Income Tax Act on its gross revenue in Canada. (c) Mountain Company is subject to tax only on its Canadian sales because the location of company employees in Canada implies that there is a permanent establishment. (d) Mountain Company is subject to a withholding tax under Part XIII of the Income Tax Act on its net income earned in Canada. 30) CBS Inc. is a private corporation incorporated in Canada in 1997. All of its income is derived from sources originating in Australia. All the CBS shareholders reside permanently in the United States, where they make all the major decisions for the company. Which of the following accurately describes CBS's tax status in Canada?
(a) CBS is not a resident of Canada and is taxed in Canada only on income earned from its permanent establishment in Canada. (b) CBS is a resident of Canada and taxed in Canada on its world income. (c) CBS is not a resident of Canada and is not subject to tax in Canada. (d) CBS is not a resident of Canada but is subject to a withholding tax on dividends paid to its shareholders in the United States. 31) Which one of the following would be considered employment income for Canadian income tax purposes for 2023? (a) Amounts paid by your employer for counselling services in respect of mental and physical health. (b) A private health services plan premium paid by your employer. (c) Benefits paid by your employer to a deferred profit sharing plan that does not pay out until 2031. (d) An all-expense-paid trip to Europe provided to you by a supplier of your company for reaching a sales quota. 32) George moved from Quebec to Ontario in 2023, as a result of a promotion by his employer to open a new branch plant. When he sold his house in Quebec he incurred a loss of $100,000 on the sale. George’s employer decided to reimburse him for the housing loss of $100,000 in 2023. Which of the following amounts represent the increase to George’s employment income in 2023? (a) No change to employment income (b) $42,500 added to employment income (c) $85,000 added to employment income (d) $100,000 added to employment income 33) Bill is the president and CEO of Connection Ltd. Connection Ltd.'s main business is to provide motivational speeches to encourage higher productivity for its corporate clients. Bill takes his wife, Mary, to Paris on a three-day convention on motivational speeches. Mary represents Connection Ltd. at the convention, and hands out brochures and gives a talk on motivational speeches, but she is not an employee of Bill's company. Which of the following statements is true for 2023? (a) The cost of the hotel for Bill's wife would be added to Bill's employment income because she is not an employee of the company; thus, a personal benefit was received. (b) Fifty per cent of the trip's cost for Mary would be added to Bill's employment income because she is not an employee of the company. (c) The cost of the trip for Mary would be added to her personal tax return as employment income even though she is not a regular employee of the company. (d) No employee benefits will be added to either Bill's or Mary's income since Mary was primarily engaged in business activities on behalf of Connection Ltd. 34) Wajeeha is given the choice in the calendar year of 2023 to receive a pay raise, either as a salary increase of $7,200 or as a benefit of a company leased car that will cost her employer $600 per month to rent, including HST. Wajeeha has come to you for advice so that she can minimize her employment income and thereby minimize her taxes. Which of the following statements is true? (a) She should be indifferent between the two choices. (b) She should accept the salary as it will result in lower employment income and a lower tax payable
(c) She should accept the leased automobile as it will result in lower employment income and a lower tax payable. (d) She should ask her employer to lease a cheaper car and then pay the difference between the monthly leasing costs as part of her salary. 35) Narith operates a small consulting business from his home. The office in his home is his principal place of business. Which of the following correctly describes the home office expenses that can be deducted for tax purposes for 2023? (a) He can only deduct property taxes, utilities, and repairs. (b) He can deduct mortgage interest, property taxes, utilities, insurance, and repairs. (c) He can only deduct property taxes and utilities. (d) He does not qualify for home office deductions. 36) Krishna is employed by a national real estate company and earns commission income. Hardip is an independent real estate broker and earns commission income. Both maintain an office in their homes as a principal location of work. Which of the following statements is false regarding the tax treatment of their incomes from real estate sales for 2023? (a) Hardip can incur a non-capital loss, but Krishna cannot. (b) Hardip and Krishna can deduct a portion of their property tax and house insurance (c) Hardip can deduct a portion of her home mortgage interest, but Krishna cannot. (d) Hardip and Krishna can claim CCA on their computers. 37) While examining the books and records in the general and administrative expense account of MBA Corporation, you come across the following contribution to the registered pension plan made by the company on behalf of two key employees for the year ended December 31, 2023: Contribution to Employment Registered compensation Pension Plan 2023 2023 President $16,000 $180,000 Vice President $14,000 95,000 The pension plan is a defined contribution (money-purchase) plan. The contributions shown above were matched by equal contributions made by the employees. Reconciling accounting income to Division B income, you discover that the following portion of RPP contribution should be disallowed from being expensed by the MBA Corporation for tax purposes for the year ended December 31, 2023. (a) $nil (b) $10,900 (c) $11,340 (d) $12,120 38) Which one of the following is deductible in computing income from a business or property? (a) $6,000 of legal expenses related to the purchase of an investment in shares. (b) $5,000 of legal expenses for the purposes of obtaining a permit to sell Microsoft products (c) Interest paid on a loan used exclusively to purchase investments in a tax-free savings account.
(d) $6,000 of donations to a federal political party. 39) During its year ended December 31, 2023, ABC Ltd. purchased a new truck (not considered a passenger vehicle) costing $50,000. In the same year, the company sold an 18-wheeled truck (which had been purchased three years earlier for $125,000) for $80,000. At the beginning of the current year, the Class 10 UCC balance was $70,000. Which one of the following amounts best represents the maximum CCA deduction for Class 10 for 2023, assuming that all amounts are net of HST because ABC Ltd. is an HST registrant? (a) $12,000 (b) $6,000 (c) $43,500 (d) $25,500 40) A taxpayer has a Class 8 pool with three office desks, originally costing $500 each, left in the class. Which of the following statement is true when it comes to calculating CCA for 2023? (a) A terminal loss occurs when there is a balance in the pool just before the last asset is sold. (b) Recapture can occur even if there are still assets left in the pool. For example a sale of an asset causes the pool's remaining UCC balance to become negative. (c) Each desk should be set up as a separate Class 8 asset. (d) When it comes to the sale of the Class 8 assets only the market value should be credited to the pool. 41) A sole proprietor purchased two computers in May 2023. The cost was made up of $8,000 for each computer, plus system software of $1,000 for each computer, plus Microsoft PowerPoint of $500 for each computer. Calculate the CCA for the year ended December 31, 2023. (a) The CCA is $9,000 for the computers and $1,000 for the software. (b) The CCA is $6,600 for the computers and $3,000 for the software. (c) The CCA is $18,000 for the computers and $1,000 for the software. (d) The CCA is $7,425 for the computers and $500 for the software. 42) On September 1, 2023, George bought a $10,000 three-year GIC that pays 9% interest per year, compounded yearly. No interest is received until the maturity date of the GIC on August 31, 2026. Which one of the following statements is correct, assuming the figure is rounded to the nearest dollar? (a) In 2023, George must report $300 of interest income. (b) In 2024, George must report $927 of interest income. (c) In 2025, George must report $981 of interest income. (d) In 2026, George must report all interest earned on the GIC. 43) Mary purchased a corporate bond on January 5, 2023 and, on the same day, gave it to her 17-year-old daughter, Jill. Jill turned 18 on April 1, 2023. The bond paid Jill $3,000 in interest during the year. Which one of the following statements is true? (a) Neither Jill nor her mother has to report any interest income in 2023. (b) Mary must report the $3,000 of interest income in her 2023 personal tax return. (c) Jill and her mother can split the interest income according to the time the GIC was held by each of them.
(d) Jill must report the entire $3,000 amount of interest income in her 2023 personal tax return. 44) Walter has a rental property that he purchased new (non used) in June 2019. The property was only rented out to commercial businesses. The original cost of the building was $850,000, and the UCC was $684,816. Walter incurred the following costs during 2023. What is the maximum CCA Walter can claim on his personal income tax return for the rental property for 2023? Gross rents received $230,000 Expenses related to earning rental income: Advertising (for tenants) ................................................................ 5,000 Property taxes................................................................................. 60,000 Utilities (paid by tenants) .............................................................. Nil Interest on Mortgage of Building .................................................. 85,000 Maintenance ................................................................................... 45,000 (a) The maximum CCA on the building is $27,393. (b) The maximum CCA on the building is $35,000. (c) The maximum CCA on the building is $41,089. (d) The maximum CCA on the building is $61,633. 45) Mr. Smith decided to have a garage sale. As it turned out, this was his lucky day. Five years ago he bought a couch for $600, and at the garage sale he sold it for $1,200. The buyer claimed that it was a rare antique couch that she had been looking for. Which one of the following statements is correct for 2023? (a) The couch is considered to be a personal-use property, and the capital gain is $200. (b) The couch is considered to be a personal-use property, and the capital gain is $600. (c) The couch is considered to be a listed personal property, and the capital gain is $200. (d) The couch is considered to be a listed personal property, and the capital gain is $600. 46) On December 19, 2023, Jerry disposed of 3,500 shares of ABC Limited (a taxable Canadian corporation) for proceeds equal to $80,000. Jerry had originally acquired the shares in 2020 at a cost of $92,000, including brokerage fees. After the disposal, Jerry noticed that the shares of ABC had fallen to an historical low level, and he now felt that they were definitely undervalued. On January 3, 2024, Jerry decided to reinvest in shares of ABC Limited, acquiring 3,500 shares for $75,000. What amount of loss should Jerry report on his 2023 tax return with respect to the disposal of 3,500 shares on December 19, 2023? Assume that Jerry does not engage in frequent stock transactions. (a) $7,000 (b) $2,000 (c) $1,000 (d) Nil 47) Jeff disposed of two residential properties during the year. The details of the dispositions are as follows: Proceeds Cost Years Owned Cottage House
$550,000 $700,000
$250,000 $300,000
2019-2023 2014-2023
What is the minimum taxable capital gain that must be included in Jeff's 2023 personal tax return?
(a) $60,000 (b) $80,000 (c) $90,000 (d) $120,000 48) John sold a rental property (ACB $250,000) to his wife, Deborah, for $400,000 cash on January 5, 2023. At the time of this sale, the fair market value was $600,000. John and his wife elected out of the rollover under subsection 73(1) of the Income Tax Act. Deborah held onto the rental property until December 27, 2023, when she sold it for $850,000. What are the taxable capital gains that John and Deborah must report on their 2023 tax returns with respect to the sale of the rental property? Assume that neither individual has any principal residence claims on the rental property. (a) The taxable capital gains are $175,000 for John and $225,000 for Deborah. (b) The taxable capital gains are $400,000 for John and $0 for Deborah. (c) The taxable capital gains are $350,000 for John and $450,000 for Deborah. (d) The taxable capital gains are $200,000 for John and $0 for Deborah. 49) In 2023, Barry made two capital transactions that resulted in one currency gain of $1,500 and one currency loss of $600. What are the capital gains on the foreign currency exchange for 2023? (a) $450 (b) $900 (c) $350 (d) $700 50) Which of the following statements is true regarding the CRA's right to reassess an income tax return? (a) A tax return may be reassessed at any time if the taxpayer made any misrepresentation that is attributable to carelessness. (b) A tax return for a Canadian-controlled private corporation may be reassessed within four years of the date on which the original assessment was mailed. (c) A tax return for a public corporation may be reassessed within five years of the date on which the original assessment was mailed. (d) A tax return for an individual may be reassessed within four years of the date on which the original assessment was mailed. 51) Mr. Smith sold land to Mr Jones for $100,000 in 2022. Mr. Smith received $20,000 and provided Mr. Jones with a mortgage of $80,000. The original cost of the land was $75,000. Mr. Smith elected to use a reserve, which resulted in a capital gain for 2022 of $5,000. In 2023, Mr. Jones decided to pay off the entire remaining debt. How much income must Mr. Smith report in 2023? (a) $5,000 of capital gains in 2023 (b) $4,000 of capital gains in 2023 (c) $80,000 of capital gains in 2023 (d) $20,000 of capital gains in 2023 52) Ms. Thomas loaned $80,000 at 3% interest to James Ltd., a small under-financed corporation owned by her friend, Ms. James. James Ltd. is a Canadian-controlled private corporate that carries on its business primarily in the United States. The purpose of the loan was to provide interifm financing of the James Ltd. business, while James Ltd. awaited longer-term financing. Ms. Thomas is not in the money-lending business. The
loan was unsecured and was repayable, with interest, no later than the end of the year. At the end of the year, James Ltd. was informed that it would not receive the long-term financing, so it was unable to repay the $80,000 loan. In fact, James Ltd. was in such dire financial circumstances that it would not be able to repay the loan in the foreseeable future and was only a few months away from being insolvent. Which of the following options and its income tax consequences is best for Ms. Thomas? (a) Ms. Thomas can continue to hold the $80,000 debt owing to her by James Ltd. in the hope that the corporation will receive the necessary financing from some source and repay the loan at some time in the future. (b) Ms. Thomas can claim a reserve for doubtful debts of $40,000, deducting it from her business income. (c) Ms. Thomas can elect to write off the debt by claiming a capital loss of $80,000 and establishing the ACB of the debt at nil. (d) Ms. Thomas can elect to write off the debt, claiming a business loss of $80,000. 53) Adam Inc. is a taxable Canadian corporation. In 2023, the corporation contributed $180,000 to a registered amateur athletic association. In 2022, the corporation was unable to deduct $63,000 of similar donations. In 2023, the income of the corporation for tax purposes consisted of $310,000 of active business income and $10,000 of property income. The maximum charitable donation deduction for Adam Inc. in 2023 is: (a) $180,000 (b) $232,500 (c) $240,000 (d) $243,000 54) The following types of income have been taxed in a foreign jurisdiction in the current year. Which one of those types of foreign income can result in foreign tax credits that can be applied to Canadian income tax payable in other taxation years? (a) Business income (b) Employment income (c) Property income (d) Taxable capital gain 55) Jonathan owns 100% of Carweb.com Ltd. and owns 100% of Taxman Inc. Hence, they are associated. Jonathan owns 10% of Internet Housefind Ltd., which is not an associated company. Each of the three corporations has at least $500,000 of active business income earned in Canada. What is the maximum small business deduction combined (i.e., total combined SBD deduction of all three companies) that the three corporations can claim on corporate income? (a) $0 (b) $500,000 (c) $800,000 (d) $1,000,000 56) Waterloo Wholesale Ltd. (WWL) is wholly owned by Barbara, a resident of Canada, who also owns all of the shares of Kitchener Klosets Ltd. (KKL). Both corporations have a December 31 year-end. KKL had both active business income and taxable income of $180,000 for its most recent taxation year. Barbara has decided to allocate as much of the small business limit as is needed to maximize the small business deduction for KKL.
Most of WWL’s income is from an active business carried on in Canada. The following additional information pertains to WWL: • Recapture of CCA on sale of operating assets $2,500 • Net taxable capital gains(Active Assets) 3,000 • Charitable donations 1,500 • Division B net income for tax purposes 180,000 What is the appropriate small business deduction for WWL for the current year? (a) $33,630 (b) $32,870 (c) $33,725 (d) $34,200 57) Robin Ltd. is a corporation whose only business is providing accounting services for a fee to Faith Ltd., a large, privately owned, arm’s length corporation. Shari and David are each 50% shareholders and the only employees of Robin Ltd. Prior to the incorporation of Robin Ltd., both Shari and David were employed by Faith Ltd. in the accounting department. What type of income is Robin Ltd. earning? (a) Active business income (b) Property income (c) Specified investment business income (d) Personal services business income 58) Elaine Ltd. is a Canadian-controlled private corporation. Its non-eligible refundable dividend tax on hand (NERDTOH) account at December 31, 2022 was $35,000. For its 2023 taxation year, its refundable portion of Part I tax was $29,000. The corporation received no dividends in 2023. It paid taxable non-eligible dividends of $60,000 in 2022 and $75,000 in 2023. The balance in Elaine Ltd.’s NERDTOH account at December 31, 2023 rounded to the nearest thousand dollars is: (a) $12,250 (b) $41,000 (c) $35,250 (d) $28,750 59) Jay is an employee and 15% shareholder of Rick's Welding Shop Ltd. (Rick's). During the 2022 calendar year, Jay was having cash flow problems. Rick's gave Jay a loan of $5,000 on May 1, 2022 to help him out. Rick's also gave Jay's son, Jake, a loan of $2,000 on September 30, 2022 to help him meet expenses while at college. Rick's has said that Jay and Jake can repay the loans whenever they can afford it. The loans remain outstanding as at December 31, 2023. Rick's year-end for accounting and taxation purposes is December 31. How much, and in which taxation year, is Jay required to include in his taxable income as a result of the above transactions? (a) $7,000 — 2022 (b) $7,000 — 2023 (c) $5,000 — 2022 (d) $5,000 — 2023 60) Jim Bee filed his 2022 personal tax return on March 1, 2023. Neither he nor his spouse had income from the carrying on of a business in 2022. The CRA mailed a Notice of
Assessment to Jim dated May 14, 2023, and Jim received it on May 31, 2023. If Jim disagrees with the Notice of Assessment, he has until which one of the following dates to file a Notice of Objection? (a) August 12, 2023 (b) August 29, 2023 (c) March 1, 2024 (d) April 30, 2024 61) Ken Kaye Ltd., a CCPC eligible for the small business deduction, has a January 31 yearend. Due to the untimely departure of a key employee, the tax return for the year ended January 31, 2021 was not filed until March 1, 2023. The unpaid tax on January 31, 2021 was $5,500. In the past, all returns have been filed on time. What is the total penalty, excluding interest that the corporation is required to pay? (a) (b) (c) (d)
Nil $275 $660 $935
62) Alpha died on September 20, 2023 at the age of 97. By what date must the executrix of her estate file Alpha’s final tax return? (a) (b) (c) (d)
January 20, 2024 March 20, 2024 March 31, 2024 April 30, 2024
63) Beta died on March 20, 2023. At the time of his death, Beta was employed as a secondary school teacher. In addition, he operated technical writing consulting business as a proprietorship with a December 31 year-end. The amounts earned to the time of his death were: Salary January 1, 2022 to December 31, 2022 January 1, 2023 to March 20, 2023
$70,000 16,000
Business income January 1, 2022 to December 31, 2022 January 1, 2023 to March 20, 2023
5,000 1,300
Interest income January 1, 2022 to December 31, 2022 January 1, 2023 to March 20, 2023
2,000 500
What is the amount of Beta’s income that should be reported in his final return? (a) $16,000 (b) $17,800 (c) $22,800 (d) $94,800
64) Chi is one of a large number of shareholders of Pubco Ltd., a public corporation. She has received an offer from Taikit Inc., another public corporation, to exchange all of her shares in Pubco Inc., which are valued at $10,000, have a PUC of $1,000 and have an adjusted cost base to her of $6,000, in return for shares of Taikit Inc. The Taikit Inc. shares, also, have a value of $10,000 and a legal stated capital of $10,000. Which of the
following amounts represents the adjusted cost base of the Taikit Inc. shares received by Chi under section 85.1? (a) $1,000 (b) $6,000 (c) $9,000 (d) $10,000 65) Delta is a member of a partnership with a December 31 year-end. Delta’s share of the 2023 partnership allocations was as follows: business loss of $25,000, and charitable donations of $1,000. Delta took draws totalling $10,000 from the partnership during 2023. Delta’s adjusted cost base (ACB) at January 1, 2023 was $59,000. What is the ACB of Delta’s partnership interest at January 1, 2024? (a) (b) (c) (d)
$23,000 $24,000 $25,000 $33,000
66) A partnership interest was sold this year by Epsilon for $13,000. The adjusted cost base of the partnership interest was negative $2,000. Expenses of disposition were $1,000. Which one of the following amounts represents the taxable capital gain realized on the sale? (a) $5,000 (b) $6,000 (c) $7,000 (d) $8,000 67) Which one of the following statements pertaining to the tax implications of a partnership is incorrect? (a) Salaries to partners are not deductible by the partnership in the computation of its income. (b) Charitable donations made by a partnership are not deductible by the partnership, despite the fact that partnerships are not taxable entities and, therefore, cannot obtain a tax credit. (c) Business losses of a partnership can be allocated to the partners for them to deduct from their other sources of income. (d) Dividends received by a partnership are grossed up by the partnership in the calculation of its income which is allocated to the partners. 68) Which one of the following items does not affect the calculation of the adjusted cost base of a partnership interest? (a) (b) (c) (d)
Interest on funds borrowed by a partner to make a capital contribution. Drawings made by partners. The non-allowable fraction of a capital loss. A political donation made by the partnership.
69) Gamma’s will provided for the creation of a trust on her death, which occurred in 2022. Distributions from the trust are to be paid equally to each of her four children. In 2023, the trust earned $50,000 in cash dividends from Canadian-resident public corporations and $20,000 in interest on Canadian bonds. The trust incurred interest expense of $2,000 on funds borrowed to buy the investments. All of the dividends and $18,000 of the
interest on the bonds was distributed to the beneficiaries and the interest expense was claimed by the trust. Which one of the following amounts represents the taxable income of one of the children from the trust for 2023? (a) $17,000 (b) $17,500 (c) $19,000 (d) $21,750 70) The country of residence of a discretionary trust and, hence, its liability for income tax in Canada, is generally determined by which one of the following criteria? (a) The country in which the settlor of the trust resided at the time the trust was created. (b) The country in which the majority of the beneficiaries are resident. (c) The country in which central management and control was exercised. (d) The country in which the majority of the trustees reside. 71) Alan Emm Inc. (AEI) has owned all of the shares of Sub Ltd. since the incorporation of the latter. The shares of Sub Ltd. have an adjusted cost base of $100,000 to AEI and a value of $900,000 now. Retained earnings in Sub Ltd., computed on a tax basis amount to $600,000. AEI wants to sell the shares of Sub Ltd. and Grabit Ltd. is interested in purchasing the shares. Sub Ltd. has $800,000 of cash that it does not need for its operations, and Grabit Ltd. does not need. AEI will cause Sub Ltd. to pay a dividend of the excess cash and then AEI will sell the shares of Sub Ltd. to Grabit Ltd. for $100,000. Which one of the following choices represents the tax consequences of the transactions described to AEI assuming that the appropriate designation is made? (a) (b) (c) (d)
A tax-free dividend of $600,000 and a capital gain of $200,000. A tax-free dividend of $600,000 and a capital gain of $400,000. A tax-free dividend of $800,000 and a capital gain of nil. A tax-free dividend of $600,000 and a capital gain of $800,000.
72) Ms. Lambda, a Canadian resident, owned all of the common shares of Lambda Enterprises Ltd. (LEL). The shares have a paid-up capital value and a cost of $75,000. She transferred these shares under section 85 to a holding company, Holdco Inc., which her two Canadian-resident adult children control, at a time when the value of the LEL shares was $800,000. As consideration for the LEL shares transferred, she received from Holdco Inc. a note with a principal amount of $500,000 and preferred shares with a fair market value of $300,000, such that an elected amount of $500,000 was possible under section 85. Ms. Lambda intended to offset all of the resultant $425,000 of capital gain with her available QSBCS capital gains exemption. Holdco Inc. plans on selling the shares of LEL within 3 years. Which one of the following statements is false? (a) (b) (c) (d)
The PUC of the Holdco Inc. preferred shares is nil. Ms. Lambda is deemed to receive a dividend of $425,000 from Holdco Inc. Ms. Lambda’s ACB of the Holdco Inc. preferred shares is nil. Ms. Lambda is deemed to receive proceeds of disposition of $500,000 for the LEL shares.
73) On incorporation, a corporation issued 100 shares from treasury for $10 per share to the owner-manager. In 2022, the owner-manager sold half of her shares to another individual for $14 per share. In 2023, an employee purchased 20 shares from treasury for
$16 per share. All shares are of the same class. Which one of the following amounts represents the per-share paid-up capital? (a) $10 (b) $11 (c) $12.67 (d) $13.33 74) Alpha contributed an asset worth $15,000 to a corporation in return for shares with a paid-up capital value and a retraction value of $20,000. Which one of the following will result from the exchange? (a) Alpha will be deemed to have realized a capital gain of $5,000. (b) Alpha will be deemed to have received a stock dividend of $5,000. (c) Alpha will be deemed to have received a dividend of $5,000. (d) Alpha will have no immediate tax consequences. However, the adjusted cost base of the shares will be reduced by $5,000, resulting in a capital gain of $5,000 on the ultimate disposition of the shares. 75) Beta is the sole shareholder of a corporation which was capitalized with $100,000 of common shares on incorporation. In 2022, Beta needed $30,000 and decided to reduce the paid-up capital of the corporation by that amount on withdrawing the $30,000 in cash. In 2023, when the shares were valued at $400,000, Beta caused the corporation to redeem 20% of the shares. Which one of the following determines the tax consequences to Beta of the redemption of the common shares? (a) Beta will be deemed to realize a capital gain of $60,000. (b) Beta will be deemed to receive a dividend of $60,000. (c) Beta will be deemed to receive a dividend of $66,000 and realize a capital gain of nil. (d) Beta will be deemed to receive a deemed dividend of $66,000 and realize a capital loss of $6,000. 76) Delta is the sole shareholder of a corporation that has just completed a liquidation of all of its assets. Delta will cause the corporation to wind up on the distribution of the net cash of $500,000 after the payment of all liabilities in the corporation. The common shares of the corporation have a paid-up capital value of $40,000 and Delta's adjusted cost base is also $40,000. The capital dividend account balance of the corporation is $90,000. Which one of the following represents the tax consequences to Delta? (a) A deemed dividend of $370,000 and a capital gain of nil. (b) A deemed dividend of $370,000 and a capital gain of $50,000. (c) A deemed dividend of $460,000 and a capital gain of nil. (d) A deemed dividend of $500,000 and a capital gain of $90,000. 77) Gamma transferred some equipment from his proprietorship to a corporation in which he owned all of the shares. The capital cost of the equipment was $20,000, its UCC before the transfer was $16,000 and it was valued at $40,000 at the time of the transfer. In order to utilize some losses of the proprietorship that were about to expire, Gamma elected a transfer price of $35,000 under subsection 85(1). Which one of the following amounts represents the capital cost of the property to the corporation? (a) $16,000
(b) $20,000 (c) $27,500 (d) $35,000 78) Chi transferred a non-depreciable capital property to her wholly owned corporation, electing under subsection 85(1). The property was valued at $25,000 and had an adjusted cost base to Chi of $15,000. The property was mortgaged for $5,000. As consideration for the transfer, Chi received cash of $20,000 and a preferred share worth $1,000. The corporation assumed the mortgage. Which one of the following choices represents the elected transfer price that will result on the transfer and the adjusted cost base of the share, respectively? (a) $15,000 and nil (b) $25,000 and nil (c) $26,000 and $5,000 (d) $25,000 and $24,000 79) Pi owns 75% of the common shares of an investment holding corporation and the remainder of the shares is owned by his daughter. In this year, Pi transferred portfolio shares that cost him $11,000 and were worth $17,000, electing at $11,000 under subsection 85(1). As consideration for the transfer, he received a promissory note for $11,000 and preferred shares with a retraction value of $4,000. Which one of the following choices represents the elected transfer price and the adjusted cost base of the preferred shares, respectively? (a) $13,000 and nil (b) $11,000 and $4,000 (c) $11,000 and $6,000 (d) $13,000 and $4,000 80) Lambda transferred a non-depreciable capital property to a corporation. The fair market value of the property was $130,000 and its adjusted cost base to him was $40,000. As consideration for the property, he received a promissory note for $20,000, 10 preferred shares with a total retraction value of $70,000, and 100 common shares worth a total of $40,000. On the transfer, he elected under subsection 85(1) at $40,000. Which one of the following choices represents the adjusted cost base of the preferred and common shares, respectively? (a) nil and $20,000 (b) $12,727 and $7,273 (c) $20,000 and nil (d) $70,000 and $40,000 81) Computer Ltd. generated the following data for its December 31, 2023 taxation year: Capital Gains Interest Income The balance in the tax accounts on January 1, 2023 Charitable Donation carryforwards Net Capital loss from 2016 Non Capital loss from August 2021
$35,000 $50,000 $15,000 $4,000 $10,000
What is the minimum taxable income (rounded to the nearest dollar) to be reported on Candy’s corporate tax return? (a) $70,000 (b) $38,500 (c) $36,500 (d) $56,000 82) Which situation results in a corporation being a Canadian Controlled Private Corporation (CCPC): (a) a Canadian private corporation that is controlled 50% by Canadian residents and 50% by non-residents is a CCPC. (b) a Canadian private corporation that is controlled 40% by Canadian residents and 60% by non-residents is a CCPC. (c) a Canadian private corporation that is controlled 40% by Canadian residents and 60% by a public company (d) a Canadian private corporation that is controlled 40% by nonresidents and 60% by a public company 83) Falcon Ltd. received the following dividends during the year for its December 31, 2023 taxation year: Non-eligible Dividend from a corporation A which Falcon Ltd has a 5% interest in Non-eligible Dividend from a wholly owned subsidiary corporation B Non-eligible Dividend from a wholly owned subsidiary corporation C
$150,000 $90,000 $60,000
Further Information Corporation B received a $20,000 dividend refund (from the NERDTOH) as a result of paying the above dividend Corporation C received no dividend refund as a result of paying the above dividend What is the minimum Part IV tax which Falcon Ltd will have to report for December 31, 2023? (a) $115,000 (b) $99,600 (c) $77,500 (d) $80,000 84) Mary has earned income of $120,000 in 2023 and earned income of $95,000 from 2022. At the end of 2022, she had unused RRSP contribution room of $12,000. Her pension adjustment from 2022 was $5,000. She anticipates a pension adjustment of $7,000 in 2023. Calculate Mary’s maximum deductible RRSP contribution for the 2023 taxation year. (Round all numbers) (a) $30,780 (b) $24,100 (c) $28,600 (d) $22,100
85) George opened up a tax-free savings account when he turned 18 years old in 2021. He contributed $1,000 in the year he opened up the account. He never contributed any further funds thereafter and has not made any withdrawals. What is the maximum contribution room available if he wishes to maximize his contribution for 2023 and use up all the contribution room available? (Round all numbers) (a) $6,500 (b) $12,500 (c) $17,500 (d) $18,500 86) In which of the following situations is the person considered a non-resident of Canada for the entire year for 2023? Ignore the impact of any tax treaties. a) Jeff lives with his family in Thunder Bay (Canada), but works in Duluth (USA). b) Dan was transferred to his employer's office in Berlin (Germany) for 18 months. His contract requires him to return to the Calgary office (Canada) at the end of the 18 months. On his departure from Canada, he severed many of his social and economic ties with Canada. However, he still has a house and car in Canada. His wife and children remained in Canada. c) Gordon, who was born in the U.S., has lived and worked there for all his life. Gordon worked at an Air Canada office in Montreal (Canada) from April 1, 2019 - December 15, 2023. During that time, he got married and had children and then returned to the U.S. On his departure from Canada, he did not sever any of his social and economic ties. He still had a house and car in Canada and his wife and children remained in Canada while he worked in the U.S. d) Kristin is single and had been living in Canada all her life until 2022, when she accepted a minimum 3-year contract with a company in Japan. When she moved to Japan in early June 2022, she terminated the lease on her apartment in Vancouver and moved all her belongings to Japan, where she now rents an apartment. She has been working and living in Japan during 2023 and has never visited Canada since departing in 2022. 87) Mr. Perrault's employer provides an automobile for his personal use and pays all operating costs for that vehicle. The vehicle, used by Mr. Perrault throughout 2023, cost his employer $45,000, including HST. Mr. Perrault drove the vehicle 25,000 km in the year, of which 8,000 km were for personal purposes. His employer paid all the operating costs on the vehicle, totalling $9,500 for the year. Mr. Perrault paid nothing to his employer for the use of the vehicle. Which one of the following amounts represents the minimum benefit that Mr. Perrault must include in his employment income for the use of this vehicle in 2023? a) $4,319 b) $6,479 c) $2,160 d) $13,440 88)In December 2019, Mukor Corp. advanced funds of $350,000 to Mr. Atari, a new employee of the corporation, to assist him in acquiring a residence when he moved from Ontario to commence employment in British Columbia. The loan bears no interest and is to be repaid in full on December 31, 2024. The prescribed rate at the time of this advance was 1%. The prescribed rate for the first and second quarter of 2023 was 2% while the prescribed rate for the third and fourth quarter of 2023 was 1%. Which of the following represents the
employment benefit from this loan that Mr. Atari must include in his employment income on his 2023 personal tax return? a) $21,000 b) $5,250 c) $7,000 d) $3,500 89) The following facts relate to an employer-provided automobile: Original cost of automobile, including HST Capital cost allowance claimed by employer Personal use kilometres driven by employee during the year Total kilometres driven by employee during the year Replacement value of car at time of providing it to employees Number of months automobile was made available to employee
$55,000 $15,000 4,000 km 25,000 km $30,000 12 months
Which one of the following amounts represents the employee's standby charge? a) $2,112 b) $3,719 c) $2,639 d) $13,200 90) Which one of the following benefits received from an employer may not result in a taxable benefit to the employee for the 2023 tax year? a) Employer-paid life insurance premiums for $20,000 of employee coverage. b) A reasonable allowance of 68 cents per kilometre for driving 3,000 km on employer business. c) Use of the employer's vehicle which is used 95% for employment purposes. d) An interest-free loan used to acquire shares of the employer. 91) Andrew secured employment as a commissioned salesman in July 2023. In 2023, he received a base salary of $10,000 and $5,000 of commissions. A further $2,000 of commissions earned in December was paid to him in January 2024. Andrew worked away from the office negotiating sales contracts and he is required to pay his own travelling expenses. His employer has signed a T2200 form certifying that requirement; and, the form further certifies that no reimbursements are paid for any expenses Andrew incurs to earn commissions. Andrew incurred the following costs from July 2023 - December 2023. Meals and entertainment for potential customers Driving costs (90% for employment purposes): Fuel Insurance Repairs Leasing costs ($600 per month)
$10,000 2,000 800 1,000 3,600
What is the maximum deduction Andrew may claim for employment expenses in 2023? a) $5,000 b) $6,660 c) $7,000 d) $11,660 92) In which of the following lists are all items relevant when computing income from employment after deductions from employment?
a) Monthly automobile allowance; group disability insurance paid by the employer; promotional costs incurred in selling the employer's products. b) Retiring allowance; life insurance paid by the employer; legal fees incurred to collect unpaid salary. c) Employee contributions to a registered pension plan; signing bonus on accepting employment; availability of an employer-owned automobile. d) Tips and gratuities; dental insurance paid by the employer; exercise of options to purchase shares of the employer. 93) Debra White is 45 years of age and is the president of Leadership Education Inc. (LE), a Canadian public corporation. Debra provided you with the following information: On November 30, 2023, Debra exercised 20,000 LE stock options at a price of $4.50 per share and immediately sold the shares (the same day) on the Toronto Stock Exchange for $9.50. At the time the stock options were granted, the fair market value of the shares was $3.50. How much will Debra's taxable income increase as a result of these events? a) $50,000 b) $100,000 c) $70,000 d) $120,000 94) Which of the following amounts paid by an employer is considered to be a taxable benefit? a) An insurance premium of $400 for a private health care services plan. b) A reserved parking spot, valued at $400 per year. c) A non-cash gift of $400 if there are no other gifts during the year. d) A reasonable mileage allowance based solely on kilometers driven, totalling $400 for the year. 95) Which of the following amounts paid by an employer is a taxable benefit? a) Tuition of $450 for a course that the employee is attending that primarily benefits the employer. b) An employer contribution of $450 to the company’s registered pension plan. c) Benefits received from counselling services, totalling $450, in respect of mental health of the employee. d) A cash gift of $450 from an employer who gave no other gifts during the year. 96) Throughout 2023, Costanza Inc. provided George with a company-leased car for employment purposes but paid none of his car-related operating costs. The manufacturer's list price of the car was $38,000, including HST. During the year, George drove a total of 40,000 kilometers, of which 30,000 were in the course of employment. Costanza Inc.'s monthly lease payments were $1,100, including HST. Which of the following is George's taxable benefit with respect of the car? a) $4,399 b) $4,559 c) $2,200 d) $3,300
97) Laurae is an engineer employed by a public company. She received a salary of $70,000 in 2023. She was awarded a bonus of $10,000 for work performed in 2023 but the bonus was not paid until January 2024. In addition, Laurae was provided with the following employee benefits: -Registered pension plan contributions (employer portion) of $5,000 -Group term life insurance premiums of $900 Laurae's employment expenses were as follows: -Registered pension plan contributions (employee portion) of $5,000 -Union dues of $1,100 -Professional dues to Professional Engineers Ontario of $1,200 Based on the above, what is the correct amount of Laurae's employment income for 2023? a) $62,700 b) $63,600 c) $73,600 d) $78,600 98)Bryan Toxicology Ltd. has a fiscal year-end of June 30. In January 2023, the company borrowed $1,000,000 to fund an expansion. The company paid $25,000 to obtain this financing. In January 2024, the company repaid $400,000 of the principal, and in June 2025, it repaid the remaining $600,000. All repayments were made from cash flow from operations. For tax purposes, which one of the following schedule of claims represents the most rapid method of claiming the costs of obtaining this financing? a) $5,000 in each of 2023 and 2024, and the remaining $15,000 in 2025. b) $10,000 in 2024 and $15,000 in 2025. c) $5,000 in each of 2023, 2024, 2025, 2027, and 2027. d) $5,000 in 2023 and $10,000 in each of 2024 and 2025. 99) Watermelon Holdings Ltd. (Watermelon) has accounting income before taxes of $61,800 for the year-ended December 31, 2023. Included in income are the following items: -Dividends from an unrelated taxable Canadian company of $4,000 -Charitable donations of $8,000 -Meals and entertainment expenses of $5,500 -Amortization on equipment of $15,000. There were no additions during the year. The undepreciated capital cost of the Class 8 equipment is $91,300. -Gain for tax (and accounting purposes) on the sale of portfolio investments of $1,200. Watermelon's net income for tax purposes for the year-ended December 31, 2023 is: a) $56,690 b) $60,690 c) $68,690 d) $69,290 100) In 2023, Erker Corporation, a public corporation, incurred costs of $75,000 for leasehold improvements to its newly rented building. The lease was signed in 2023 for an initial term of three years plus four successive options to renew the lease, each for an additional one year term. Which one of the following amounts represents the maximum capital cost allowance claim in 2023? a) $16,071 b) $37,500
c) $28,125 d) $22,500 101) On December 1, 2023, Smith Limited, a public company, purchased a franchise for $110,000. The franchise has a limited life of 15 years. Which one of the following amounts represents the maximum amount of capital cost allowance Smith Limited can deduct for its year ended December 31, 2023? a) $623 b) $7,333 c) $934 d) $11,000 102) Mrs. Miller is the sole shareholder of her green tea business, Mrs. Miller's Matcha Corp. (MMMC). In 2023, Mrs. Miller transferred a piece of equipment that she has owned since 2017 into MMMC at a value $50,000. Which of the following represents the maximum allowable capital cost allowance that MMMC may claim for this piece of equipment for fiscal 2023? a) $2,000 b) $10,000 c) $15,000 d) $22,500 103) Jolene's Baked Goods Ltd. (JBG), a public company, was incorporated and issued 100 shares on November 1, 2023. JBG has chosen December 31 as its year-end. On December 1, 2023, the company purchased a franchised restaurant and paid the following amounts: Amount paid for restaurant equipment Amount paid for the franchise
$60,000 $70,000
The franchise is for an initial term of three years, followed by three renewal terms of five years each. The renewal terms are at the discretion of the franchisee with no additional fees payable. The maximum capital cost allowance on equipment for the year-ended December 31, 2023 will be: a) $3,008 b) $8,858 c) $1,529 d) $2,005 104) Traves Installations Inc. (TI), a public company, was incorporated on June 1, 2023. During its first taxation year ended December 31, 2023, it purchased the following capital assets for use in its repair and renovation business: Land and building Truck Computer equipment Office equipment
$950,000 20,000 4,000 3,000
The land and building is in Moose Jaw, Saskatchewan. The building is a brand new showroom (i.e. non-residential property, not for manufacturing purposes) that was built in 2023. The building is appraised at $600,000 and the land is appraised at $350,000.
What is TI's maximum CCA deduction for 2023? a) $26,266 b) $39,399 c) $57,868 d) $67,200 105) Bob's Trucking Ltd. (Bob's), a public company, has a September 30 taxation year. At September 30, 2022, the balance in Class 10 was $65,000, representing the undepreciated capital cost of 4 trucks purchased in 2017 for $27,000 each. In November 2022, Bob's purchased one more truck for $32,000. In August 2023, Bob's decided to start leasing trucks rather than owning them. Consequently, Bob's sold all its trucks for $18,000 each before its 2023 year-end. Which of the following statements is true with respect to Bob's Class 10 capital cost allowance for its 2023 taxation year? a) Bob's can claim CCA of $7,000. b) Bob's can claim CCA of $33,900 c) Bob's has a recapture of $43,000. d) Bob's has a $7,000 terminal loss. 106) Baba's BBQ House Ltd. (BBH), a public company, was incorporated in 2022. At the end of its first taxation year ended December 31, 2022, it had the following undepreciated capital cost (UCC) balance: Class 50
$2,500
During its 2023 taxation year, BBH purchased the following assets: Kitchen equipment Tables and chairs
$40,000 $20,000
Which one of the following is BBH's maximum CCA deduction for 2023? a) $19,375 b) $20,063 c) $18,000 d) $13,375 107) Investment Capital Inc. (IC), a public company, has a May taxation year. At May 31, 2022, the balance in Class 8 was $10,000. Additions to Class 8 in IC's 2023 taxation year cost $8,000 and disposals (which originally cost $3,000) were made for proceeds of $7,000. What is the maximum Class 8 CCA claim for IC's 2023 taxation year? a) $2,500 b) $3,000 c) $3,500 d) $4,500 108) In 2003, Ms. Holmes became a homeowner, acquiring a residence in Regina at a cost of $160,000. In 2014, she was transferred by her employer to Calgary. She rented accommodation in Calgary and leased the Regina residence. Ms. Holmes filed an election under subsection 45(2) so that a change of use would not occur in 2014 and therefore, did not claim capital cost allowance on the property. In 2023, she sold the Regina house for $350,000, netting a gain of $190,000. Which one of the following amounts represents the minimum capital gain that she must report in 2023?
a) b) c) d)
$36,190 $72,381 $45,238 $190,000
109) Cale sold the following assets in 2023:
Painting Stamp collection Outboard motor Desk
Sale price
Cost
$2,800 400 800 1,100
$ 500 1,400 400 1,800
Which one of the following amounts represents his taxable capital gain net of allowable capital losses for 2023? a) $500 b) $700 c) $900 d) $350 110) Jeremy (age 61) is leaving Canada on May 1, 2023 and will take up residency in the U.S. He has the following investments: a cottage in Canada, a home in the United States, several pieces of art, shares of public corporations resident in Canada, and mutual funds held in a Canadian RRSP. When he leaves, which of the following will Jeremy be deemed to have disposed of at fair market value for Canadian income tax purposes? a) All assets except for his investments held in RRSP. b) All assets except for his shares of public corporations resident in Canada. c) All assets except for his cottage and investments held in RRSP. d) All assets except for his home, cottage, and investments held in RRSP. 111) In 2023, Curtis Clark sold land and building at fair market value. The land had a fair market value of $1,200,000 and an adjusted cost base of $900,000. The building had a fair market value of $500,000, an undepreciated capital cost of $600,000, and an original capital cost of $800,000. Which of the following statements is true? a) Curtis will report a terminal loss of $200,000. b) Curtis will report a capital gain of $300,000 and recapture of $100,000. c) Curtis will report a capital gain of $200,000. d) Curtis will report a capital gain of $300,000 and a terminal loss of $100,000. 112) Dolores Rislund wishes to gift mutual funds to her three grandchildren, all of whom are under the age of 6. She wants to minimize any income that will attribute to her. Which one of the following mutual funds will best accomplish this goal? a) An equity fund that invests in preferred shares of top Canadian corporations and earns primarily dividend income. b) A growth fund that invests in corporations with a history of paying minimal dividends and earns its income primarily in the form of capital gains. c) A bond fund that invests in long-term, interest-bearing Government of Canada bonds, earning interest income and capital gains. d) A money-market fund that invests in short-term treasury bills and earns only interest income.
113) Cooper wishes to transfer an investment to his wife, Chloe. However, Chloe does not have sufficient cash to purchase the investment for fair value. Cooper would like to loan the funds to Chloe to facilitate the purchase, as he wants the income on this investment to be reported by her. Chloe will pay interest on the loan, as Cooper expects the investment to generate substantial income. Which one of the following is not a requirement to ensure that the income on this investment will be taxable to Chloe, and not attributed to Cooper, in the future? a) Interest charges must be at least equal to the greater of the prescribed rate and a commercial rate. b) Chloe must pay Cooper an amount equal to the fair market value of the investment. c) Interest on the loan must be paid from Chloe to Cooper annually, by January 30 of the following year. d) Cooper must elect out of the interspousal rollover and realize any gains inherent in the property at the transfer date. 114) In 2023, Mrs. Dunbar moved from her rented home in Manitoba to her newly purchased home in Prince Edward Island to start a new business. In her 2023 fiscal year, the business generated income in excess of $70,000. Mrs. Dunbar incurred the following costs of moving: Transport of household items Travel - self, spouse, and three children Legal fees - house purchase in PEI Cancellation costs - lease in Manitoba Temporary accommodation while waiting for new house at $90 per day for 30 days House-hunting trip (prior to move)
$6,000 $3,000 $2,000 $1,800 $2,700 $1,500
Assuming that Mrs. Dunbar does not use the simplified method for calculating moving expenses, which one of the following amounts represents the maximum amount that Mrs. Dunbar may deduct as moving expenses on her 2023 personal income tax return? a) $14,150 b) $15,000 c) $12,150 d) $17,000 115) Which one of the following lists describes items that are all included in the determination of earned income for RRSP purposes? a) Auto standby charge, salesperson's expenses, and resource royalties. b) Author's royalties, CPP/QPP disability benefits, and child support received/paid. c) Business income or losses, CPP/QPP survivor benefits, and research grants. d) Rental income or losses, salaries, and scholarships. 116) During the year, Billy Gillis received workers' compensation payments totalling $15,000 as a result of an injury he suffered at work. His only other source of income for the year was his wages of $30,000. Which of the following statements accurately represents Billy's net income for tax purposes and taxable income for the year? a) Net income for tax purposes of $30,000 and taxable income of $30,000 b) Net income for tax purposes of $37,500 and taxable income of $37,500 c) Net income for tax purposes of $45,000 and taxable income of $45,000 d) Net income for tax purposes of $45,000 and taxable income of $30,000
117) Brendon contributed $10,000 to his RRSP in October 2023 and $10,000 to a spousal RRSP in January 2024. Brendon had earned income of $120,000 in 2022 and $70,000 in 2023. Brendon's 2022 notice of assessment showed unused RRSP deduction room at the end of 2022 of $1,000. His 2022 T4 slip showed a pension adjustment of $4,000. Based on the above, what is the maximum RRSP contribution that Brendon can deduct for his 2023 personal tax return? a) $9,600 b) $18,600 c) $10,000 d) $20,000 118) Bob and Jane have one daughter, Autumn, who is 9 years old. In 2023, they paid a nanny $15,000 to look after Autumn while they were working. In 2023, Jane received a salary of $150,000 and Bob received a salary of $70,000. Bob and Jane had no other income in 2023. Which of the following statements is true? a) The maximum child care expense that Jane can claim is $5,000. b) The maximum child care expense that Jane can claim is $8,000. c) The maximum child care expense that Jane can claim is $15,000. d) Jane cannot claim child care expenses. 119) Nathaniel moved from Edmonton to Kingston to be closer to his job at Queen's University. Which of the following moving expenses is not tax deductible on his tax return? a) Costs of changing his address on legal documents. b) Legal costs of selling his house in Edmonton. c) Expenses incurred on house hunting trips. d) Reasonable travelling costs in moving his family to a new residence. 120) During the year, Cale Houston donated $60,000 to a Canadian registered charity. His net income for the year was $140,000. Calculate Cale's maximum federal non-refundable tax credit for charitable gifts. a) $17,372 b) $9,000 c) $19,764 d) $17,400 121) In 2023, Shannon received an offer for the shares of her corporation, Flin Flon Creek Construction Ltd (FFCC). Shannon's shares in FFCC have an adjusted cost base of $500,000. Shannon used the full amount of her capital gains exemption on previous share sales, leaving none remaining for the current sale. Although Shannon would like to sell her shares and retire, she only wishes to sell them if her after-tax proceeds from the shares total at least $2.5 million. Assuming that Shannon's combined federal and provincial marginal tax rate is 52%, what is the minimum price Shannon should accept for her shares? a) $3,000,000 b) $3,202,703 c) $3,750,000 d) $4,807,692 122) Karen, a retired single individual who is 57 years of age, received the following types of income in 2023:
Registered pension plan annuity income Non-eligible cash dividends from a CCPC Interest income
$15,000 8,000 3,000
Which amount best represents Karen's federal tax credits for 2023? a) $3,750 b) $2,250 c) $3,081 d) $3,381 123) Kimberley, a single individual, has provided you with the following tax information for 2023: Salary and taxable benefits Donations made to registered charities
$39,000 1,200
Kimberley's employer withheld the appropriate amounts of CPP and EI from Kimberley's pay cheques. Which of the following best represents Kimberley's federal tax for 2023? a) $2,663 b) $2,983 c) $3,075 d) $5,850 124) Dominic donated publicly traded securities to his favourite registered charity in 2023. At the time of the donation, the fair market value of the securities was $40,000. The adjusted cost base of the securities was $10,000. Which of the following statements is true regarding Dominic's 2023 personal tax return? a) Dominic will have a taxable capital gain of $15,000. b) Dominic will have a charitable donation receipt of $30,000. c) Dominic will have a capital gain of $30,000. d) Dominic will have a taxable capital gain of $7,500. 125) Wiggins Ltd., a processor distributor, currently owns 20% of the outstanding common shares of Cumberland Ltd. Two unassociated companies, Munroe Ltd. and Hilliard Ltd., own 55% and 25% of the outstanding common shares of Cumberland Ltd., respectively. Cumberland Ltd., a laptop manufacturer, has had several years of large losses. These losses are due, in part, to high interest costs and a highly competitive market. Which one of the following percentages represents the minimum percentage of additional common shares of Cumberland Ltd. that Wiggins Ltd. must purchase in order that there be an acquisition of control? a) 30% b) 51% c) 31% d) 40% 126) Ana's Patisserie Inc. (AP) is a Canadian-controlled private corporation which operates a chain of bakeries. For its most recent fiscal year-end, the company had the following information available:
Active business income earned in Canada Active business income earned outside Canada Taxable capital gains Investment income earned in Canada Net income for tax purposes
$180,000 30,000 nil 136,000 $346,000
Taxable income
$300,000
AP's taxable capital was less than $10 million in the prior year and investment income earned in Canada is identical to prior year results. AP has no associated corporations and paid no foreign taxes on its foreign operations. Which one of the following amounts represents the maximum amount of income on which CCT may claim the small business deduction? a) $70,000 b) $180,000 c) $210,000 d) $300,000 127) Burger Ltd. is a Canadian-controlled private corporation which operates a chain of fastfood restaurants. In its most recent fiscal year, the company had the following financial results: Active business income eligible for the small business deduction Taxable capital gains Foreign investment income Investment income earned in Canada Net income for tax purposes
$250,000 nil 48,000 52,000 $350,000
Taxable income
$350,000
Burger Ltd. paid no foreign taxes on its foreign investment income and has no associated corporations. Which one of the following amounts represents the refundable portion of Part I Tax? Which RDTOH account would increase as a result? a) Refundable portion of part I tax is $30,667 increasing the NERDTOH b) Refundable portion of part I tax is $30,667 increasing the NERDTOH c) Refundable portion of part I tax is $50,667 increasing the Eligible RDTOH d) Refundable portion of part I tax is $14,720 increasing the Eligible RDTOH 128) Stefan's Steel & Concrete Ltd. (SSC) is a Canadian-controlled private corporation (CCPC) with a year-end of January 31, 2023. Stefan, the owner of SSC, also controls Bryan's Bakery Inc. (Bryan's), another CCPC with active business income for the year-ended January 31, 2023, of $150,000. Stefan has agreed to allocate a sufficient amount of the small business deduction to Bryan's to ensure that all of its active business income is taxed at the lower rate. You may assume that all of SSC's active business income is from Canadian activity. The combined taxable capital employed in Canada of SSC and Bryan’s is less than $10 million. SSC and Bryan’s did not have any passive investment income in the prior taxation year.
Other information about SSC: 1. SSC had a taxable capital gain of $4,000 and CCA recapture of $50,000 from the disposition of an "active" asset. 2. Charitable donations were $5,000 3. Net income for tax purposes for the fiscal year was $360,000 What is the appropriate small business deduction for SSC? a) $58,140 b) $66,500 c) $67,450 d) $67,640 129) Serenity Holdings Ltd. (Serenity) is a Canadian-controlled private corporation (CCPC). Serenity received $40,000 of eligible dividends from its investments in publicly traded Canadian shares during its fiscal year-ended June 30, 2023. Serenity has loss carryforward balances available for application as follows: non-capital losses of $8,000, net capital losses of $10,000, and farm losses of $4,000. Serenity is unsure of whether it will be able to pay dividends in the future to recover refundable taxes and therefore wishes to minimize Part IV Tax. Assuming Serenity has no other income, what is Serenity's minimum 2023 Part IV Tax payable? a) $15,333 b) $6,900 c) $12,267 d) $10,733 130) Brian Haner owns 100% of Shred Guitar Technology Ltd (SGT). Valerie Benz owns 100% of Tennessee Tours Inc (TT). Brian and Valerie each own 50% of Musical Gear Transport Ltd (MGT). Brian is married to Valerie's sister, Michelle. Assume that the three companies combined have less than $10 million of taxable capital employed in Canada, that each has no passive investment income, and that each has at least $500,000 of active business income earned in Canada. What is the maximum combined corporate income on which the three corporations can claim the small business deduction? a) Nil b) $500,000 c) $1,500,000 d) $1,000,000 131) Renée and Matthew are sister and brother. Renée owns 100% of all the common shares of Renn Ltd. and Renn Ltd. owns 25% of the common shares of Doug Ltd. The remaining common shares of Doug Ltd. are owned by unrelated individuals. Doug Ltd. and Matthew each own 10% of the common shares of another company, Matt Ltd. Based on this information, which of the following statements is correct? a) Renn Ltd. and Doug Ltd. are associated. b) Renn Ltd. and Matt Ltd. are associated. c) Renn Ltd. and Doug Ltd. are connected. d) Doug Ltd. and Matt Ltd. are connected. 132) Theo and Amanda are married. Theo owns 100% of the shares of JTG Ltd. and 25% of the shares of Bass Ltd. The remaining shares of Bass Ltd. are owned by unrelated individuals. Bass Ltd. and Amanda each own 50% of another company, WG Ltd.
a) b) c) d)
Theo is deemed to own 25% of WG Ltd. Amanda and JTG Ltd. are related. JTG Ltd. and WG Ltd. are associated. JTG Ltd. and Bass Ltd. are associated.
133) Charge Ltd., a company that sells electronics, is a Canadian-controlled private corporation with a December 31 year-end. Charge Ltd. earned the following sources of income in 2023: Active business income earned in Canada Eligible dividends from non-connected Canadian corporations
$900,000 30,000
Charge Ltd. has no associated corporations, and has Canadian taxable capital of $6 million. It claimed the maximum small business deduction available to it in 2023. If the balance in Charge Ltd.'s General Rate Income Pool (GRIP) at the end of 2022 was $50,000, what is the GRIP balance at the end of 2023? a) $368,000 b) $338,000 c) $318,000 d) $480,000 134) Jones Ltd. has a December 31 year-end and is not in the business of lending money. It has one shareholder, Kevin Jones. Kevin is a resident of Canada and an employee of Jones Ltd. In 2022, Kevin received a loan of $15,000 to use with no specified purpose. None of the other employees of Jones Ltd. were eligible to receive similar loans. The loan is due in 2024 and Jones Ltd. was very careful to ensure that bona fide arrangements were made at the time of each $15,000 loan for repayment within a reasonable time. Kevin repaid $11,000 of his loan on December 31, 2023 and the remaining $4,000 is still outstanding. Which of the following statements is true? a) Kevin will include $15,000 in his income in 2023. b) Kevin will include $15,000 in his income in 2022. c) Kevin will include $4,000 in his income in 2023. d) Kevin will not include any loan amount in his income in 2022. 135) Nelson is an employee of Vancouver Coastal Health and did not engage in any selfemployment activity in 2022. Nelson filed his 2022 T1 Canadian personal tax return on March 26, 2023. The CRA mailed a Notice of Assessment to Nelson dated May 20, 2023, and Nelson received it on June 2, 2023. If Nelson disagrees with the Notice of Assessment, he has until which one of the following dates to file a Notice of Objection? a) 90 days from May 20, 2023 b) 1 year from April 30, 2023 c) 90 days from June 2, 2023 d) 1 year from June 15, 2023 136) James filed his 2018 tax return on April 30, 2019 and the return was assessed as filed by the CRA. The mailing date on the original notice of assessment was June 30, 2019. In 2023, James received a notice of reassessment for his 2018 tax return stating that one of his deductions was denied. The mailing date on this notice of reassessment was July 11, 2023. Which of the following is not correct? a) The CRA can only reassess James if there is misrepresentation in the tax return. b) Legal and accounting fees incurred to fight the assessment are tax deductible. c) The normal assessment period ended on June 30, 2023.
d) To dispute the reassessment, James must file a notice of objection by October 9, 2023. 137) Edmund (age 61) died on May 1, 2023. In his will, he named his wife, Brianne, as the Executrix of the Estate. As Executrix, Brianne invested some of the excess cash in common shares of a Canadian public company and received eligible dividends on these shares during the year. None of this income was paid or payable to any of the Estate beneficiaries in the year. Which of the following statements is true about this trust? a) Its first tax return is due 6 months after the end of its first taxation year. b) Its first taxation year must end no later than December 31, 2023. c) It may claim a federal dividend tax credit of 2/3 of the dividend gross-up against its tax in 2023. d) It will compute its tax for its first taxation year using graduated tax rates if the Estate designates itself as a graduated rate estate on its first tax return. 138) Frank (age 63) established a trust for his daughter, Marley (age 22) on July 1, 2023. The trustees of the trust are Frank, his wife, and Marley. The trust invested funds received from Frank in common shares of a Canadian-controlled private corporation and received dividends on these shares during the year. None of this income was paid or payable to Marley during the year. Which of the following statements is true about this trust? a) It may claim a dividend tax credit against its taxes in 2023. b) It will compute its federal tax in 2023 using the rate of 26%. c) Its first taxation year must end no later than June 30, 2024. d) Its tax return for its first taxation year is due on June 30, 2024. 139) Which one of the following statements is correct? a) Because a GST registrant generally recovers all GST paid with respect to expenses included in employee taxable benefits, GST can be excluded from the cost of such benefits in calculating the employee's taxable income. b) An employee incurring deductible expenses related to his employment is not automatically entitled to claim a GST rebate on his income tax return. c) If an automobile costing $21,500 is used 75% for business use in a proprietorship, the input tax credit available in the year of purchase is $1,050. d) Generally, a business earning only zero-rated sales is not required to register for GST.
Multiple Choice Exam Solutions (Q1 to 139)
1)
Chapter 2 Carla does not live in Canada 24 hours a day. She only works in Canada 9 am to 5 pm, Monday through Friday. Therefore, she will be taxed in the USA, subject to tax withheld on her employment income in Canada since she is a non-resident. Answer C
2)
Chapter 3 Standby Charge and Operating Benefit [ITA 6(1)(e), 6(1)(k), and 6(2)] Business km > 50%; therefore, the standby charge is:
5,000/16,670 × ⅔ × (10 × 800) Operating costs >50% use for business Lower a) ½ of standby charge = of: b) 33 cents × 5,000 =
$1,600
$800
800
$1,650 $2,400
Answer
B
3)
Chapter 3 ITA 6(1)(a) The Christmas gift is a cash gift, not a non-cash gift up to $500. Answer A
4)
Chapter 3 Stock Options [ITA 7(1.1)] CCPC 2015 Grant Date — No Effect 2018 Exercise Date — No Effect 2023 Selling Date — Employment Income (FMV – cost) × 10,000 ($6 – $3) × 10,000 Capital gain $7 – $6 × 10,000 =
Total =
$30,000 + $5,000 =
=
$30,000
TCG
$10,000 × ½ $ 5,000 $35,000
The s. 110(1)(d.1) deduction is used in the calculation of taxable income, not income for tax purposes (Div. B). Answer D 5)
Chapter 3 Capital Gains [ITA 38, 39, 54, 41(2), 40(2)(g)(iii), 46(1-3)] Shares
PUP
LPP $900
$1,600 (850) $ 750
$850 $850
(300) (105) $495
=
Taxable capital gain
Answer 6)
$2,095 ½ $1,048
A
Chapter 5 Class 14.1 Intangible assets Calculation of CCA = $100,000 × 150% (Accelerated rate) × 5% = $7,500 Class 14.1 is not eligible for immediate expensing.
Answer
7)
C
Chapter 5 Class 14 Limited-life asset [ITA 13(21) and IT-477 paragraph 4] Eligible for immediate expensing. Maximum CCA is $115,000
Answer 8)
A
Chapter 4 Reserve [ITA 40(1)(a), 40(1.1), 40(1)(a)(ii) and 40(1)(a)(iii)] Proceeds minus ACB minus selling cost = $200,000 − $115,000 − $7000 = $78,000 Reserve is lesser of: a) 185,000/200,000 × $78,000 = $72,150 b) 1/5 × $78,000 (4-0) = $62,400 Lesser is $62,400 Therefore = $78,000 − $62,400 → $15,600 × ½ = $7,800 minimum capital gain.
Answer 9)
C
Chapter 5 Class 10.1 [ITA 13(7)(g), 13(7)(h), 13(2), 20(16.1), 248(16), ITR 1100(2.5), 1101(1af), 7307(1)(b)] ½ year rule in year of sale No terminal loss or recapture $17,850 × 15% = $2,677.50
New car = $36,000 X 150% (Accelerated Rate) × 30% = $16,200 (HST excluded from cost, because HST registrant) Maximum CCA = $2677.50 + $16,200 = $18,878 Answer B 10)
Chapter 4 Self Employed Individual [ITA 18(1)(a), 18(12) and IT-514] Utilities House insurance House maintenance Mortgage interest Property tax
Answer
D
$1,600 700 1,000 3,700 1,100 $8,100
× 400/2,400 = Business liability Office supplies Total
$1,350 500 500 $2,350
11)
Chapter 5 Class 13 Asset [ITR 1100(1)(b), Schedule III]
20211
2022
=6+2=8 2021 = 32,000/8 = 4,000 × 150% =
2026 5
$6,000 $4,000
Year 1 Year 2
2021 2022 and onward
$3,000
Year 1
2022
$2,000 Therefore, $4,000 + $3,000 = $7,000
Year 2
2023 and onward
2022 = 14,000/7 = 2,000 × 150%=
Answer
B
12) Chapter 5 Class 10.1 Asset [ITA 13(7)(g), 13(7)(h), 248(16), ITR 1100(2.5), 1101(1af), 7307(1)(b)] First, the prescribed limit for Class 10.1 for 2023 is $36,000. Second, they are a HST registrant — therefore, no HST in calculation. This is a CCPC therefore is eligible for immediate expensing, the full $36,000 can be expensed. Answer D
13)
Chapter 3 Standby Charge and Operating Benefit [ITA 6(1)(e), 6(1)(k), and 6(2)] Business km > 50% — therefore, 50% rule available for operating cost benefit. Standby charge 2% × $33,900 × 12 × (5,000/20,004) = $2,034
Operating cost Lower of: A) 33 cents × 5,000 = $1,650 B) 50% of $2,034 = $1,017
Answer 14)
B
Chapter 5 Class 12 [ITR 1100(2)] Computer Software Class 12: 100% $10,000 × 100% = $10,000
Answer
B
15) Chapter 7 Building Maximum proceeds UCC Terminal loss Land Proceeds for property Proceeds for building Proceeds for land ACB Capital gain Taxable capital gain
$12,000 (12,000) Nil $420,000 (12,000) $408,000 (80,000) $328,000 $164,000
Subsection 13(21.1) would disallow the terminal loss by making the proceeds on the building equal to the UCC, assuming the taxpayer wishes to minimize the taxes. Answer C 16)
Chapter 2 [ITA: 2(1), 114, 118.91] Jamal Ling has left the country for good; therefore, he is a part-year resident. Answer B
17)
Chapter 2 [ITA 250(4)(a), 250(4)(c)] Resident if incorporated in Canada after April 26, 1965. Must be carrying on business in Canada after April 26, 1965. This is not the case; therefore, non-resident. Answer C
18)
Chapter 4 Carrying Charges on Land [18(2), 18(3), 53(1)(h)] Can only deduct interest and property tax on vacant land against revenues generated on the vacant land. Answer B
19)
Chapter 4 Soft costs related to construction of building must be capitalized under ITA 18(3.3) and 18(3.1). Additionally, CCA on office furnishing in storage as of December 2020 is not available for use [ITA 13(26), 13(27) to (32)] and therefore no CCA can be taken on it. Therefore, the only deductible item is Landscaping costs under Paragraph 20(1)(aa) of the ITA. Answer D
20)
Chapter 4 Reserve [ITA 40(1)(a), 40(1.1), 40(1)(a)(ii) and 40(1)(a)(iii)] Proceeds minus cost = 300,000 − 120,000 = $180,000 Reserve is: 225,000/300,000 × 180,000 = $135,000 Answer
B
21)
Chapter 7 Change from non-income producing to income producing [ITA 13(7)(b)] Lesser of: 1) FMV @ time of change in use
$340,000
2) total of: a) Cost @ change in use b) FMV @ change in use cost of property
$280,000 $340,000 (280,000) 60,000 ×½ 30,000 $310,000 Lesser amount: $310,000× 4% (Class 1) = $124200 Accelerated investment incentive does not apply since it was previously held by the individual.
Answer 22)
D
Chapter 7 FMV $145,000 change in use Elect under 45(2) to defer gain on change Dec-20 Proceeds on sales Less: Adjusted cost base Capital gain
$180,000 (130,000) $50,000
Less: Principal residence deduction Principal residence for 9 years (5 years + 4 years 45(2) election) Property owned for 14 years Therefore, $50,000 × (9 + 1)/14 = $35,714 = $50,000 − $35,714 → $14,286 × ½ = $7,143
Answer
C
23) Chapter 7 Original cost
$500,000 Class 53(50%) UCC of $187,500 Insurance proceeds $345,000 New machine $280,000 May 31, 2023
May 31, 2024
Class 53
UCC = Disposal Deferred recapture Class 53 Additions New machinery UCC
$187,500 (345,000) (157,500) $280,000 $122,500
May 31, 2024 impact on income for 2024 is CCA of $122,500(i.e., 100% of $122,500) (Enhanced First Year Allowance 100% if property is available for use between November 20, 2018 to Dec 31, 2023) . Involuntary Disposition [ITA 13(1), 13(4), 13(4)(d), 13(21), 44, 44(5) and IT-259R4 paragraph 16-21]
Answer
D
24)
Chapter 8 & 19 Death of a taxpayer (1) Shares in publicly traded company transferred to spouse on death. The deceased is deemed to have disposed of the shares at the adjusted cost base. The surviving spouse assumes shares at the ACB. Therefore, no capital gain unless the estate elects. Not included in income on final return. (2) Car — no effect on transfer to spouse (automatic rollover) (3) Rental building — deemed disposition at FMV ($150,000) Proceeds ACB Capital gain Taxable capital gain Recapture
Answer
25)
D
C
Chapter 1 [IC-73-10R3]
Chapter 1 Tax avoidance — deliberate planning of events and transaction to circumvent the law. Answer
27)
$52,500 30,000 $82,500
Chapter 1 Tax evasion — knowingly failing to report revenues of the corporation. Answer
26)
$150,000 45,000 $105,000
Chapter 1 tax costs. Answer
B
Chapter 1 [IC-73-10R3]
Tax planning — legitimate arrangements of financial activities that reduce A
Chapter 1 [IC-73-10R3]
28)
Answer D [ITA: 2(1), 114, 118.91] Chapter 2 Francis is considered to be a part-time resident since there is a transition between nonresident and resident (i.e., she just immigrated to Canada on April 30, 2023). Therefore, she is taxed on her worldwide income from when she first arrives in Canada until the end of the calendar year.
29)
Answer A [Cda-U.S. TT: Art V. par 6] Chapter 2 The corporation does not carry business through an employee or agent who has general authority to contract or who has a stock of merchandise owned by the employer from which he/she regularly fills orders. In this case, the sales representative has no authority to accept orders. Furthermore, orders were filled from Mountain Company in the USA. Therefore, the conditions for a permanent establishment are not met.
30)
CBS was incorporated in Canada after 1965 and is, therefore, subject to tax. Answer B [ITA 250(4)(a), 250(4)(c)] Chapter 2
31)
Answer D Chapter 3 A reward received from a supplier rather than from the employer can be regarded as a benefit received by virtue of employment. Paragraph 6(1)(a) is broad in its inclusion of benefits and does not specifically state that remunerations be from the employer.
32)
Chapter 3 Answer
B
[ITA 6(19)-(23)]
The ITA allows the first $15,000 of housing loss reimbursements by employers to be tax free. Of the remainder, 50% is subject to tax. Therefore $100,000 - $15,000 = $85,000 X 50% = $42,500 additional employment income for 2023. 33)
Answer D Chapter 3 [IT 470R par 15 Archived] The CRA’s position under IT-470R in respect of business trips for spouses of employees indicates that there is no employment benefit to the employee if the spouse was, in fact, engaged primarily in the business activities on behalf of the employer as opposed to engaged primarily in personal activities.
34)
Two-thirds of the lease cost is taxable as a standby charge benefit. The benefit may be even lower if Wajeeha uses the vehicle for business purposes. Answer
C
Chapter 3 [ITA 6(1)(e), 6(1)(k), and 6(2)]
35)
Answer B Chapter 4 Narith is an independent contractor and is therefore allowed to deduct all home office expenses including mortgage interest, property tax, utilities, insurance and repairs under 18(1)(a) of the ITA. See chart under ¶4,610 Sales/Negotiating Person’s Expenses Revised.
36)
Answer D Chapter 4 Krishna is an employee and cannot deduct CCA on his computer under section 8, while Hardip who is self employed can deduct CCA expenses under 18(1)(a) of the ITA. See chart under ¶4,610 Sales/Negotiating Person’s Expenses Revised.
37) Least of: (a) total contribution (b) dollar limit (2023) (c) 18% of compensation
President $32,000 $31,560 $32,400
Manager $28,000 $31,560 $17,100
Total contribution less: least of above
$32,000 31,560
$28,000 17,100
$440
$ 10,900
over-contribution
Answer 38)
C
Total
$11,340
Chapter 9
The expense of representation for the purposes of obtaining a licence, permit, franchise or trademark related to the business of a taxpayer are deductible under 20(1)(cc) of the ITA. Answer
B
Chapter 4
39)
CCA calculation: no accelerated investment incentive because sales are greater than purchases. Therefore, Class 10 calculation = $70,000 − (80,000 − 50,000) = $40,000 × 30% = 12,000 CCA. Answer
A
Chapter 5
40)
Answer B Chapter 5 Recapture as defined in subsection 13(1) is calculated at the end of the taxation year. When at the time, the total amount represented by elements E to J of the formula indicated in the definition of Undepreciated Capital Cost (UCC) in subsection 13(21) exceed the total of the amounts represented by elements A to D, (i.e., it becomes a negative balance) the client must include that excess as recapture in the calculation of income for the year.
41)
Class 50 and 12 are eligible for immediate expensing. The cost for Class 50 includes system software. For application software, it is Class 12 at 100%. Calculation: $8,000 + $8,000 + $1,000 +$1,000 = $18,000 for Class 50. Class 12 = $500 + $500 = $1,000 × 100% = $1,000. Note that the computer will not work unless it has its system software. Therefore, it is considered part of the computer (Class 50). The other software is a separate class since it is not essential to make the computer run. Therefore, it is Class 12. Answer
42)
Chapter 6
D
Chapter 8
Rental Properties [ITR 1100(11)-(20), IT-195R4] $230,000 − 5,000 − 60,000 − 85,000 − 45,000 = $35,000. Class 1 NRB (6%) UCC: $684,816 × 6% = $41,089. However, you cannot create a loss using CCA; therefore, the maximum is $35,000. Answer
45)
C
Attribution Rules [ITA 74.1(2), 74.3, 251, 252, and IT 419R2] Attribution rules no longer apply in the year the child turns 18. Answer
44)
Chapter 5
Accrual Rules for Individuals [ITA 12(4), 12(11), and 12(1)(c)] For 2023: nil should be reported. For 2024: $10,000 × .09 = $900. For 2025 (compounded): 10,900 × .09 = $981 Answer
43)
C
B
Chapter 6
Personal Use Property ITA [38, 39, 54, 40(2)(g)(iii), 46(1-3), 50(2)] Capital gain is $1,200 − minimum ACB of $1,000 = $200. The antique couch is a PUP, not an LPP. Answer
A
Chapter 7
46)
Nil—the identifical shares were repurchased within 30 days therefore it is a superficial loss. The loss would be added to the cost base of the new shares. Answer
47)
D
Chapter 7 [ITA 54 and 53(1)(f)]
Principal Residence Exemption [ITA 54, 40(2)(b), and IT 120R6] Cottage: $300,000/5 = $60,000 per year House: $400,000/10 = $40,000 per year Designate 2019–2022 to cottage (4 years plus one = 5 years) Designate 2014–2018, 2023 to house (6 years plus one = 7 years) Minimum TCG = 50% of $40,000 × 3 yrs = $60,000
Answer
A
Chapter 7
Non Arm’s Length Transaction [69(1)(a), 69(1)(b), 38, 39, 54] John: ($600,000 − $250,000) × ½ = $175,000 taxable capital gains. Deborah: ($850,000 − $400,000) × ½ = $225,000 taxable capital gains. However because Deborah did not pay FMV consideration for the rental property, her Taxable capital gain would attribute back to John. John would include $400,000 in taxable capital gain and Deborah would have nil. 48)
Answer
49)
B
Chapter 8,
The first $200 is tax-free, per IT 39(1.1)→ $1,500 - $600 = $900 − $200 = $700 Answer
D
Chapter 7
50)
Answer
A
[ITA 152(4)] Assessments and Reassessments
51)
Reserve and capital gains [ITA 39, 40(1)(a), 40(1.1), 40(1)(a)(ii) and 40(1)(a)(iii)] $100,000 - $75,000 = $25,000 capital gain in 2022. Capital gain reported, after reserve of $20,000, in 2022 = $5,000. The capital gain in 2023 is the 2022 reserve of $20,000 being brought into income since the entire amount due has been received in 2023. Answer
52)
D
Chapter 7
Answer C Chapter 7 Under subsection 50(1) of the ITA where a debt is taken back from the purchaser of a capital property and it is established to be a bad debt, the seller can elect to have disposed of the debt and to reacquire it immediately at a cost equal to nil. Note: If James Ltd. is a small business corporation, the loss may be a business investment loss. A business investment loss is a capital loss
53)
Charitable Donation [ITA 110.1(1), 110(1)(a.1)] Division B income = $310,000 + $10,000 → $320,000 × 75% = $240,000
Answer
C Chapter 9
54)
Business Income Chapter 4 Answer A
55)
Association Rules [ITA 125(3), 125(7), 127(10.1), 127.1, 125(7), 129(6)] Associated companies must share the SBD. Therefore, Carbweb and Taxman must share $500,000. Internet is not associated; therefore, it has its own $500,000 SBD. Total = $500,000 + $500,000 = $1,000,000 Answer D Chapter 12
56)
Small business deduction [ITA 89(1), 125(1), 125(2), 125(3), 125(7), 126(1)] 19% of net active business income = small business deduction = 19% × (180,000 − $3,000) = 19% × 177,000 = $33,630 Answer A Chapter 12
57)
Personal service business income [ITA 125(7), 18(1)(p)] Only 2 employees < 6 employees The services are rendered to Faith Ltd. (their former employer). If Robin Ltd. didn't exist, they would likely be employees of Faith. Therefore, Robin Ltd. is carrying on a personal service business. Answer D Chapter 12
58) RDTOH [129(3)(a through d), 186, 129(4) & (6), and 111(1)(b)]
Add: Refundable portion of Part I
$35,000 (23,000) 12,000 $29,000
NERDTOH Dec. 31, 2023
$41,000
NERDTOH Dec. 31, 2022 Less dividend refund in 2022
Answer
= $60,000 × 38 1/3%
B Chapter 12
59)
Loans have no repayment terms. You have one year to pay back the money; if not, will be included in the income of the recipient in the year the loan was taken. Jake is connected under 15(2.1) with Jay and therefore, Jake must include $2,000 under section 15(2). Note that these two sections override section 56(2). So Jay must include $5,000 in taxable income in 2022. Answer C Chapter 13
60)
[ITA 165(1)(b)] The filing deadline for a Notice of Objection is the later of: (i) (ii)
one year from the filing deadline for the 2022 return, i.e., April 30, 2024, and 90 days from the date of mailing of the Notice of Assessment or Reassessment, i.e., August 12, 2023.
Answer
D Chapter 14
61)
[ITA 162(1)] The penalty for a late-filed tax return (for the first offence within three years) is 5% + 2% per full month late to a maximum of 17%. Since the return was 20 months late, the maximum penalty is 17% of $5,500 = $935. Answer D Chapter 14
62)
[ITA 150(1)(b), 150(1)(d)] The return must be filed by the later of: (i) six months from the date of death, i.e., March 20, 2024, and (ii) the normal filing deadline for 2023, i.e., April 30, 2024. Answer D Chapter 14
63)
The final return must include income earned in the year of death, i.e., 2023, to the date of death on March 20, 2023. Total income will include: salary for 2023 business income for 2023 interest income for 2023 total
Answer 64)
B
$16,000 1,300 500 $17,800
Chapter 14
The amount of the ACB of the shares given up (i.e., $6,000 for the Pubco shares) becomes the amount of the ACB of the shares acquired in the exchange (i.e., Taikit). Answer B
65)
The ACB at January 1, 2024 would be completed as follows: ACB, January 1, 2023 Share of business loss Share of charitable donations Drawings ACB, January 1, 2024
Answer 66)
Chapter 19
P of D ACB (add negative) Selling costs Capital gain Taxable capital gain
Answer 67)
A
C
$ 59,000 (25,000) (1,000) (10,000) $ 23,000
$13,000 2,000 (1,000) $14,000 $ 7,000
Chapter 19
The amount of a dividend from a taxable Canadian corporation received by a partnership is included in its income and allocated to the partners as part of their partnership income allocation. Individual partners will, then, include the gross-up on their share of the dividends in their income and corporate partners will deduct their share of the dividend in the calculation of corporate taxable income. Answer D Chapter 19
68)
Interest on funds borrowed by a partner has no effect on the partner’s ACB of a partnership interest. Answer A Chapter 19
69)
Trust Beneficiaries $50,000 (50,000) $50,000 19,000 20,000 (18,000) 18,000 (2,000) ______ $NIL $87,000 × ¼ = $21,750
Dividends Distributed Gross-up @ 38% Interest income Distributed Interest expense Income Answer
D
Chapter 19
70)
Answer
C
Chapter 19
71)
Dividend received by AEI Less: dividend attributed to post-71 income Deemed P of D Actual proceeds ($900,000 – $800,000) Total P of D ACB Capital gain Answer A
72)
There will be a s. 84.1 deemed dividend of $425,000, equal to the excess of the boot of $500,000 over the greater of PUC and ACB, i.e., $75,000 of the LEL shares. Therefore, P of D of the LEL shares will be computed as: Elected amount $500,000 s. 84.1 deemed dividend (425,000) P of D $ 75,000 Answer D Chapter 17
73)
100 shares × $10 = 20 shares × $16 = 120 Per share Answer B
74)
Increase in PUC Increase in net assets Deemed dividend (taxable) Answer C Chapter 18
$800,000 600,000 200,000 100,000 300,000 (100,000) $200,000
$1,000 320 $1,320 $ 11 Chapter 18 $20,000 (15,000) $ 5,000
75)
PUC & ACB On issuance PUC/ACB withdrawn PUC/ACB 20% Redemption of 20% of $400,000 = $80,000 Deemed dividend Redemption proceeds PUC Deemed dividend Capital gain (loss) Redemption proceeds Deemed dividend P of D ACB Capital gain (loss) Answer
76)
$80,000 (14,000) $66,000 $80,000 (66,000) 14,000 (14,000) Nil
C Chapter 18
Winding-up distribution PUC Deemed dividend on winding-up Elect capital dividend Deemed dividend
$500,000 (40,000) 460,000 (90,000) $370,000
Winding-up distribution Deemed dividend P of D ACB Capital gain
$500,000 (460,000) 40,000 (40,000) Nil
Answer 77)
$100,000 (30,000) $ 70,000 $ 14,000
A
Chapter 18
Proceeds (elected amount) Capital cost Capital gain Taxable capital gain Recapture ($20,000 − $16,000) Capital cost to corporation Original capital cost 20,000
$35,000 (20,000) $15,000 $ 7,500 $ 4,000
Taxable capital gain
7,500 $27,500
Answer
C Chapter 17
78)
Boot Cash Assumed mortgage Minimum elected amount
$20,000 5,000
ACB of shares ($25,000 − $20,000 − $5,000) Answer 79)
ACB of shares
80)
81)
$17,000 (15,000) 2,000 11,000 $13,000 Nil
A
Chapter 17
Elected amount Allocated to: Note Preferred shares Common shares Answer
Nil
B Chapter 17
FMV in FMV out ($11,000 note + $4,000 preferred shares) Benefit Minimum elected amount (allocated to note) Total elected amount
Answer
$25,000 $25,000
C
$40,000 $20,000 $20,000 Nil
Chapter 17
Non Capital Loss and Net Capital Loss Carryforwards (ITA 111(1)(a); 111(1)(b) and 111(8)) Chapter 11 TCG = ½ X $35,000 =$17,500 + $50,000 = $67,500 minus Net capital losses $4,000. Therefore $67,500 - $4,000 -$15,000 - $10,000 = $38,500. Answer B
82)
Canadian Controlled Private Corporation (ITA 125(7)) Chapter 11(see textbook
11,214) Answer
A – 50%/50% qualifies as a CCPC
83)
Dividend Refund (ITA 186(2); 186(4); 129(1)(a) and 186(1)(b)) Chapter 12 $150,000 X 38.33% Part IV tax paid = Part IV tax paid =
=
$57,500 $20,000 Wholly owned subsidary therefore connected corporation B Nil
Wholly owned sudsidary therefore connected
corporation C $77,500 Answer C 84)
RRSP Deduction and Dollar Limit (Subsection 146(1)) Chapter 9 Lesser of: a) $30,780 maximum for 2023 b) 18% X $95,000 = $17,100 Lesser is: $17,100 plus unused room $12,000 subtotal $29,100 Less: PA from 2022 $5,000 Maximum $24,100 Note that the earned income and pension adjustment are from the prior year 2021 per subsection 146(1) Answer B
85) Tax Free Saving Account (TFSA) (ITA 146.2; 207.01; 207.02; and Beam and Laiken 9120) Chapter 9 Total contribution available 2021, 2022 and 2023 is $18,500 ($6,000 per year for 20212022 and $6,500 for 2023) minus $1,000 contributed already = $17,500 maximum contribution for 2023 (ITA 146.2; 207.01 and 207.2) Answer C 86) Kristin is a non-resident for the entire year for 2023 because she severed her ties with Canada and acquired ties with Japan in 2022. - Chapter 2 Correct answer is D 87) Chapter 3 - standby charge = $45,000 x 2% x 12 months x 8,000/(1667x12) = $4,319 Plus operating benefit – the lessor of a) Personal km x prescribed rate 8,000 km x .33 = 2,640 b) ½ of standby charge $4,319 x 50% = $2,160 Total benefit is $4,319 + 2,160 = $6,479 Correct answer is B 88) Chapter 3 – loan $350,000 x the lower of the current prescribed rate (2% in Q1 and Q2 and 1% in Q3 and Q4) or the prescribed rate at time of loan (1%) - the interest benefit is $350,000 x 1% = $3,500
Correct answer is D 89) Chapter 3 - standby charge is = $55,000 x 2% x 12 months x 4,000/(1667x12) = $2,639 Correct answer is C 90) Chapter 3 (B) is correct since all other options would result in a taxable benefit. 91) Chapter 3 Correct answer is B – calculated as follows: Deducting as a salesperson: Automotive: Fuel Insurance Repairs Leasing Total automotive costs $ % for employment Total deductible automotive Meals & entertainment (50%) Total salesperson expenses
2,000 800 1,000 3,600 7,400 90% 6,660 5,000 11,660
Deduction allowed under 8(1)(f) - lessor of Total salesperson expenses 11,660 Commission received in 2023 5,000 Lower of two amounts Deducting as an employee under 8(1)(h)&(H.1) Total deductible automotive Maximum claim
5,000 6,660 6,660
92) Chapter 3 - (C) is correct. All items from this option are relevant when computing income from employment after deductions from employment. 93) Chapter 3 – A is correct calculated as follows:
Stock option benefit: FMV price at exercise date $ Less: exercise price $ Difference # of shares Total benefit Capital gain/loss: POD ($9.50 X shares) ACB ($9.50 X shares) Division C deduction: Total benefit Rate Total Div C deduction Net increase to taxable income
9.5 (4.5) 5 20,000 100,000 190,000 (190,000) 100,000 50% (50,000) 50,000
94) Chapter 3 - (B) is correct as there is no exception for parking spots and the other options are not taxable benefits. 95) Chapter 3 - (D) is correct. Only non-cash gifts up to $500 are tax-free. 96) Chapter 3 – A is correct… calculated as follows: ($1,100 x 12) x 2/3 x 4000 km / (1667x12) 97) Chapter 3 – B is correct – calcualted as follows: Salary $ Bonus (received in 2024) RPP (employer) - not taxable Life insurance premiums RPP (employee) Union dues Professional dues Employment income $
70,000 900 (5,000) (1,100) (1,200) 63,600
98) Chapter 4 – A is correct: Expenses of issuing shares or borrowing money are to be amortized equally over five years. However, any undeducted balance becomes deductible for the year in which the debt is fully repaid (assuming no new debt is incurred to replace previous financing). 99) Chapter 4 – C is correct calculated as follows:
Accounting income Additions:
$
61,800
Charitable donations Meals & entertainment (50%) Amortization on equipment Taxable capital gains (gain X 50%) Total additions $
8,000 2,750 15,000 600 26,350
Deductions: Gain on sale of investments - accounting CCA ($91,300 X 20%) Total deductions Net income for tax purposes $
1,200 18,260 19,460 68,690
100) Chapter 5 – D is correct calculated as follows: Lesser of: (1)
0.2 Capital cost
(2)
Capital cost # of 12-month periods plus 1 renewal Lesser amount Accelerated Investment Incentive
0.20 75,000 15,000 75,000 4 18,750 15,000 1.50 22,500
101) Chapter 5 – C is correct calculated as follows: Capital cost Legal life prorated for December only (31/365) Accelerated Investment Incentive
110,000 15 7,333 per year 0.08 623 1.5 934
102) Chapter 5 - (B) is correct. $50,000 x 20% = $10,000. No half-year rule, accelerated investment incentive, or immediate expensing will apply since the property was acquired from a person not dealing at arm's length where the property was depreciable and owned continuously by the transferor from a day that was at least 365 days before the end of the taxation year of the acquirer in which the property was acquired. 103) Chapter 5 - A is correct
Class 8 additions Class 8 accelerated rate (20% X 1.5)
60,000 30% 18,000 0.17 3,008
prorated - short taxation year (61/365)
104) Chapter 5 – B is correct calculated as follows: Class 1 building: Capital cost Class 1 NRB accelerated rate (6% X 1.5) Subtotal Prorated for short taxation year (214/365) Class 10 truck: Capital cost Class 10 accelerated rate (30% X 1.5) Subtotal Prorated for short taxation year (214/365) Class 50 computer equipment: Capital cost Class 50 accelerated rate (55% X 1.5) Subtotal Prorated for short taxation year (214/365) Class 8 office equipment: Capital cost Class 8 accelerated rate (20% X 1.5) Subtotal Prorated for short taxation year (214/365) Σ - Total maximum CCA $
600,000 9% 54,000 31,660 Σ 20,000 45% 9,000 5,277 Σ 4,000 83% 3,300 1,935 Σ 3,000 30% 900 528 Σ 39,399
105) Chapter 5 – D is correct calculated as follows: UCC - opening balance Additions Disposals - lower of cost & proceeds (5 X $18,000) Terminal loss
65,000 32,000 97,000 (90,000) 7,000
106) Chapter 5 – Correct answer is A, calculated as follows:
Class 50 computer equipment: UCC - opening Class 50 rate (55%) Maximum CCA
2,500 55% 1,375 Σ
Class 8 equipment, furniture, fixtures: Capital cost Class 8 accelerated rate (20% X 1.5) Maximum CCA
60,000 30% 18,000 Σ
Σ - Total Maximum CCA
19,375
107) Chapter 5 – correct answer is C, calculated as follows: UCC - opening balance Add: property eligible for accelerated rate Less: disposals (lower of cost & proceeds) Adjusted UCC after additions/disposals
10,000 8,000 (3,000) 15,000
Adjustment to addition (50% X (8,000 - 3,000)) Base for CCA Class 8 rate Max CCA UCC - ending balance
2,500 17,500 20% 3,500 11,500
108) Chapter 7 – correct answer is A, calculated as follows: Years owned as personal property Additional years under 45(2) +1 rule Total years owned Percentage eligible for exemption Capital gain before exemption Principal residence exemption Minimum capital gain for 2023
12 4 1 17 21 0.81 190,000 153,810 36,190
109) Chapter 7 – B is correct Painting - LPP: Proceeds of disposition (minimum 1,000) Adjusted cost base (minimum 1,000) Capital gain Stamp collection - LPP:
2,800 1,000 1,800
Proceeds of disposition (minimum 1,000) Adjusted cost base (minimum 1,000) Capital loss (up to 1,800 max)
1,000 1,400 (400)
Outboard motor - PUP: Proceeds of disposition (minimum 1,000) Adjusted cost base (minimum 1,000) Capital gain
1,000 1,000 -
Desk - PUP: Proceeds of disposition (minimum 1,000) Adjusted cost base (minimum 1,000) Capital loss (not allowed for PUP)
1,100 1,800 -
Total capital gain Inclusion rate Taxable capital gain
1,400 50% 700
110) Chapter 8 (C) is correct. The deemed disposition rules under ITA 128.1 do not apply to real estate in Canada and RRSPs. 111) Chaper 5 (C) is correct. See calculations. Since the building and associated land were disposed of in the same year, the ITA would reallocate the proceeds and remove the terminal loss.
Land: POD ACB
1,200,000 (900,000)
Capital gain
300,000
Building: POD UCC Terminal loss
500,000 (600,000) (100,000)
Reallocation of proceeds to remove terminal loss: Land: Revised POD ACB Capital gain
1,100,000 (900,000) 200,000
Revised POD UCC Revised recapture/terminal loss
600,000 (600,000) -
112) Chapter 8 - (B) is correct. A growth fund that pays minimum dividends and that will appreciate in value is the most desirable as the grandchildren can simply retain ownership of the fund units until they attain the age of 18, at which point they may sell the fund units with no attribution to Dolores. Dolores will still have dividend income attributed to her in the meantime; however, this is minimal and superior to the alternative scenarios. 113) Chapter 8 (A) is correct. The interest charges must be at least equal to the lesser of the prescribed rate and a commercial rate. 114) Chapter 9 (C) is correct: $6,000 + $3,000 + $1,800 + ($90 X 15) 115) Chapter 9 (B) is correct as each of these items is included in earned income. 116) Chapter 9 (D) is correct. Workers' compensation payments are included in net income for tax purposes and subsequently deducted to arrive at taxable income. In this way, the payments are accounted for in determining income-tested programs/benefits. 117) Chapter 9 (B) is correct. See calculations.
Unused RRSP contribution room - 12/31/2022 Add: 18% of 2022 earned income ($120,000) Less: 2022 pension adjustment Maximum deduction
1,000 21,600 (4,000) 18,600
2023 RRSP dollar limit (for reference) 18% of earned income lower of two amounts
30,780 21,600 21,600
118) Chapter 9 (D) is correct. The lower-income spouse, Bob, must claim the child care expenses. They do not meet the exceptions for allowing the higher income spouse to claim 119) Chapter 9 (C) is correct. House hunting trips are not deductible. The other options are incorrect since these other options are specifically mentioned in the ITA as deductible. 120) Chapter 10 (A) is correct. See calculations. First $200 Rate Remaining donations Rate
Total charitable donation tax credit
200 15% 30 59,800 29% 17,342 17,372
121) Chapter 10 B is correct. See calculation X – (X-500,000)*50%*52% = $2,500,000 → .74X = $2,370,000 → X = $3,202,703 CHECK: Gross proceeds Adjusted cost base Capital gain Taxable capital gain Marginal tax rate Taxes payable
3,202,703 (500,000) 2,702,703 1,351,352 52% 702,703
Gross proceeds Less: taxes payable After-tax proceeds
3,202,703 (702,703) 2,500,000
122) Chapter 10 – D is correct A is incorrect as it adds the full gross up as the dividend tax credit B is incorrect as the pension amount and dividend tax credit are missing C is incorrect as the pension amount is missing Basic personal amount - 2023 Pension amount
Subtotal Dividend tax credit: Actual amount of non-eligible dividends Federal DTC rate (15% X (9/13)) Total credits ($2,550 + $831)
15,000 2,000 17,000 15% 2,550 8,000 10.38% 831 3,381
123) Chapter 10 – A is correct – see calculation Employment Income Less: CPP Enhanced Deduction ((39,000 - 3,500) x (5.95% - 4.95%)) Taxable Income Tax Rate Tax on Income Tax Credits: Basic Personal Amount - 2023 Canada Employment Amount - 2023 CPP - 2023 ((39,000 - 3,500) x 4.95%) EI - 2023 (39,000 x 1.63%) Subtotal Rate Donation Tax Credit - First $200 at 15% Donation Tax Credit - Remaining $1,000 at 29% Total Tax Credits Tax on Income Less: Tax Credits Federal Tax Payable
124) Chapter 10 – Correct answer is C
39,000 355 38,645 15% 5,797
15,000 1,368 1,757 636 18,761 15% 2,814 30 290 3,134 5,797 3,134 2,663
(C) is correct. The capital gain will be $30,000 ($40,000 - $10,000); however, the taxable capital gain is zero because it is a gift of publicly traded shares to a registered charity. 125) Chapter 15 – Correct answer is C Current ownership is 20% - to acquire control the minimum amount needed is 30% to give them 51% 126) Chapter 12 (A) is correct. See calculations. Aggregate investment income (AII) Add: dividends from non-connected corps
136,000 -
Add: taxable life insurance amounts not already included in AII Less: Taxable capital gains and allowable capital losses from disposition of "active assets"
-
Less: net capital losses carried over from other taxation years Adjusted aggregate investment income (AAII) Less: allowable AAII not subject to grind
136,000 (50,000) 86,000 5 430,000
Multiply by factor of 5 Business limit reduction Business limit before reduction Business limit reduction
500,000 (430,000) 70,000
SBD is applied to the least of: Canadian active business income Taxable income Business limit Least amount 127) Chapter 12 – Correct answer is A … see below Least of: (i): Canadian investment income 52,000 Foreign investment income
48,000
Total AII X 30 & 2/3 %
100,000 30.67% 30,667
less: non-business foreign tax credit less: 8% X foreign investment income
-
180,000 300,000 70,000 70,000
30,667
(i) (ii): Taxable income Less: amount eligible for SBD 100/38.67 X non-business foreign tax credit 4 X business foreign tax credit Subtotal X 30 & 2/3 % (ii)
350,000 (250,000) 100,000 30.67% 30,667
(iii): Part I tax on investment income: Total AII X 50 & 2/3%
100,000 50.67% 50,667
128) Chapter 12 – Correct answer is B, calculated as follows: Least of: (1): Net income for tax purposes Less: taxable capital gain
(2): Net income for tax purposes Less: charitable donations Taxable income (3): Business limit Less: allocation to Bryan's
Least amount SBD rate
360,000 (4,000) 356,000
360,000 (5,000) 355,000
500,000 (150,000) 350,000 350,000 19% 66,500
129) Chapter 12 – Correct answer is D, calculated as follows: Income subject to Part IV Tax Non-capital losses Farm losses Part IV Tax rate
40,000 (8,000) (4,000) 28,000 38.33%
10,733 130) Chapter 12 - (D) is correct. SGT and TT are associated through a common third corporation, MGT. If MGT elects for the deemed association rule to not apply, then MGT's small business deduction will be nil. With this election, SGT and TT will each keep their full $500,000 small business deduction. 131) Chapter 12 (C) is correct. Renn Ltd. is connected with Doug Ltd. because Renn Ltd. owns greater than 10% of the common shares of Doug Ltd. 132) Chapter 12 (B) is correct. Amanda is related to JTG Ltd. because she is married to the person who controls JTG Ltd. 133) Chapter 12 (A) is correct. See calculations. GRIP - opening balance Income taxed at high rate (900,000 - 500,000) Rate Eligible dividends Total GRIP additions GRIP - closing balance (opening + additions)
50,000 400,000 72% 288,000 30,000 318,000 368,000
134) Chapter 13 (B) is correct. Although bona fide arrangements were made, Kevin is a specified employee, the loan was not for any particular purpose, and he received the loan by virtue of his shareholdings. Therefore, he does not meet the requirements for exclusion from income. 135) Chapter 14 (B) is correct. Later of: Mailing date on the notice of assessment plus 90 days and the tax return filing due date + 1 year. 136) Chapter 14 (C) is correct. The statement in (c) is not correct because the normal reassessment period ended on June 30, 2022 (three years after the original mailing date of the first notice of assessment on June 30, 2019). 137) Chapter 19 (D) is correct. The trust is a testamentary trust that can designate itself as a graduated rate estate for up to 36 months after the date of death. 138) Chapter 19 (A) is correct because the trust will include the dividends in its income. No income was paid or payable to the beneficiary and therefore, a dividend tax credit can be claimed. 139) Chapter 21 (B) is the only correct statement. The employer must be a registrant for the employee to receive a GST rebate.
Part 2 This file includes all the MCQ Questions by Chapter. It includes the Dynamic questions as well as those that are theory based. Solutions are in a separate file.
Chapter 2
Question 1 X Ltd. is a corporation which has always been managed by the same Board of Directors. The Board of Directors has always met where the directors reside. Based on these facts, X Ltd. will NOT be resident in Canada for income tax purposes if X Ltd. was: (A) incorporated in Canada in 1968 and its directors are all U.S. residents; (B) incorporated in the U.S. in 1970 and its directors are all U.S. residents; (C) incorporated in the U.S. in 1968 and its directors are all Canadian residents; (D) incorporated in Canada in 1964 and its directors are all Canadian residents.
Question 2 Joe is legally separated from his wife and has two adult children who live with his wife and are not dependent on him for support. Joe is leaving Canada to take a job in Germany on June 30 of this year. He plans to stay in Germany indefinitely and has purchased a home there. Which one of the following things is the most important for Joe to do to help ensure that he is not a resident of Canada for Canadian income tax purposes after he leaves? (A) Take his wife and children with him to Germany. (B) Give up his Canadian citizenship. (C) Sell his Canadian home or rent it under a long-term lease. (D) Put all his household furniture and personal effects into storage in Canada.
Question 3 (dynamic) Mr. Ng is not a resident of Canada. In the year, he had worldwide income of $250,000, including $70,000 of employment income earned in Canada (from director’s fees) and $20,000 of interest on Government of Canada bonds. What amount of taxable income must Mr. Ng report on his Canadian personal income tax return for the year? (A) $20,000 (B) $70,000 (C) $90,000 (D) $250,000
Question 4 (dynamic) Jay ceased to be a resident of Canada on April 30 of the year and moved to New Zealand on that date. During the first four months of the year, he earned $ 25,000 of employment income in Canada and $ 1,000 of interest income from his bank accounts in Canada. While living in New Zealand during the remainder of the year, he earned $ 30,000 (Cdn. $) of employment income in New Zealand and received $2,000 of interest income from his Canadian bank accounts. What amount of taxable income must Jay report on his Canadian personal income tax return for the year? (A) $58,000 (B) $56,000 (C) $26,000 (D) $nil
Question 5 Mr. A was born in Canada and has lived in Canada all of his life. On November 1st of the current year, he was transferred by his employer to Brussels, Belgium. There is no plan for him to return to Canada in the foreseeable future. He is not married and has no children. For the current year, Mr. A’s Canadian residence status for tax purposes is most accurately described as: (A) non-resident. (B) resident by virtue of common-law. (C) deemed resident. (D) part-time resident.
Question 6 Mrs. Bee was born in Florence, Italy. She was married for several years to Mr. Cee and resided with him in the family home in Waterloo, Ontario, Canada. Three years ago, Mrs. Bee and Mr. Cee were divorced and she moved back to Florence at that time, where she continues to reside and own a home. During the current year, Mrs. Bee spent the full months of February through April and the full months of August through November in Canada, assisting a friend of hers who was ill. She resided at the friend’s home during her time in Canada. Mrs. Bee’s Canadian residence status for tax purposes, under the provisions of the Income Tax Act, for the current year is most accurately described as: (A) non-resident. (B) resident by virtue of common law. (C) deemed resident. (D) part-time resident.
Question 7 Miss Dey is employed by an engineering consulting firm, with its head office in Mississauga, Ontario, Canada. She rents an apartment near her employer’s office. She is single and has no children. During the current year, Miss Dey’s employer asked her to take on a project for the company in Alaska, USA. She moved to Alaska on February 1st. She is uncertain when she will be moving back to Mississauga, but it will be some time prior to the end of next year. She is maintaining her apartment and has sublet it to a friend. Miss Dey’s Canadian residence status for tax purposes, under the provisions of the Income Tax Act, for the current year is most accurately described as: (A) non-resident. (B) resident by virtue of common law. (C) deemed resident. (D) part-time resident.
Question 8 Mr. E moved from Buffalo, New York, USA to Vancouver, British Columbia, Canada on May 27th of the current year. He commenced employment in Canada on May 28th. He lived in a hotel until he took possession of his new home in Vancouver on June 1st. His wife and children accompanied him to Canada at the end of the school year in June. Mr. E had no income from Canadian sources prior to moving to Canada. For the current year, Mr. E is taxable in Canada on: (A) his Canadian source employment income from May 28th to the end of the year. (B) his Canadian source income from all sources from May 28th to the end of the year. (C) his worldwide income from all sources from May 28th to the end of the year. (D) his worldwide income from all sources for the entire year.
Question 9 Corporation F was incorporated in Edmonton, Alberta ten years ago. The corporation has never carried on business in Canada and the Board of Directors all reside outside of Canada and hold Board of Director’s meetings in Las Vegas, Nevada, USA. The Canadian residence status of F, under the provisions of the Income Tax Act, is best described as: (A) deemed resident by virtue of incorporation.
(B) deemed resident by virtue of common law. (C) part-time resident. (D) non-resident.
Question 10 Gee Limited was incorporated in Raleigh, North Carolina, USA in 1959. Its head office is located in North Carolina. Gee Limited is 100% owned by a company incorporated in Canada. Gee Limited’s Board of Directors does have some individuals who are resident in Canada, but all management decisions related to Gee Limited are made by a management group at the head office in North Carolina. Meetings of the Board of Directors are held in North Carolina. The Canadian residence status of Gee Limited, for the current year, under the provisions of the Income Tax Act, is best described as: (A) deemed resident by virtue of incorporation. (B) deemed resident by virtue of common law. (C) part-time resident. (D) non-resident.
Question 11 In which of the following situations is the person considered a non-resident of Canada for Canadian income tax purposes in the year in question? (A) James Hill, a 25-year-old engineer living in Ottawa, accepted a six-month transfer to an office in London, England for the period July 1 to December 31, of the year in question. He returned to Canada in the following year. James is not married and has always lived at his parents’ house in Ottawa. (B) Judy Gordon, a financial analyst, lives in a house she owns in London, England. She had lived in Toronto all her life, until she started a minimum three-year contract with CS Services Inc., which started in July of the year in question. Judy is single and terminated the lease on her apartment in Toronto before moving her belongings to England when her position started in July. (C) ERT Limited was incorporated in Canada in 1988 and, until recently, its manufacturing plant was located in Ontario. In June of the year in question, it moved all of its operations, including the manufacturing plant, to Mexico. (D) Doug Stewart, a member of the Canadian Armed Forces, has been stationed in Germany for the last 5 years, including the year in question. Doug was born in Canada and lived in Canada prior to moving to Germany.
Chapter 3 Question 1 (dynamic) This year, Bob’s employer provided him with an employer-owned automobile costing $55,000 (including HST) for 12 months. His kilometres for personal use were 14,000 out of a total of 19,000 kilometres. Operating costs paid by his employer during this year were $ 3,700 (including HST). Which one of the following statements is TRUE for this year? (A) Bob’s standby charge is $13,200 (B) Bob’s minimum operating cost benefit is $2,726 (C) Bob’s minimum operating cost benefit is $6,600 (D) Bob can elect to use 1/2 of his standby charge as his operating cost benefit
Question 2 (dynamic)
This year, Mary earned a $ 50,000 annual salary as a computer repair person and received a total yearly car allowance of $3,500. The car allowance was paid to her monthly and was not based on the number of kilometres that she drove. Her employment-related expenses (all reasonable) were: Automobile expenses (gas, parking, CCA) Entertainment What is Mary’s minimum employment income for the year?
$3,000 $2,000
(A) $53,500 (B) $50,500 (C) $49.500 (D) $49,000
Question 3(dynamic) Susanne Denholm is employed as a provincial payroll tax auditor and is required by contract to maintain an office in her home. Susanne works at home most of the time and has been provided with a laptop computer and a fireproof audit bag for her files. She has not been provided with any reimbursement or allowance in connection with her home office, which occupies 10% of the square footage of her home. She incurred the following costs to maintain her entire home this year: Telephone (general line)* $ 600 House insurance 2,000 Property taxes 4,000 Heat, hydro, & maintenance 5,000 Mortgage interest 24,000 * Susanne estimates that she used her telephone 50% for employment purposes during the year. What is the maximum amount that Susanne can claim for the costs she has incurred in respect of her home office? (A) $ 500 (B) $ 1,100 (C) $ 1,400 (D) $ 3,800
Question 4 (dynamic) On April 1, 2020, E Ltd. made a loan of $100,000 to Mr. Walker, a new employee of the corporation, to assist him in purchasing a residence when he moved from Quebec to commence employment in British Columbia. The loan bears interest at 2%, which is to be paid monthly. The principal of the loan is to be repaid in full on April 1, 2029. The prescribed interest rate on April 1, 2020, was 4%. Assuming that the prescribed interest rate throughout 2023 was 3% and only the interest owing on the loan is paid each month, which one of the following amounts represents the increase in Mr. Walker’s employment income in 2023 due to the loan? (A) $ 1,000 (B) $ 2,000 (C) $ 3,000 (D) $ 4,000
Question 5 (dynamic) Tanya, an employee of a Canadian public company, received an option to purchase 1,000 common shares of her employer at $30 per share in April 2023, when the shares were worth $19 per share. In December 2023, when the fair market value was $40 per share, she exercised her options. In January 2024, she sold all the shares for
$48 per share. Tanya wants to know what employee benefit she will have to report on her tax return in 2023. She wants to pay the lowest amount of taxes possible. (A) $ 5,000 (B) $ 18,000 (C) $ 14,000 (D) $ 10,000
Question 6 (dynamic) Tim began employment as a commissioned salesperson in July of this year and received a base salary of $60,000 and $5,000 in commissions based on sales for the year. During the year, Tim worked away from the office negotiating sales contracts. Tim is required to pay his own travelling expenses and his employer has signed a T2200 form certifying that requirement and certifying that no reimbursements are paid for any expenses Tim incurs to earn commissions. Tim incurred the following work-related costs from July through December of this year and all expenses are reasonable: Meals and entertainment for potential customers Automobile costs (90% of the following amounts were for employment purposes based on kilometres driven): Fuel Insurance Repair Leasing costs for a car costing $20,000 ($500 per month)
$14,000 4,000 750 2,250 3,000
What is the maximum deduction Tim may claim for employment expenses for the year? (A) $ 5,000 (B) $ 9,000 (C) $ 14,000 (D) $ 16,000
Question 7 Which ONE of the following is NOT taxable employment income for an employee for the current year? (A) Commission received by a salesperson on sales made in the year. (B) Cash gratuities (“tips”) received in the year (C) A bonus payable to the employee six months after the end of the year for services performed in the year (D) An advance on an employee’s January pay for the following year, received in December of the current year
Question 8 Which ONE of the following is NOT taxable as employment income if received by an employee. (A) Payment by the employer of the employee’s tuition for an MBA degree to allow the employee to develop skills to be promoted to upper management (B) Golf clubs received from a customer in appreciation for excellent customer service (C) Use of the employer-owned condominium in Florida for the employee and her family for one week for a personal family vacation, at no cost (D) Shares in the employer corporation
Question 9
Ms. Zee received the following benefits from her employer in the current calendar year. Benefit A non-cash gift for the birth of her first child A watch, in recognition of five years of service with the employer; this was her first ever long service award from her employer Reimbursement of fitness equipment purchased for use by Ms. Zee at her own home Subsidized meals in the company cafeteria; employees pay only the cost to the employer of providing the meals
Value $ 675 750 1,200 950
The taxable employment income to Ms. Zee, from the above benefits, for the current year is: (A) $1,375 (B) $1,625 (C) $2,125 (D) $2,625
Question 10 Mr. W received the following benefits from his employer, in the current year, in addition to an annual salary of $50,000. Employer-paid premium for group term life insurance coverage $500 Employer contribution to registered pension plan 10,000 Employer-paid private health insurance premiums 1,600 Employer-paid personal income tax return preparation 400 What is Mr. W’s taxable income from employment, for the current year? (A) $50,000 (B) $50,500 (C) $50,900 (D) $61,600
Question 11 On January 1st of the current year, Mrs. X was provided with a company-owned automobile for her use. She drove the car 1600 kilometres per month for employment-related driving and 400 kilometres per month for personal use. The automobile was purchased by her employer for $32,000 + HST (13%) of $4,160 for a total purchase price of $36,160. Mrs. X is responsible for all of the costs of operating the car, including insurance. What is the standby charge, rounded to the nearest dollar, to Mrs. X for the current year in respect of this automobile? (A) $1,536 (B) $1,736 (C) $1,934 (D) $2,082
Question 12 Mr. Why is considering an offer of employment that will involve him selling his current home to move to a new city. He will realize an economic loss of approximately $25,000 on the sale of his home. If his new employer agrees to reimburse him for the loss on the sale of his home, what would be the taxable benefit to him for the year in which the reimbursement is received? (A) $5,000 (B) $10,000
(C) $12,500 (D) $25,000
Question 13 Which ONE of the following criteria is relevant in determining whether an allowance received by an employee for the use of an automobile for employment purposes is taxable to the employee? (A) The allowance exceeds a legislated per kilometre threshold amount (B) The allowance is paid on a monthly basis (C) The allowance is part of the employee’s contract of employment (D) The allowance is calculated based on actual kilometres driven for employment
Question 14 Which ONE of the following is deductible in computing employment income if paid by an employee earning commission income? (A) Parking at the employer’s place of business (B) Rental of a laptop computer used to carry out duties of employment (C) Cost of home telephone line used 50% for personal use and 50% for employment use (D) Purchase price of a cellular phone to be used for employment purposes
Chapter 4 Question 1 Which one of the following items is NOT deductible in computing the income of a corporation under Division B of the Act? (A) Amounts paid for landscaping business premises. (B) Interest on money borrowed to finance the purchase of a factory for use in its business. (C) The premium on a $100,000 term life insurance policy on an employee if the beneficiary of the policy is the employee’s family. (D) Interest and penalties on late income tax payments.
Question 2 Which one of the following amounts is DEDUCTIBLE in computing the income of a corporation under Division B of the Act? (A) $11,000 of accrued legal fees for a pending lawsuit. The accrual is an estimate because no work has been done to date by the lawyers. (B) $4,000 of donations to registered charities made for no business reason. (C) $15,000 spent on three social events in the taxation year for all employees at a particular location. (D) $1,500 for golf club membership dues for employees.
Question 3 Which one of the following amounts is DEDUCTIBLE in computing income of a corporation under Division B of the Act? (A) $5,000 of donations to federal political parties. (B) $44,000 in accrued bonuses unpaid 7 months after year end. The amounts were legal liabilities at year end. (C) A $10,000 increase in the financial accounting reserve for warranty expenses. (D) The $2,000 cost of tickets for meals and entertainment at a gala fundraising event for a registered charity.
Question 4 (dynamic question) XYZ Ltd.’s current financial statement shows a deduction for $26,000 of legal and accounting expenses. This amount consists of the following items: • $6,000 of legal expenses related to the purchase of an investment in shares; • $7,000 of legal expenses incurred to dispute a tax assessment; • $6,000 of legal expenses related to the issuance of debt; and • $7,000 of accounting fees related to the preparation of a prospectus regarding the issuance of shares. What amount is deductible under Division B of the Act? (A) $9,600 (B) $10,800 (C) $19,000 (D) $7,000
Question 5 Ten years ago, Sam, a real estate agent, purchased a piece of land for $50,000. His intention at that time was to build a rental building on the land and use it to earn rental income, which he did four years ago. In the current year, he sold the land and building for $100,000 and $80,000 respectively after receiving an unsolicited offer. Based on the facts, which one of the following statements is true? (A) The CRA may argue that the gain on the sale of the land is a capital gain, because Sam is a real estate agent. (B) The CRA may argue that the gain on the sale of the land is business income, because of the 10-year holding period of the land. (C) The CRA may argue that the gain on the sale of the land is business income because of the unsolicited offer for sale. (D) The gain on the sale of the land will likely be treated as a capital gain for income tax purposes.
Question 6 Which of the following amounts is DEDUCTIBLE in computing the income of a corporation under Division B of the Act? (A) $13,000 of legal fees to defend a lawsuit brought by a customer. (B) Accounting loss on the sale of a capital property. (C) The principal amount of a mortgage on a company’s warehouse. (D) The personal and living expenses of the shareholder who works very hard in the business and is not paid a salary.
Chapter 5 Question 1(dynamic) X Ltd., a public company, purchased a $50,000 (GST/HST excluded) passenger vehicle in 2023. X Ltd. is a GST registrant. What is the maximum amount that X Ltd. may claim as capital cost allowance for the vehicle in 2023?
(A) $22,500 (B) $10,800 (C) $16,200 (D) $17,010
Question 2 (dynamic) R Ltd., a public company, owns a restaurant business which it carries on in rented premises. R Ltd. redecorated and renovated in 2023 and made $80,000 of leasehold improvements. The lease expires on December 31, 2027 (five years) and has two successive renewal options of three years each. Assuming that R Ltd. has a December 31 year-end, what is the maximum CCA that R Ltd. can claim in 2023 in respect of these improvements? (A) $15,000 (B) $16,000 (C) $10,000 (D) $24,000
Question 3 (dynamic) In the year, ABC Ltd., a public company, purchased goodwill relating to a business for $100,000. Assuming ABC Limited has no other depreciable property, what is the maximum CCA that ABC Ltd. can claim for this goodwill in the year? (A) $ 7,500 (B) $ 7,275 (C) $ 5,000 (D) $ 2,500
Question 4 (dynamic) On January 1, 2022, ABC Ltd., a public company, signed a six-year lease for retail space for a store. The lease expires on December 31, 2027 and has two successive renewal options for two years each. In 2023, ABC Ltd. made $60,000 of leasehold improvements to this space. Assuming that ABC Ltd. has a December 31 year end, what is the maximum capital cost allowance claim that ABC Ltd. can make in 2023 in respect of these improvements? (A) $15,000 (B) $12,857 (C) $18,000 (D) $ 8,571
Question 5 (dynamic) During the year, Swiss Restaurants, a public company, purchased the following assets for its restaurant and catering business: Moulds for fancy chocolate items ($300 each) An accounting program (computer software) Linens for tables in the restaurants Cutlery, dishes, and kitchen utensils costing less than $500 each What is the maximum CCA claim for these assets? (A) $ 8,600
$ 1,200 600 400 15,000
(B) $ 16,300 (C) $ 25,800 (D) $ 17,200
Question 6 The new controller of a pharmaceutical company, a public company, has asked you how the legal costs to obtain a 20-year patent on a new drug are treated for tax purposes. Which one of the following options is not available? (A) include in Class 14 (B) include in Class 44 (C) deduct in the year incurred (D) include in Class 14.1
Question 7 On October 1st of the current year, J Limited, a public company, purchased all of the assets of K Limited. One of the assets purchased was goodwill of K Limited, valued at $50,000. What is the maximum amount of capital cost allowance (CCA) that J Limited can claim in respect of the purchase of goodwill in the year, assuming that this is the first asset in the appropriate CCA class? Ignore the effects of leap year. (A) $1,250 (B) $1,875 (C) $2,500 (D) $3,750
Question 8 On April 1st of the current year, M Limited, a public company, paid $20,000 for a license to manufacture widgets. The license has a 4-year limited life. Assuming M Limited has a December 31, year-end, what is the maximum amount of capital cost allowance (CCA) that M Limited can claim in the current year in respect of this license. Ignore the effects of leap year. (A) $3,767 (B) $5,000 (C) $5,650 (D) $7,500
Question 9 N Limited, a CCPC, produces automobile parts using moulds that it purchases from a third party. On December 1st of the current year, N Limited paid $160,000 for two new moulds. Assuming that there are no other transactions in the appropriate capital cost allowance (CCA) class for the current year, what is the maximum amount of CCA that N Limited can claim in the current year in respect of the purchase of the new moulds? (A) $48,000 (B) $240,000 (C) $80,000 (D) $160,000
Question 10
P Limited, a public company, is in the restaurant business. On March 1st of the current year, as part of a makeover of its image, it purchased new china (plates and bowls) for $5,000, cutlery for $1,500 and tableware (tablecloths and cloth serviettes) for $3,500. The previous china, cutlery and tableware was purchased three years ago and was disposed of in the current year for no proceeds. Assuming that these are the only transactions in the appropriate capital cost allowance (CCA) class for the year, what is the maximum CCA that can be claimed in respect of these expenditures? (A) $10,000 (B) $7,500 (C) 15,000 (D) $5,000
Question 11 R Limited, a public company, commenced operations on November 1st of the current year. R Limited will have an October 31 year end. R Limited purchased the following computer and computer-related items for use in the business. Laptop computer Microsoft operating system for laptop computer Microsoft office 365 (applications software) annual subscription fee (for 12 months) Various other applications software programs
$2,200 300 100 600
Which ONE statement below most accurately describes the maximum tax deduction allowed for the current year on the above purchases? (A) CCA of $2,062 on the laptop and related operating system; a deductible business expense of $100 for the annual subscription to Microsoft Office 365 and CCA of $600 on the various other applications software (B) CCA of $1,815 on the laptop computer, a deductible business expense of $100 for the annual subscription to Microsoft Office 365 and CCA of $900 on the operating system and other applications software combined (C) CCA of $750 on the laptop and related operating system combined and CCA of $350 on the applications software (Microsoft office and other applications combined) (D) CCA of $375 on the laptop and related operating system and CCA of $350 on the applications software (Microsoft office and other applications combined)
Chapter 6 Question 1 (dynamic) Max is planning to invest in preferred shares of a friend’s Canadian-controlled private corporation, which are paying a $12,000 dividend per year from income taxable at the low corporate rate. Assuming that Max is in the top federal tax bracket (33%) and that the provincial tax on income rate in his province is 17%, how much income tax will Max pay on this dividend income? Assume that the combined federal and provincial dividend tax credit is equal to the dividend gross-up. (A) $2,754 (B) $5,100 (C) $6,900 (D) $6,000
Question 2 (dynamic) Wendy Jang owns three rental buildings. All of the buildings are in Class 1.
Property 1
Property 2
Property 3
Original cost
$120,000
$80,000
$150,000
UCC at Jan. 1
$100,000
$75,000
$150,000
Rental revenue for the year
$58,000
$22,000
$20,000
Interest Property taxes
$20,000 $13,000
$10,000 $6,000
$8,000 $11,000
Other
$17,000
$4,000
$1,000
Expenses for the year:
What is the maximum CCA that Wendy Jang can claim on the rental properties for the year? (A) $13,000 (B) $10,000 (C) $ 7,000 (D) $ 6,500
Question 3 Which of the following items is DEDUCTIBLE by Canadian taxpayers in the computation of income from business or property in Subdivision b of Division B of the Act? (A) Commissions paid on the purchase of an investment in common shares. (B) The premium paid on a $100,000 term life insurance policy on the taxpayer’s life which is required as collateral for a $100,000 bank loan used to purchase a $100,000 investment in common shares. (C) Interest expenses on a loan to invest in a registered retirement savings plan. (D) Commissions paid on the sale of an investment in common shares.
Question 4 (dynamic) During the year, Mike received two cheques, one in the amount of C$20,000, the other in the amount of C$8,500. The $20,000 cheque was a dividend from business income taxed at the low corporate rate of a Canadian-controlled private corporation. The $8,500 cheque was a dividend from a foreign corporation, net of the $1,500 of foreign tax withheld by the foreign country from the dividend payment. Which of the following amounts must Mike include in his income for Canadian income tax purposes in respect of these two dividend cheques? (A) $20,000 (B) $28,500 (C) $30,000 (D) $33,000
Question 5 Mr. J had the following sources of interest income in the current year. Mr. J follows the cash method of reporting his personal interest income and has correctly reported interest income for all prior years on all of his investments. Personal Savings account – interest received Prior year income tax refund – interest received 1-year guaranteed investment certificate – interest accrued to December 31st 3-year guaranteed investment certificate – interest received
$515 185 117 3,153
The 1-year guaranteed investment certificate was purchased on September 1st of the current year for $10,000. The interest rate is 3.5% to be paid on maturity on August 31st next year. The 3-year guaranteed investment certificate was purchased on July 1st 3 years ago and matured on June 30th of the current year. The investment was for $20,000 with a 5% annual interest rate. The interest compounded annually and was payable only on maturity. What is Mr. J’s taxable interest income for the current year, rounded to the nearest dollar? (A) $ 700 (B) $ 1,803 (C) $ 1,700 (D) $ 3,853
Question 6 Mrs. V paid the following expenditures in the current year. Interest on line of credit ($20,000 outstanding for the entire year) Investment management fees for her registered retirement savings plan Investment management fees for her non-registered investments Legal fees related to the acquisition of a rental property
$1,000 6,000 800 1,200
The line of credit is mostly for the purchase of non-registered investments, made several years ago. All of the investments are still owned. However, $5,000 of the total outstanding principal was used to renovate her home last year. The rental property was purchased late in the year. No rental income was received in the year. What is the total amount that she can deduct on her personal income tax return for the current year, in respect of these expenditures? (A) $ 1,550 (B) $ 1,800 (C) $ 2,750 (D) $ 3,000
Chapter 7 Question 1 (dynamic) During the year, Mina sold the following personal assets, all of which she had acquired within the last 10 years. Cost
Proceeds
$20,000
$18,000
$600
$1,500
Painting
$600
$1,300
Jewellery
$1,400
$200
Automobile Boat
Her capital gain for the year from these dispositions is: (A) $ 900 (B) $ 800 (C) $ 500
(D) $ 400
Question 2 (dynamic) Amanda sold her cottage for $130,000 in May 2023. The cottage cost her $50,000 in 2016 and qualifies as a principal residence. The only other principal residence that Amanda has owned during her lifetime was her Toronto home, which she owned from 2014 to 2022. Even though she sold it for $200,000 more than it cost, the net taxable capital gain reported on her 2022 tax return was $0 (nil) because it was her principal residence. What is the minimum taxable capital gain that Amanda must report on her 2023 tax return in respect of the sale of the cottage? (A) $ 80,000 (B) $ 25,000 (C) $ 30,000 (D) $ 50,000
Question 3 Gary Chin purchased his first and only principal residence in 2006 for $350,000. The residence was in Toronto, and when he was transferred to Windsor because of a promotion to managing partner in 2017, he rented the residence. The residence was worth $550,000 in 2017 and he elected to be deemed not to have changed the use of the residence pursuant to subsection 45(2) of the Act. Gary rented an apartment in Windsor with the expectation of moving back into his Toronto residence on retirement. On January 1, 2023, Gary received an unsolicited offer of $850,000 for the Toronto residence which he accepted. Which of the following is a true statement? (A) There is no taxable capital gain to report in 2017 or 2023 in respect of the principal residence. (B) There is no capital gain to report in 2017 in respect of the principal residence. The taxable capital gain is $13,889 in 2023 in respect of the principal residence. (C) The taxable capital gain is $100,000 in 2017 and $150,000 in 2023 in respect of the principal residence. (D) The taxable capital gain is $250,000 in 2023 in respect of the principal residence.
Question 4 (dynamic) A Canadian resident individual received a stock dividend from a public corporation of one share. The dividend is a taxable dividend. The stock dividend resulted in an increase in the paid-up capital of $4 for each share issued but the fair market value of each share is $10. Which of the following statements is correct about the stock dividend received? (A) The cost of the stock is deemed to be $4 and the individual’s net income increases by $4. (B) The cost of the stock is deemed to be $4 and the individual’s net income increases by $5.52. (C) The cost of the stock is deemed to be $10 and the individual’s net income increases by $10. (D) The cost of the stock is deemed to be $10 and the individual’s net income increases by $13.8.
Question 5 (dynamic) Donna Jailal has provided you with the following information in connection with her income tax return for the year: Capital Gains: Shares $ 1,600 Personal-use property 700 Listed personal property 500 Capital Losses:
Shares Personal-use property Listed personal property Listed personal property losses from the previous year
$ 820 1,000 140 100
What is the minimum net taxable capital gain that she must report as Division B income for the year? (A) $ 370 (B) $ 740 (C) $ 870 (D) $ 920
Question 6 (dynamic) On April 1 of this year, X Ltd., with a December 31 year-end, sold a parcel of land, a capital property with an adjusted cost base of $100,000, for $600,000. The $600,000 proceeds were payable in the form of a mortgage, with principal payments of $90,000 due every six months, starting on October 1 of this year, until the full proceeds are paid in full. What is the minimum taxable capital gain that X Ltd. must report in the current year? (A) $100,000 (B) $ 50,000 (C) $ 75,000 (D) $ 37,500
Question 7 Mega Ltd., which has a May 31 year end, had its land and building expropriated on June 30, 2023, and received $1 million of compensation from the government for the expropriation. Which one of the following is the deadline for Mega Ltd. to replace the property with another property costing at least $1 million in order to defer the entire recapture and capital gain on the disposition of the expropriated property? (A) On or before May 31, 2025. (B) On or before June 30, 2025. (C) On or before December 31, 2025. (D) On or before May 31, 2026.
Question 8 Steve is the proprietor of a sporting goods retail business. By chance, he discovered on the Internet a used motor boat for sale for $4,000 — a bargain price. He purchased the motor boat and immediately sold it for a profit of $3,000. He did not use the boat. Which of the following best describes the tax treatment of this transaction? (A) The motor boat purchase is an investment, and the sale results in a taxable capital gain. (B) The motor boat purchase is an investment, and the sale results in property income. (C) The motor boat purchase is an adventure or concern in the nature of trade, and the sale results in business income. (D) The motor boat purchase is an adventure or concern in the nature of trade, and the sale results in a taxable capital gain.
Question 9 (dynamic) Frames Inc., a public company, had a warehouse where it stored its inventory of picture frames, but a fire destroyed the Class 1 building in September 2022. The original cost of the building was $800,000 and the UCC value at the time was $540,000. The insurance company decided the building was a write-off and paid Frames Inc. $850,000 for the building in October 2023. Frames Inc. paid $950,000 to construct a new building by
November 2023. What is the UCC of the building before CCA to Frames Inc. for its taxation year ended December 31, 2023, assuming they wish to minimize tax? (A) $640,000 (B) $690,000 (C) $950,000 (D) $900,000
Question 10 (dynamic) Gloria owned a non-residential building, purchased in 2021, the original cost of which was $400,000, plus $150,000 for the cost of land. The UCC value of the building was $360,000, and the land and building were sold for $750,000 in 2023. The split the taxpayer used between land and building was $300,000 for building and $450,000 for land. Assuming that Gloria wishes to minimize her taxes, what are the tax implications regarding the sale? (A) A capital gain of $300,000 and a terminal loss of $60,000. (B) A capital gain of $240,000 and a terminal loss of nil. (C) A capital gain of $150,000 and a terminal loss of $60,000. (D) A capital gain of $120,000 and a terminal loss of nil.
Question 11 Ms. Es sold the following properties in the current year and has provided the related information below. Asset Personal computer Grandmother’s wedding ring Mr. Es’ stamp collection Antique piano
Proceeds Received $ 400 500 2,200 4,000
Cost paid $1,300 See below 800 1,600
Ms. Es’ grandmother’s wedding ring was given to her as a gift on the passing of her grandmother. It is estimated that it was worth $1,200 at the time she received it. What is the minimum taxable capital gain that Ms. Es must report on her tax return for the current year assuming she has no loss carry over balances of any kind as of the end of the prior year? (A) $1,550 (B) $1,700 (C) $1,800 (D) $1,900
Question 12 Mr. T paid $20,000 for 500 units in a mutual fund last year. He received a T3 reporting slip for last year showing income earned by him as set out below. All of this income was reinvested in the mutual fund. Mr. T sold the mutual fund in October of the current year for $24,000. Capital gains Eligible dividends Taxable (eligible) dividends Federal Dividend tax credit
$1,000 600 828 124
What is the taxable capital gain that Mr. T is required to report for the current year in respect of the sale of this mutual fund. (A) $1,086 (B) $1,200 (C) $1,500 (D) $2,000
Question 13 Mrs. A sold a parcel of vacant land in the current year for proceeds of $520,000. She had costs related to the sale of $20,000. The land was purchased ten years ago for $50,000. The purchaser paid Mrs. A $220,000 in December of the current year and signed a promissory note agreeing to pay $100,000 in December for each of the next 3 years until the total proceeds are paid. What is the minimum taxable capital gain that Mrs. A can report for the current year in respect of this sale? (A) $95,192 (B) $45,000 (C) $190,385 (D) $259,615
Chapter 8 Question 1 In the year, Mr. P made the following loans and gifts to family members to split income with his family members. Which one of the loans and/or gifts will result in income being attributed to Mr. P? (A) A gift of $100,000 to his son, Peter, age 21. Peter invested the money in a term deposit and earned $3,000 of interest income. (B) An interest-free loan of $100,000 to his mother-in-law, Mabel, age 81. Mabel invested the money in mutual funds and earned $12,000 of dividend income. (C) An interest-free loan of $100,000 to his daughter, Daphne, age 28. Daphne bought a cottage and used it for personal use. (D) A gift of $100,000 to his wife, Debbie. Debbie put the money in her non-interest bearing chequing account and paid all the family’s household expenses from the account. She then used $100,000 of her own money to invest in the stock market and earned $10,000 of dividend income.
Question 2 Ron Bordessa is 18 years of age. He inherited shares of Royal Roads Ltd., a private corporation, on his grandfather’s death three years ago. Which of the following statements is true? (A) Any dividend that Ron receives on these shares will be subject to the tax on split income. (B) The tax on split income does not apply to any dividends on these shares because they were inherited. (C) Any capital gains that Ron realizes on the disposition of these shares to an arm’s length person, will be subject to the tax on split income. (D) The tax on split income does not apply to any dividend on these shares because Ron has reached the age of 18.
Question 3 On December 31 of this year, Ms. Y gave her 6-year-old child some common shares of a public corporation with an adjusted cost base of $900,000 and a fair market value of $1,000,000. Which one of the following statements is TRUE? (A) The attribution rule will apply to attribute to Ms. Y any future dividends received by her child on the shares. This attribution will continue until the year in which the child becomes 18 years old. (B) The attribution rule will apply to attribute to Ms. Y any future dividends received by her child on the shares as well as any capital gains or losses if her child sells the shares. This attribution will continue until the year in which the child turns 18 years of age. (C) Ms. Y will report no gain or loss on the transfer of property this year because it is a gift. (D) Ms. Y will report a $100,000 taxable capital gain on the gift this year.
Question 4 (dynamic) Mike purchased 100 shares of Pubco (a taxable Canadian corporation and public company) in 2020 for $3.11 per share plus $39 in commissions. In 2021, Mike purchased another 100 shares of Pubco for $4 per share plus a brokerage commission of $50. On March 1, 2023, when the shares were worth $6 per share, Mike gifted half the Pubco shares to his 8-year-old son and half to his wife (no special elections were filed). What is the amount of the taxable capital gain that Mike must report in 2023? (A) $ 100 (B) $ 122 (C) $ 200 (D) $ 400
Question 5 (dynamic) Mr. Smith died on June 30 of this year and left his entire estate to his son, Mark. His executor has provided you with a list of assets and their fair market value at the date of death. List of Assets Toronto home (sole principal residence during past 23 years)
Cost
Fair Market Value
$300,000
$840,000
$50,000
$100,000
Rental property in London, Ontario —Land —Building (UCC: $2,000)
$25,000
$35,000
Mutual funds units
$12,000
$60,000
Shares of a public companies
$90,000
$100,000
What is the amount that must be included in Mr. Smith’s Division B income for the year of death? (A) $ 59,000 (B) $ 70,500 (C) $ 82,000 (D) $ 352,000
Question 6 (dynamic) Mr. T ceased to be a resident of Canada on September 1, 2023. At that date, he owned the following assets:
Year Acquired
Cost
Fair market value Sept. 1, 2023
Rental real estate in Canada
2006
$50,000
$100,000
Registered retirement savings plan
2014
$60,000
$80,000
Painting
2015
$6,000
$10,000
Shares of a public corporation (listed) resident in Canada (owns less than 1%)
2017
$10,000
$40,000
Which one of the following amounts represents Mr. T’s minimum taxable capital gain on the above assets for 2023? (A) $ 15,000 (B) $ 17,000 (C) $ 27,000 (D) $ 42,000
Question 7 Ms. Y sells a stock (adjusted cost base $900,000) to her husband for $800,000 cash (the fair market value of the stock) and elects out of the interspousal rollover. Which one of the following statements is TRUE? (A) Ms. Y will report an allowable capital loss of $50,000 which she can only deduct against taxable capital gains. (B) Ms. Y does not have a capital loss because transfers to a spouse are made for proceeds equal to adjusted cost base. (C) Ms. Y does not have a capital loss because of the superficial loss rules. (D) The attribution rule will apply to attribute to Ms. Y any future dividends received by her husband on the shares as well as any capital gains or losses if her husband sells the shares.
Chapter 9 Question 1 Max retired in 2023 and received a $100,000 retiring allowance. Max worked for his employer for the past 18 years and always contributed the maximum he could to his RRSP so he has no unused RRSP contribution room. He never belonged to a registered pension plan or a deferred profit-sharing plan during any of those years. What is the maximum amount of retiring allowance that Max can shelter from tax by transferring directly into his RRSP? (A) Nil (B) $ 27,000 (C) $ 63,000 (D) $ 100,000
Question 2 (dynamic) Ms. Assad wants to know the maximum RRSP contribution she can make in 2023 or in the first 60 days of 2024 that will be fully deductible on her 2023 tax return. The following information was taken from Ms. Assad’s 2022 tax return: Income from employment RPP contributions deducted in arriving at employment income Moving expenses Taxable spousal support received
$ 44,000 1,000 300 3,600
Pension income Real estate rental income
6,000 1,400
The pension adjustment reported by Ms. Assad’s employer for 2022 was $4,000. Ms. Assad also has a $1,000 unused RRSP deduction limit room which has carried forward from 2022. What is the maximum RRSP contribution that Ms. Assad can make in 2023 or in the first 60 days of 2024 and deduct fully on her 2023 tax return? (A) $5,748 (B) $5,000 (C) $6,000 (D) $9,000
Question 3 (dynamic) Meg and James Rashev were both employed full-time during the year. The Rashevs have four children: Joanne (age 17), Susie (age 14), and Sarah and Kelly (4-year-old twins). The Rashevs employed a nanny to look after their children and paid her $15,000 for the year. In addition, during July, Susie went to overnight camp for two weeks at a cost of $250 per week. The Rashevs’ family income is summarized below: Salary & taxable benefits Employment expenses [sec. 8] Business income: Revenue Expenses Interest income
Meg $46,000 2,800
800
James
$ 50,000 32,000 1,500
Which one of the following represents the maximum childcare deduction that can be claimed by the Rashevs in the year? (A) James can claim a deduction of $12,000 (B) Meg can claim a deduction of $15,250 (C) James can claim a deduction of $21,000 (D) James can claim a deduction of $15,250
Question 4 (dynamic) Ms. Chiu moved from Toronto to Vancouver to start a new job. She earned $50,000 from her Toronto job and $40,000 from her Vancouver job in the year of the move. Ms. Chiu incurred the following costs of moving all of which can be substantiated by receipts: Moving van to transport household effects Travelling costs—self, spouse and two children Legal fees—Vancouver house Legal fees—Toronto house Loss on sale of Toronto house Costs while waiting for Vancouver house Hotel (20 days x $100) Meals (20 days x $45) House hunting trip (prior to Vancouver move)
$5,000 3,000 900 1,100 25,000 2,000 900 800
Travelling costs consist of three meals a day for four persons over five full days, gas and other car costs, and hotel for five nights at $100 per night. The distance moved between Toronto and Vancouver was 4,430 kilometres. Which one of the following amounts represents the maximum amount that Ms. Chiu can deduct as moving expenses on her personal income tax return for the year of the move? (A) $10,900 (B) $17,067 (C) $11,700 (D) $12,900
Question 5 (dynamic) Sahar’s income for tax purposes for 2022 and 2023 is as follows: 2022 $100,000 $8,000 $3,000
2023 $110,000 $8,000 $2,000
Registered pension plan contributions under s. 8
$4,200
$4,200
Business losses Rental income (net of expenses and CCA)
$1,000 $3,200
$1,200 $3,600
Spousal support paid
$12,600
$12,000
Net income under Division B .
$90,400
$102,200
Salary Taxable benefits under sections 6 and 7 Travel expenses under section 8
Which of the following statements is correct? (A) The earned income that should be used to calculate her child care expense deduction for 2023 is $110,000. (B) The earned income that should be used to calculate her RRSP deduction for 2023 is $106,400. (C) The earned income that should be used to calculate her child care expense deduction for 2023 is $102,200. (D) The earned income that should be used to calculate her RRSP deduction for 2023 is $94,600.
Question 6 (dynamic) Natalie Doak moved 1,000 kilometres from Winnipeg, on March 1, 2023, to a new job and earned $40,000 in her new work location. Her employer reimbursed the costs of selling her old residence and purchasing her new residence. She did not receive any allowance or reimbursement in respect of the following expenses, all of which she paid in 2023: Moving van Travelling costs to move Natalie and family (four persons in all) Cost of cleaning house in new work location Cost of painting and installing new carpets and windows Cost of maintaining vacant former residence for three months until it was sold (mortgage interest and property taxes of $3,000 per month) Cost of changing address on legal documents House hunting trips for new residence
$2,600 900 100 10,000 9,000 100 3,000
Travelling costs consist of three meals a day for four persons over three full days, gas and other car costs, and hotel for two nights at $100 per night. What is the maximum amount Natalie can claim for moving expenses in 2023? (A) $25,700 (B) $16,248 (C) $12,600 (D) $ 9,288
Question 7 Ms. C has a tax-free savings account (TFSA) balance of $64,000. She has no plans to make a contribution in 2023. Prior to the current year, she has made the maximum allowable contribution every year since the plan’s inception in 2009. She is planning to withdraw $24,000 from her TFSA later this year to make a down payment on a condominium. Assuming that she makes the planned withdrawal, what will be Ms. C’s TFSA contribution limit next year? (A) $ 6,000 (B) $12,000 (C) $30,000 (D) $37,000
Chapter 10 Question 1 (dynamic) Banbury Ltd. (BL) is a Canadian-controlled private corporation (CCPC). Brad King is one of BL’s employees and deals at arm’s length with BL. On April 30, 2020, Brad was granted an option to purchase 1,000 BL shares at $2 per share. Brad exercised the stock option on June 30, 2021, when the market price was $5 per share. In December 2023, Brad sold the shares for $7 each. The fair market value of the shares on April 30, 2020, was $2.50. Which one of the following amounts represents the increase in Brad’s taxable income resulting from the above transactions? (A) $ 3,000 in 2021 and $1,000 in 2023 (B) $ 1,250 in 2021 and $1,000 in 2023 (C) $ 2,500 in 2023 (D) $ 4,000 in 2023
Question 2 (dynamic) Bob, a widower who is 65 years old, has correctly calculated his taxable income for 2023 as follows: Employment income under Subdivision a Pension income (registered pension plan) Old Age Security and Canada Pension Plans Dividends from Canadian-resident public corporations (grossed up) Interest income
$10,000 20,000 10,000 5,520 5,000 $50,520 What is the maximum amount (rounded to the nearest dollar) of federal income tax credits that Bob can claim on his 2023 tax return? (A) $4,154 (B) $3,830
(C) $4,660 (D) $4,844
Question 3 (dynamic) In 2023, Shabir Hassam attended McGill University on a full-time basis for eight months, paying tuition fees of $3,900 for that period. In April 2023, Shabir moved back to Toronto to stay with his family and worked as a waiter. Shabir earned $10,500 in wages and $1,500 in tips during the summer. His moving costs were $200 to Toronto in April 2023 and $500 to Montreal in September 2023. Shabir also received a $3,500 scholarship from McGill in September 2023. What is the maximum amount of federal personal income tax credits that Shabir can transfer to a parent in respect of his university education in 2023? (A) $ 585 (B) $ 690 (C) $ 750 (D) $ 525
Question 4 (dynamic) Kyle, who is employed by a CCPC, had the following sources of income for the year: Salary
$80,000
Dividends from Canadian-resident public corporations (amount received)
20,000
Employee stock option benefit
200,000
Capital gain
200,000
The stock option benefit relates to 50,000 shares that Kyle acquired under an employee stock option plan in January 2022 when the fair market value of the shares was $10 per share. Kyle paid $6 per share for the stock, which was the fair market value of each share at the time that the employee stock options were granted to him. He sold the stock when it was worth $14 per share. Kyle’s employer withheld $3,754 for CPP and $1,002 for EI. Kyle is married and his wife works full-time, earning a salary of $95,000. Their three children attend university. Each child has transferred the $5,000 maximum amount of tuition credit to Kyle. Based on this information, what is Kyle’s federal Part I tax for the year under the regular rules, ignoring the minimum tax rules? (A) $68,857 (B) $70,495 (C) $73,003 (D) $101,857
Question 5 (dynamic) Based on the information in Question 4, above, what is Kyle’s minimum amount of federal tax for the year under minimum tax, after deducting minimum tax credits? (A) $54,053 (B) $51,803 (C) $45,053 (D) $36,053
Chapter 11 Question 1 (dynamic) During 2023, Curran Ltd., a public corporation, has net income for tax purposes of $600,000, including $100,000 of dividends from taxable Canadian corporations and $500,000 of retailing profits. It made $200,000 of charitable donations during the year. Income earned in a province was 90%. What is Curran Ltd.’s taxable income for the year? (A) $ 600,000 (B) $ 500,000 (C) $ 400,000 (D) $ 300,000
Question 2 (dynamic) Refer to the facts given in Question 2, above. What is Curran Ltd.’s federal tax payable for the year? (A) $ 22,000 (B) $ 48,000 (C) $ 87,000 (D) $ 30,000
Question 3 Z Limited is a Canadian-controlled private corporation. In the current year, Z Limited had net income for tax purposes of $100,000. Z Limited made the following charitable contributions during the current year and has charitable donation receipts to support these amounts. •
Donation of Canadian public Securities with a cost of $10,000 and a fair market value of $16,000 to the United Way. • Cash donation of $3,000 to Canadian Cancer Society • Donation of used computer equipment to a children’s registered charity, the equipment had a UCC of $5,000 and a fair market value of $1,000 Z Limited has unused charitable donations from two years ago of $4,000. The net income for tax purposes of $100,000 has already been adjusted for the donations that were deducted in computing accounting net income. What is the maximum deduction available to Z limited in computing its taxable income for the current year, in respect of the above donations? (A) $ 18,000 (B) $ 20,000 (C) $ 23,000 (D) $ 24,000
Question 4 Why Limited is a Canadian public corporation. For the current year, Why Limited has correctly computed net income for tax purposes of $1,000,000, based on the following sources of income. Business income Taxable capital gains
$946,000 16,000
Dividends from Canadian corporations Rental income
24,000 14,000
Why Limited has net capital losses carried over from prior taxation years of $30,000. What is Why Limited’s minimum taxable income for the current year, assuming it claims all possible deductions in computing taxable income? (A) $ 946,000 (B) $ 960,000 (C) $ 970,000 (D) $ 984,000
Question 5 X Limited is a Canadian public corporation with permanent establishments in Ontario, Canada and Las Vegas, Nevada, USA. For the current year, X Limited has correctly determined that 25% of its taxable income is attributable to the permanent establishment in the United States. X Limited has also correctly computed its taxable income for the current year, to be $500,000. What is X Limited’s Canadian federal income tax payable for the current year? Ignore provincial corporate income taxes. (A) $ 87,500 (B) $ 125,000 (C) $ 152,500 (D) $ 190,000
Chapter 12 Question 1 (Dynamic) Concept Corp, a CCPC, correctly calculated its taxable income for its year ended December 31, 2023 as follows: Income from retailing business carried on in Canada $120,000 Loss from retailing business carried on in United States 20,000 Interest income from long-term bonds 30,000 Taxable capital gain from sale of a capital asset (considered active) 5,000 Net income 135,000 Non-capital losses carry forward (3,000) Taxable income $132,000 Concept Corp and X Ltd. are associated corporations. X Ltd. claimed a 19% small business deduction on $385,000 for 2022. The taxable capital of Concept Corp and X Ltd. is significantly less than $10 million. Which one of the following amounts is the maximum 19% small business deduction for Concept Corp for 2023? (A) $ 19,000 (B) $ 21,850 (C) $ 22,800 (D) $ 25,080
Question 2 M Ltd. provides management advisory services to ACC Ltd. and is not involved in any other business. Mr. Mud is the sole shareholder and only employee of M Ltd. Mr. Mud and his son each own 50% of the issued shares of ACC Ltd. Which one of the following statements is TRUE?
(A) If Mr. Mud would reasonably be regarded as an employee of ACC Ltd., but for the existence of M Ltd., then M Ltd. is carrying on a ‘‘personal services business’’. (B) M Ltd. is carrying on a ‘‘personal services business’’, unless it employs in the business more than five full-time employees throughout the year, which it does not. (C) M Ltd. is carrying on a ‘‘specified investment business’’. (D) M Ltd. is carrying on an ‘‘active business’’.
Question 3 (Dynamic) B Ltd. is a Canadian-controlled private corporation which distributes plastic bottles. The following information relates to its year ended December 31, 2023. Active business income earned in Canada $495,000 Net income, Division B 520,000 Taxable income 520,000 B Ltd. is not associated with any other corporation. B Ltd. did not earn any foreign business income nor any investment income. B Ltd.’s taxable capital is well below $10 million. Which of the following amounts is the maximum general rate reduction for the year ending December 31, 2023? (A) $ 2,600 (B) $ 3,250 (C) $ 52,124 (D) $ 67,600
Question 4 (Dynamic) A Ltd., a private corporation, received non-eligible dividends from B Ltd. and C Ltd. during its year ended December 31, 2023. B Ltd.
C Ltd.
Amount of dividend received by A Ltd. Percentage of shares owned by A Ltd. (votes and value)
$120,000 70%
$120,000 8%
Dividend refund received by the payer of the dividend
$40,000
$400,000
A Ltd. and C Ltd. are not related. All three are taxable Canadian corporations. Which one of the following amounts is the Part IV tax payable by A Ltd.? (A) $ 60,000 (B) $ 73,600 (C) $ 74,000 (D) $ 92,000
Question 5 Joanne owns 55% of the common shares of J Co. and Doug (her spouse) owns 55% of the common shares of D Co. Which of the following would not make J Co. and D Co. associated? (A)
If Joanne owned 25% of the common shares of D Co.
(B)
If Doug owned 25% of the common shares of J Co.
(C)
If a trust for their twin two-year-old daughters controls T Co. and no special elections were made.
(D) If J Co. and D Co. each owned 40% of the shares of R Co., a corporation carrying on a retailing business.
Question 6 In which of the following situations are X Ltd. and Y Ltd. NOT associated? (A) Rod owns 10% of voting shares of X Ltd. and 50% of the voting shares Y Ltd. and Patrick owns 60% of the voting shares of X Ltd. and 10% of the voting shares of Y Ltd. Rod and Patrick are not related. (B) The adult son of the controlling shareholder of X Ltd. controls Y Ltd. and owns 25% of the voting shares of X Ltd. (C) A mother controls Company X. Her two adult daughters each own 30% of the voting shares of Y Ltd. Her adult son owns 25% of the voting shares of Y Ltd. (D) A brother and sister each own 30% of the voting shares of Sibco Inc. A mother and father each own 20% of the shares. The mother and father each own 50% of the voting shares of Parentco Inc.
Chapter 13 Question 1 Stan owns 100% of the shares of S Ltd. that has a December 31 year end. He is also an employee of S Ltd. On January 1, 2023, S Ltd. loaned Stan $200,000 interest-free to assist him in purchasing a new home. Stan signed a promissory note for the loan. Under the terms of the note, the loan is to be repaid in five equal annual instalments commencing January 1, 2024. Such a loan is not available to other employees. Which one of the following statements is true under current tax administrative practice? (A) Stan will have $200,000 included in his income in 2023. (B) Stan will have $160,000 included in his income in 2023. (C) An imputed interest benefit will be calculated for 2023 using a rate not in excess of the rate in effect at January 1, 2023, as the loan was used to purchase a home. (D) The portion of the loan not repaid within one year of the end of the 2023 calendar year, will be included in Stan’s income in 2024.
Question 2 In 2023, S Ltd., which has a December 31 year end, made the following loans to shareholders. All of the shareholders are resident in Canada and are not related to S Ltd. or each other. This was the first time that these shareholders had received a loan or had become indebted to S. Ltd. Since S Ltd. was not in the business of lending money, it was very careful, in each case, to ensure that bona fide arrangements were made at the time the loan was made for repayment of the loan within a reasonable time. Taking all this into consideration, which one of the following loan principal amounts will be included in the borrower’s income in 2023? (A) A loan to Mrs. A, a vice-president and 20% shareholder. The loan was made to assist Mrs. A in the purchase of newly issued shares of S Ltd. The loan was made on April 1, 2023, and repaid on April 1, 2024. No other employees have received similar loans. (B) A loan made to B Ltd., a corporation which is a 20% shareholder of S Ltd. The loan was used to help B Ltd. repurchase some of its shares for cancellation and pay off a bank loan. (C) A loan to Mrs. C, a vice-president and 20% shareholder. The loan was made to assist Mrs. C in the purchase of a home. The loan was made on April 1, 2023, and will be repaid on April 1, 2025. No other employees have received similar loans. (D) A loan to Mr. D, an S Ltd. vice-president and 5% shareholder. Mr. D deals at arm’s length with S Ltd. and with all other shareholders of the corporation. The loan was made to assist Mr. D in the purchase of a home computer for employment use. Five other employees of the company currently work at home and have received similar loans. None of the other employees are shareholders. Mr. D’s loan was made on April 1, 2023, and will be repaid on April 1, 2025.
Question 3 In computing the net income on the financial statement of Fortelli Inc. for its year ended December 31, 2023, bonuses of $300,000 were accrued. On August 15, 2024, $100,000 of the bonus was paid to the ownermanager, and the remaining $200,000 of bonuses were paid to the sales staff on August 31, 2024. Which one of the following statements is true? (A) If the $100,000 bonus, due to a related party, was not paid by December 31, 2025, it would be included in Fortelli Inc.’s income in the year 2026. (B) The $100,000 bonus is not deductible in 2023, but the $200,000 bonus is deductible. (C) An election is available to deem the bonus paid and loaned back to the corporation. This election can be used if the bonuses are not going to be paid by the appropriate deadline. (D) The $300,000 bonus is not deductible in 2023.
Question 4 The Act contains a general anti-avoidance provision often referred to as the GAAR. Which one of the following statements concerning the GAAR is false? (A) The tax benefit that results from an avoidance transaction will be denied. (B) When the GAAR is applied, a penalty will be assessed, in addition to the tax owing plus interest. (C) An avoidance transaction is any transaction that results in a tax benefit, unless the transaction can reasonably be considered to have a bona fide purpose other than obtaining the tax benefit. (D) The GAAR applies to transactions that result in a misuse or abuse of the Act read as a whole.
Question 5 The general anti-avoidance provision, GAAR, is most likely to apply to which one of the following transactions? (A) As part of an estate freeze, Bill had a trust for his adult children acquire 80% of the common shares of B Ltd. Until then, Bill had owned all the shares of B Ltd., a successful grocery retail outlet. Each year B Ltd. pays dividends to the trust which are paid to the children all between the ages of 22 and 28. As university students, they have no other income and all work part time for the grocery store during the summer. (B) Sam transferred his unincorporated pizza business, on a tax-deferred basis, to a corporation, for the sole purpose of reducing tax by claiming the small business deduction. (C) Paul gave his son a gift of $10,000 and the son invested it in dividend-paying shares. His son does not pay tax on the dividend income as he is a 19-year-old student with little other income. Paul will celebrate his 65th birthday two years after his son graduates. It is anticipated that Paul will receive a birthday gift of $10,000 from his son at that time. (D) Mary owns all the shares of M Ltd., a CCPC that carries on an active business. For M Ltd.’s taxation year ended June 30, 2023, Mary accrued herself a bonus of $700,000 that reduced M Ltd.’s taxable income to $300,000.
Question 6 Ms. Prentice owns P Ltd., a Canadian-controlled private corporation with assets worth $4,000,000 and liabilities amounting to $1,000,000. 60 % of its assets are used in an active business carried on in Canada by the
corporation and 20% are used in an active business carried on in Canada by a corporation controlled by Ms. Prentice’s brother. The remaining assets (non-active business assets) earn investment income."," Which of the following is the minimum amount of non-active business assets that P Co must sell in order for its shares to qualify as shares of a small business corporation? Assume that the after-tax proceeds on the sale will be used to pay off some of the corporation’s liabilities. (A) None (B) $400,000 (C) $444,444 (D) $1,333,333
Chapter 14 Question 1 (Dynamic) Jane filed her tax return for the 2023 taxation year on September 15, 2024. She enclosed with the return a cheque for $10,000, the balance of tax owing. Neither Jane nor her husband carried on business in 2023. Jane will be assessed a late filing penalty of: (A) $ 500 (B) $ 900 (C) $ 950 (D) $1,000
Question 2 A Canadian-controlled private corporation received a notice of assessment for its taxation year ended December 31, 2023. The date of mailing on the notice of assessment was August 15, 2024. The normal reassessment period for the corporation’s 2023 taxation year ends: (A) December 31, 2026 (B) August 15, 2027 (C) December 31, 2027 (D) August 15, 2028
Question 3 Darol disagrees with the notice of assessment he received for his 2023 tax return. The date of mailing on the notice of assessment was October 16, 2024. The tax return was filed on June 15, 2024 as Darol carried on a business in 2023. The notice of objection must be filed by: (A) December 31, 2024 (B) January 14, 2025 (C) April 30, 2025 (D) June 15, 2025
Question 4 Bill was a lawyer with a very successful law practice. He died March 31, 2023. Which one of the following is the due date for his 2022 tax return? (A) April 30, 2023 (B) June 15, 2023 (C) June 30, 2023 (D) September 30, 2023
Question 5 (Dynamic)
The controller of X Ltd., a Canadian-controlled private corporation, estimates that the company’s taxes payable for its year ended December 31, 2023, will be $200,000. Taxes payable for each of the previous three years was as follows: 2020—$212,000 2021—$180,000 2022—$140,000 (taxable income was $600,000) What is the minimum monthly instalment that X Ltd., which is not an eligible small CCPC, must pay for the 2023 taxation year and the due date for the final balance of tax? (A) The minimum monthly instalment is $11,667 and the due date for the final balance of tax is February 28, 2024. (B) The minimum monthly instalment is $16,667 and the due date for the final balance of tax is February 28, 2024. (C) The minimum monthly instalment is $16,667 and the due date for the final balance of tax is March 31, 2024. (D) The minimum monthly instalment is $15,000 and the due date for the final balance of tax is February 28, 2024.
Question 6 (Dynamic) Ms. Jones is a retired partner in a law firm and has taxable income of $70,000 each year from the partnership, her RRIF and her investments. She expects to pay $25,000 in tax in respect of 2023. She paid $16,400 in tax in respect of 2022 and $15,300 in respect of 2021. No tax is withheld on any of this income. Which of the following is the minimum amount that Ms. Jones should pay for her 2023 quarterly income tax instalments, in order to avoid any unnecessary interest costs? (A) 4 payments of $6,250 (B) 2 payments of $4,100 and 2 payments of $6,250 (C) 2 payments of $3,825 and 2 payments of $4,100 (D) 2 payments of $3,825 and 2 payments of $4,375
Question 7 Ms. W filed her personal income tax return for 2023, on April 30, 2024. She does not earn any self-employment income. She received a Notice of Assessment dated May 21, 2024 that confirmed her return was accepted as filed. However, she later received a Notice of Reassessment for this return, dated September 21, 2024, disallowing one of the deductions she had claimed. She disagrees with the reassessment. What is the deadline for her to file a Notice of Objection to this reassessment? (A) August 19, 2024 (B) December 20, 2024 (C) April 30, 2025 (D) May 21, 2026
Question 8 UV Limited (“UV”) is a Canadian public corporation. The accountant for UV filed its corporate income tax return for the year ended December 31, 2023 on June 30, 2024. UV received a Notice of Assessment dated August 21, 2024 confirming that the return was accepted as filed. However, UV later received a Notice of Reassessment for this return, dated September 21, 2024, disallowing one of the deductions it had claimed. UV disagrees with the reassessment. What is the deadline for UV to file a Notice of Objection to this reassessment? (A) November 19, 2024
(B) December 20, 2024 (C) June 30, 2025 (D) August 21, 2028
Question 9 Mrs. T passed away on March 24, 2023. As of the date of death, she had not yet filed her personal income tax return for 2022 (the prior year). Neither Mrs. T, nor her surviving spouse, have income from a business. What are the deadlines for Mrs. T’s 2022 and 2023 personal income tax returns? (A) 2022 is due April 30, 2023; 2023 is due April 30, 2024 (B) 2022 is due September 24, 2023; 2023 is due April 30, 2024 (C) 2022 is due April 30, 2023; 2023 is due September 24, 2023 (D) 2022 and 2023 are both due April 30, 2023
Chapter 15 Question 1 Helen acquired all of the voting shares of Lossco Inc. from a non-related individual on February 1, 2023. Lossco has always had a December 31 year end since its incorporation. Which one of the following statements is TRUE? (A) Lossco had a deemed year end February 1, 2023. (B) Lossco may select any date, within the 53-week period commencing February 1, 2023, as its new year end. (C) Lossco must continue to have a December 31 year end unless the CRA grants permission for a change. (D) Lossco had a deemed year end on January 31, 2023 and is required to keep January 31 as its year end for the future.
Question 2 (Dynamic) Jim acquired control of Smart Ltd. from an unrelated person on May 15, 2023. The following information relates to the inventory and capital assets owned by Smart Ltd. at that time. Cost
FMV
Inventory
$120,000
$100,000
Land
$200,000
$140,000
Building
$100,000
$75,000
Marketable securities
$20,000
$30,000
For its taxation year ended on May 14, 2023, Smart Ltd. is required to recognize a capital loss of: (A) $ 85,000 (B) $ 80,000 (C) $ 60,000 (D) $ 50,000
Question 3 (Dynamic) On April 1, 2023, Calm Corp purchased 72% of the voting shares of X Ltd. from an unrelated person. The tax position of the fixed assets of X Ltd. at that time is summarized below.
Cost
UCC
FMV
Automobile (Class 10)
$100,000
$42,000
$45,000
Computer equipment (Class 50)
$64,000
$38,000
$33,000
Computer software (Class 12)
$30,000
$0
$5,000
Office furniture (Class 8)
$80,000
$58,000
$48,000
The business loss of X Ltd. for the year ended March 31, 2023, will be increased by deemed CCA of: (A) $ 7,000 (B) $ 10,800 (C) $ 15,000 (D) $ 23,000
Question 4 For its year ended December 31, 2022, its first year end since its incorporation, Lakehead Co. (Lakehead) reported the following income (losses) for tax purposes.
Business loss (retailer of widgets) ............................................................... $ (20,000) Capital loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000) On January 1, 2023, Pacific Co. acquired control of Lakehead from an unrelated person and transferred its profitable gadget retailing business to Lakehead. For its year ending December 31, 2023, Lakehead is expected to have the following income/losses.
Business loss (widgets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business income (gadgets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable capital gain on sale of capital asset . . . . . . . . . . . . . . . . . . . . .
$ (3,000) 15,000 6,000
Assuming widgets and gadgets are similar products, which one of the following statements is TRUE? (A) For its year ending December 31, 2023, Lakehead will be able to deduct net capital losses of $3,000, provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023 with a reasonable expectation of profit. (B) For its year ending December 31, 2023, Lakehead will be able to deduct non-capital losses of $18,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023, with a reasonable expectation of profit. (C) For its year ending December 31, 2023, Lakehead will be able to deduct non-capital losses of $12,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023, with a reasonable expectation of profit. (D) For its year ending December 31, 2023, Lakehead will be able to deduct non-capital losses of $15,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023, with a reasonable expectation of profit.
Question 5 (Dynamic) *Moved from Chapter 13. Mrs. Boehmer, age 50, owns all the Class A common shares of a corporation which has an investment portfolio worth $500,000. The Class A shares were issued to Mrs. B on incorporation. The corporation has no other assets or liabilities and has a December 31 year end. On January 1 of the current year, Mr. Boehmer (Mrs. Boehmer’s husband), age 51, subscribed for $1,000,000 Class B non-voting preferred shares of the corporation
and paid for them in cash. The purpose of this transaction was to income-split with his wife. The corporation earned $10,000 during the year and paid a $10,000 cash dividend to Mrs. Boehmer. Assuming the prescribed rate is 3% throughout the year, what is the minimum amount of income that Mr. Boehmer must report in the year in respect of his investment in the corporation? (A) $ 10,000 (B) $ 11,600 (C) $ 15,000 (D) $ 30,000
Chapter 16 Question 1 Which one of the following statements is FALSE? (A) A capital dividend is usually received tax-free. (B) A corporation must elect to pay a capital dividend, not later than the day the dividend is paid. (C) If a private corporation has had more capital gains than capital losses and hasn’t paid any capital dividends, it will probably have a balance in its capital dividend account. (D) The payment of a capital dividend by a private corporation will trigger a dividend refund.
Question 2 (Dynamic) Mr. Andrews owned Class A special shares of Atlantis Ltd. with the following characteristics: Fair market value Cost Paid-up capital
$60,000 20,000 10,000
These shares were redeemed. Which one of the following best describes the tax consequences of the redemption to Mr. Andrews? (A) A capital gain of $40,000 (B) A dividend of $40,000 (C) A dividend of $50,000 and a capital gain of $40,000 (D) A dividend of $50,000 and a capital loss of $10,000
Question 3 (Dynamic) X Ltd. had $40,000 available for distribution to its sole shareholder, Xavier, on winding-up. The balances in the tax accounts of X Ltd. were as follows: Share capital (paid-up capital) RDTOH
$2,000 Nil
Capital dividend account
8,000
Other surplus (LRIP taxed at low CCPC rate)
30,000 $40,000
Xavier paid $1,000 for the shares of X Ltd. when he purchased them two years ago. Which one of the following statements is TRUE? (A) The winding-up can occur on a tax-deferred basis. Xavier will be able to defer the recognition of any
income for tax purposes. (B) Xavier will have dividend income of $30,000, which will be grossed-up to $34,500 for tax purposes. In addition, he will have a capital gain of $1,000. (C) Xavier will have dividend income of $30,000, which will be grossed-up to $34,500 for tax purposes. In addition, he will have a capital gain of $9,000 (D) Xavier will have a capital gain of $39,000 on the winding-up of X Ltd
Question 4 (Dynamic) Art, the sole shareholder of Art’s Variety Inc. with a November 30 year end, has decided to wind up the corporation, effective December 1. The balance sheet as at that date is anticipated to be as set out below. ASSETS Cash Non-Eligible Refundable dividend tax on hand Land, at cost (FMV, $850,000) Building, at UCC (FMV, $780,000; cost, $380,000) LIABILITIES & EQUITY Liabilities Paid-up capital Capital dividend account Other surplus
$45,000 30,000 250,000 180,000 $505,000 $ 20,000 5,000 10,000 470,000
Art’s Variety Inc. is a Canadian-controlled private corporation. It pays tax at a combined federal and provincial rate of 14% on business income in the winding-up period and 50 2/3% including the additional refundable tax on investment income. The amount available for distribution to Art on the windup will be: (A) $ 1,655,000 (B) $ 1,373,667 (C) $ 1,557,000 (D) $ 1,858,333
Question 5 (Dynamic) At the beginning of its first taxation year, Newco Ltd., a newly incorporated company, issued 100 common shares to Mr. A for $10,000. On June 1 of the same year, Newco issued an additional 100 common shares to Mr. B for $ 15,000 (which is the fair value of the shares on that date). On December 30 of the same year, Mr. C acquired all of Mr. A’s common shares for $20,000. At the end of this year (December 31), which of the following statements is true? (A) The total paid-up capital of the common shares is $25,000, 1/2 of which is attributable to each of Mr. C and Mr. B. (B) The total paid-up capital of the common shares is $35,000, 1/2 of which is attributable to each of Mr. C and Mr. B. (C) The total paid-up capital of the common shares is $25,000, $10,000 of which is attributable to Mr. C and $15,000 of which is attributable to Mr. B. (D) The total paid-up capital of the common shares is $35,000, $20,000 of which is attributable to Mr. C and $15,000 of which is attributable to Mr. B.
Question 6 C Co. is a Canadian controlled private corporation with a December 31 year end. During the year it sold all its
assets including goodwill. The goodwill was sold for fair market value: $1 million. The cost of the goodwill and the company’s Class 14.1 UCC balance was Nil. Which of the following is a correct statement? (A) C Co. will report a taxable capital gain of $500,000 and its capital dividend account will increase by $500,000. (B) C Co. will report active business income of $500,000 and its capital dividend account will increase by $500,000. (C) C Co. will report active business income of $750,000 and its capital dividend account will increase by $250,000. (D) C Co. will report a taxable capital gain of $750,000 and its refundable dividend tax on hand account will increase by $230,000.
Chapter 17 Question 1 Pauline plans to sell a depreciable asset to a corporation wholly owned by her husband. The characteristics of the assets are as follows: FMV $3,000 Capital cost 2,200 UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 Which one of the following statements is true? (A) The gain will be deferred due to the spousal rollover since the corporation is owned by Pauline’s husband. (B) Pauline should file a section 85 election and elect at $2,200 to defer the tax on the sale. (C) Pauline should file a section 85 election and elect at $800 to defer the tax on the sale. (D) If a section 85 election is not made, the capital cost and UCC of the asset to the corporation will be $3,000.
Question 2 (Dynamic) Steve plans to sell a non-depreciable asset that has a mortgage of $15,000 to S Ltd. S Ltd. is a taxable Canadian corporation. Steve owns all the shares. Steve and S Ltd. will file an election under section 85. S Ltd. will assume the mortgage. For proceeds, Steve would like to receive a non-interest bearing note for the maximum amount possible without incurring adverse tax consequences. The balance of the consideration will be in shares of S Ltd. Steve considers any tax incurred an adverse consequence. The asset has the following characteristics: FMV $ 100,000 ACB 40,000 What is the maximum amount of the note that Steve should take? (A) $ 100,000 (B) $ 85,000 (C) $ 40,000 (D) $ 25,000
Question 3 (Dynamic) Susan sold a Class 1 depreciable asset to a corporation that she controls in exchange for a non-interest bearing demand loan of $100,000 and preferred shares redeemable for $80,000 in total. Susan and the corporation filed a section 85 election electing for the transfer to take place at $120,000. The characteristics of the asset were as follows: FMV
$180,000
Capital cost 100,000 ACB 100,000 UCC 75,000 The capital cost of the asset to the corporation is: (A) $ 120,000 (B) $ 110,000 (C) $ 85,000 (D) $ 75,000
Question 4 (Dynamic) Sylvia is the sole shareholder of Strained Ltd., a taxable Canadian corporation. Sylvia transferred a nondepreciable capital property having an adjusted cost base of $40,000 and a fair market value of $50,000 to Strained Ltd. in exchange for the following package of consideration. Cash Debt Preferred shares (FMV and legal stated capital) Common shares (FMV and legal stated capital)
$ 3,000 2,000 15,000 30,000 $50,000 Sylvia and Strained Ltd. made a joint election under section 85, electing a transfer price of $40,000. The cost to Sylvia of the common shares received as consideration is: (A) $ 35,000 (B) $ 23,000 (C) $ 23,333 (D) $ 20,000
Question 5 Which one of the following is an advantage for a vendor and purchaser using a section 22 election to transfer accounts receivable rather than electing under section 85? (A) The vendor will realize a loss that may be a superficial loss. (B) The vendor will realize a loss that is a capital loss. (C) The vendor will not be required to add the prior year’s doubtful debts reserve to income. (D) The purchaser will be able to take a doubtful debts reserve on the accounts receivable.
Question 6 Rebecca transfers land to R Co and makes a joint election with R Co under section 85 of the Income Tax Act in the amount of $50,000. The land has a cost of $50,000 and a fair market of $210,000. Rebecca takes back a demand promissory note of $60,000 and redeemable, retractable preference shares worth $150,000 in value. The tax consequences of this transaction are that: (A) Rebecca is deemed to dispose of the land for proceeds of $50,000. (B) R Co.’s cost of the land is $50,000. (C) Rebecca’s cost of the preference shares is $150,000. (D) R Co.’s cost of the land is $60,000.
Question 7 P Ltd. is a profitable taxable Canadian corporation with a December 31 fiscal year end. It has a wholly owned subsidiary, L Ltd., with a June 30 fiscal year end. L Ltd. has a significant 2018 non-capital loss balance. Therefore, consideration is being given to either amalgamating P Ltd. and L Ltd. or winding up L Ltd. into P Ltd. in order to utilize the loss. The amalgamation or the winding-up will take place on November 1, 2023.
Which one of the following statements is true? (A) The newly amalgamated corporation can utilize the non-capital loss in its deemed year ended October 31, 2023. (B) The newly amalgamated corporation cannot utilize the non-capital loss until its taxation year commencing one year after the amalgamation. (C) If a winding-up takes place, P Ltd. can utilize the non-capital loss in its taxation year commencing January 1, 2024. (D) If a winding-up takes place, P Ltd. can utilize the non-capital loss in its taxation year ended December 31, 2023.
Question 8 (Dynamic) On September 1, 2020, X Ltd. acquired all the shares of Y Ltd. for $500,000. At that time, Y Ltd. had land with a fair market value of $130,000 and a cost of $100,000. On September 1, 2023, a winding-up of Y Ltd. into X Ltd. took place. At the time of the winding-up, the tax values of Y Ltd.’s assets totalled $420,000. The fair market value of the land at this time was $300,000. X Ltd. received $15,000 of dividends from Y Ltd. between September 1, 2020 and September 1, 2023. The adjusted cost base of the land after the winding-up cannot exceed: (A) $ 100,000 (B) $ 130,000 (C) $ 165,000 (D) $ 180,000
Question 9 (Dynamic) In the course of the reorganization of the capital of A Ltd., Chris exchanged all his common shares of A Ltd. (which are capital property to him) for the package of consideration outlined below. Cash Preferred shares (50 shares redeemable at $100 each))
$135 5,000 $5,135
At the time of the exchange, Chris’ common shares had an ACB of $2,000 and a FMV of $5,135. Which one of the following best describes the tax consequences to Chris as a result of the exchange? (A) Chris will have no capital gain on the disposition of his common shares and the ACB of his preferred shares is $2,000. (B) Chris will have no capital gain on the disposition of his common shares and the ACB of his preferred shares is $1,865. (C) Chris will have a capital gain of $3,135 on the disposition of his common shares and the ACB of his preferred shares is $5,135 (D) Chris will have a capital gain of $135 on the disposition of his common shares and the ACB of his preferred shares is $2,135.
Question 10 Shelly exchanged her shares of Abigail Inc., a public corporation, for shares of Clare Ltd., another public corporation, when Abigail Inc. was taken over by Clare Ltd. Her shares of Abigail Inc. had the following characteristics: FMV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000 ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 PUC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
Section 85.1 is often used in take-over situations. Which one of the following statements with respect to the rollover in this case is FALSE?
(A) When there are many diverse shareholders, a share-for-share exchange rollover is easier to accomplish than a subsection 85(1) rollover because there is no need for each shareholder to file an election. (B) The ACB of Shelly’s shares of Clare Ltd. is $7,000. (C) The ACB of the Abigail Inc. shares acquired by Clare Ltd. from Shelly is $5,000. (D) Non-share consideration, up to the PUC of the exchanged shares, $5,000, could have been received by Shelly without any adverse tax consequences to her.
Question 11 Mr. Winters owns 100% of the shares of ABC Co., a small business corporation. He would like to freeze the value of this company for tax purposes at today’s value and transfer future growth to his children without giving up control over the company. He does not want to pay tax any sooner than he has to. His will currently leaves everything to his wife. Which of the following plans will achieve his objectives? (A) His children should subscribe to common shares of a holding company and he should transfer his shares of ABC to this holding company, electing under section 85 at tax cost and taking back voting redeemable retractable preferred shares as consideration. (B) He should change his will to leave his shares of ABC to his children rather than his wife. (C) He should gift the ABC shares to his children during his lifetime. (D) He should sell the ABC shares to his children at fair market value, taking back debt as consideration.
Question 12 Which of the following techniques will allow Mr. Singh to use up his $913,630 capital gains exemption on the accrued gain on shares of a qualified small business corporation? The shares were issued to him 20 years ago for $1 and are worth $1 million now. (A) A reverse asset freeze. (B) An internal freeze, using section 86. (C) A holdco freeze, taking back boot of $1. (D) A holdco freeze, taking back boot of $913,630.
Chapter 19 Question 1 (Dynamic)
Bert & Ernie Partnership Income Statement For the year ended December 31, 2023 Income:
Consulting fees Dividends received from low-rate income of a CCPC Gain on sale of shares of taxable Canadian corporation
$300,000 $40,000 $120,000 $460,000
Expenses: Salaries to staff Capital cost allowance on equipment
$50,000 $15,000
Office rent
$10,000
Charitable donations
$20,000
Net income
$95,000 $365,000
The dividends were received from a CCPC whose income was eligible for the small business deduction. Bert and Ernie each took drawings of $30,000 in the year. Bert and Ernie share income from the partnership equally. Bert has no other source of income in 2023. Bert will have taxable income in 2023 of: (A) $ 185,500 (B) $ 182,500 (C) $ 170,100 (D) $ 165,500
Question 2 (Dynamic) On January 1, 2023, Ann and Bob formed a partnership to provide window cleaning services. The partners each contributed $5,000 and agreed that all income and losses would be shared equally. For the fiscal period January 1 to December 31, 2023, the following information is available. (1) The partnership earned income for tax purposes of $200,000. Included in this amount is a taxable capital gain of $40,000. (2) The partnership made charitable donations of $12,000. (3) Ann took draws totalling $70,000. (4) Ann contributed additional capital of $14,000 to the partnership. The adjusted cost base of Ann’s partnership interest at January 1, 2024, is: (A) $ 23,000 (B) $ 43,000 (C) $ 63,000 (D) $ 69,000
Question 3 Al Smith settled a trust in favour of his two children on May 1, 2023. He settled the trust with marketable securities worth $50,000. His adjusted cost base for the marketable securities was $20,000. Al, his wife, and a family friend were named as trustees. His two children are ages five and six. Which one of the following statements is FALSE?
(A) The tax return for the first year of the trust is due March 31, 2024. (B) The trust is entitled to a deduction in computing its income for amounts paid to the children during the year. (C) Income in the trust will be subject to a 33% federal rate of tax. (D) Al can defer the recognition of the capital gain on the transfer of the securities to the trust.
Question 4 The James Stewart family trust was created on and as a consequence of the death of James Stewart on May 1, 2023. Which one of the following statements with respect to the trust is TRUE? (A) The trust must have a December 31 year end. (B) The income in the trust will automatically be subject to the same graduated rates of tax applicable to individuals. (C) The trust return is due six months after the year end of the trust. (D) The trust is not entitled to claim a dividend tax credit for dividends received and retained in the trust.
Question 5 Which of the following types of trusts has a deemed disposition of all its assets at fair market value on the settlor’s death? (A) An inter vivos trust (B) A joint partner trust (C) An alter ego trust (D) A discretionary trust
Question 6 Which of the following is not an advantage of providing for testamentary trusts in your will for each of your children with a gift over to your grandchildren on each child’s death? (A) Income-splitting through discretionary income distributions to lower income beneficiaries. (B) Avoiding a deemed disposition of assets at fair market value on the child’s death that would result if the assets were left directly to the child. (C) Avoiding the deemed disposition of assets at fair market value on the transfer of assets to the trust on death. (D) Providing your children with beneficial ownership over their inheritances, but giving control over their inheritances to the trustees of each trust.
Question 7 Mrs. G is a partner in EFG Partnership. EFG Partnership has a December 31 year end. Mrs. G shares 25% in all income of the partnership. For the year ended December 31, 2023, EFG Partnership had the following, correctly calculated, net income for tax purposes.
Income from business Taxable capital gains Eligible dividends Capital dividends Rental income Net income for tax purposes
$240,000 6,000 1,000 2,000 44,000 $293,000
In addition to the above, EFG Partnership made donations to registered charitable organizations in Canada totaling $5,000. Assuming that Mrs. G’s only income is her share of income from EFG Partnership and assuming that she has no carry over amounts, what is Mrs. G’s taxable income for 2023? (A) $72,750 (B) $72,845 (C) $73,250 (D) $73,345
Question 8 Based on the facts in question 7, assume Mrs. G sold her interest in EFG Partnership for $450,000 on January 2, 2024. Assuming that Mrs. G’s adjusted cost base (ACB) of her partnership interest in EFG Partnership was $345,000 as of January 1, 2023, what is her taxable capital gain from the sale of her partnership interest? (A) $15,750 (B) $15,875 (C) $16,125 (D) $16,500
Question 9 Which ONE of the following qualifies as a graduated rate estate for the current year? (A) A taxpayer passed away four years ago with a large estate which is still awaiting distribution of assets. (B) A taxpayer passed away last year and the executors expect to wind up the estate and distribute the assets later this year. (C) A taxpayer passed away two years ago and, on her death, she created a trust for her granddaughter, settled with $100,000 cash from her estate. (D) A taxpayer passed away five years ago and, on his death, he created a trust for his grandson, settled with $50,000 cash from his estate.
Question 10 Which ONE of the following qualifies as a testamentary trust? (A) A taxpayer, who is alive, settled a trust for her daughter. (B) A taxpayer, who is alive, contributed $100,000 to an existing trust for her daughter. The trust had been established for her daughter, by the taxpayer’s father, on his death, two years ago. (C) A taxpayer, on her death, settled a trust for her son with $200,000 of cash from her estate. (D) A taxpayer, in her will, instructed her beneficiaries to contribute an additional $200,000 of cash from her estate to an existing trust for her grandson that she had established, with $1,000,000 of cash, prior to her death.
Question 11 Which ONE of the following qualifies as a spousal trust in the current year? (A) A taxpayer establishes a trust for his spouse and children. His spouse is to receive all of the income from the trust during the taxpayer’s lifetime. The children are not entitled to share in income during their mother’s lifetime. Upon the death of the taxpayer, the capital of the trust is to be distributed to his children. (B) A taxpayer establishes a trust for her spouse and children. The trust document states that her children are to receive all of the income from the trust during the taxpayer’s lifetime. Her spouse is not entitled to share in income during the taxpayer’s lifetime. Upon the death of the taxpayer, the capital of the trust is to be distributed to her spouse. (C) A taxpayer establishes a trust for his spouse and children. His spouse and children share equally in the income and capital of the trust. Upon the taxpayer’s death, the capital of the trust is to be distributed to his spouse. (D) A taxpayer establishes a trust for her spouse and children. Her spouse is entitled to all of the income of the trust during her spouse’s lifetime. The children are not entitled to share in income during their mother’s lifetime. Upon her spouse’s death, their two children become entitled to all of the capital of the trust.
Question 12 Which ONE of the following trusts can be settled with no tax implications to the settlor, if the trust is settled with capital property that has accrued capital gains? (A) A spousal trust (B) A graduated rate estate (C) A testamentary trust that is not a graduated rate estate (D) An inter-vivos trust that is not an alter ego trust
Chapter 20 Question 1 Jari Kitsopolous is a resident of Greece. Last year, he disposed of real estate located in Saskatchewan for a gain. Jari will pay Canadian income taxes at which of the following rates? (A) Federal tax based on the tax rate schedule plus Saskatchewan taxes. (B) Federal tax based on the tax rate schedule plus an additional federal tax. (C) Withholding tax only at 25%. (D) Withholding tax only at 331/3%.
Question 2 Prior to immigrating to Canada, Mai Kim had money on deposit in a Canadian bank and earned $1,000 interest. After taking up Canadian residence, she immediately used that deposit towards a down payment on a home. Which of the following is the correct tax treatment of the $1,000 interest earned in the year of immigration? (A) She pays a 25% non-resident tax and the interest is excluded from the Canadian tax return for the period of residency. (B) She does not pay any Canadian tax in relation to the interest. (C) The income is included in her Canadian tax return for the period of residency, but she receives a foreign tax credit for any taxes paid in her previous country of residence. (D) The income is included in her Canadian tax return for the period of residency based on a proration calculated as the number of days resident divided by 365 days.
Question 3 Antonio Sperilli immigrated to Canada from Brazil last year, but continues to be a partner in a Brazilian business. What is the correct tax treatment of any income earned from the partnership? (A) It is subject to tax only in Brazil. (B) It is included in Antonio’s Canadian income tax return, but any Brazilian taxes are deductible from the partnership income. (C) It is included in Antonio’s Canadian income tax return, but a foreign tax credit may be claimed in Antonio’s Brazilian tax return for any Canadian income taxes paid. (D) It is included in Antonio’s Canadian income tax return, and a foreign tax credit may be claimed for any Brazilian taxes paid.
Question 4 Betty Albright emigrated from Canada to the United States last year. At the time that she gave up her Canadian residence, she held an RRSP with a fair market value of $100,000. Which of the following statements is true? (A) The RRSP is taxable Canadian property and Betty will have to file a Canadian non-resident tax return when she disposes of the RRSP. (B) There is a deemed disposition of the RRSP at fair market value on emigration. (C) There will be a withholding tax at the time Betty terminates the RRSP and has it paid to her. (D) Non-resident withholding tax should be paid, at 25%, from the income earned in the RRSP after emigration.
Question 5 Maxwell Rock Ltd. is a Canadian incorporated entity with a December 31 year end. The corporation has a gravel pit operation owned and operated in Collingwood, Ontario. The company expanded operations into the United States this year through a January 15, 2023 100% acquisition of a U.S. incorporated company with gravel pits operating in Michigan. The U.S. corporation also has a mining operation in a non-designated treaty country. In the U.S. corporation’s first November 30, 2023 taxation year end since acquisition, it earned C$100,000 of after-tax business income from its Michigan operation and C$200,000 ofafter-tax business income in Paraguay. On December 15, 2023, the U.S. company paid a dividend to Maxwell Rock Ltd. of C$150,000. Which of the following statements is true? (A) Maxwell will include the C$150,000 dividend in taxable income for the year in which the dividend was received. A foreign tax credit can be claimed for the withholding tax paid to the U.S. government on the dividend. (B) Maxwell will include the C$150,000 dividend in Division B income for the year in which the dividend was received. An offsetting deduction of C$100,000 will be available for the portion of the dividend paid from exempt surplus. (C) Maxwell will include the C$150,000 dividend in Division B income for the year in which the dividend was received. An offsetting deduction will be available in computing taxable income for C$150,000 because the dividend was from exempt surplus. (D) Maxwell will include the C$150,000 dividend in Division B income for the year in which the dividend was received. A deduction will be available in computing taxable income for the underlying tax paid by the U.S. company on the business income earned in the United States and Paraguay.
Question 6 Bob Smith is a Canadian resident and owns a condominium in Arizona that he and his family use during their winter holidays. The property is left vacant the rest of the year. What is Bob’s filing obligations regarding this property?
(A) Bob is required to file Form T1135 reporting foreign property ownership. (B) Bob is exempt from filing a Form T1135 as the property is personal-use property. (C) Bob is required to file a Form T1135 only if the property has a cost of over $100,000. (D) Bob needs to file a U.S. Form 1040NR (non-resident income tax return) and declare the ownership of the property to the U.S. Internal Revenue Service.
Question 7 Jane Alison, a resident of Canada, sold $100,000 of her Canadian mutual funds and invested the funds in common shares of a newly incorporated U.S. corporation. Jane’s friend, Tori, also a Canadian resident, invested $500,000, and a third friend, a U.S. resident, invested $400,000 in common shares of the corporation. The $1 million was invested in fixed income securities with future plans to invest in U.S. stock markets. Which statement is correct regarding the interest income on the investments? (A) It will not be taxed in Canada until dividends are paid to the shareholders. A foreign tax credit will be available for the U.S. withholding tax. (B) It will not be taxed in Canada until dividends are paid to the shareholders. An offsetting deduction will be available under Division C because the dividend will be paid from taxable surplus. (C) It will not be taxed in Canada until dividends are paid to the shareholders. An offsetting deduction will be available under Division C because the dividend will be paid from exempt surplus. (D) It will be included in income of the Canadian shareholders annually because the company is a controlled foreign affiliate.
Chapter 21 Question 1 CART Ltd. is registered for HST purposes. The following is a summary of the transactions for CART Ltd. for the month of December: Account
(Net of HST) Amount
Sales (Taxable at 13%) ............................................................................................... $250,000 Exports ........................................................................................................................ . 100,000 Purchase of supplies from a registrant ......................................................................... (30,000) Salaries ......................................................................................................................... (70,000) Interest Expense ........................................................................................................... (20,000) $230,000 The HST that has to be remitted in respect of the above transaction is: (A) $ 19,500 (B) $ 26,000 (C) $ 28,600 (D) $ 39,000
Question 2 Which of the following statements is true?
(A) The following are all exempt supplies: a visit to a doctor, daycare cost for a minor child, tutoring for a course required for an undergraduate degree, basic groceries. (B) The following are all taxable supplies: a restaurant meal, sale of a sweater by a large department store, sale of tickets to a Taylor Swift concert, basic groceries. (C) The following are all exempt supplies: airfare to Toronto from Saskatoon, prescription drugs, discount on bonds, property taxes. (D) The following are all taxable supplies: royalties on a textbook, wheelchair, dividends on preferred shares, accounting fees.
Question 3 H Limited carries on a home renovation business. H Limited has the following revenues and expenses for the current quarter. H is an HST registrant in the province of Ontario (HST rate is 13%). Revenue from work done in Canada Revenue from work done in Florida, USA Salaries & wages Warehouse rent
$500,000 30,000 80,000 12,000
H Limited’s HST to be remitted to the Canada Revenue Agency for the current quarter is: (A) $53,040 (B) $58,500 (C) $63,440 (D) $65,000
Solution file for MCQs (correct answer is highlighted in yellow) Chapter 2
Question 1 (A) incorporated in Canada in 1968 and its directors are all U.S. residents; (B) incorporated in the U.S. in 1970 and its directors are all U.S. residents; (C) incorporated in the U.S. in 1968 and its directors are all Canadian residents; (D) incorporated in Canada in 1964 and its directors are all Canadian residents. Feedback: (B) is correct. Since X Ltd. is not incorporated in Canada, it is not deemed to be resident in Canada. Since the directors are not resident in Canada, X Ltd. is not resident in Canada under the common law ‘‘central management and control’’ rule. (A) is incorrect because X Ltd. is deemed to be resident. (C) is incorrect because X Ltd. is resident under the common law ‘‘central management and control’’ rule. (D) is incorrect because X Ltd. is deemed to be resident; the common law ‘‘central management and control’’ rule would also apply.
Question 2 (A) Take his wife and children with him to Germany. (B) Give up his Canadian citizenship. (C) Sell his Canadian home or rent it under a long-term lease. (D) Put all his household furniture and personal effects into storage in Canada. Feedback: (C) is correct. Generally, the CRA will consider the individual not to have severed residential ties within Canada if he has a dwelling available for occupancy. (A) is incorrect, because taking his wife and children with him to Germany is not feasible, since the couple is legally separated and the children are not dependent on him for support. (B) is incorrect, because giving up Canadian citizenship has little relevance in determining resi- dency. (D) is incorrect. Although putting all his household furniture and personal effects into storage in Canada is a residential tie, the tie is a weaker one than that cited in (C).
Question 3 (dynamic) (A) $20,000 (B) $70,000 (C) $90,000 (D) $250,000 Feedback: (B) is correct. Only the $70,000 of employment income earned in Canada would be reported on Mr. Ng’s Canadian personal income tax return for the year. (A) is incorrect. The $20,000 interest, earned by the non-resident, is not taxable under either Part I (ssec. 2(3)) or Part XIII (ssec. 212(3), ‘‘fully exempt interest’’). (C) is incorrect for the same reason as (A). (D) is incorrect, because only residents of Canada are subject to Canadian income tax on their worldwide income.
Question 4 (dynamic) (A) $58,000 (B) $56,000 (C) $26,000 (D) $nil Feedback: (C) is correct. Because Jay ceased to be a resident of Canada on April 30 of the year, only his worldwide income during the first four months of the year ($26,000 = $25,000 + $1,000) is subject to tax in Canada under Part I and would be reported on his Canadian personal income tax return for the year. (A) is incorrect as it includes income earned while not a resident of Canada: $58,000 = $25,000 + $1,000 + $30,000 + $2,000. The $30,000 of employment income earned in New Zealand and the $2,000 of Canadian interest earned from May 1 to December 31 of the year are not subject to Part I tax because Jay is not resident in Canada at that time. The $2,000 of Canadian interest is exempt from withholding tax under Part XIII. (B) is incorrect as it includes the salary earned in New Zealand: $56,000 = $25,000 + $1,000 + $30,000. As in (A), above, the $30,000 of employment income earned in New Zealand is not subject to tax in Canada. (D) is incorrect since it excludes the worldwide income earned while Jay was a resident in Canada. As discussed in (A), above, this would be reported on his Canadian personal income tax return for the year.
Question 5 (A) non-resident. (B) resident by virtue of common-law. (C) deemed resident. (D) part-time resident. Feedback: D is correct - Mr. A is ceasing residency on November 1st therefore we have a situation where the residency status is changing in the year. Mr. A would be a resident for the January 1, to November 1 period and a non-resident in the later part of the year. He would be a part-year resident in the current year. A, B, and C are incorrect see the explanation above.
Question 6 (A) non-resident. (B) resident by virtue of common law. (C) deemed resident. (D) part-time resident. Feedback: C is correct - Mrs. Bee leaves in Florence therefore would be a non-resident were it not for the sojourner rule. Since she spent a significant amount of time in Canada during the year (more than 179 days), she would be a deemed resident and would be taxed on her worldwide income. A, B and D are incorrect see the explanation above
Question 7 (A) non-resident. (B) resident by virtue of common law. (C) deemed resident. (D) part-time resident.
Question 8 (A) his Canadian source employment income from May 28th to the end of the year. (B) his Canadian source income from all sources from May 28th to the end of the year. (C) his worldwide income from all sources from May 28th to the end of the year. (D) his worldwide income from all sources for the entire year.
Question 9 (A) deemed resident by virtue of incorporation. (B) deemed resident by virtue of common law. (C) part-time resident. (D) non-resident.
Question 10 (A) deemed resident by virtue of incorporation. (B) deemed resident by virtue of common law. (C) part-time resident. (D) non-resident.
Question 11 (A) James Hill, a 25-year-old engineer living in Ottawa, accepted a six-month transfer to an office in London, England for the period July 1 to December 31, of the year in question. He returned to Canada in the following year. James is not married and has always lived at his parents’ house in Ottawa. (B) Judy Gordon, a financial analyst, lives in a house she owns in London, England. She had lived in Toronto all her life, until she started a minimum three-year contract with CS Services Inc., which started in July of the year in question. Judy is single and terminated the lease on her apartment in Toronto before moving her belongings to England when her position started in July. (C) ERT Limited was incorporated in Canada in 1988 and, until recently, its manufacturing plant was located in Ontario. In June of the year in question, it moved all of its operations, including the manufacturing plant, to Mexico. (D) Doug Stewart, a member of the Canadian Armed Forces, has been stationed in Germany for the last 5 years, including the year in question. Doug was born in Canada and lived in Canada prior to moving to Germany. Feedback: (B) is correct. Judy is a non-resident. She seems to have severed her residential ties to Canada (moving her belongings) and established new ties to London, England (buying a house). (A) is incorrect. James is still a resident of Canada. There is no indication that James has severed his residential ties to Canada or established ties to London, England. (C) is incorrect. Since ERT Limited was incorporated in Canada after April 26, 1965, it is deemed to be a resident of Canada. (D) is incorrect. Doug is deemed to be a resident of Canada because he is a member of the Canadian armed forces.
Chapter 3 Question 1 (A) Bob’s standby charge is $13,200 (B) Bob’s minimum operating cost benefit is $2,726 (C) Bob’s minimum operating cost benefit is $6,600 (D) Bob can elect to use 1/2 of his standby charge as his operating cost benefit Feedback: (A) is correct: 12 X 2% X the total cost of the vehicle (including HST) (B) incorrectly computes the operating cost benefit as: personal km/total km X operating costs paid by employer (C) incorrectly takes the higher of ½ of the standby charge and personal km x the prescribed rate (D) is wrong because he does not have more than 50% employment use.
Question 2 (A) $53,500 (B) $50,500 (C) $49.500 (D) $49,000 Feedback (B) is correct: Salary + the allowance less the automobile expenses would be employment income. The car allowance is taxable because it is not based solely on kilometres driven. Since the car allowance is taxable, the automobile expenses can be deducted. The entertainment expenses are not deductible because she has no commission income. (A) incorrectly excludes a deduction for automobile expenses (C) incorrectly includes a deduction for entertainment expenses. (D) incorrectly excludes the car allowance and the deduction for automobile expenses and incorrectly includes a deduction for entertainment expenses.
Question 3 (A) $ 500 (B) $ 1,100 (C) $ 1,400 (D) $ 3,800 Feedback (A) is correct. Susanne Denholm can claim home office expenses because she is required by contract to maintain an office in her home and she works principally in her home (i.e., ‘‘most of the time’’). The correct amount of deductible home office expenses is calculated as follows: Subsection 8(13) allows deductions under paragraphs 8(1)(f) or 8(1)(i). Since Susanne does not have any commission income, she can only deduct items under paragraph 8(1)(i). The distinction between (f) and (i) is that under (f) the expenses are fixed in nature and under (i) they are variable in nature (like supplies deductible under (i)). Since the only expenses that are variable with use are the heat, hydro, and maintenance, they are the only ones deductible. The mortgage interest is not deductible under either (f) or (i), since the only interest that is deductible as an employment expense is for automobiles and aircraft. (B) incorrectly includes a deduction for property taxes and insurance. However, if Susanne had commission income, 10% of her insurance and property taxes would be deductible. (C) incorrectly includes deductions for insurance, property taxes and the general telephone line. The insurance, property taxes and the cost of the general telephone line are not deductible. If Susanne had commission income, the cost of the general telephone line would still not be deductible — only long- distance calls would be deductible. (D) incorrectly includes insurance, property taxes, the general telephone line and mortgage interest. The insurance, property taxes, the cost of the general telephone line and mortgage interest are not considered to be supplies. If Susanne had commission income, the mortgage interest would still not be deductible since the Act limits interest expense of an employee to interest on automobiles and planes.
Question 4 (A) $ 1,000 (B) $ 2,000 (C) $ 3,000 (D) $ 4,000 Feedback (A) is correct. The loan qualifies as a home relocation loan. The benefit is computed using the lower of the prescribed interest rate at the time of the loan (4%) and the prescribed interest rate during the year (3%). (B) incorrectly computes the employment benefit using 4% (C) incorrectly ignores the 2% interest paid in the computation of the interest benefit. (D) incorrectly computes the employment benefit using 4% rather than 3%. The interest paid is not deducted
Question 5 (A) $ 5,000 (B) $ 18,000 (C) $ 14,000 (D) $ 10,000 Feedback (D) is correct. The stock option benefit is (FMV at exercise date – Option price) X # of shares exercised (A) incorrectly subtracts the stock option deduction. This deduction is a Division C deduction. (B) incorrectly computes the benefit based on the sales price of the shares rather than the price of the stock at the time of exercise. (C) incorrectly includes the taxable capital gain in the employee benefit
Question 6 (A) $ 5,000 (B) $ 9,000 (C) $ 14,000 (D) $ 16,000 Feedback (B) is correct: 50% of meals and entertainment plus 90% of automobile expenses would be eligible for deduction. Tim can either claim a deduction for these amounts to the extent of his commission income or he can claim a deduction for his automobile costs alone, without the commission limitation. (A) is incorrect because it is the commission-limited amount. (C) is incorrect because it is the full meals and entertainment amount and ignores the commission limitation. (D) is incorrect because it represents the expenses eligible as a salesperson but ignores the commission limitation.
Question 7 (A) Commission received by a salesperson on sales made in the year. (B) Cash gratuities (“tips”) received in the year (C) A bonus payable to the employee six months after the end of the year for services performed in the year (D) An advance on an employee’s January pay for the following year, received in December of the current year Feedback (C) is correct since the bonus was not received by the employee until the following year, it would not be included in employment income until it is received. The other three options deal with cash being received by the employee in the year and therefore would be taxable in the year received.
Question 8 (A) Payment by the employer of the employee’s tuition for an MBA degree to allow the employee to develop skills to be promoted to upper management (B) Golf clubs received from a customer in appreciation for excellent customer service (C) Use of the employer-owned condominium in Florida for the employee and her family for one week for a personal family vacation, at no cost (D) Shares in the employer corporation Feedback (A) Is correct. The tuition relates to the employee’s position in the company therefore the tuition would not be a taxable benefit.
Question 9 (A) $1,375 (B) $1,625 (C) $2,125 (D) $2,625 Feedback: (B) Is correct since it includes the amount of the non-cash gift over $500, the amount over $500 for the anniversary gift and the fitness equipment. The non-cash gift would not be taxable unless the amount is over $500/year. Only the amount above $500 would be taxable. The subsidized meals are not considered taxable since the employee is paying the cost of providing the meals.
Question 10 (A) $50,000 (B) $50,500 (C) $50,900 (D) $61,600 Feedback: (C) Is correct since it includes the employment income + the life insurance premiums paid by the employer + the employer paid personal income tax return preparation. The employer contribution of the RPP is not taxable until withdrawn from the plan and the private health insurance premiums are specifically exempt.
Question 11 (A) $1,536 (B) $1,736 (C) $1,843 (D) $2,082 Feedback: (D) is correct. The taxable benefit is calculated using the full cost of the vehicle (including HST). Since the employee uses the vehicle more than 50% for work, we can apply the standby charge reduction which is personal kms/[1,667 x (the number of days/365)] (A) incorrectly excludes HST from the calculation of the standby charge (B) incorrectly uses the personal kms/total kms driven to calculate the standby charge (C) incorrectly includes only GST in the cost of the vehicle.
Question 12 (A) $5,000 (B) $10,000 (C) $12,500 (D) $25,000 Feedback: (A) Correctly includes 50% of the loss in excess of the first $15,000. (B), (C) and (D) are all incorrect (see the explanation for A).
Question 13 (A) The allowance exceeds a legislated per kilometre threshold amount (B) The allowance is paid on a monthly basis (C) The allowance is part of the employee’s contract of employment (D) The allowance is calculated based on actual kilometres driven for employment Feedback: (D) is correct as the allowance must be based on kilometres in order to be considered reasonable. (A), (B) and (C) are all incorrect, see the explanation for A
Question 14 (A) Parking at the employer’s place of business (B) Rental of a laptop computer used to carry out duties of employment (C) Cost of home telephone line used 50% for personal use and 50% for employment use (D) Purchase price of a cellular phone to be used for employment purposes Feedback: (B) Is correct. While CCA on a computer purchased is not deductible, the rental of a computer to carry out duties related to employment would be an allowed deduction, assuming the employee is required to pay the cost. (A) Is incorrect as parking is not an allowed deduction (C) is incorrect as the phone line is not a dedicated phone line used solely for the purpose of earning employment income. (D) the cell phone is a capital cost and cannot be deducted.
Chapter 4 Question 1 (A) Amounts paid for landscaping business premises. (B) Interest on money borrowed to finance the purchase of a factory for use in its business. (C) The premium on a $100,000 term life insurance policy on an employee if the beneficiary of the policy is the employee’s family. (D) Interest and penalties on late income tax payments. Feedback: (D) is correct. A deduction for interest and penalties on late income tax payments is denied. (A) is a deductible item. A deduction for amounts paid for landscaping business premises is allowed. (B) is a deductible item. A deduction for interest on money borrowed to finance the purchase of a factory for use in its business is allowed. (C) is a deductible item. If the beneficiary of a $100,000 term life insurance policy on an employee is the employee’s family, the cost of the insurance premium is part of the cost of the employee’s remuneration package. As such, it is not denied as it is incurred for the purpose of earning income.
Question 2 (A) $11,000 of accrued legal fees for a pending lawsuit. The accrual is an estimate because no work has been done to date by the lawyers. (B) $4,000 of donations to registered charities made for no business reason. (C) $15,000 spent on three social events in the taxation year for all employees at a particular location. (D) $1,500 for golf club membership dues for employees. Feedback: (C) is correct. The entire $15,000 spent on three social events for all employees at a particular location is deductible as long as the number of events does not exceed six. (A) The deduction for $11,000 of accrued legal fees for a pending law suit is not allowed, because it is a contingent liability. There is no legal liability to pay this amount. (B) The deduction for $4,000 of donations to registered charities is denied because it is not incurred for the purpose of earning income. The donations would be deductible in the computation of taxable income. (D) The deduction of $1,500 for golf club membership dues for employees is denied.
Question 3 (A) $5,000 of donations to federal political parties. (B) $44,000 in accrued bonuses unpaid 7 months after year end. The amounts were legal liabilities at year end. (C) A $10,000 increase in the financial accounting reserve for warranty expenses. (D) The $2,000 cost of tickets for meals and entertainment at a gala fundraising event for a registered charity. Feedback: (D) is correct, because the Act provides an exception to the 50% rule for the cost of meals and entertainment relating to a fund-raising event the primary purpose of which is to benefit a registered charity. (A) is incorrect since donations to political parties are not deductible. The federal political donation would be eligible for a tax credit. (B) is incorrect, because accrued bonuses are not deductible if they are unpaid 180 days after year end (C) is incorrect because the deduction for a financial accounting reserve for warranty expense is denied
Question 4 (dynamic question) (A) $9,600 (B) $10,800 (C) $19,000 (D) $7,000 Feedback: (A) is correctly calculated which includes 100% deduction of the legal fees related to the disputed tax assessment, 1/5 of the legal expenses related to the issuance of debt (considered a financing fee) and 1/5 of the accounting fees related to the issuance of shares (considered a financing fee). (B) incorrectly deducts 1/5 of the legal fees related to the purchase of the investment in shares – these are considered capital costs. (C) incorrectly deducts the legal fees related to the investment in shares and 100% of the legal fees related to the debt and accounting fees related to the issuance of shares. (D) incorrectly only deducts the legal fees for the dispute.
Question 5 (A) The CRA may argue that the gain on the sale of the land is a capital gain, because Sam is a real estate agent. (B) The CRA may argue that the gain on the sale of the land is business income, because of the 10-year holding period of the land. (C) The CRA may argue that the gain on the sale of the land is business income because of the unsolicited offer for sale. (D) The gain on the sale of the land will likely be treated as a capital gain for income tax purposes. Feedback: (D) is correct. Most of the facts support capital gains treatment: the nature of the asset (real estate), its use and intended use (rental), the 10-year holding period and the unsolicited offer for sale. As a result, the gain on the sale of the land will likely be treated as a capital gain for income tax purposes. (A) is incorrect. Because Sam is a real estate agent, the CRA may argue that the gain on the sale of the land is business income (not a capital gain). (B) is incorrect. The fact that the land has been held for 10 years supports capital gains treatment, not business income treatment. (C) is incorrect. The unsolicited offer for sale supports capital gains treatment, not business income treatment.
Question 6 (A) $13,000 of legal fees to defend a lawsuit brought by a customer. (B) Accounting loss on the sale of a capital property. (C) The principal amount of a mortgage on a company’s warehouse. (D) The personal and living expenses of the shareholder who works very hard in the business and is not paid a salary. Feedback: (A) is correct. Legal fees to defend a lawsuit brought by a customer would be deductible. (B) and (C) are incorrect because these items (accounting loss on the sale of capital property and the principal amount of a mortgage) are on account of capital and therefore not deductible. (D) is incorrect because personal and living expenses are not deductible.
Chapter 5 Question 1 (A) $22,500 (B) $10,800 (C) $16,200 (D) $17,010 Feedback: (C) Is correctly calculating CCA by limiting the cost of the vehicle to $36,000 x 30% x 1.5 for the accelerated investment incentive. (A) incorrectly uses the full cost of the vehicle. (B) incorrectly ignores the accelerated investment incentive. (D) incorrectly includes GST on the $36,000 when calculating the CCA.
Question 2 (A) $15,000 (B) $16,000 (C) $10,000 (D) $24,000 Feedback: (A) correctly calculates the two lease amounts: (i) based on 1/5 and (ii) as the total leasehold/ (lease term plus one renewal option) and applies the accelerated investment incentive to the lower of the two amounts. (B) is incorrect as it simply takes 1/5 of the total leasehold improvements. Five years is the minimum amount of time leaseholds can be depreciated. A taxpayer must calculate the two amounts and depreciate the leasehold the lower of the two amounts of depreciation. In the year of acquisition, the accelerated investment incentive must then be applied to the lower of the two amounts. (C) is does not consider the accelerated investment incentive to the lower of the two leasehold amounts: (i) based on 1/5 and (ii) as the total leasehold/ (lease term plus one renewal option) (D) is incorrect as it applies the accelerated investment incentive to 1/5 of the total costs of the leasehold improvements
Question 3 (A) $ 7,500 (B) $ 7,275 (C) $ 5,000 (D) $ 2,500 Feedback: (A) correctly calculates the maximum CCA in Class 14.1 by taking the total cost x 5% and applying the accelerated investment incentive. (B) incorrectly deducts the first $3,000 from the cost then applies the CCA rate of 5% and applying the accelerated investment incentive. The first $3,000 relates to the incorporation costs where the first $3,000 is allowed as a deduction in the year incurred. This does not apply to goodwill. (C) incorrectly excludes the accelerated investment incentive (D) incorrectly applies the half- year rule.
Question 4 (A) $15,000 (B) $12,857 (C) $18,000 (D) $ 8,571
Feedback: (B) correctly calculates the CCA as the lesser of: (i) 1/5 of the capital cost of the leasehold improvement and (ii) as the capital cost of the leasehold interest divided by the number of 12-month periods from the beginning of the taxation year in which the cost was incurred to the end of the term (5 years) plus the first renewal term (2 years) and applies the accelerated investment incentive to the lower of the two amounts. (A) incorrectly calculates the CCA on the leasehold using the full lease term without the renewal period and then applying the accelerated investment incentive. (C) incorrectly calculated CCA by taking 1/5 of the leasehold improvement x the accelerate investment incentive. (D) incorrectly excludes the accelerated investment incentive.
Question 5 (A) $ 8,600 (B) $ 16,300 (C) $ 25,800 (D) $ 17,200 Feedback: (D) correctly calculates the CCA as the full amount of all the additions. The half-year rule is temporarily suspended and replaced with the Accelerated investment incentive. Since we cannot deduct more than the cost, the full amount of the cost is deductible in the year acquired. (A) is incorrect because it applies the half-year rule to the costs. (B) is incorrect because it applies the half-year rule to the software and moulds. (C) is incorrect because it applies the accelerated investment incentive to all the costs, thereby creating a CCA greater than the cost. We cannot deduct more than the cost.
Question 6 (A) include in Class 14 (B) include in Class 44 (C) deduct in the year incurred (D) include in Class 14.1 Feedback: (D) is the correct answer. The patent has an indefinite life whereas Class 14.1 is for indefinitely life assets. (A), (B), (C) are all options of the treatment of patent costs.
Question 7 (A) $1,250 (B) $1,875 (C) $2,500 (D) $3,750 Feedback: (D) correctly calculates the maximum CCA for the year using the cost of the goodwill x 5% and then applied the accelerated investment incentive. (A) incorrectly applies the half-year rule. (B) incorrectly deducts the first $3,000 from the cost then applies the CCA rate of 5% and applying the accelerated investment incentive. The first $3,000 relates to the incorporation costs where the first $3,000 is allowed as a deduction in the year incurred. This does not apply to goodwill. (C) incorrectly excludes the accelerated investment incentive
Question 8 (A) $3,767 (B) $5,000 (C) $5,650 (D) $7,500 Feedback: (C) correctly calculates the maximum CCA by taking 275 days/1,460 days (the license term) x the cost then applying the accelerated investment incentive. (A) incorrectly ignores the accelerated investment incentive in the calculation of the maximum CCA (B) incorrectly calculates the CCA based on a full 365 days in the fiscal year and does not apply the accelerated investment incentive. (D) incorrectly uses 365 days to calculate the CCA but applies the accelerated investment incentive.
Question 9 (A) $48,000 (B) $240,000 (C) $80,000 (D) $160,000 Feedback: (D) is correct. The moulds would be placed in class 12 with a 100% rate. The half-year rule is currently suspended therefore the full amount would be deductible in the current year. (A) has included the assets in class 8 with a 20% CCA rate and applied the accelerated investment incentive. (B) incorrectly applied the accelerated investment incentive thereby deducting more than the original cost. (C) incorrectly applies the half-year rule.
Question 10 (A) $10,000 (B) $7,500 (C) $15,000 (D) $5,000 Feedback: (A) correctly calculates the CCA as the full amount of all the additions. The half-year rule is temporarily suspended and replaced with the Accelerated investment incentive. Since we cannot deduct more than the cost, the full amount of the cost is deductible in the year acquired. (B) incorrectly applies the half-year rule to the china. (C) incorrectly applies the accelerated investment incentive to the cost and deducts more than the original cost. (D) incorrectly applies the half-year rule to all the purchases in the year.
Question 11 (A) CCA of $2,062 on the laptop and related operating system; a deductible business expense of $100 for the annual subscription to Microsoft Office 365 and CCA of $600 on the various other applications software (B) CCA of $1,815 on the laptop computer, a deductible business expense of $100 for the annual subscription to Microsoft Office 365 and CCA of $900 on the operating system and other applications software combined (C) CCA of $750 on the laptop and related operating system combined and CCA of $350 on the applications software (Microsoft office and other applications combined) (D) CCA of $375 on the laptop and related operating system and CCA of $350 on the applications software (Microsoft office and other applications combined) Feedback: (A) Is correct as it includes the laptop and operating system in class 50 and correctly applies the accelerated investment incentive. The application software would be in class 12 and fully deductible. The subscription is fully deductible. (B), (C), (D) are incorrect for the reasons stated in the explanation in (A) above.
Chapter 6 Question 1 (A) $2,754 (B) $5,100 (C) $6,900 (D) $6,000 Feedback: (B) correctly grosses up the dividend at 15%, applies the 50% tax rate and deducts the dividend tax credit equal to the gross up. (A) incorrectly only applies the federal tax rate when calculating the total tax owing (C) incorrectly ignores the dividend tax credit. (D) incorrectly ignores the gross up and the dividend tax credit.
Question 2 (A) $13,000 (B) $10,000 (C) $ 7,000 (D) $ 6,500
Feedback: (B) is correct. CCA cannot create a rental loss. Since the net rental income is less than the maximum CCA for each asset, the CCA would be limited to the rental loss. (A) is incorrect as it deducts the Maximum CCA and does not limit the CCA to the net rental loss. (C) is incorrect as it only claims CCA on property 1 and 2. (D) in incorrect as it takes ½ of the CCA incorrectly applying the half-year rule.
Question 3 (A) Commissions paid on the purchase of an investment in common shares. (B) The premium paid on a $100,000 term life insurance policy on the taxpayer’s life which is required as collateral for a $100,000 bank loan used to purchase a $100,000 investment in common shares. (C) Interest expenses on a loan to invest in a registered retirement savings plan. (D) Commissions paid on the sale of an investment in common shares.
Feedback: (B) is correct. The premium paid on a $100,000 term life insurance policy on the taxpayer’s life which is required as collateral for a $100,000 bank loan used to purchase a $100,000 investment in common shares is deductible. (A) is incorrect because commissions paid on the purchase of an investment in common shares are capitalized as part of the cost of the shares. (C) is incorrect because the Act does not allow a deduction for interest expense on a loan to invest in a registered retirement savings plan. (D) is incorrect because commissions paid on the sale of an investment in common shares are a selling cost deducted in computing the capital gain on the sale of the shares. One-half of a capital gain is a taxable capital gain which is computed under Subdivision c of Division B of Part I of the Act, whereas income from business or property is computed under Subdivision b.
Question 4 (A) $20,000 (B) $28,500 (C) $30,000 (D) $33,000 Feedback: (D) is correct. It grosses up the cash dividend by 15% and includes the gross amount of the foreign dividend. (A) is incorrect because it only includes the cash portion of the dividend from the CCPC. (B) is incorrect because it only includes the cash portion of both dividends (C) is incorrect it includes the cash dividend from the CCPC (no gross up) and the gross foreign dividend (cash dividend plus the foreign tax withheld).
Question 5 (A) $ 700 (B) $ 1,803 (C) $ 1,700 (D) $ 3,853 Feedback: (B) is correct. It includes the interest for the last year of the GIC plus the interest from the personal savings and the tax refund. The GIC interest is calculated as follows: GIC year 1 $20,000 x 5% = $1,000 ($20,000 + $1,000) x 5% = $1,050 ($21,000 + $1,050) x 5% = $1,103 (A) incorrectly excludes the interest from the 3-year GIC. (C) incorrectly calculates the interest on the 3rd year GIC based on the face value of the GIC. (D) incorrectly includes the full interest on the 3rd year GIC rather than just one year.
Question 6 (A) $ 1,550 (B) $ 1,800 (C) $ 2,750 (D) $ 3,000 Feedback: (A) correctly calculates the deductible interest as the portion of the line of credit interest related to the investments plus the investment management fees. The legal fees are added to the cost base of the rental property. The management fees on the RRSP are not deductible. (B) incorrectly deducts the full interest on the line of credit plus the investment management fees on the non-registered investments (C) incorrectly deducts the legal fees related to the acquisition of the rental property plus the proportionate interest on the line of credit plus the management fees on the non-registered investments. (D) incorrectly deducts the full interest on the line of credit plus the management fees on the non-registered investments and the legal fees related to the purchase of the rental property.
Chapter 7 Question 1 (A) $ 900 (B) $ 800 (C) $ 500 (D) $ 400 Feedback: (C) is correct. the loss on the automobile is not allowed since it is personal-use property (PUP). The $1,000 rule is correctly applied to the boat, painting, and jewelry. The LPP loss is correctly limited to the LPP gain in the year. (A) is incorrect, because it ignores the $1,000 rule in the computations of the gains. The LPP gain is then offset by a portion of the LPP loss, leaving the $900 gain. (B) is incorrect, because it does not subtract the deductible portion of the LPP loss from the LPP gain (D) is incorrect because it deducts the full LPP loss against all the gains.
Question 2 (A) $ 80,000 (B) $ 25,000 (C) $ 30,000 (D) $ 50,000 Feedback: (B) is the correct answer. Since Amanda had no capital gain on her house, she must have designated it as her principal residence for all but one of the years she owned the home. She therefore has two years to designate in respect of the cottage: one of the years not used on the house (say, 2022) plus 2023. Since she owned the cottage eight years (2016 to 2023), the principal residence exemption for the cottage is: 3/8 X $80,000 = $30,000 (3 = 2 years designated + ‘‘one-plus rule’’). Therefore, Amanda’s taxable capital gain is $25,000 (1/2 X ($80,000 -- $30,000 principal residence exemption)). (A) is incorrect because it is the capital gain on the cottage before any exemption (C) is incorrect because it fails to use the 1+ rule in the calculation of the exemption (D) is incorrect because it includes the capital gain after the exemption rather than the taxable capital gain.
Question 3 (A) There is no taxable capital gain to report in 2017 or 2023 in respect of the principal residence. (B) There is no capital gain to report in 2017 in respect of the principal residence. The taxable capital gain is $13,889 in 2023 in respect of the principal residence. (C) The taxable capital gain is $100,000 in 2017 and $150,000 in 2023 in respect of the principal residence. (D) The taxable capital gain is $250,000 in 2023 in respect of the principal residence. Feedback: (B) is correct. Because Gary made the election to be deemed not to have changed the use in respect of the property, there is deemed to be no change in use in 2017. The only disposition occurs in 2023 on the date of sale. The Act allows Gary to designate the property as his principal residence for up to four years where the election was made. The gain on the property is $500,000 ($850,000 -- $350,000) and the total years of ownership were 18 (2006 to 2023) and the maximum number of years that can be designated is 16 (2006 to 2017 plus 4). Therefore, the principal residence exemption is [(16 + 1)/18] X $500,000 or $472,222. The capital gain is therefore $27,778 ($500,000 -- $472,222) and the taxable capital gain is $13,889 (1/2 X $27,778).
(A) is incorrect because there is a taxable capital gain to report in 2023 because not all years of ownership qualify as years eligible for a principal residence. The extension of the four-year rule does not apply, because Gary did not move back into the residence before it was sold. (C) incorrectly calculates taxable capital gains of $50,000 in 2017 [1/2 ($550,000 -- $350,000)] and 2023 [1/2 ($850,000 -- $550,000)]. The timing is wrong because there is no deemed disposition in 2016 because of the election. The amount is also wrong because 12 years (2005 – 2016) can be designated in respect of the residence. (D) correctly calculates the gain in 2023 as $500,000 without claiming any principal residence exemption, resulting in a taxable capital gain of $250,000 (1/2 X $500,000).
Question 4 (A) The cost of the stock is deemed to be $4 and the individual’s net income increases by $4. (B) The cost of the stock is deemed to be $4 and the individual’s net income increases by $5.52. (C) The cost of the stock is deemed to be $10 and the individual’s net income increases by $10. (D) The cost of the stock is deemed to be $10 and the individual’s net income increases by $13.8. Feedback: (B) is correct. The amount of the dividend is the increase in the paid-up capital, and this is also the cost of the shares (ssec. 53(3)). However, the individual’s net income would increase by the grossed-up dividend. The dividend would be grossed up by 38%. (A) is incorrect because although the dividend is equal to the increase in paid-up capital, the taxable amount is the grossed-up dividend which would be the dividend x 1.38. (C) is incorrect because the dividend should be the increase in paid-up capital not the fair market value of the shares and the taxable dividend should be grossed-up by 38%. (D) is incorrect because the dividend should be the increase in paid-up capital not the fair market value of the shares.
Question 5 (A) $ 370 (B) $ 740 (C) $ 870 (D) $ 920 Feedback: (C) Is correct. The total taxable capital gain is calculated as 50% of the capital gain from the shares plus the PUP gains plus the LPP gains less the current period LPP loss and the prior year LPP loss. (A) Is incorrect because it deducts the pup loss in the calculation. Losses on pup are disallowed. (B) Is incorrect because it deducts the pup loss in the calculation. Losses on pup are disallowed and included the full amount of the gains/losses rather than taking 50% to include the taxable capital gains (D) is incorrect because it does not deduct the LPP loss from prior years in the calculation of the net LPP gains.
Question 6 (A) $100,000 (B) $ 50,000 (C) $ 75,000 (D) $ 37,500 Feedback: (B) is correct. The gain is: Proceeds less the ACB. The maximum reserve for the current year is computed using the lesser of the percentage of proceeds payable after the end of the year and four fifths (4/5) of the gain. Since the lesser amount is four fifths, the minimum taxable capital gain would be 50% of the capital gain net of the reserve of four fifths of the gain. (A) is incorrect because the capital gain less the reserve was included and it was not multiplied by the 50% inclusion rate to get the taxable capital gain. (C) is incorrect because it uses the larger of the two amounts in the capital gains formula to calculate the minimum capital gain and it was not multiplied by the 50% inclusion rate to get the taxable capital gain. (D) is incorrect because it uses the larger of the two amounts in the capital gains formula to calculate the minimum taxable capital gain.
Question 7 (A) On or before May 31, 2025. (B) On or before June 30, 2025. (C) On or before December 31, 2025. (D) On or before May 31, 2026. Feedback: (D) is the correct answer. Since the expropriation is an involuntary disposition, the property must be replaced by the later of two taxation years from the end of the taxation year in which the disposition took place or 24 months from the end of the taxation year in which the disposition took place. Since the relevant taxation year was May 31, 2024, the two-year deadline is May 31, 2026. (A) incorrectly uses the one-year deadline which is applicable for voluntary dispositions. (B) incorrectly uses two years from the disposition date as the deadline. (C) incorrectly uses two years from the end of the calendar year of the disposition as the deadline.
Question 8 (A) The motor boat purchase is an investment, and the sale results in a taxable capital gain. (B) The motor boat purchase is an investment, and the sale results in property income. (C) The motor boat purchase is an adventure or concern in the nature of trade, and the sale results in business income. (D) The motor boat purchase is an adventure or concern in the nature of trade, and the sale results in a taxable capital gain. Feedback: (C) is correct It can be concluded from the facts that Steve’s primary intention was to purchase the boat and sell it for a profit. He bought the boat and immediately sold it for a profit the way a person in the boat-sales trade would act. He did not use the boat personally or rent it out for use as a capital asset. The transaction was, in some sense, related to his sporting goods retailing business which would give Steve some insight into the purchase and sale of a boat in this way. Profit from an
adventure in the nature of trade is considered to be business income. (A) incorrectly includes the profit as a taxable capital gain, rather than business income. (B) incorrectly includes the income as income from property, rather than income from business. (D) incorrectly includes the profit as a taxable capital gain, rather than business income from an adventure in the nature of trade.
Question 9 (A) $640,000 (B) $690,000 (C) $950,000 (D) $900,000 Feedback: (A)
(B) (C) (D)
is correct. This is an involuntary disposition replaced within the time limit. The replacement cost would be equal to the original cost less the deferred capital gain (PofD less ACB) would be the adjusted capital cost. The amount included in the UCC would be the adjusted capital cost less the deferred recapture (UCC less the lower of cost or proceeds of the original building). incorrectly ignores the deferred capital gain. incorrectly ignores all deferrals. incorrectly ignores all deferred recapture
Question 10 (A) A capital gain of $300,000 and a terminal loss of $60,000. (B) A capital gain of $240,000 and a terminal loss of nil. (C) A capital gain of $150,000 and a terminal loss of $60,000. (D) A capital gain of $120,000 and a terminal loss of nil. Feedback: (B) is correct. Subsection 13(21.1) would disallow the terminal loss by making the proceeds on the building equal to the UCC with the remaining proceeds allocated to the land. (A) incorrectly ignores the reallocation of proceeds under subsection 13 (21.1) to eliminate the terminal loss on the building when there is a capital gain on the land. (C) incorrectly ignores the reallocation of proceeds and calculates the taxable capital gain, rather than the capital gain, as required. (D) incorrectly calculates the taxable capital gain, rather than the required capital gain.
Question 11 (A) $1,550 (B) $1,700 (C) $1,800 (D) $1,900 Feedback: (B) is the correct answer. It correctly adjusts the P of D and ACB for the minimum $1,000 rule. The loss on the computer is disallowed but the loss on the grandmother’s ring can be used against the LPP gains. (A) in incorrect as it does not adjust the P of D and ACB for the minimum $1,000 rule. (C) is incorrect as it ignores the LPP loss on the grandmother’s ring. (D) in incorrect as it does not adjust the P of D and ACB for the minimum $1,000 rule and ignores the loss on the LPP.
Question 12 (A) $1,086 (B) $1,200 (C) $1,500 (D) $2,000 Feedback: (B) is correct as it includes the capital gain and the actual dividend in the calculation of the ACB of the mutual funds (Cost + capital gains + actual dividends). (A) incorrectly includes the taxable dividends in the calculation of the ACB of the mutual funds. (C) incorrectly ignores the dividend in the calculation of the ACB of the mutual funds (D) incorrectly multiplies the capital gain by 2 and adds it to the ACM of the mutual funds. It also ignores the dividend in the calculation of the ACB of the mutual funds.
Question 13 (A) $95,192 (B) $45,000 (C) $190,385 (D) $259,615 Feedback: (A) is correct because it calculates the minimum taxable capital gain by deducting the maximum reserve which is computed as the lesser of the proceeds not yet due / total proceeds x capital gain or four fifths of the capital gain. The lesser amount is based on the proceeds not yet received. The minimum taxable capital gain is the capital gain less the reserve multiplied by 50%. (B) is incorrect as it uses the higher of the two amounts in the reserve calculation as the deductible amount (see A) (C) in incorrect as it ignores the capital gains inclusion rate of 50% - the amount represents the capital gain after deducting the appropriate capital gain reserve. (D) in incorrect as the amount is the allowed capital gain reserve for the year.
Chapter 8 Question 1 (A) A gift of $100,000 to his son, Peter, age 21. Peter invested the money in a term deposit and earned $3,000 of interest income. (B) An interest-free loan of $100,000 to his mother-in-law, Mabel, age 81. Mabel invested the money in mutual funds and earned $12,000 of dividend income. (C) An interest-free loan of $100,000 to his daughter, Daphne, age 28. Daphne bought a cottage and used it for personal use. (D) A gift of $100,000 to his wife, Debbie. Debbie put the money in her non-interest bearing chequing account and paid all the family’s household expenses from the account. She then used $100,000 of her own money to invest in the stock market and earned $10,000 of dividend income. Feedback: (B) is the correct answer. The $12,000 of dividend income will be attributed to Mr. P. Mabel and Mr. P are related and it can reasonably be considered that one of the main reasons for making the loan was to reduce tax. (A) is incorrect. The $3,000 of interest income will not be attributed. Peter is not under 18 years of age and, therefore, attribution does not apply. If it had been a loan, instead of a gift, subsection 56(4.1) would apply and may attribute the income. (C) is incorrect. Even though an interest-free loan was made to which attribution would apply, there is no property income from the cottage to attribute. (D) is incorrect. Even though a gift was made to a spouse to which attribution would apply, there is no property income from the chequing account to attribute.
Question 2 (A) Any dividend that Ron receives on these shares will be subject to the tax on split income. (B) The tax on split income does not apply to any dividends on these shares because they were inherited. (C) Any capital gains that Ron realizes on the disposition of these shares to an arm’s length person, will be subject to the tax on split income. (D) The tax on split income does not apply to any dividend on these shares because Ron has reached the age of 18. Feedback: (B) is correct. (A) is incorrect because the tax on split income would not apply since Ron inherited the shares. (C) is incorrect because the only exemption regarding inherited shares is for shares inherited from a parent. (D) is incorrect because the tax on split income may apply to Ron after he turns 18 under the correct circumstances.
Question 3 (A) The attribution rule will apply to attribute to Ms. Y any future dividends received by her child on the shares. This attribution will continue until the year in which the child becomes 18 years old. (B) The attribution rule will apply to attribute to Ms. Y any future dividends received by her child on the shares as well as any capital gains or losses if her child sells the shares. This attribution will continue until the year in which the child turns 18 years of age. (C) Ms. Y will report no gain or loss on the transfer of property this year because it is a gift. (D) Ms. Y will report a $100,000 taxable capital gain on the gift this year.
Feedback: (A) is correct. The dividends from a public common will attribute back to Ms. Y until the year in which her child turns 18 years of age. (B) is incorrect, because capital gains or losses do not attribute on loans or gifts to minors. (C) is incorrect, because there will be a capital gain on the gift. (D) is incorrect. $100,000 is the capital gain.
Question 4 (A) $ 100 (B) $ 122 (C) $ 200 (D) $ 400 Feedback: (A) is correct. the gift to his would be a deemed disposition resulting in a capital gain equal to the fair market value less the adjusted cost base x the number of shares gifted. 50% of the capital gain would be included in income. The gift to his wife would automatically rollover without any income tax implications. (B) is incorrect as it excludes the brokerage commissions from the ACB calculation for the shares. (C) incorrectly computes a taxable capital gain on the gift to his wife. (D) is incorrect, because it incorrectly computes a capital gain on the gift to his wife and does not apply the 50% inclusion rate to compute the taxable portion of the gain.
Question 5 (A) $ 59,000 (B) $ 70,500 (C) $ 82,000 (D) $ 352,000 Feedback: (C) is correct. There is no gain on the Toronto home. The building, land, mutual funds and public company shares’ taxable capital gain (TCG) is correctly calculated as 50% x (proceeds less the ACB). The building recapture is correctly calculated by removing the lower of cost and proceeds from the UCC pool. (A) incorrectly ignores the recapture (B) incorrectly multiplies the recapture by the capital gains inclusion rate of 50%. (D) incorrectly includes the capital gain on the principal residence.
Question 6 (A) $ 15,000 (B) $ 17,000 (C) $ 27,000 (D) $ 42,000 Feedback: (B) is correct, because the taxable capital gain is computed using 50% x ( the proceeds less the ACB) for the listed shares of a public corporation resident in Canada and paintings. The rental real estate in Canada and the registered retirement savings plan are specifically exempted from the deemed disposition rules.
(A) incorrectly excludes the taxable capital gain on the painting (C) incorrectly includes 50% of the gain on the RRSP (D) incorrectly includes a taxable capital gain on the rental real estate in Canada. The rental real estate in Canada are specifically exempted from the deemed disposition rules.
Question 7 (A) Ms. Y will report an allowable capital loss of $50,000 which she can only deduct against taxable capital gains. (B) Ms. Y does not have a capital loss because transfers to a spouse are made for proceeds equal to adjusted cost base. (C) Ms. Y does not have a capital loss because of the superficial loss rules. (D) The attribution rule will apply to attribute to Ms. Y any future dividends received by her husband on the shares as well as any capital gains or losses if her husband sells the shares. Feedback:
(C) is correct. There is a superficial loss because Ms. Y has incurred a loss on the sale to an affiliated person (Mr. Y). The transfer is between spouses (so they are affiliated persons) therefore when the Ms. Y elects out of the rollover, she has a disposition to her husband, an affiliated person, on the same day (which is withing the 30day period). (A) is incorrect, because it ignores the superficial loss rule and computes the loss as 1/2 X ($800,000 -- $900,000). (B) is not correct, because Ms. Y elected out of the interspousal rollover. (D) is not correct. There is no attribution because she elected out of the subsection 73(1) rollover and received fair market value consideration (i.e., $800,000 cash).
Chapter 9 Question 1 (A) Nil (B) $ 27,000 (C) $ 63,000 (D) $ 100,000 Feedback: (A) is the correct answer in this case, since no amount of the retiring allowance provides a deductible RRSP contribution. He did not work for the company for pre-96 years so there is no ability to directly transfer the retiring allowance to the RRSP. (B), (C), and (D) incorrectly consider any amount of the retiring allowance to be deductible in this case when no amount is deductible.
Question 2 (A) $5,748 (B) $ 5,000 (C) $ 6,000 (D) $9,000 Feedback: (C) is the correct answer in this case since it takes the lower of 18% x (employment income + the RPP contribution + the taxable spousal support + rental income) less the pension adjustment plus the unused RRSP deduction limit (A) is incorrect because it ignores the rental income in the calculation of the current year RRSP contribution room. (B) incorrectly ignores the unused RRSP deduction limit room
(D) incorrectly ignores the pension adjustment and unused deduction room.
Question 3 (A) James can claim a deduction of $12,000 (B) Meg can claim a deduction of $15,250 (C) James can claim a deduction of $21,000 (D) James can claim a deduction of $15,250 Feedback: (A) is correct. The calculations are as follows:
Meg Salary
46,000
Employment expenses
-2,800
Business revenue
James
0
50,000
Business expenses
(32,000)
Interest income
800
1,500
Net income
44,000
19,500
Earned income
46,000
18,000
Since James has the lower net income ($19,500), he must claim the deduction, which is the least of: 1)
Eligible child care expenses: $15,000 + ($125 X 2 weeks)
2)
Eligible children:
15,250
$5,000 x 1
5,000
$8,000 x 2
16,000
21,000
2/3 X James’ earned income: 2/3 X $18,000
12,000
Least of the three amounts is $12,000. Since Joanne is age 17, she is not an eligible child. The deduction for the overnight camp for Susie is restricted to $125 per week.
(B)
is incorrect, because Meg cannot claim the deduction, since she has the higher net income.
(C)
and (D) are incorrect because they are not the least amount calculated in (A) above.
Question 4 (A) $10,900 (B) $17,067 (C) $11,700 (D) $12,900 Feedback: (B) is correct and is calculated as follows: Moving van to transport household effects . . . . . . . . . . . . . . . . . . .
$
5,000
Travelling cost — self, spouse and two children Meals — flat rate ($69 X 4 persons X 5 days) . . . . . . . . . . . . . .
$1,380
Car — flat rate (4,430 kms X $0.575) . . . . . . . . . . . . . . . . . . . . .
2,547
Hotel ($100 X 5 nights) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
4,427
Legal fees — Vancouver house . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal fees — Toronto house
900 1,100
Costs while waiting for Vancouver house — . . . . . . . . . . . . . . . . . Hotel (15 days (max.) X $100)
1,500
Meals (15 days (max.) X 4 persons X $69) . . . . . . . . . . . . . . . .
4,140 $
17,067
(A) incorrectly excludes the legal fees on the houses and uses the actual travel costs rather than the flat rates under the simplified method (C) incorrectly includes all 20 days in the hotel costs while waiting for Vancouver house to be ready, the house hunting trip and uses actual travel costs rather than the flat rates under the simplified method. (D) incorrectly includes all the hotel costs
Question 5 (A) The earned income that should be used to calculate her child care expense deduction for 2023 is $110,000 (B) The earned income that should be used to calculate her RRSP deduction for 2023 is $106,400 (C) The earned income that should be used to calculate her child care expense deduction for 2023 is $102,200 (D) The earned income that should be used to calculate her RRSP deduction for 2023 is $94,600 Feedback: (D) is correct. The earned income that should be used to calculate her RRSP deduction for 2023 is her 2022 earned income, which is: Salary
$100,000
Taxable Benefits
$8,000
Travel expenses
-$3,000
Business losses
-$1,000
Rental income (net of expenses and CCA)
$3,200
Spousal support Paid 2021 Earned income
-$12,600 $94,600
(A) incorrectly includes 2023 salary only. (C) is the 2023 net income under Division B which includes amounts for travel expenses, RPP contributions, business losses, rental income and spousal support which are not part of the earned income calculation for the child care expense deduction. (B) is incorrect because the amount is the 2023 earned income. We should be using the earned income for 2022 for the 2023 RRSP deduction.
Question 6 (A) $25,700 (B) $16,248 (C) $12,600 (D) $ 9,288
Feedback: (D) is correct. Deductible moving costs are:
Moving Van Travelling costs to move Natalie and family Meals - flat rate ($69 x 4 persons x 3 days) Car - Flat Rate (1,000 kms x $0.52/km [Manitoba]) Hotel ($100 x 2 nights) Cost of maintaining vacant property (maximum of $5,000) Cost of changing address on legal documents
2,600 828 520 200 5,000 100 9,248
(A) incorrectly includes all expenses listed, including the actual amounts for travelling costs rather than the flat rate. (B) incorrectly includes the actual cost of maintaining the former residence plus the house hunting trip. (C) incorrectly includes all actual cost of maintaining the former residence including the actual amounts for travelling costs rather than the flat rate.
Question 7 (A) $ 6,000 (B) $12,000 (C) $30,000 (D) $37,000 Feedback: (D) is correct. She would be able to contribute $6,500 for this year (2023), plus the amount withdrawn plus the contribution room for next year ($6,500). (A) incorrectly shows the contribution room for next year (B) incorrectly ignores that the amount withdrawn this year is added back to the contribution limit in the following year. (C) incorrectly excludes next year’s contribution room.
Chapter 10 Question 1 (A) $ 3,000 in 2021 and $1,000 in 2023 (B) $ 1,250 in 2021 and $1,000 in 2023 (C) $ 2,500 in 2023 (D) $ 4,000 in 2023 Feedback: (C) is correct. Since BL is a CCPC and is at arm’s length with Brad, the stock option benefit will be included in Brad’s income in the year of sale (along with Brad’s taxable capital gain). The stock option benefit is based on the number of shares x (FMV at exercise – option price). Brad’s taxable capital gain is calculated as the number of shares x (P of D per share – share price at exercise). Since Brad held the shares for at least two years, he can claim a Division C deduction equal to 50% of the employment income inclusion. (A) incorrectly includes the section 7 benefit in 2021 and ignores the deduction. (B) incorrectly includes the employment benefit in the year of exercise and uses the FMV when the option was granted to calculate the benefit. (D) incorrectly ignores the Division C deduction.
Question 2 (A) $4,154 (B) $3,830 (C) $4,660 (D) $4,844
Feedback: (C) is correct and is calculated as follows:
Basic Age Pension Employment
Dividend Tax credit Total tax credits
$
15,000 7,168 2,000 1,368 25,536 15% $ 6/11*(taxable dividend - actual) $ $
(A) incorrectly ignores the pension credit and the employment credit (B) incorrectly ignores the dividend tax credit (D) incorrectly ignores the income restriction on the age credit
Question 3 (A) $ 585 (B) $ 690 (C) $ 750 (D) $ 525
3,830 829 4,659
Feedback: (A) is correct. Shabir’s net income and taxable income is calculated as wages + tips less cost to move to Toronto. Since the income is below the basic personal credit and the employment credit, Shabir can transfer the entire tuition. (B) in incorrectly includes the scholarship in income and claims the full moving costs to McGill and Toronto. It also ignores the employment tax credit and assumes the maximum $5,000 is eligible for transfer. (C) incorrectly assumes the maximum tuition transfer of $5,000 is available for transfer (D) calculates the tuition credit based on the scholarship income.
Question 4 (A) $68,857 (B) $70,495 (C) $73,003 (D) $101,857 Feedback and formulas for Q4 (A)is correct.
(A) Salary Dividends at 38% Stock Option benefit Taxable capital gains at 50% Enhanced CPP deduction Net income Stock Option deduction Taxable income
Tax
$
$ $
80,000 27,600 200,000 100,000 (631) 406,969 100,000 306,969
First 235,676 Balance at 33%
(B) $
80,000 20,000 200,000 100000 (631) $ 399,369 100,000 $ 299,369
(D) $
$
80,000 27,600 200,000 100,000 (631) 406,969
$
406,969
54,578 23,527
54,578 21,019
54,578 56,527
5,102.10 4,145.45
5,102.10
5,102.10 4,145.45
less credit Basic CPP EI Tuition transferred Employment Dividend tax credit
13,521 3,123 1,002 15000 1368 34014
15%
68,857 (B)incorrectly omits the gross-up on the dividend and the dividend tax credit:
70,495
(C)incorrectly omits the dividend tax credit:
73,003
(D)incorrectly omits the stock option deduction
Question 5 (A) $54,053 (B) $51,803 (C) $45,053 (D) $36,053
101,857
Feedback and formulas for Q5 (A) is correct.
(A)
Taxable income 30% of capital gain 3/5 of stock option deduction Deduct gross up on dividends Adjusted taxable income
(C)
(D)
$ 306,969 60,000
$
306,969
$
306,969 60,000 60,000 (7,600) 419,369
(7,600) $ 359,369
$
(7,600) 299,369
$
(40,000) 379,369
(40,000) $ 319,369
$
(40,000) 259,369
15% $
56,905
$
47,905
$
38,905.35
$
(2,028) (205) (468) (150) 54,053
$
(2,028) (205) (468) (150) 45,053
$
(2,028) (205) (468) (150) 36,053
$
51,803 $
45,053
$
36,053
$
Add
Less: Basic exemption Net Minimum tax before credits Basic credit Employment CPP EI
13521 @15% 1368 @15% 3123 @15% 1002 @15%
(B)incorrectly deducts the transfer of tuition credits
(C)incorrectly omits the adjustment to add back the stock option deduction:
(D)incorrectly omits the adjustment to add back the tax-free portion of the capital gain and the stock option deduction:
Chapter 11 Question 1 (A) $ 600,000 (B) $ 500,000 (C) $ 400,000 (D) $ 300,000 Feedback: (D) is correct as it deducts the Canadian dividends and the charitable donations as they are less than 75% of net income. (A) incorrectly makes no adjustments (B) incorrectly omits the deduction for charitable donations (C) incorrectly omits the section 112 deduction for Canadian dividends
Question 2 (A) $ 22,000 (B) $ 48,000 (C) $ 87,000 (D) $ 30,000
Feedback:
(B) is correct. Taxable income as per the answer to Question 2 Part I tax on taxable income Tax @ 38% on $300,000 Deduct: Federal tax abatement (10% X 90% X $300,000) Deduction for General Rate Reduction (13%) Total federal tax
(A) incorrectly applies the rate reduction to $500,000 of business income (C)incorrectly omits the 13% rate reduction. (D)incorrectly calculates the rate reduction as 19% rather than 13%
Question 3 (A) $ 18,000 (B) $ 20,000 (C) $ 22,000 (D) $ 24,000
$
300,000 $ 300,000 $ 300,000 $
300,000
$
114,000 114,000 114,000 (27,000) (27,000) (27,000) 87,000 $ 87,000 $ 87,000 $ (39,000) (65,000) $ 48,000 $ 22,000 $ 87,000 $
114,000 (27,000) 87,000 (57,000) 30,000
$
$
22,000 $
87,000 $
30,000
Feedback: (D) is correct. The fair market value of the securities + the cash donation + the fair market value of the donated equipment + the carryforward is less than 75% of Z ltd. net income for tax purposes. (A) is incorrect as it uses the costs of the Canadian securities and the computer. It also ignores the carry forward (B) is incorrect as it ignores the carry forward (C) is incorrect as it excludes the donation of the equipment
Question 4 (A) $ 946,000 (B) $ 960,000 (C) $ 970,000 (D) $ 984,000
Feedback: (B) Is correct as it correctly deducts the dividends and limits the net capital loss carryforward to the amount of taxable capital gains in the year. (A) is incorrect. It only represents the business income in net income for tax purposes (C) is incorrect. It deducts the full amount of the net capital loss carry forward and ignores the deduction of dividends. (D) is incorrect as it ignores the deduction of dividends.
Question 5 (A) $ 87,500 (B) $ 125,000 (C) $ 152,500 (D) $ 190,000 Feedback: (A) correctly limits the abatement to 10% of income allocated to the provinces (does not include the percentage of income allocated to Nevada) and applies 13% general rate reduction to the full net income for tax purposes. (B) incorrectly ignores the abatement deduction (C) incorrectly ignores the general rate reduction (D) incorrectly ignores both the general rate reduction and abatement.
Chapter 12 Question 1 (A) $ 19,000 (B) $ 21,850 (C) $ 22,800 (D) $ 25,080 Feedback: (B) is correct. It is calculated as 19% of the lower of (i) active business income carried on in Canada, (ii) taxable income and (iii) the small business limit. (A) is incorrect. The foreign business loss has been netted against the of Canadian business income. (C) is incorrect. This amount is 19% of the Canadian active business income. (D) is incorrect. This amount is 19% of the taxable income.
Question 2 (A) If Mr. Mud would reasonably be regarded as an employee of ACC Ltd., but for the existence of M Ltd., then M Ltd. is carrying on a ‘‘personal services business’’. (B) M Ltd. is carrying on a ‘‘personal services business’’, unless it employs in the business more than five full-time employees throughout the year, which it does not. (C) M Ltd. is carrying on a ‘‘specified investment business’’. (D) M Ltd. is carrying on an ‘‘active business’’.
Feedback: (D) is correct. M Ltd. is carrying on an active business. The business is not a personal services business as the services are provided to an associated corporation. M Ltd. and ACC Ltd. are associated. M Ltd. is not a specified investment business as the principal purpose is not to derive income from property. Thus, by default, it is carrying on an active business. (A) is incorrect. M Ltd. is not carrying on a personal services business for the reasons outlined above. (B) is incorrect. M Ltd. is not carrying on a personal services business for the reasons outlined above. (C) is incorrect. M Ltd. is not carrying on a specified investment business as the principal purpose is not to derive income from property.
Question 3 (A) $ 2,600 (B) $ 3,250 (C) $ 52,124 (D) $ 67,600 Feedback: (B) is correct. This amount is 13% of taxable income in excess of ABI eligible for the SBD. (A) is incorrect. This amount is 13% of taxable income in excess of the maximum small business limit . (C) is incorrect. This amount is 13% X (Canadian ABI minus the 19% of the SBD). (D) is incorrect. This amount is 13% X taxable income.
Question 4 (A) $ 60,000 (B) $ 73,600 (C) $ 74,000 (D) $ 92,000 Feedback: (C) is correct. It includes 38 1/3% of the non-connected corporation plus 70% of the dividend refund received by B Ltd upon paying a taxable dividend. B Ltd. is connected to A Ltd., because of de jure control and because A Ltd. holds more than 10% of B Ltd. (A) is incorrect as it uses the percentage ownership x the dividend refund received for both dividends to calculate part IV tax. (B) in incorrect as it applies 30 2/3%, the ART rate, to the total dividend received. (D) is incorrect. This amount is 381/3% X the dividends received and ignores the special rules for connected corporations.
Question 5 (A) (B) (C) (D)
If Joanne owned 25% of the common shares of D Co. If Doug owned 25% of the common shares of J Co. If a trust for their twin two-year-old daughters controls T Co. and no special elections were made. If J Co. and D Co. each owned 40% of the shares of R Co., a corporation carrying on a retailing
Feedback: (D) is correct. Neither J Co. nor D Co. is associated with R Co., since neither Joanne nor David own at least 25% of the shares of R Co. through J Co. and D Co. Their ownership is only 22% (i.e., 55% of 40%). Hence, J Co. and D Co. cannot be associated through R Co. (A) and (B) are incorrect because Joanne controls J Co. and her spouse controls D Co. Two corporations are associated under paragraph 256(1)(c), if related persons control each corporation and either person owns at least 25% of the shares of the related persons’ corporation. Spouses are related by marriage. (C) is incorrect because if a trust for their twin daughters controls a third company, T Co., those shares are deemed to be owned by the beneficiaries. In addition, because those beneficiaries are minors, their shares are deemed to be owned by each of Joanne and Doug. Therefore, J Co. and T Co. are associated because they are deemed to be controlled by the same person (Joanne). The same is true for D Co. and T Co. (each deemed to be controlled by Doug). The two corporations are associated with each other unless an election is made and the third corporation (T Co.) is deemed to have a business limit of nil
Question 6 (A) Rod owns 10% of voting shares of X Ltd. and 50% of the voting shares Y Ltd. and Patrick owns 60% of the voting shares of X Ltd. and 10% of the voting shares of Y Ltd. Rod and Patrick are not related. Ltd.
(B) The adult son of the controlling shareholder of X Ltd. controls Y Ltd. and owns 25% of the voting shares of X
(C) A mother controls Company X. Her two adult daughters each own 30% of the voting shares of Y Ltd. Her adult son owns 25% of the voting shares of Y Ltd. (D) A brother and sister each own 30% of the voting shares of Sibco Inc. A mother and father each own 20% of the shares. The mother and father each own 50% of the voting shares of Parentco Inc.
Feedback: (C) is correct. X Ltd. and Y Ltd. are not associated because although X Ltd. is controlled by a person who is related to each member of the various groups of persons (i.e., a pair of the two daughters and one son or all three) who controls Y Ltd., there is no cross-ownership of at least 25%. Thus, X Ltd. and Y Ltd. are not associated (A) is not correct. X and Y are associated. The same group (Rod and Patrick) controls both corporations. This group controls X Ltd., despite the fact that Patrick himself controls X Ltd. It does not matter that the individuals are not related. (B) is not correct because X Ltd. and Y Ltd. are associated because they are controlled by related persons (a parent and son are related by blood) and one of the persons owns not less than 25% of the shares of both companies (D) is not correct. Sibco and Parentco are associated. Sibco is controlled by a related group of two, three, or four of its shareholders. Parentco is controlled by the related group of the mother and father. Each member of any related group that controls Sibco is related to each member of the related group that controls Parentco. The mother and father, together, own at least 25% of the shares of both corporations.
Chapter 13 Question 1 (A) Stan will have $200,000 included in his income in 2023. (B) Stan will have $160,000 included in his income in 2023. (C) An imputed interest benefit will be calculated for 2023 using a rate not in excess of the rate in effect at January 1, 2023, as the loan was used to purchase a home. (D) The portion of the loan not repaid within one year of the end of the 2023calendar year, will be included in Stan’s income in 2024. Feedback: (B) is correct under administrative practice outlined in the text. If $40,000 of the loan is repaid within one year of the end of the year of S Ltd. in which the loan was made, then $160,000 must be included in the year of the loan. Subsequent repayments are deductible in the year of the repayment. (A) is incorrect under administrative practice. Only the part of the loan ($160,000) that was not paid before the oneyear limit will be included in Stan’s income in 2023, the year he received the loan. The limit is one year after the end of the taxation year of the lender in which the loan was made. He does not meet the other criteria for exclusion. Since such a loan is not available to other employees, it is not reasonable to conclude that he received the loan because of his employment. (C) is incorrect. There is no imputed interest benefit when the loan is included in income. If there was an imputed interest benefit the prescribed rate protection rule would not apply as the loan was not received because of his employment. (D) is incorrect. One year after the end of the calendar year in which the loan is received has no significance. The shareholder loan rule includes the loan in income in the year it is received (i.e., 2023) unless it is repaid by one year after the end of the taxation year of the lender in which the loan was made, or the loan meets one of the specific exclusions.
Question 2 (A) A loan to Mrs. A, a vice-president and 20% shareholder. The loan was made to assist Mrs. A in the purchase of newly issued shares of S Ltd. The loan was made on April 1, 2023, and repaid on April 1, 2024. No other employees have received similar loans. (B) A loan made to B Ltd., a corporation which is a 20% shareholder of S Ltd. The loan was used to help B Ltd. repurchase some of its shares for cancellation and pay off a bank loan. (C) A loan to Mrs. C, a vice-president and 20% shareholder. The loan was made to assist Mrs. C in the purchase of a home. The loan was made on April 1, 2023, and will be repaid on April 1, 2025. No other employees have received similar loans. (D) A loan to Mr. D, an S Ltd. vice-president and 5% shareholder. Mr. D deals at arm’s length with S Ltd. and with all other shareholders of the corporation. The loan was made to assist Mr. D in the purchase of a home computer for employment use. Five other employees of the company currently work at home and have received similar loans. None of the other employees are shareholders. Mr. D’s loan was made on April 1, 2023, and will be repaid on April 1, 2025. Feedback: (C) is the correct answer. The shareholder loan rule would include the principal amount of the loan in Mrs. C’s income in 2023 because none of the exception tests are met. (1) The exception test in subsection 15(2.2) does not apply because Mrs. C is resident in Canada. (2) The exception in subsection 15(2.3) does not apply since the money is not lent in the ordinary course of money lending business. (3) None of the exceptions for employees in subsection 15(2.4) are met, because it is not reasonable to conclude that the loan is received because of employment since no other employees have received similar loans.
The exception in subsection 15(2.6) does not apply since the debt was repaid on April 1, 2025, which is more than one year from the end of S Ltd.’s December 31, 2023 fiscal year (A) Is incorrect. The loan in (A) would not be included in Mrs. A’s income because the one-year repayment exception test applies: the debt is repaid on April 1, 2024, which is within one year from the end of S Ltd.’s December 31, 2023 fiscal year. Note, however, that the imputed interest benefit rule would apply to compute a deemed interest benefit on the loan. (B) in incorrect. The loan in (B) would not be included in B Ltd’s income because the shareholder loan rule does not apply to corporate shareholders resident in Canada. (D) is incorrect. The loan in (D) would not be included in Mr. D’s income because one of the exceptions for employees is met: Mr. D is not a specified employee and it is reasonable to conclude that the loan is received because of employment, since the computer is for employment use and other employees currently working at home have received similar loans. Since Mr. D is not a specified employee, the loan does not have to be for any specified purpose. A specified employee is an employee who is either a specified shareholder (i.e., generally, a person who owns (with non-arm’s length persons) at least 10% of the shares of any class of the corporation) or a person who does not deal at arm’s length with the corporation. Since Mr. D owns only 5% of the shares of S Ltd. and deals at arm’s length with the corporation, he is not a specified employee.
Question 3 (A) If the $100,000 bonus, due to a related party, was not paid by December 31, 2025, it would be included in Fortelli Inc.’s income in the year 2026. (B) The $100,000 bonus is not deductible in 2023, but the $200,000 bonus is deductible. (C) An election is available to deem the bonus paid and loaned back to the corporation. This election can be used if the bonuses are not going to be paid by the appropriate deadline. (D) The $300,000 bonus is not deductible in 2023.
Feedback: (D) is correct. Since the $300,000 bonus is unpaid on the 180th day after the end of the taxation year of Fortelli Inc. in which the expense was incurred, it is not deductible until 2024, the taxation year in which it is actually paid. (A) is incorrect. This amount refers to the rules in subsection 78(1) for unpaid amounts due to related persons, other than pension benefits, retiring allowances, salary, wages, or other remuneration. (B) is incorrect. Subsection 78(4) does not distinguish between amounts owed to related and unrelated persons. (C) is incorrect for the same reason as (A).
Question 4 (A) The tax benefit that results from an avoidance transaction will be denied. (B) When the GAAR is applied, a penalty will be assessed, in addition to the tax owing plus interest. (C) An avoidance transaction is any transaction that results in a tax benefit, unless the transaction can reasonably be considered to have a bona fide purpose other than obtaining the tax benefit. (D) The GAAR applies to transactions that result in a misuse or abuse of the Act read as a whole.
Feedback: The correct answer is (B). There is no penalty. The tax benefit that would otherwise have been enjoyed is denied. (A) is incorrect as it is true in accordance with subsection 245(2). (C) is incorrect as it is true in accordance with subsection 245(3). (D) is incorrect as it is true in accordance with subsection 245(4).
Question 5 (A) As part of an estate freeze, Bill had a trust for his adult children acquire 80% of the common shares of B Ltd. Until then, Bill had owned all the shares of B Ltd., a successful grocery retail outlet. Each year B Ltd. pays dividends to the trust which are paid to the children all between the ages of 22 and 28. As university students, they have no other income and all work part time for the grocery store during the summer. (B) Sam transferred his unincorporated pizza business, on a tax-deferred basis, to a corporation, for the sole purpose of reducing tax by claiming the small business deduction. (C) Paul gave his son a gift of $10,000 and the son invested it in dividend-paying shares. His son does not pay tax on the dividend income as he is a 19-year-old student with little other income. Paul will celebrate his 65th birthday two years after his son graduates. It is anticipated that Paul will receive a birthday gift of $10,000 from his son at that time. (D) Mary owns all the shares of M Ltd., a CCPC that carries on an active business. For M Ltd.’s taxation year ended June 30, 2023, Mary accrued herself a bonus of $700,000 that reduced M Ltd.’s taxable income to $300,000.
Feedback: (C) is correct. The purpose of the transaction seems to be the reduction or avoidance of tax on the income earned on the $10,000 gift. This transaction goes against the spirit of the Act, read as a whole, and falls within the definition of an avoidance transaction. Note that an attribution rule would apply if it was a loan instead of a gift. (A) is incorrect. The transaction is an estate freeze that can reasonably be considered to have been undertaken for bona fide purposes other than to obtain the tax benefit. This transaction does not result in a misuse or abuse of the Act, read as a whole. TOSI will apply to dividends received by the children. The dividends will be derived from a ‘‘related business’’. A related business is a business carried on by a related corporation in which the related person owns shares worth 10% of the value of the corporation. Bill owns 20% of the corporation. TOSI applies unless the income can be considered an ‘‘excluded amount’’. The dividends are excluded if derived from an ‘‘excluded business’’. The children do not work in the business 20 hours per week throughout the year and, therefore, would not be considered to be actively engaged in the business during the year. Further, the children have not contributed property to the operating company and could not meet either of the ‘‘safe harbor capital return’’ or ‘‘reasonable return exception’’. Bill should stop paying dividends from the trust to the children as the dividends will be subject to tax calculated at the highest marginal tax rate. (B) is incorrect. The incorporation of a business and the claiming of a small business deduction by a CCPC is specifically provided for in the Act. This transaction does not result in a misuse or abuse of the Act, read as a whole. (D) is incorrect. The Act will deny the deduction of the bonus to the extent it is in excess of a reasonable amount. To the extent the transaction is reasonable, it does not result in a benefit. Corporate tax will be reduced by the accrual, but Mary will pay tax on the income personally.
Question 6 (A) None (B) $400,000 (C) $444,444 (D) $1,333,333 Feedback: (C) is correct. In order to be a small business corporation, the percentage of assets used in an active business by the corporation and the corporation controlled by Ms. Prentice’s brother must be at least 90%. It is now 80% (60% + 20%) or $3,200,000. Therefore, total assets must be $3,200,000/90% or $3,555,555. Therefore, $444,445 ($4,000,000 -- $3,555,555) of the non-active business assets must be sold and the after-tax proceeds used to pay off the company’s liabilities. (A)
is incorrect because the corporation does not currently meet the 90% test.
(B)
incorrectly assumes that 10% of the assets must be sold: 10% X 4,000,000 = $400,000 and the
after-tax proceeds used to pay off the company’s liabilities. This would result in only 89% of the assets of the company being used in an active business, i.e., $3,200,000/$3,600,000 = 89%. (D) incorrectly ignores the assets used by the related corporation and calculates that since active business assets are $2,400,000 (60% X $4,000,000), total assets must be $2,400,000/90% or $2,666,666 to meet the 90% test. As a result, $1,333,333 ($4,000,000 -- $2,666,666) of the non-active business assets must be sold and used to pay off liabilities.
Chapter 14 Question 1 (A) $ 500 (B) $ 900 (C) $ 950 (D) $1,000 Feedback: (B) is correct. The initial penalty rate of 5% is increased by 1% for each complete month after April 30, 2024, that the return was not filed to a maximum penalty of 5% + 4% = 9%. (A) is incorrect as it includes only the initial penalty of 5% of the unpaid tax. (C) is incorrect as it includes 1/2% for the half month of September. Only complete months should be counted for purposes of the penalty. (D) is incorrect as it includes 1% for the month of September. Only complete months should be counted for purposes of the penalty.
Question 2 (A) December 31, 2026 (B) August 15, 2027 (C) December 31, 2027 (D) August 15, 2028 Feedback: (B) August 15, 2027, is correct. The normal reassessment period for a CCPC ends three years after the day of mailing of a notice of assessment for the year. (A) December 31, 2026, three years after the end of the taxation year, is incorrect. The three-year period commences with the date of mailing of the notice of assessment, not the last day of the fiscal year. (C) December 31, 2027, four years after the end of the taxation year, is incorrect. (D) August 15, 2028, four years after the day of mailing of a notice of assessment for the year, is incorrect. It would be correct if the taxpayer were a corporation other than a CCPC.
Question 3 (A) December 31, 2024 (B) January 14, 2025 (C) April 30, 2025 (D) June 15, 2025
Feedback: (D) June 15, 2025, is correct. The notice of objection filing due date is the later of90 days after the date of the Notice of Assessment or one year after Darol’s filing due date for 2023. (A) December 31, 2024, being one year after the end of the taxation year, is incorrect. (B) January 14, 2025, being 90 days after the date of mailing of the notice of assessment, is incorrect in this case. For an individual and a graduated rate estate, the due date is the later of this date and one year after the filing-due date for the tax return. (C) April 30, 2025, being one year after the filing-due date for 2023 for an individual not carrying on a business, is incorrect. Darol’s filing-due date for 2023 was June 15, 2024, as he carried on business in 2023.
Question 4 (A) April 30, 2023 (B) June 15, 2023 (C) June 30, 2023 (D) September 30, 2023
Feedback: The correct answer is (D) September 30, 2023, being six months after the date of death. (A) is incorrect. It is the most common due date for 2022 personal tax returns. This date is not correct for two reasons: first, he has income from carrying on business, and second, he has at least six months from the date of death. (B) is incorrect. It is the date the return would have been due if he had not died. (C) is incorrect as it is six months after the end of the year for which the return is being filed.
Question 5 (A) The minimum monthly instalment is $11,667 and the due date for the final balance of tax is February 28, 2024. (B) The minimum monthly instalment is $16,667 and the due date for the final balance of tax is February 28, 2024. (C) The minimum monthly instalment is $16,667 and the due date for the final balance of tax is March 31, 2024. (D) The minimum monthly instalment is $15,000 and the due date for the final balance of tax is February 28, 2024. Feedback: (A) is correct. The minimum monthly instalment is the least of 1/12 of the estimated taxes payable, 1/12 of the prior year’s taxes payable and 1/12 of the second prior year’s taxes payable. The least of these is either the prior year method or the second prior year method. Only the prior year method is listed as a choice in this question. Because X Ltd. had taxable income in the prior year of more than the small business deduction limit, it must pay its final balance due within two months of year end (February 28, 2024). (B) and (C) incorrectly base the instalments on estimated taxes payable. (B) has the correct final due date. (C) incorrectly uses the balance-due day that is three months after the end of the year which is applicable only for Canadian-controlled private corporations that have taxable income that is less than the small business deduction limit in the prior year. (D) incorrectly uses the amount for the first two payments of the second prior year method for all 12 payments but has the correct final due date for the balance due.
Question 6 (A) 4 payments of $6,250 (B) 2 payments of $4,100 and 2 payments of $6,250 (C) 2 payments of $3,825 and 2 payments of $4,100 (D) 2 payments of $3,825 and 2 payments of $4,375 Feedback: (D) is correct (two payments of $3,825 and two payments of $4,375). The minimum quarterly instalment is the least of:
– 1/4 of the estimated taxes payable: 1/4 X $25,000 = $6,250 – 1/4 of the prior year’s taxes payable: 1/4 of $16,400 = $4,100 – 1/4 of the second prior year’s taxable payable (1/4 of $15,300 = $3,825) for two months and two payments of $4,375 (1/2 X [$16,400 -- 2 X $3,825]). (A) is incorrect because four payments of $6,250 is not the minimum payment. (B) is incorrect because two payments of $4,100 and two payments of $6,250 is not the minimum amount. Four payments of $4,100 would result in the minimum amount. (C) is incorrect because two payments of $3,825 and two payments of $4,100 is not the minimum amount. If the first two payments are $3,825, the last two payments must be $4,375. Alternatively, four payments of $4,100 can be made.
Question 7 (A) August 19, 2024 (B) December 20, 2024 (C) April 30, 2025 (D) May 21, 2026
Question 8 (A) November 19, 2024 (B) December 20, 2024 (C) June 30, 2025 (D) August 21, 2028
Question 9 (A) 2022 is due April 30, 2023; 2023 is due April 30, 2024 (B) 2022 is due September 24, 2023; 2023 is due April 30, 2024 (C) 2022 is due April 30, 2023; 2023 is due September 24, 2023 (D) 2022 and 2023 are both due April 30, 2023
Chapter 15 Question 1 (A) Lossco had a deemed year end February 1, 2023. (B) Lossco may select any date, within the 53-week period commencing February 1, 2023, as its new year end. (C) Lossco must continue to have a December 31 year end unless the CRA grants permission for a change. (D) Lossco had a deemed year end on January 31, 2023 and is required to keep January 31 as its year end for the future. Feedback: (B) is correct. Loss Co may select any date, within the 53-week period commencing February 1, 2022, as its new year end. (A) is incorrect, as the taxation year is deemed to have ended immediately before control was acquired. Since control was acquired on February 1, 2022, the year is usually deemed to have ended January 31, 2022. (Technically, it is possible to have an acquisition of control occur at a specific time, say, 10 a.m. on February 1, in which case, the taxation year can be deemed to have ended on February 1 at 9:59 a.m. Usually, a time is not specified, in which case, the taxation year is deemed to end the day before.) (C) is incorrect because the corporation is deemed not to have established a fiscal period yet. This being the case, the corporation is free to select any year end, within the 53-week limitation. (D) is incorrect for the same reason as (C).
Question 2 (A) $ 85,000 (B) $ 80,000 (C) $ 60,000 (D) $ 50,000 Feedback: (C) is correct. The ACB of the land is reduced from $200,000 to $140,000, its FMV. The $60,000 reduction is deemed to be a capital loss for the taxation year ended May 14, 2023. (A) is incorrect as it includes the $25,000 accrued loss on the building which is depreciable property. Capital losses on depreciable assets are specifically disallowed. (B)
is incorrect as it includes the $20,000 accrued loss on the inventory which is not a capital property.
(D) is incorrect, because the $60,000 accrued loss on the land was reduced by the $10,000 accrued gain on the marketable securities. The recognition of the accrued gain on the marketable securities is not required. An election is available to recognize the accrued gain, if it is desirable.
Question 3 (A) $ 7,000 (B) $ 10,800 (C) $ 15,000 (D) $ 23,000
Feedback: (C) is correct. The UCC of the Class 50 computer equipment is reduced by $5,000, from $38,000 to $33,000. The UCC of the Class 8 office furniture and equipment is reduced by $10,000, from $58,000 to $48,000. The total of the two reductions, $15,000, is deemed to have been claimed as CCA in the year ended March 31, 2023. (A) is incorrect as this amount adjusts the UCC of all the classes to the FMV of the classes. This amount includes an adjustment of $8,000 to increase the UCC of the Class 10 automobiles and the Class 12 assets to the FMV of the respective classes. The $8,000 is then subtracted from the $15,000 reduction calculated in (C). This is incorrect. The adjustment applies only to the classes where the UCC is higher than the FMV. (B)
is incorrect as it includes only 72% of the adjustment calculated in (C).
(D) is incorrect for the same reason as (A). The difference between (A) and (D) is that in (D) the positive and negative adjustments have been totalled, whereas in (A) they have been netted.
Question 4 (A) For its year ending December 31, 2023, Lakehead will be able to deduct net capital losses of $3,000, provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023 with a reasonable expectation of profit. (B) For its year ending December 31, 2023, Lakehead will be able to deduct non-capital losses of $18,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023, with a reasonable expectation of profit. (C) For its year ending December 31, 2023, Lakehead will be able to deduct non-capital losses of $12,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023, with a reasonable expectation of profit. (D) For its year ending December 31, 2023, Lakehead will be able to deduct non-capital losses of $15,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023, with a reasonable expectation of profit. Feedback: (D) is correct. For its year ending December 31, 2023, Lakehead Co. will be able to deduct non-capital losses of $15,000 (maximum), provided the widget retailing business is carried on throughout the taxation year ended December 31, 2023 with a reasonable expectation of profit. (A) is incorrect as net capital losses incurred prior to the acquisition of control expire on the date control is acquired. (B) is incorrect. Non-capital losses realized prior to an acquisition of control cannot be deducted against taxable capital gains incurred after the acquisition of control. Non-capital losses are only deductible against income from the business in which the losses were incurred and income from a similar products or services. (C) is incorrect. The non-capital loss deduction has been limited to the income from a similar products or services net of the loss from the widget business. The netting of the widget business loss is not required.
Question 5 (A) $ 10,000 (B) $ 11,600 (C) $ 15,000 (D) $ 30,000 Feedback: (D) is correct. All the conditions for corporate attribution are met. As a result, Mr. Boehmer is deemed to have income equal to the prescribed rate x the investment in the preferred shares. Note that this
amount would be reduced by taxable dividends received by Mrs. Boehmer that are subject to TOSI. In this case, TOSI would not apply to the dividends received by Mrs. Boehmer. The dividends are not derived from a ‘‘related business’’ and are income on ‘‘excluded shares’’. The Class A common shares provide Mrs. Boehmer with 10% or more of the votes and value of the corporation and meet the definition of an ‘‘excluded share’’. Taxable dividends paid to Mr. Boehmer would reduce the deemed income inclusion under the corporate attribution provision. (A)
incorrectly attributes the cash dividend received by Mrs. Boehmer to Mr. Boehmer
(B)
incorrectly attributes the grossed up dividend received by Mrs. Boehmer to Mr. Boehmer
(C)
incorrectly computes the attributed amount to Mr. Boehmer based on $500,000
Chapter 16 Question 1 (A) A capital dividend is usually received tax-free. (B) A corporation must elect to pay a capital dividend, not later than the day the dividend is paid. (C) If a private corporation has had more capital gains than capital losses and hasn’t paid any capital dividends, it will probably have a balance in its capital dividend account. (D) The payment of a capital dividend by a private corporation will trigger a dividend refund. Feedback: (D) is false. Only taxable dividends paid are included in the computation of dividend refunds.
Question 2 (A) A capital gain of $40,000 (B) A dividend of $40,000 (C) A dividend of $50,000 and a capital gain of $40,000 (D) A dividend of $50,000 and a capital loss of $10,000 Feedback: (D) is correct. The dividend would be calculated as the FMV less the PUC. The capital loss would be based on the adjusted proceeds of disposition (Redemption amount less the dividend) less the cost base. (A)
is incorrect. This amount ignores the redemption deemed dividend.
(B)
is incorrect. This amount calculates the dividend using the cost as opposed to the PUC.
(C) is incorrect. The dividend has not been subtracted from the redemption amount to arrive at the proceeds of disposition.
Question 3 (A) The winding-up can occur on a tax-deferred basis. Xavier will be able to defer the recognition of any income for tax purposes. (B) Xavier will have dividend income of $30,000, which will be grossed-up to $34,500 for tax purposes. In addition, he will have a capital gain of $1,000. (C) Xavier will have dividend income of $30,000, which will be grossed-up to $34,500 for tax purposes. In addition, he will have a capital gain of $9,000 (D) Xavier will have a capital gain of $39,000 on the winding-up of X Ltd
Feedback: (B) is correct. The taxable dividend is calculated as the funds available for distribution less PUC less the elected amount from the capital dividend. The capital loss would be calculated as the adjusted proceeds (funds for distribution less PUC) less the adjusted cost base. (A) is incorrect. Only subsidiaries in which the parent company owns at least 90% of the shares can wind up on a taxdeferred basis. (C) is incorrect. The capital dividend has been subtracted from the deemed dividend in the calculation of the proceeds. (D) is incorrect. The ACB has been subtracted from the funds available to arrive at the capital gain. The general winding-up rule and the deemed dividend on winding-up have been ignored.
Question 4 (A) $ 1,655,000 (B) $ 1,373,667 (C) $ 1,557,000 (D) $ 1,858,333 Feedback:
(C) is correct Proceeds
ABI
AII
CDA
NERDTOH
10,000
30,000
300,000
300,000
92,000
200,000
61,333
510,000
183,333
Opening Balance Cash
45.000
Land
850,000
Building
780,000
200,000
200,000
1,675,000
200,000
500,000
Liabilities
(20,000)
@14%
@50 2/3 %
Income taxes
(281,333)
28,000
253,333
1,373,667 Dividend refund available
183,333 1,557,000
(A)
$1,655,000 is incorrect. The tax and RDTOH have not been accounted for. Only the liabilities were deducted.
(B)
$1,375,667 is incorrect. The RDTOH has been omitted.
(D) $1,858,333 is incorrect. The liabilities and the income tax have not been deducted in the computation of the amount available for distribution.
Question 5 (A) The total paid-up capital of the common shares is $25,000, 1/2 of which is attributable to each of Mr. C and Mr. B. (B) The total paid-up capital of the common shares is $35,000, 1/2 of which is attributable to each of Mr. C and Mr. B. (C) The total paid-up capital of the common shares is $25,000, $10,000 of which is attributable to Mr. C and $15,000 of which is attributable to Mr. B. (D) The total paid-up capital of the common shares is $35,000, $20,000 of which is attributable to Mr. C and $15,000 of which is attributable to Mr. B. Feedback: (A) is correct. The total paid-up capital of the common shares is $25,000 ($10,000 + $15,000), 1/2 of which is attributable to Mr. C and 1/2 is attributable to Mr. B. (B) and (D) are incorrect. The total paid-up capital of the common shares is not $35,000. The sale by Mr. A to Mr. C for $20,000 does not affect the paid-up capital of the shares. (C) is incorrect because the $25,000 total paid-up capital of the common shares is split equally among the shares and is not based on the issue price of the shares.
Question 6 (A) C Co. will report a taxable capital gain of $500,000 and its capital dividend account will increase by $500,000. (B) C Co. will report active business income of $500,000 and its capital dividend account will increase by $500,000. (C) C Co. will report active business income of $750,000 and its capital dividend account will increase by $250,000. (D) C Co. will report a taxable capital gain of $750,000 and its refundable dividend tax on hand account will increase by $230,000.
Feedback: (A) is correct. There will be a capital gain equal to the $1 million proceeds of disposition less an adjusted cost base of nil. This will result in a taxable capital gain of $500,000, an addition to the eligible RDTOH of $153,333 and the non-taxable portion of the gain of $500,000 will be added to the capital dividend account. (B) and (C) are incorrect. The disposition of goodwill no longer results in business income unless there is recaptured depreciation in Class 14.1. (D) is incorrect. The capital gains inclusion rate is 50%, not 75%.
Chapter 17 Question 1 (A) The gain will be deferred due to the spousal rollover since the corporation is owned by Pauline’s husband. (B) Pauline should file a section 85 election and elect at $2,200 to defer the tax on the sale. (C) Pauline should file a section 85 election and elect at $800 to defer the tax on the sale. (D) If a section 85 election is not made, the capital cost and UCC of the asset to the corporation will be $3,000. Feedback: (C) is correct. Electing at $800, the UCC of the transferred asset, will defer recapture as well as the capital gain. (A) is incorrect. The spousal rollover applies to transfers to a spouse or a spousal trust, but never to a corporation. (B) is incorrect. Electing at $2,200 will defer the capital gain, but recapture of $1,400 will be incurred. (D) is incorrect. Since the corporation will have acquired the depreciable asset from a non-arm’s length individual, $2,600 (i.e., $2,200 + 1/2 ($3,000 -- $2,200) is the maximum amount that the capital cost could be.
Question 2 (A) $ 100,000 (B) $ 85,000 (C) $ 40,000 (D) $ 25,000 Feedback: (D) $25,000 is correct. In order to defer the gain, Steve will elect at $40,000, the ACB of the asset. The elected amount cannot be less than the non-share consideration. Since S Ltd. assumed the mortgage of $15,000, an additional $25,000 of non-share consideration is the maximum that can be taken. (A) $100,000 is incorrect. This amount would result in a capital gain of $60,000 as well as a shareholder benefit of $15,000 for the assumed mortgage. The total non-share consideration would be $115,000 ($100,000 + $15,000). (B)
$85,000 is incorrect. This amount would result in a capital gain of $60,000.
(C)
$40,000 is incorrect. This amount would result in a capital gain of $15,000.
Question 3 (A) $ 120,000 (B) $ 110,000 (C) $ 85,000 (D) $ 75,000 Feedback: (B) is correct. Since the corporation has acquired the depreciable property from a non- arm’s length individual, the capital cost is limited to the transferor’s capital cost plus the taxable capital gain on the transfer (A) the elected transfer price, is incorrect for the same reason that (B) is correct. (C) the transferor’s UCC plus the taxable capital gain on the transfer, is incorrect. The starting point is the transferor’s capital cost, not UCC. (D) the transferor’s UCC, is incorrect for the same reason that (B) is correct.
Question 4 (A) $ 35,000 (B) $ 23,000 (C) $ 23,333 (D) $ 20,000 Feedback: (D) is correct. The ACB is the elected amount – first allocated to the non-share consideration (Cash and Debt) up to the FMV, then to the preferred shares (up to FMV) with the balance going to the common shares. (A) is incorrect. The elected amount, in excess of the non-share consideration, has all been allocated to the common shares. (B) is incorrect. None of the elected amount has been allocated to the cash. (C) is incorrect. The allocation between the preferred and common shares has been done based on proportionate values, which is incorrect (see the calculation in D above).
Question 5 (A) The vendor will realize a loss that may be a superficial loss. (B) The vendor will realize a loss that is a capital loss. (C) The vendor will not be required to add the prior year’s doubtful debts reserve to income. (D) The purchaser will be able to take a doubtful debts reserve on the accounts receivable. Feedback: (D) is correct because a section 22 election ensures that the purchaser will be able to take a doubtful debts reserve on the accounts receivable. (A) and (B) are incorrect because a section 22 election ensures that the loss to the vendor is a business loss rather than a capital loss or superficial loss. If no section 22 election is made, the vendor will realize a loss that is a capital loss. Further, if the vendor and purchaser are affiliated persons, the loss will be denied and will be a superficial loss. (C) is incorrect because the vendor is always required to add the prior year’s doubtful debts reserve to income. It does not matter whether or not a section 22 election is made.
Question 6 (A) Rebecca is deemed to dispose of the land for proceeds of $50,000. (B) R Co.’s cost of the land is $50,000. (C) Rebecca’s cost of the preference shares is $150,000. (D) R Co.’s cost of the land is $60,000. Feedback: (D) is correct. Because the promissory note is $60,000, the elected amount is deemed to be $60,000. The elected amount determines the proceeds of disposition to Rebecca, R Co.’s cost of the land, the cost of the consideration to Rebecca, and the paid-up capital of the shares issued as consideration after the paid-up capital reduction (A) is incorrect because the proceeds to Rebecca are deemed to be %60,000 not $50,000 as discussed above (B) is incorrect because R Co’s cost of the land is deemed to be $60,000 due to taking back non-chare consideration greater than the original cost. The elected amount determines the proceeds of disposition to Rebecca, R Co.’s cost of the land, the cost of the consideration to Rebecca, and the paid-up capital of the shares issued as consideration after the paid-up capital reduction. (C) is incorrect because Rebecca’s cost of the preference shares is zero. It is calculated as the elected amount minus the boot ($60,000 -- $60,000 demand note).
Question 7 (A) The newly amalgamated corporation can utilize the non-capital loss in its deemed year ended October 31, 2023. (B) The newly amalgamated corporation cannot utilize the non-capital loss until its taxation year commencing one year after the amalgamation. (C) If a winding-up takes place, P Ltd. can utilize the non-capital loss in its taxation year commencing January 1, 2024. (D) If a winding-up takes place, P Ltd. can utilize the non-capital loss in its taxation year ended December 31, 2023. Feedback: (C) is correct. On winding-up, the losses of the subsidiary are not available to the parent, until the parent’s taxation year commencing after the commencement of the winding-up. Thus, the losses of L Ltd. would first be available to P Ltd. in its taxation year commencing January 1, 2024. (A) is incorrect. The predecessor corporations are deemed to have a year end immediately before the amalgamation, October 31, 2023. The amalgamated corporation first exists on November 1, 2023. (B) is incorrect. The amalgamated corporation can utilize the losses in its first taxation year commencing November 1, 2023. (D) is incorrect for the reasons (C) is correct.
Question 8 (A) $ 100,000 (B) $ 130,000 (C) $ 165,000 (D) $ 180,000 Feedback: (B) is correct. X Ltd’s adjusted cost base of the shares of Y Ltd.
500,000
Less: Cost amount of Y Ltd.’s assets
-420,000
Dividends paid to X Ltd.
-15,000
Potential bump 65,000 The ACB of the land can be bumped by $30,000, up to its FMV at the time X Ltd. acquired control of Y Ltd., $130,000. (A) is incorrect. The bump available on a winding-up has not been applied. (C) is incorrect. The full amount of the bump available has been allocated to the land. The ACB of the land cannot be bumped above the FMV of the land when X Ltd. acquired control of Y Ltd. (D) is incorrect for the same reason as (C). In addition, the potential bump has not been reduced by the dividends received from X Ltd.
Question 9
(A) Chris will have no capital gain on the disposition of his common shares and the ACB of his preferred shares is $2,000. (B) Chris will have no capital gain on the disposition of his common shares and the ACB of his preferred shares is $1,865. (C) Chris will have a capital gain of $3,135 on the disposition of his common shares and the ACB of his preferred shares is $5,135 (D) Chris will have a capital gain of $135 on the disposition of his common shares and the ACB of his preferred shares is $2,135. Feedback: (B) is correct. Since Chris exchanged all his common shares as part of a reorganization of capital, the rollover applies automatically. The cost of the preferred shares is equal to the cost of his common shares, less the non-share consideration: $2,000 -- $135 = $1,865. For purposes of calculating the capital gain on the disposal of the common shares, proceeds are defined as the cost of the new shares, plus non-share consideration received: $1,865 + $135 = $2,000. As the proceeds equal his ACB, there is no capital gain. (A) is incorrect. The ACB of the preferred shares has not been reduced by the non-share consideration received. (C)
is incorrect. The tax-deferral provisions have been ignored.
(D)
is incorrect. A capital gain equal to the non-share consideration has been recognized.
Question 10 (A) When there are many diverse shareholders, a share-for-share exchange rollover is easier to accomplish than a subsection 85(1) rollover because there is no need for each shareholder to file an election. (B) The ACB of Shelly’s shares of Clare Ltd. is $7,000. (C) The ACB of the Abigail Inc. shares acquired by Clare Ltd. from Shelly is $5,000. (D) Non-share consideration, up to the PUC of the exchanged shares, $5,000, could have been received by Shelly without any adverse tax consequences to her. Feedback: (D) is correct as it is false. The provision specifically states that subsection 85.1(1) does not apply where consideration other than shares of the particular class of the purchaser was received by the vendor. Therefore, in the absence of any other election being made, Shelly would have a capital gain of $5,000 on the exchange if she received any non-share consideration. (A) is incorrect as it is true. Section 85.1 is automatic; no election is required. (B) is incorrect as it is true. (C) is incorrect as it is true.
Question 11 (A) His children should subscribe to common shares of a holding company and he should transfer his shares of ABC to this holding company, electing under section 85 at tax cost and taking back voting redeemable retractable preferred shares as consideration. (B) He should change his will to leave his shares of ABC to his children rather than his wife. (C) He should gift the ABC shares to his children during his lifetime. (D) He should sell the ABC shares to his children at fair market value, taking back debt as consideration. Feedback:
(A) is the correct answer because this plan will freeze the value of his interest in ABC for tax purposes (since preferred shares don’t grow in value) and transfer future growth to his children (because common shares do grow in value) without giving up control (because the preferred shares are voting). There will be no tax on the transfer since he will be electing at tax cost. (B) is incorrect because changing his will to leave his shares of ABC to his children does not achieve his objective of freezing the value of his interest and having no tax on the transfer. (C) is incorrect because gifting the ABC shares to his children results in the loss of control and immediate tax on the accrued capital gain because the gift results in a deemed disposition at fair market value. (D) is incorrect because, although a sale at fair market value taking back debt as consideration will defer tax somewhat because of the capital gains reserve, there will be tax on the accrued gain payable over the 5-year period and there is a loss of control.
Question 12 (A) A reverse asset freeze. (B) An internal freeze, using section 86. (C) A holdco freeze, taking back boot of $1. (D) A holdco freeze, taking back boot of $913,630. Feedback: (C) is correct, assuming an election is made at $913,630. The boot must be limited to $1 because the Act will cause any boot in excess of this amount to be a deemed dividend not a capital gain. That is why (D) is incorrect. (A) is incorrect because a reverse asset freeze involves a transfer by a company rather than an individual. Hence, the $913,630 capital gains exemption cannot be used. (B) is incorrect because an internal freeze using section 86 involves an automatic rollover. Hence, the $913,630 capital gains exemption cannot be used. While it is possible to accomplish an internal freeze with the crystallization of his capital gains exemption using section 85 as discussed in the textbook, that was not a choice offered in this question.
Chapter 19 Question 1
(A) $ 185,500 (B) $ 182,500 (C) $ 170,100 (D) $ 165,500 Feedback: (D) is correct. Net income per financial statement
$365,000
Add: Donations
$20,000
Sale of shares — Taxable capital gain
$60,000 — Accounting gain
(120,000)
-$60,000 $325,000 50%
Bert’s share
$162,500
Dividend gross-up: $20,000 X 15%
3000 $165,500
(A) is incorrect. The only adjustment that was made was for the dividend gross-up. (B) is incorrect. All of the adjustments have been ignored: donations, net accounting/tax gain, and the dividend grossup. (C)is incorrect. All adjustments were made. However, the dividend gross-up was calculated at 38%, which was incorrect on dividends from a CCPC out of its LRIP.
Question 2 (A) $ 23,000 (B) $ 43,000 (C) $ 63,000 (D) $ 69,000
Feedback: (C) is correct. Contributions — initial - additional Share of profit Share of non-taxable portion of capital gain Share of charitable donations Drawings ACB
$5,000 14,000 100,000 20,000 (6,000) (70,000) 63,000
(A) is incorrect. The taxable capital gain has been deducted rather than added the non-taxable portion. (B)is incorrect. The non-taxable portion of the capital gain has not been included. (D)is incorrect. The ACB has not been reduced by Ann’s share of the charitable donations.
Question 3 (A) The tax return for the first year of the trust is due March 31, 2024. (B) The trust is entitled to a deduction in computing its income for amounts paid to the children during the year.
(C) Income in the trust will be subject to a 33% federal rate of tax. (D) Al can defer the recognition of the capital gain on the transfer of the securities to the trust. Feedback: (D) is correct because D is false. Al is deemed to have received proceeds equal to the fair market value of the marketable securities transferred to the trust. Therefore, Al is required to recognize the $30,000 capital gain. (A) is true. The tax return is due 90 days after the year end of the trust. Inter vivos trusts are taxed on a calendar year basis. (B) is true. The trust is entitled to the deduction. (C) is true. The tax rate is 33%.
Question 4 (A) The trust must have a December 31 year end. (B) The income in the trust will automatically be subject to the same graduated rates of tax applicable to individuals. (C) The trust return is due six months after the year end of the trust. (D) The trust is not entitled to claim a dividend tax credit for dividends received and retained in the trust. Feedback: (A) is true. The taxation year of a testamentary trust that is not a graduated rate estate must have a calendar year end. (B) is false. Only a graduated rate estate is taxed at graduated tax rates and only for the first 36 months from the date of death. A testamentary trust that is created by will is not an ‘‘estate’’ and cannot be a graduated rate estate. (C) is false. The trust return is due 90 days after the end of the fiscal period of the trust. (D) is false. The trust is entitled to claim a dividend tax credit for dividends received from taxable Canadian corporations because it is taxed as an individual.
Question 5 (A) An inter vivos trust (B) A joint partner trust (C) An alter ego trust (D) A discretionary trust Feedback: (C) is correct. An alter ego trust has a deemed disposition on the settlor’s death (A) is incorrect. An inter vivos trust generally has a deemed disposition at fair market value at the end of 21 years, unless it is a joint partner trust (described in (B)), in which case the deemed disposition takes place on the partner (i.e., spouse or common-law partner) beneficiary’s death. (B) is incorrect. A joint partner trust has a deemed disposition on the death of the partner (i.e., spouse or commonlaw partner). (D) is incorrect. A discretionary trust would always have a deemed disposition at fair market value at the end of 21 years, since it cannot be a joint partner trust (which, by definition, must pay the income out to the beneficiary and, therefore, cannot be discretionary).
Question 6 (A) Income-splitting through discretionary income distributions to lower income beneficiaries. (B) Avoiding a deemed disposition of assets at fair market value on the child’s death that would result if the assets were left directly to the child. (C) Avoiding the deemed disposition of assets at fair market value on the transfer of assets to the trust on death. (D) Providing your children with beneficial ownership over their inheritances, but giving control over their inheritances to the trustees of each trust. Feedback: (C) is correct. Avoiding the deemed disposition is not an advantage. You cannot avoid the deemed disposition at FMV if the beneficiaries of the testamentary trust are your children. (A) is incorrect because income-splitting through distributions to beneficiaries is an advantage. (TOSI does not apply to dividends or taxable capital gains on property inherited on the death of a parent where the child has not attained the age of 24 years old before the year.) (B) is incorrect, because avoiding the deemed disposition on the child’s death is an advantage. (D) is incorrect, because providing your children with beneficial ownership but not control over their inheritance is an advantage.
Question 7 (A) $72,750 (B) $72,845 (C) $73,250 (D) $73,345
Question 8 (A) $15,750 (B) $15,875 (C) $16,125 (D) $16,500 Feedback: (A) is correct – see calculation below. (B) is incorrect because it omits the non-taxable portion of the capital gains added to ACB as well as the partner’s proportion of the charitable donations which reduces partner ACB. (C) is incorrect because it only adds Mrs. G’s income allocated for the year to ACB (omits the non-taxable portion of capital gain added to ACB, capital dividend added to ACB, and charitable donations subtracted from ACB) (D) is incorrect because it omits the non-taxable portion of the capital gain added to ACB.
Partnership ACB - January 1, 2022
345,000
Add: Share of Income from Business Share of Taxable Capital Gains Non-Taxable Portion of Capital Gains Share of Eligible Dividends Share of Capital Dividends Share of Rental Income
60,000 1,500 1,500 250 500 11,000
Less: Share of Donations Partnership ACB - January 1, 2023 Proceeds of Disposition Adjusted Cost Base Capital Gain Taxable Capital Gain
-
-
1,250 418,500 450,000 418,500 31,500 15,750
Question 9 (A) A taxpayer passed away four years ago with a large estate which is still awaiting distribution of assets. (B) A taxpayer passed away last year and the executors expect to wind up the estate and distribute the assets later this year. (C) A taxpayer passed away two years ago and, on her death, she created a trust for her granddaughter, settled with $100,000 cash from her estate. (D) A taxpayer passed away five years ago and, on his death, he created a trust for his grandson, settled with $50,000 cash from his estate.
Question 10 (A) A taxpayer, who is alive, settled a trust for her daughter. (B) A taxpayer, who is alive, contributed $100,000 to an existing trust for her daughter. The trust had been established for her daughter, by the taxpayer’s father, on his death, two years ago. (C) A taxpayer, on her death, settled a trust for her son with $200,000 of cash from her estate. (D) A taxpayer, in her will, instructed her beneficiaries to contribute an additional $200,000 of cash from her estate to an existing trust for her grandson that she had established, with $1,000,000 of cash, prior to her death.
Question 11 (A) A taxpayer establishes a trust for his spouse and children. His spouse is to receive all of the income from the trust during the taxpayer’s lifetime. The children are not entitled to share in income during their mother’s lifetime. Upon the death of the taxpayer, the capital of the trust is to be distributed to his children. (B) A taxpayer establishes a trust for her spouse and children. The trust document states that her children are to receive all of the income from the trust during the taxpayer’s lifetime. Her spouse is not entitled to share in income during the taxpayer’s lifetime. Upon the death of the taxpayer, the capital of the trust is to be distributed to her spouse.
(C) A taxpayer establishes a trust for his spouse and children. His spouse and children share equally in the income and capital of the trust. Upon the taxpayer’s death, the capital of the trust is to be distributed to his spouse. (D) A taxpayer establishes a trust for her spouse and children. Her spouse is entitled to all of the income of the trust during her spouse’s lifetime. The children are not entitled to share in income during their mother’s lifetime. Upon her spouse’s death, their two children become entitled to all of the capital of the trust.
Question 12 (A) A spousal trust (B) A graduated rate estate (C) A testamentary trust that is not a graduated rate estate (D) An inter-vivos trust that is not an alter ego trust
Chapter 20 Question 1 (A) Federal tax based on the tax rate schedule plus Saskatchewan taxes. (B) Federal tax based on the tax rate schedule plus an additional federal tax. (C) Withholding tax only at 25%. (D) Withholding tax only at 331/3%. Feedback: (B) is correct. Jari is taxed as a non-resident on the disposition of taxable Canadian property. The tax is federal tax on the graduated rate schedule plus 48% of tax otherwise payable. The Canada–Greece tax treaty does not override Canada’s right to tax the taxable capital gain. (A) is not correct. Income earned in a particular province for a non-resident includes only employ- ment income and income from carrying on business. (C) and (D) are not correct. Non-residents are taxable on gains from the disposition of taxable Canadian property under Part I of the ITA. Withholding tax is exigible under Part XIII. Jari will need to pay 25% of the actual or estimated gain on filing a notice either prior to or within 10 days of the sale. If the notice is not filed, the purchaser must withhold and remit 25% of the purchase price of the property within 30 days of the end of the month of purchase.
Question 2 (A) She pays a 25% non-resident tax and the interest is excluded from the Canadian tax return for the period of residency. (B) She does not pay any Canadian tax in relation to the interest. (C) The income is included in her Canadian tax return for the period of residency, but she receives a foreign tax credit for any taxes paid in her previous country of residence. (D) The income is included in her Canadian tax return for the period of residency based on a proration calculated as the number of days resident divided by 365 days. Feedback: (B) is correct. The interest was earned while Mai was a non-resident, before she became a resident of Canada. Withholding tax does not apply to interest paid by a Canadian resident bank to unrelated non-residents. (A) is incorrect. Only interest that is not fully exempt interest paid to a non-arm’s length person and participating debt interest is subject to 25% withholding tax. and (D) are incorrect. The interest was not earned during her period of residency
Question 3 (A) It is subject to tax only in Brazil. (B) It is included in Antonio’s Canadian income tax return, but any Brazilian taxes are deductible from the partnership income. (C) It is included in Antonio’s Canadian income tax return, but a foreign tax credit may be claimed in Antonio’s Brazilian tax return for any Canadian income taxes paid. (D) It is included in Antonio’s Canadian income tax return, and a foreign tax credit may be claimed for any Brazilian taxes paid.
Feedback: (D)is correct. As a resident of Canada, Antonio is taxed in Canada on his worldwide income. Canada provides a foreign tax credit to alleviate potential double taxation of the income. (A) is incorrect. As a resident of Canada, Antonio is subject to tax on his worldwide income. (B) is incorrect. Deductions for business foreign tax credits are not available in Division B of the ITA (C) is incorrect. Business income is sourced to the country in which the business activities are carried on (or where a permanent establishment is located under treaty). Brazil has jurisdiction to tax the income, and Canada provides a foreign tax credit for the Brazilian tax.
Question 4 (A) The RRSP is taxable Canadian property and Betty will have to file a Canadian non-resident tax return when she disposes of the RRSP. (B) There is a deemed disposition of the RRSP at fair market value on emigration. (C) There will be a withholding tax at the time Betty terminates the RRSP and has it paid to her. (D) Non-resident withholding tax should be paid, at 25%, from the income earned in the RRSP after emigration. Feedback: (C) is correct. There are no tax consequences until Betty receives payments from her RRSP/RRIF, at which time, the payer will withhold tax on each payment. The withholding tax rate is 25%, but is reduced to 15% under treaty for annuity payments if the RRSP is matured and converted to an annuity. (A) is not correct. Taxable Canadian property, as defined, does not include RRSPs. (B) is not correct. Excluded rights or interests are exempt from deemed disposition at the time of emigration. (D) is not correct. Only payments out of an RRSP are subject to withholding tax.
Question 5 (A) Maxwell will include the C$150,000 dividend in taxable income for the year in which the dividend was received. A foreign tax credit can be claimed for the withholding tax paid to the U.S. government on the dividend. (B) Maxwell will include the C$150,000 dividend in Division B income for the year in which the dividend was received. An offsetting deduction of C$100,000 will be available for the portion of the dividend paid from exempt surplus. (C) Maxwell will include the C$150,000 dividend in Division B income for the year in which the dividend was received. An offsetting deduction will be available in computing taxable income for C$150,000 because the dividend was from exempt surplus. (D) Maxwell will include the C$150,000 dividend in Division B income for the year in which the dividend was received. A deduction will be available in computing taxable income for the underlying tax paid by the U.S. company on the business income earned in the United States and Paraguay. Feedback: (B) is correct. The exempt surplus balance of Maxwell Rock Ltd. will be $100,000 at the end of the year. The business income earned in Michigan is the net earnings for the year from an active business carried on by it in a designated treaty country and would be exempt surplus of the U.S. company. The business income earned in Paraguay is included in taxable surplus because the income is being earned in a country that is not a designated treaty country. Of the $150,000 dividend paid to Maxwell, $100,000 will be considered to have been paid from exempt surplus and $50,000 will be considered to have been paid from taxable surplus because of the ordering rule. The exempt surplus portion of the dividend is fully deductible in computing taxable income.
(A) is incorrect. Dividends received by a corporation from a foreign affiliate are not eligible for a foreign tax credit. (C) is incorrect. Only $100,000 of the dividend is paid from exempt surplus. (D) is incorrect. A deduction will be available in computing taxable income for the underlying tax paid associated with the dividend paid by the U.S. company from business income earned in Paraguay but not from business income earned in the United States. The business income earned in the United States is exempt surplus and is fully exempt from tax in Canada when paid as a dividend.
Question 6 (A) Bob is required to file Form T1135 reporting foreign property ownership. (B) Bob is exempt from filing a Form T1135 as the property is personal-use property. (C) Bob is required to file a Form T1135 only if the property has a cost of over $100,000. (D) Bob needs to file a U.S. Form 1040NR (non-resident income tax return) and declare the ownership of the property to the U.S. Internal Revenue Service. Feedback: (B) is correct, for the reason stated in the question. (A) and (C) are incorrect for the reason stated in (B). (D) is incorrect. Bob would only need to file a U.S. form 1040NR in relation to an income producing property.
Question 7 (A) It will not be taxed in Canada until dividends are paid to the shareholders. A foreign tax credit will be available for the U.S. withholding tax. (B) It will not be taxed in Canada until dividends are paid to the shareholders. An offsetting deduction will be available under Division C because the dividend will be paid from taxable surplus. (C) It will not be taxed in Canada until dividends are paid to the shareholders. An offsetting deduction will be available under Division C because the dividend will be paid from exempt surplus. (D) It will be included in income of the Canadian shareholders annually because the company is a controlled foreign affiliate. Feedback: (D) is correct. The company will be a controlled foreign affiliate of each of the Canadian share- holders because (i) it is a foreign affiliate (each Canadian shareholder owns not less than 1% of the shares and not less than 10% of the shares with related persons) of the company, and (ii) it is controlled by less than five unrelated Canadian residents (Jane and Tori). The income of the corporation will be FAPI because it will be considered income from property. The shareholder’s participating percentage of the income as of the end of the affiliate’s taxation year will be included in Division B income. A deduction for the related U.S. tax paid on the income calculated using the relevant tax factor will also be available. (A) is incorrect. The income will be taxed annually. Dividends paid to the Canadian shareholders will be included in Division B income. Foreign tax credits will be available against Part I tax for U.S. tax withholdings. An offsetting deduction will be available for the lesser of the amount of the dividend and the cumulative total of prior year’s net income inclusions for FAPI.
(B) is incorrect. The income will be taxed annually. An offsetting deduction for a dividend is not available under Division C because the dividend is not received by a corporation. Division C deductions are only available to Canadian resident corporations. (C) is incorrect. The income will be taxed annually. An offsetting deduction for a dividend is not available under Division C because the dividend is not received by a corporation.
Chapter 21 Question 1 (A) $ 19,500 (B) $ 26,000 (C) $ 28,600 (D) $ 39,000 Feedback: (C) is correct. Sales (taxable at 13%) .................................... $250,000 Purchase of supplies from a registrant ............. (30,000) $220,000 X 13% = $28,600. (A) incorrectly takes a deduction for salaries which is an exempt supply: $250,000 -- $30,000 -$70,000 = $150,000. $150,000 X 13% = $19,500. (B) incorrectly takes a deduction for interest expense: $250,000 -- $30,000 -- $20,000 = $200,000. $200,000 X 13% = $26,000. (D) incorrectly includes exports (which are zero-rated) and takes a deduction for interest expense (an exempt supply): $250,000 + $100,000 -- $30,000 -- $20,000 = $300,000. $300,000 X 13% = $39,000.
Question 2 (A) The following are all exempt supplies: a visit to a doctor, daycare cost for a minor child, tutoring for a course required for an undergraduate degree, basic groceries. (B) The following are all taxable supplies: a restaurant meal, sale of a sweater by a large department store, sale of tickets to a Taylor Swift concert, basic groceries. (C) The following are all exempt supplies: airfare to Toronto from Saskatoon, prescription drugs, discount on bonds, property taxes. (D) The following are all taxable supplies: royalties on a textbook, wheelchair, dividends on preferred shares, accounting fees. Feedback: (B) is correct. Basic groceries is a zero-rated taxable supply, so while no GST/HST is charged on basic groceries, it is still considered a taxable supply. (A) incorrectly includes basic groceries in the list as it is a taxable supply. A visit to a doctor, daycare cost for a minor child, tutoring for a course required for an undergraduate degree are all exempt supplies. (C) incorrectly includes the airfare within Canada and prescription drugs in the list. Airfare within Canada (Toronto to Saskatoon) and prescription drugs are both taxable supplies. Prescription drugs are a zero-rated taxable supply. The discount on bonds and property taxes are exempt supplies. (D) incorrectly includes dividends on preferred shares in the list. Dividends on preferred shares are considered a financial service and therefore an exempt supply. The remaining items, royalties on a textbook, wheelchair (zero-rated) and accounting fees are all taxable supplies.
Question 3 (A) $53,040 (B) $58,500 (C) $63,440 (D) $65,000
Application Questions and Answers Part 3
Question 1 (36 minutes) [Chapter 2] Roman A. Round was born, raised, and educated in Canada, where he had lived continuously until March of 2023. Roman was the senior vice-president of International Products Manufacturing Ltd. (IPML), which had its head office in Canada. The corporation transferred him to its Hungarian sales subsidiary to gain some marketing experience in the emerging markets of Eastern Europe. IPML planned to have him return to Canada as its president in about two to three years. The family home was listed for sale with a realtor in February 2023 with the objective of selling it by the end of the school year in June 2023. Roman left Canada on March 1, 2023 to begin his position in Hungary, after arrangements to obtain a work permit were made by the Hungarian subsidiary. He left his wife and children, who were in elementary school, in Canada, in order for the children to complete the school year. Roman took all of his personal possessions with him when he left. He sold his car, but the family kept a second car registered to his wife for their use in Canada. The Hungarian subsidiary arranged the rental of a furnished three-bedroom apartment for Roman and his family. Roman planned to look for a house to purchase when his family arrived later, but prospects for finding a suitable house were not great, due to a very heavy demand. If a suitable house were not found, the apartment would be adequate for the family. As a result of the slow real estate market in Canada, the family home could not be sold at an acceptable price. The family decided to rent the house for the period that they were living in Hungary. Finally, in July 2023, tenants were found to rent the house and the furniture on a oneyear lease. Roman's wife and children left Canada to join him on August 1, 2023, after selling the second car. Roman and his wife own a cottage in Canada which they plan to live in during a onemonth vacation in each of the summers that they will be away, starting with the summer of 2022. This would allow the family to visit with relatives and friends who remained in Canada. Roman retained his golf club membership in Canada, because he did not want to lose the high initiation fee that he had paid fairly recently to become a member. However, he did resign from two Canadian business clubs that required annual membership fees. He joined similar clubs on his arrival in Hungary. Roman was paid in Hungarian currency by the subsidiary, which deposited his pay directly into a bank account which he opened in Hungary. He retained his RRSP invested in Canada and his investment portfolio containing mostly Canadian securities. He also had to retain a bank account in Canada into which the rent on the house was deposited by the tenants. The tenants were instructed to withhold and remit to the Canada Revenue Agency 25% of the agreed monthly rental, as required on payments to non-residents. Required: Advise Roman on how to file his 2023 tax return. Evaluate thoroughly and in detail the alternatives in the residence issue as they relate to this fact situation. Present your answer by discussing each degree of residence and its tax consequences as it applies to this fact situation. Provide your advice, in conclusion, after weighing the relevance of the facts you have considered.
Solution 1 Canadian resident: taxed on worldwide income for the whole year 2023 Criterion: continuing state of relationship with Canada; i.e., ties not cut. Evidence: Primary — did not sell house in Canada — price may have been set too high on purpose so that it would not be sold — house in Canada rented with furniture, possibly indicating an intent to return to it — one-year lease makes it more difficult to sell with vacant possession — cottage owned in Canada — indicated intention to return to it during summer vacation of one month — immediate family did not leave with him Secondary — born, raised, educated, and worked in Canada — plan to have him return in two to three years — rental of furnished apartment in Hungary may indicate temporary stay there — relatives and friends remained in Canada — retained golf club membership — retained RRSP and investment portfolio in Canada — maintained bank account in Canada Deemed resident-sojourning: taxed in Canada on worldwide income for the whole year. Criterion: paragraph 250(1)(a) requires that he sojourn in Canada for an aggregate of 183 days or more while a non-resident. Note that CRA practice is to count any part of a day as a “day” for this purpose. Evidence: — when he was in Canada during 2023, he was not sojourning, because he was not living in Canada temporarily or visiting — furthermore, he left Canada on March 1, 2023, therefore, being in Canada for less than 183 days — as a result, deemed full-time residence is not a viable conclusion in this particular case Part-year resident: tax on worldwide income for the part of 2023 when fully resident. Criterion: “clean break” from Canada in 2023. Evidence: — planned stay abroad was for an indefinite term of “two to three years” — listed family home for sale — no sale due to poor market conditions — work permit obtained in Hungary — wife and children left in Canada only to complete school year — took all of his personal possessions when he left
— sold his car when he left — three bedroom, furnished apartment rented for use of the whole family — apartment rented because prospects of finding a suitable house to purchase were not great — one-year lease makes house in Canada difficult to re-occupy on short notice — not available for his use at any time in the year after leaving — immediate family left Canada after arrangements to rent house completed — second car used by family sold when they left — in Income Tax Folio S5-F1-C1, the Canada Revenue Agency indicates that occasional, but not regular, return visits for personal or business reasons will not be used to argue against a “clean break” — not reasonable to expect relatives and friends to move in order to help establish his “clean break” — resigned from two Canadian clubs — joined business clubs in Hungary — paid in Hungarian currency — maintained bank account in Hungary — tenants withheld tax from rental payments, as required for payments to non-residents Non-resident: tax in Canada on Canadian-source income. Criterion: employed in Canada or carried on business in Canada after making a “clean break”. Evidence: — if it is established that he made a “clean break” in 2023, then there is no evidence of his performing employment services in Canada or carrying on business in Canada after such a “clean break” — as a non-resident, the rental payments are subject to withholding tax as arranged with the tenants Conclusion: — Roman should be advised to report his income for 2023 as a part-year resident — the facts appear to weigh more heavily in this direction, since very few significant ties to Canada remain — his past history in Canada is not determining — assets left in Canada like the house and cottage are either not available for his use or will not be used regularly — the golf membership is not determining; it can be used when on vacation to recover some of the benefit of the high initiation fee — investments in Canada are not determining; anyone can invest in Canada as a non-resident — there may be a question as to when in 2023 he became a non-resident by making the “clean break” — the Schujahn case would suggest that the “clean break” occurred when he left on March 1, not when his family left on August 1 — however, the CRA’s position is that the “clean break” may not occur until the individual’s family leaves Canada [Income Tax Folio S5-F1-C1, par. 1.22]
*Question 2 (40 minutes) [Chapter 2] Murray Glow, your client, was born and raised in Canada. After obtaining his MBA in 2013, he began working as a consultant. In July 2022, Just-Do-It Limited (JDIL), of which he was a major shareholder, entered into a contract with a Canadian Crown corporation to furnish consulting advice in Portugal. Services were to commence July 15, 2022, and end January 14, 2024. A daily rate of fees was set, but total billings were not to exceed a specified maximum. The contract also provided for moving, travel, and living expenses for Murray and his dependants up to a specified maximum. All fees and expenses were paid to JDIL in Toronto. Murray continued to be a shareholder, director, and officer of the corporation, and he remained very interested in its activities. JDIL paid Murray and was instructed to deposit these payments in Murray's Canadian bank account, which he continued to maintain for this purpose and for the operation of the rental property that he owned. He felt that the Canadian bank account was necessary because of foreign exchange difficulties that he might otherwise encounter. He instructed JDIL not to withhold any income taxes on these payments, because he intended to give up his Canadian residence status to establish an international consulting business abroad upon termination of the Portuguese contract. Since Murray had little time before leaving for Portugal, he quickly rented, on a month-to-month basis, the unit that he had been occupying in a duplex that he owned. He intended to sell the property when the market would provide him with a reasonable profit. He arranged to have JDIL manage the renting of this property for a fee which he paid to the corporation. Murray stored his major furnishings and winter clothing in Canada. His smaller household and personal effects were shipped to Portugal. He sold his car, cancelled his auto insurance and a gasoline company credit card, and obtained an international driver's licence. He retained credit cards such as American Express, Visa, and MasterCard, as well as his retirement accounts. Under the contract, he was also required to maintain his provincial health insurance coverage. When Murray left Canada for Portugal, he was accompanied by his friend, Martha, who had been a part of his life for over a year before their departure. Martha had obtained leave from her university program of studies for the fall 2022 term. The couple took up residence in a hotel suite that was converted into an apartment in Lisbon, Portugal. No conventional living quarters were available, because of the housing market. During his stay in Portugal, Murray obtained a Portuguese driver's licence and maintained two bank accounts and two cars. He joined sports, dining, and social clubs in Lisbon. He was provided with an office by the Portuguese government and he carried business cards which identified him as a consultant with that government. He actively promoted the consulting business of JDIL in Portugal in the hope of establishing the business abroad, but he did not generate sufficient business to stay in Portugal beyond the period of the existing contract. He did not seek to extend his visa or pay any form of tax on his income in Portugal. Martha returned to Canada for the winter 2023 term and returned to Portugal for the summer of 2023, but returned to Canada in September 2023 to begin a new program. By December 2023, Murray had billed the limit under the contract. He vacated his apartment, sold his cars, packed up his possessions (including some artwork, textiles, and other souvenirs that he had acquired), and returned to Canada.
Required: Evaluate thoroughly and in detail the facts to determine if Murray: (a) maintained Canadian resident status throughout the period in question, or (b) ceased to be a resident of Canada in July 2022, thereby establishing part-year resident status in that year and non-resident status immediately thereafter until December 2023. Advise Murray on how to file his 2022 tax return. Present your answer by discussing briefly the tax consequences of the options outlined above as they apply to this fact situation. Provide your advice, in conclusion, after weighing the relevance of the facts you have considered.
Solution 2 Canadian resident: taxed on worldwide income for the whole year 2022 and subsequent years Criterion: continuing state of relationship with Canada; i.e., ties not cut Evidence: — born, raised, and educated in Canada — agreed to short-term contract abroad — contract provided for living expenses, indicating the temporary nature of the stay abroad — fees under the contract were paid to Murray's Canadian corporation — he continued as a shareholder, director, and officer of the Canadian corporation — he maintained an interest in the activities of the Canadian corporation — he maintained a Canadian bank account — he owned a rental property in Canada — he arranged a rental on a month-to-month basis to allow him to resume his habitation of the residence on short notice — he stored his major furnishings and winter clothing in Canada, indicating an intention to return — he retained credit cards issued in Canada and his retirement accounts — he maintained his health coverage in Canada — he did not extend his visa in Portugal, indicating an intention to return — he did not pay income tax in Portugal, indicating a lack of permanence in his stay there — his girlfriend returned to Canada, spending only a fall term and a summer in Portugal with him, indicating a lack of permanence in his stay — he returned to Canada, leaving nothing in Portugal Part-year resident: tax on worldwide income for the part of 2022 when fully resident Criterion: “clean break”, i.e., severed ties in July 2022 Evidence: — the Canadian bank account was only to avoid foreign exchange difficulties and to maintain his rental property — no withholding of income tax on his fees — he intended to establish an international consulting business abroad and to that end attempted to promote such a business in Portugal — he intended to sell his residence property in Canada when market conditions were right and to this end he arranged a rental on a month-to-month basis to facilitate a sale — he moved his personal effects to Portugal — he sold his car — he cancelled his auto insurance and a gasoline company credit card — he was accompanied to Portugal with his girlfriend who stayed with him when not in school — he rented an apartment in Portugal because more permanent accommodation was not available — he obtained a Portuguese driver's licence — he maintained two bank accounts and cars in Portugal — he joined clubs in Portugal — he had an office in Portugal — his business cards identified him as a consultant to the Portuguese government — the credit cards he kept could be used internationally — he maintained his health coverage in Canada only because it was a requirement of his contract
Non-resident: taxed in Canada on Canadian-source income Criterion: employed in Canada, i.e., performed services of employment in Canada — Evidence: after leaving in July 2022, he was not providing services of employment in Canada — therefore, non-resident taxable in Canada is not a possibility in this case Conclusion — while Murray stated an intention to establish residence abroad, he was not successful in doing so — in fact, he returned immediately at the termination of a short-term contract — he did not sever his major ties to Canada or establish strong ties abroad — his ties to Portugal were merely those necessary to sustain a lifestyle while there OR — on the other hand, it could be argued that — he made an effort to establish a consulting practice abroad and the lack of business was unforeseen and beyond his control — he attempted to integrate himself into Portuguese society by living there and joining clubs — his lack of more permanent housing was due to market conditions beyond his control
Question 3 (34 minutes) [Chapter 2] Ms. Vanna Van der Vamp was born in Vancouver in 1976, was educated in Waterloo, and has lived and worked in Canada all of her life. Until mid-July 2023, she had been senior vicepresident of Waterloo Debits Manufacturing Limited (“Waterloo Debits”). Effective July 15, 2023, Ms. Van der Vamp was promoted to president of the corporation’s wholly owned subsidiary in Mexico, Mexican Credits Mfg. Ltd., and was paid by that corporation from that date. No definite term was placed on her contract with the Mexican subsidiary. Ms. Van der Vamp is generally regarded as the leading candidate for the office of president of Waterloo Debits when the incumbent retires within the next several years. Ms. Van der Vamp left Canada on July 15, 2023 to take up her new position in Mexico. One of her two minor children stayed in Canada to complete his final year of high school, which was beginning in the fall of 2023. He stayed with one of the Van der Vamps’ two married children who remained in Canada. The other unmarried minor child left with her mother for Mexico. Mr. Van der Vamp stayed in Canada until August 31, 2023, when the sale of the Waterloo house closed, and while he arranged to conduct his international consulting practice from the Mexican home. The Van der Vamps did not sell their cottage in Grand Bend, Ontario, on Lake Huron, but they did enter into a long-term agreement with a realtor to have the cottage rented during the winter ski season and the summer vacation period, except for the first two weeks in August each year, beginning August 2024, when they intended to vacation there with their family. In Mexico, Ms. Van der Vamp rented an unfurnished house which was smaller than their Waterloo house. She rented some basic furniture for the short period to September 2023 when most of her furniture from Waterloo was moved. The Van der Vamps left some of the furnishings from their Waterloo home with their married children for their use. Title to this property was not formally changed, but the Van der Vamps had listed this property in their wills as being transferable to these children on death. These children both had guest rooms in their homes which the Van der Vamps and their unmarried children could use whenever they chose to. The Van der Vamps maintained their portfolio of investments in Canada with the Canadian broker that they had always used. They did this because of their lack of confidence in other financial markets. Ms. Van der Vamp also decided to maintain her accumulated pension credits with Waterloo Debits, rather than transfer them to the Mexican corporation’s pension plan. However, she did join the Mexican company’s plan for services after July 15, 2023. The Van der Vamps closed all of their bank accounts, except for one necessary for the running of the Waterloo household until August 31, 2023, at which time this account was also closed. They had funds transferred to a new account for the maintenance of the remaining unmarried child while he was in school. Ms. Van der Vamp terminated her Canadian health and car insurance and her business and social club memberships, except for one business club, which she retained on a non-resident basis, effective July 15, 2023. They sold one car on July 15, 2023, and the other one on August 25, 2023, but Ms. Van der Vamp kept her Canadian driver’s licence in force. The Van der Vamps and the unmarried child who moved with them spent about two weeks in Canada during the December 2023 holiday period visiting with the other children. In addition, they planned a two-week vacation in August in 2024 and thereafter. Required: The Van der Vamps are concerned about how to file their tax returns for 2023. Prepare an analysis for the tax person in your firm who will advise them on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation for the
year 2023. Discuss each possible degree of residence and its general tax consequences. State your conclusion on this case after weighing the relevance of the facts considered.
Solution 3 1. Canadian resident in Canada; taxed on world-wide income for the full year 2023 Criterion: must establish a continuing state of relationship with Canada, i.e., ties to Canada Evidence: — past history in Canada; born and educated in Canada; always lived in Canada — expectation that she might return as president at some time in the future; stay abroad indefinite — one unmarried child remained and had a bank account for his maintenance — married children remained — retained the cottage and rented it out, but available for use during August vacation — rented house in Mexico; did not buy — left some home furnishings with married children — maintained investment portfolio in Canada — maintained pension in Canada — maintained Canadian driver's licence — returned during December and planned to return in subsequent Augusts — guest rooms in homes of married children available for their use whenever they chose — maintained one club membership 2. Deemed resident-sojourning of Canada by virtue of s. 250(1)(a): taxed on world-wide income for the full year 2023 Criterion: in this case, must show that she was sojourning in Canada for 183 days or more. Note that CRA practice is to count any part of a day as a “day” for this purpose. Evidence: — during 2023, was in Canada more than 183 days to July 15, 2023, and for two weeks in December — however, while in Canada to July 15, not sojourning and when sojourning in December, not for 183 days or more 3. Part-year resident in Canada: taxed on world-wide income to July 15, 2023, with proration of certain tax credits Criterion: must establish a clean break from Canada in the year and a period in which she was not resident in Canada, not employed in Canada and not carrying on business in Canada Evidence: — she took a full-time position with a Mexican company in 2023 — she left Canada in July 2023 for an indefinite period — her husband followed her and one of their unmarried children to Mexico as soon as was practical — his stay in Canada to August 31, 2023 was merely to complete the sale of the Waterloo home — the unmarried child stayed in Canada for the convenience of completing high school — Waterloo home sold — married children not expected to follow parents; they have lives of their own — had a permanent home in Mexico
— most household effects moved to Mexico — property that remained in Canada effectively given to married children — guest rooms not available exclusively for their use and not an uncommon arrangement, indicating a relatively weak tie — cottage rented for most of the year and not available for their use, except for a brief period — closed bank accounts and terminated insurance and club memberships, except for one membership held on a non-resident basis indicating less than a full tie — one bank account kept only for the convenience of maintaining the one unmarried child while in school — investments in Canada only because of the familiarity and security — past history in Canada does not indicate continuing ties in the future 4. Non-resident: taxed on income from employment in Canada or business carried on in Canada Criterion: must be employed in Canada or carry on business in Canada Evidence: — when employed in Canada to July 15, 2023 not as a non-resident with no other ties — after July 15, not employed in Canada; no services performed in Canada — employed by Mexican company, performed services there and paid there 5. Conclusion — either Canadian resident or part-time resident in 2023 — can conclude either way, supported by some key factors from the above analysis
Question 4 (30 minutes) [Chapter 2] Tamara Quist is a 57-year-old Canadian citizen, and the only daughter of Bob and Linda Quist. Tamara is the president and sole owner of all 100 common shares of Quist Tires (“QT”), a successful retailer of Michelin Tires located in north Toronto. Tamara’s father, Bob, incorporated QT in Canada about 22 years ago. Tamara took over the business upon finishing university about 14 years ago. Tamara lives in a downtown Toronto condominium. She owns a portfolio of stock investments of companies listed on both the TSX and NASDAQ. She also has a self-directed registered retirement savings plan (RRSP). In January of 2022, Tamara went to the Cayman Islands for a vacation and met the man of her dreams, Frank Smeltzer. Frank, a U.S. citizen, had lived in the Cayman’s since 2019 when he moved there from the United States. Frank is the sole shareholder and president of a small U.S. incorporated entity, Smeltzer Jewels (SJ). SJ distributes Colombian-purchased emeralds to U.S. jewellers. Frank’s company has two employees living in New Jersey (a sales agent and a purchasing manager). The corporation is considered a resident of the United States for U.S. tax purposes. Tamara and Frank were married on the beach in the Cayman Islands on January 10, 2022. Since January 15, 2022, Frank has been living with Tamara in her Toronto condominium. He had never been to Canada prior to the move. Frank set up an office in the second bedroom of the condominium and began to contribute towards the mortgage. He continued to manage SJ’s business from this office, travelling to the United States and Colombia on a frequent basis and discussing operational issues with SJ’s employees on a daily basis. He obtained a separate phone line and a P.O. box for the office. When in the United States, Frank stays in an apartment rented by the company in Manhattan. Frank kept his fully furnished beachfront home and his BMW in the Cayman’s. When he moved to Canada, he considered selling the property. It was listed for a short time before he decided to keep it. Frank has a Cayman Island bank account, share investments, and a driver’s license. In Canada, he has a chequing account and a health club membership. Frank’s activities for 2022 were as follows: Activity
Location
Work from Cayman home office Work from Cayman home office Work from home office Vacation Business trips Vacation Business trips Vacation
Cayman Islands Cayman Islands Canada Canada United States United States Colombia Cayman Islands
Days (including weekends) 10 (pre-January 15) 3 (post-January 15) 247 24 38 5 20 9
Tamara and Frank sold the condominium and furniture and moved to the Cayman Islands permanently on February 18, 2023. Tamara continued to manage QT from the home in the Cayman’s and received employment income from the company after the move. She visited the company and her parents in Canada once a month and expects to spend a total of 95 days in Canada in 2023. The directors of the company held their 2023 annual meeting in the Caymans in early May. Tamara kept a car at her parents and retained her Canadian driver’s license. She closed her bank account when she left Canada and opened a new one in the Cayman Islands, but kept her RRSP and stock investments.
Required: (a)
Discuss Frank’s Canadian residency status for tax purposes for 2022. Identify each degree of residence that could apply to him for the year and its tax consequences. State a conclusion once you have assessed all of the facts considered. (14 minutes)
(b)
Discuss SJ’s Canadian residency status for tax purposes for 2022 and its tax consequences. (4 minutes)
(c)
Discuss Tamara’s Canadian residency status for tax purposes for 2023. Identify each degree of residence that could apply to her for the year and its tax consequences. State a conclusion once you have assessed all of the facts considered. (8 minutes)
(d)
Discuss QT’s Canadian residency status for tax purposes for 2023 and its tax consequences. (4 minutes)
Solution 4 (a) Frank’s Residency Status It is necessary to determine if Frank became a resident for Canadian tax purposes on January 15, 2022. For 2022, there are three residency degrees he could fall into: 1) Part-year resident 2) Deemed resident-sojourning 3) Non-resident 1) Part-year Resident For Frank to be a part-year resident for 2022, he must have established a continuing state of relationship with Canada on January 15, 2022. Factors indicating that Frank established ties with Canada on January 15, 2022 are as follows: Primary Ties Frank had a dwelling place in Canada available for his occupation. Frank’s spouse Tamara lives with him in Canada. Secondary Ties Secondary ties must be looked at collectively to evaluate the significance of any one tie. Bank account Health club membership Office at the condo Canadian P.O. box and telephone listing Evidence of Intention to Permanently Sever Residential Ties It could be argued that Frank intended to permanently sever residential ties in the Cayman Islands because he attempted to sell his residence there. Regularity and Length of Visits to Canada Frank spent most of his time in Canada (271 days versus 365 days in the year). He spent only 12 days in the Cayman Islands after January 15, most of which was for vacation time. He used the Cayman Island’s property as a vacation property not a home or dwelling. Primary and Secondary Factors Indicating a Continuing State of Relationship with the Cayman Islands Cayman Islands home and office Car and furniture Bank and investment accounts Driver’s license Tax Treatment: Taxable on Canadian source income from January 1, 2022 to January 15, 2022. He would have no Canadian source income for this period. Taxable on worldwide income from January 15, 2022 onwards. 2) Deemed Resident-sojourning If Frank were not considered to be a part-time resident, he could be deemed to be a resident of Canada for all of 2022 because he sojourned in Canada at least 183 days.
Note that CRA practice is to count any part of a day as a “day” for this purpose.
Tax Treatment: Taxable in Canada on his worldwide income for 2022. 3) Non-Resident If Frank is not a part-year or deemed resident of Canada, he would be a non-resident. Tax Treatment: Taxable in Canada only if employed, carrying on business or disposed of taxable Canadian property under subsection 2(2) and taxable only on Canadian source income under section 115 of the Act. Treaty Impact If Frank were found to be a resident of both Canada and the Cayman Islands, it would be necessary to consider the tie-breaker rule in a treaty between the two countries. As Canada does not have a tax treaty with the Cayman Islands, there is no tie-breaker rule available under a treaty to impact Frank’s residency status in Canada. Conclusion: It is likely that the CRA would consider Frank to be a part-year resident of Canada for 2022 because of his primary ties to the country starting January 15, 2022. (b) Residency of SJ SJ would be considered a Canadian Resident, if the mind and management of the company is located in Canada. Frank, effectively, controlled and managed SJ from the home office in Toronto for 2022. Article IV of the Canada–U.S. Treaty is a tie-breaker rule used to determine residency where a taxpayer is considered a resident of both Canada and the United States. SJ would be deemed a resident of the United States because it was incorporated in the United States. Tax Treatment As a non-resident, SJ would only be taxable in Canada on any income from carrying on business in Canada. (c) Tamara’s Residency Status It is necessary to determine if Tamara became a non-resident for Canadian tax purposes on February 18, 2023. For 2023, there are three residency degrees she could fall into: 1) Canadian Resident 2) Deemed resident-sojourning 3) Part-year resident 1) Canadian Resident For Tamara to retain her Canadian residency status in Canada, she must have maintained a continuing relationship with the country after February 18, 2023. Factors that indicate that she retained a continuing state of relationship with Canada are as follows:
Primary Ties None Secondary Ties She is an officer and employee of the Canadian company. Canadian investments and a self directed RRSP. Vehicle and Canadian driver’s licence. Regularity and Length of Visits to Canada Tamara will return to Canada once a month. Tax Treatment As a Canadian Resident, Tamara would be taxed on her worldwide income for 2023 per subsection 2(1). 2) Deemed Resident-sojourning As Tamara was in Canada for less than 183 days during 2023, she would not be deemed to be a resident of Canada under subsection 250(1). 3) Part-year Resident For Tamara to be a part-time resident of Canada, she must have made a “clean break” from Canada on February 18, 2023. Factors that indicate that she made a clean break are as follows: Primary Ties — Dwelling/Spouse She sold her condo, and Frank moved with her to the Cayman Islands. Secondary Ties She closed her bank account in Canada. She and Frank established significant residential ties in the Cayman Islands. Tax Treatment Tamara would be taxed on her worldwide income to February 18, 2023 and taxed on Canadian source income after February 18, 2023. As she will be employed by QT after February 18, 2023, Tamara would be taxable in Canada on income from her employment. (d) Residency of QT After Tamara moves, QT will effectively be controlled and managed from the Cayman Islands. This will not affect the residency status of QT, as the company was incorporated in Canada after April 26, 1965, and is deemed a resident of Canada throughout each taxation year under subsection 250(4). Therefore, the company will continue to be taxed on its worldwide income.
Question 5 [Chapter 2] Products was incorporated in Ontario in 1934, but it operated from Evanston, Illinois, where its directors’ and shareholders’ meetings were held. Its statutory head office was in Toronto at the same address as that of the Crush Group of companies, of which it was one. The company was inactive from 1948 to 1970. In 1970 the Crush Group learned that the Coca Cola Company, which had licensed bottlers in Iraq, had fallen out of favour with the government of that country as a result of its trade with Israel. This opened the way for the Crush Group to negotiate a franchise in Iraq with an agency of the Iraqi government for the purchase of concentrates. The agreement was signed in Evanston by Products, which had been reactivated to conceal United States involvement in the agreement. Products’ policies were set by a board of directors in Evanston and the operations of the company were generally conducted from that city. All negotiations leading to the franchise agreement were conducted by employees of another company, Crush U.S.A., which was operated in the United States. Crush trademarks for Iraq were transferred to Products so that they could be used as contemplated by the agreement. However, all sales promotion as well as training, technical assistance and clerical services required by the Iraqi Government agency were provided by Crush U.S.A. employees. The Iraqis were led to believe that these representatives were actually employees of a Canadian-based company. A portion of this expense was subsequently allocated to Products at the end of the taxation year. As orders were received by Products from Iraq, Products purchased the goods from a Canadian operating company in the Crush Group, Crush Canada, and the orders were filled. One employee of Crush Canada resided in Toronto and acted on behalf of Products by virtue of a resolution of its Board of Directors, but he was not an employee of or paid any fee or salary by Products. He forwarded all mail received at the Toronto address to Evanston. Replies to Iraq were mailed from Canada and bore a Canadian address. The replies, however, all originated from Evanston or their contents were fully authorized by Evanston. While Evanston exercised immediate, direct and detailed control over all correspondence and communications with Iraq, the Toronto address was used to induce Iraq into believing that matters were under Canadian control. The concentrate for Iraq was purchased by Products from Crush Canada at cost plus 20%. It was shipped from Canada to Iraq through New York. Products added a considerable mark-up on its shipments to Iraq. The export documentation was generally prepared in Toronto because it had to accompany the trucks leaving Toronto for New York and it had to contain details which were only available at the point of shipping. Arrangements for shipment from New York to Iraq were made by personnel of Crush in Evanston. Products used the services of a Canadian bank in Toronto. However, funds were received in U.S. dollars and never converted to Canadian dollars. These funds were remitted to the United States almost immediately on receipt. All legal problems, credit arrangements, trademark matters, sales records, and accounting were handled from Evanston. Required: Evaluate in detail the alternatives in the residence issue as they relate to Products from 1970 onward. Present your answer by discussing each possible degree of residence and its tax consequences and by stating your conclusions on the case after appropriately weighing the significance of the facts considered.
Solution 5 The Queen v. Gurd’s Products Company Limited, (F.C.A.) 85 DTC 5315 A. Resident in Canada — central management and control in Canada — evidence — directors and shareholders met in the United States — policies set in the United States and operations conducted from there — negotiations for the agreement conducted by employees of a U.S. company — all sales promotion, training and other assistance provided by U.S. company — correspondence and communication directed from the United States — all legal problems, credit arrangements, etc. handled from the United States — if central management and control were considered to be exercised in Canada, Products would be taxed in Canada on its world-wide income. B. Deemed Resident in Canada — conditions provided in ssec. 250(4) — Par. 250(4)(c) applies to a corporation incorporated in Canada before April 27, 1965 — Products would be deemed resident in Canada if, after April 26, 1965: (a) it were resident in Canada by the common law principle of central management and control, or (b) it carried on business in Canada — evidence — facts pertaining to central management and control are discussed under resident above — facts pertaining to carrying on business in Canada — executed a plan of subterfuge by an appointed agent in Toronto — the nature of the activities to foster the scheme necessitated the carrying on of a business in Canada — carried out banking operations in Canada to which profits were originally remitted — derived from outright sale of concentrates to a customer — use of Toronto address for correspondence — use of an official agent who was based in Canada — execution and preparation of certain documentation in Canada — head office in Canada — on the other hand — the operations giving rise to the business arose outside of Canada through the negotiation of the contract — all services were provided from Evanston — Products acted like a commission agent placing orders for goods in Canada for export with the proceeds of the orders including the profit being remitted to the United States — if deemed resident, result is that Products will be taxed in Canada on worldwide income.
Non-resident — conditions provided in ssec. 2(3) — par. 2(3)(b) requires carrying on business in Canada — evidence of carrying on business same as above — results in tax on business profits earned in Canada. C. Conclusion — central management and control would probably be considered to be exercised outside Canada; therefore, Products would not be resident according to the common law criteria of where central management and control is resident — the deeming provisions in ssec. 250(4) would likely apply because even though Products was not resident in Canada, the evidence for carrying on business in Canada is probably stronger than the evidence against it. (Note the wording in par. 250(4)(c) “was resident in Canada or carried on business in Canada”.)
Question 6 (62 minutes) [Chapter 3] Ms. Emm Tax is employed as an internal auditor of Uncle Stan's Enterprises Limited, a Canadian-controlled private corporation. She is provided with a car owned by the corporation to allow her to travel to the various plants and offices of the firm. An amount is withheld from her salary for the personal use of the car, which amounts to 30% of the 30,000 total kilometres driven in the year. On her auditing trips, she is away for a minimum of five days. Ms. Tax is considered to be a “key employee” and receives various benefits, including stock options. Ms. Tax presents you with a shopping bag full of receipts and notes written on scraps of paper from which you develop the following information for the year 2023. Net salary Withholding by employer from salary Income tax Registered Pension Plan Canada Pension Plan (enhanced portion is $631) Employment Insurance Group term life insurance Group disability insurance (40% of total premium) Payment for personal use of company car Total gross salary
$84,744 $42,000 8,400 3,754 1,002 750 400 2,100
58,406 $143,150
Travel allowance paid by employer ($135 per day for 60 days; actual reasonable travelling expenses for 2023 were $10,665, consisting of $2,400 for meals, $4,400 for accommodation, and $3,865 for air and ground transportation)
$ 8,100
Book value of company-owned automobile (original capital cost in November 2022 of $32,000, plus 13% HST; capital cost allowance claimed by company in 2023 of $4,950; operating costs paid by employer for 2023 of $9,575, including HST) Payment received from group disability plan while disabled by falling off a loading dock while counting inventory (she paid premiums of a total of $1,200 since commencing employment in 2019 and she has not received benefits previously)
31,280
Employer contributions Group term life insurance policy Premium Group disability insurance plan (60% of premium) Liberty Health extended medical insurance premium Registered Pension Plan
3,750
450 600 900 8,400
Proceeds received from sale of 100 shares of stock (representing less than 1% of all shares) acquired under the employee stock option plan at an option price of $10 per share (when she was granted the option in 2019, the fair market value of the stock was $12; when she exercised the option in 2019, the fair market value was $13)
1,500
Fees paid by company for University of Waterloo correspondence course in philosophy taken on Ms. Tax's own initiative on her own time
950
Donation to Lower Taxes Party of Canada, a registered political party
100
Premium paid by Ms. Tax on personal whole life insurance policy
500
Membership fees paid by Ms. Tax to athletic club
900
Interest received on Canada Savings Bonds purchased through payroll savings plan
200
Birthday gift paid in cash under company policy and deducted by employer
200
Cost (including all taxes) to company of her eating lunch once per month in the executive dining room at no charge
300
Interest paid to company on a $10,000 loan for unanticipated expenses; the loan was outstanding throughout 2023 at a rate of 1% (assume that the prescribed rates for 2023 are: 2%, 3%, 4%, and 3% for the first, second, third, and fourth quarters, respectively) Value of internal auditor's required uniform consisting of green eyeshade, elastic armbands, white blouse, and dark grey suit (three sets), all tastefully monogrammed with the firm's logo and provided by the company
100
2,700
Premium paid by Ms. Tax for Liberty Health private dental insurance
500
Dues paid by Ms. Tax to the Institute of Internal Auditors, a professional body recognized by legal statute
450
Gain on sale of shares purchased as a result of a stock tip given by Uncle Stan who was told by a friend that Underground Airways stock was about to take off
1,200
Bonus payable on December 31, 2023 but not paid to Ms. Tax until January 2024
4,000
Expenses paid by company for Ms. Tax's husband who accompanied her on an auditing trip to Moosonee
2,050
Required: (A) Determine the amount of Ms. Tax's income from employment for 2023. Show all aspects of the required calculations, whether or not necessary to the final answer. (B) Briefly comment on why you consider any of the above amounts to be inapplicable to the calculation. Be sure to comment on all items not used in your computation of employment income.
Solution 6 Income from employment Inclusions Gross salary Travel allowance (less than reasonable actual expenses) Standby charge (reduction available since use primarily employment (70%)) (9,000*/20,004 × .02 × $32,000 × 1.13 × 12) * lesser of: (a) 30% of 30,000 km = 9,000 (b) 20,004
$ 143,150 8,100 $3,904
Operating cost benefit (can use “lesser of” method since use primarily employment) lesser of: (a) 50% of $3,904 = $1,952 (b) $0.33 × 9,000 km = $2,970 Less: amount paid to employer Disability benefit Receipts Less: premiums paid by employee Employer contribution to group term life premium Stock option benefit on sale of CCPC shares (100 shares × ($13 - $10)) Tuition fees for course (not at employer's initiative: IT-470R, par. 18) Birthday gift (cash) Dining room costs (IT-470R, par. 28) Imputed interest benefit on loan .02 × $10,000 × 90/365 = $ 49 .03 × $10,000 × 91/365 = 75 .04 × $10,000 × 92/365 = 101 .03 × $10,000 × 92/365 = 75 less: amount paid (.01 × $10,000) Cost of trip taken by spouse
1,952 (2,100) $ 3,750 1,200
3,756
2,550 450 300 950 200 300
$300 100
200 2,050 $162,006
Deductions Travel expenses Meals (.50 × $2,400) Accommodation Transportation Registered Pension Plan — employee’s portion Professional dues Net employment income
$ 1,200 4,400 3,865 8,400 450 $18,315 $143,691
Omitted Items: Non-deductible amounts withheld — income tax withheld is applied against tax payable ($42,000) — CPP and EI are not part of employment income. They provide tax credits ($3,123 and $1,002 respectively) plus a deduction under Subdivision e Sec 60 which is the CPP enhanced contribution deduction of $631(rounded). ($631 + $3,123 = $3,754 CPP withheld from employee). Book value of company car ($32,000), CCA claimed by company and actual operating costs ($9,575) are irrelevant to standby charge and operating cost benefit calculations. Note that no HST was used in calculating CCA since the company is an HST registrant. Non-taxable employer contributions — group disability premium exempted [spar. 6(1)(a)(i)] ($600) — Liberty Health premium (private health services) exempt [spar. 6(1)(a)(i)] ($900) — RPP exempt [spar. 6(1)(a)(i)] ($8,400) — employer’s portion — Capital gain (100 shares × ($15 − $13)) on sale of shares acquired under stock option is not employment income — Political donations not deductible from employment income ($100) — Premium for whole life insurance not deductible from employment income ($500) — Membership fees in athletic club not deductible from employment income ($900) — Interest received on CSB not income from employment ($200) — Uniforms not a taxable benefit (IT-470R, par. 29) ($2,700) — Premium for Liberty Health dental plan not deductible from employment income ($500) — Gain on sale of shares acquired on tip not included in income from employment ($1,200) — Bonus included in the year received ($4,000) — Group term life insurance paid by employee is not deductible ($750) Note the following for term disability insurance: — If the employee pays 100% of premium and employer contributes zero, then the payments received from the group disability plan ($3,750) are tax-free. — The moment the employer contributes (i.e., $1) to the term disability insurance, the benefit becomes taxable (i.e., $3,750) and the premiums paid over the years by the employee are deductible against the benefit (i.e., $3,750 − $1,200). — Also note that the group disability insurance paid by the employee ($400) is part of the total premiums paid of $1,000.
Question 7 (22 minutes) [Chapter 3] Grinch’s income for the year is as follows: Salary gross Less: CPP and El contributions (CPP enhanced portion is $631) Add: bonus based on his sales volume
$84,000 (4,757) 10,000 $89,243
The costs of travel, wholly related to work, are as follows (he now has a 4×4): Gas, oil, and maintenance License and insurance
$6,000 2,000 $8,000
He has discovered that he drives mostly for work. During this year, he has driven 34,000 km for work and only 6,000 km for personal use. The company leased his 4×4 from the Whos on January 1, 2023, for $900 per month, plus GST for a total of $945 (there is no HST where he lives in Nunavut); annual total of $11,340 which excludes insurance of $1,200. The manufacturer's suggested list price for the vehicle was $33,000. The operating cost for the year paid directly by the employer was $4,000 including GST but excluding parking. Grinch reimbursed the employer 5 cents for every kilometre of personal use. Additional costs of travel while away from the area of Who-ville are train fare ($2,500), accommodation ($2,000), and meals ($3,000). The company does not give him an office, as he is out selling every day. He has partitioned a work space in his cave atop the mountain overlooking Who-ville, which he uses for his office. The office space takes up about 20% of the cave and is used for no other purpose, except when his dog Max gets into it and makes a mess. The costs associated with his cave are as follows: Wood fuel for the stove Satellite phone service-monthly “link-up” charge (too remote for wires) Mortgage interest Long distance calls for work Property taxes (to the Whos of course) Computer equipment needed for work General upkeep and maintenance Contents and property insurance (mostly garbage) Supplies for the office
$ 3,000 5,000 6,000 1,000 2,000 2,500 5,000 100 400 $25,000
Under the Grinch’s contract of employment he is required to pay all of his own employmentrelated expenses, as well as the costs to maintain his own office. He regularly travels out of the Who-ville municipality on employment-related matters. Required: Compute the Grinch’s income from employment. Show/support any computations whether or not relevant to your final answer. For items excluded from your calculation, describe why you excluded them.
Solution 7 Salary Bonus Less: deductions under 8(1)(f) or 8(1)(h), (h.1) Gas, oil, and maintenance License and insurance Train costs Accommodations Meals 50% × 3,000 (assume away >12 hours from Who-ville)
$84,000 10,000 6,000 2,000 2,500 2,000 1,500 $14,000
more than commission income of $10,000 so use 8(1)(h), (h.1) As an ordinary employee under 8(1)(h), (h.1) there are no limits (i.e., the expenses can be higher than the commissions/bonus of $10,000)
Standby charge (reduction available since used primarily for employment (85%) 6(1) (e), 6(2) (6,000 KM / 20,004 × 2/3 (11,340) =
(14,000)
$2,268
Operating Cost Benefit 6(1)(k)(v) Lower of: a) 33 cent × 6,000 KM = $1,980 b) 50% of Standby charge $2,268 =$1,134
$1,134
Less: amount paid to employer 5 cents × 6,000 KM =
($300) $3,102
Less: deduction under 8(1)(i) Pro rated home office: Wood fuel General upkeep and maintenance Long distance calls Supplies
$3,000 5,000 8,000 × 20% =
$1,600 1,000 400
(3,000)
Income from employment $80,102
Omitted items: — CPP and EI are not part of Income from employment. They provide tax credits ($3,123 and $1,002 respectively) plus a deduction under Subdivision e Sec 60 which is the CPP enhanced contribution deduction of $631. ($631 + $3,123 = $3,754) CPP withheld from employee). — Satellite phone not deductible since personal expense — Mortgage interest not allowed (s. 84, s. 8(2)) — Property taxes and insurance would have been deductible under 8(1)(f), but 8(1)(h), (h.1) better — Computer is a capital item not deductible by employee under the Income Tax Act
Question 8 (32 minutes) [Chapter 3] Ima N. Employee, a senior production manager and corporate director of Valleytown Industries Ltd. (VIL), of Dundas, Ontario, received the following amounts and benefits from her employer during 2023. The corporation is a Canadian-controlled private corporation, having no shares listed on a stock exchange. 1. Salary, gross Payroll deductions: Income taxes Canada Pension Plan premium (enhanced portion is $631) Employment Insurance premium Group accident disability insurance premiums Net pay
$140,000 $38,000 3,754 1,002 600
(43,356) $ 96,644
2. Director's fees of $3,400 received from VIL. 3. Ima exercised a stock option to buy 1,000 shares of VIL at $25 per share. The fair market values at the date of grant (August 2022) and purchase (July 2023) were $24 per share and $27 per share, respectively. Also, in 2023, Ima was granted an option on an additional 1,000 shares, which had a fair market value of $29 per share at the time. The exercise price is $26. 4. A cash birthday gift of $450 was paid to Ima. VIL corporate policy was to deduct such gifts. 5. Ima and her life partner were provided with the company's condo in Colorado for two weeks during the winter ski season. They had to pay VIL $1,500 for accommodations that would otherwise have cost them $3,400. Ima was not involved in any business activities during this trip. 6. Ima’s life partner accompanied her on a business trip to Cuba that was paid for by her employer. The main purpose of the trip was for Ima to work with a customer. Her life partner performed no business function during the trip. They did not extend their trip to include a vacation. Ima’s expenditures of $5,000, including applicable taxes, were paid by VIL and were reasonable in relation to the business function. The portion of the travelling expenses related to Ima’s life partner were also paid by VIL and amounted to $1,000, including applicable taxes. 7. During 2023, VIL paid for Ima to have her income 2022 tax return prepared by the company’s accountants at a cost of $375, including HST. 8. During the year, VIL provided its employees with free meals in the company cafeteria. Ima’s meals cost the company $1,100 to prepare and serve. The meals would have cost Ima $1,900 in a similar commercial restaurant.
9. VIL provided Ima with a car, which they bought January 3, 2023. Capital cost of the car including applicable taxes Capital cost allowance claimed by company in 2023 Operating costs paid by the company Kilometres driven in 2023 as per Ima’s log: Business use Personal use Amount paid by Ima to VIL for personal use at $0.20 per kilometre (2,400 km × $0.20)
$38,529 16,200 4,300 7,600 2,400 480
10. In May 2023, Ima was in a production accident and was unable to work for six weeks. During this period, she received disability payments totalling $11,538 from Star Life and Disability Assurance Co. All disability insurance premiums were paid by Ima through payroll deduction. 11. VIL paid Ima an allowance of $18,000 to cover the cost of moving from Gander, Newfoundland, to Dundas, Ontario, plus a $35,000 payment in respect of an actual loss on the sale of her former home. Ima's newly acquired home in Dundas required some major renovations. While the Dundas property was not inhabitable, VIL provided Ima with a company-owned apartment. Ima stayed in the apartment for two months, paying $300 per month, while rent in this building for a similar unit was $1,000 per month. 12. VIL made available in-house staff to provide Ima with tax planning advice valued at $800, including applicable taxes. 13. During the holiday season in 2023, VIL gave all of its employees wrist watches that cost the company $150, including applicable taxes. The company claimed these costs as a business expense in computing corporate taxable income. 14. The company installed recreational facilities at its head office. All employees are permitted to use these facilities free of charge. The equivalent value for similar facilities at a private club would be $1,100 per year, including applicable taxes. Required: (a) Calculate Ima’s employment income inclusions for 2023 in accordance with the provisions of the Act and the CRA’s administrative position as reflected in IT-470R and related announcements. (b) Briefly explain why any items were omitted from the calculations above.
Solution 8 Employment income inclusion: Salary Director’s fees Birthday gift (Note 1) Company condo (Note 2)
$140,000 3,400 450 1,900
5(1) 6(1)(c) Adm. Prac. 6(1)(a)
Cuba trip (Note 3) Tax return preparation Free meals in company cafeteria Automobile (Note 4) Moving allowance (Note 5) Payment for loss on former home (Note 5) Apartment rent (Note 6) Tax advice
1,000 375 1,100 1,184 17,350 10,000 1,400 800 $178,959
6(1)(a) IT-470R IT-470R 6(1)(e), 6(2) 6(1)(b) 6(19) 6(1)(a) 6(1)(a)
Notes: 1. To be excluded the gift must be other than cash or near cash, according to current administrative practice ($450 cash received). 2. The company condo was provided to her as an employee and there was a benefit of $1,900 (i.e., $3,400 − $1,500) which must be included in income, unless the low rent charged can be considered to result in a non-cash gift under the new administrative practice. 3. Since Ima was in Cuba on business, she does not receive a taxable benefit. Since there was no business purpose to her life partner’s trip, Ima will receive a taxable benefit for the cost of his trip. 4. Standby charge ($38,529 × 2% × 12 months × 2,400/20,004)
$1,109
Operating cost benefit Lesser of (since >50% for business use) 1. 50% of standby charge = 50% × $1,109 = 555 2. $0.33 × 2,400 km = $792 Less: Reimbursement $0.20 × 2,400 km
555 (480) $1,184
5. An allowance paid to cover moving expenses is income under par 6(1)(b), since it does not meet one of the exceptions. The first $650 is non taxable since it is an employment related move ($18,000 - $650 = $17,350) if the employee certifies in writing that they incurred expenses for at least the amount of the allowance, per T4130 Employer’s Guide Of the payment for the loss on the former home $10,000 is taxable [½ × ( $35,000 − $15,000)] Subsection 6(19) to 6(23)
6. It may be argued that this is not a taxable benefit since she has a home but she is unable to move into it yet. Therefore, the company is just providing her with temporary accommodation in the course of the move. They wanted her to move but her new house is not yet ready so it should be their expense not hers.
Omissions: 1.
Payroll deductions (income taxes, CPP, and EI) do not reduce employment income inclusions.
2.
The stock option was exercised but the recognition of the employment income benefit can be deferred until the shares are sold, since the corporation is a Canadian-controlled private corporation.
3.
There is no benefit when a stock option is granted, only, at the earliest, when it is exercised, unless the deferral is available.
4.
Since Ima paid all the premiums for the disability policy, none of the proceeds she receives are taxable [par. 6(1)(f)] by the current departmental practice.
5.
Since the seasonal gift ($150 gift watch) was not cash and less than $500, it is not a taxable benefit, even if it is expensed by the company.
6.
Recreational facilities are specifically excluded in Folio S2-F3-C2.
7.
Capital cost allowance claimed by company omitted since it is irrelevant to the computation of the standby charge and operating expense benefit.
Question 9 (18 minutes) [Chapter 3] Robert is a salesperson employed by Candy-Land Limited. He receives commission based on sales. During 2023, Robert received total commission income of $19,000. He is having trouble determining what expenditures will be deductible by him in computing his 2023 income from employment for tax purposes. He provides you with the following list of expenditures incurred by him during 2023. All of these expenditures are required to be paid by Robert under his contract of employment and, where necessary, his employer will duly sign form T2200. Travel Costs: Meals (consumed while travelling more than 12 hours from employer’s main office) Bus and taxi fares Accommodation Automobile operating expenses correctly computed for tax purposes based on 85% employment use of automobile Opening UCC on automobile purchased last year and used 85% in 2023 for employment purposes; the applicable CCA rate is 30%
$ 1,500 1,200 5,200 7,800
18,700
Home office space expenses (the following are 100% of the relevant costs for the year; Robert’s home office occupies approximately 15% of the total square footage of his home). Assume that Robert meets the criteria set out in the Income Tax Act for deducting home office expenses. Property taxes: House insurance Repairs and maintenance Mortgage interest Utilities General office expenses: Cost of rented computer, printer, fax and photocopy machine Paper and other supplies Promotion expenses: Christmas cards, business cards and letterhead Christmas gifts to large clients (not meals or entertainment) Client entertainment expenses: Meals with client Theatre tickets given to clients
$ 5,500 480 150 6,000 5,000 $17,130 $1,630 425 $2,055 $1,050 500 $1,550 $2,400 2,200 $4,600
Required: (A) Calculate Robert’s maximum 2023 deductible employment expenses for tax purposes. (B) Briefly comment on any items excluded from your calculation.
Solution 9 Employment income deductions: Travel costs Meals (50% × $1,500) Business and tax Accommodation Automobile operating expenses Subtotal (makes sense to use par. 8(1)(f) to get additional amounts) Home office Property tax (15% × $5,500) Insurance (15% × $480) General office Rental computer, fax, printer, photocopier Promotion Christmas gifts Client entertainment Meals (50% × $2,400) Tickets (50% × 2,200) Limited to commission income [proper expenses limited] Additional expenses deductible (not limited to commissions) Promotion Christmas cards, business cards, and letterheads [par. 8(1)(i)] CCA on automobile ($18,700 × 30% × .85) Home office [par. 8(1)(i)] Repairs and maintenance (15% × $150) Utilities (15% × $5,000) General office [par. 8(1)(i)] Paper and other supplies Total deductible expenses
$750 1,200 5,200 7,800 14,950
825 72 1,630 500 1,200 1,100 $20,277 $19,000
1,050 4,769 23 750 425 $26,017
Omitted items: Mortgage interest a capital item, not deductible (par. 8(1)(j))
Question 10 (61 minutes) [Chapter 3, 21(HST Employee Rebate)] Ima Flogger has been a salesperson employed by Floggem Sales Ltd. since early in 2020. The corporation, which sells tax reference materials, is a Canadian-controlled private corporation, based in Dundas, Ontario. Ms. Flogger's sales territory is southwestern Ontario and she is required to travel regularly within that territory. Ms. Flogger has requested your help in the preparation of her 2023 tax return. She has provided you with the following information about her receipts and selected disbursements. Receipts and Fringe Benefits (a) Her salary was $72,000 and her commissions were $20,000. (b) Her employer paid the following amounts on her behalf: Canada Pension Plan premium Employment Insurance premium Extended health care — Great West Life Dental plan premium — Manulife Financial Employers’ health tax levy Group term life insurance premium Workers’ Compensation Registered Pension Plan — defined benefit
$3,754 1,403 1,450 1,385 1,500 1,080 1,135 7,000
The group term life insurance policy was for $250,000 of insurance coverage. Ms. Flogger's portion of the premium was withheld through payroll deductions, as indicated in item (j), below. (c) When she joined the company in January 2020, Ms. Flogger was provided with a car, which was available to her throughout 2023. The car had cost $36,800, including HST of 13% in January 2019. Its fair market value in 2022 was $15,500. Its net book value after depreciation for tax purposes was $8,085, assuming the company is an HST registrant. She used the car in 2022 for employment purposes 72% of the time and drove a total of 30,000 kilometres during the year. Her employer paid the insurance costs of $3,000 and the license of $150. (d) Ms. Flogger’s employer paid the following allowances for the year in equal monthly instalments: Meals, entertainment, and accommodation Car Clothing
$15,000 4,200 540
(e) To help her develop and maintain her clientele for her employer, the corporation paid $3,000 for Ms. Flogger’s membership at the Dundas Golf and Curling Club. (f) Ms. Flogger was permitted to participate in the corporation's stock option plan. In 2023, she was granted an option to purchase 2,000 shares at $12 per share. At that time, the shares were valued at that amount. She exercised her option to buy 500 shares in 2023 at a time when they were valued at $15 per share.
(g) The corporation provided Ms. Flogger with a loan of $6,000, on August 1, 2023, to buy the shares. The loan agreement required the payment of monthly interest at 1% per annum. The principal was payable in four annual instalments due on the anniversary date of the loan. The prescribed rates of interest for 2023 were: 3% in the first quarter, 3% in the second quarter, 4% in the third quarter, and 3% in the fourth quarter. (h) Corporate policy allowed Ms. Flogger to purchase her employer's products for her personal use at a 20% discount from selling price. During the year, she purchased $1,000, at selling price before the discount, of products for her sister who was setting up a law practice. (i)
In 2023, Ms. Flogger received an HST rebate of $980, based on the deductions she claimed on her 2022 tax return, which was filed in April 2023.
Payroll Deductions and Selected Disbursements (j)
Payroll deductions were as follows: Income tax withheld Registered Pension Plan — defined benefit Canada Pension Plan premium Employment Insurance premium United Way donation to registered charity Reimbursement for use of company car Group long-term disability insurance premium Group term life insurance premium
$15,000 7,000 3,754 1,002 600 900 675 400
(k) Her reasonable travel costs amounted to the following, which include HST: Meals Entertainment Accommodation Car — gas and oil — maintenance
(l)
$7,600 4,000 10,000 5,900 2,000
In 2023, Ms. Flogger paid legal fees of $1,500, including HST, to recover unpaid salary from her former employer, which she left in 2019.
(m) She paid membership dues of $350, including HST, for membership in the Canadian Association of Professional Salespersons. (n) Ms. Flogger paid $250, including HST, in fees to you, her accountant, for preparing her 2022 tax return and for counselling her on tax matters. (o)
She paid $300, including HST, to a community college for a course on personal motivation to help her in her career.
(p)
Ms. Flogger purchased $750 in clothing to maintain her wardrobe at professional standards for her job.
Required: (a) (i) Determine Ima Flogger's employment income for tax purposes for 2023. Show all calculations whether or not necessary to the final answer. (ii) Indicate why you did not include any of the above amounts in your answer. (iii) Compute the HST rebate that should be claimed in respect of 2023. Assume all expenses paid were subject to HST.(54 minutes) (b) Ms. Flogger has recently received an offer of employment from another corporation, which is based in Ottawa. She would be responsible for their eastern Ontario region. The offer contains the following. (i) In addition to a higher salary and commission, she has been offered a signing bonus of $7,500, to be paid to her before commencing employment. (ii) She will receive a moving allowance of $5,000 and she will be compensated for any loss on the sale of her home in Stoney Creek, which is expected to be $25,000. (iii) She would not be provided with a company car, but she would receive an interest-free loan to purchase her own car. She would also receive an allowance of $0.455 per kilometre for employment driving. If Ms. Flogger accepts this offer, she will be asked to sign an agreement with her present employer undertaking not to sell for her new employer in southwestern Ontario for a period of three years. For the signing of this agreement, she will receive a payment of $10,000 from her current employer on her termination of employment with the corporation. Her new employer would not oppose this agreement. Very briefly explain the tax implications of the above features of this offer without supporting calculations. (7 minutes)
Solution 10 (a)(i) Employment income Inclusions: Gross salary and commissions ($72,000 + 20,000) Group term life premium paid by employer Standby charge (Reduced as business km > 50% and personal km < 20,004 km) ($36,800 × 2% × 12 months) × (28% × 30,000 km) / (12 × 1,667) = $8,832 × $8,400 / 20,004
Operating cost benefit lesser of: (a) ½ × $3,709 = $1,855 (b) $0.33 × 8,400 [28% × 30,000 km] = $2,772 Less: reimbursement Allowances: Meals, entertainment, and accommodation (less than $19,600 actually spent); therefore, unreasonable Car (deemed not reasonable because not based solely on kilometres driven) Clothing (no exclusion) Imputed interest benefit: 4% of $6,000 × 61/365 = $40 3% of $6,000 × 92/365 = 45 $85 Less: interest paid 1% of $6,000 × 153/366 = 25 HST rebate received
$92,000 1,080
$3,709
$1,855 (900)
4,664
15,000 4,200 540
60 980 $118,524
Deductions: Registered Pension Plan Meals and entertainment (.5 × ($7,600 + $4,000)) Accommodation Car (($5,900 + $2,000) × .72) Deduction limited by commissions Legal fees to recover salary Employment income
$ 7,000 5,800 10,000 5,688 $21,488 20,000 1,500
28,500 $90,024
(ii) Items not used in calculations — payments by employer not taxable benefits — premium for extended health care is for private health services ($1,450) — CPP and EI premiums are not part of employment income ($3,754 and $1,403) — premium for dental plan is for private health services ($1,385) — employee health tax is an employer payroll tax ($1,500) — Worker's Compensation is a payroll tax ($1,135) — RPP contribution by employer is specifically excluded ($7,000) — operating cost benefit includes employer-paid insurance and license ($3,000 & $150) — golf and curling club membership is not a taxable benefit if it is primarily to the employer's advantage for her to be a member (e.g., increases sales for the company) ($3,000)
— no benefit from exercise of a stock option from a CCPC — imputed interest benefit is deemed paid by s. 80.5 and deductible under s. 20(1)(c), but not from employment income ($60) — merchandise discounts not a taxable benefit to an employee by administrative practice ($1,000) — payroll deductions — income tax not an allowed deduction in s. 8 ($15,000) — CPP and EI are not are not deductible under section 8. They provide tax credits ($3,123 and $1,002 respectively) plus a deduction under Subdivision e Sec 60 which is the CPP enhanced contribution deduction of $631. ($631 + $3,123 = $3,754 CPP withheld from employee). — United Way donation not deductible under s. 8 ($600) — long-term disability premium not deductible under s. 8 ($675) — group term life insurance premium not deductible under s. 8 ($400) — salespersons association dues not deductible because not paid to maintain status in a profession recognized by statute ($350) — fees paid for tax return and advice not deductible under s. 8 ($250) — tuition fees not deductible from employment income under s. 8 ($300) — clothing expense is not deductible under s. 8 ($750) (iii) HST rebate to be included in 2024 income Meals, entertainment ((7,600 + 4000)/2 + 10,000 + 4,200), accommodation, and car $20,000* Legal fees 1,500 Assuming all expenses paid were subject to the HST 13/113 × $21,500 *Recall the expenses are limited to the commission (i.e., $20,000)
= $2,473
(b) Tax implications of offer
— signing bonus included in income from employment income (s. 6(3)) ($7,500)moving allowance cannot be excluded from employment income except for the first $650 is non taxable since it is an employment related move if the employee certifies in writing that they incurred expenses for at least the amount of the allowance ($5,000 - $650 = $4,350), per T4130 Employer’s Guide — loss on sale of house paid by employer is a taxable benefit to the extent of one-half of the difference between the loss and $15,000, i.e., $25,000 - $15,000 → $10,000 × ½ = $5,000 — non-interest bearing loan will result in an imputed interest benefit — allowance based on kilometres driven is not deemed to be not reasonable, but must be reasonable to exclude — no deduction of car expenses if allowance is excluded — compensation for agreement not to compete must be included in employment income (s. 6(3))
Question 11 (18 minutes) [Chapter 3] Bonnie is a qualified caregiver. Bonnie is registered with Nannies R Us, a personnel agency which specializes in placing caregivers for temporary work when parents are ill or when regular caregivers are unavailable. When a client calls Nannies R Us, they indicate their needs and the requirements of the position. Nannies R Us then goes through their list of available caregivers. They will call those who they believe are most suitable and offer them the work. The caregivers have the choice as to whether they wish to take the position. If a caregiver takes the position, they are paid by Nannies R Us at an hourly rate for the work they perform. Nannies R Us does not take any source deductions (income tax, Canada Pension Plan premiums, or Employment Insurance premiums) against this income. It is the responsibility of the caregiver to provide his or her own transportation to and from the position. The hours for the position are dictated by the client and the client generally provides detailed instructions as to what is to take place during the duration of the placement. The caregivers are responsible for ensuring that they keep up to date with emergency health procedures and general childcare issues. To this end, each caregiver registered with Nannies R Us is required to pay for and attend an annual childcare seminar as well as one workshop a year which relates to general childcare issues. Bonnie is currently supplementing her income from Nannies R Us with income from some of her own clients. She is working two days a week providing childcare to a family of three children. This is expected to last until the end of the year. She is also working three mornings a week for another client who is physically impaired and requires general care and attendance. This position is indefinite. In the past, Bonnie has done housekeeping to supplement her income as required. Required: With specific reference to the appropriate tests as set out by the courts, determine whether the income earned by Bonnie from Nannies R Us for the year is income from employment or income from business. (In other words, is Bonnie an employee or self-employed (an independent contractor)?) Be sure to consider both sides of the issue in detail.
Solution 11 Test Economic Reality Test Control Test
Employment
Self employed contractor
— pay set by Nannies R Us
—Nannies R Us does not interfer in the exercise of Bonnie’s professional skills — no source deductions made — Bonnie can refuse work — Bonnie has multple clients
— Nannies R Us finds work — Client dictates hours of work — Client instructs work to do — Nannies R Us dictates PD Ownership of Tools
— not a lot of tools involved
— education provided by Bonnie — annual PD provided by Bonnie
Chance of Profit/ Risk of Loss
— few expenses involved Nannies R US — Nannies R US assumes liabilities — Bonnie must do the work personally. She cannot employ substitute employees to do the work for her
— Bonnie provided transportation — Bonnie paid annual PD costs — Bonnie is hired for a specific job rather tha an ongoing relationship. — work is always temporary — Bonnie is not dependent; she has other income -Bonnie is required to find other clients or work to supplement her income
Conclusion: Conclusion must be indicated. Can go either way depending on arguments. More evidence towards self-employment.
Question 12 (30 minutes) [Chapter 3] Bob Reid, a retired chartered accountant and former partner of a multi-national accounting firm, entered into a verbal agreement with Wilkenson Associates, a regional office of a national accounting firm, to provide his talent and energy in locating new clients and promoting the firm’s products to existing clients. As part of the agreement, Bob was responsible for contacting prospective and existing clients identified as targets by partners of Wilkenson to promote the firm’s resources. Preliminary discussions and meetings with existing and prospective clients would take place in various places, including the offices of Wilkenson or the client and in restaurants. Bob was reimbursed for certain expenses related to these promotional activities. He paid for all other expenses. If Bob was able to gain some interest in Wilkenson’s services from a new client or an existing client, he would arrange a marketing meeting between the client and a partner of the firm. He was involved in the preparation and would attend the meeting with the client. In preparing for the meeting, Bob would direct the work of his assistants in the development of promotional material, such as PowerPoint presentations, flyers, and handouts. He would be in charge of the preparation process with input from the Wilkenson partner and staff on the technical content and format of the meeting and/or presentation. Wilkenson would pay the cost of the presentation materials, and provide all equipment including hardware and software necessary to complete the job. Most of the work was done at Wilkenson in whatever space was available, although Bob often worked from his office at home as well. Bob was responsible for hiring his own assistants. Bob was paid $1,900 every two weeks, or $49,400 for a year, as a retainer or guarantee for his services. Under the agreement, he could not work for any other accounting firms. He was also paid an additional $5,000 for every successful marketing meeting resulting in a new client with billings of a minimum of $25,000 in a 12-month period from the date of the meeting or resulting in new work from an existing client with billings of a minimum of $35,000 in a 12-month period from the date of the meeting. He received nothing extra if a client meeting was unsuccessful or billings did not meet these targets. To be paid, he had to invoice the accounting firm. He reimbursed the accounting firm for its share of the premium for the medical plan in which he participated. He had no specific hours of work. He had no profit-sharing arrangement. The Minister of National Revenue disallowed some of Bob’s expenses in providing these services on the basis that he was not self-employed. Required: As a judge of the Tax Court of Canada, discuss and evaluate the facts supporting the positions of Bob and the Minister of National Revenue.
Solution 12 1. Economic Reality Test: the economic nature of the relationship (a) Control: whether someone is in a position to determine not only what is to be done but how it is to be done. Arguments Supporting Employment — As the service provider, Wilkenson exerted financial control. — Wilkenson provided some direction in identifying existing and potential clients Bob should contact. — Wilkenson partners and staff had input into format and content of work performed for client marketing meetings. — Bob could not use a replacement to do his work. — Bob worked for only one accounting firm as part of the agreement. — The agreement was for an indefinite period of service. — No specific amount of work was to be completed; the verbal contract was not specific as to the work to be completed. Arguments Supporting Self-Employment — Bob had control over his work since he had the final say in the product with only input from a Wilkenson partner and staff on technical content and format — He had to find the work. — He had no specific work hours. — Wilkenson had no input/control over preliminary client meetings. — Bob has the flexibility to work at home or work. — He used facilities of Wilkenson, of clients, and of others. He did not appear to have an office at Wilkenson and paid for a home office. — He had to invoice the accounting firm to be paid. — He reimbursed the accounting firm for its share of the medical plan premium. — He paid for most of his own expenses. It would be difficult to exercise control over the manner of doing the work due to the skilled nature of the work, whether performed by an employee or independent contractor. (b) Ownership of Tools Arguments Supporting Employment — The accounting firm provided the equipment needed to complete the job. Arguments Supporting Self-Employment — Bob provided the professional skills. (c) Chance for Profit Arguments Supporting Employment — No profit-sharing arrangement. — He was guaranteed a substantial and set amount of income per month from Wilkenson. — Bob was reimbursed for certain expenses — He received a fixed income amount every two weeks.
Arguments Supporting Self-Employment — If successful in obtaining new clients/work, Bob could increase his profit substantially. — He hired and used his own assistants. — He did not get paid the extra fee if a client meeting was unsuccessful — Bob was paid by the successful meetings that he conducted. Conclusion: Conclusion must be indicated. Can go either way depending on arguments. More evidence towards self employment.
Question 13 (35 minutes) [Chapter 3] Iona has come to you to help her compute her employment income for the year. Her details are as follows. Iona’s income for the year is as follows: Salary — gross Less: CPP and EI contributions Less: RPP Contributions (matched by employer) (contributions are to a defined benefit pension plan) Allowance for travel costs Allowance for gas ($300 per month) Bonus based on her sales volume
$99,000 (4,757) (4,100) 5,000 3,600 18,000 $116,744
The total costs of travel, partially for work, are as follows: Gas, oil, and maintenance License and insurance
$8,000 3,000 $11,000
Iona discovered that she needed a car for work. She purchased a Volkswagen Passat on January 10, 2023 for $55,000, plus HST of 13% for a total of $62,150. She received the money to buy the car from her dad. During the year, she has driven 34,000 km for work and only 6,000 km for personal use. You know that CCA rate for cars is 30% but is limited to $36,000, and Iona will qualify for the accelerated investment incentive which provides a 150% CCA deduction in the year of acquisition. Additional costs of travel while away from the area of where she lives are airfare ($3,500), accommodation ($4,000), and meals ($2,500). The company does not give her an office, as she is out selling every day. She has partitioned a workspace in her home that she uses for her office. The office space takes up about 20% of the home and is used for no other purpose. The company provided all employees with a turkey at Christmas and Thanksgiving (value of $80 in total for the year). The company has deducted this expense for tax purposes. The costs associated with Iona’s home are as follows: Oil for furnace Telephone service (basic monthly charge for home phone) Mortgage interest Long-distance calls for work Property taxes Computer equipment needed for work (CCA would be $375) General upkeep and maintenance Contents and property insurance Supplies for the office
$ 3,000 800 6,000 1,000 5,000 2,500 2,000 900 400 $21,600
Under Iona’s contract of employment, she is required to pay all of her own employment-related expenses as well as the costs to maintain her own office. She regularly travels out of the municipality on employment-related matters. Required: Compute Iona’s income from employment. Show/support any computations whether or not relevant to your final answer. Cite in detail the relevant provisions in the Income Tax Act, and provide explanations to support all inclusions, deductions, and exclusions.
Solution 13 Inclusions Salary 5(1) Bonus 5(1)
$99,000 18,000
Travel allowance 6(1)(b) the allowance is not reasonable since actual costs for travel were $3,500; therefore, no exception under 6(1)(b)(v) Gas allowance 6(1)(b) the allowance is deemed not to be reasonable by 6(1)(b)(x) since it is not a per kilometre allowance; therefore, no exception under 6(1)(b)(v)
5,000
3,600
$125,600 Deductions under 8(1)(f) or 8(1)(h), (h.1) Gas, oil, and maintenance License and insurance Total auto Business use (*34/40) Airfare Accommodations Meals 50% × $2,500
$8,000 3,000 $11,000 $9,350 3,500 4,000 1,250
(assumes away for > 12 hours from work base) (limited to 50% under 67.1) Home office: Property tax Insurance 20% of
$5,000 900 $5,900 1,180 $19,280
Total 8(1)(f) (more than commission income of $15,000)
(18,000)
Deductions under 8(1)(i) Oil for furnace General up-keep and maintenance ($5,000 × 20%) Long-distance calls Supplies
$ 3,000 2,000 $1,000 1,000 400
(2,400)
Deduction under 8(1)(j) CCA on vehicle (Note 1) (15,560) Deduction 8(1)(m) RPP Contributions Net Employment Income
(4,100) $85,540
Note 1 CCA claim (limited by 67.3) — lesser of (a) actual cost (b) dollar limit
$55,000 $36,000 × 1.13 =
$40,680
Maximum claim:
$40,680 × 1.5× 30%
=
Business use:
34/40 × $18,306
= $ 15,560
$ 8,306
Omitted items: — CPP and EI not specifically deductible under section 8 (is a credit). CPP and EI provide tax credits ($3123 and $1,002 respectively) plus a deduction under Subdivision e Sec 60 which is the CPP enhanced contribution deduction of $631. ($631 + $3,123 = $3,723 CPP withheld from employee). — RPP Contributions by employer are not taxable by subparagraph 6(1)(a)(i) — Turkey not a cash or near-cash gift; not taxable — Mortgage interest is on account of capital and not deductible under section 8 — Property taxes and insurance would have been deductible under paragraph 8(1)(f), but 8(1)(h), (h.1) better in total. They are not considered a supply for paragraph 8(1)(i) — Computer is a capital item not deductible by employees under paragraph 8(1)(j) — Telephone service is a personal expense and cannot be deducted
Question 14 (25 minutes) [Chapter 4] Ziggy’s Inc. is a retailer of highly specialized clothing that opened for business on May 1, 2021, in a leased store in a strip mall. A condensed income statement for Ziggy’s Inc. for its year, ended December 31, 2023, shows the following: Ziggy’s Inc. Condensed Income Statement For the Year Ended December 31, 2023 unaudited (000s) Sales Cost of sales Gross profit General and administrative expense Other Income before income taxes Income tax expense Net income
$ 1,932 (1,439) 493 (279) (54) 160 (13) $ 147
An analysis of the cost of sales account revealed that the inventory is valued at average cost within each of the different styles carried. Since the owner is still learning what has appeal, a “mark-down rack” has become a common fixture at the back of the store. The tagged prices of the mark-downs are less than their costs, at December 31, 2023 by $700. This difference has not been recorded in the financial statements. Cost of goods sold includes a charge of $1,800 to set up an allowance for returns (at 0.1% of sales) that are not subsequently saleable at full retail price. No such allowance was recorded last year-end because the company only discovered that the allowance was necessary this year. General and administrative expenses include the following: Contributions to a registered pension plan made monthly for the two key employees, expensed by the corporation’s accountant, were as follows: President and CEO Store manager
Registered Pension Plan $21,000 $12,800
Employment compensation $190,000 130,000
The pension plan is a defined contribution (money-purchase) plan. The contributions above were matched by equal contributions made by the employee. The company paid the following amounts to Sun Insurance Limited during the year: Group term life insurance for the four full-time employees $200,000 term life insurance policy on the president, which was included in the “Insurance” expense account
$2,200 900 $3,100
Ziggy’s Inc. is the beneficiary of the insurance policy on the president. The term life insurance policy on the president was assigned to the bank as collateral for a $500,000 loan from January 1 through August 30, 2023. The loan was repaid on September 1, 2023 in favour of an operating line of credit. The following selected information was taken from the “Promotions” account:
Charitable donation to the local United Way Political contributions to the local politicians Hockey tickets given to suppliers as Christmas gifts Meals and entertainment incurred by the owner while negotiating with suppliers Golf green fees incurred while entertaining suppliers Two customer parties and one staff party — full costume occasions (staff and “significant others” make up about one-third of the attendees) Account total
$ 4,500 2,500 2,800 2,000 1,800 12,000 $ 25,600
The company’s “Professional expense” account included the following legal and accounting fees: Accounting fees for yearend work and monthly bookkeeping Legal fees incurred on the purchase of capital assets during the year Legal and accounting fees incurred in connection with negotiations for a line of credit at the bank Account total
$15,000 2,000 4,000 $21,000
In 2022, the company incurred fees of $1,000 to issue shares to the president and CEO. Other expenses deducted in the financial accounting computation of income include: Depreciation and amortization Interest on the loan and operating line of credit Interest on insufficient income tax instalments Purchase of additional store fixtures bought at a going-out-of-business sale; expensed due to their small dollar amount Damages under a breach of contract suit initiated by a supplier Total
$47,000 7,500 400 1,500 1,700 $58,100
Added to the capital asset account for leasehold improvements this year is $15,000. This amount represents the store’s share of new landscaping of the strip mall premises that was undertaken after road work was done in front of the mall. You have correctly determined that Ziggy’s Inc. is entitled to a $50,000 capital cost allowance amount claim in 2023. Required: Based on the foregoing information, compute the income from business for tax purposes for Ziggy’s Inc. for its 2023 fiscal year. Show all calculations whether or not they seem relevant to the final answer. Comment briefly on why any items were omitted from the calculation.
Solution 14 1. Calculation of income from business Net income Add: Income tax expense Returns reserve RPP over-contribution (Note 1) Non-deductible life insurance 4/12 × $900 Charitable donations Political contributions Hockey tickets (50%) [under 67.1] (2800 × ½) Meals and entertainment for negotiations (50% × $2,000) [under 67.1] Golf green fees Customer portion of parties (50% of $8,000) [under 67.1] Legal costs on purchase of capital item Legal and accounting for line of credit (80% of $4,000) 20(1)(e) Depreciation Interest on income tax instalments Store fixtures Deduct: Write-down of inventory Deduction for last year’s share issue costs (20% of $1,000) 20(1)(e) Landscaping costs [20(1)(aa)] CCA
$147,000 $13,000 1,800 12,640 300 4,500 2,500 1,400 1,000 1,800 4,000 2,000 3,200 47,000 400 1,500
97,040
$ 700 200 15,000 50,000
(65,900) $ 178,140
Note 1 Least of: (a) total contribution (b) dollar limit (2023) (c) 18% of compensation
President $42,000 $31,560 $34,200
Manager $25,600 $31,560 $23,400
Total contribution less: least of above over-contribution
$42,000 31,560 $10,440
$25,600 23,400 $ 2,200
Total
$12,640
2. Omitted items — Group life for employees are deductible as a business expense [18(1)(a)] ($2,200) — President’s life insurance while loan outstanding — needed as collateral [20(1)(e.2)] (8/12 × $600 = $400) — Food for staff party not subject to 50% rule ($4,000 of total) — Regular accounting fees are deductible as a cost of doing business [18(1)(a)] ($15,000) — Interest on operating line and loan specifically deductible in section 20 [20(1)(c)] ($7,500) — Breach of contract suit cost of doing business [18(1)(a)] ($1,700)
Question 15 (42 minutes) [Chapters 4, 5] You have been asked to reconcile accounting income to Division B income for tax purposes and to compute taxable income for your client, Waterloo Industries Ltd a Canadian Controlled Private Corporation (CCPC). The income statement for the year ended December 31, 2023 is shown below: Waterloo Industries Ltd. Statement of Income Year Ended December 31, 2023 Sales Cost of sales Gross profit Expenses: Selling General and administrative Amortization Interest on long-term debt Other interest
$4,780,000 3,560,000 $1,220,000 $ 395,000 305,000 230,000 37,000 55,000 $1,022,000
Other income: Gain on sale of fixed asset Income from other investments
$
Income before income taxes
$ 308,900
Income taxes: Current Provision for future income taxes
$
1,900 109,000 $ 110,900
$ Net income
93,000 4,500 97,500
$ 211,400
During your review of the working paper file and last year’s tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items: 1. The December 31, 2023 finished goods inventory is stated net of a reserve for a possible decline in market value of $57,000. 2. Included in general and administrative expenses are the following transactions: (a) landscaping (b) cost associated with the valuation of land (c) donations consisting of $63,000 to registered charities and $1,000 to registered political parties (d) premium for term life insurance policy on the president in which the company is the beneficiary and the policy is used as collateral for a bank operating line of credit (e) memberships in private clubs for senior executives (f) meals and entertainment with clients (g) cost of employee training seminar to teach employees about new provincial workplace safety laws (h) cost of seasonal holiday party to which all employees were invited (i) warranty provision (actual warranty costs: $18,000) (j) reserve for decline in value of marketable securities
$17,000 2,800 64,000 22,200 3,200 12,000 7,200 17,700 28,000 13,000
(k) accrued bonuses, paid July 30, 2024
30,000
3. Included in interest expense on long-term debt and other interest are the following transactions: (a) bond interest paid to November 30, 2023 bond interest accrued to December 31, 2023 (b) interest on deficient income tax instalments interest on late municipal property taxes
$10,000 950 1,200 500
4. Included in other income are the following transactions: (a) sale of capital property Cost $ 80,000 956,183 50,000 160,000 65,000
Truck (not class 10.1) Class 1 NRB— (purchased Feb 2014) Building Class 1 Patent limited life — Class 44* Computer system hardware**
Proceeds $25,000 650,000 37,200 50,000 10,000
* This was the only asset in the class (Purchased 2020) ** No separate class used
(b) the gain on sale of fixed asset arose from the sale of an oil painting hung in the office of the Director of Taxation; the painting cost $18,000 in 2014 and was sold for $19,900 (c) income from other investments includes the receipt of a cash dividend of $7,500 from the subsidiary corporation 5. The company had the following balances in its tax accounts on January 1, 2023: Class 1 Class 1-NRB Class 8 Class 10 Class 12 Class 44
$225,000 615,048 55,000 354,000 Nil 78,750
6. The following purchases of assets were purchased also in February 2023. office furniture computer system — hardware — applications software
$ 1,000 55,000 12,000
7. The balances in the following tax accounts on January 1, 2023 were: charitable donations carry forward from 2019 non-capital loss carry forward from 2020 net capital loss from 2001
$ 7,000 97,000 1,800
Required: Prepare the requested reconciliation and compute taxable income. List under the heading “Omitted”, with a very brief explanation why, any of the above items which were omitted from the reconciliation.
Solution 15 Net income per financial statements Add: Provision for income tax
$211,400 — current — deferred
Amortization Reserve for decline in market value of inventory Cost associated with valuation of land Charitable and political donations Memberships in private clubs Recapture Non-deductible portion of meals and entertainment (50% of $12,000) Warranty provision Reserve for decline in value of securities Accrued bonus not paid within 179 days of year-end Interest on deficient income tax instalments Taxable capital gain on painting [½ ($19,900 − $18,000)]
$ 93,000 4,500 230,000 57,000 2,800 64,000 3,200 34,952 6,000 28,000 13,000 30,000 1,200 950
Deduct: Gain on sale of fixed asset Warranty expense Capital cost allowance (Note)
$ 1,900 18,000 182,212
Terminal loss on Class 44 (Note)
28,750
Income from business for tax purposes Less Division C deductions: Charitable donations ($7,000 + $63,000) Dividends Net capital losses $1,800 available, but limited to taxable capital gains of $950) Non-capital losses Taxable income
568,602 $780,002
230,862 $549,140
$70,000 7,500 950 97,000
175,450 $373,690
Omitted from reconciliation: (a) landscaping is specifically deductible ($17,000) (b) premium for life insurance policy on president deductible because it is used as collateral ($22,000) (c) employee training seminar expense deductible as an expense incurred to earn income ($7,200) (d) cost of seasonal holiday party to which all employees were invited is deductible without the 50% limit ($17,700) (e) bond interest paid and accrued deductible if funds are used to produce income from business ($10,000 and $950) (f) interest on municipal property taxes deductible as a cost of doing business ($500) (g) dividends are included in income (h) Political Contribution $1,000 18(1)(n) plus Charitable Donation $63,000 18(1)(a)
Notes to Reconciliation: Cl. 1: 4% Cl. 8:20% Cl.10:30% UCC 1/1/23 $225,000 $55,000 $354,000 Purchases: Off. furn. Comp. hd. Comp. sf. Disposals: Truck (25,000) Building sale Building (37,200) Comp. (10,000) Patent sale UCC 187,800 55,000 319,000 Plus AII* 0 UCC 12/31/23 187,800 55,000 319,000 CCA (7,512) (11,000) (95,700) Terminal loss
Recapture Total CCA above = $114,212 plus below
Cl.44.25% Cl.1NRB:6% $78,750 $615,048
(650,000)
(50,000) 28,750
0
28,750 (28,750)
$34,952
*AII = Accelerated Investment Incentive Immediate expensing CCA for CCPC calculation (maximum $1.5 million) after April 19, 2021 100% Class 8 $1,000 Class 12 $12,000 Class 50 $55,000 Immediate Expensing CCA $68,000 Total CCA = $68,000 + $114,212 =$182,212
Question 16 (49 minutes) [Chapter 4, 5] The following information is taken from the financial statements and audit working papers of Eldridge Asset Sales Inc. (“EASI”) a public company for its fiscal year ended December 31, 2023. Eldridge Asset Sales Inc. Condensed Unaudited Income Statement For the Year Ended December 31, 2023 Sales Cost of goods sold Gross profit Selling expenses General and administrative expenses Net income before provision for income taxes Provision for income taxes — current — future Net income after tax
$16,650,000 (14,050,000) $ 2,600,000 $975,000 195,000
(1,170,000) $ 1,430,000
$220,000 310,000 $
(530,000) 900,000
Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year. The following items were deducted in arriving at the above net income: 1. During the year, a warehouse worker managed to remove valuable inventory worth $8,000 during the night shift by taking it out in his lunch box. 2. Late in the year, it became apparent that during the next year new competitive products would come on the market which would drive the price of EASI’s products down. They expect this decline to take place in about six months. As a result, they decided to set up a reserve for a decline in the inventory value in the amount of $17,000. They have never set up this kind of reserve before. 3. Because EASI’s products come back for repair under their warranty program, they set up a reserve for this expense on their financial statements. Last year the reserve was $76,000. This year they increased the reserve to $97,000. 4. Charitable donations were made in the amount of $9,000. 5. Golf club membership fees in the amount of $2,600 were paid for the sales manager who used the club regularly to close sales. 6. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of $2,300. 7. Management bonuses of $96,000 were accrued at December 31, 2023 ($35,000 was not paid until June 30, 2024 due to lack of sufficient funds). 8. The December holiday banquet for the employees cost $15,000. 9. EASI had a dispute with one of its major suppliers over the use of the supplier's product. As a result of a court decision, the supplier was awarded damages for breach of contract in the amount of $38,000. 10. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of $5,000 and appraisal fees of $2,000 related to this financing. The mortgage has a 10-year term and a 30-year amortization period. 11. A number of years ago, the company issued a bond at a discount. They have been amortizing this discount at the rate of $7,000 per year ever since, including this year.
12. During the year, the company bought the shares of another company. In completing this transaction, legal fees of $8,500 were incurred. 13. During the year, they borrowed to buy new equipment. The interest expense related to this was $23,000. 14. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of $390. 15. A life insurance policy was taken out on the president's life in order to provide funding for the company in the event of his death. Life insurance premiums on this policy amounted to $4,600. 16. Business interruption insurance premiums of $3,300 were paid to protect the company in the event a fire forced them to close for a period of time. 17. Computer software costing $750 related to word processing was expensed because they always bought the upgrades each year. 18. Amortization expense on the fixed assets was $86,000. An examination of the capital cost allowance schedule for 2023 provided the following opening balances for the undepreciated capital cost for each class of EASI's assets: Class 1 Class 8 Class 10 Class 12 Class 13 Class 44
— building .................................................. — office furniture and equipment ............... — trucks for transportation of goods .......... — small tools .............................................. — leasehold improvements ......................... — Patent and rights limited life ..................
$188,383 60,000 80,000 5,000 162,500 90,000
The following additional information was found in the 2023 fixed asset schedules working paper files. 1. The building which cost $997,426 in 1990 was sold for $150,000. It was the only building in Class 3 at the time of its sale. A new building was purchased (non used) in February 2023 for $750,000. Also, in February 2023 a lot adjacent to the new building, was purchased for $100,000 for use as a parking lot by employees and visitors. This lot was paved at a cost of $25,000. A fence was erected also in February 2023 around an outside storage area near the new building at a cost of $40,000. 2. New office furniture was purchased for $20,000. This purchase replaced old assets which were sold for $5,000. None of the old assets was sold for more than capital cost. 3. Three small trucks purchased in 2018 for $12,000 each were traded in for three new trucks. Each new truck was priced at $15,000, but this was reduced by a trade-in credit of $2,500 for each old truck. 4. Some small tools were sold for a total of $7,000. All of these tools were sold at a price less than their capital cost. 5. Leasehold improvements had been made to a leased warehouse at a cost of $225,000 in September 2021. The remaining length of the lease in that year was six years with two successive renewal options of three years each. Further leasehold improvements were made to this warehouse in 2023 at a cost of $21,000. 6. During January 2023, an unlimited life franchise was purchased for $48,000. 7. Accounting gains and losses on the above asset sales netted to nil. Required: Based on the foregoing information, compute the minimum income from business for tax purposes for Eldridge Asset Sales Inc. in respect of its 2023 fiscal year. In addition, comment on the items not included in your calculation of income from business.
Solution 16 Net income after tax, per financial statements Add: s. 18(1)(e) Provision for income tax s. 18(1)(e) Reserve for decline in inventory values not permitted s. 18(1)(e) Warranty reserve not permitted (2023 increase: $97,000 – $76,000) s. 18(1)(a) Charitable donations usually not incurred to produce income s. 18(1)(l) Golf club membership specifically denied s. 67.1(1) Meals and entertainment (50% of $2,300) s. 78(4) Management bonus unpaid on 180th day after Dec. 31/23 s. 20(1)(e) Accounting and appraisal fees [financing costs: 80% of ($5K + 2K)] s. 18(1)(b) Amortization of bond discount not permitted s. 18(1)(b) Legal fees on share purchase a capital expenditure s. 18(1)(t) Interest on late income tax instalments specifically denied s. 18(1)(a) Life insurance premiums on policy not required as collateral s. 18(1)(b) Computer software is Class 12 depreciable capital property s. 18(1)(b) Amortization
$ 900,000
s. 13(1)
Recapture of Class 12 CCA (see below)
1,250 1,629,840
Deduct: s. 20(1)(m) s. 20(16)
Reserve for deposit on goods not delivered Terminal loss
s. 20(1)(a)
CCA (see below)
$
530,000 17,000 21,000 9,000 2,600 1,150 35,000 5,600 7,000 8,500 390 4,600 750 86,000
8,200 38,383 189,475 236058 $1,393,782
Income from business for tax purposes
Omitted from calculations: ▪ Loss from theft a normal risk of business (Cassidy's case and IT-185) ($8,000) ▪ Management bonus of $61,000 ($96K − 35K) paid before 180th day from Dec. 31/23 ▪ Seasonal holiday banquet available to all employees; not limited by s. 67.1(2)(e) ($15,000) ▪ Damages a normal risk of business (IT-467R) ($38,000) ▪ Interest on funds borrowed to buy equipment incurred to produce income (s. 20(1)(c)) ($23,000) ▪ Business interruption insurance premium incurred to protect source of income (s. 18(1)(a)) ($3,300) Effect 1/23 UCC Purch. Disp. Plus AIC* Subtotal CCA T. Loss Recapt. -AIC* 12/23 UCC
Class 1- NRB 6% —
Class 1 4% 188,383
Class 6 10% —
Class 8 20% 60,000
Class 10 30% 80,000
Class 12 100% 5,000
Class 13 SL 162,500
Class 14.1 5% ----
Class 17 8% —
Class 44 25% 90,000
750,000 — 750,000 375,000 1,125,000 (67,500)
— (150,000) 38,383 — 38,383 —
40,000 — 40,000 20,000 60,000 (6,000)
20,000 (5,000) 75,000 7,500 82,500 (16,500)
45,000 (7,500) 117,500 18,750 136,250 (40,875)
750 (7,000) (1,250) — (1,250) —
21,000 — 183,500 -183,500 (29,500)
48,000 -------48,000 24,000 72,000 (3,600)
25,000 — 25,000 12,500 37,500 (3,000)
— — 90,000 — 90,000 (22,500)
— — (375,000) 682,500
38,383 ---— NIL
— — (20,000) 34,000
— — (7,500) 58,500
— — (18,750) 76,625
— 1,250 — NIL
— — — 154,000
--------(24,000) 44,400
— — (12,500) 22,000
— — — 67,500
Income
(189,475) 38,383 1,250
2021 leasehold improvement — lesser of:
(a) 1/5 × 225,000 = $45,000 (b) $225,000/(6 + 3) = $25,000
lesser amount: 2023 leasehold improvement — lesser of:
*AIC =
$25,000 (a) 1/5 ×$21,000 = $ 4,200 (b) $21,000/(4 + 3) = $ 3,000
lesser amount × 1.5(AIC) = Accelerated Investment credit
4,500
*Plus AIC = Accelerated Investment credit = (Net of additions – disposals) X 1/2
Note that for recapture in Class 12, the asset does not have to be the last asset in the pool. The moment the balance becomes negative for the UCC balance at December 31, 2023, the negative balance turns into recapture. Note that for terminal losses the rules are different in that it must be the last asset in the pool in order for it to be a terminal loss.
$29,500
Question 17 (40 minutes) [Chapter 5] Chazerai Ltd. is engaged in manufacturing and processing, which is 95% of their business, with a December 31 year-end. Chazerai Ltd. distributed all of the $1.5 million limit for eligible propety amoung it associated member’s companies. On January 1, 2023, the undepreciated capital cost for each class of its assets was as follows: Class 1-MB Class 8 Class 10.1 Class l2 Class 13
— building — office furniture and equipment — automobiles — small tools — leasehold improvements
$316,558 60,000 11,550 5,000 175,000
The following additional information was found in the 2023 audit files: (1) The building, which cost $564,309 in 2017, was sold for $260,000. It was the only building in Class 1 MB at the time of its sale. The underlying land was sold for proceeds equal to the original cost. Chazerai Ltd purchased a new building in 2022 for $600,000. (2) New office furniture was purchased for $20,000. This purchase replaced old assets, which were sold for $5,000. None of the old assets were sold for more than original cost. (3) Some small tools were sold for a total of $7,000. All of these tools were sold at a price less than their original cost. (4) The opening balance in Class 13 represents leasehold improvements of $210,000 made during August 2021 to the leased warehouse. During 2023, further leasehold improvements were made to the same leased warehouse at a cost of $24,000. The remaining lease term was five years with two successive two-year renewal terms. (5) The Class 10.1 automobile was purchased in December 2021 for $34,000. During 2023, it was sold for $21,000. A new automobile was purchased for $45,200, which included HST of $5,200 (13%). (6) A license (expected to be used indefinitely) was purchased for $60,000 in 2023. (7) A new computer was purchased in January 2023 for $7,000. (8) Chazerai Ltd. is registered to collect and remit HST.
Required: Prepare a schedule to show the maximum deductions for tax purposes available to Chazerai Ltd. for 2023 based on the above information.
Solution 17 Class 1MB
Class 8
Old Class 10.1
New Class 10.1
Class 12
Class 13
Class 14.1
Class 1 MB
Class 50
10%
20%
30%
30%
100%
See below cal.
5%
10%
55%
$ 0 36,000
$5,000
Opening Balance UCC $316,558 $60,000 $11,550 Additions 20,000 Disposals** (260,000) (5,000) Balance 56,558 75,000 11,550 Plus AIC* 0 7,500 0 Subtotal 56,558 82,500 11,550 CCA (16,500) (1733) Recapture Terminal Loss 56,558 Minus AIC Nil (7,500) Closing Balance UCC Nil $58,500 Nil
36,000 18,000 54,000 (16,200)
$ 0 $ 0 60,000 600,000
(7,000) (2,000) N/A NIL
60,000 600,000 30,000 300,000 90,000 900,000 (4,500) ( 90,000)
$ 0 7,000 7,000 3,500 10,500 (5,775)
2,000 (18,000) $19,800
(30,000) (300,000) (3,500) Nil
$55,500 $510,000
$1,225
** Lower of Cost or Market New Class 10.1 addition = $36,000 maximum since it gets 13% input tax credits (HST) *Plus AIC = Accelerated Investment credit = (Net of additions – disposals ) X 1/2
Class 13 • End of 2023, four years left • Therefore beginning of 2023, 5 years plus two 2-year renewal periods • From this we can conclude that the beginning of 2021 was 7 years plus two 2-year renewal periods Therefore, the capital cost for leasehold improvements is: Lesser of: a) 210,000/(7+2) = $23,333.33 b) 210,000/5 = $42,000
Additional improvements Lesser of: a) 24,000/(5+2) = $3,428 × 1.5 AIC b) 24,000/5 = $4,800
Lesser of: $23,333
Rules on CCA Calculations assuming no Terminal loss or Recapture LEGEND R — Rate UCC — Undepreciated Capital Cost ADDITIONS > SALES
5,142 $ 28,475
(UCC × R) + [(ADDITIONS − SOLD ITEMS) × ½ RULE × R] SALES > ADDITIONS [UCC MINUS (SALES − ADDITIONS)] × R CLASS 10.1 SALE One half-year applies in year of sale
Question 18 (19 minutes) [Chapter 5] Kvetch Ltd. has operated one business with a December 31 year-end since its incorporation in 2022. It has made the following transactions: Febuary 2023
— incurred incorporation costs of $2,500
May 2024
— purchased a licence with an indefinite life for $11,755
June 2025
— purchased goodwill for $80,000
August 2027
— purchased a franchise with an indefinite life for $120,000
October 2029
— sold the licence for $50,000 purchased in May 2024
June 2030
— sold the franchise for $200,000 purchased in August 2027
Required: Calculate the effect of the above transactions on income from business, assuming that the maximum write-off is taken by the corporation in all of the years indicated. Assume that the transaction was an arm’s length transaction. Please round off to the nearest dollar when you do your calculations.
Solution 18 Balance 2023
The first $3,000 of incorporation cost is deductible under 20(1)(b). Therefore $2,500 incorporation cost is deductible.
2024
Purchase Licence with an indefinite life* CCA ($11,755 X 5%) = Balance January 1, 2025 Add: Purchase Goodwill* Subtotal before CCA CCA ($91,167 X 5%)= Balance January 1, 2026 CCA ($86,609 X 5%)= Balance January 1, 2027
11,755 (588) 11,167 80,000 91,167 (4,558) 86,609 (4,330) 82,279
Purchase franchise indefinite life
120,000
Balance December 31, 2027 before CCA CCA ($202,279 X 5%) =
202,279 (10,114)
Balance January 1, 2028 before CCA CCA ($192,165 X 5%) = Balance January 1, 2029
192,165 (9,608) 182,557
Disposition Lower of cost or proceeds ($11,755 vs $50,000) Balance December 31, 2029 before CCA CCA ($170,802 X 5%) = Balance January 1, 2030 Disposition Lower of cost or market ($120,000 vs $200,000) Balance December 31, 2030 before CCA CCA (($42,033 X 5%)= Balance December 31, 2030 after CCA
(11,755) 170,802 (8,540) 162,262 (120,000) 42,262 (2,113) $40,149
2025
2026
2027
2028 2029
2030
Up to $3,000 of incorporation costs deductible undr par. 20(1)(b). Excess (none here) is capitalized in Class 14.1. * Accelerated investment incentive does not apply for 2024 and later, but still suspends the half-year rule
Question 19 (49 minutes) [Chapter 4,5] Your client, Jon's Auto Parts Ltd., a Canadian Public corporation, has prepared its own financial statements for the year ended December 31, 2023. The financial statements are not necessarily in accordance with generally accepted accounting principles. Jon's Auto Parts Ltd. Balance Sheet December 31, 2023 Assets: Cash Accounts receivable Inventory
$
75,401 131,520 526,810 733,731 1,883,200 178,750 1,200,000 $3,995,681
Capital assets, net of amortization Development costs Goodwill Liabilities: Accounts payable Long-term debt
$ 229,090 866,295 1,095,385
Shareholders' Equity: Share capital Contributed surplus Retained earnings
110,000 1,200,000 1,590,296 2,900,296 $3,995,681
Jon's Auto Parts Ltd. Statement of Income and Retained Earnings For the Year Ended December 31, 2023 Sales Cost of sales Opening inventory Material costs Wages Amortization Rent Overhead Closing inventory Gross profit
$1,503,850 $287,120 715,690 215,321 165,000 55,000 32,300 (526,810)
943,621 560,229
Expenses Administrative salaries and benefits Advertising Amortization of capital assets Automotive expenses Bad debts Charitable donations Interest expense - on building loan - on equipment loan Loss on sale of computer Management bonuses Meals and entertainment Office expense Professional fees Sales commissions and benefits
85,320 22,551 20,860 7,390 6,514 500 23,833 15,506 17,500 73,654 7,815 8,312 8,020 37,977 335,752 224,477 51,600 172,877 1,417,419 $1,590,296
Income before income taxes Income taxes Net income for the year Retained earnings, beginning of year Retained earnings, end of year
The following information was provided by Jon's Auto Parts Ltd.'s accountant who prepared the financial statements: 1.
Accounts receivable — The company provides an allowance for doubtful accounts for accounting purposes, based on historical experience, equal to 4% of gross receivables.
December 31, 2022 December 31, 2023
A/R $120,000 137,000
Allowance $ 4,800 5,480
Net $115,200 131,520
The actual doubtful accounts, based on a review of the aged listing, were $2,200 and $6,300 at December 31, 2022 and 2023, respectively. 2. Inventory — The inventory is valued at cost which is determined on a direct cost basis. One particular line of parts which is included in inventory has a market value of nil but is recorded on the books at $35,000. The write-down has not been recorded since the total cost of inventory is less than the total market value. 3. Capital assets, net of amortization — December 31, 2023 December 31, 2022 Accumulated Accumulated Cost Amortization NBV Cost Amortization Land $ 300,000 $ - $ 300,000 $ $ Building under construction 800,000 800,000 Manufacturing equipment 1,525,060 857,000 668,060 1,370,000 692,000
NBV $
678,000
Computer equipment 33,000 Computer hardware 110,000 Computer software 12,000 $2,780,060
17,360
15,640
33,000
16,000
17,000
16,500
93,500
70,000
28,000
42,000
6,000 6,000 12,000 $896,860 $1,883,200$1,485,000
3,000 $739,000
9,000 $746,000
The company began the construction of a building to house their manufacturing operations in September 2023. The building has an estimated completion date of May 2024. The company replaced its computer hardware in 2023. The old equipment was depreciated to a net book value of $42,000 and its disposition resulted in a loss of $17,500. The old computer hardware was included in Class 10 for CCA purposes. The company purchased a piece of manufacturing equipment during the year for $155,060. There were no other additions or deletions of capital assets during the year. The closing UCC's at December 31, 2022 were: Class 8 $ 25,000 Class 10 26,000 Class 43 410,000 4. Purchases — During the year the company bought $32,000 worth of new furniture for the office. 5. Goodwill — The company had a valuation completed by an independent valuator early this year. The valuation identified that the company had goodwill of $1,200,000. The company recorded the goodwill in order to enhance the financial position of the company to potential investors. 6. Accounts payable — Accounts payable at December 31, 2023 included bonuses payable to employees unrelated to the company of $25,000 and bonuses payable to employees related to the company of $35,000. The bonuses were considered reasonable and were paid on June 30, 2024 before the 2023 tax returns were filed. Required: Determine the minimum Division B income for tax purposes of Jon's Auto Parts Ltd. for the year ended December 31, 2023.
Solution 19 (Past exam question: 49 minutes) Note Net income for the year Add: Income taxes Amortization — cost of sales $165,000 — expenses 20,860 Charitable donations Interest — on building loan Loss on sale of computer Meals and entertainment (50% of $7,815) Allowance for doubtful accounts — 2023 accounting Allowance for doubtful accounts — 2022 tax Unpaid bonuses — unrelated employees 25,000 — related employees 35,000 Deduct: Allowance for doubtful accounts — 2023 tax Allowance for doubtful accounts — 2022 accounting Capital cost allowance - Cl. 1 Nil - Cl. 8 14,600 - Cl. 10 450 - Cl. 43 123,000 - Cl. 53 155,060 - Cl. 50 90,750 Cumulative eligible capital Inventory write-down Net income
$172,877 $ 51,600
1
185,860 500 23,833 17,500
2 1 3 4
3,908
5
5,480
6
2,200
6
60,000
350,881
7
6,300
6
4,800
6
8 383,860 Nil 35,000
9 (429,960) $93,798
10
Notes: 1. Income Taxes/Charitable Donations Income taxes, and generally charitable donations, are not incurred to earn income and, therefore, are not deductible by virtue of par. 18(1)(a). 2.
Amortization Accounting amortization is not deductible by virtue of par. 18(1)(b).
3.
Interest — on building loan Interest incurred during the period of construction must be capitalized to the cost of the building by virtue of ssec. 18(3.1).
4.
Loss on Sale of Computer The accounting loss on the sale of depreciable property is not deductible for tax purposes but is accounted for through the undepreciated capital cost pool.
5.
Meals and Entertainment 50% of meals and entertainment is not deductible by virtue of sec. 67.1.
6.
Allowance for Doubtful Accounts The allowance for doubtful accounts must be determined by reference to specific accounts in order to be deductible for income tax purposes.
7.
Unpaid Bonuses Remuneration must be paid within 179 days of year end (June 29, 2023) in order to be deductible in the fiscal year, whether the remuneration is payable to employees that are or are not related to Jon's Auto Parts Ltd. (ssec. 78(4)).
8.
Capital Cost Allowance Cl. 8 Opening $25,000
Cl. 10 $ 26,000
Cl. 43 $410,000
Cl. 53 $ -
$
Additions Disposals Plus AIC*
32,000 16,000
(24,500) -
-
155,060 nil**
110,000 55,000
Rate
73,000 20%
1,500 30%
410,000 30%
155,060 100%
165,000 55%
Cl. 50 -
CCA $ 14,600 $ 450 $123,000 $155,060 $90,750 ___________ The building was not available for use at December 31, 2023 and, therefore, no CCA can be claimed. *Plus AIC = Accelerated Investment credit = (Net of additions – disposals) X 1/2 **Class 53 receives special AIC treatment of 100% write off
9.
Class 14.1 Eligible Capital property Goodwill must be purchased (rather than recorded internally) in order to qualify as an eligible capital expenditure.
10.
Inventory By virtue of ssec. 10(1), all items in inventory must be valued at the lower of cost or market or, by virtue of reg. 1801, all at market value.
Question 20 (45 minutes) [Chapters 4 to 7] You have been asked to prepare the Schedule 1 (reconciliation of accounting income to income for tax purposes) for SMR Limited, a Canadian Public corporation (20% retail and 80% manufacturing business). The following income statement and miscellaneous financial information for the year ended December 31, 2023 has been provided to you for this purpose. Sales ..................................................................................... Cost of goods sold................................................................ Gross profit .......................................................................... General and administrative expenses ............ $300,000 Amortization ................................................. 100,000 Interest .......................................................... 80,000 Gain on disposal of fixed assets ........................................... Net income before income taxes .......................................... Income taxes Current....................................................... $600,000 Deferred..................................................... 340,000 Net income ....................................................
$5,600,000 2,400,000 $3,200,000
480,000 $2,720,000 85,000 $2,805,000
(940,000) $1,865,000
During your review of the working paper file and last year’s tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items. 1. Included in cost of sales is a reserve for a possible decline in the market value of finished goods inventory of $57,000. There is also an obsolescence reserve of $200,000 for some raw materials that were purchased from a supplier and were later found to be defective and worthless. So far, the supplier has refused to allow SMR to return the materials for a refund. 2. The gain on disposal of fixed assets consists of the accounting gain on the sale of some land for $415,000 on May 30, 2023, and the sale of a limited life license for $16,000 on July 15, 2023. SMR purchased the land on January 15, 2023 for $325,000. The land was purchased with the intention of it being used to expand the manufacturing operation. After purchasing the property, SMR received some bad publicity and complaints regarding the expansion plans, as the land was relatively close to a new subdivision. The management group at SMR decided to sell the land and expand its operations at the current location instead. Real estate commissions of $15,000 were paid in relation to the sale. SMR expanded its manufacturing space by constructing a new building adjacent to its current manufacturing plant. The construction of the new building started March 1, 2023 and was completed June 30, 2023. The license was purchased in 2020 for $6,000. It was the only asset left in the CCA class when it was disposed of in July. 3. General and administrative expenses include: (a) Donations of $63,000 to registered charities and $1,000 to registered political parties .... (b) Accrued bonuses — fully paid June 27, 2024 ................................................................... (c) Property taxes: $1,000 per month for the existing property ....................................................................... $950 per month for the new building (starting March 1, 2023)......................................... $200 per month for land purchased (See 2, above) ........................................................... (d) Accrual for a potential settlement to a former employee for an injury received on the job; SMR was notified of the pending lawsuit on December 18, 2023 ........................
$64,000 44,000 12,000 9,500 900 60,000
(e) Utility connection costs for the new building .................................................................... (f) Insurance Costs: $400 per month for the existing property .......................................................................... $200 per month for the new building (starting March 1, 2023)......................................... (g) New software purchased Nov 1, 2023 ($3,000 for applications and $10,000 for systems) ........................................................................................................................ (h) Application to the State of Michigan in January 2023 for an unlimited life license to sell in the state ..............................................................................................................
5,000 4,800 2,000 13,000 6,000
4. Interest includes the following: Interest on 9% $215,000 Mortgage for land purchased. The mortgage was repaid May 30, 2023 on the sale of the property. (See 2, above) ............................................ Interest on 5% $340,000 Mortgage for the construction of the new building taken out April 15, 2023. Interest is payable semi-annually starting October 15, 2023. No principal payments were made in 2023........................................................................
$ 7,210
12,156
5. The undepreciated capital cost balances at December 31, 2022 were as follows: (a) (b) (c) (d) (e) (f)
Class 1 ............................................................................ Class 8 ............................................................................ Class 10.1 ....................................................................... Class 14 .......................................................................... Class 53 .......................................................................... Class 44 ..........................................................................
$550,000 35,000 12,495 5,000 313,750 15,000
6. Purchases and sales made during 2023 were as follows: (a) The cost of constructing in January 2023 of the new building was $340,000. (b) The company purchased a new facsimile machine for $1,200. (c) Some outdated desks used by the finance department with a cost of $5,000 were sold for proceeds of $3,500. (d) A 20-year patent to use a manufacturing process was purchased on July 1, 2023 for $120,000. (e) A company car for use by the president of the company was purchased for $40,000 excluding HST. This car replaced the only other existing company car, which was purchased in January 2020 for $35,000. The old car was sold for $12,000. (f) Dies and moulds for manufacturing equipment were purchased for $85,000 in January 2023. (g) A customer list with long-term value was purchased for $40,000 in February 2023 from a former sales agent of the company located in Vancouver. Required: A. Please prepare the requested reconciliation. State any assumptions made in determining inclusions and omissions. Provide explanations for inclusions if not self explanatory. B. Provide a brief explanation for any items omitted from the above calculation.
Solution 20 Net income Add: Income taxes Amortization Inventory reserve [not based on LCM or market valuation; reserve per 18(1)(e)] Political donations [specifically excluded; tax credit; 18(1)(n)] Charitable donations [excluded per 18(1)(a); Division C deduction] Property taxes new building [$950 for 4 months per 18(3.1), added to ACB/CC] Property taxes vacant land [18(2)] Settlement accrual [Contingent 18(1)(e)] Utility connection costs [18(3.1), added to ACB/CC] Insurance new building [$200 for 4 months per 18(3.1), added to ACB/CC] Software [18(1)(b)] Cost of Michigan licence Mortgage interest on land [18(2)] (Why → because you deducted interest) Mortgage interest on new building (April 15 to June 30 under construction) [340,000 × 5% × 77/365, per 18(3.1)] (see Note 1) Taxable capital gain land [50% of ($415,000 − ($325,000 + $15,000 + $7,210 + $900))] (Note: same marks available if student assumed it was an income property) Taxable capital gain license [50% of ($16,000 − $6,000)] Class 14 Recapture [$5,000 − LCP of $6,000]
$1,865,000
Subtotal
$3,165,741
Deduct: Gain on disposal of fixed assets Class 1-NRB: [($340,000 + $3,800 + $800 + $5,000 + $3,586) × 6% × 1.5] Class 1: [$550,000 × .04] Class 8: [($35,000 − $3,500) × 20%] Class 8 (new fax): [$1,200 × 1.50 × 20%] [in separate class] Class 10.1 (old): [$12,495 × 50% × 30%] Class 10.1(new): [30% × 1.5 × 36,000] Class 12: [(($85,000 + $3,000) × 100%] Class 53: 50% × 313,750
(85,000) (31,787) (22,000) (6,300) (360) (1,874) (16,200) (88,000) (156,875)
Class 14.1 ($40,000 customer list plus $6.000 Michigan license) × 1.5 × 5%=
(3,450)
Class 44: 25% × [$15,000 + ($120,000 × 1.5)] [better to include in Cl 44 than Cl 14; therefore no election] Class 50: [$10,000 × 55% × 1.5]
(48,750) (8,250)
Income from business or property for tax purposes
940,000 100,000 57,000 1,000 63,000 3,800 900 60,000 5,000 800 13,000 6,000 7,210 3,586
33,445 5,000 1,000
$2,696,895
Omitted Items — The obsolescence reserve of $200,000 for raw materials is deductible as it is based on LCM. — Bonus accrued and paid within 180 days is allowed ($44,000). — Half-year CCA is allowable on disposed Class 10.1 vehicles; no terminal loss/no recapture rule in effect for Class 10.1.
(6,300)
— The cost of the new company car is limited to the year 2023 maximum for CCA purposes without HST because the company must be registered for HST purposes if carrying on business in Canada. — Property tax deductible on existing building ($1,000 × 12 = $12,000). — Insurance cost deductible on existing building ($400 × 12 = $4,800). Note 1 April 15 to June 30, 2022 (building complete) = 77 days /365× 5% × $340,000 = $3,586
Question 21 (32 minutes) [Chapters 5, 7] Joan’s Party Planners Limited a CCPC provides start-to-finish party planning services for all occasions. A summarized set of financial statements for the taxation year ended December 31, 2023 are set out below: Joan’s Party Planners Limited STATEMENT OF INCOME For the year ended December 31, 2023 Revenues........................................................................................................... $561,000 Expenses: General and administrative ........................................... $411,930 Amortization on fixed assets ......................................................... 28,170 440,100 120,900 Gain on disposal of fixed assets (see details below) ......................................... 79,100 Net income before income taxes ....................................................................... 200,000 Provision for income taxes ............................................................................... 43,240 Net income after income taxes ......................................................................... $156,760
Additional information related to 2023 is provided below. The opening UCC balances as at January 1, 2023 were as follows: Class 1 .................................................................. Class 6 .................................................................. Class 8 .................................................................. Class 10 ................................................................ Class 12 ................................................................
$30,000 2,100 2,000 11,000 Nil
During 2023, Joan’s Party Planners Limited purchased the following depreciable assets: Office furniture……… .............................................................................. Delivery van………. ................................................................................. Computer equipment & related systems software ..................................... Computer word processing software … .................................................... Cutlery and dishes …….. ......................................................................... Kitchen utensils (less than $200 each) ...................................................... Photocopy machine ................................................................................
$15,000 30,000 10,000 6,000 21,000 1,000 2,600
In April 2023, Joan’s Party Planners Limited sold their owned business premises (consisting of land and a Class 1 building) and moved to a more suitable location, which is currently being rented. They received proceeds of $20,000 for the land (original cost of $5,000). The Class 6 asset mentioned above is the fence that was erected around these former business premises. On the sale of these premises, no proceeds were allocated to the fence. This was the only asset in Class 6. The details of the sale of the former Class 1 building, as well as the other depreciable assets sold during 2023, are set out below: Cl 1 building Chairs and tables (Class 8) Delivery van Office equipment Table linens
Proceeds 125,000 6,000 4,500 5,000 3,000
Original Cost 45,000 8,000 18,000 15,000 25,000
Net book value 40,000 5,120 6,175 4,915 8,190
During July 2023, Joan’s Party Planner Limited purchased the client list from a competitor who was going out of business. They paid $12,000 for this list which had an indefinite life. Required: Calculate the corporation’s minimum income from business for the year ended December 31, 2023. Assume all expenses are reasonable in the circumstances. Support your treatment of each item listed above with a reason or a calculation.
Solution 21 Net income after income taxes
$156,760
Add: Provision for income tax
$43,240
Amortization
28,170
Recapture on Building Sale = $30,000 minus the lesser of:
1)
$ 45,000
2)
$125,000
15,000
Taxable Capital Gains on sale of Land = ½ × ($20,000 − $5,000)
7,500
Taxable Capital Gains on sale of Building = ½ × ($125,000 − $45,000)
40,000 133,910
Subtotal
$290,670
Deduct: Book gain on sale of fixed assets Terminal loss on Class 6
$79,100 2,100
Class 8* = (2,000 × 20%) + ((15,000 +2600 - 5,000** − 6,000**)×100%*) =
7,000
Class 10 = (11,000 × 30%) + ((30,000 − 4,500**) × 100%*) =
28,800
Class 50* Budget 2021 allows 100% write off purchased after April 19th/21
10,000
Class 12 = Nil + $21,000 + $1,000 + (6,000 − 3,000**) × 100% =
25,000
Class 14.1 = 5% × $12,000 X 1.5
900 (152,900) $ 137,770
*Class 8→ Budget 2021 allows for immediate expensing of assets purchased after April 19th/2021 up to $1.5 million for a CCPC There is no capital loss on the sale of the chairs/tables, delivery van, office equipment, and linens because capital losses are deemed nil on depreciable property. ** Lower of Proceed or Original Cost
Question 22 (29 minutes) [Chapters 5, 6, 7] Mr. I.N. Vestor is retired and is slowly selling some of his assets to supplement his retirement income. He wants to have some idea of how much tax he is going to owe for 2023 on the asset sales that have taken place to date. He has provided you with the following details of his sales. 1. He sold his existing home and his cottage during the year and moved into a condominium. His home was purchased in 2007 at a cost of $85,000. He sold it in May 2023 for proceeds of $250,000. He paid real estate commission of $12,000 on this sale. His cottage was purchased in 2008 at a cost of $120,000. He sold it in September 2023 for proceeds of $320,000. He paid real estate commission of $10,000 on this sale. He did not own any other residences during the relevant years and, thus, has not previously designated any of the relevant years for purposes of the principal residence exemption. 2. He sold the following personal items during 2023: Antique coat rack .......................................................................... Coin collection .............................................................................. Stamp collection ........................................................................... 1964 Ford (a collector’s item).......................................................
Proceeds $ 1,500 450 1,100 7,000
$
Cost 200 1,200 100 12,000
3. He sold one of two rental properties that he owns (Rental #1). He sold the property for total proceeds of $500,000. The details of the sale of Rental #1 are as follows:
Original cost UCC, December 31, 2022 Proceeds, June 30, 2023
Land $125,000 n/a 260,000
Building (Class 3) $175,000 135,000 220,000
Equipment (Class 8) $38,000 16,000 20,000
The proceeds received included $200,000 cash paid on July 1, 2023, and a mortgage for $300,000 amortized over 15 years with a four-year term. The interest rate on the mortgage is 8% payable monthly. Principal repayments of $10,000 are to be made on January 1 each year, commencing January 1, 2024. At the end of the four-year term, the balance of the mortgage will be paid in full. Details of his rental income for the year before the above sale of Rental #1 are as follows: Gross rents ............................................................................... Expenses: Mortgage interest............................................................. Property taxes .................................................................. Insurance ......................................................................... Maintenance .................................................................... Amortization ................................................................... Net income (loss) ............................................................
Rental #1 $25,000
Rental #2 $ 15,000
— (3,000) (2,000) (8,000) (7,000) $ 5,000
(25,000) (3,500) (2,400) (1,500) (4,500) ($21,900)
The undepreciated capital cost of Rental #2 (Class 1) was $83,236 on December 31, 2022. Required: Determine I.N. Vestor’s net income for tax purposes as a result of the above information. Show all of your calculations.
Solution 22 Rental income(1) Taxable capital gain on sale of home
$ 35,271 (2)
63,000
Listed personal property Coin collection ($1,000 – $1,200)
$(200)
Stamp collection ($1,100 – $1,000)
100
($100 loss carried back 3 forward 7 against LPP gains)
$
Nil
Personal-use property Taxable capital gain on antique coat rack [½ × ($1,500 – $1,000)]
250
Allowable capital loss on 1964 Ford [½ × ($7,000 – $12,000)]
0
(PUP loss is nil) Taxable capital gain on sale of rental property(3)
36,000
Accrued interest on mortgage [8% × $300,000 × 6 months]
12,000
Income for tax purposes
$146,521
Notes to Solution (1)
Rental #1
Rental #2
Net income.......................................................................................
$ 5,000
($21,900)
Add: Amortization ...........................................................................
7,000
4,500
Recapture on building [$135K – $175K] ........................................
40,000
0
Recapture on equipment [$16K – $20K] .........................................
4,000
0
Net income before CCA ..................................................................
$ 56,000
($17,400)
Deduct: CCA ($83,236 × .04)..........................................................
n/a
(3,329)
Net rental income.............................................................................
$ 56,000
($20,729)
Total combined rental income .........................................................
$ 35,271
The CCA deduction for Rental #2 is based on the fact that the combined rental income before CCA is $56,000 − 17,400 = $38,600 and is not based on just the results of Rental #2 which is obviously in a loss position before CCA. (2) Proceeds of disposition ............................................. Cost ........................................................................... Selling costs .............................................................. Total period gain....................................................... Years owned ............................................................. 17 Gain per year ............................................................ $9,000 Exemption................................................................. (1 + 2)/17 × $153,000 [2007, 2023] ......................... (1 + 15)/16 × $190,000 [2008–2022] Total capital gain ...................................................... Taxable capital gain (½) ...........................................
Home $250,000 (85,000) (12,000) $153,000
Cottage $320,000 (120,000) (10,000) $190,000 16 $11,875
(27,000) $126,000 $ 63,000
(190,000) $ Nil $ Nil
(3) Proceeds of disposition Cost Capital gain Total capital gain Capital gain reserve is the lesser of: (i) [1/5 × $180,000 × (4 − 0)] = $144,000 (ii) $300,000/$500,000* × $180,000 = $108,000 Capital gain after reserve Taxable capital gain (½) * Assumes that all assets are subject to the mortgage.
Land $ 260,000 (125,000) $ 135,000 $ 180,000
(108,000) $ 72,000 $ 36,000
Building $ 220,000 (175,000) $ 45,000
Question 23 (65 minutes) [Chapter 4, 5, 7] The following condensed income statement for accounting purposes is for Payless Co. Ltd., a Canadiancontrolled private corporation, for its fiscal year ended December 31, 2023. Payless Co. Ltd. was incorporated in 1974 and has continued in the same retail business since that time. Payless Co. Ltd. Income Statement For the year ended December 31, 2023 Sales
$600,000
Cost of sales — see note (1) Administrative and selling expenses — see note (2)
$365,000 110,000
475,000
Other income and extraordinary expense — see note (3)
125,000 225,000
Net income before income taxes Provision for income taxes
350,000 75,000
Net income after income taxes
$275,000
Additional and Supplementary Information Note (1) Cost of Sales Inventory Dec. 31, 2022 — net of a reserve for potential decline in market prices of $10,000 Net purchases Inventory Dec. 31, 2023 Less: a reserve for a potential decline in market prices
$100,000 400,000 500,000
$150,000 15,000
135,000 $365,000
Note (2) Administrative and selling expenses — selected amounts only A.
B.
Included in the advertising account were the following amounts: (i) advertising in two upper New York State newspapers for mail order purposes (ii) uniforms for a local girl's baseball team (iii) charitable donations Included in the financial costs account were the following selected amounts: (i) purchase on May 1st of customer list from a reliable source to solicit sales (ii) cost of issuing new share capital (iii) interest on a bank loan to acquire equipment interest paid interest accrued (iv) appraisal of building just prior to sale
1,500 400 1,250
6,000 750 2,500 1,500 500
Note (3) Other income and extraordinary expenses — selected amounts only A.
The company sold the following capital property during 2023:
Securities Land* Building* Truck
Cost $ 5,000 50,000 112,500 8,000
Book Value Proceeds $ 5,000$ 3,000 25,000 125,000 30,000 175,000 500 200
* The land and building were sold to a developer who offered identical leased space at a very reasonable price. The lease was to have a life of three years with two successive five-year options to renew. The building and truck were the only assets in their respective tax classes. Note (4) Other Information A.
The company had the following balances in selected tax accounts as at January 1, 2023: Undepreciated capital cost - class 1 $80,000 - class 8 7,500 - class 10 750
B.
During the year, the company acquired the following capital property: (i) On March 1, 2023, an exclusive licence to market a line of Japanese products for five years 5,000 (ii) On September 30, 2023, additional merchandise display cases 10,000 (iii) On November 1, 2023, paid contractor for leasehold improvements on the land and building which was leased above 30,000 (iv) Unlimited franchise on Jan 3, 2023 4,000
C.
The net income above reflects a charge for depreciation for fixed assets of $9,650. The company wishes to claim the maximum capital cost allowance.
Required: (a) (b) (c)
Prepare a schedule to reflect the maximum capital cost allowance amount for 2023 and the appropriate closing balances. Prepare a reconciliation between accounting net income after taxes and income for tax purposes supported by necessary computations. Explain in your own words the tax implications of all the items described in note (2) (Administrative and selling expenses — selected amounts only), assuming that all items are reasonable in the circumstances.
Solution 23 (65 minutes)
Part (a) - Schedule of Capital Cost Allowance
Total CCA * ***AIC =
47,250 th
Purchased after April 19 , 2021 100% CCA up to a maximum of $1.5 million Accelerated Investment credit
***Plus AIC = Accelerated Investment credit = (Net of additions – disposals) X 1/2
Part (b) Reconciliation to Division B Income Net income after income taxes Add: Provision for income taxes $ 75,000 Difference between opening and closing reserves disallowed ($15,000 - $10,000) 5,000 Purchase of customer list (Class 14.1) 6,000 Appraisal cost of building (reduces capital gain on sale) 500 Taxable capital gain - land* 37,500 - building** 31,000 Recapture — Class 1 32,500 Depreciation and amortization 9,650 Loss on securities 2,000 Loss on sale of truck 300 Share issue costs (see deduction below) 750
$275,000
Charitable donations (sec.110.1) Deduct:
1,250
Share issue costs — amortized over 5 years (par. 20(1)(e)) 150 Profit - land ($125,000 - 25,000) 100,000 - building (175,000 -30,000) 145,000 Terminal loss — Class 10 550 Capital cost allowance 47,250 Allowable capital loss securities (½ × ($3,000 - $5,000)) 1,000
*
**
201,450 $476,450
Proceeds Less: ACB Proceeds Less: Capital Cost Appraisal
$125,000 50,000 $ 75,000 × ½ =
293,950 $182,500
$ 37,500 $175,000
$ 112,500 500
113,000 62,000 × ½ = $31,000
Part (c) - Tax Implications of Note 2 A.
(i) (ii) (iii)
B.
(i) (ii) (iii) (iv)
This is an advertising expense for the purpose of earning income and is not restricted by sec.19 since the primary market is outside of Canada ($1,500). As long as the name of the company appears on the baseball outfit, it would appear that this is a form of advertising ($400). Donations to charities are not expenses for the purpose of earning income and, hence, not deductible under Division B. However, deductions are permitted under Division C of up to 75% of Division B income with a five-year carry-forward period ($1,250). Purchase of customer list has an unlimited life and is therefore would fit the criteria of Class 14.1 as a $6,000 addition plus the unlimited franchise $4,000 = $10,000. Cost of issuing new shares is also a capital expenditure but is specifically allowed as a deduction under sec. 20(1)(e). However, such expenses are only deductible in equal portions over five years (add back $750 and deduct 1/5th $150) All of the interest is deductible under sec. 20(1)(c)(i), even though it relates to the acquisition of capital equipment ($2,500 +$1,500). The appraisal cost is also a capital expenditure, but is deductible from the proceeds of disposition for either capital gains or recapture purposes ($500).
Question 24 (38 minutes) [Chapters 6, 7] Earl Grey has come to you for some help in computing his income from his investments. He is trying to plan for the payment of his 2023 taxes and wants an idea as to how much that tax bill will be. He has provided you with the following details regarding his investments for 2023. Banking He has a chequing and savings account that are both joint with his wife, Rose (funds contributed and used by both). Total service charges are $240; total interest earned is $100. GIC He has a 5% three-year semi-annual compound-interest GIC purchased April 1, 2022 for $10,000. Interest accruing on the GIC has been as follows: April 1, 2022 to September 30, 2022 .............................................. October 1, 2022 to December 31, 2022 .......................................... January 1, 2023 to March 31, 2023 ................................................. April 1, 2023 to September 30, 2023 .............................................. October 1, 2023 to December 31, 2023 ..........................................
$250 126 123 250 125
Shares He has owned Chamomile Co. shares for a number of years. Chamomile is a public Canadian company and his employer. The shares paid total dividends of $0.06 per share in 2023. On October 1, 2023, after the dividend payments for the year, Earl sold 800 shares for $28.125 per share for total proceeds of $22,500. Brokerage fees are $200. The history of transactions in Chamomile is as follows: February 2010 June 2014 July 2014 Apri1 2016
He purchased 1000 shares for $8 per share under his employer's stock option plan. At the time of the exercise, the shares were valued at $10.50 per share. These shares were split 2 for 1. He purchased an additional 600 shares for $12.50 per share. He received a 5% stock dividend on these shares. The company increased paid-up capital by $1 per share as a result of this stock dividend.
Earl also owns shares of Tetley, a British corporation. During the year he received dividends of $1,700 (translated into Canadian dollars, net of $300 taxes withheld). Rental Properties At the beginning of 2023, Earl had two rental properties. These properties are expected to have the following operating cash flows associated with them: Gross rents received Expenses related to earning rental income: Advertising (for tenants) Property taxes Utilities (landlord provided)
#1 $20,000
#2 $12,000
200 2,400 4,200
Nil 2,000 2,800
Property #1 was purchased in 2009 at a cost of $500,000 for both the land and building. The cost of the land was $90,000 of the total purchase price. Property #2 was purchased in 2012 at a total cost of $305,000; the fair market value of the land at the time was $105,000. The UCC balance in Class 1 for property 1 was $236,339 and property 2 was $130,307 at January 1, 2023. During 2023, the local community enacted strict new bylaws on the safety requirements of rental properties. To upgrade the two properties to the new code would require $40,000 for property #1 and $60,000 for property #2. As a result, Earl decided to improve #1 and paid $40,000 during March 2023. However, he decided to sell property #2 and did so for $448,000, effective April 5, 2023. The fair market value of the land was appraised to be $120,000 and the building $328,000. The purchaser of the property paid $100,000 on April 5, 2023, plus a mortgage that repays $10,000 monthly plus interest at 10% computed semi-annually. Thus, combined payments on May 5, 2023 through November 5, 2023, inclusive, were for $11,233 each, and from December 5, 2023 through May 5, 2024, inclusive, will be $10,733 each. Earl used the proceeds, net of the $40,000 needed for property #1, to purchase a new sixplex on Orange Pekoe Lane. The cost of the new property was $900,000, of which $150,000 related to the cost of the land. This property closed on April 15th, 2023. Interest on the $700,000 mortgage is $37,060 for the last 8.5 months of the year. He was able to rent the building's units to students beginning of August with cash flows as follows: Gross rents received.......................................................................................... Expenses related to earning rental income: Advertising (for tenants) ................................................................................... Property taxes ................................................................................................... Utilities (paid by tenants).................................................................................. Other Transactions Sale of personal boat (cost $4,500 in 2018)...................................................... Sale of jewellery inherited from a great aunt (fair market value at time of inheritance was $800) ................................................................................. Sale of antiques also inherited from this same great aunt (fair market value at time of inheritance was $300) ..................................................................... Sale of old coin collection (cost $1,500) ..........................................................
$24,000 500 3,400 Nil $1,500 2,000 900 850
Required: Calculate the effect on income for tax purposes for 2023 of the above investments. Mr. Grey always likes to report the minimum possible income each year. Support your treatment of each item listed above with a reason or a complete calculation.
Solution 24 Banking
Acct × 50% Husband/Wife = 50% × $100 GIC Interest 4/1/22 to 3/31/23 anniversary = 250 + 126 + 123 Dividends Cdn shares 2,730 shares (see calculation of share ACB, Note 3) × .06 × 1.38 U.K. company (gross amount) = $1,700 plus $300
$ 50 $ 499 $ 226 $ 2,000
Mortgage Interest = (7 × $1,233) + $733 Rental property (see Note 1)
$ 9,364 $16,279
Calculation of Taxable Capital Gain Proceeds of Disposition $ 22,500
Shares (see calculation of share ACB, Note 3) Rental Land 120,000 Rental Building 328,000 Less: Reserve (448 − 100 − 70)/448 × (15 + 128 capital gain) = LLP — Jewellery 2,000 LLP — Coin 1,000 PUP — Boat 1,500 PUP — Antique 1,000
ACB $ 5,313
Direct Costs $200
Gain $16,987
105,000 200,000
15,000 128,000 0 (88,737) 1,000 1,000 1,500 (500) 4,500 0 1,000 0 71,750 ×½ Income for tax purposes
$35,875 64,293
Note 1: Rental Property #1 $20,000
Rents Recapture (see CCA schedule) Expenses Advertising Property Tax Utilities Interest CCA (calculation below, Note 2) Net
(200) (2,400) (4,200) (11,854) $ 1,346
#2 $12,000 69,693
(2,000) (2,800)
$76,893
Note 2: Calculation of CCA
1. UCC Opening (Class 1) 2. Additions 3. Adjustments 4. Cost (ACB) 5. Proceeds 6. Lower of cost or proceeds 7. Undepreciated capital cost 8. Add for Accelerated I. I. 9. Adjustment UCC #7 Plus #8 10. Rate 11. #9 × #10 CCA 12. #7 − #11 UCC at end
#1 $236,339 40,000
276,339 20,000 296,339 4% 11,854 264,485
Property #2 $130,307 ** 200,000 328,000 200,000 (69,693) 0 (69,693) 4% 0 Recapture
#3 $0 750,000
0 750,000 375,000 1,125,000 4% 45,000 705,000
#3 $ 24,000
(500) (3,400) (37,060) (45,000) $(61,960)
$16,279
Note 3: Calculation of Share ACB Shares Feb-10 Feb-10 Jun-14 Jul-14 Apr-16
1,000 employment benefit ($10.50 − $8.00 × 10,000) 1,000 Stock Split 600 130* 5% stock dividend on 2,600 2730 shares @ $1.00
Unit cost
Cost
$ 8.00
$ 8,000 2,500 0 7,500 130 $18,130
$12.50
Dividend Cdn Shares 2,600 shares × 5% = 130 Therefore, weighted average cost: $18,130 ÷ 2,730 = 6.641025641 × 800 = ** Property 2 cost is $305,000 minus FMV of Land $105,000 = $200,000 *
$5,313
Question 25 (11 minutes) [Chapter 8] Dr. No just cannot seem to say no. When people ask him for things, he tries to comply. His family members are well aware of this, and others are now starting to catch on. Examples of his generosity are given below. 1. Dr. No gave his wife $10,000 cash in June 2023, to allow her to invest in the market. Mrs. No decided to be careful and invested the $10,000 in Series 1HMS007 Bonds. Interest paid to the end of the year amounted to $500. 2. James, the 13-year-old son of Dr. No, asked his father for some of his shares in Goldfinger Enterprises. Dr. No gifted the shares that had a fair market value at the time of $900. The cost of the shares to Dr. No was $1,250. James decided to sell the shares in December for proceeds of $1,050. 3. Jaws, a brother-in-law of Dr. No, asked for help as he was having difficulty finding work recently — something about dental insurance. Dr. No, feeling some level of pity, sold him his rental property (building only) on January 3, 2023, valued at $100,000, for $10,000 down and the remainder as an interest-free note. The cost of the property to Dr. No was $90,000 one year earlier. Dr. No has not claimed any CCA on the property. Repayment of the note is required in equal annual instalments of $10,000 each year for the next nine years on January 2 of each year. Present value of the payments is approximately $75,000 (at 7% rate). Net rental income for 2023 is $8,000. Required: Provide Dr. No with an analysis of the income that he must report in 2023 as a result of these activities. Provide reasons for all included items and justifications for all excluded amounts.
Solution 25 1. $500 interest is attributed to Dr. No because it was a gift to his spouse (no FMV consideration). 2. Gift constitutes a disposition of the shares at FMV, since not affiliated. Capital loss = 900 − 1250 = $(350); loss allowed since not affiliated. Disposition to son ($1050) is not attributed back because he is not Dr. No’s spouse. 3. Sale below market value ($75,000) to non-arm’s length party constitutes a sale at FMV. TCG = ½ × (100,000 – 90,000) = 5,000. Reserve permitted $100,000 − $90,000 = $10,000 gain Reserve Lower of:
Capital gain $10,000
A) $90,000/100,000 × $10,000 = $9,000 B) (1/5 × $10,000) × (4 − 0) = $8,000
Lower of Capital gain Taxable Capital gain
$8,000 $2,000 $1,000
Rental income attributed back to Dr. No because low interest loan is to non-arm’s length party. Section 56(4.1) is an anti-avoidance section which deals with loans to non-arm’s length parties (i.e., Jaws is Dr. No’s brother-in-law).
Question 26 (35 minutes) [Chapter 7] Fred Footloose is at it again. In 2023, he returned to his Waterloo home after spending three years in Moose Jaw. When he moved to Moose Jaw in 2020, he had leased his house to a group of university students — you know, the really responsible accounting students. It was good to be back in the Waterloo home that was purchased in 2015 for $200,000. To live in Moose Jaw, he had purchased a house in the “nice” part of town for $80,000 since real estate is so inexpensive there. In 2023, he not only sold the house in Moose Jaw, but he also sold the farmhouse he had inherited from his parents in 2012 (the actual farm acreage was given to his brother). Being a big old farm in the middle of the country, the house was valued at $75,000 at that time. Fred’s family had liked vacationing in the country each summer for as long as anyone could remember. The family was older now and preferred to vacation at the beach, and the local town had sprawled into a city that would shortly engulf the farm property. So, the Moose Jaw property was sold for $95,000, and the farm property was sold for $155,000 to buy a cottage in northern Ontario for $250,000. The only out-of-pocket costs were the $5,500 for real estate fees on the Moose Jaw sale and legal fees of $500 on each sale. A review of Fred’s files shows that a real estate agent had tried to get him to sell his Waterloo house in 2020 when he had moved. The agent had assured him that the house was worth at least $300,000. Now, it appears that the house is only worth $285,000. Required: Assume that the market value of the home is $285,000, and the home is to be sold in 2023. What is the minimum taxable capital gain that would need to be reported on the sale of the three properties by considering whether a 45(2) election should be be made or not. Show all calculations, whether or not directly important to the final answer.
Solution 26 Using subsection 45(2) election P of D ACB CD Gain Years
MOOSE JAW WATERLOO $95,000 $285,000 (80,000) (200,000) (6,000) $ 9,000 $ 85,000 2020–2023 4 2015–2021 9 2012–2023
Gain/Year Designated None Principal residence exemption Capital gain Taxable capital gain (50%)
2,250 2016-2023 $ 0 $ 9,000 $ 4,500
9,444 (8+1)/9 2012-2015 $ (85,000) $ 0 $ 0
FARM $155,000 (75,000) (500) $ 79,500 12 6,625 (4+1)/12 $(33,125) $ 46,375 $ 23,188
Total $27,688
Not using subsection 45(2) election MOOSE JAW WATERLOO 2020 disposition P of D $ 300,000 ACB (200,000) CD Gain $ 100,000 Years 6 Gain/Year $ 16,667 Designated 2015–2019 (5+1)/6 Principal residence exemption $(100,000) Capital gain $ 0 Taxable capital gain (50%) $ 0 2023 disposition P of D ACB CD Gain Years 2020-2023 Gain/Year None Designated Principal residence exemption Capital gain Taxable capital gain (50%)
$95,000 (80,000) (6,000) $ 9,000 4 $ 2,250 $ 0 $ 9,000 $ 4,500
Conclusion: Don’t use subsection 45(2) *No capital loss on depreciable property
FARM
$ 285,000 (300,000) Nil* 2012-2023 2012-2015 2021-2023 $
0
$155,000 (75,000) (500) $ 79,500 12 6,625 (7+1)/12 $(53,000) $ 26,500 $ 13,250
$17,750
Question 27 (19 minutes) [Chapter 7] On August 27, 2023, Ms. Bubkeh sold 250 shares of Hundt Ltd., a public corporation, for $20 per share. Her trading history in these shares was as follows: May 24, 2003— purchased 130 shares @ $26 per share June 30, 2003 — purchased 170 shares @ $31 per share Aug. 20, 2004 — received a 5% stock dividend, with each share received having a paidup capital value of $25 Oct. 31, 2005 — purchased 300 shares @ $29 per share June 9, 2011 — sold 400 shares @ $15 per share July 5, 2011 — purchased 400 shares @ $12 per share June 3, 2015 — purchased 385 shares @ $18 per share Apr. 19, 2017 — received a 5% stock dividend with each share received having a paid-up capital value of $20 Required: Calculate the taxable capital gain or allowable capital loss on the 2011 and 2023 transactions. Show all calculations.
Solution 27 June 2011 Sale Proceeds
(400 share @ $15)
ACB
400 @
$28.82
Superficial loss — loss denied
6,000
ACB (weighted average cost)
(11,528)
Shares
Cost/share
Total Cost
(5,528)
130
$26
$3,380
Nil
170
31
5,270
15
$25
375
300
29
8,700
615
$17,725
Average
$28.82
August 2023 Sale Proceeds
(250 share @ $20)
$ 5,000
ACB (weighted average cost)
ACB
250 @
(5,823)
Shares
$23.29
ACL deductible from TCG
Cost/share
Total Cost
$28.82
$6,197
(823)
215
$ (412)
Superficial loss
5,528
400
$12
4,800
385
$18
6,930
1,000 50 1,050
Average
23,455 $20
1,000 $24,455
$23.29
Question 28 (25 minutes) [Chapter 8] Early in 2018, Ms. Chu bought $120,000 of common shares in a public company with an annual dividend of $6,000. Ms. Chu would like to transfer these shares to her husband or possibly to her 16-year-old daughter. At the present time, the fair market value of the shares is $180,000. Required: (A)
What are the income tax implications for Ms. Chu and her husband, if the shares are gifted to her husband? (11 minutes)
(B)
What are the income tax implications for Ms. Chu and her husband if Ms. Chu lends him the money to purchase the shares from her and he signs an interest-bearing promissory demand note as evidence of the loan? (7 minutes)
(C)
What are the income tax implications for Ms. Chu and her 16-year-old daughter if Ms. Chu sells the shares to her daughter for $100, which the daughter has saved from babysitting in the neighbourhood? (7 minutes)
Solution 28 (A) Tax implications of a gift to husband (i) S. 73(1) rollover applies automatically • P of D to Ms. Chu equals her ACB, so no capital gain realized • ACB to Mr. Chu is equal to his wife’s ACB of $120,000 • Attribution applies o Ms. Chu did not receive fair market value consideration for the shares from her husband and did not elect out of the rollover o All dividends received by him will be attributed to her o Second generation income from property, i.e., interest or dividends on reinvested dividends will not be attributed o All capital gains, including second generation capital gains, resulting from his sale of the shares or substituted property will be attributed to Ms. Chu (ii) Ms. Chu and her husband can jointly elect not to have the rollover apply • Her proceeds of disposition will be equal to fair market value of $180,000, resulting in the realization of $60,000 of capital gains, which can be used to offset capital losses or losses from non-capital sources • ACB to Mr. Chu is equal to his wife’s P of D of $180,000 • Attribution applies • Since Ms. Chu did not receive fair market value consideration for the shares from her husband, the attribution consequences are the same as under the rollover (B) Tax implications of a loan to husband for the purchase of shares • Tax implications will be the same as the gift to her husband unless: o Ms. Chu and her husband jointly elect out of the rollover o The loan is for the fair market value of the shares, i.e., $180,000 o Interest is charged on the loan at the prescribed rate or higher and paid within 30 days of the end of the year • If the loan meets all of the above conditions, o Ms. Chu will realize $60,000 of capital gains on the transfer of the shares o No attribution of dividends or future capital gains will result o Her husband will be able to deduct the interest paid to Ms. Chu, since the funds were borrowed to produce income from property, i.e., the dividends • Ms. Chu must report the interest received as income (C) Tax implications of a sale for less than fair market value to minor daughter • P of D to Ms. Chu is FMV of $180,000 • Ms. Chu will realize $60,000 of capital gain on the sale • ACB to the daughter will be $100, i.e., the amount she paid • If the daughter were to sell the shares immediately. a capital gain of $179,900 would be reported by the daughter, thereby double counting the capital gain realized by Ms. Chu • Attribution to Ms. Chu of dividends earned by the daughter until the year in which the daughter reaches 18 years of age • Second generation income from property earned by the daughter not attributed • No capital gains realized by the daughter are attributed
Question 29 (20 minutes) [Chapter 8] Mr. Nudnic completed the following transactions in 2023. (a) He gave his wife 100 common shares of Underground Airways Ltd., a public company which had cost him $30 per share several years ago. At the time of the gift, the fair market value of the shares was $50 per share. The shares pay an annual dividend of $2 per share. His wife plans to reinvest the dividends in more shares of the company. If and when she sells the shares, she will reinvest the proceeds in shares of other corporations. (9 minutes) (b) In order to provide for his 13-year-old daughter's future education, he transferred a stone sculpture which had a fair market value of $50,000 to her. The lawyer who arranged to transfer title to the sculpture advised him to sell it to his daughter for $1 of her own money to effect a legal transfer. Mr. Nudnic had inherited the sculpture on the death of his mother when the fair market value of the sculpture was $20,000. In about five years, when his daughter begins university, she will sell the sculpture. (8 minutes) (c) He personally loaned $150,000 to his wife on a demand promissory note without interest, in order to help her purchase some land adjacent to her retailing business which she operated as a sole proprietorship. The land was used as a parking lot for the customers and employees of the business and was responsible for increasing the income of the business by about 5%. However, early in 2023, the land was expropriated by the city for $200,000 and it was not replaced. The note was repaid from the proceeds of the sale of the land. (3 minutes)
Required: Discuss all of the possible income tax implications of these transactions through to the ultimate disposition by the recipient of the property involved.
Solution 29 (a) (i) If there is no election out of the rollover in s. 73(1): — Mr. Nudnic is deemed to sell the shares for his ACB of $30 per share, thereby deferring the accrued capital gain — His wife is deemed to acquire the shares at a cost of the same $30 per share — Any dividends received by his wife on the shares will be attributed back to him, since the gift is a transfer of income-producing property. Note that the dividend gross up would be 38% and the dividend tax credit would be 15% rounded × 138% (grossed-up dividend) = 20.7%. — Second generation income resulting from the reinvestment of the attributed dividends will not be attributed — If and when the shares are sold by his wife, any capital gain or loss realized will be attributed back to him — Second generation capital gains resulting from the reinvestment of the attributed capital gains will be attributed (ii) If an election is made under s. 73(1) not to have the rollover apply: — Mr. Nudnic will be deemed to have received proceeds of $50 per share, thereby realizing the accrued capital gain of $20 per share — His wife will be deemed to acquire the shares at an ACB of $50 per share — Since Mr. Nudnic did not receive fair market value consideration for the shares, the attribution outlined in (i) will occur (b)
The sale of the sculpture to the daughter for $1 will result in the following: — Mr. Nudnic will be deemed to have received proceeds of $50,000, thereby realizing a capital gain of $30,000 (i.e., $50,000 − $20,000) — The daughter will be deemed to have acquired the sculpture at a cost of $1, i.e., the amount paid — When she sells the sculpture, that part of her gain from her cost of $1 up to $50,000 will be taxed again in her hands — There is no attribution of capital gains on transfers to a child and, if the proceeds of the sale of the sculpture when she is 18 are invested, there will be no attribution of income from property, because she will be 18 — It would have been better for Mr. Nudnic to have given her the sculpture
(c)
On the loan to his wife: — There will be no attribution of income from business generated by the use of the funds loaned — When the land is expropriated, resulting in the realization of a capital gain, that gain will be attributed back to him because he did not receive fair market value consideration from his wife with a no-interest loan
Question 30 (28 minutes) [Chapter 7] Blarney Blatant has come to you for some tax advice concerning the potential sale and relocation of his unincorporated wholesaling business, Floggem Sales, which has a December 31 year-end. He has received an extremely favourable offer to purchase the business land and building (Class 1) if he can vacate the premises by December 15, 2023. Blarney has already investigated other properties in the area and he has located a suitable site which he can acquire in June 2024, after the expiration of the current tenant's lease on that property. He intends to sell all of his present business assets in December 2023 and to travel around the world for six months, before moving into the new location and purchasing new assets to resume his business. The following assets will be sold in December 2023:
Estimated proceeds ACB UCC (Jan.1/23)
Accounts Receivable $ 9,000 11,200 N/A
Inventory $13,500 14,625 N/A
Land $675,000 170,000 N/A
Building $400,000 112,500 50,625
Furniture & Fixtures $12,000 56,250 22,500
Additional Information: (a) The accounts receivable will be sold to a factoring agent. The reserve for doubtful debts deducted for tax purposes in 2022 was $900. (b) The furniture and fixtures will be sold to a dealer in those assets. (c) Blarney will pay $500,000 for the new land and $340,000 for a new unused non-residential building purchased in August 2023.
Required: Indicate the initial income for 2023 without election and the final income tax consequences for the years affected by the sale of the present business assets and the acquisition of the new property with elections. Show all calculations whether or not necessary to the final answer.
Solution 30 2022 income must be reported as follows before the former business property is replaced. Inclusion of 2022 reserve Allowable capital loss on sale of receivables (½ × ($9,000 − $11,200)) (s. 22 cannot apply because the purchaser of the accounts receivable will not carry on the wholesaling business.) Business loss on sale of inventory ($13,500 − $14,625) Taxable capital gain on land (½ × ($675,000 − $170,000)) Recapture on building ($112,500 − $50,625) Taxable capital gain on building (½ × ($400,000 − $112,500)) Terminal loss on furniture and fixtures ($12,000 − $22,500) Income reported for 2023
$
900
(1,100)
(1,125) 252,500 61,875 143,750
(10,500) $446,300
In 2024, when the one-year replacement period condition is met (i.e., one year from the end of the 2023 year of sale), the 2023 return can be amended as follows. Land: amend the taxable capital gain to the lesser of: (a) P of D $675,000 ACB Gain
(170,000) $505,000
(b)
P of D Replacement cost Excess, if any capital gain taxable capital gain (½ × $175,000)
$675,000 (500,000) $175,000 $175,000 $ 87,500
deferred capital gain ($505,000 − $175,000)
$330,000
ACB of replacement land ($500,000 − ($505,000 − $175,000))
$170,000
Building: amend the taxable capital gain to the lesser of: (a) P of D $400,000
(b)
ACB Gain
(112,500) $287,500
P of D Replacement cost Excess, if any
$400,000 (340,000) $ 60,000
capital gain
$ 60,000
taxable capital gain
$ 30,000
deferred capital gain ($287,500 − $60,000)
$227,500
ACB of replacement building ($340,000 − ($287,500 − $60,000))
$112,500
Building: amend the recapture as follows. Class 1 UCC, prior to disposal Less: lesser of (a) capital cost (b) P of D lesser amount Reduced by lesser of (a) recapture* (b) replacement cost lesser amount UCC, December 31, 2023
$50,625 $112,500 $400,000 $112,500 $ 61,875 $340,000 61,875
Class 1 (Separate) NRB (6%) Purchase Less: deferred capital gain Less: deferred recapture UCC
Note: CCA is subject to AII rate of 150% x regular CCA rate * $112,500 − $50,625 = $61,875
50,625 Nil
$340,000 227,500 $112,500 61,875 $ 50,625
Question 31 (23 minutes) [Chapter 7] On June 30, 2023, Uncle Stan’s Enterprises Ltd. (USEL) sold a rental property that it had operated for many years. USEL has a December 31 year-end. You have been given the following background information. Original cost UCC, December 31, 2022 Proceeds, June 30, 2023
Land $125,000 270,000
Building (Class 3) $175,000 135,000 230,000
USEL received the following consideration in payment for the assets. Cash Mortgage
$200,000 300,000
The principal amount of the mortgage is amortized over 25 years and has a three-year term, starting July 1, 2023. The interest rate is 10%, payable monthly on the outstanding balance. The principal payments of $12,000 are made on January 1 each year, starting on January 1, 2024. At the end of the three-year term, the balance of the mortgage will be paid in full. Required: Calculate the minimum effect on income in all relevant years.
Solution 31 2023: Recapture on building ($135,000 – $175,000) Gain Land ($270,000 – $125,000) Building ($230,000 – $175,000) Less: reserve = lesser of (a) $300,000/$500,000 × $200,000 (b) 1/5 × $200,000 (4 – 0) lesser amount Capital gain Taxable capital gain Interest ($300,000 × .10 × ½ year) Income for 2023 2024: Reserve claimed in previous year Less: reserve = lesser of (a) $288,000/$500,000 × $200,000 (b) 1/5 × $200,000 (4 – 1) lesser amount Capital gain Taxable capital gain Interest ($288,000 × .10) Income for 2024 2025: Reserve claimed in previous year Less: reserve = lesser of (a) $276,000/$500,000 × $200,000 (b) 1/5 × $200,000 (4 – 2) lesser amount Capital gain Taxable capital gain Interest ($276,000 × .10) Income for 2025 2026: Reserve claimed in previous year Less: reserve (mortgage fully paid at 2026 year-end) Capital gain Taxable capital gain Interest ($264,000 × .10 × ½ year) Income for 2026
$40,000 $145,000 55,000 200,000 $120,000 $160,000 120,000 $ 80,000 40,000 15,000 $95,000
$120,000 $115,200 $120,000 $
115,200 4,800 2,400 28,800 $31,200
$115,200 $110,400 $ 80,000 80,000 $ 35,200 17,600 27,600 $45,200
$80,000 Nil $80,000 $40,000 13,200 $53,200
Question 32 (18 minutes) [Chapter 7] You are the tax consultant for Deferit Ltd., a wholesale company which has a December 31 year-end. The owner-manager of the corporation wants to minimize Deferit’s income for tax purposes. You are given the following information. In June 2024, Deferit replaced a building in Class 1 (the only asset in the class) destroyed by fire in 2023 with another building (new and unused non-residential building) that cost $600,000. Insurance proceeds of $400,000 were received in May 2023. The original cost in 2013 of the destroyed building was $350,000. This was the only capital asset transaction in 2023 and 2024. The undepreciated capital cost of Class 1 at the beginning of 2023 was $238,000. Required: Compute the minimum income that must be reported for the corporation’s 2023 taxation year after the above disposition and purchase transactions have taken place. Indicate the ACB and the UCC, before CCA, of the new building. Support your answer by showing all calculations, whether or not included in your final determination of income.
Solution 32 Calculation of taxable capital gain for the involuntary disposition of a Class 1 asset replaced within two years of end of the year of loss (2023): The capital gain is the lesser of: (i)
proceeds (compensation received) less: adjusted cost base capital gain
$400,000 350,000 $ 50,000
(ii)
proceeds less: replacement cost excess, if any
$400,000 600,000 Nil
Therefore, the capital gain that must be reported in 2023 is nil and, hence, the taxable capital gain is nil. The deferred capital gain is $50,000 (i.e., $50,000 − nil). Therefore, the ACB of the replacement building is $550,000 (i.e., $600,000 − $50,000). Calculation of UCC for the new building: UCC before disposal less the lesser of: (i) capital cost (ii) proceeds lesser amount less the lesser of: (i) recapture (ii) replacement cost lesser amount UCC, December 31, 2023
purchase less: reduction for deferred gain deemed capital cost less: deferred recapture UCC, December 31, 2024
Class 1 $238,000 $350,000 $400,000 $350,000 $112,000 $600,000 112,000
(238,000) Nil Class NRB $600,000 50,000 550,000 112,000 $438,000
New NRB is class 1 at 6% declining balance and is subject the accelerated rate for the first year (1.5). Each building added to this class will be put in its own separate class.
Question 33 (50 minutes) [Chapters 3, 6, 7, 9] Joe Townsend, a computer programmer is a 57-year-old married man with two children. Joe’s wife, Jane, is a homemaker and has never worked outside of the home. In April of 2023, Joe was laid off from his job at a software development company in Markham, Ontario, after being employed by the company for 20 years, starting January of 2003. Within a month, he had been offered a position at Computel, a company located in Waterloo, Ontario. The company provided him with a $3,000 moving allowance to relocate his family to Waterloo. Joe purchased a new residence in Waterloo in May of 2023. The family moved into the home on May 15, 2023. Joe incurred the following expenditures related to the move: Gas (180 km per the odometer) Rental of moving van Land transfer tax on new residence Legal fees related to purchase of new house
$50 $600 $1,200 $400
Joe had purchased the Markham home in 2020 for $320,000. He was finally able to sell it on August 1, 2023 for $490,000. Joe incurred the following expenditures related to the Markham home in 2023: Legal fees related to sale Real estate commission on sale Insurance from January 1 to July 31 Property taxes from January 1 to July 31 Utilities from January 1 to July 31 Gardening from May 15 to July 31
$600 $5,000 $40 per month $300 per month $90 per month $300
When Joe was laid off, he was paid severance of $70,000, all of which he transferred into his registered retirement savings plan (RRSP). Joe did not make any other RRSP contributions during the year. Joe and his wife jointly own a property in St. Catharines where their eldest son, Jake, is currently attending University. The property cost $180,000 (land $100,000 and building $80,000) and was purchased in January of 2023. Jake is required to pay his parents $400 per month in rent, as are the other two students living in the property. The income and expenses incurred in relation to the property for the year were as follows: Rental income Heat Hydro Water Repairs (including a new sunroom addition in October for $33,000) Mortgage payments (includes $8,000 of interest) Loan payments (includes $1,880 of interest)
$14,400 $1,100 $900 $300 $35,000 $11,600 $3,440
Joe earned total employment income of $120,000 for 2023 ($40,000 in his old job and $80,000 in his new position). Last year, Joe’s Division B income consisted of $150,000 of employment income, $31,000 of investment income, and $1,000 of net taxable capital gains. His unused RRSP deduction room as of December 31, 2022 was $28,000. He has a nil pension adjustment for 2022.
Joe’s only other sources of income and expenses in 2023 consisted of: Dividends on shares of Canadian Pacific (CP) Railway Limited Interest accrued on an 8% $20,000 GIC acquired May 1, 2023, maturing April 30, 2027 Interest paid from January 1, 2023 to December 31, 2023 on a line of credit used to acquire the shares in CP Railway Limited. Interest on mortgage for Waterloo home. Capital gain on the disposition of CP Railway Limited shares on June 1, 2023. The proceeds were used to help purchase the Waterloo home. Payments to day camp for Joe’s 13-year-old daughter, Tersilla.
$25,000 $1,074 $3,000 $15,000 $10,000 $2,500
As part of Joe’s compensation package with Computel, he received stock options issued to him on May 15, 2023, when the share price was $10 per share. On June 15, 2023, Joe exercised options to obtain 400 shares at the option price of $8 per share when the share price was $12 per share. These shares provided him with a less than 1% interest in the company. Joe sold the shares on December 15, 2023 for $20 per share.
Required: Compute Joe’s Division B income for 2023. Provide detailed section references. Provide brief explanations of inclusions and omissions if not self-explanatory. Assume that the prescribed rate for 2023 was 6%.
Solution 33 Division B Income 3(a) Non-capital sources Employment income Employment income Moving allowance Stock option benefit Property income Rental income Dividend Interest on LOC Other income Retiring allowance Total 3(a) 3(b) Net TCG TCG — CP shares TCG — Option shares
$120,000 3,000 1,600 — 34,500 (1,241)
$124,600
5(1) 6(1)(b) 7(1)
400 × ($12 − $8)
33,259
12(1)(j) 12(1)(c)
$25,000 × 1.38 $3,000 × 151/365
70,000 227,859 5,000 1,600
6,600 234,459
3(c): 3(a) + 3(b) Less Subdivision e Moving expenses (8,86) RRSP contribution Division B income 3(d) Business loss Division B income
(55,000)
56(1)(a)
38 38
$10,000/2 (400 × (20 – 12))/2
62(1) (63,986) 170,473 Nil $170,473
60(i)
RRSP Contribution Lesser of 1) Unused Room Lesser of 18% of $150,000 2022 max limit of $30,780
$28,000 27,000
Less: PA
55,000 — $55,000
RRSP contribution
$70,000
Annual limit Overcontribution Overcontribution allowed
(55,000) $15,000 (2,000) $13,000
Investment income and TCGs not included in earned income ($31,000 + $1,000)
2)
Subject to overcontribution penalty per 204.1(2.1) He should remove the excess and get 146(8.2) deduction.
Rental Property Revenue Expenses Heat Hydro Water Repairs Interest
$14,400
Income CCA Net Income
220 (220) —
1,100 900 300 2,000 9,880
$
$8,000 + $1,880 Regulation 1100(11) max. Cost Addition CCA Avail. ($113,000 X.04 X1.5) =
Class 1 $ 80,000 33,000 $113,000 $
6,780
Moving Expenses Gas (0.615 × 180 km) Moving van Real Estate Commission Land transfer tax Legal fees: Old house Legal fees: New house Insurance: Old house Property tax: Old house Utilities: Old house
$
111 600 5,000 1,200 600 400 100 750 225 $8,986
2.5 months × $40 2.5 months × $300 2.5 months × $90
62(3)(a) 62(3)(b) 62(3)(e) 62(3)(f) 62(3)(e) 62(3)(f) 62(3)(g)* 62(3)(g)* 62(3)(g)*
*April to May 15 = 2.5 months This was an eligible relocation per s. 248(1), as he moved 40 km closer to his new work location. Both the old and new houses were in Canada. The move was to enable him to be employed in Canada.
Principal Residence Exemption P of D ACB SC (ded. mov. exp.) Gain Yrs 2019–2022 Gain/Yr Designate PR exemption Capital gain
House $490,000 (320,000) — $170,000 4 $42,500 (1 + 3)/4 (170,000) $ —
2018–2021
Omissions 1) Anniversary date for the GIC is not until May 1, 2024. No inclusion per s. 12(4) ($1,074). 2) Interest on mortgage not deductible under s. 20(1)(c). Not incurred for purpose of earning income ($15,000). 3) Interest on LOC after June 1, 2023 not deductible as shares sold and proceeds used to invest in personal property ($3,000 × 214/365 = $1,759). 4) No deduction is available for the day camp as Joe’s wife does not have eligible income; the expenses would not have been incurred by her to perform duties of an office or employment, carry on business or enrol as a student ($2,500). 5) Gardening expenditure for the old house is not included in the definition of “moving expenses” in s. 62(3) ($300). 6) On the rental property, the principal on the mortgage is not deductible (i.e., $11,600 – $8,000 = $3,600). 7) With regard to the rental property, the sun room addition for $33,000 should be capitalized.
Question 34 (16 minutes) [Chapter 9] Diana Dundastard is employed by Dundas Processing Ltd. (DPL), a Canadian-controlled private corporation. The following information pertains to her income over the past two years: Salary before benefits Employee stock option benefit Deemed interest employment benefit Registered pension plan contributions Other deductible employment expenses Interest income Taxable capital gain Business income Royalty income from book Rental loss before capital cost allowance Spousal support payment Dividend on DPL stock
2023 $115,000 17,000 5,000 (5,500) (6,500) 2,000 13,000 35,000 18,000 (6,000) (17,000) 1,000
2022 $117,000 14,000 6,000 (5,200) (6,000) 1,500 8,000 26,000 15,000 (11,000) (14,000) 1,200
Net income
$171,000
$152,500
Diana participates in DPL’s money-purchase registered pension plan. DPL contributes an amount that matches the amount contributed by an employee to the plan. Her pension adjustment is $10,400 for 2022 and $11,000 for 2023. Diana has never contributed to a registered retirement savings plan (RRSP), although she had enough income to entitle her to contribute the maximum allowed in 2020 of $27,230; 2021 of $27,830 and 2022 of $29,210. In those years she was not enrolled in the company pension plan. The royalty income listed above is computed at 3% of the sales of a utensil that she invented. The business income listed above is earned from lingerie party sales that she makes in her spare time.
Required: (A) Calculate Diana’s earned income for the purpose of determining her maximum 2023 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. (10 minutes) (B) Based on the above information, calculate Diana’s maximum deductible RRSP contribution for 2023. (6 minutes) Show all calculations.
Solution 34 (A) Earned income (based on 2022) for purposes of determining maximum 2023 RRSP contribution: Salary before benefits Employee stock option benefit Deemed interest benefit Other deductible employment expenses
$117,000 14,000 6,000 (6,000)
$131,000
Business income Royalty income
26,000 15,000
41,000
Less: rental loss spousal support payments
(11,000) (14,000)
(25,000)
Earned income
$147,000
Items that are not included in the calculation of earned income: Registered pension plan contributions Interest income Taxable capital gains Dividends (B) Diana’s maximum allowable RRSP deduction for 2023 is: Unused RRSP deduction room 2020 2021 2022
$27,230 27,830 29,210
$84,270
Add: 2023 deduction based on 2022 earned income lesser of: (i) 2023 $ limit $30,780 (ii) 18% of $147,000 $26,460 lesser amount
$26,460
less: PA for 2022
(10,400)
Maximum RRSP deduction allowed in 2023
16,060 $100,330
Question 35 (21 minutes) [Chapter 9] Ken and Mary are married and have two children, ages three and six years. In 2023, Ken earned $70,000 from employment, and Mary earned $105,000 as a self-employed consultant. The couple employ a full-time nanny, at a salary of $12,000 per year, to take care of their two children while they work. They also paid overnight camp fees of $1,200 for two weeks for the older child. On January 4, 2023, the family moved from Edmonton, Alberta, to Toronto, Ontario, so that Ken could accept a new position. Mary continued her consulting business in Toronto. The following expenses were incurred as a result of the move: Return airfare for trip to find living accommodation Hotel and meals for three days during trip to find living accommodation (receipts kept) Airfare for four persons on move to Toronto Hotel and meals in Toronto and while moving for 20 days while waiting for completion of construction of the new home Hotel (receipts kept) Meals (not all receipts kept) Repairs in respect of disposition of old home Legal fees and commissions in respect of disposition of old home Actual loss on sale of old home Cost of transporting household goods Legal fees and land transfer tax on acquisition of new home Interior decorating of new home
$
650 600 2,500
3,800 2,900 1,000 3,700 27,000 4,900 900 9,500
In 2023, Ken received a termination payment of $21,000 from his previous employer, with whom he had been employed from October 2002 to December 2022. He contributed $12,000 of this amount to his RRSP since he had RRSP room of $15,000 from his earned income from prior years . Ken received a moving allowance of $9,000 from his new employer and $7,000 in spousal support from his former spouse. Mary did not make an RRSP contribution.
Required: Calculate Ken’s and Mary’s net incomes for tax purposes. Show all calculations. Briefly explain why you left any amount out of these calculations.
Solution 35 Ken Income from employment Income from business Termination payment (retiring allowance) Moving allowance Spousal support
$70,000 $105,000 21,000 9,000 7,000
Retiring allowance deduction Room from prior years ($15,000) – Contributed RRSP Childcare expense deduction: Least of: 1. Amount paid ($12,000 + ($200 × 2)) 2. 2 × $8,000 3. ⅔ × ($70,000 + $21,000 + $8,000) Moving expense deduction: Airfare for move Hotel and meals near new residence Hotel (15 days (max.) × $3,800/20) Meals (4 people × 15 days × $69) Legal fees and commissions on sale Cost of transporting household effects Cost of acquiring new home Net income for tax purposes
Mary
(12,000)
(12,400) $12,400 $16,000 $66,000 $ 2,500 2,850 4,140 3,700 4,900 900 $82,600
(18,990) $86,010
• Childcare deduction must be taken by lower income spouse • Moving expense deduction, as a general practice, should be taken by the higher income person who qualifies Omitted items: • overnight camp fees in excess of $200 per week
• expenses of finding accommodation preceding a move are not deductible: • return airfare, hotel and meals on house hunting trip ($650 & $600) • hotel and meals for a stay near new residence in excess of 15 days not deductible • repairs in respect of sale of old house not a deductible moving expense ($1,000) • loss on sale of old house not a deductible moving expense ($27,000) • interior decorating of new house not a deductible moving expense ($9,500) • Note that some students get mixed up between spousal support and child support. Spousal support is included in income but is not included in earned income for child care.
Question 36 (54 minutes) [Chapter 3-7, 9, 10] Chauncey, a friend of your father, asked for your help in preparing his 2023 tax return. His wife died in 2022 and he has not remarried. He has three daughters, ages 3, 5, and 8 at December 31, 2023. He provided the following information: 1.
He was employed as a salesman for the entire year by James Inc., a Canadian-controlled private corporation. He received a salary of $90,000 plus commissions totalling $8,500, based on sales he generated.
2.
His employer withheld the following amounts from his pay cheques: Income tax $23,905 CPP and EI 4,757 RPP contributions 2,000 The RPP is a money-purchase plan. The employer matched the contributions made by Chauncey, resulting in a 2023 pension adjustment of $4,000.
3.
4.
Chauncey received the following additional amounts in 2023: (a)
$139,700 — Proceeds from the sale of 1,000 qualified small business corporation shares of James Inc. in October 2023, net of $300 of selling costs.
(b)
Each of Chauncey's three daughters received a $100 dividend cheque. The dividends were paid on shares of Nats Ltd., a taxable Canadian public corporation. Chauncey had given the shares of Nats Ltd. to his daughters as birthday presents in 2022.
Chauncey made the following disbursements in 2023: (a)
Car expenses (including HST where applicable): Purchase price, January 2, 2023 Gasoline Maintenance Licence renewal Insurance Parking (all incurred in carrying out his duties of employment)
$32,200 2,800 700 90 600 500
Chauncey is required to use his car in the performance of his duties of employment. Previously, he leased a car. In 2023, Chauncey drove his car 24,000 kilometres, of which 18,000 kilometres were driven in carrying out his duties of employment. The remainder of the kilometres driven were personal. (b)
Chauncey is provided with a nice office at James Inc. and spends most of his time there. However, there are times when his job takes him away from the metropolitan area in which James Inc. is located for two to three days at a time. The following are travel costs incurred in 2023 while away for such periods: Meals Accommodation
$ 2,450 3,000
(c)
Supplies of $1,320 were consumed in carrying out his duties of employment.
(d)
$250 per week for 47 weeks to a babysitter to look after his three daughters while he worked; plus $1,500 for the three of them to go to summer camp for one week in July. Chauncey took vacation for the remaining four weeks and paid his cousin $400 to help him watch the children at the family cottage.
(e)
Purchased 2,000 shares of James Inc. from treasury for $50 each on April 15, 2023. At that time, the shares were worth $57 each. In 2021, when the shares were worth $48 each, James Inc. had granted Chauncey options to purchase 4,000 shares at $50 per share at any time in the nine-year period of 2021 to 2029. This was the first time Chauncey had exercised any of the options.
(f)
House expenses: Monthly mortgage payments on his home totalling $12,000 for the year ($10,000 of interest and $2,000 of principal). Property taxes $3,000 Insurance 210 Repairs 1,000 Telephone: monthly charge × 12 months 96 long distance calls for James Inc. 450 long distance calls for Chauncey's Supplies (see below) 800 long distance calls, personal 300
(g)
RRSP contributions made during the period Mar./23 – Dec./23 $8,000 RRSP administrative fee 130 Chauncey made a further RRSP contribution of $14,000 in February 2024.
5.
Chauncey borrowed $200,000 from James Inc. on June 15, 2022, to enable him to purchase a home in Waterloo, Ontario, when he moved at his employer's request, from the Quebec City office of James Inc. to the Waterloo office. James Inc. charges Chauncey interest of 2% per annum on this loan which is repayable in full the day he ceases to be employed by James. Inc. Interest of $2,000 on the house loan for the period January 1, 2023 through June 30, 2023 was paid by Chauncey on August 15, 2023. $2,000 of interest for the period July 1, 2022 through December 31, 2023 was paid February 15, 2024.
6.
Chauncey has $10,000 invested in a bond which will pay interest at maturity at a rate of 7% compounded annually. The bond was issued November 1, 2022 and matures October 31, 2024. No interest was received in 2023.
7.
Chauncey uses 10% of the space in his home to operate a small business, "Chauncey's Supplies", which he started a few years ago. The following information relates to the fiscal year ended December 31, 2023: Sales $36,000 Advertising 200 Accounting and bookkeeping fees 250 Interest and bank charges 125 Salaries 12,000 The expenses are net of HST as Chauncey's Supplies is an HST registrant.
8.
The following additional information was obtained by reviewing Chauncey's 2022 tax return: o
Chauncey's earned income for 2022 was $143,000 and his 2022 pension adjustment was $7,000.
o
In 2001, Chauncey reported his first capital gain ever. He reported a taxable capital gain of $28,000 on qualifying small business corporation shares and claimed a capital gains deduction of $16,500.
o
On December 31, 2022, the balance in Chauncey's cumulative net investment loss account was $11,500 comprising investment expenses of $17,500 and investment income of $6,000.
o
Chauncey's unused RRSP deduction room at the end of 2022 was nil.
o
The UCC balances of the assets of Chauncey's Supplies at December 31, 2022 were as follows: ▪ Class 8 $3,000 ▪ Class 10 4,000 Chauncey claimed a GST rebate in 2022 of $214 relating to employment expenses he deducted.
o Required:
Determine Chauncey's taxable income for 2023 on the assumption that he wishes to pay the least amount of tax possible. Show all your calculations. Briefly explain why you omitted any of the above information from your calculations. Assume James Inc. has properly completed and certified form T2200 with respect to the expenses paid by Chauncey. Ignore the effects of a leap year in your answer. Assume the prescribed rates of interest have been as follows: 2022, all four quarters 2023, 1st quarter 2023, 2nd quarter 2023, 3rd quarter 2023, 4th quarter
4% 4% 4% 5% 5%
Solution 36 (54 minutes)
Employment income: Sec. 5 Salary Commissions Ssec. 6(8) HST rebate received Ssec. 6(9) Imputed interest benefit on the Home relocation loan [ssec. 80.4(4)] $200,000 × 4% × 365/365 = $ 8,000 see note 9 par. 80.4(1)(c) (2,000) Ssec. 7(1.1) Stock option benefit 1,000 shares ($57 - $50) Par. 8(1)(f)
Car operating expenses: Gasoline Maintenance License renewal Insurance
6,000 7,000 111,714
$ 2,800 700 90 600 $ 4,190
Employment usage × 18/24 kms Parking Travelling expenses: Meals ($2,450 × 50%) Accommodation
$ 90,000 8,500 214
$ 3,143 500 $ 1,225 3,000
Telephone (long-distance)
4,225 450
*(8,318)
*Limited to commissions ($8,500) Par. 8(1)(i)
Supplies
Par. 8(1)(j)
CCA on car [par. 13(7)(g)]
prorate for employment use Par. 8(1)(m)
RPP-employee contribution
(1,320) $32,200 × 30% ×1.5 14,490 × 18/24
(10,868) (2,000) 89,208
Sec. 9
Par. 12(1)(j) Ssec. 12(4) Sec. 38
Business income: Sales Expenses listed CCA: Cl.8 20% × 3,000 = 600 Cl.10 30% × 4,000 = 1,200 Telephone – long-distance Work space in the home: Home loan: Imputed interest $6,000 Interest paid in year 2,000 Mortgage interest 10,000 Property taxes 3,000 Insurance 210 Repairs 1,000 $22,210 × 10%
$36,000 (12,575) (1,800) (800)
(2,221)
Dividends attributed from daughters [ssec. 74.1(2)] 3 × $100 × 1.38
414
Bond interest (annual accrual rules) $10,000 × 7%
700
Taxable capital gain Shares of James Inc. ($139,700 - $57,000) × ½
18,604
1,114
41,350 150,276
Sec 60
CPP enhanced contribution deduction
(631)
Ssec. 60(i)
RRSP [S.146(5)] least of: (a) premiums paid on or before 60 days after 2023 $8,000 + $14,000 = $22,000 (b) lesser of (1) $30,780 (2) 18% 2022 earned income 18% × $143,000 $25,740 minus 2022 PA (7,000)
(18,740)
Sec. 63
Child care expenses: least of (1) amount paid babysitter $250 × 47 weeks = camp: $200 × 1 week × 2 children = $125 × 1 week × 1 child = (2) 2/3 x earned income [par. 63(3)(b)] Salary Commissions Sec.6 benefits Sec.7 benefit Business income
(3) $8,000 × 2 children = + $5,000 × 1 child =
(12,275) $11,750 400 125 $12,275 $ 90,000 8,500 8,214 7,000 18,604 125,318 × 2 /3 $ 83,545 $ 16,000 5,000 $ 21,000
_
Net income under Division B
118,630
Ssec. 110(1)(d.1) Stock option deduction ½ × $7,000
(3,500)
Sec. 110.6
(41,350)
Capital gains deduction least of: (a) unused lifetime entitlement 2023
$485,595
claimed in 2001
(16,500) $469,095
(b) annual gains limit
$ 41,350
(c) cumulative gains limit: TCG $28,000 + $41,350 = capital gains deduction claimed previously CNIL (below)
$ 69,350 (16,500) (10,500) $ 42,350
Investment expenses: opening balance Investment income: opening balance dividend income bond interest CNIL Taxable income
$ 17,500 $
6,000 300 700 7,000 $ 10,500
_______ $ 73,950
Items omitted from calculations: (1)
Income tax is not deductible [ssec. 8(2)] ($23,905).
(2)
CPP and EI premiums are not deductible [ssec. 8(2)]. CPP and EI provide tax credits ($3,123
(3)
RPP – employer's contribution is not a taxable benefit. It is specifically excluded [par. 6(1)(a)] ($2,000)
(4)
Child care – $400 paid to cousin is not included as a child care cost as the cost was not incurred either to enable Chauncey to perform his duties of employment or to carry on business [par. 63(3)(a)].
(5)
Stock option benefit – as James Inc. is a CCPC and Chauncey deals at arm's length with the corporation, recognition of the stock option benefit is deferred until the year the shares are sold. Therefore, the stock option benefit in respect of the exercise of options for 1,000 shares only is recognized in 2023.
(6)
Telephone – monthly charge for home telephone is not deductible; it is considered to be a personal expense ($96 and personal long distance $300)
(7)
Office in the home expenses – no deduction in computing employment income as Chauncey does not meet the conditions of ssec. 8(13).
(8)
The RRSP administrative fee is not deductible ($130). The undeducted RRSP premiums of $3,260 ($22,000 minus $18,740) are not subject to penalty as they are contributed in 2024 and may be deductible in that year.
(9)
Interest locked in for 5 years at the lower of rate at time loan taken out or the quarterly rate. Since the rate never dipped below 4% the rate of 4% is used
and $1,002 respectively) plus a deduction under Subdivision e Sec 60 which is the CPP enhanced contribution deduction of $631. ($631 + $3,123 = $3,754 CPP plus $1,002 EI = $4,757 withheld from employee).
Question 37 (10 minutes) [Chapter 10] Joel is a teacher who operates a lawn maintenance business during the summer months. He has provided you with the following information pertaining to 2023: Employment income Net loss from lawn maintenance business Net rental loss (before CCA) Taxable capital gain Allowable capital loss
$ 85,000 (52,000) (20,000) 4,500 (5,000)
Based on his 2022 income, Joel made an RRSP contribution of $22,500 to his RRSP in respect of 2023. He also contributed $450 to a registered charity in 2023.
Required: Compute Joel’s net income for tax purposes using the ordering rule in section 3, taxable income, and the amount of any loss carryover available as a result of the above information. Show all calculations.
Solution 37 s. 3(a) s. 3(b)
Employment income Taxable capital gain Allowable capital loss
$85,000 $ 4,500 (5,000)
Nil $85,000
RRSP deduction (22,500) $62,500
s. 3(c) s. 3(d)
Income Business loss Property loss Division B and taxable income Loss carryovers: Net capital loss ($5,000 − $4,500) Non-capital loss: Loss for year Applied to s. 3(c) income in the year Non-capital loss for carryover
$52,000 20,000
$
500
$ 72,000 (62,500) $ 9,500
(72,000) Nil
Question 38 (65 minutes) [Chapters 4, 5, 10] Part A (40 minutes) Earl Grey has come to you for some help in computing his income from his investments. He is trying to plan for the payment of his 2023 taxes and wants an idea as to how much that tax bill will be. Earl is married to Flo and they have a daughter, Mint-Green, who is mentally infirmed and is 22. Earl has provided you with the following details regarding his activities for 2023. Earl’s income for the year is as follows: Salary — gross Less: CPP and EI contributions United Way charitable contributions through payroll deductions* Bonus (based on company profits for the year)
$85,000 (4,757) (500) 18,645 $98,388
The costs of travel, partially for work, are as follows (he now has a 4x4 truck): Gas Maintenance Licence Insurance
$5,000 1,000 200 1,800 $8,000
*Note that Earl has regularly made charitable contributions yearly on his payroll deductions. He has discovered that he drives mostly for work. During this year, he has driven 34,000 km for work and only 6,000 km for personal use. He purchased his 4x4 from Red Rose Toyota, on January 10, 2023, for $42,500 plus PDI and delivery of $1,000, plus HST, for a total of $47,855. Additional costs of travel while away from the area of his home are train fare ($2,500), accommodation ($3,000), and meals ($2,000). Under Earl’s contract of employment, he is required to pay all of his own employment-related expenses. He regularly travels out of the municipality on employment-related matters. He has owned Chamomile Co. shares for a number of years. Chamomile is a public Canadian company. The shares paid total dividends of $0.06 per share in 2023. On October 1, 2023, after the dividend payments for the year, Earl sold 800 shares for $28.125 per share for total proceeds of $22,500. Brokerage fees are $200. Based on his history of transactions, at the time of the sale, he had 2,750 shares at an adjusted cost base of $6.50 per share. At the beginning of 2023, Earl had two rental properties. These properties are expected to have the following operating cash flows associated with them: #1 Gross rents received ..................................................................... $ 20,000 Expenses related to earning rental income: Advertising (for tenants) .................................................... 200 Property taxes .................................................................... 1,400 Utilities (landlord provided) .............................................. 4,200
#2 $ 16,000 — 3,000 2,800
Property #1 was purchased in 1999 at a cost of $95,387 for both the land and building. The cost of the land was $25,000 of this total purchase price. Property #2 was purchased in 2015 at a total cost of $105,000; the fair market value of the land at the time was $60,000. The UCC balance in Class 1 for property #1 was $26,975 and Class 1 for property #2 was $33,139 at January 1, 2022. During 2023, the local community enacted strict new bylaws on the safety requirements of rental properties. To upgrade the two buildings to the new code would require $40,000 for property #1 and $60,000 for property #2. As a result, Earl decided to improve #1 and paid $40,000 during July 2023. However, he decided to sell property #2 and did so for $268,000, effective May 5, 2023. The fair market value of the land was appraised to be $140,000 and the building $128,000. Earl used the proceeds, net of the $40,000 needed for property #1, to purchase a new sixplex on Orange Pekoe Lane. The cost of the new property was $900,000, of which $150,000 related to the cost of the land. This property closed on August 1, 2023. Interest on the $700,000 mortgage is $21,800 for the last five months of the year. He was able to rent the building’s units to students beginning in September with cash flows as follows: Gross rents received .......................................................................... $ 48,000 Expenses related to earning rental income: Advertising (for tenants) ..................................................... 500 Property taxes ..................................................................... 3,400 Utilities (paid by tenants) .................................................................. —
Required: Calculate Earl’s income under Division B. Show supporting computations whether or not relevant to your final answer. For items excluded from your calculations, describe why you excluded them. Ignore the HST rebate for this and subsequent years.
Part B (25 minutes) Upon further questioning, Earl revealed that his daughter, Mint-Green, has very poor eyes. It costs $800 to buy her special contact lenses that last about three years. The last pair was purchased in November 2022. Even with the contact lenses, she can barely function and cannot obtain regular employment and so has no income. In spite of these hardships, she is attending the local university and with the aid of special equipment, purchased in January 2023 for $10,000, is doing quite well. Other medical receipts total about $200 per year and Earl cannot remember ever claiming the medical credit. Mint-Green’s tuition for the eight months that she will be in full-time attendance is $4,000. While Mint-Green continues to live at home, Flo has decided to return to the work force and has a casual job. She is expected to earn $9,000 by the end of the year.
Required: Calculate Earl’s federal taxes payable for 2023. Calculate the minimum tax.
Solution 38 Part A 3(a) Income: Employment income Salary Bonus Less: deductible 8(1)(h) Train costs Accommodations Meals: 50% of $2,000 (assumes away for > 12 hours) Less: deductible under 8(1)(j), (h.1) Auto CCA — limited to 30% x 1.5 of $36,000 × 1.13 = Gas Maintenance Licence Insurance
$85,000 18,645 $ 2,500 3,000 1,000
(6,500)
$ 18,306 5,000 1,000 200 1,800 26,306 × 34/40
(22,360)
Property income Dividends: Canadian shares [2,750 × $0.06 × 1.38] Rental property income†
$74,785 228 10,082
3(b) TCG: Shares Rental land Rental building
3(c) Subdivision e
POD $ 22,500 140,000 128,000
Sec 60
ACB + SDC $5,200 + $200 60,000 45,000
Gain $ 17,100 80,000 83,000 $180,100
CPP enhanced contribution deduction
× 50%
90,050
(631)
$174,514
Omitted items: CPP and EI are not deductible in Division B CPP and EI provide tax credits ($3,123 and $1,002 respectively) plus a deduction under Subdivision e Sec 60 which is the CPP enhanced contribution deduction of $631. $3,754 ($631 + $3,123) CPP plus $1,002 EI = $4,757 withheld from employee). Donations are not deductible in Division B ($500) †
Rental properties Rents Recapture (see below) Expenses: Advertising Property taxes Utilities Interest CCA (see below) Net
#1 20,000
#2 16,000 11,861
(200) (1,400) (4,200)
(3,000) (2,800)
(3,479) $10,721
– $22,061
#3 48,000 (include as rental income for CCA limit) (500) (3,400) – (21,800) (45,000) $(22,700)
= $10,082
CCA:
UCC Add: purchases Less: lesser: POD CC Add: AIC* Subtotal CCA Recapture
Class 1
Class 1
$26,975 40,000
$33,139
$128,000 $ 45,000
Class 1
(separate) $ 750,000
(45,000) 20,000 $86,975 $ 3,479
$(11,861)
375,000 $ 1,125,000 $ (45,000)
$ 11,861
Part B Division B income from part A (equals taxable income) Federal tax [$34,207 + 29% × ($174,514 – $165,430)] Less credits 2023: Credits @ 15% Basic $15,000 – ($174,514 - $165,430) X ($1,479/$70,245) Spouse [$14,809 – $9,000)] Mint-Green Canadian Caregiver Credit CPP EI Medical [($10,000 + $200 + $800) ] * (if Nov. to Oct. period chosen) Mint-Green’s transferred credits: Disability credit tuition credits (max $5,000 limit)
$ 174,514 $ 36,841
$14,809 5,809 7,999 3,123 1,002 11,000 9,428 $4,000
$57,170 × 15% Charitable [15% of $200 + 29% of ($500 – $200)] Canada Employment Credit Lower of employment income or $1,368 × 15% = Dividend 15% × $228 or [6/11 times ($228 - $165)] or 20.7% X $165
*
(8,576) (117) (205) (34) $ 27,909
No deduction of $2,635 since Mint Green has no income (i.e., lower of 3% of other dependents net income or $2,635). Part D of the Medical expense formula applicable since Mint is over 18 years old and is a dependant.
Minimum Tax (Bonus Marks) Taxable income Add: 30% of TCG [30% of $90,050] Less: dividend gross up [2,750 × $0.06 × .38] Less Basic Exemption Net Minimum tax before credits (@ 15%)
$ 174,514 27,015 (63) $201,466 $40,000 $161,466 $ 24,220
Less than regular tax so no need to complete calculation. No minimum tax to pay. AIC* =
Accelerated Investment credit
There the remaining UCC = $86,975- 20,000 AIC adjustment –CCA $3,479 = $63,496 - for rental property 1 There the remaining UCC = $1,125,000- 375,000 AIC adjustment –CCA $45,000 = $705,000 - for rental property 3
Question 39 (55 minutes) [Chapter 10] Dara Doodle, age 67, has asked you for assistance in preparing her 2023 tax return. She is married to Drake, age 56, who has three children from a previous marriage, ages 22, 20, and 15. The children live with the couple and are supported by both. Dara is a manager with Tax Preparer’s Unlimited Limited. Drake is an economist who occasionally finds contract work preparing economic forecasts at the minimum wage. Drake is certified as having a mental impairment. Drake is incapable of caring for the children as a result of his mental impairment. The following information has been provided. (a) Dara’s salary slips show the following: gross salary and taxable benefits less withholdings: income tax withheld RPP contributions to a defined benefit plan donation to United Way registered charity CPP premiums** Employment Insurance premium net salary and taxable benefits
$95,000 $22,000 4,000 600 3,754 1,002
31,365 $63,635
** Note that after age 65 you have a choice to continue contributing to CPP up to age 70 (b) Dara has the following other sources of income: dividends from Airways Ltd. (Public Co), actual amount taxable capital gains (allowable capital losses) Tax Trivia Canada Ltd., common shares painting by Beam, a noted Canadian artist Growth Potential Unlimited Limited, common shares loss on common shares of Drivel Ltd., a small business corporation monthly pension of $3,200 from previous employer Old Age Security pension received Dara’s disbursements included the following: interest on funds borrowed to purchase investment portfolio RRSP contributions (fully deductible, based on 18% of 2022 earned income)
$ 600 14,500 2,500 (1,100) (40,000) 38,400 8,251 $700 23,000
(c) Drake has the following income: income (for tax purposes) from part-time employment dividends from Bell Canada Enterprises (BCE), actual amount interest on savings Bond given to him by Dara on October 31, 2019 Canadian-source bank interest interest on loan to his sister
$5,000 360 400 200 175
Drake’s disbursements included bank interest on funds borrowed to purchase the BCE shares
450
(d) Dot, the 22-year-old, attended the University of Waterloo for eight months during 2023 as a full-time student. She has income for tax purposes of $4,500 and paid tuition fees of $4,500. (e) Duncan, age 20, attends high school and Duggan, age 15, attends a special school for the hearing impaired, since he has no hearing. Child care expenses for Duggan were incurred of $4,600. Each has as his only source of income $225 of interest income from Canada Savings Bonds given to them by Dara on October 31, 2022. Dara paid $6,500 in expenses for rehabilitative therapy fees to Duggan’s special school in 2023.
(f) The following additional disbursements were made by Dara in 2023: donation to University of Waterloo* London Life extended health care premiums donation to registered provincial political party
$300 375 125
*Note that donation were regularly paid out by Dara on a yearly basis (g) Dara has a net capital loss balance of $1,350 arising from a disposition in 2001. She did not realize any capital gains, other than as noted above, during the period from 2001 to the present. (h) Dara had a non-capital loss balance of $5,500 available in 2023.
Required: 1. Calculate Dara Doodle’s taxable income and federal taxes owing or refundable for 2023 without electing under subsection 82(3) in respect of her husband’s dividends. Use the appropriate ordering rules in sections 3, 111.1, and 118.92. Briefly explain any items omitted from your calculations. Ignore minimum tax and provincial tax. Also assume that the pension income is not split between the couple. (46 minutes) 2. Determine whether Dara should elect under subsection 82(3). (9 minutes) Show all calculations whether or not necessary to the final answer.
Solution 39 1. Dara’s taxable income and taxes payable (no subsection 82(3) election): s. 3(a) income from non-capital sources employment income gross income less: RPP deduction property income dividends (1.38 × $600) interest attributed from Drake interest attributed from Duggan subtotal less: interest paid on borrowed funds pension income OAS
$95,000 (4,000) 828 400 225 $ 1,453 (700)
$
s. 3(b) net taxable capital gains: Tax Trivia Canada Ltd. painting
$
753 38,400 8,251 138,404
$14,500 2,500
Growth Potential Unlimited Limited s. 3(c) total less: RRSP deduction
(1,100)
s. 3(d) losses from non-capital sources and ABILs ABIL (Drivel Ltd.) ½ × $40,000 Child care expenses lesser of: a) $4,600 b) $5,000 c) earned income ($75,000 × ⅔) = $50,000 Enhanced CPP deduction Division B income before OAS clawback Less: OAS clawback (see AAA, below) Division B income Less Division C deductions: net capital losses carried forward non-capital losses Taxable income Federal income tax on first $53,359 on next $42,990 @ 20.5% Less tax credits: basic married ($15,000− $5,422) (see B, below)* age (see C, below) CPP EI Canada Employment Credit pension transfer of Duggan’s Disability credit Impairment credit supplement (under 18 years impairment) — Duggan ($5,500 − (child care $4,600 − base $3,221))*
$ 91,000
15,900 $154,304 (23,000) $131,304 (20,000)
(4,600) (631) $106,073 (2,874) $ 103,199
A
$1,350 5,500 $8,004 8,813 $ 15,000 9,578 Nil 3,123 1,002 1,368 2,000 9,428
4,121
(6,850) $ 96,349 $ 16,817
B C
transfer of tuition fee (see D, below) transfer of Drake’s Disability credit Medical expense expenses for rehabilitative therapy at special school par. 118.2(2)(l.3) London Life premiums medical expense less the lesser of: (a) $2,635 (b) 3% of $103,199 (A, above) = $3,096 charitable donations 15% of first $200 29% of ($600 + $300 − $200)
4,500 9,428
D
$ 6,500 375
(2,635) 63,788 $
30 203
× 15%
$
dividend tax credit (600 ×1.38 ×15% or $228 X 6/11)
9,568
233 124
357 (9,925)
Basic federal tax OAS clawback lesser of: (a) OAS benefit (b) Division B income before clawback less threshold excess, if any 15% of excess Total tax Less: tax withheld Refund Married tax credit base employment income dividend from BCE (grossed up) i.e., $360 × 1.38 interest from bank interest from brother interest paid Division B income Age credit base full base less lesser of: (a) credit base (b) Division B income less threshold excess, if any 15% of excess net Tuition, education base transfer lesser of: (a) (b) $4,500 =
$ 6,892 AAA $8,251 $106,073 86,912 $ 19,161 $2,874
B
w/o s. 82(3) $5,000 497 200 175 (450) $5,422 B
w/ s. 82(3) $5,000 Nil 200 175 (450) $4,925 E
C
$ 8,396 $8,396
$103,199 42,335 $ 60,864 $9,130
D $ 5,000 $ 4,500
$8,396 Nil C
$ 2,874 $ 10,984 (22,000) ($11,016)
* Refer to ¶10,471 of the text (Credit for Mental or Physical Impairment). For this solution, note that, since Drake was incapable of caring for the children the higher income spouse, Dara, is entitled to the child care deduction. Omitted items: − Dot will not pay tax, since her level of income ($4,500) is less than the personal tax credit base. − Duncan’s interest on his Canada Savings Bond is not attributed to Dara, since he has reached the age of 18 ($225). − Donations to a provincial political party provide a provincial tax credit, not a federal deduction or credit ($125).
2. s. 82(3) Election (a) Does the election increase the marital tax credit? E with s. 82(3) election ($15,000 − $4,925) without s. 82(3) election (see above marriage deduction) ($15,000 − $5,422) B increase in credit base (b) Effect of s. 82(3) election: Increase in dividend and Division B income less increase in OAS clawback (15% of $497) Increase in federal income tax @ 26% Increase in married credit ($497 × 15%) Increase in dividend tax credit ($497 × 15%)**** Decrease in basic federal tax Less increase in OAS clawback ($497 × .15) Net tax cost from use of election
$10,075 9,578 $ 497
$ 497 75 $ 75 75
Therefore, the subsection 82(3) election should not be used. **** Dividend tax credit ($497 – $360 = $137 × 6/11 = $75) Note that $360 × 1.38 = $497, above
$422 110 (150) $ 40 (75) $(35)
Question 40 (60 minutes) [Chapter 9, 10] Ms. I.M. Outovit formally separated from her husband late in 2022. Custody of her three children, ages 14, 10, and 7, was granted to her as part of an agreement (properly referenced to the Income Tax Act, as necessary) that was worked out with her husband in Family Court. The oldest child, Real, is 20 years old and, therefore, not part of the agreement, although he lives with her and the other children. To make a fresh start, on January 15, 2023, she resigned from her position in Elmira, Ontario, where she had been employed by the same employer since November 2005. She took a position in Dundas, Ontario, about 65 kilometres away. Ms. Outovit had always prepared her own tax return in previous years, but because of the extraordinary events of 2022 and 2023, she is having some difficulty with the preparation of her return. She has come to you for help, having already correctly calculated her income under Subdivisions a, b, and c of Division B, as follows: Subdivision a Salary (from both employers in 2023) Taxable group term life insurance premium (paid by both employers in 2023) Taxable car benefit Deductible professional fees Deductible RPP contributions (defined benefit plans) Net Subdivision a income Subdivision b Business income (loss) from partnership share (drawings from partnership in both years: $4,000) Property income: Net rental income (loss) from apartment building (loss is before CCA) Grossed-up dividends from active business income of a CCPC Savings Bond interest Deductible interest on loan to buy shares Net Subdivision b income Subdivision c Taxable capital gain on sale of shares Taxable capital gain on sale of cottage Taxable capital gain on sale of painting Net Subdivision c income Total income from above sources
2022
2023
$ 86,500
$ 95,000
450 4,350 (350) (4,800) $ 86,150
495 5,000 (400) (5,500) $ 94,595
$ (1,000)
$
10,050 1,100 3,300 (200) $ 13,250
(2,000) 1,200 3,500 (200) $ 8,500
$
6,200
$
$
6,200
6,500 8,000 1,200 $ 15,700
$ 105,600
$ 118,795
6,000
Additional Information for 2023: (1) She made a lump-sum direct transfer of $27,000 to her RRSP out of the RPP of her former employer who had made vested contributions since January 1, 2010. (2) During 2023, she received a retiring allowance of $63,000 for long service from her previous employer.
(3) During 2023, she made the following selected expenditures: (a) contribution to her RRSP in respect of 2023, consisting of $42,000 in January 2023 and another $14,000 in October 2023. Her employer reported a pension adjustment (PA) of $7,500 for 2022. From prior years Ms. Outovit had carryforward room of $40,000 which she has not used up yet. (b) legal fees — • •
for representation in Family Court for appealing an income tax assessment which she lost
$ 2,600 900 $ 3,500
(c) care for her children — • • • •
food and clothing babysitter for half days during 30 weeks of school term ($110 per week) babysitter for full days during 15 weeks of summer and other vacations ($105 per week) overnight summer camp for 14-year-old child for four weeks
$ 6,500 3,300 1,575 1,000 $12,375
(d) move to Dundas — unsuccessful trip to find accommodation • • • •
car expenses hotel for two nights ($150 per night) meals for three days ($30 per day) long distance calls to realtor to find accommodation
$
$
50 300 90 35 475
$
550
move with family • • • • •
cancellation of lease on Elmira apartment hotel for two nights near Dundas after movers packed and while household effects in transit meals for two days during packing and in transit car expenses transportation, packing and unpacking of household effects
300 200 25 3,195 $ 4,270
(e) maintenance payment for husband by virtue of agreement made pursuant to a court order — • •
total of monthly payments for his maintenance total of monthly payments made directly to his apartment landlord
$ 4,800 3,600 $ 8,400
(4) Ms. Outovit had net capital losses of $4,200 in 2001 which were available for carryforward. (5) Ms. Outovit had the following amounts withheld from her salary in 2023: Canada Pension Plan Employment Insurance
$ 3,754 1,002 $ 4,757
(6) Ms. Outovit’s oldest child, Real, attends the University of Waterloo and paid tuition of $4,000 for eight months of full-time attendance during 2023. Real earned gross employment income of $12,500 during the summer. No amounts were withheld from his pay. Ms. Outovit’s other children do not have any income. (7) Ms. Outovit made total contributions to registered charities of $700.
Required: Showing all calculations, whether or not necessary to the final answer, calculate the following: (A)
Subdivision d inclusions and Subdivision e deductions for 2023, noting briefly why any items were not used in your calculations (consider in these notes the amount of any RRSP over-contribution, its consequences and how it should be dealt with),
(B)
taxable income for 2023, and
(C)
federal taxes payable for 2023
Solution 40 Part (A) Subdivision d inclusions: Retirement Allowance Subdivision e inclusions: Maintenance paid to husband by agreement Rental payments
Current year RRSP contribution — lesser of: 1) 2023 dollar limit 2) 18% of 2022 earned income (note 1) (18% of $100,000) lesser amount Less: 2022 pension adjustment Add: RRSP Room not used up in prior years
$ 63,000 $ (4,800) $ (3,600)
$30,780 $18,000 $18,000 ($7,500) $40,000 (50,500) $ (900) (631)
Legal fees on appeal of an income tax assessment CPP enhanced contribution deduction (sec 60) Moving expense travel costs car expenses (65km × $0.615) Hotel meals ($69 × 5 people × 2 days) transport of household lease cancellation Child care expenses — least of: 1) amount paid (with camp limit) ($3,300 + $1,575 + (4 × $125)) 2) $5,000 × 2 children $8,000 × 1 child
$ 40 $ 300 $ 690 $ 3,195 $ 550
3) ⅔ earned income (note 2) (⅔ × $106,495) least amount
$70,997
C
$ (4,775)
$ 5,375 $18,000 $ (5,375) $(70,581)
Notes: 1) 2022 earned income employment income add: RPP deduction business loss rental income
A
$86,150 $ 4,800
2) 2023 earned income for childcare expense employment income inclusions ($95,000 + 495 + 5,000) business income
Items not used in calculations: Direct transfer of lump sum of $27,000 to RRSP from RPP is exempt from income. RRSP overcontribution
$90,950 $(1,000) $10,050 100,000
$100,495 $ 6,000 $106,495
B
Total contribution made in 2023 ($42,000 + $14,000) deductible amount in respect of 2023
$ 56,000
current year contribution See C $(50,500) excess $ 5,500 allowable excess $ (2,000) overcontribution subject to penalty $ 3,500 − This overcontribution will be subject to the penalty of 1% per month after the end of 2023 until it is removed. Remove immediately. − Legal fees for family court representation are not deductible ($2,600). − All house hunting costs and long distance calls to the realtor are not deductible moving expenses (50 + 300 + 90 + 35 = $475). − Food and clothing for the children are not deductible childcare expenses ($6,500).
Part (B)
Part (C)
Taxable income Income (given) Subdiv d additional inclusions Subdivision e deductions Division B income Division C deductions: Net capital loss carry forward from 2001 Taxable income Net federal taxes payable Federal tax on $106,717
See A See B
118,795 $ 63,000 $(70,581) 111,214 $ (4,200) 107,014 $18,942
on next
$297 @ 26% $107,014 Less non-refundable tax credits: basic personal equivalent to married for one child with no income CPP EI tuition and education transfer — lesser of: a) tuition fee paid b) limit Lesser amount: Real’s taxable income less: basic personal available for transfer
77 $19,019 $ 15,000 15,000 3,123 1,002 $4,000 $5,000 $ 4,000 $12,500 15,000
Nil
charitable donation on first $200 @ 15% $ 30 on next $500 @ 29% 145 $700 not in excess of 75% of Div. B income of $111,214 dividend tax credit ($1,200/1.15 = $1043.48 X .1038 =) CCPC (for 2023)* Canada Employment Credit Lower of employment income or $1,368 × 15% = Federal tax payable* *CCPC Alternative 2 is $1200 X 9% = $108
4,000 $38,125 × 15%
(5,719)
(175)
(108) (205) $12,812
Question 41 (46 minutes) [Chapter 10] Mrs. Yacumflastor, who is 68 years old, has correctly computed the following separate amounts in respect of income for tax purposes in 2023 for both her and her husband, who is 66 years old. (Amounts in brackets reflect losses or expenditures.) Mrs. Y. Mr. Y. Employment income (subdivision a, net) Pension income (life annuity from a registered pension plan) Old Age Security pension Canadian-source dividends CCPC (actual amount received) Interest income Allowable capital losses RRSP contribution (fully deductible) Interest on loan to purchase investments
$ 8,000 62,000 8,251 12,000 3,000 (3,000) (900) (2,000)
$8,251 1,500 500
During 2023, she made donations to registered charities of $17,000 and incurred medical expenses for herself and her husband of $4,000. Mrs Yacumflastor makes donations on a regular basis each calendar year.
Required: (a) Calculate Mrs. Yacumflastor’s taxable income and federal taxes payable for 2023 without electing under subsection 82(3) in respect of her husband’s dividends. Assume that the taxable dividends of the Canadian source dividend CCPC was from active business income taxed at the low corporate rate. (37 minutes) (b) Determine whether Mrs. Yacumflastor should elect under subsection 82(3). (9 minutes) Show all calculations whether or not necessary to the final answer.
Solution 41 Taxable Income Employment income Pension income OAS Dividend income (receipt × 1.15) Interest income Less: RRSP contribution Interest on investment loan Allowable capital losses Division B Income before clawback Less: OAS clawback Division B Income and Taxable Income
$ 900 2,000 Nil*
Mrs. Y. $ 8,000 62,000 8,251 13,800 3,000
Mr. Y.
(2,900) $92,151 (786)** $91,365
______ $10,476 ______ $10,476***
8,251 1,725 500
*
The allowable capital losses of $3,000 can be carried back three years or carried forward indefinitely, but are deductible only from taxable capital gains. ** The amount of the OAS clawback is computed as: lesser of: (a) OAS benefit $8,251 (b) Division B income before clawback $92,151 less: threshold 86,912 excess, if any $ 5,239 15% of excess $ 786 *** Since his taxable income is less than the personal tax credit base of $15,000 all eligible credits can be transferred to Mrs. Y. (a) Mrs. Y.’s Taxes Payable Federal income tax on first $53,359
$8,004
on next $38,006 @ 20.5% Less tax credits: Basic ($15,000 × 15%) Married [($15,000 − $10,476) × 15%] Age [($8,396 - (($91,365 – 42,335 ×.15)) × 15%] Pension ($2,000 ×15%) Transfer from spouse Age ($8,396 × 15%) Medical expenses less lesser of: (a) (b) 3% of $90,196 lesser amount
7,791 $2,250 679 156 300 1,259 $4,000 $2,635 $2,706
Canada Employment Credit: Lower of employment income or $1,368 times 15% = Charitable donations $200 × 15% $ 30 16,800* × 29% 4,872 Dividend tax credit (13,800-12,000)*9/13 2023 rate used Basic federal tax OAS clawback Total
$15,795 - $11,202=
$15,795
(2,635) $1,365*15%
205
205
4,902 1,246 $ 11,202 $4,593 786 $ 5,379
*
Charitable donations eligible for a credit are limited to 75% of Division B income of $91,365 or $68,534. Therefore, the total credit base is $17,000 can be used as a deduction. (b) Effects of s. 82(3) Election: Increase in dividend $1,725 Increase in clawback deduction (.15 × $1,725) (259) Increase in Division B income $1,466 Increase in federal income tax $1,466 × 20.5% = $301 Increase in married credit: With election [($15,000 − ($10,476 − $1,725*) × 15%] Without election (see marriage deduction above) Increase in dividend tax credit ($225 x 9/13)** 2023 rate used Decrease in basic federal tax Increase in OAS clawback Net increase in tax *
$420 (679)
($259) 156
Therefore, the s. 82(3) election should not be used. * Note that you deduct the increase in dividend from the Division B income of Mr. Y. ** ($1725 gross up calculated above minus original $1,500 = $225)
103 $ (114) 259 $ 549
Question 42 (85 minutes) [Chapter 9 and 10] Ms. Haddie comes to you for advice in February 2024. Last year, 2023 was a year of considerable change and turmoil for her. Her job in Waterloo, with Takeover Ltd., evaporated on March 31, 2023, as a result of a reorganization of the company's business after a merger with a competitor. She found another job in Dundas (an improvement), but it required her to move there. Her divorce from her former husband became final during 2021. Ms. Haddie, who was already a single parent of a nine-year-old daughter, decided to adopt a five-year-old child locally on May 1st of 2023. By June 2023, after completing her move to her new job, the adoption was finalized. The court costs, legal cost, and administrative costs were $17,000. Other information on receipts and benefits: Salary earned in 2023 ($50,000 in Waterloo, $74,000 in Dundas) Profit from sale of cosmetics at home parties held in spare time Interest on Canada Savings Bonds Spousal support pursuant to divorce agreement ($600 per month for her support and $450 per month for the support of her daughter, age 9) Moving allowance
$124,000 4,850 1,725 12,600 4,500
Disbursements and withholdings: Employment Insurance premium withheld Canada Pension Plan contributions withheld Union dues
1,002 3,754 500
Net rental loss (for tax purposes) on investment property Registered retirement savings plan contributions, made on February 14, 2024 (2022 earned income was $145,000) Registered education savings plan payments 2023 ($60 per month) Tuition fees for 4 months part-time at a local University Payment on cancellation of lease for Waterloo apartment Security deposit on apartment in Dundas Gasoline and direct car expenses incurred in move to Dundas (92 km) Trailer rental for move to Dundas (including one-way drop-off fee of $75) Cost of shipping remainder of household effects (including packing and unpacking fees of $1,500) Cost of hotel ($125) and meals ($55) in Hamilton while awaiting delivery and unpacking of household effects (one day) Payment to babysitter for care of both children after school (38 weeks @ $100 per week) and during school holidays (8 weeks @ $500 per week) Summer camp for children (4 weeks @ $300 per week)
(4,800) 30,000 720 3,910 575 475 40 190 2,600 180 7,800 $1,200 each
Required: Calculate: (A) the minimum income under Division B for Ms. Haddie in 2023; (B)
taxable income for 2023 and federal taxes payable for 2023.
Provide explanation for all items omitted and show all calculations whether or not necessary to the final answer. Also provide any tax advice on RRSP.
Solution 42 Income from employment for 2023 Salary Moving allowance Total inclusions Less: Deductions Union dues Employment income Income from business or property Profit from sale of cosmetics Interest of CSB Net rental loss
$124,000 4,500 $128,500 $ (500) $128,000 4,850 1,725 (4,800)
Miscellaneous inclusions Spousal support
$7,200
Miscellaneous deductions RRSP deductions (see Schedule 2) Moving expenses Lease cancellation Car expense (92 km × $00.615) Trailer rental Shipping Hotel Meals ($23 per meal × 3 × 2 people) Sec 60 CPP Enhanced contribution deduction Child care expenses (Schedule 1) Division B income and Taxable Income
$26,100 575 57 190 2,600 125 138
Schedule 1 (Child care expense deduction) Lesser of: 1) Expenses incurred Babysitter Summer camp ($200 × 4 weeks) adopted child < 7 Summer camp ($125 × 4 weeks) daughter > 7
$ 7,800 800 500
$ 9,100
2) Child Care Expense $8000 × one child (< 7) $5000 × one child (> 7)
$ 8,000 5,000
$13,000
$128,500 4,850 $133,350 ×⅔
$88,900
3) ⅔ earned income — Income from employment — Profit from cosmetics business
$ 1,775
$(29,785) (631) (9,100) $97,459
Schedule 2 (Maximum deductible RRSP contribution in 2020) Least of: 1) Dollar limit 2) 18% of 2022 earned income 3) Amount contributed Taxable income Federal income tax on first $53,359 thereafter × 20.5% Less tax credits: Basic Equivalent-to-married (see note 1 below) CPP EI Canada employment credit
Adoption tax credit: Lower of a) $17,000 or b) $18,210 Transfer of tuition fee, education, and textbook credits (see calculation below) Federal Taxes Payable Tuition credit lesser of: (a) (b)
$145,000
$30,780 $26,100 $30,000 $97,459
$53,359 44,100 $97,459
$8,004 9,041
$17,045
$ 15,000 15,000 3,123 1,002 1,368
17,000 3,910
$56,403 15%
( 8,460) $ 8,585
$ 5,000 $ 3,910
Other items − Child support not included in recipient's income ($450 × 12 = $5,400) − Rental loss is from property; no reduction in child care earned income − RESP contribution not deductible, but income sheltered until withdrawn $720 − Security deposit does not qualify as a moving expense $475 − Excess RRSP contribution of $30,000 − $26,100 = $3,900 − Of this, the excess of $1,900 above $2,000 is not subjected to penalties of 1% per month, since the contribution was made in the first 60 days of 2024 and can apply to the 2024 contribution Note: 1) Where a single parent, the parent who claims equivalent to married credit for the child can also claim the child amount for the same child.
Question 43 (55 minutes) [Chapters 5, 6, 7, 11] Sigma Products Limited, a Canadian Controlled private corporation (CCPC) spent $5,000 in September 2020 for legal fees to raise capital and begin its current business operations which is over 90% manufacturing and processing. This is the third year of operations, but the first year to show an accounting profit. Previous years’ business losses for tax purposes are $500,000 in 2021 and $250,000 in 2022. A $20,000 capital loss on the sale of excess raw land was realized in 2022. None of these losses have been used to date. The accountant for Sigma Products Limited has provided you with the following income statement and miscellaneous financial information for the year ended June 30, 2023. Sales .......................................................................................................... $8,300,000 Cost of goods sold (Note 2) ....................................................................... 6,300,000 Gross profit .............................................................................................. $2,000,000 General and administrative expenses ........................... $ 500,000 Amortization ................................................................. 80,000 Interest .......................................................................... 190,000 770,000 $ 1,230,000 Gain on disposal of fixed assets ................................................................. 116,000 Net income before income taxes ............................................................. $ 1,346,000 Income taxes .............................................................................................. 295,000 Net income .............................................................................................. $ 1,051,000
Notes: 1. The company operates exclusively in Canada. 2. The cost of goods sold includes a general reserve in inventory of $41,500, calculated as 5% of the closing inventory value, to account for an anticipated introduction of a new product by a competitor. The company did not record any inventory reserves in its year ended June 30, 2022. 3. General and administrative expenses include: a) b) c) d)
e)
Political donations Advertising in a European magazine distributed only in Europe Accrued bonuses — fully paid September 28, 2023 Provision for low-price guarantee The company made payments of $6,200 during the year to customers who found lower priced merchandise. Donation to the United Way, a registered charity
$
500 1,200 44,000 5,600
10,000
4. The gain on disposal of fixed assets consists of the accounting gain on the sale of one of the corporation’s warehouses and its related land. For many years, the warehouse was the corporation’s only asset. The sale took place on October 30, 2022. The building was the last Class 3 asset held by the corporation. The total proceeds of disposition on the land and building was $200,000, of which 80% was allocated to the land. The land and building were purchased at a total cost of $120,000, of which 60% was allocated to the land at the time.
5. Purchases made during 2023 were as follows: a) A new warehouse was purchased in February 2023 for $240,000. The cost of the land was $70,000 and the balance was allocated to the building; b) The company replaced its only photocopier with two new models, one that included a facsimile machine. The new photocopier machines were purchased in August 2023 and the cost $24,000 and $18,000 respectively. The old photocopier was sold for proceeds of $3,500. c) Improvements on its leased administrative offices were made at a cost of $224,000 in February 2023. The premises were rented in February 2021 for 4 years with two successive options to renew for 5 years each. In February 2021, improvements were made in the amount of $360,000; d) New manufacturing machinery was purchased in February 2023 for $250,000 to replace old machinery that was sold on e-Bay for $20,000, purchased in January 2017 for $100,000; e) A 20-year license to use a manufacturing process was purchased on May 1, 2023 for $160,000; and f) A company car to be available for transporting out-of-town clients was purchased in January 2022 for $60,000 before 13% HST. This car replaced the only other existing company vehicle, a truck, which was purchased in fiscal 2021 for $44,000. The truck was sold for $22,000. 6. The undepreciated capital cost balances at July 1, 2022 were as follows: a) b) c) d) e) f)
Class 1 ............................................................................................................ $1,600,000 Class 3 ............................................................................................................ 26,600 Class 8 (photocopier) ...................................................................................... 11,750 Class 10 ........................................................................................................... 26,180 Class 13 .......................................................................................................... 300,000 Class 53 .......................................................................................................... 313,750
Required: Part A (46 minutes) Calculate the corporation’s minimum income from business or property for the year ended June 30, 2023 under the provisions of Division B of the Act. Support your answer with calculations and provide a brief explanation if not self-explanatory. For your explanation, you do not need to cite provisions of the Act, but this may be the easiest way to explain. Assume that the corporation DOES NOT wish to elect under subsections 13(4) and 44(1) or under subsection 44(6) in respect of the disposition of its warehouse. Assume all expenses are reasonable in the circumstances. Part B (4 minutes) Provide a brief explanation for any items omitted from the above calculation. Part C (5 minutes) Calculate the corporation’s minimum taxable income for the year ended June 30, 2023.
Solution 43 Part A: Division B Income Net income Add: Income taxes Provisions for guarantee [reserve denied, 18(1)(e)] Amortization Donation to the United Way [excluded (18(1)(a)); Div. C deduction] Inventory reserve [not based on LCM or market valuation; reserve denied per 18(1)(e)] Political contribution [specifically excluded (18(1)(n)); tax credit] Recapture on Class 3 Assets lesser of: (a) PoD $40,000 (b) CC $48,000 → $40,000 – $26,600 Taxable capital gain land [50% of ($160,000 – $72,000)] Deduct: Legal fees to raise capital 20% × $5,000 [amortized cost; 20(1)(e)] Gain on disposal of fixed assets [not a tax amount] Payments under low-price guarantee [operating cost] Class 1: 4% of [$1,600,000] Class 8 (new): Budget 2021 100% X ($24,000 + $18,000)** Class 1-MB (new): 10% of [$0 + ($170,000 × 1.5)] Class 10.1 (new)Budget 2021 100% × $36,000] Class 13: lesser of (a) $360,000 /(4+5) = $40,000 (b) $360,000 / 5 = $72,000 Class 13 (new) Budget 2021 100% X $224,000 Class 14: Budget 2021 100% X $160,000** Class 53: 50% of [$313,750 – $20,000**] Class 53: [$250,000 × 100% Enhanced first year allowance] Terminal loss: Class 8 (old) [$11,750 – $3,500] Class 10: $26,180 – $22,000** Division B Income (Net Income for Tax Purposes) ** Lower of cost or market
$1051,000 $295,000 5,600 80,000 10,000 41,500 500
13,400 44,000
490,000
1,000 116,000 6,200 64,000 42,000 25,500 36,000 40,000 224,000 160,000 146,875 250,000 8,250 4,180
(1,124,005) $416,995
**Assets purchased after April 19, 2021 for the classes 8, 10, 10.1, 13 are 100% deductible up to a maximum of $1.5 million per year which includes associated corporations.
Part B: Omitted Items • Advertising in Europe is allowed ($1,200) • Bonus accrued and paid within 180 days is allowed ($44,000) • The cost of the new company car is limited to $36,000 for CCA purposes without HST because the company must be registered for HST purposes if carrying on business in Canada Part C: Taxable income Division B income Deduct: Donations Net capital losses: lesser of: (a) TCG (b) net capital loss balance ($20,000 × ½) Non-capital losses: lesser of: (a) Division B income less donations and NCL (b) carry forward balance (500 + 250)
$416,995 $10,000 $ 44,000 $ 10,000
10,000
$396,995 $750,000
$396,995 ($416,995) $NIL
Question 44 (13 minutes) [Chapter 11] The following data summarize the operations of Kopy Kat Inc. for its taxation year ended September 30, 2023: Loss from business Dividend income from taxable Canadian corporations Taxable capital gains Allowable capital losses Donations to registered charities
$(95,000) 22,500 6,250 (4,375) (3,500)
The corporation had the following carry forward balances: Donations made in 2020 to registered charities Net capital losses which arose in 2018
950 6,000
Required: Compute the corporation’s taxable income for its 2023 taxation year and the balances available for carry forward to 2024 for all relevant accounts. Show all calculations whether or not necessary to the final answer.
Solution 44 s. 3(a) Income from property — dividends s. 3(b) Net taxable capital gains Taxable capital gains Allowable capital losses s. 3(c) s. 3(d) Business loss Division B income Less: intercompany dividends charitable donations – carry forward – current net capital losses (limited to net TCG) Taxable income
$22,500 $ 6,250 (4,375)
1,875 $24,375 (95,000) Nil $22,500 950 3,500 1,875
Balance of donations carried forward: carried forward from 2020 carried forward from 2023
$
950 3,500 $ 4,450
Balance of net capital losses carried forward: carried forward from 2018 utilized in 2023 carried forward from 2023 Balance of non-capital losses carried forward: s. 3(d) loss from business in 2023 add: dividends deducted under s. 112 add: net capital losses claimed in 2023 less: s. 3(c) carried forward from 2023
28,825 Nil
$ 6,000 (1,875) $ 4,125
$95,000 22,500
$117,500 1,875 $119,375 (24,375) $ 95,000
Question 45 (42 minutes) [Chapter 15] Kitchener Pant Sales Ltd. (KPSL), a retailer of men’s ready-to-wear pants, commenced operations in 2021 with a December 31 year-end. The retail market is highly competitive. Due to KPSL’s lack of funds for adequate advertising and lack of good supply contracts, the corporation incurred losses in its first two years of operations as follows: December 31, 2021 December 31, 2022
non-capital losses
net capital losses
$200,000 250,000
Nil $10,000
On October 1, 2023, 55% of the common shares of KPSL were purchased by Frugal’s Ltd. (FL). FL has been very successful for a number of years in the business of wholesaling and retailing men’s and women’s jeans. FL has two divisions, one for wholesaling and one for retailing. FL intends to inject additional capital and retrain the management of KPSL. FL is confident that with its expertise and track record it will be able to turn KPSL’s business around and make it profitable within two years. A financial statement was prepared for KPSL for the nine months ended September 30, 2023. From this statement, it was determined that KPSL had incurred a business operating loss for tax purposes of $54,000 for the period. The financial statement and tax records also revealed the following values of the assets owned by KPSL on September 30, 2023: Cost Marketable securities Inventory Land Building Store fixtures and equipment
UCC
FMV
$11,000 N/A $ 5,000 50,000 N/A 45,000 550,000 N/A 750,000 95,000 $75,000 115,000 35,000 35,000 27,000
On November 15, 2023, FL transferred its retailing division to KPSL which continued to carry on its business of retailing men’s ready-to-wear pants. At its year ended December 31, 2023, KPSL had net income of $282,000, all of which was earned in the period after September 30, 2023. The income was derived from the following sources: men’s ready-to-wear pants men’s and women’s jeans taxable capital gains on marketable securities
$(75,000) 350,000 7,000 $282,000
In the 2023 taxation year, it is expected that KPSL will earn $600,000 of which $100,000 will be from the retailing of men’s ready-to-wear pants.
Required: (a) Compute taxable income and the appropriate loss balances, ACB, and UCC amounts under the following assumptions: (i) full advantage of all elections and options is taken, and (ii) a minimum amount is elected under paragraph 111(4)(e) to utilize expiring losses. (36 minutes) (b) Comment on the deductibility of losses for the taxation years ended December 31, 2023 and 2024, assuming that men’s and women’s jeans retailing is considered to be similar to men’s ready-to-wear pants retailing, and indicate with reasons which of the two options in (a) would be better in this situation. Relate your comments to the specific facts of this case. (6 minutes) Show all calculations whether or not necessary to the final answer.
Solution 45 (a) At the deemed taxation year ended September 30, 2023, the following would exist: Loss carry forward 2021 2022 Total carry forward Loss for the deemed taxation year-end Operating loss Loss on inventory valuation ($50K − $45K) Unrealized terminal loss ($35K − $27K) Total loss from business
Non-capital $200,000 250,000 $450,000
Net capital Nil 10,000 $ 10,000
Business $ 54,000 5,000 8,000 $ 67,000
ACL
Marketable securities ($11K − $5K) × ½
Potential elections Land ($750K − $550K) × ½ Building ($115K − $95K) × ½ ($95K − $75K)
$ 3,000
Business
$20,000
Expires
$10,000
3,000 $13,000
TCG $100,000 10,000 $110,000
Taxable Income
(i)
(ii)
s. 3(a) s. 3(b) Net TCG Land (elected) Building (elected)
nil
nil
securities s. 3(c) s. 3(d) business loss less: recapture Division B income Less: net capital losses non-capital losses
Non-capital loss carried forward Add: s. 3(d) losses Net CL claimed Less: s. 3(c)
Ded.: Non-CL claimed Balance
$100,000 10,000 110,000 (3,000) 67,000 20,000 $ 10,000 50,000
$107,000 $107,000 (47,000) $ 60,000 (60,000) nil
$13,000 nil 13,000 (3,000) 67,000 nil $10,000 nil
$450,000 $ 47,000 10,000 $ 57,000 107,000
nil $450,000 50,000 $400,000
$10,000 $10,000 (67,000) nil $10,000 nil $450,000
$67,000 10,000 $77,000 10,000
67,000 $517,000 nil $517,000
ACB
— land ($550,000 + 2 × TCG) — building ($95K + 2 × TCG) — marketable securities
$750,000 115,000 5,000
$576,000 95,000 5,000
UCC
— building ($75K + recap. + TCG) — furniture and fixtures
105,000 27,000
75,000 27,000
(b) conditions for non-capital loss carry forward •
must carry on the men’s ready-to-wear pant retailing business
•
throughout the year in which a deduction for non-capital losses is taken with a reasonable expectation of profit
•
may deduct non-capital losses against income from the men’s ready-to-wear pant retailing business that generated the loss or from the sale of similar products
•
deduction at December 31, 2023
•
since men’s and women’s jeans retailing is assumed to be similar
• • •
carry forward balance, depending on whether (i) or (ii) chosen
deduction at December 31, 2024
•
since men’s and women’s jeans retailing is assumed to be similar
• •
deduct $350K − $75K = $275K of non-capital loss
deduct the balance of non-capital loss carry forward
make the minimum election to utilize expiring losses (i.e., case (ii)) if profit expectations are valid
Question 46 (60 minutes) [Chapter 15] The management of Kamper Company, a Canadian public corporation, acquired the shares of Marto Limited, a Canadian privately owned corporation, on September 1, 2022. Marto Limited, a manufacturer of plastic ergonomic devices for the furniture industry was incorporated on October 1, 2020 and has not been profitable since. The management of Kamper Company purchased Marto Limited to expand the furniture components segment of its business into the plastic ergonomic products market. Both Kamper Company and Marto Limited have September 30 year-ends. The balance sheet of Marto Limited as of August 31, 2023 was as follows: Assets Accounts Receivable (FMV $300,000) Inventory (at cost) (FMV $50,000) Machinery and Equipment (at UCC) (Capital Cost $2,000,000) (FMV $600,000) Building (at UCC) (Capital Cost $1,200,000) (FMV $1,300,000) Land (at ACB) (FMV $630,000) Shares in non-controlled Canadian-controlled private corporations (at ACB) (FMV $40,000) Prepaid Expenses (at Cost) (FMV $25,000) Total Assets Liabilities and Capital Stock Liabilities Share Capital Deficit Total Liabilities and Capital Stock
Book Value $ 300,000 75,000 1,000,000 500,000 200,000 100,000 25,000 $2,200,000 $2,200,000 748,000 (748,000) $2,200,000
Marto Limited’s tax losses were as follows: September 30, 2021 non-capital loss (including a capital loss of $30,000) September 30, 2021 net capital loss September 30, 2022 non-capital loss September 1 to 30, 2023 business loss August 31, 2023 business loss, including $25,000 allowable business investment loss
$320,000 $ 15,000 $ 50,000 $ 2,000 $323,000
Marto Limited had forecasted taxable income (losses) as follows: September 30, 2024 September 30, 2025 September 30, 2026 September 30, 2027 September 30, 2028
$ 150,000 $(130,000) $ (50,000) $ 50,000 $ 120,000
One of Kamper Company’s many divisions, Challenger, a manufacturer of metal furniture components, was transferred to Marto Limited immediately following the acquisition. Kamper Company has forecasted taxable income for its Challenger division as follows: September 1, 2023 to September 30, 2023 Year Ended September 30, 2024 Year Ended September 30, 2025 Year Ended September 30, 2026 Year Ended September 30, 2027 Year Ended September 30, 2028
$ $ $ $ $ $
150,000 200,000 280,000 310,000 320,000 100,000
Based on your research, you are comfortable that the Challenger division earns income from the sale of products similar to those sold by Marto Limited’s ergonomic products’ business for tax purposes. Required: (a)
Discuss and summarize all of the income tax implications to Marto Limited of the acquisition of the company by Kamper Company. Consider whether the pre-acquisition losses will be deductible in the future. Perform calculations where necessary to assist in describing the implications. (28 minutes)
(b)
Recommend the appropriate election strategy for Marto Limited. Calculate the taxable income for Marto Limited for years ending in the 2023 calendar year, if the optimal amounts were elected under paragraph 111(4)(e). Assume that Marto Limited will retain its September 30 year-end following the acquisition of control. Calculate the tax cost (and capital cost of depreciable assets) of Marto Limited’s assets immediately following the acquisition by Kamper Company. Also calculate its non-capital loss carryforward balances at the end of each of the company’s 2023 taxation year-ends. (26 minutes)
(c)
As noted above, immediately following the acquisition of control, the Challenger division was transferred to Marto Limited. What non-tax considerations may have been at issue in the decision to transfer this division? (6 minutes)
Solution 46 Part A At the deemed year-end August 31, 2023, the following would exist: Non-Capital Losses $370,000 ($320,000 in 2021 + $50,000 in 2022)
Net Capital Losses $15,000
Expiring $15,000
Business Losses (Deemed Year) $273,000 ($323,000 − $50,000)
Allowable Capital Losses $30,000 (($40,000 − $100,000)/2) on Shares of CCPC
$30,000
$25,000 ($75,000 − $50,000) Unrealized Inventory Loss $400,000 ($1,000,000 − $600,000) CCA M&E $723,000 Allowable Business Investment Losses $25,000 Unrealized Taxable Capital Gains $50,000 (($1,300,000 − $1,200,000)/2) Building $215,000 (($630,000 − $200,000)/2) Land Total Expiring Losses
$25,000 Unrealized Recapture $700,000 ($1,200,000 − $500,000)
$70,000
Short year-end results in faster expiration of losses. Short year-end requires proration of CCA if claimed. F/Ss and tax returns required for short year-end. New year-end can be chosen within 365 days of September 1, 2023. An election may be filed to realize some of the unrealized taxable capital gains/recapture in the short year-end to use up losses. Loss Utilization Non-capital loss carryforwards may be used: a) If the ergo products business is carried on following the acquisition of control and with a reasonable expectation of profit. This condition appears to have been met. b) Only against income from the ergo products business or a business that sells similar products or services. As the Challenger division sells similar products to Marto’s ergo division, it will be possible to use all of the loss carryforward balances of Marto within the expiration period (see below). Part B Taxable Income The optimal election under par. 111(4)(e) results in an election on the land to utilize the expiring losses prior to the acquisition of control. An elected amount on the land of $340,000 creates the desired $70,000 taxable capital gain (i.e., $340,000 − $200,000 = 140,000 CG × ½ = $70,000 TCG utilized against the expiring losses of $70,000). This is the optimal election because it is possible to use the non-capital losses within the expiration period following the acquisition of control. This is preferable to trapping the losses in the ACB/UCC balances of the company’s assets.
It is preferable to elect on the land over the building to prevent recapture, which would erode the non-capital losses. 3(a) 3(b) TCGs ACLs Net TCGs 3(c) 3(d) Bus Loss ABIL
Division B Division C Non-CL Net CL Taxable Income Non-Capital Loss Beginning Balance Addition: 3(d) Add: Net CL Less: 3(c)
Tax Cost of Assets A/R Inventory M&E Building Land Shares Prepaids
31-Aug-23 $ —
30-Sep-23 $13,000
70,000 (30,000) $ 40,000 40,000
0 13,000
(723,000) (25,000) (748,000)
0
—
$13,000
(15,000) $ —
(13,000) — $ —
$
$15,000 $(2,000)
Challenger Marto
Used
30-Sep-23 $1,093,000 (13,000)
31-Aug-23 $ 370,000 $748,000 15,000
Cost $300,000 $ 50,000
763,000 (40,000) $1,093,000
$1,080,000
UCC
ACB
CC
$600,000 $500,000
$2,000,000 $1,200,000 $ 340,000 $ 40,000
$2,000,000 $1,200,000
$ 25,000
Part C 1) Legal liability issues, i.e., liability limited to Marto would be extended to the Challenger business. 2) Financial reporting issues to Challenger business, e.g., impact on employee compensation. 3) Professional fees, i.e., legal and accounting to transfer the assets. 4) Other reasonable.
Question 47 (45 minutes) [Chapter 11] Soap Opera Editing Ltd. (SOEL) operates a film and videotape editing business. The corporation commenced operations in 2008 with a December 31 year-end. Ms. Sappy owns 50% of the common shares and all of the non-voting preferred shares of the corporation. The other 50% of the common shares are owned by Golden Television Drama Productions Inc. (GTDPI), which is involved in the production of television programming. GTDPI, also, has a December 31 year-end. During the last two years, Ms. Sappy has been in ill health and has not been able to do the promotional work necessary to maintain the growth of the business. As a result of this reduced marketing effort, financing of new projects has become more difficult. Her physician has ordered her to reduce considerably her commitment to the business. GTDPI has agreed to purchase all of her shares, effective April 1, 2023. During the past taxation years, SOEL has accumulated the following loss balances: December 31, 2019 December 31, 2021 December 31, 2022
non-capital losses Nil $ 90,000 70,000
net capital losses $120,000 21,000 Nil
GTDPI intends to inject additional capital and replace Ms. Sappy. GTDPI is confident that, with a new manager and better capitalization, it will be able to turn SOEL’s business around and make it profitable within two years. A financial statement was prepared for SOEL for the three months ended March 31, 2023. From this statement, it was determined that SOEL had incurred a business operating loss for tax purposes of $78,000 and a property loss of $7,000 for the period. The financial statement and tax records also revealed the following values of the assets owned by SOEL on March 31, 2023: Marketable securities Land Building General equipment Computers Vehicles
Cost $ 60,000 260,000 310,000 130,000 50,000 40,000
UCC N/A N/A $200,000 95,000 35,000 10,000
FMV $ 40,000 390,000 510,000 70,000 20,000 10,000
Assume no CCA is claimed in the short taxation year. On August 15, 2023, GTDPI transferred its post-production services division to SOEL, which continued to carry on its business of film and videotape editing. At its year ended December 31, 2023, SOEL had net income of $230,000, all of which was earned in the period after March 31, 2023. The income was derived from the following sources: film and videotape editing $ (100,000) post-production operations taxable capital gains on marketable securities
320,000 10,000 $ 230,000
In the 2024 taxation year, it is expected that SOEL will earn $450,000 of which $80,000 will be from film and videotape editing.
Required: (a)
Compute taxable income, the non-capital loss balance carried forward, and the ACB and UCC for all assets under the following assumptions: (i)
full advantage of all elections is taken, and
(ii)
a minimum amount is elected under paragraph 111(4)(e) to utilize the maximum of expiring losses, while at the same time preserving the maximum amount of noncapital losses carried forward. (Hint: Recapture reduces current losses that would otherwise be carried forward as non-capital loss.) (34 minutes) (b)
Comment on the deductibility of losses for the taxation years ended December 31, 2023 and 2024, supported by numerical data given and computed above, and indicate with reasons which of the two options in (a) would be better in this situation. (11 minutes)
Solution 47 (a) At the deemed taxation year ended March 31, 2023, the following would exist: Loss c/f: 2019 2021 2022 Total c/f
Non-capital Nil $ 90,000 70,000 $160,000
Net capital $120,000 21,000 Nil $141,000
Expires
$141,000 Losses for the deemed taxation year-end: Business: Operating Unrealized terminal loss — equip. ($95K − $70K) — comp. ($35K − $20K) Total
Losses from non-capital sources
ACL
$ 78,000 25,000 15,000 $118,000
Property
$
7,000
7,000
Unrealized ACL — marketable securities ($60K − $40K) × ½
$ 10,000
10,000 $158,000
Potential elections: Unrealized TCG Land ($390K − $260K) × ½ Building ($510K − $310K) × ½ Unrealized recapture Building ($310K − $200K)
Taxable Income s. 3(a) s. 3(b) net TCG land building securities s. 3(c) s. 3(d) business loss less: recapture property loss Division B income Less: net capital losses non-capital losses Taxable income
bus. inc.
TCG $ 65,000 $100,000
$110,000
(i)
(ii) Nil
$ 65,000 100,000 165,000 (10,000)
$ 65,000 Nil 65,000 $155,000 155,000
118,000 110,000 8,000 7,000 141,000 Nil
Nil
(15,000) 140,000 (141,000) Nil
(10,000) 118,000 Nil 118,000 7,000
Nil
$ 55,000 55,000
(125,000) Nil (55,000) Nil
Non-capital loss Carried forward Add: s. 3(d) losses Net CL claimed Less: s. 3(c) Ded.: Non-CL claimed Prop. loss expired Balance
$160,000 $ 15,000 141,000 156,000 155,000 Nil Nil
1,000 161,000 Nil $161,000
$160,000 $125,000 55,000 180,000 55,000 Nil 7,000
125,000 285,000 7,000 $278,000
ACB - land - building - marketable securities
$390,000 510,000 40,000
$390,000 310,000 40,000
UCC - building ($200K + Recap. + TCG) - general equipment - computers - vehicles
410,000 70,000 20,000 10,000
200,000 70,000 20,000 10,000
(b) conditions for non-capital loss carryforward •
must carry on the film and videotape editing business •
throughout the year in which a deduction for non-capital losses is taken
•
with a reasonable expectation of profit
•
may deduct non-capital losses against income from the film and videotape editing business that generated the loss or from the sale of similar products or services
•
deduction at December 31, 2023 •
•
if post-production services is considered similar •
deduct maximum $320,000 − $100,000 = $220,000 of non-capital loss
•
carryforward balance, depending on whether (i) or (ii) chosen
if post-production services is not considered similar •
•
deduction at December 31, 2024 •
if post-production services is considered similar •
•
deduct the balance of non-capital loss carryforward
if post-production services is not considered similar •
•
no deduction for non-capital losses carried forward
deduct the $80,000 and carry forward the balance
make the minimum election to utilize expiring losses (i.e., case (ii)) if profit expectations are valid, particularly if film and videotape editing and post-production services are similar
Question 48 (65 minutes) [Chapters 11, 12] Dripper Catcher Ltd. is a Canadian-controlled private corporation with head offices in Langley, British Columbia. Dripper Catcher is a wholesale company that sells manufactured aluminum eaves troughs directly to builders. It also has a construction business that installs its products (and related products) on consumers’ homes. For its fiscal year ended December 31, 2023, the corporation had correctly calculated its income for tax purposes under Division B as follows: Canadian operating profits (Note 1) Foreign: income before tax from U.S. branch in C$ (Note 2) Royalty income (Note 3) Interest income on outstanding A/R in construction business Recapture of CCA (Note 4) Rental income (Note 5) Taxable capital gains net of allowable capital losses (active) Dividends from taxable Canadian corporations — non-connected (eligible) Division B income for tax purposes
$493,000 40,000 15,000 4,500 12,500 19,000 3,000 13,000 $600,000
Notes: (1) Operating profits are from its two businesses; geographic and business line details described below. (2) Foreign income tax was paid in the amount of C$10,500 on this income. (3) The royalty income had been determined to be property income. (4) The recapture resulted from the sale of some equipment used in the construction business. (5) The rental income was derived from a five-year lease of the entire space of an unused warehouse owned by the corporation. Additional Information: (A) The balance in the tax accounts at the end of 2022 and other information from the 2022 taxation year were: Unused business foreign tax credit Refundable dividend tax on hand (non eligible) Dividend refund for 2022 (non eligible)
$ 4,000 20,000 8,000
(B) A net capital loss of $6,000 was realized in June 2022; no capital gains were realized by the corporation in 2022 or in the prior three years. (C) DCL made charitable donations of $12,500 during the year. (D) Four quarterly dividends of $25,000 (non eligible) were declared at the end of each calendar quarter of 2023 and, as always, were paid two weeks after their declaration. Similarly, the dividend for the last quarter of 2022 of $22,500 (non eligible) was paid on January 14, 2023.
(E) The corporation has permanent establishments in British Columbia, Ontario, and the United States. Its gross revenues, salary and wages, operating profit, and gross asset values are as follows: Location
Gross revenue ($000s)
Payroll ($000s)
Operating profit ($000s)
Gross asset value ($000s)
British Columbia
1,750
1,950
123
4,500
Ontario
2,500
900
140
800
U.S.
750
150
40
700
Totals
5,000
3,000
303
6,000
(F) The corporation has taxable capital of $4,500,000.
Required: Calculate the federal taxes and provincial taxes at an assumed net tax rate of 12% on federal taxable income payable by Dripper Catcher Ltd. Assume that the current year’s passive income is equal to the prior year’s passive income. Additionally assume the initial general tax reduction is $4,875 (confirm this amount by demonstrating the calculation). Also compute the refundable dividend tax on hand balance as at December 31, 2023 and compute the dividend refund for 2023. Show all calculations.
Solution 48 Division B income (net income for tax purposes) Division C deduction: Charitable donations (limited to 75%) Dividends from taxable Canadian corporation Net capital losses (lesser of $6,000 and $3,000) Taxable income Federal tax @ 38% Federal abatement (Schedule 1)
$ 600,000
Subtotal
$ 165,735
Additional refundable tax (Schedule 2) (ART) Subtotal Deduct: Business income foreign tax credit (Schedule 3) Small business deduction (Schedule 4) (SBD)
3,627 $ 169,362
Tax reduction (Schedule 5) Political contribution tax credit Subtotal Less: Investment tax credit Part I tax payable Provincial tax @ 12% of tax income × 90.0% = $571,500 × 12% × 90.0% Subtotal Add: Part IV tax schedule 8 Less: Dividend refund schedule 7 Total taxes paid
(4,875) — $ 54,987 — $ 54,987 61,722 $ 116,709 4,983 (21,123) $ 100,569
Schedule 1: Federal Abatement Gross Revenue Amount % British Columbia $1,750,000 35 Ontario 2,500,000 50 85 U.S. 750,000 15 $5,000,000 100 Abatement: 10% of: 90%
Salaries & Wages Amount % $1,950,000 65 900,000 30 95 150,000 5 $3,000,000 100 $ 571,500 =
(12,500) (13,000) (3,000) $ 571,500 $ 217,170 (51,435)
(14,500) (95,000)
of
Average %
90 10 100 $51,435
Schedule 2: Additional Refundable Tax Source Cdn. $ Operating $493,000 Royalty Inc. Interest A/R 4,500 Recapture CCA 12,500
ABI Foreign $
Portfolio Investment Connected Non-Conn Cdn. $ Foreign $ Dividends Dividends $15,000
Total $493,000 15,000 4,500 12,500
Rental income TCG net ACLs Dividends Cdn U.S. Branch
19,000 3,000 $13,000 $510,000 **
$40,000 $40,000
$37,000 *
Aggregate investment income from above chart* Less: Net capital loss claimed Less: Dividends deducted under Division C Aggregate investment income 10⅔% of lesser of: a) Aggregate investment income b) Taxable income Less: Income eligible for SBD***
—*
$
—*
$
$13,000 *
19,000 3,000 13,000 40,000 $600,000
$ 50,000 From the chart above ($37,000 + $13,000) $ (3,000) $ (13,000) $ 34,000 $34,000 $ 571,500 $(500,000)
$71,500 Therefore the lesser of is: $ 34,000 times 10 ⅔% = $3,627 *** Lower of ABI above (see ** above) or maximum SBD limit of $500,000
Schedule 3: Business Income Foreign Tax Credit Least of: a) Foreign tax paid + unused amount ($10,500 + $4,000) = $14,500 b) Foreign Business Income × 38% tax – 13% General reduction Div. B − (sec. 112 + par. 111(1)(b)) i.e., Dividends + net capital loss both under Division C ***
$40,000 $500,000 − ($13,000 + $3,000) c) Least of:
× ($217,170 − $4,875)
=
$14,541
Tax otherwise payable minus General reduction minus non-business FTC ($217,170 − $4,875 − $0) =
$212,295
equals
$ 14,500
Schedule 4: Small Business Deduction 19% of least of: a) Canadian active business income (Schedule 2) b) Taxable income Less: 100/28* NBFTC Less: 4 times BFTC 100/28 times $ — = $ — 4 times $ (14,500) = (58,000) $(58,000) c) Business limit (allocated) Least of: $500,000 × 19%
$510,000 $571,500
(58,000) $513,500 $500,000
$ 95,000
Adjusted AII for SBD Royalty income Patent income
15,000
Portfolio Dividends
13,000
Rental income
19,000
AAII
$
47,000
Reduction in SBD limit AAII less base
47,000 50,000
AAII in excess Reduction in SBD limit
x $5
$
-
SBD limit Less amount allocated to associated corporation
$
500,000
SBD to Dripper Company
$
-
500,000
Schedule 5 General reduction (13% reduction): taxable income Less: ii) 100/19 × small business deduction iii) Aggregate investment income (ART)
$ 571,500
$95,000
$500,000 34,000 $(534,000) $ 37,500
Net 13% of net amount Total
$4,875 $4,875
Schedule 6: Refundable Portion of Part I Tax Least of : (a) 30 ⅔% of aggregate investment income (Sch 2) Less: NBFTC Minus: 8% × foreign non-business income
$34,000
= $
$ 10,427 — — $
(b) 30 ⅔% of: Taxable income Less: Income eligible for SBD 100/38.67 × NBFTC 4 × BFTC
(0)
$ 10,427
$571,500 $500,000 — 58,000
$0 $14,500
(558,000) $ 13,500
$ 4,140 $54,987
(c) Part I tax Least of (a), (b), or (c) :
RDTOH and Dividend refund Opening balance as of January 1, 2023
$ 4,140
Schedule 7
Eligible RDTOH -
Non-eligible RDTOH $
20,000
Refund - 2022
$
Refundable Part I tax Part IV tax on portfolio dividends @
(8,000) 4,140
38.33%
Part IV tax on Connected corporations Balance at the end of December 31, 2023 - prior to refund
4,983
-
-
-
$ 4,983
$
16,140
$
-
$
16,140
- in any other case, nil
$
4,983
The total dividend refund for 2023 is
$
21,123
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year
nil
Its eligible RDTOH balance at the end of the year
$ 4,983
plus 2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year**
97,500
- Its non-eligible RDTOH balance at the end of the year
$37,375 16,140
plus 3. either: - if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess - the amount by which it eligible RDTOH balance at the end of the year exceeds the amount in 1, if any
$21,235 4,983
**(3 X 25,000 = $75,000 + 22,500 = 97,500) x 38 1/% = $37,375
Schedule 8: PART IV TAX ON TAXABLE DIVIDENDS RECEIVED
Portfolio dividends ( non connected corp) Part IV @ 38 1/3%
Eligible $13,000
Non Eligible Nil
$4,983
Plus Dividend refund*** $4,983 Part IV Tax
$4,983
$0
Question 49 (50 minutes) [Chapters 11, 12] Manitoba Traders Ltd. is a Canadian-controlled private corporation located in Winnipeg, Manitoba. For its fiscal year ended December 31, 2023, the corporation had correctly calculated its income for tax purposes under Division B as follows: Operating income (Note 1) Profit on the sale of excess land (Note 2) Royalty income (Note 3) Retailing income Interest on o/s accounts receivable in retailing business Recapture of CCA (Note 4) Advertising agency loss
$ 387,000 305,000 15,000 210,000 14,500 30,500 (53,500)
Rental income (Note 5) Taxable capital gains net of losses (from active assets) Interest income from five-year bonds Div from non-connected taxable Canadian corporations(eligible) Foreign non-business income in Cdn. $ (Note 6) Division B net income for tax purposes
36,500 63,000 10.000 9,000 25,000 $ 1,052.000
Notes: (1) This amount of operating income was computed correctly under Division B. The corporation has permanent establishments in Manitoba and North Dakota in the United States. Its gross revenue and salary and wages information is as follows:
Gross revenue Salaries and wages
Manitoba
North Dakota
$10,325,000 5,375,000
$3,675,000 993,000
(2) The land had been held for approximately three years. It had been held vacant in order to realize a profit on its sale at the right time. (3) The royalty income had been determined to be property income. (4) The recapture resulted from the sale of some fixtures used in the retailing business. (5) The rental income was derived from leasing the entire space on a five-year lease in an unused warehouse. (6) Withholding tax on the pre-tax non-business income of $25,000 was C$5,000.
Additional information: (a) Manitoba Traders Ltd. made the following selected payment during the year: Charitable donations
$12,500
(b) Four quarterly dividends (non-eligible) of $45,000 were declared at the end of each calendar quarter of 2023 and paid within two weeks of their declaration. The last quarter of 2023 was paid in January 2024 and a dividend (non-eligible) of $30,000 declared in the last quarter of 2022 was paid in January 2023. (c) Manitoba Traders Ltd. had allocated $50,000 of its business limit to other associated corporations. Taxable capital of the associated group for large corporations tax purposes was $11,000,000. (d) The balance in the tax accounts on January 1, 2023 were: Charitable donation carryforward Unused business foreign tax credit Non-capital losses from 2017 Net capital losses from 2018 Refundable dividend tax on hand (non-eligible) Dividend refund for 2022 (non-eligible)
$ 15,500 14,000 46,500 14,500 20,000 18,000
Required: (A) Compute the federal Part I tax and provincial tax at a 17% rate for Manitoba on federal taxable income payable by the corporation for 2023. Show in detail the calculation of all tax deductions in the computation, using a separate schedule for each special tax deduction. Assume that the current year’s passive income is equal to the prior year’s passive income. (52 minutes) (B)
Compute the refundable tax on hand balance as at December 31, 2023, showing in detail your calculation and compute the dividend refund for 2023. (15 minutes)
Solution 49 A) Part I Tax Division B income (net income for tax purposes) Division C deduction: Charitable donations ($15,500 + $12,500) max.75% of $1,052,000 Dividends Non-capital losses Net capital losses Taxable income Federal tax @ 38% Federal abatement Subtotal Additional refundable tax (ART) Subtotal Deduct: non-business income foreign tax credit
$ 1,052,000 (28,000) (33,000) (46,500) (14,500) $ 954,000 $ 362,520 (75,441) 287,079 14,400 301,479
Sch 1 Sch 2
(5,000)
Sch 3
Small business deduction (SBD)
(42,275)
Sch 4
Tax reduction
(77,545)
Sch 5
Part I tax payable Provincial tax @ 17% of taxable income Subtotal Add: Part IV tax Less: Dividend refund schedule 7 Total taxes paid
176,659 × 17% ×
$954,000
Schedule 1: Federal Abatement Gross Revenues Amount % Manitoba $10,325,000 73.75 North Dakota 3,675,000 26.25 $14,000,000 100 Abatement: 10% of: 79.08%
of
79.08%
Salaries & Wages Amount % $5,375,000 84.4 993,000 15.6 $6,368,000 100 $954,000 equals
128,252 304,911 3,450 (43,850) $264,511
Sch 8
Average % 79.08 20.92 100 $75,441
Schedule 2: Additional Refundable Tax Analysis of Division B Income ABI Source Manufacturing income Profit on sale of land Royalty Interest on accounts receivable Recapture CCA Advertising agency loss Rental income Taxable capital gain Interest on five-year bond
Cdn. $387,000 305,000
Foreign
Portfolio Investment Connected Non-Conn Cdn. Foreign Dividends Dividends
$15,000
Total $387,000 305,000 15,000
36,500 63,000 10,000
14,500 30,500 (53,500) 36,500 63,000 10,000
14,500 30,500 (53,500)
Dividend Foreign non-business income Retail income
$ 9,000 $25,000 210,000 $893,500
Aggregate investment income from above chart $158,500 less: Net capital loss claimed (14,500) less: Dividends deducted under Division C (9,000) Aggregate investment income $135,000 10⅔% of lesser of: a) Aggregate investment income b) Taxable income $954,000 Less: Income eligible for SBD* (222,500)
0 $124,500
$25,000
$
0
25,000 210,000 $ 9,000 $1,052,000
($124,500 + 25,000 + 9,000)
$135,000
$731,500 Therefore, the lesser is: $135,000 × 10⅔% = $14,400 * Lower of Canadian ABI, above, or maximum SBD limit of $222,500 See SBD to see how $222,500 was calculated. Schedule 3: Non-Business Income Foreign Tax Credit Lesser of: a) Foreign tax paid $5,000 b) Foreign non-business income × (38% − 10% abatement + ART*) Div B − (Sec 112 + Par 111(1)(b)) $25,000 × (362,520 – 75,443 + 14,400) $7,328 $1,052,000 minus ($9,000 plus $14,500) Lesser amount: $5,000 From Sch 2 * In the formula above, deduct the 13% general reduction only if the company is not a CCPC. In this case it is a CCPC; hence, do not deduct the 13% reduction. Schedule 4: Small Business Deduction 19% of least of: a) Canadian active business income (Sch. 2) b) Taxable income Less: 100/28 times NBFTC (Sch. 3) Less: 4 times BFTC (Sch. 4) 100/28 times ($5,000) = ($17,857)
$893,500 $954,000
(17,857) c) Business limit (allocated) Least amount: $222,500 × 19% =
$936,143 $222,500*
$42,275
9,000
Adjusted AII for SBD Interest income Royalty income
10,000 15,000
Foreign non-business income Portfolio Dividends
25,000 9,000
Rental income
36,500
AAII
$
95,500
Reduction in SBD limit AAII less base
95,500 50,000
AAII in excess
45,500
Reduction in SBD limit
x $5
SBD limit Less amount allocated to associated corporation
$
227,500
$
272,500 50,000
$
SBD remaining
222,500
Since taxable capital is $11 million the max SBD is the greater of $227,550 versus $12,500 as calculated below: ** $11 million minus $10 million = $1 million. Therefore $1 million/40 Million X $500,000 = $12,500 reduction
Schedule 5 General reduction (13% reduction): taxable income Less: ii) 100/19 × small business deduction iii) Aggregate investment income (ART)
$ 954,000
$42,275
$222,500 135,000 $(357,500) $ 596,500
Net 13% of net amount Total
$77,545 $77,545
Schedule 6: Refundable Portion of Part I Tax Least of : (a) 30⅔% of aggregate investment income Less: NBFTC (Sch 3) Minus: 8% X foreign non business income (b) 30⅔% of: Taxable Income Less: income eligible for SBD 100/38.67 × NBFTC
$135,000 $25,000
= $5,000 (2,000)
$41,400 (3,000)
$38,400
$954,000 $222,500 12,930
$5,000
(235,430) $220,382 30⅔% of
$718,570
(c) Part I tax
$176,659 $176,659
Least of (a), (b), and (c) :
$38,400
Eligible RDTOH
Schedule 7 - RDTOH and Dividend refund Opening balance as of January 1, 2023
-
Refund - 2022
Non-eligible RDTOH $
20,000
$
(18,000)
Refundable Part I tax
38,400
Part IV tax on portfolio dividends @
38.33%
Part IV tax on Connected corporations Balance at the end of December 31, 2023 - prior to refund
3,450
-
-
-
$ 3,450
$
40,400
$
-
$
40,400
- in any other case, nil
$
3,450
The total dividend refund for 2023 is
$
43,850
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year
nil
Its eligible RDTOH balance at the end of the year
$ 3,450
plus 2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year**
165,000
- Its non-eligible RDTOH balance at the end of the year
$63,249 40,400
plus 3. either: - if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess - the amount by which it eligible RDTOH balance at the end of the year exceeds the amount in 1, if any
**(45K X3 = 135K =165K 8 38 1/3 % = $63,249)
Schedule 8: Part IV Tax on Taxable Dividends Received Eligible Dividend Portfolio dividends (non-connected corp.)
$9,000
Part IV @ 38⅓% of $9,000
$ 3,450
$22,849 3,450
Question 50 (50 minutes) [Chapters 11, 12] BC Enterprises Ltd. is a Canadian-controlled private corporation located in Vancouver, British Columbia. For its fiscal year ended December 31, 2023, the corporation had correctly calculated its income for tax purposes under Division B and some of the federal Part I tax as follows: Domestic sources — Retail income Advertising agency loss Rental income from unused warehouse fully rented on a five-year lease Retailing income Interest on outstanding accounts receivable in retailing business Recapture of CCA from sale of fixtures used in retailing business Interest income from five-year bonds Taxable capital gains net of losses (from active assets)
$ 160,000 (80,000) 25,000 330,000 15,000 10,000 20,000 70,000
Dividends from non-connected taxable Canadian corporations (eligible dividend) 12,000
Foreign sources — Foreign business income in C$ earned through unincorporated branch in United States before C$11,500 in income tax paid in United States Foreign non-business income in C$ before C$6,000 withheld
45,000 40,000
Division B net income for tax purposes
$647,000
Division C deductions:
(15,500) (12,000) (50,000) (14,000)
charitable donations ($12,500 + $3,000) dividends (Canadian-source) non-capital losses net capital losses
Taxable income
$555,500
Federal tax @ 38% Federal abatement (Note 1) Partial Part I tax correctly computed
$211,090 (48,000) $163,090
Notes with additional information — (1) The corporation has permanent establishments in British Columbia and the state of Washington in the United States. The federal abatement has been correctly computed based on its gross revenue and salary and wages information. (2) BC Enterprises Ltd. made the following selected payment during the year: Charitable donations
12,500
(3) Four quarterly dividends of $30,000 (non-eligible dividend) were declared at the end of each quarter of the 2023 fiscal year and were paid within two weeks of their declaration. The dividend for the last quarter of 2023 was paid in January 2024. A dividend of $25,000 (noneligible dividend)declared in the last quarter of 2022 was paid in January 2023. (4) BC Enterprises Ltd. had allocated all but $40,000 of its business limit to other associated corporations. Taxable capital does not exceed $10,000,000 within the associated group. The only scientific research and experimental development expenditures of the associated group were made by BC Enterprises Ltd.
(5) The balances in the tax accounts on December 31, 2022 were: Charitable donation carryforward Unused business foreign tax credit Non-capital losses from 2018 Net capital losses from 2019 Refundable dividend tax on hand (Non-eligible Dividend) Dividend refund for 2022 (Non eligible Dividend)
$ 3,000 3,500 50,000 14,000 20,000 9,000
Required:
Assume that the current year’s passive income is equal to the prior year’s passive income.Determine, by clearly presenting all component parts and their calculations, (a) total federal Part I tax payable for 2023, assuming that the foreign tax credits are equal to the foreign taxes paid, without recalculating the parts of the Part I tax already computed or assumed correctly above, and (32 minutes) (b) the amount of the dividend refund for 2023. (18 minutes) Show all calculations whether or not necessary to the final answer.
Solution 50 (A) Total Part I Tax Partial Part I tax correctly computed (given) Additional refundable tax (Schedule 1) Deduct: non-business income foreign tax credit (assumed) business income foreign tax credit (assumed, $11,500 + $3,500) small business deduction (Schedule 2) general reduction (Schedule 3) Part I tax payable
$163,090 15,040 (6,000) (15,000) (7,600) (48,685) 100,845
Schedule 1: Additional refundable tax 10⅔% of lesser of: (a) Aggregate Investment Income (below) (b) Taxable income Less: income eligible for small business deduction 10⅔% of $141,000 = Aggregate Investment Income (AII) Net taxable capital gain for the year Less: net capital losses claimed Canadian and foreign property income: Rental Interest Foreign Dividends Dividends deducted under Division C
$141,000 $555,500 40,000
$515,500 $ 15,040
$ 70,000 14,000
$ 56,000 $25,000 20,000 40,000 12,000 (12,000)
85,000 $141,000
Schedule 2: Small business deduction 19% of least of: (a) Canadian active business income Retailing retailing advertising recapture A/R interest (b) Taxable income Less: 4 × $15,000 100/28 × $6,000 (c) Business limit (allocated) 19% of $40,000 See Adjustment for SBD schedule 3
$160,000 330,000 (80,000) 10,000 15,000 $555,500 $60,000 21,429
(81,429)
$435,000
$474,071 $40,000 $ 7,600
Schedule 3: Adjustment AII for SBD Interest Income
$20,000
Rental Income
$25,000
Portfolio Dividends
$12,000
Foreign non business
$40,000
AAII
$97,000
Total
Less reduction in SBD limit
($50,000)
AAII in excess
$47,000
Reduction in SBD Limit = $500,000 – ($5 X $47,000) – allocated to associated co $225,000 = $500,000 -$235,000 – 225,000 = $40,000 Schedule 4: General reduction Taxable income Less: (a) 100/19 × small business deduction (b) Aggregate investment income (ART) Net 13% of net amount Total
$555,500 7,600
$40,000 141,000
$(181,000) $ 374,500 $48,685 $48,685
(B) Dividend Refund Refundable portion of Part I tax Least of: (a)
(b)
30⅔% of AII (30⅔% of $141,000) Less: NBFTC Minus: 8% times $40,000 30⅔% of: Taxable income Less: income eligible for SBD 100/38.67 × $6,000 4 × $15,000
$ 43,240 $
6,000 (3,200)
(2,800) $555,500
$40,000 15,516 60,000
115,516 $439,984
(c)
Part I tax Least amount: See schedule 5
$ 40,440
$ 134,929 $100,845 $ 40,440
RDTOH and Dividend refund
Eligible RDTOH
Schedule 5
Opening balance as of January 1, 2023
-
Refund - 2022
Non-eligible RDTOH $
20,000
$
(9,000)
Refundable Part I tax Part IV tax on portfolio dividends @
40,440 38.33%
4,600
-
-
-
Part IV tax on Connected corporations Balance at the end of December 31, 2023 - prior to refund
$ 4,600
$
51,440
$
-
$
44.083
- in any other case, nil
$
-
The total dividend refund for 2023 is
$
44,083
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year
nil
Its eligible RDTOH balance at the end of the year
$ 4,600
plus 2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year**
115,000
- Its non-eligible RDTOH balance at the end of the year
$44,083 51,440
plus 3. either:
- if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess - the amount by which it eligible RDTOH balance at the end of the year exceeds the amount in 1, if any
$ 4,600
**($30,000 X 3 = $90,000 + $25,000)= $115,000 Part IV Tax = $12,000 X 38 1/3 = $4,600
Question 51 (45 minutes) [Chapter 11, 12] The controller of Above All Inc. (AA Inc.) provided you with the following selected information related to the 2023 taxation year ended December 31, 2023. AA Inc. is a Canadian-controlled private corporation. AA Inc. did not have taxable capital in excess of $10,000,000 in 2022. Canadian manufacturing profits Canadian retail business income Taxable capital gains(non-active) Interest income: Canadian long-term bonds Interest on overdue accounts receivable Dividend income: From taxable Canadian corporations(eligible dividend) (AA owns less than 5% of the shares of these corporations) From U.S. corporations (before U.S. tax of $1,800) (these corporations are not foreign affiliates) Non capital losses from prior years applied in the calculation of taxable income Net capital losses from prior years applied in the calculation of taxable income
$451,500 50,000 4,500 40,000 5,000
9,000 12,000 55,000 4,500
Calculations correctly prepared under the Income Tax Act Taxable income Part I tax payable (including additional refundable tax) Foreign non-business tax credit
$503,500 66,682 1,800
Miscellaneous Items Refundable dividend tax on hand as of December 31, 2022 (non-eligible) Dividend refund received in respect of the 2022 taxation year (non-eligible) Taxable dividends paid during 2023 (non-eligible)
$20,000 9,000 120,000
Required:
Assume that the current year’s passive income is equal to the prior year’s passive income. Determine, for AA Inc., by clearly presenting all component parts and their calculations, (a) the amount of the small business deduction, and (15 minutes) (b) the amount of the dividend refund for 2023. (30 minutes) Do not re-compute the Part I tax and the other related tax credits. Assume that they have been computed correctly.
Solution 51 (1) Small Business Deduction 19% of least of: (a) Canadian source ABI ($451,500 + $50,000 + $5,000)
$506,500
(b) Taxable income Less: 100/28 × NBFTC (100/28 × $1,800)
$503,500
(c) Business limit
$322,500
(6,429) $497,071
Least amount is 19% X $322,500 Adjusted AII for SBD Taxable capital gains Interest Income Foreign non business income Portfolio Dividends AAII Reduction in SBD limit AAII less base AAII in excess Reduction in SBD limit x $5 SBD limit Less amount allocated to associated corporation SBD remaining
$ 61,275
$
4,500 60,000 12,000 9,000 85,500
$
85,500 50,000 35,500 177,500
$
322,500
$
322,500
(2)
Dividend Refund
Refundable portion of Part I tax Least of: (a) 30⅔% × Aggregate investment income 30⅔% × ($4,500 + $40,000 + $9,000 + $12,000 − $9,000 − $4,500) = $52,000 Less: NBFTC − 8% × FII ($1,800 − 8% × $12,000) (b) Taxable income Less: SBD amount 100/38.67 × NBFTC (100/38.67 × $1,800) 30⅔% of $176,345
$ 15,947
(840) $ 15,107 $503,500 (322,500) (4,655) $176,345 $ 54,079
(c) Part I tax, including ART Least amount is:
$ 66,682 $ 15,107
Part IV tax Portfolio dividends ($9,000 × 38⅓%)
$3,450 Eligible RDTOH
RDTOH and Dividend refund Opening balance as of January 1, 2023
-
Refund - 2022
Non-eligible RDTOH $
20,000
$
(9,000)
Refundable Part I tax Part IV tax on portfolio dividends @
15,107 38.33%
Part IV tax on Connected corporations Balance at the end of December 31, 2023 - prior to refund
3,450
-
-
-
$ 3,450
$
26,107
$
-
$
26,107
- in any other case, nil
$
3,450
The total dividend refund for 2023 is
$
29,557
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year Its eligible RDTOH balance at the end of the year
nil $ 3,450
plus 2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year** 120,000 x 38 1/3%
$46,000
- Its non-eligible RDTOH balance at the end of the year
26,107
plus 3. either: - if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess - the amount by which it eligible RDTOH balance at the end of the year exceeds the amount in 1, if any
$19,893 3,450
Question 52 (90 minutes) [Chapter 12] OTOH Ltd. is a Canadian-controlled private corporation located in Moncton, New Brunswick. For its fiscal year ended December 31, 2023, the corporation had correctly calculated its income for tax purposes under Division B as follows: Domestic sources: Advertising agency loss Dividends from non-connected taxable Canadian corporations (eligible) Interest income from five-year bonds Interest income on outstanding accounts receivable in retailing business Wholesale income Profit on the sale of excess land (Note 1) Recapture of CCA (Note 2) Rental income (Note 3) Retailing income Royalty income from the sale of a trade name Taxable capital gains net of losses (from active assets) Division B net income for tax purposes
$(73,000) 16,000 22,000 14,000 187,000 105,000 10,000 36,000 410,000 6,000 63,000 $796,000
Notes: (1) The land had been held for approximately two years. It had been held vacant in order to realize a profit on its sale at the right time. (2) The recapture resulted from the sale of some fixtures used in the retailing business. (3) The rental income was derived from leasing the entire space on a five-year lease in an unused warehouse. Additional information: (A) OTOH Ltd. made the following selected payment during the year: Charitable donations
12,000
(B) Four quarterly dividends of $45,000 (non-eligible) were declared on the last day of each calendar quarter of 2023 and paid two weeks later. A dividend of $30,000, (noneligible) declared in the last quarter of 2022, was paid in January 2023. Additionally, a separate eligible dividend was declared and paid in 2023 of $10,000. (C) OTOH Ltd. had allocated $50,000 of its business limit to other associated corporations. The taxable capital of the associated group was less than $10,000,000. (D) The balances in the tax accounts on January 1, 2023 were: Charitable donation carryforward Non-capital losses from 2017 Net capital losses from 2018 Refundable dividend tax on hand (non-eligible) Dividend refund for 2022 (non-eligible)
$ 2,500 46,500 12,000 20,500 8,500
Required: (a) Assume that the current year’s passive income is equal to the prior year’s passive income. Compute the federal Part I tax and provincial tax at a 12% rate on federal taxable income payable by the corporation for the 2023 taxation year. Show in detail the calculation of all tax deductions, using a separate schedule for each, as needed. (60 minutes) (b) Compute the refundable tax on hand balance as at December 31, 2023, showing in detail your calculation. Compute the dividend refund for the 2023 taxation year. (30 minutes)
Solution 52 Division B income (net income for tax purposes) Division C deduction: Charitable donations (12,000 + 2500) max. 75% of $679,000 Dividends Non-capital losses Net capital losses Taxable income Federal tax @ 38% Federal abatement (10% × $707,000) Subtotal Additional refundable tax Subtotal Deduct: Small business deduction Tax reduction Subtotal Less: Investment tax credit Part I tax payable Provincial tax @ 12% of tax income = 12% × $707,000 Subtotal Add: Part IV tax Less: Dividend refund (below) Total taxes paid
$796,000 (14,500) (16,000) (46,500) (12,000) $707,000 $268,660 (70,700) 197,960 12,267 210,227 (57,000) (37,960) 115,267 (NIL) 115,267 84,840 200,107 6,133 (39,567) $166,673
Sch 1
Sch 2 Sch 3
Sch 5 Sch 6
Schedule 1: Additional Refundable Tax Analysis of Division B Income
Source
Advertising agency loss Interest A/R retail Wholesale income Royalty Rental Net taxable capital gain Recapture Profit on sale of land Interest — Bond Retailing income Foreign Dividends Profit
Active Business Income Cdn. Foreign
Portfolio Investment Connected Non-Conn. Cdn. Foreign Dividends Dividends
($73,000) 14,000 187,000 $6,000 36,000 63,000 10,000 105,000 22,000 410,000
$653,000
$
0 $127,000
$
Aggregate investment income from above chart ($127,000 + 16,000) Less: Net capital loss claimed Less: Dividends deducted under Division C Aggregate investment income6 ART: 10⅔% of lesser of: (a) Aggregate investment income (b) Taxable income Less: Income eligible for SBD*
0
$
0
$143,000 (12,000) (16,000) $115,000
$115,000 $707,000 (300,000)
$407,000
$115,000 × 10⅔ =
Therefore, the lesser is:
* Lower of ABI, above, or maximum SBD limit (after allocation to associated corporation). Schedule 2: Small Business Deduction 19% of least of: (a) Canadian active business income (Schedule 1) (b) Taxable income Less: 100/28 × Non-business foreign tax credit Less: 4 × Business income foreign tax credit (c) Business limit (allocated) Least amount: $300,000 × 19% = $57,000
$653,000 $707,000 (0) $ (0)
Total
($73,000) 14,000 147,000 6,000 36,000 63,000 10,000 105,000 22,000 410,000 65,000 $16,000 16,000 0 $16,000 $796,000
$707,000 $300,000
$12,267
Adjusted AII for SBD Interest income Royalty income Portfolio Dividends Rental income AAII
$
22,000 6,000 16,000 36,000 80,000
Reduction in SBD limit AAII less base AAII in excess Reduction in SBD limit x $5
$
80,000 50,000 30,000 150,000
SBD limit
$
350,000
$
50,000 300,000
Less amount allocated to associated corporation SBD remaining
Schedule 3: CCPC Rate Reduction General reduction Taxable income Less: (a) 100/19 × small business deduction (b) Aggregate Investment Income Net 13% of net amount
$ 707,000
57,000
300,000 115,000
($415,000) $ 292,000 $37,960
Schedule 4: Refundable Portion of Part I Tax Least of : (a) 30⅔% of aggregate investment income 30⅔% × $115,000 (Sch 1) (b) 30⅔% of: Taxable income Less: Income eligible for SBD
$ 35,267 $707,000 300,000 $407,000
30⅔% (c) Part I tax Least of (a), (b), and (c):
$124,813 $115,267 $35,267
Schedule 5: Part IV Tax on Taxable Dividends Received Portfolio dividends (non-connected corp.)
$16,000
Part IV @ 38⅓% of $16,000
$ 6,133
Eligible RDTOH
Schedule 6 RDTOH and Dividend refund Opening balance as of January 1, 2023
-
Refund - 2022
Noneligible RDTOH $
20,000
$ (18,000)
Refundable Part I tax
35,267
Part IV tax on portfolio dividends @
38.33%
Part IV tax on Connected corporations Balance at the end of December 31, 2023 - prior to refund
6,133
-
-
-
$ 6,133
$
37,267
$
3,833
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year $10,000 x 38 1/3% Its eligible RDTOH balance at the end of the year plus
3,833 $
6,133
2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year** $165,000 x 38 1/3% - Its non-eligible RDTOH balance at the end of the year
$ 63,249 37,267
plus
$
37,267
- in any other case, nil
$
2,300
The total dividend refund for 2023 is
$
39,567
3. either: - if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess - the amount by which it eligible RDTOH balance at the end of the year exceeds the amount in 1, if any
**(45K X3 = 135K =165K)
$25,983 2,300
Question 53 (45 minutes) [Chapter 11, 12] The following tax calculations have been prepared by the senior accountant and the bookkeeper. The senior accountant has correctly determined the income for tax purposes for the various sources of the corporate revenue and deductions. However, the computation of taxable income and income tax have been done incorrectly by the bookkeeper. Assume that the current year’s passive income is equal to
the prior year’s passive income. Rhodes Multi-National Ltd. (A Canadian-controlled Private Corporation) Income for Tax Purposes for the fiscal year ended December 31, 2023 Canadian manufacturing profits Canadian wholesaling profits United Kingdom wholesaling profits - Note 1 Sale of wholesaling business and equipment . taxable capital gains (non active) . recapture Profit from the sale of land held on a speculative basis Rental income - Note 2 Interest - U.S. non-business income - Note 3 - 20-year bonds of subsidiary corporation Taxable dividends from taxable Canadian corporations: . controlled (100%) - Note 4 . non-controlled (5%) Income for tax purposes - Division B
$100,000 35,000 30,000 45,000 15,000 55,000 22,000 6,000 27,000 9,000 2,000 $346,000
Notes to Statement of Income for Tax Purposes 1. These profits arose from wholesaling operations in buildings located in London, England and Glasgow, Scotland. Income taxes paid to U.K. governments totalled C$9,000. (All amounts have been converted to Canadian dollars). 2. Rental income was derived from a warehouse no longer required by the manufacturing operation. 3. U.K. withholding tax was C$500. (All amounts are expressed in Canadian dollars). 4. The wholly owned corporation sells manufactured parts to its parent, Rhodes Multi-National Ltd. Other Information and Correct Data (a) During the year, the corporation paid the following selected amounts: (i) Charitable donations (ii) Manufacturing equipment . new . used (b) The balances in the tax accounts as at January 1, 2023 were: Investment tax credits on hand Unused foreign business tax credit Non-capital losses Net capital losses (arising in 2001)
$ 12,000 110,000 162,000 $ 1,000 1,600 13,000 38,000
(c) The corporation has one permanent establishment in Canada, located in Dundas, Ontario. Incorrect Taxable Income and Part I Tax Net income for tax purposes
$346,000
Deduct Dividends from controlled corporations Charitable donations Non-capital losses Net capital losses Taxable income Part I tax calculation: Basic federal tax 41.5% × $346,000 Small business deduction: 18.5% of the least of (i) Active business income (ii) Taxable income (iii) Annual limit $500,000 Federal abatement: 10% × 274,000 Deduct: Foreign tax credits: 1. Non-business - lesser of (a) $500 (b) $6,000 × $143,590 $346,000 - ($9,000 + $38,000) = $2,881 2. Business - lesser of: (a) $9,000 (b) $30,000 × ($143,590 - 27,400) $346,000 - ($9,000 + $38,000) = $11,639
$ 9,000 12,000 13,000 38,000
72,000 $274,000 $143,590
$100,000 254,000 500,000
(18,500)
(27,400)
(500)
(9,000)
Tax reduction (13% of $274,000) (35,620) Total Part I tax $ 52,570 Required: Draft a memorandum to the bookkeeper indicating the errors made in the calculation of Part I tax and explain in your words, not by calculation, how the bookkeeper would proceed to do these calculations correctly. Note:
(i) (ii)
Do not redo the calculations. Ignore subtotal, mechanical and carry forward errors arising from the original errors.
Solution 53 (45 minutes) Errors in Arriving at Taxable Income (i)
Taxable dividends from all taxable Canadian corporations should be deducted, i.e.,
$11,000
Errors in Determining the Tax Liability (i) (ii)
The basic rate of tax is 38%. The basic rate of tax should be applied to taxable income not net income. (i.e., $274,000 not $346,000)
(iii)
Small business deduction: (a) (b)
The rate of deduction is 19%. Active business income includes the following actual and ancillary activities, plus income from an adventure in the nature of trade:
(i) (ii) (iii) (iv) (v) (c) (d)
manufacturing Canadian wholesaling recapture—mfg. equip. profit on sale of land interest on bonds of subsidiary corp. ssec.129(6)
In calculating the SBD, taxable income is reduced by the foreign source income by subtracting 100/28 times of the non-business tax credit and four times the foreign business tax credit. Investigate whether the business limit is to be shared with the subsidiary corporation. The business limit for 2022 is $500,000. Adjustments are described below:
Adjusted AII for SBD Capital Gains Portfolio Dividends Rental income AAII Reduction in SBD limit AAII less base AAII in excess Reduction in SBD limit x $5 SBD limit Less amount allocated to associated corporation SBD remaining
(iv)
(v)
$100,000 35,000 15,000 55,000 27,000 $232,000
$
35,000 2,000 22,000 59,000
$
59,000 50,000 9,000 45,000
$ 455,000 Must investigate $ 455,000
Federal abatement cannot be 10% of taxable income since there are U.K. business operations included in this figure. Foreign tax credits
(a)
The foreign taxes paid on the business foreign tax calculation ($9,000) should be increased by the unused foreign tax credit of $1,600.
(b)
Foreign tax credit ratios of foreign income to adjusted income for tax purposes are multiplied by the incorrect Part I tax: (i) (ii)
(c) (vi)
The business foreign tax credit is the least of the two amounts calculated and the basic federal tax minus the non-business tax credit.
The 13% general tax reduction is calculated by a formula which eliminates income that has benefited from other tax incentives. (i) (ii) (iii)
(vii)
non-business ratio should be multiplied by the basic federal tax minus the 10% abatement plus additional refundable tax. the business ratio should be multiplied by the basic federal tax less the tax reduction (No 10% abatement should be in the calculation).
The gross up of the SBD deduction (100/19) should be deducted from the taxable income; the aggregate investment income should be deducted from the taxable income next. The net of these two deductions should be multiplied by 13%
The additional refundable tax of 30⅔% × aggregate investment income has not been calculated as part of Part I tax
Question 54 (10 minutes) [Chapter 12] Rose owns 65% of the common shares of Rose’s Flowers Ltd. (RFL). Samantha owns 75% of the common shares of Riddled with Rain Investments Ltd. (RRIL). The other 25% of RRIL common shares are owned by unrelated persons. RRIL owns all of the common shares of Treading Water Ltd. (TWL). RRIL also owns the remaining 35% of the common shares of RFL. Rose is married to Samantha’s nephew, Pete. The 35% ownership of RRIL in RFL was to provide RFL with some needed start-up financing. Samantha has no other involvement with RFL’s operations.
Required: Explain, in detail, why the corporations involved in the preceding fact situation are associated or not associated. If they can be associated in more than one way, describe only one. If appropriate, describe any actions that the corporations could take, given the existing business structure, to enhance access to the small business deduction by the corporations.
Solution 54 RRIL and TWL are associated by 256(1)(b) ▪ Samantha controls both companies
or or
by 256(1)(a) ▪ RRIL controls TWL
RFL is not associated with any other company because Rose is not related to Samantha so not associated under 256(1)(c). 256(2.1) should not apply since RFL operates independently from the other companies and there are likely good business reasons for a separate existence. Regarding 256(5.1), Samantha does not appear to have de facto control over RFL as she has no involvement in and does not appear to be exerting influence on RFL.
Question 55 (45 minutes) [Chapter 12] The following accurate information has been gathered from the working paper files of Uncertain Ltd. for its fiscal year ending on December 31, 2023. The corporation is a Canadiancontrolled private corporation. Retail operations Maintenance and service operations Interest income from Canadian sources (Note 2) Dividends from taxable Canadian corporations (Note 3) Taxable capital gains (from active assets) Recapture of CCA (Note 4) Rental income Division B income (income for tax purposes) Deductions: Donations Dividends from taxable Canadian corporations Non-capital losses Net capital losses Taxable income
$392,700 93,800 62,900 107,200 90,000 71,000 85,000 $902,600 $20,200 107,200 60,500 25,000
212,900 $689,700
Notes and additional information: (1) The accountant has correctly determined that the Part I tax, excluding the additional refundable tax, is $134,515. (2) The Canadian interest is from the following sources: Interest on debt loaned to a Canadian subsidiary, Forsure Ltd., of which Uncertain Ltd. owns 80% of the shares: Forsure Ltd. carries on an active business $48,200 Treasury bill interest from seasonal excess cash 10,700 Bank interest on fluctuating cash working capital 4,000 $62,900
(3) Dividends: Portfolio eligible dividends from non-connected companies received March 31 $40,200 Eligible Dividends from Forsure Ltd., received on July 15, from its subsidiary, which resulted in a total dividend refund of $13,400 to Forsure Ltd. 67,000 $107,200
(4) The recapture arose on the disposal of all of the company's Class 10 assets when it discontinued its unprofitable delivery service division. (5) The balance in the Refundable Dividend Tax on Hand (non eligible), on December 31, 2022, was $40,000, before the Dividend Refund (non-eligible) of $18,000 for the 2022 year.
(6) During 2023, Uncertain Ltd. declared and paid the following taxable cash dividends which were non-eligible : Date Declared
Date Paid
Amount
March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023
April 15, 2023 July 15, 2023 October 15, 2023 January 15, 2024
$33,500 $33,500 $33,500 $67,000
Required:
Assume that the current year’s passive income is equal to the prior year’s passive income. Determine, for Uncertain Ltd., by clearly presenting all component parts and their calculations: (a) the amount of the small business deduction, assuming that $450,000 of the business limit is allocated to Uncertain Ltd. with taxable capital of the associated group being less than $10,000,000, and (15 minutes) (b) the amount of the dividend refund for 2023. (30 minutes) Do not compute the Part I tax and the other related tax credits. Assume that they have been computed correctly.
Solution 55 Schedule 1: Additional Refundable Tax Analysis of Division B Income Active Business Income Source
Cdn.
Retail Maintenance Interest* Dividends TCG Recapture Rental
$392,700 93,800 62,900
Investment
Foreign
Cdn.
Connected
Foreign
Dividends
Portfolio NonConn. Dividen ds
$67,000
$40,200
$67,000
$40,200
Total
$392,700 93,800 62,900 107,200 90,000 71,000 85,000 $902,600
$90,000 71,000 $620,400
$
0
85,000 $175,000
Aggregate investment income from above chart ($175,000 + 67,000 + 40,200) Less: Net capital loss claimed Less: Dividends deducted under Division C Aggregate investment income ART: 10⅔% of lesser of: (a) Aggregate investment income (b) Taxable income Less: Income eligible for SBD**
$
0
$282,200 (25,000) (107,200) $ 150,000
$150,000 $689,700 (74,000)
$615,700 $150,000 ×10⅔% =
Therefore, the lesser is:
$16,000
* Interest received from Forsure Ltd. is deemed to be ABI (s. 129(6)) because it is deductible in computing the ABI of an associated corporation. Interest on treasury bills and the bank account is considered to be ancillary to the business and, therefore, ABI. ** Lower of ABI, above, or maximum SBD limit of $450,000. In this case, $450,000 was allocated to Uncertain Ltd. Schedule 2: Small Business Deduction 19% of least of: (a) Canadian active business income (b) Taxable income Less: 100/28 × Non-business foreign tax credit Less: 4 × Business income foreign tax credit (c)
$620,400 $689,700 (0) $ (0) $689,700 $74,000
Business limit (allocated)
Least amount:
$74,000× 19% =
$14,060
Adjusted AII for SBD Portfolio Dividends Rental income AAII Reduction in SBD limit AAII less base AAII in excess Reduction in SBD limit x $5
$
40,200 85,000 125,200
125,200 50,000 75,200 $
376,000
SBD limit
$
124,000
Less amount allocated to associated corporation SBD remaining
$
50,000 74,000
Schedule 3: Refundable Portion of Part I Tax Least of : (a) 30⅔% of aggregate investment income 30⅔% × $150,000 (b) 30⅔% of: Taxable income Less: Income eligible for SBD
$46,000 $689,700 (74,000) $615,700
30⅔% (c) Part I tax Least of (a), (b), and (c):
$188,815 $134,515 $46,000
Schedule 4: Part IV Tax on Taxable Dividends Received Portfolio dividends (non-connected corp.)
$40,200
Part IV @ 38⅓% of $40,200
15,410
Dividend from 80% subsidiary ($13,400 × 80%)
10,720 $26,130 Noneligible RDTOH
Eligible RDTOH
Schedule 4 RDTOH and Dividend refund Opening balance as of January 1, 2023
-
$
Refund - 2022 Refundable Part I tax Part IV tax on portfolio dividends @
40,000
$ (18,000) 46,000 38.3 3%
15,410
-
Part IV tax on Connected corporations
10,720
-
Balance at the end of December 31, 2023 - prior to refund
$26,130
$
68,000
$
-
$
38,525
- in any other case, nil
$
-
The total dividend refund for 2023 is
$
38,525
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year Its eligible RDTOH balance at the end of the year
$26,130
plus 2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year**
$38,525
- Its non-eligible RDTOH balance at the end of the year
68,000
plus 3. either: - if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess
**(33.5K X3 = 100,500) = $100,500 x 38 1/3% = $38,525
$ 26,130
Question 56 (60 minutes) [Chapter 12] The schedule below outlines the net income for income tax purposes (by source) of Moon Ray Inc. (MRI), a Canadian-controlled private corporation wholly owned by Ms. Sun, for its fiscal year ended December 31, 2023. The Toronto-based company is a wholesale company with corporate and public clients. Moon Ray Inc. Net Income for Income Tax Purposes (by Source) for the Year Ended December 31, 2023 Income from Wholesale sales net of all capital cost allowance Interest income Dividend income Taxable capital gain (non-active)
$150,000 50,000 47,000 40,000
Net income for income tax purposes
$287,000
Additional Information: 1.
Interest income is derived from the following sources: (a) 10-year bond in Neptune Ltd., a Canadian company (b) Interest on a term loan to Pluto Limited a Canadian company Note:
2.
$ 34,000 16,000 $ 50,000
MRI owns 65% of Pluto Limited. The other 35% is owned by a Canadian friend of Ms. Sun's.
Dividend income is derived from the following sources: (a) Pluto Limited(non-eligible) (b) Can Public Corp. (Canada) Ltd.(eligible) (c) DEF Investment Co. (1% shareholder eligible)
$46,100 400 500 $47,000
3.
Sale of non-active assets during the year resulted in the taxable capital gain of $40,000
4.
Pluto Limited (Pluto) had taxable income of $800,000 for the year ending March 31, 2023, all of which was active business income. Pluto was allocated a Business Limit of $250,000 for the year Pluto received a dividend refund of $25,000 when it paid out dividends of $70,923 on its shares.
5.
During the year, MRI paid non-eligible dividends to Ms. Sun totalling $55,000 of which $5,000 was a capital dividend. (Election forms were already filed.)
6.
For the fiscal year ended December 31, 2023, MRI made the following expenditures: Charitable donations not yet deducted
$ 5,000
Federal tax instalments
$ 9,000
7.
Balances in the tax accounts as at the beginning of fiscal 2023 are as follows: Charitable donations made in 2022, unused in that year Refundable dividend tax on hand (non-eligible dividends) Dividend refund in 2022 (non-eligible dividends) Net capital losses realized in 2016, unused to date Capital dividend account
$ 2,000 $ 5,000 $2,000 Nil $ 1,500 $ 5,000
Required: (a)
Assume that the current year’s passive income is equal to the prior year’s passive income. Compute the net taxes payable by (refundable to) Moon Ray Inc. for its 2023 taxation year making use of all credits, refunds and payments. Show all your calculations. The provincial tax rate is 12 per cent.
(b)
Compute the Refundable Tax on Hand showing all your work including the dividend refund and Part 1V Tax.
(c)
Compute the capital dividend account as at December 31, 2023.
Solution 56 (60 minutes) Analysis of Net Income
ABI Cdn. For. $150
Manufacturing Interest from Pluto 10-year Bond Neptune Interest Pluto 129(6) 16 Dividends TCG ____ 166
AII Cdn. For.
Divid _ Port. Conn.
34 ____ nil
40 74
.9 ____ .9
____ nil
46.1 ____ 46.1
= 287
Part A Part I Tax Payable
Net income for income tax purposes Division C deductions: Charitable donations (max. 75% × $171,000) ($2,000 + $5,000) Dividends from taxable Canadian corporations Net capital loss Taxable income Tax at 38% of $231,500 Federal abatement @ 10% of $231,500 Tax after abatement
$287,000 $ 7,000 47,000 1,500
55,500 $231,500 $ 87,970 (23,150) $ 64,820
Additional refundable tax is 10⅔% × the lesser of:
(i) (ii)
AII ($40,000 + 34,000 + 900 - $1,500 - $47,000) 72,500 Taxable income- SBD income ($231,500 – 125,500) 106,000 10⅔ × $72,500 Deduct: Small business deduction (Schedule 1) Tax reduction (Schedule 2)
7,733 (23,845) (4,355)
Part I federal tax payable Add: Part IV Tax Provincial taxes $231,500 X 12% = Subtotal
$ 44,353 16,595 27,780 88,728
Less: Dividend Refund Less: Instalments Total Taxes Payable
(19,167) (9,000) $ 60,561
Part IV Tax Payable:
Dividends received from non-connected corps: $900 × 38⅓% Dividends received from connected corp: $25,000 × 65% Part IV tax payable
$
345 16,250 $ 16,595
Schedule 1: Small Business Deduction Income from an active business in Canada
Income from manufacturing
$150,000
Interest from Pluto Limited deemed per s. 129(6) to be active
16,000
Taxable income Annual business limit ($500,000 - $375,000) 19% of least of (A), (B), and (C) (19% × $125,500)
$166,000 (A) $231,500 (B) $125,500 (C) $ 23,845
Adjusted AII for SBD Capital Gains Interest income
40,000 34,000
Royalty income Portfolio Dividends
900
Rental income
-
AAII
$
74,900
Reduction in SBD limit AAII less base
74,900 50,000
AAII in excess Reduction in SBD limit
24,900 x $5
SBD limit
$
124,500
$
375,500
Less amount allocated to associated corporation SBD remaining
250,000
$
125,500
Schedule 2: Tax reduction
General tax reduction taxable income 100/ × SBD amt 19
All Net 13% of Nil
$231,500 125,500 72,500
(198,000) $ 33,500 $ 4,355
Part B Refundable Portion of Part I Tax:
(1) (2) (3)
30⅔% × aggregate investment income = 30⅔% × $72,500
$22,233
30⅔% × (TI - SBD amt ) = 30⅔% × ($231,500 – 125,500 )=
$ 32,507
Part I tax =
$ 44,353
Refundable portion of Part I tax is the least amount
$ 22,233 Eligible RDTOH
RDTOH and Dividend refund Opening balance as of January 1, 2023
-
Refund - 2022
Non-eligible RDTOH $
5,000
$
(2,000)
Refundable Part I tax Part IV tax on portfolio dividends @
22,233 38.33%
345
16,250
-
-
Part IV tax on Connected corporations Balance at the end of December 31, 2023 - prior to refund
$
345
$
41,483
$
-
$
19,167
- in any other case, nil
$
-
The total dividend refund for 2023 is
$
19,167
Schedule 2 - Dividend refund is equal to the total of three amounts: 1. The lesser of: 38 1/3% x total of all eligible dividends paid in the year Its eligible RDTOH balance at the end of the year
$
345
plus 2. The lesser of: - 38 1/3% x total of all non- eligible dividends paid in the year**
$19,167
- Its non-eligible RDTOH balance at the end of the year
41,483
plus 3. either: - if 38 1/3% of non-eligible dividends is in excess of non-eligible RDTOH at the end of the year, the lesser of: - the amount in excess $ - the amount by which it eligible RDTOH balance at the end of the year exceeds the amount in 1, if any
**(55K – 5K capital dividend =50K), $50,000 x 38 1/3% = $19,167
345
Part C The capital dividend account will change as follows:
Opening balance January 1, 2023 Capital gain Less: taxable portion Capital dividend paid out during year Capital dividend account at December 31, 2023
$ $ 40,000 20,000
5,000 20,000
(5,000) $ 20,000
Question 57 (12 minutes) [Chapter 12] The voting common shares of Elana Inc. are owned 35% by Jonathan Inc., 25% by Alexander Inc., and 40% by an individual, Elana. Jonathan Inc. and Alexander Inc. are 100% owned by Jon and Alex, respectively. Their spouses are sisters. Elana Inc. derives all of its income from a ladies’ wear retailing business carried on in Toronto on a property owned by Jonathan Inc. Elana Inc. pays $120,000 in annual rent to Jonathan Inc., deducting this amount as a business expense. Elana Inc. also pays annual dividends of $30,000 to each of Jonathan Inc. and Alexander Inc. The dividend income of $30,000 is the only other income of Jonathan Inc. and the only income of Alexander Inc. Required: (a) Show how Jonathan Inc. and Elana Inc. are associated. Describe the reasons for this association, in detail, by reference to specific conditions in the Act. (7 minutes) (b) (i) What is the nature of the rental income earned by Jonathan Inc. from Elana Inc.? Explain, by reference to specific conditions in the Act. (2 minutes) (ii) What is the Part IV tax liability, if any, for Jonathan Inc. and/or Alexander Inc. on the dividends from Elana Inc.? (3 minutes)
Solution 57 (a) Association of Jonathan Inc. and Elana Inc. by s. 256(1)(d) • Pattern condition
• One corporation, Jonathan Inc., is controlled by one person, Jon • The other corporation, Elana Inc., is controlled by a group — Jonathan Inc. and Alexander Inc.
• Relationship condition • The person who controls one, Jon, is related to each member of the group that controls the other
• Jon is related to the corporation, Jonathan Inc., that he controls by s. 251(2)(b)(i) • Jon is related to Alexander Inc., by s. 251(2)(b)(iii), because it is controlled by Alex, who is Jon’s brother-in-law [s. 252(2)(b)] (Alex is the spouse of the sister of Jon’s spouse)
• Cross-ownership condition • The person who controls one, Jon, owns not less than 25% of the shares of any class, except specified shares, in the other corporation
• Jon owns 35% of the shares of Elana Inc. through his ownership of 100% of the shares of Jonathan Inc. by s. 256(1.2)(d)
• Common shares are not specified shares [s. 256(1.1)] (b) (i) Nature of rental income earned by Jonathan Inc. • Deemed ABI [s. 129(6)(b)(i)]
• Rental income, in this case, would normally be income from property • It is deducted from the ABI of an associated payer, Elana Inc. • Retailing is considered to be an active business, since it is not a specified investment business or a personal services business [s. 125(7)] (ii) Part IV tax liability of Jonathan Inc. and Alexander Inc. • Elana Inc. is connected (s. 186(4)(b) with more than 10% of the votes and value), with both Jonathan Inc. and Alexander Inc. and has only ABI (i.e., no investment income and, hence, no RDTOH and no possible dividend refund)
• No Part IV tax liability for either corporation
Question 58 (10 minutes) [Chapter 12] Consider the following diagram. Curtis 100%
100%
Steven
Chapman
40%
60%
S Ltd.
SC Ltd. C Ltd. 1 voting preferred share
1. C Ltd.'s voting preferred share in SC Ltd. has a value of $1,000,000. 2. The common shares in SC Ltd. held by Steven and Chapman have a total value of $50,000. 3. Steven and Chapman are children of Curtis’s and both are over 18 years of age.
Required: Determine whether the corporations shown above are associated. Describe the reasons for your conclusion, in detail. Substantiate your determination by reference to specific conditions in the Act.
Solution 58
S Ltd. and C Ltd.
• S Ltd. and C Ltd. are associated • by virtue of 256(1)(b) — control by the same person because Curtis has direct control of both corporations through his ownership of greater than 50% of the common/voting shares in each corporation SC Ltd. and C Ltd. OR SC Ltd. and S Ltd.
• SC Ltd. is also associated with C Ltd. (or S Ltd.) • by virtue of 256(1)(b) — control by the same person, namely, Curtis • Curtis controls C Ltd. (or S Ltd.) directly via his control of the common shares and by virtue of the paragraph 256(1.2)(d) “look-through”
• where shares of one corporation are held by another corporation, Curtis is deemed to own the 1 voting preferred share in SC Ltd. held by C Ltd.
• this 1 voting share is deemed to control SC Ltd. • by virtue of subparagraph 256(1.2)(c)(i) because this share has a fair market value of more than 50% of the fair market value of all issued and outstanding shares of SC Ltd.
• ($1,000,000/$1,050,000), thus, Curtis has control of SC Ltd. as well. OR
• SC Ltd. is associated with C Ltd. (or S Ltd.) • By virtue of 256(1)(c) or (d) — reasonable description of the conditions of (c) or (d) given because Curtis controls C Ltd. or S Ltd.
• and Chapman or a group consisting of Steven and Chapman control SC Ltd. • and Curtis is related to Chapman/related to both Steven and Chapman by blood • and Curtis owns not less than 25% in each of C Ltd. (or S Ltd.) and SC Ltd. • directly via common share ownership in C Ltd. (or S Ltd.) • and indirectly through C Ltd. 100% of the preferred shares in SC Ltd. S Ltd. and SC Ltd. OR C Ltd. and SC Ltd.
• S Ltd. and SC Ltd. (or C Ltd. and SC Ltd.) are associated by virtue of 256(2) as a result of common association with C Ltd. (or S Ltd.)
• In this case, the 256(2) election to not be associated is not available because the corporations are associated under other provisions as described above
Question 59 (18 minutes) [Chapter 12] Maggie Limited is owned 50% by Barb Limited and 50% by John Limited. Barb Limited and John Limited are 100% owned by Barb and John, respectively. Barb and John are married. Maggie Limited derives all of its income from active business carried on in Canada. It rents facilities from Barb Limited to which it pays $120,000 in annual rent, deducting this amount as a business expense. Maggie Limited also pays annual dividends of $30,000 to each of Barb Limited and John Limited. The dividend income of $30,000 is the only other income of either Barb Limited or John Limited. Required: (1) Determine whether the corporations described above are associated. Describe the reasons for your conclusion, in detail. Substantiate your determination by reference to specific conditions in the Act. (9 minutes) (2) Assuming that Maggie Limited, Barb Limited, and John Limited are all associated with each other: (a) What is the nature of the rental income earned by Barb Limited from Maggie Limited? (4 minutes) (b) What is the Part IV tax liability, if any, for Barb Limited and/or John Limited on the dividends from Maggie Limited? (5 minutes)
Solution 59 BARB
JOHN
100%
100%
John Limited
Barb Limited
50%
50% Maggie Limited
Part 1 Barb Limited and Maggie Limited are associated [par. 256(1)(d) criteria] as follows: • • • • •
Barb Limited is controlled by Barb Barb Ltd. and John Ltd. is a group that controls Maggie Limited Barb is related to Barb Limited because she controls this corporation Barb is related to John Limited because she is related to John, who controls this corporation Barb owns at least 25% in each of Barb Limited (directly) and Maggie Limited (indirectly through Barb Limited)
In a similar manner, John Limited and Maggie Limited are associated. Therefore, all three corporations are associated by virtue of subsection 256(2). Part 2(a) The rental income is deductible to Maggie Limited in computing its income from an active business since Maggie Limited and Barb Limited are associated and the rental income would otherwise be included as income from property to Barb Limited. The income is deemed to be income from an active business to Barb Limited. Part 2(b) Maggie Limited is connected to both Barb Limited and John Limited. Since each of Barb Limited and John Limited own shares representing greater than 10% of the votes and greater than 10% of the total fair market value of Maggie Limited. Therefore, there is no Part IV tax payable by either Barb Limited or John Limited on dividends from Maggie Limited because Maggie Limited will not have a dividend refund on the payment of dividends. Since Maggie Limited earns only active business income, dividend refunds are realized only if Maggie Limited earns aggregate investment income, which is not the case.
Question 60 (21 minutes) [Chapter 12] Consider the following diagram: Stan 100% common
Janna
Rayna
50 common
50 common
BUYHI-SELLO INC.
Gord 25%
Rick 40%
35% common
BROS. MANUFACUTRING INC. (BMI)
150 preferred
JANRAY LTD. Stan, Gord, and Rick are brothers. Buyhi-Sello Inc. is an investment holding corporation; Bros. Manufacturing Inc. (BMI) is a manufacturer of leisure furniture. Janna, age 33, and Rayna, age 30, each own 50% of the common shares of Janray Ltd., a retail florist. They are Stan’s daughters. Their common shares have a total value of $100,000. Buyhi-Sello Inc. owns all 150 of the voting preferred shares of Janray Ltd. These preferred shares have a value of $1,500,000. Each share of both the common and preferred classes in Janray Ltd. has one vote. Required: Determine whether the corporations described are associated and whether an election under subsection 256(2) is possible. Substantiate your determination by applying specific conditions in the Act to specific facts of the case. Be thorough in your application and substantiation. Two corporations may be associated by more than one provision. However, only one applicable provision need be substantiated, unless one of the provisions is subsection 256(2).
Solution 60 Buyhi-Sello Inc. and BMI s. 256(1)(d): associated •
Stan controls Buyhi-Sello Inc.
•
The group, Stan and Gord, or the group, Stan and Rick, controls BMI
•
Stan is related to each member of a group that controls BMI
•
•
Stan is related to himself
•
Stan is related to his brother, Gord, or to his brother, Rick
Stan owns 25% (i.e., not less than 25%) of the issued shares of BMI
Buyhi-Sello Inc. and Janray Ltd. (only one way of associating needed) s. 256(1)(a): associated • Buyhi-Sello controls Janray by having more votes in its preferred shares than the common shares or • Buyhi-Sello is deemed to control Janray, because it owns preferred shares with a FMV that is greater than the FMV of all of the shares [s. 256(1.2)(c)(i)] or s. 256(1)(b): associated • Stan controls Buyhi-Sello and he controls Janray through Buyhi-Sello or s. 256(1)(d); associated • Stan controls Buyhi-Sello Inc. •
The group, Janna and Rayna, is deemed to control Janray [s. 256(1.2)(c)(ii)]
•
Stan is related to each member of a group that controls Janray •
•
Stan is related to his daughters
Stan owns through Buyhi-Sello [s. 256(1.2)(d)] 100% (i.e., not less than 25%) of the preferred shares (not of a specified class, because they are voting shares) of Janray
BMI and Janray s. 256(1)(d): associated • • •
Stan controls Janray through Buyhi-Sello The group, Stan and Gord, or the group, Stan and Rick, controls BMI Stan is related to each member of a group that controls BMI • Stan is related to himself •
•
Stan is related to his brother, Gord, or to his brother, Rick
Stan owns not less than 25% of the issued shares of BMI
Applicability of s. 256(2) Election • •
Since the corporations are associated by one of the rules in s. 256(1) [s. 256(2)(a)] Then, an election under s. 256(2) is not possible
Question 61 (39 minutes) [Chapter 12] Consider the following unrelated fact situations in which all individuals are at least 18 years of age. (A)
Jennifer owns 100% of the common shares of Khalid Co, Ltd. (KCL), and Rodney owns 70% of the common shares of Yi Co. Ltd. (YCL). The other 30% of the common shares of YCL are owned by KCL. Rodney is married to Jennifer’s granddaughter. (9 minutes)
(B)
Stephanie and Monica are siblings who each own 50% of the common shares of Christopher Michael Enterprises Ltd. (CMEL). Tricia and Kristen each own 40% of the common shares of David Mfg. Ltd. (DML). The other 20% of the common shares of DML are owned 10% each by Stephanie and Monica. Tricia and Kristen are adult daughters of Stephanie and Monica, respectively. The parents, who have operated their financial advice business for many years, were providing needed outside funding of their daughters' manufacturing business through the parents’ 20% share ownership. The parents take no part in the management of their daughters’ business, since the parents have no expertise related to the business of DML. (6 minutes)
(C)
Kamen owns all of the common shares of Christopher James Retailing Ltd. (CJRL), and 75% of the common shares of Tomasaburo Investments Ltd. (TIL). The other 25% of TIL common shares are owned by unrelated persons. Also, TIL owns all of the common shares of Karen Mfg. Ltd. (KML). Geoff owns 65% of the common shares of Sherrie Wholesalers Ltd. (SWL). The other 35% of the common shares of SWL are owned by CJRL. Geoff is married to Kamen’s niece. The 35% ownership of CJRL in SWL was to provide SWL with some needed start-up financing. (24 minutes)
Required: Indicate whether the corporations in each of the above situations are associated. Explain in your own words the reasoning behind your conclusion, based on the conditions for association contained in any provision of the legislation that you choose to apply.
Solution 61 (A) Associated by s. 256(1)(c) • each corporation was controlled by one person through ownership of common shares •
Jennifer, who controls KCL, is related to Rodney, who controls YCL •
•
Rodney is Jennifer’s grandson-in-law and is, therefore, related by marriage [s. 252(1)(e), 252(2)(d)]
Jennifer owns 30% of the common shares of YCL, which are not shares of a specified class, through her ownership of shares in KCL by virtue of s. 256(1.2)(d)
(B) Not associated under s. 256(1); s. 256(1)(e) does not apply •
S. 256(1)(e) requires that each corporation be controlled by a related group •
Tricia and Kristen are cousins and, hence, are not related under the Act
• •
Stephanie is Kristen’s aunt and Monica is Tricia’s aunt; hence, Stephanie is not related to Kristen and Monica is not related to Tricia under the Act S. 256(2.1) would apply if it can be established that one of the main reasons for the separate existence of the two corporations is a reduction of taxes •
•
the two corporations are managed separately, so that there appears to be a good business reason for their separate existence S. 256(5.1) does not apply to deem the parents to have control of DML through direct or indirect influence, since they have no role in the management of DML and have no expertise in that business
•
CJRL and TIL are associated by s. 256(1)(b)
(C) • •
• •
Kamen controls both corporations through share ownership
TIL and KML are associated by s. 256(1)(a) •
TIL controls KML
•
alternatively, they are associated by s. 256(1)(b)
Kamen controls both because he controls TIL through direct ownership and he controls KML through her control of TIL CJRL and KML are associated by s. 256(1)(b) •
•
Kamen controls both, because he controls CJRL through direct share ownership and he controls KML through the control of TIL SWL is not associated with any of the other corporations •
S. 256(1)(c) does not apply because Kamen and Geoff are not related •
•
Kamen is Geoff’s wife’s uncle and, hence, not related under the Act
S. 256(2.1) should not apply because CJRL and SWL operate independently and, hence, there is good business reason for separate existence
S. 256(5.1) should not apply because Kamen is providing start-up financing to SWL through the CJRL share ownership and, hence, is not exerting influence on SWL.
Question 62 (14 minutes) [Chapter 12] Alan owns all of the common shares of Holdco Inc., and 25% of Family Manufacturing Inc. (FMI), a manufacturer of office furniture. Bea, Alan’s wife, and Colin, Alan’s brother, own 40% and 35%, respectively, of the common shares of FMI. Yvonne, age 27, and Zena, age 30, each own 50% of the common shares of Whyzed Ltd., a retailer of ladies’ clothing. They are the daughters of Alan and Bea. Their common shares have a total value of $100,000. Holdco Inc. owns all 150 of the voting preferred shares of Whyzed Ltd. These preferred shares have a value of $1,500,000. Each share of both classes has one vote. Required: Determine whether the corporations described are associated and whether an election under subsection 256(2) is possible. Substantiate your determination by reference to specific conditions in the Act.
Solution 62
Note to Instructors: Except for the names, the solution to this question is the same as that for Question 60. The difference is that Question 60 provides a diagram in the question, whereas this question does not provide the diagram for students. Alan 100%
Yvonne
Zena
50 common
50 common
HOLDCO INC.
Bea 25%
Colin 40%
35%
FAMILY MANUFACUTRING INC. (FMI)
150 preferred
WHYZED LTD.
Holdco Inc. and FMI s. 256(1)(d): associated • Alan controls Holdco Inc. • The group, Alan and Bea, or the group, Alan and Colin, controls FMI • Alan is related to each member of a group that controls FMI • Alan is related to himself • Alan is related to his wife, Bea, or to his brother, Colin • Alan owns 25% (i.e., not less than 25%) of the issued shares of FMI Holdco Inc. and Whyzed Ltd. s. 256(1)(a): associated • Holdco controls Whyzed by having more votes in its preferred shares than the common shares or • Holdco is deemed to control Whyzed, because it owns preferred shares with a FMV that is greater than the FMV of all of the shares [s. 256(1.2)(c)(i)] or s. 256(1)(b): associated • Alan controls Holdco and he controls Whyzed, through Holdco or s. 256(1)(d); associated • Alan controls Holdco Inc. • The group, Yvonne and Zena, is deemed to control Whyzed [s. 256(1.2)(c)(ii)]
• •
Alan is related to each member of a group that controls Whyzed • Alan is related to his daughters Alan owns through Holdco [s. 256(1.2)(d)] 100% (i.e., not less than 25%) of the preferred shares (not of a specified class, because they are voting shares) of Whyzed
FMI and Whyzed s. 256(1)(d): associated • Alan controls Whyzed through Holdco • The group, Alan and Bea, or the group, Alan and Colin, controls FMI • Alan is related to each member of a group that controls FMI • Alan is related to himself • Alan is related to his wife, Bea, or to his brother, Colin • Alan owns through Holdco [s. 256(1.2)(d)] 100% (i.e., not less than 25%) of the issued shares of Whyzed or s. 256(1)(e): associated • The related group, Alan and Bea, or the related group controls FMI • Alan is related to himself • Alan is related to his wife, Bea • The related group, Yvonne and Zena, is deemed to control Whyzed [s. 256(1.2)(c)(ii)] • Yvonne and Zena are sisters • Each member of the related group that controls FMI is related to each member of the related group that controls Whyzed • Each parent is related to each daughter • Alan owns, on behalf of the related group that controls FMI, through Holdco [s. 256(1.2)(d)] 100% (i.e., not less than 25%) of the issued shares of Whyzed Applicability of s.256(2) • •
s. 256(2) does not apply, because the corporations are associated by one of the rules in s. 256(1) [s. 256(2)(a)] Therefore, an election under s. 256(2) is not possible
Question 63 (54 minutes) [Chapter 3, 6, 7, 9, 10, 15] Mr. Grocer is a fellow member of a service club that you belong to. You have known each other since December 2022 when he joined your service club after moving from Saskatoon to Dundas, Ontario, to become the local supermarket manager. It is early January 2024 and Mr. Grocer knows that you have a Master of Taxation degree and has asked you to look at his 2023 tax situation for him. He provides you with the following information: 1.
Mr. Grocer is 40 years old. His wife is 38 years old. They have two children, Bran, who is eight, and Muffin, who is five. After a five-year absence, Mrs. Grocer decided to re-enter the work force to continue her career as an electrical engineer in September of 2023.
2.
Mr. Grocer has never been part of a pension plan and in 2020 started contributing to RRSPs for himself and Mrs. Grocer since neither had done so previously. In June 2023, he contributed $12,000 to his own RRSP and $6,000 to Mrs. Grocer's RRSP. His total employment income in 2022 was $85,000. Based on his 2022 Notice of Assessment, Mr. Grocer had no unused RRSP contribution room.
3.
He earns a gross salary of $90,000 (deductions of income tax, CPP and EI of $20,000, $3,754 and $1,002, respectively) and has the following fringe benefits from the supermarket in Dundas: -
For all of 2022, he has had the use of a car purchased by his employer on January 2, 2023 for $16,000 plus $2,080 HST. During 2023, he drove the car 30,000 kilometres of which 19,500 kilometres were for business purposes.
-
The supermarket paid for all of the operating expenses of the car.
Gas Oil changes Repairs Insurance -
4.
Net
HST
Total
$3,097 266 531 1,200
$403 34 69 -
$3,500 300 600 1,200
He received a $60,000 loan from the supermarket on December 1, 2022 in order to purchase a house in Dundas. The loan is interest-free and is repayable in five equal instalments on the anniversary date of the loan.
He paid $8,000 of eligible expenses in December 2022, to move from Saskatoon to Dundas. He was able to deduct $5,400 of this in 2022.
5.
In January of 2023, he sold 5,000 shares in Outasite Corp. which are qualified small business corporation shares. He felt that he had done well selling them for $26,000 as had purchased them in 2020 for only $5,000. The shares of Outasite Corp. had provided him with actual non-eligible dividends of $300 in 2020, $300 in 2021 and $200 in 2022. These dividends were his only investment income and he thought that the gain and the $800 dividends over the past four years were a pretty good deal. Mr. Grocer has not used any of his capital gain exemption yet.
6.
Mr. Grocer owns a rental property in Saskatoon which he purchased in 2022. In 2022, there was a rental loss of $3,000. However, in 2023, the property generated a loss of only $1,000. These losses do not include CCA; the CCA is disallowed since it would increase the rental loss.
7.
Bran and Muffin have no income other than $200 interest each from bonds purchased by Mr. Grocer on December 30, 2022.
8.
Mrs. Grocer has no income other than $2,000, which she withdrew from her spousal RRSP in August 2023, and her employment income of $23,000 from September to December 2023. Note:
The prescribed rates are as follows:
4th quarter 2022 1st quarter 2023 2nd quarter 2023 3rd quarter 2023 4th quarter 2023
3% 2% 1% 1% 1%
Required: Compute Mr. Grocer's federal income tax payable for 2023 showing all necessary calculations.
Solution 63 (54 minutes) Inclusions in Income Employment income
Salary Car - Operating benefit, Note 2 Car - Standby charge, Note 1 Housing loan benefit, Note 3
$ 90,000 1,139 2,278 738
Total employment income
$ 94,155
RRSP income attributed from spousal plan Interest income attributed from children ($200 × 2) Rental loss Taxable capital gain, Note 5
2,000 400 (1,000) 10,500 106,055
Deductions from Income Less:
Moving expenses remaining from 2022 ($8,000 - $5,400) to extent of employment income in 2023 of $94,155 $ 2,600 RRSP contributions deductible, Note 4 14,760 (17,360) (631) 88,064
Enhanced CPP deduction Net income Less:
Capital gains deduction, Note 7
Taxable income
$ 80,244
Federal Tax Payable
Tax on $53,359 @ 15% Tax on $26,885 @ 20.5% $80,244
(7,820)
$ 8,004 5,511 $13,515
Non-refundable tax credits
Basic $ 15,000 CPP 3,123 EI 1,002 Canada Employment credit 1,368 $20,493 × 15%
(3,074)
Federal tax payable Less: Tax Withheld at Source Refund
$10,441 (20,000) $9,559
Notes: 1.
6(1)(e) Standby Charge Benefit Mr. Grocer is allowed the standby charge reduction since the car is used greater than 50% for business.
10,500 x 2% × 12 months × ($16,000 + 2,080) = $2,278 20,004 2.
6(1)(k) Benefit on Operating Costs Calculation Lesser of:
(i) Total kilometres Less: business use kilometres Personal use kilometres
30,000 19,500 10,500 × $0.33 = $3,465
(ii) ½ × $2,278 = $1,139 lesser is $1,139 Mr. Grocer qualifies for the alternative method of determining a benefit derived from employer paid automobile operating costs under par. 6(1)(k), since he drove the automobile greater than 50% for employment purposes in the year and assuming that he notified his employer before December 31, 2023. The operating benefit under the alternative method results in a decreased income inclusion.
3.
Loan Benefit Calculation The loan would qualify as a home purchase loan and home relocation loan. Remember,
$60,000 $12,000 $48,000
received December 1, 2022 ($60,000/5) repaid December 1, 2023 outstanding from December 1 to December 31, 2023
Benefit is calculated using the Lesser of: (a) (b)
prescribed rate in effect at the time the loan was made (3%); and prescribed rates in effect during the year while the loan was outstanding.
Calculation (the effect if leap year is ignored):
01/01/23 to 31/03/23 01/04/23 to 01/12/23 02/12/23 to 31/12/23 4.
2% × 90/365 x $60,000 = $296 1% × 245/365 x $60,000 = 403 1% × 30/365 x $48,000 = 39 $738
Deductible RRSP Contributions Least of: (a)
2022 earned income × 18%
Employment income Rental loss Earned income
(b)
Amounts contributed
Self Spousal (c)
$85,000 (3,000) $82,000 × 18% $14,760
limit for 2023
$ 12,000 6,000 $18,000 $30,780
Contributed RRSP= $18,000 -$14,760 = $3,240 - $2,000 = $1,240 over contributed subjected to 1% penalty per month
5.
Capital Gain
Proceeds Less: adjusted cost base Capital gain Taxable capital gain (½) 6.
7.
$26,000 5,000 $21,000 $10,500
Cumulative Investment Loss Calculation
2020 Income - dividends $300 × 1.15 2021 Income - dividends $300 × 1.15 2022 Income - dividends $200 × 1.15 2022 Expenses - rental loss 2023 Income - interest from children 2023 Expenses - rental loss
$
CNIL account
$(2,680)
Capital Gains Deduction
Taxable capital gains Less: CNIL, Note 6 Capital gain deduction
$10,500 (2,680) $ 7,820
345 345 230 (3,000) 400 (1,000)
Question 64 (19 minutes) [Chapter 13] You have just met with Joanne Investor. She is the vice-president of Finance with Waterloo Manufacturing Ltd. (WML), a Canadian-controlled private corporation. She has provided you with the following details concerning her current borrowings. 1. She has $100,000 outstanding on her personal residence mortgage held by the Bank of Ontario. The interest rate is 4.75%. (1 minute) 2. She has borrowed $25,000 from the Bank of Ontario to invest in the common shares of a publicly traded company, Underground Airways Inc., that she feels is about to “take off” and realize a large increase in the share price. This company historically has not paid any dividends on its common shares. The interest rate on this loan is 6%. (2 minutes) 3. She has a line of credit with her bank that currently bears interest at 5%. (a) She has borrowed $75,000 of this credit to fund the purchase of a parcel of land. This parcel of land is currently vacant, but she hopes to build soon a summer home on the property. (b) She borrowed to fund her maximum RRSP contribution for the year. (c) She borrowed $23,500 of the line of credit to purchase a Guaranteed Investment Certificate yielding 4%. She gave the certificate to her 12-year-old daughter. (5 minutes) 4. She is one of a group of five senior executives of WML who have been granted options to purchase from the corporation unissued non-voting Class B common shares of the corporation. She presently owns 15% of these shares. In order to assist this group of employees to acquire shares under the stock option plan, WML provides loans at low interest rates under an established policy approved by the Board of Directors. During the year, she borrowed $30,000 from WML to enable her to exercise some of her stock options. She signed a note promising to repay $6,000 of principal on the anniversary date of the loan in each of the next five years and to pay interest at a rate of 3% per year paid quarterly. The prescribed rates for each quarter in which the loan was outstanding during the year were higher than 3%. (11 minutes) Required: Advise Joanne Investor regarding the tax implications of borrowing from WML and the deductibility of the interest paid on each of the above loans. There is no need to do detailed calculations of the exact amount of interest on each loan. However, be sure to indicate clearly your reasoning in all situations. Section references may be helpful in providing precision to your answer, but are not required.
Solution 64 1. Not deductible — not borrowed to earn income from business or property. 2. All interest paid is deductible — expectation of profit from common shares in form of dividends (income from property), even though no dividends are currently being paid. Note that when a dividend is received from the public corporation the dividend gross-up and credit will be 38% (combined federal and provincial), as opposed to a CCPC, which is 15%. 3. Borrowings from the line of credit are dealt with as follows: (a) interest not deductible — land is for personal use; (b) interest on RRSP loan is not deductible (s. 18(11)(b)); (c) only 4% of the interest paid to purchase the GIC is deductible (not 5%), because this is the limit of income-earning potential on this investment (income is attributed back to Joanne on the gift to her minor child); the remaining 1% interest paid has no expectation of profit. 4. Borrowing from her corporation will be treated as follows:
• s. 15(2) applies, because she is a shareholder at the time she received the loan • s. 15(2.4)(a) does not apply to exclude the $30,000 principal amount of the loan, because she is a specified employee, i.e., she owns at least 10% of the shares of any class of the corporation
• s. 15(2.4)(c) does apply to exclude the principal amount of the loan, because the loan is used to acquire previously unissued shares of the corporation
• furthermore, the conditions of the additional provisions required to exclude the principal amount are met
• s. 15(2.4)(e) is met, because the loan is obtained as a result of employment, not as a result of shareholdings
• a corporate policy approved by the Board of Directors was established to provide loans to the senior executive group
• s. 15(2.4)(f) is met, because bona fide arrangements were made at the time of the loan to repay within a reasonable period of time
• five years for a share-purchase loan would appear to be a reasonable repayment period, particularly with annual instalments of principal
• therefore, the $30,000 principal amount of the loan can be excluded • s. 80.4(1) applies to compute an imputed interest benefit, which is included in employment income
• s. 80.5 deems the imputed interest benefit to be interest paid • s. 20(1)(c) allows a deduction for interest actually paid and deemed paid on funds borrowed to produce income from property
• the shares purchased will produce income from property in dividends
Question 65 (19 minutes) [Chapter 13] Ms. Bea Essee is the vice-president of SR&ED with Dundas Manufacturing Ltd. She is one of a group of eight senior executives who have been granted options to purchase from the corporation unissued non-voting Class B common shares of the corporation. She presently owns 15% of these shares. In order to assist this group of employees to acquire shares under the stock option plan, the corporation provides loans at low interest rates under an established policy approved by the Board of Directors. On April 1, 2023, Ms. Essee borrowed $50,000 to enable her to exercise some of her stock options. She signed a note promising to repay $10,000 of principal on the anniversary date of the loan in each of the next five years and to pay interest at a rate of 1% per year paid quarterly. Assume that the prescribed rates in 2022 were: first quarter, 3%; second quarter, 3%; third quarter, 2%; fourth quarter, 3%. Required: Advise Ms. Bea Essee of the 2023 Division B income tax effects to her of receiving the loan amount of $50,000 and of paying interest of 1% to the corporation. Be complete in your analysis of these features of the loan in respect of the likely provisions of the Act that could apply and support your advice with complete calculations where necessary. Section references may be helpful in providing precision to your answer.
Solution 65
• s. 15(2) applies, because she is a shareholder at the time she received the loan • s. 15(2.4)(a) does not apply to exclude the $50,000 principal amount of the loan, because she is a specified employee, i.e., she owns at least 10% of the shares of any class of the corporation
• s. 15(2.4)(c) does apply to exclude the principal amount of the loan, because the loan is used to acquire previously unissued shares of the corporation
• furthermore, the conditions of the additional provisions required to exclude the principal amount are met
• s. 15(2.4)(e) is met, because the loan is obtained as a result of employment, not as a result of shareholdings
• a corporate policy approved by the Board of Directors was established to provide loans to the senior executive group
• s. 15(2.4)(f) is met, because bona fide arrangements were made at the time of the loan to repay within a reasonable period of time
• five years for a share-purchase loan would appear to be a reasonable repayment period, particularly with annual instalments of principal
• therefore, the $50,000 principal amount of the loan can be excluded • s. 80.4(1) applies to compute an imputed interest benefit, which is included in employment income, as follows: 3% of $50,000 × 91/365 2% of $50,000 × 92/365 3% of $50,000 × 92/365 less: 1% of $50,000 × 275/365
$ 374 252 378
$1,004 377
$627
• s. 80.5 deems the imputed interest benefit of $629 to be interest paid • s. 20(1)(c) allows a deduction for interest paid on funds borrowed to produce income from property
• the shares purchased will produce income from property in dividends • therefore, the interest deduction will be $1,004 (i.e., $377 + $627)
Question 66 (22 minutes) [Chapter 13] During its 2022 fiscal period ended December 31, 2022, MaggieMade Limited made two noninterest bearing advances to its sole shareholder and president, Ms. Maggie Fornswater. The total advances were $400,000 and were recorded by Maggie as “Due from Shareholder”, a receivable in the books and records of MaggieMade Limited. Details of the advances are set out below. 1. $350,000 was advanced to Maggie on March 1, 2022 to aid her in the purchase of a waterfront condo — top floor, of course. At the time of the advance, Maggie signed a note with the corporation agreeing to repay the principal in equal annual instalments of $35,000 a year for the next ten years. The first principal repayment was due and paid February 28, 2023. The company does not have a policy of making such loans to other employees and has never made a similar loan to an employee in the past. 2. On September 1, 2022, $50,000 was advanced to Maggie to purchase a new car for herself. The car is used for employment purposes. The company has a policy of aiding its key employees to purchase automobiles that will be used to carry out their employment duties and has made such loans to other key employees in the past. At the time of the advance, Maggie signed a note with the corporation agreeing to repay the principal in equal annual instalments of $10,000 a year over five years. The first principal repayment was due and paid January 1, 2023. Required: MaggieMade Limited is not in the business of lending money. It is now December 2023 and Maggie has asked you to advise her on the tax consequences of the above advances. Be sure to consider the tax consequences for both 2022 and 2023 for each advance. A thorough explanation of your reasoning that considers all potentially relevant provisions must accompany your conclusion. Assume that the prescribed interest rates applicable to taxable benefits were 3% for all of 2022 and 4% for all of 2023.
Solution 66 $350,000 Home Purchase Loan — S. 15(2) requires the principal amount of $350,000 to reported as income to Maggie for 2022 — An imputed interest benefit will not be assessed to Maggie and included in her income since the principal of the loan was included in her income pursuant to subsection 15(2). — Maggie cannot meet the exceptions in the Act because — she is a specified employee, since she is the sole shareholder [s. 15(2.4)(a)] — she received the loan in her shareholder capacity; cannot meet s. 15(2.4)(e) — no company policy — no similar loans made to other employees — Maggie will not repay the entire principal by December 31, 2023 [s. 15(2.6)] — only one payment made in 2023 — Maggie can deduct the $35,000 principal repayment made in February 2023 on her 2023 return [s. 20(1)(j)] $50,000 Automobile Loan — $50,000 principal amount can be excluded — S. 15(2.4)(d) is met (loans for automobile for employment) — S. 15(2.4)(e) is met (policy on car purchase loans in place and other such loans are available to employees) — S. 15(2.4)(f) is met (bona fide repayment terms; five years is a reasonable term for a car loan) — since principal is excluded, s. 80.4(1) requires imputed interest for 2022 and 2023 — 2022 imputed interest is $50,000 × 3% × 122/365 = $501 — 2023 imputed interest is $50,000 × 4% = $2,000 — the imputed interest each year is deemed to be interest paid [s. 80.5] and will be deductible by Maggie as an expense to earn employment income [s. 8(1)(j)] — deduction must be prorated for employment driving — interest deduction limited to $300 per 30-day month [s. 67.2]
Question 67 (26 minutes) [Chapter 13] Dave Stieb is a valued senior executive and shareholder of Jays Ltd., a large Canadian-controlled private corporation. The corporation has been encouraging its employees to acquire its Class B common shares by lending the money to them to acquire the shares at no interest. Accordingly, the corporation has a written policy for making such loans to all full-time employees with at least three years of service with the corporation and many employees, including Dave, have received these loans. On February 14, 2023, Dave received a loan of $37,000 to purchase 1,000 new shares of the corporation directly from the corporation at their fair market value on that date. The loan was repayable in seven equal annual instalments payable on the anniversary date of the loan. Dave already owns about 13% of the issued Class B common shares. Required: (A) Verify that the $37,000 principal amount of this loan does not have to be included in Dave’s income in 2023 by reference to specific conditions in the appropriate provisions of the Act. Briefly state each relevant condition and apply it to the facts of this case to show that each condition is met. (16 minutes) (B) Compute the net effect of receiving this loan on Dave’s income for 2023. The prescribed quarterly interest rates for 2023 are as follows: 3% for the first and second quarter; 2% for the third quarter; and 3% for the fourth quarter. (10 minutes)
Solution 67 Part (A)
• Since Dave is a shareholder of Jays Ltd. and received a loan, s. 15(2) would normally apply to include the principal amount of the loan in his income in 2021
• However, s. 15(2) does not apply to a loan that meets specific conditions in s. 15(2.4) • The relevant conditions in s. 15(2.4) applied to the facts of the case to exclude the principal amount are as follows:
• s. 15(2.4)(c) applies in this case • The lender corporation is a particular corporation in respect of the employee • Dave is an employee of the lender corporation, Jays Ltd. • The loan is to enable the employee to acquire previously unissued fully paid shares of the corporation
• Dave borrowed the money to buy new shares directly from the corporation at their fair market value
• The shares are to be held by the employee for his own benefit • Dave purchased the shares under a policy of the corporation to encourage the acquisition of its Class B common shares
• s. 15(2.4)(e) further requires that it is reasonable to conclude that the employee received the loan because of his employment and not his share-holdings
• Dave received the loan under a written corporate policy making such loans to all fulltime employees with at least three years of service
• Many employees have received these loans • s. 15(2.4)(f) requires that at the time of the loan bona fide arrangements were made for repayment within a reasonable time
• The terms of the loan included repayment in seven years which is reasonable for a loan to buy shares Part (B) s. 80.4(1) deemed interest benefit for 2023: Feb. 14/23 — Mar. 31/23 46/365 × $37,000 × .03 Apr. 1/23 — June 30/23 91/365 × $37,000 × .03 July 1/23 — Sept. 30/23 92/365 × $37,000 × .02 Oct. 1/23 — Dec. 31/23 92/365 × $37,000 × .03 Imputed interest benefit inclusion in employment income s. 80.5 deems imputed interest to be paid Deduction of interest deemed paid Net effect on Dave’s income
$ 140 277 187 280 $ 884
(884) Nil
Question 68 (29 minutes) [Chapter 13,15] Ms. Dundastard, a Canadian resident, has owned all of the shares of Dundas Distributors Inc. (DDI) for over 10 years. She is also the president and the key employee of the corporation which carries on a wholesale distribution business in the Niagara Peninsula of Ontario. The corporation’s asset mix has been quite stable for the past three years. The corporate Balance Sheet at September 30, 2023, and appraised fair market values (FMV), shows the following: Assets Cash Accounts receivable (net of $1,500 allowance) Inventory Term deposits Shares in Trading Spaces Suppliers Ltd. (TSSL) Land Building, fixtures and equipment (net of amortization) Liabilities Accounts payable Future income taxes Long-term debt Capital Common shares Retained earnings
Balance Sheet $ 3,600 13,400 190,000 155,000 23,000 140,000 215,000 $740,000
FMV 3,600 12,700 200,000 155,000 18,700 215,000 305,000 $910,000 $
$ 18,000 45,000 325,000 388,000 1,000 351,000 $740,000
When the above assets were appraised, a valuation of the corporation’s customer lists and goodwill, due to location and management, determined that they were worth $90,000. The term deposits represent a build-up of surplus funds that have not been required in DDI’s business over the last several years. The shares owned by DDI in TSSL are common shares and amount to 18% of the total FMV of TSSL common shares. TSSL, which has no investment assets, is a CCPC carrying on its business across southern Ontario and is a supplier to DDI. Ms. Dundastard is considering a transaction that will realize her capital gains exemption, none of which she has used to date. Required: (A) Advise Ms. Dundastard on whether her shares in DDI can be considered to be qualified small business corporation shares (QSBCS). If not, advise her on the most tax effective steps that should be taken to ensure that the shares qualify. (21 minutes) (B) As part of the plan that she is considering and ignoring any steps recommended in Part (A), Ms. Dundastard will transfer her shares to a holding corporation which she will incorporate with her husband, so that she and her husband will each own 50% of the common shares of the holding corporation. In return for her shares in DDI, she will receive preferred shares with a FMV of $657,000, which is equal to the FMV of her common shares in DDI. The preferred shares will pay a 3% dividend annually. Her husband stays home to look after the couple’s three young children and is a part-time PhD student in socialist philosophy. If DDI builds up too much in non-active investment assets in future years, explain why section 74.4 would apply and show the results of its application. Assume a prescribed interest rate of 4%. (8 minutes)
Solution 68 Part (A) Qualifying Small Business Corporation Shares tests: SBC Test Considerably less than 90% [i.e., 85% (83% + 2%)] of the FMV of DDI’s gross assets, including unrecorded assets, consist of a combo of assets used in an active business carried on primarily in Canada and shares of a connected small business corporation. Cash A/R Inventory Land Building & equipment Customer list and goodwill Total Active Business Assets Shares of connected SBC Non-active Business Assets
$
3,600 12,700 200,000 215,000 305,000 90,000 $ 826,300 18,700 155,000 $1,000,000
83% 2% 15% 100%
The term deposits are considered to be non-active business assets. They do not appear to be needed in the active business of DDI Recommend to Ms. Dundastard that some of the term deposits be sold and used to repay some of the long-term debt prior to the transaction being contemplated. This will ensure that the shares meet the SBC test above on the date of the contemplated transaction. Minimum sale of term deposits should be $61,111 (i.e., $1,000,000 – ($826,300 + $18,700)/.9) Consider selling more of the term deposits and paying more of the long-term debt to get well above the 90% minimum. Holding Period Test Ms. Dundastard has held the shares for more than 24 months. Basic Asset Test DDI meets the Basic Asset Test, since its own active business assets constitute more than 50% of the FMV of its gross assets. Therefore, it is not necessary to consider the Modified Asset Test. Part (B) If DDI builds up too much in investment assets, it will not qualify as an SBC. If that occurs, the corporate attribution rules may apply as follows: • •
An individual, Ms. Dundastard, transferred property, shares of DDI, to a corporation, Holdco, in which a designated person, her husband, was a specified shareholder (since he owns 50%) One of the main reasons for the transfer was probably to reduce Ms. Dundastard’s income and to benefit her husband who has no apparent source of income (i.e., income splitting purpose)
If Holdco is not an SBC, Ms. Dundastard will be deemed to have received an imputed interest benefit, calculated (for a whole year) as follows: Outstanding amount (FMV of preferred shares) Deemed interest (prescribed rate of 4%) ($657,000 × .04) Less: dividend paid 1.15 ×.03 × $657,000) Net imputed interest benefit to Ms. Dundastard
$657,000 $ 26,280 (22,667) $ 3,613
Question 69 (13 minutes) [Chapter 13] Tina is the national sales manager of TransCanada Sales Ltd. She owns 12.5% of the common shares of the corporation, having exercised stock options in previous years. She was not involved in the financial management of the corporation. On June 9, 2022, she borrowed $200,000 from the corporation, under its employee-loan policy applicable to all full-time employees, to finance the purchase of a condominium for her and her husband to live in Dundas, Ontario, near the head office of the company. Under the terms of the loan plan, Tina signed an agreement on the day she received the loan to pay interest at 2% annually on the first day of each month during which the loan was outstanding and to repay the principal in 20 equal annual instalments on January 1 of each year, beginning January 1, 2024. Required: (a) Indicate each of the conditions necessary to exclude the principal amount of the loan from Tina’s income and indicate, briefly from the facts, how each condition is satisfied. (6 minutes) (b) Compute the amount of the interest benefit to be included in Tina’s income in 2023 in respect of the loan. (7 minutes) Assume that the prescribed interest rate for the second quarter of 2022 was 3% and the prescribed rates for 2023 are: Jan. 1 to Mar. 31 Apr. 1 to June 30 July 1 to Sept. 30 Oct. 1 to Dec. 31
3% 2% 3% 3%
(Show all supporting calculations and round to the nearest dollar.)
Solution 69 (a) Exclusion of Principal Amount:
• loan made by the corporation to a shareholder who is also an employee to assist her to acquire a home for her own occupation
• condition is met, because Tina purchased a condominium for her and her husband to live in AND
• the loan arose because of the employee’s employment (i.e., in her capacity as an employee) and not because of her shareholdings
• there was a company employee-loan policy in place • she did not own a sufficient number of shares in the corporation to have significant influence on financial management decisions of this nature AND
• bona fide arrangements for repayment within a reasonable time made when loan received • Tina signed an agreement when she received the loan • repayment of a house loan of $200,000 over 20 years appears to be a reasonable repayment period (b) Interest Benefit Inclusion for 2023: Jan.1 – Mar.31 Apr.1 – June 30 July 1 – Dec.31
90/365 × $200,000 × lesser of 3% and 3% 91/365× $200,000 × lesser of 3% and 2% 184/365 × $200,000 × lesser of 3% and 3%
$1,479 997 3,025 $5,501
Less: interest paid Jan.1 – Dec.31 $200,000 × 2%
(4,000)
Deemed interest benefit
$1,501
Question 70 (11 minutes) [Chapter 15] Consider the asset mix, based on fair market values, of each of the following three independent Canadian-controlled private corporations: Corporation 1: Land and buildings used in an active business carried on in Canada Shares (45% of issued shares) of Janna Ltd., a small business corporation
80% 20%
Corporation 2: Equipment used in an active business carried on in Canada Shares (< 1% of issued shares) of Jonathan Ltd., a public corporation
85% 15%
Corporation 3: Term deposits Shares of Ethan Ltd., a wholly owned small business corporation
40% 60%
Required: Indicate which of the above three corporations satisfy or do not satisfy all of the conditions in the definition of a “small business corporation”, supporting your conclusions with the facts given above.
Solution 70
• all corporations are CCPCs (given) Corporation 1:
• all of the FMV of its assets are used in an active business carried on in Canada or are shares of a connected SBC
• the land and buildings are active business assets • Janna Ltd. is connected (i.e., > 10% owned) and is an SBC • therefore, Corporation 1 is an SBC Corporation 2:
• only 85% of the FMV of its assets (equipment) are used in an active business carried on in Canada
• the shares of Jonathan Ltd. are of a public corporation which cannot be an SBC (i.e., not a CCPC)
• therefore, Corporation 2 is not an SBC Corporation 3:
• only 60% of its assets (shares of Ethan Ltd.) are shares of a connected SBC • term deposits, in combination with shares, as the only other asset cannot be assets used in an active business
• therefore, Corporation 3 is not an SBC
Question 71 (11 minutes) [Chapter 15] Consider the asset mix, based on fair market values, of each of the following three independent cases involving Canadian-controlled private corporations, Rayna Ltd., the shares of which are owned by an individual, and Alex Ltd., the wholly owned subsidiary of Rayna Ltd.: Rayna Ltd. Alex Ltd. Case 1: Assets used in an active business carried on in Canada Investment in shares of Alex Ltd Other assets
70% 15% 15% 100%
Assets used in an active business carried on in Canada Investment in shares of Alex Ltd. Other assets
25% 30% 45% 100%
Assets used in an active business carried on in Canada Investment in shares of Alex Ltd. Other assets
35% 25% 40% 100%
25% 75% 100%
Case 2: 95% 5% 100%
Case 3: 80% 20% 100%
Required: Indicate which of the above three cases satisfy or do not satisfy the conditions in the “basic asset test” or the “modified asset test” (i.e., the third test) in the definition of “qualified small business corporation shares”, supporting your conclusions with the facts given above. Assume that the proportions of the fair market values of assets shown have remained constant for at least the preceding 24 months. Do not consider the SBC or Holding Period Tests in the QSBCS definition.
Solution 71 Case 1: • more than 50% of the FMV of the assets of Rayna Ltd. are used by it in an active business carried on in Canada •
therefore, the basic asset test is met
•
there is no need to consider the assets of the connected corporation, Alex Ltd.
Case 2: • since Rayna Ltd. does not meet the >50% test with its own active business assets, the assets of the subsidiary, Alex Ltd., must be considered
•
•
both Rayna Ltd. and the connected Alex Ltd. each meet the >50% test with a combination of their own active business assets and securities of a connected corporation • Rayna Ltd., 55% and Alex Ltd., 95%
•
one of the two corporations, Alex Ltd., meets the 90% test with a combination of its own active business assets and securities of a connected corporation
therefore, the modified asset test is met
Case 3: • since Rayna Ltd. does not meet the >50% test with its own active business assets, the assets of the subsidiary, Alex Ltd., must be considered •
both Rayna Ltd. and the connected Alex Ltd. each meet the >50% test with a combination of their own active business assets and securities of a connected corporation • Rayna Ltd., 60% and Alex Ltd., 80%
•
however, one of the two corporations must meet the 90% test with a combination of its own active business assets and securities of a connected corporation •
•
neither meets this condition
therefore, the modified asset test is not met
Question 72 (41 minutes) [Chapter 13, 15] Cornerstone Appliances Limited (“Cornerstone”) is a Canadian-controlled private corporation (“CCPC”) with a December 31 year-end. The company is a Canadian distributor of large appliances operating from its head office in Hanover, Ontario. Today is December 25, 2023 and Mr. Cook, the sole shareholder and president of the company, has requested a meeting with you to discuss various tax issues related to the company’s December 31, 2023 taxation year-end. At the meeting he provided you with the following information. 1)
Mr. Cook is considering accruing a $150,000 bonus payable to himself in the December 31, 2023 financial statements for Cornerstone.
2)
Mr. Cook’s spouse, Betty, provided a personal guarantee of $400,000 to the bank to cover their operating line of credit. In a written agreement with the company it was agreed that Cornerstone would pay her a guarantee fee of 2% per year on the $400,000 guaranteed starting on January 1, 2020. To date, Cornerstone has not paid any part of the guarantee fee. The fee that will have been accrued in the December 31, 2023 financial statements and deducted for tax purposes will be $32,000 ($8,000 per year).
3)
Mr. Cook received a $90,000 3% loan, dated July 1, 2023 to enable him to purchase a new home for his own occupancy. Other senior employees of Cornerstone are eligible for, and have received, loans on similar terms. The loan was repayable over 10 years in equal instalments of principal payable on the anniversary date, but with interest payable monthly.
4)
Mr. Cook holds 1,000 common shares of Cornerstone that were issued to him for $10 per share on incorporation of the company. Mr. Cook’s daughter, Belinda, the vice-president of the company, plans to purchase 200 of the 1,000 shares from her father on December 31, 2023. She will receive a $100,000 non-interest bearing loan, dated December 31, 2023, from Cornerstone to cover the full purchase price of the shares. Under the loan agreement, Belinda is required to make principal repayments on the loan starting December 31, 2024 of $20,000 per year. Belinda plans to follow this repayment schedule.
5) The balance sheet for Cornerstone on November 30, 2023 was as follows. Book Value Assets (FMV) Cash ($4,000) Accounts Receivable ($15,000) Term Deposits ($150,000) Loan Receivable — Mr. Cook ($90,000) Inventory ($125,000) Land ($250,000) Building & Equipment ($350,000) Shares in Y Ltd. ($25,000) Total Assets ($1,009,000)
$
$
4,000 15,000 150,000 90,000 125,000 150,000 250,000 15,000 799,000
Liabilities Accounts Payable Loan Payable Mrs. Cook
$
Total Liabilities
$ 244,000
Capital Common Shares Retained Earnings Total Liabilities and Share Capital
$
20,000 224,000
10,000 545,000 799,000
Mr. Cook indicated that there has not been a substantial change in the proportionate fair market value of the assets of the company for several years. A recent valuation of the company showed that the company’s customer lists and goodwill are worth $100,000. Cornerstone owns 13% of the shares of Y Ltd. Y Ltd. is a CCPC that manufactures most of the stoves and fridges sold by Cornerstone. All of the assets of Y Ltd. have been used in its active business operated in Owen Sound, Ontario, since it began operations in 2018. 6)
Mr. Cook has used up all but $500,000 of his capital gains exemption.
Required: Provide Mr. Cook with a detailed summary of the tax consequences to him, his daughter, and Cornerstone for the above for the year ending December 31, 2023, with calculations where necessary. Assume that the prescribed interest rate for the first quarter of 2023 was 4%, for the second quarter it was 3%, for the third quarter it was 4%, and for the fourth quarter it was 5%.
Solution 72 (1) Bonus to Mr. Cook • Mr. Cook should ensure that the bonus is paid to him by June 28, 2024 (179 days after year-end). • If it is not paid by that date, the deduction will not be allowed until the bonus is paid. (2) Interest Accruals • The interest accrual for the 2020 taxation year of $8,000 was not paid by December 31, 2022. Therefore, the amount will be added to Cornerstone’s taxable income for the December 31, 2023 taxation year-end. • Alternatively, Cornerstone and Betty may file a prescribed form on or before June 30, 2024 to deem the amount to have been paid by Cornerstone and received by Betty on January 1, 2023. • Betty would be deemed to have loaned the unpaid interest to Cornerstone on January 1, 2023. • Betty would be taxable on the $8,000 in her 2023 personal tax return. • Cornerstone should pay the $8,000 interest accrual for the 2021 taxation year by December 31, 2023 to Betty to avoid the application of subsection 78(1) in the December 31, 2024 taxation year. • Cornerstone should pay the $8,000 interest accrual for the 2022 taxation year by December 31, 2024 to Betty to avoid the application of subsection 78(1) in the December 31, 2025 taxation year. • Cornerstone should pay the $8,000 interest accrual for the 2023 taxation year by December 31, 2025 to Betty to avoid the application of subsection 78(1) in the December 31, 2026 taxation year. (3) Loan to Mr. Cook • The principal amount of the loan will not be included in Mr. Cook’s income in the 2023 taxation year because the exception under paragraph 15(2.4)(b) applies. • The loan was made to enable him to acquire a dwelling for his habitation. • The loan was made in his capacity as an employee as evidenced by the fact that other employees have received a similar loan with similar terms. • At the time the loan was made, bona fide arrangements were made for its repayment. • Subsection 80.4(1) applies since the loan was made by virtue of his office. • Since the loan is a home purchase loan, the interest benefit on the loan is calculated, on a quarter-by-quarter basis, at the lesser of the prescribed rate when the loan was made of 4% and the prescribed rate in effect for the quarter. • Since the prescribed rate at the time the loan was made of 4% is less that than the prescribed rate for the fourth quarter, the 4% rate will be used for all of 2023. • Mr. Cook will have an interest benefit of $1,815 ($90,000 × .04 × 184/365) less: the interest paid for the year of $1,361 ($90,000 × .03 × 184/365) for a net benefit of $454. • Interest on the loan will not be deductible under 20(1)(c), although deemed to be interest paid by section 80.5, since the purpose is not to produce income.
(4) Loan to Belinda • The loan was not received to purchase previously unissued shares from the corporation. • This loan will be received by virtue of Belinda’s shareholdings as it is unlikely that other employees would receive such a loan. • As she does not plan to repay the loan by December 31, 2024, the full $100,000 should be included in her taxable income for 2023; she can deduct the $20,000 repayments in the year that she makes them. • No imputed interest benefit will result since the principal amount will be taxable to her in 2023. • It would be possible to defer the income inclusion if the share sale occurred January 1, 2024 instead of December 31, 2023. (5) Disposition of Mr. Cook’s shares • Mr. Cook will realize a $98,000 (i.e., $100,000 – ($10 × 200)) capital gain on the disposition of his shares of Cornerstone. • The shares of Cornerstone do not meet the definition of Qualifying Small Business Corporation Shares as follows: • SBC Test — 90% or more of the FMV of Cornerstone’s gross assets do not consist of a combo of assets used in an active business carried on primarily in Canada and shares of a connected small business corporation 78% (76% + 2%). Goodwill Cash A/R Inventory Land Building & equipment Total Active Business Assets Shares of connected SBC Non Active Business Assets
• • • •
$ 100,000 4,000 15,000 125,000 250,000 350,000 $ 844,000 25,000 240,000 $1,109,000
76% 2% 22% 100%
Holding Period Test — Mr. Cook has held the shares for more than 24 months. Asset Test — Cornerstone meets the Basic Asset Test. Its own active business assets constitute more than 50% of the FMV of its gross assets. It is not necessary to consider the Modified Asset Test. The term deposits are considered to be non-active business assets as they do not appear to be needed in the active business of Cornerstone since they have been untouched for a number of years. It should be recommended to Mr. Cook that some of the term deposits be sold and used to repay the loan to Mrs. Cook prior to the share sale on December 31 (or another valid suggestion). This will ensure that the shares meet the SBC Test above on the date of sale. $143,444 of term deposits need to be sold and used to repay the loan ($1,109,000 – ($844,000 + $25,000)/.9).
Question 73 (19 minutes) [Chapter 13] Cher is the owner-manager of a Canadian-controlled private corporation carrying on an active business in Canada. On June 1, 2023, she caused her corporation to declare a dividend of $100,000 and to elect that the dividend be distributed to her tax-free from the corporation’s capital dividend account. Cher needed these funds to finance an investment holding company, Holdem Corp. Inc. (HCI), the sole common shareholder of which is Cher’s husband, Sonny. Cher immediately invested the $100,000 in the preferred shares of HCI. These shares pay a fixed dividend of 1% annually on December 31. HCI uses all of its assets to produce income from property which is distributed as dividends to Cher on the preferred shares and to Sonny, who has no other source of income, on his common shares. Required: Discuss the income tax implications in 2023 for Cher of the purchase of the preferred shares in HCI. Support your answer with specific calculations where appropriate and provide reasons for your conclusions. Where the Act specifies conditions, be sure to consider all such conditions that are applicable. Assume that the prescribed interest rates for 2023 were 3% for the second quarter, 2% for the third quarter, and 5% for the fourth quarter.
Solution 73 $100,000 invested in the preferred shares of HCI •
Corporate attribution •
An individual, Cher, transferred property to a corporation, HCI, in which a designated person, Sonny, was a specified shareholder •
•
Sonny owns 100% of the common shares
One of the main purposes of the transfer may reasonably be considered to be to reduce Cher’s income and to benefit Sonny, a designated person •
Sonny has no other source of income, so that income splitting may reasonably be considered to be one of the main purposes of the transfer of the $100,000 to HCI.
•
HCI is not a small business corporation, since all of its assets produce income from property
•
Cher will be deemed to have received interest income computed as follows: Outstanding amount (the value of the preferred shares)
$100,000
Interest at the prescribed rate for the periods in the year June 1 – 30 July 1 – Sept 30 Oct 1 – Dec 31
$100,000 × 3% × 30/365 $100,000 × 2% × 92/365 $100,000 × 5% × 92/365
Less: 115% of dividends paid to Cher 1.15 × 1% of $100,000 Net imputed interest
$ 247 504 1,260 $2,011 1,150 $ 861
Question 74 (5 minutes) [Chapter 14] Your client, Jean Beliveau, received a Notice of Reassessment in respect of his 2019 taxation year dated August 1, 2023. His 2021 tax return was originally assessed by a Notice of Assessment dated August 13, 2022. The reassessment was in respect of a 2021 transaction that was reported as a capital gain but is being reassessed by the CRA as business income. As a result, the additional tax owing in respect of that 2021 transaction is assessed at $25,000. You have reviewed your documentation of your analysis of the transaction and you realize that the facts support a strong argument by the CRA for business income. You have discussed this with Jean and you have agreed not to pursue an appeal of the reassessment. Jean has agreed to pay the tax owing and the appropriate interest today, October 24, 2023. Required: Compute the amount of total tax and interest that Jean must pay on October 24, 2023. Ignore the fact that instalments may have been deficient. Assume, as necessary, that the basic prescribed rates for employee and shareholder loans, throughout each of the indicated calendar years are: 2021 — 5%; 2022 — 2%; and 2023 — 3%. Ignore the effects of any leap year.
Solution 74 Ignoring the effect of any leap as given in the questions the answer would be: Tax owing at April 30, 2022:
$25,000
Tax owing compounded at 6% to December 31, 2022 (245 days): [$25,000 (1 + .06/365)245]
$26,027
Compounded at 7% to October 24, 2023 (298 days): [$26,027 (1 + .07/366)298]
$27,553
Therefore, Jean should pay $27,553 on October 24, 2023.
Question 75 (14 minutes) [Chapter 14] At the time of her death, on October 2, 2023, at the age of 97, your client, Ima Deceased, owned the following assets, all of which are to be transferred, according to her will, to her son, who is her only beneficiary: Term deposits Shares of Bell Canada Enterprise (a public corporation)
Cost
FMV
$ 75,000 250,000
$ 75,000 370,000
In 2023, she had received the following amounts up to the date of death: Fees for acting as an art consultant Pension income Interest on term deposits Dividends on Bell shares
$20,000 36,000 1,500 8,960
Interest on the term deposits is payable on April 30 and October 31. Since April 30, 2023, when the above $1,500 was paid, additional interest of $1,275 accrued to the date of death. Also, a dividend of $1,120 was declared on the Bell shares, payable to all shareholders of record on September 30, 2023, but the cheque was not mailed until October 6, 2023.
Required: (A) Briefly explain the determination of when the terminal income tax return is due. (4 minutes) (B) Compute Ms. Deceased’s income for 2023 and recommend to the executor of her estate the most appropriate manner to report the income to minimize income tax. (10 minutes)
Solution 75 Part (A) The executor will have at least six months from the date of death to file the terminal return, unless the normal filing deadline for the year (i.e., June 15, 2024, since she has income from business) is later. Since the six-month period ends on April 2, 2024, the terminal return can be filed on June 15, 2024. Part (B) The executor should file a terminal return and a rights or things return as follows: Terminal return TCG on Bell shares [½ × ($370,000 – $250,000)] Consulting fees received Pension income received Interest received Grossed-up dividend received [1.38 × $8,960] Accrued interest (not receivable at death) Income to be reported on terminal return
$ 60,000 20,000 36,000 1,500 12,365 1,275 $131,140
Rights or Things return Grossed-up dividend receivable at date of death (1.38 × $1,120)
$
1,546
Question 76 (27 minutes) [Chapter 8, 14] The father (Mr. Lucifer) of one of your clients (Mrs. Damien) passed away on the evening of October 31, 2023. Mr. Lucifer was 66 years old. Mrs. Damien is the sole beneficiary of her father’s estate. Mrs. Damien has given you the following information with respect to her father’s income from January 1, 2023 to the date of his death. (1) Salary — $4,000 a month for January through October, paid on the last day of the month. (2) Mr. Lucifer was owed a bonus by his employer amounting to $3,000. This was received by the estate on November 30, 2023. (3) Bond interest — interest of $950 was accrued on a bond that doesn’t mature until June 30, 2024; interest is payable only upon maturity of the bond. (4) Bank account interest — interest of $150 was accrued on his chequing account from January 1 through October 31, 2023. (5) Dividend income — dividends of $200 were declared on his shares in Underground Explorations Limited; the dividends were payable October 30, 2023, but had not been paid as of the date of Mr. Lucifer’s death. (6) The shares in Underground Explorations Limited were purchased for $13 in 2016. The fair market value of the shares, on October 31, 2023, was $39. Underground Explorations Limited is a public company. (7) Mr. Lucifer had made RRSP contributions of $1,500 monthly for the months of January through October 2023. These total contributions of $15,000 were to be towards his 2023 RRPS contribution limit. His earned income for 2022 was $98,000 and he had no pension adjustment for 2022. (8) The fair market value of Mr. Lucifer’s RRSP at October 31, 2023 was $78,000. This includes the contributions mentioned in (6), above.
Required: a) What is the due date of Mr. Lucifer’s 2023 personal income tax return? (1 minute) b) What are the tax implications of each of the above items assuming that no elective returns are utilized? (19 minutes) c) Which of the above items are eligible to be included on an elective return? Identify the name of the elective return. What is the filing deadline for this return? (7 minutes)
Solution 76 (a) Due date for the terminal return is 6 months from the date of death or the regular due date for the 2023 return: April 30, 2024 (b) No Elective Returns Salary of $36,000 received — taxable on terminal return Salary of $4,000 receivable — taxable on terminal return Bond interest accrued — taxable on terminal return Bank account interest accrued — taxable on terminal return Dividends payable — taxable on terminal return (note that the dividend gross up is 38% and the dividend tax credit is theoretically 20.7% of the dividend paid or 15% of the grossed up dividend. Shares — capital gain/deemed disposition at $26 per share — taxable on terminal return RRSP contribution of $15,000 — deductible on terminal return RRSP left to daughter — taxable to estate, not to daughter/no means to defer (c) Elective Return – Rights and Things Rights and things return due later of one year after death/90 days after assessment of terminal return Can include: Bonus owing at date of death; dividends declared not paid
Question 77 (16 minutes) [Chapter 14] The following four situations are independent. Required: Provide a brief and specific answer to the questions posed. (a)
Sly Don passed away on April 1, 2023. He had been a sole practitioner of tax in a public accounting practice until the date of his death. At that date, he had not filed his personal income tax return for 2022 and certainly not for 2023. What is the filing deadline for: (i) the 2022 return? (ii) the 2023 return? (1 minute)
(b)
Ms. JSK is a sole practitioner in public accounting practice. The fiscal year-end of her practice is December 31. Her only source of income is from the practice, which is expected to generate net income of $80,000 in fiscal 2023. She expects to pay $21,000 in tax in respect of 2023. She paid $13,200 in tax in respect of 2022 and $12,900 in tax in respect of 2021. Provide Ms. JSK with a schedule indicating the date and the calculation of the minimum amount of each instalment that she is required to pay in respect of 2023. (5 minutes)
(c)
(d)
RFL Inc., a Canadian-controlled private corporation, has a July 31 year-end. It is not associated with any other corporation. Its tax manager has estimated its 2023 federal income tax liability at $48,000 on taxable income estimated to be $250,000. Its federal income tax liability for 2022 was $24,000 on taxable income of $187,000, and its federal income tax liability for 2021 was $18,000 on taxable income of $140,000. RFL Inc does not have a “perfect compliance history” when it comes to paying quarterly instalments. (i) Provide the tax manager with a schedule indicating the date and minimum amount of each instalment that the corporation is required to pay in respect of its 2023 taxation year. (5 minutes) (ii)
When must the final balance of federal income tax be paid for the 2023 taxation year? Specify the conditions to permit that date. (2 minutes)
(iii)
What is the filing deadline for the 2023 income tax return of the corporation? (1 minute)
Mr. ARFL filed his 2022 personal income tax return on March 10, 2023. He received a Notice of Assessment on May 9, 2023, disallowing a tax credit in respect of tuition paid to the University of Pennsylvania. The Notice of Assessment had been mailed May 3, 2023. What is the filing deadline for a Notice of Objection, if he wished to dispute the issue? Specify the options for this deadline. (2 minutes)
Solution 77 (a)
(b)
(i)
October 1, 2023, i.e., six months after the date of death.
(ii)
June 15, 2024.
Ms. JSK should pay quarterly instalments in 2023 as follows: March 15: June 15 September 15 December 15
(c)
(i)
¼ × $12,900 ¼ × $12,900 ½ × ($13,200 − (2 × $3,225)) ½ × ($13,200 − (2 × $3,225))
RFL Inc. should pay the following instalments in its 2023 taxation year: August 31 and September 30, 2022 1/12 × $18,000 Last day of each of October 2022 to July 2023 1/10 × ($24,000 – (2 × $1,500))
(d)
$3,225 3,225 3,375 3,373
$1,500 $2,100
(ii)
Where a small business deduction is claimed and taxable income for the preceding year was less than $500,000, the balance of tax in respect of the 2023 taxation year is due on October 31, 2023, i.e., three months after the taxation year-end.
(iii)
January 31, 2024; i.e., six months after the 2023 year-end.
The deadline for a Notice of Objection to be filed by an individual is the later of: (i)
April 30, 2024; i.e., one year after the filing-due day of the tax return for the year, and
(ii)
August 1, 2023; i.e., 90 days after mailing the Notice of Assessment.
Question 78 (25 minutes) [Chapter 14] As Director of Taxation of Verblonget Ltd., a Canadian-controlled private corporation, you are responsible for ensuring that corporate income tax instalments are correctly calculated and paid on time. The corporation has a December 31 year-end and operates only in Canada. In 2021, the corporation paid $33,000 in income tax on $150,000 of active business income. In 2022, it paid $40,000 on $180,000 of active business income. At the beginning of 2023, you expected active business income to be a little lower than last year, at $175,000, and this would result in income tax of $38,000 for the year. Required: (a)
By showing your calculations for all of the options, indicate • the minimum amount that should be paid in instalments for 2023 to be sure of not having to pay any interest on a deficiency of instalments, and • the specific dates on which these instalments must be paid. (11 minutes)
(b)
Assume that your estimate of the income tax for 2023 was inaccurate because the actual income tax amount turns out to be $45,000 for 2023. Also, assume that the corporation paid the minimum monthly (not quarterly) required instalments computed in (a) on time. How much is the balance due and on what specific date must it be paid? (3 minutes)
(c)
Assume that, at the end of November, it looked to you like the corporation had overpaid its monthly tax by instalments for 2023, because income was a little lower than expected in the preceding two months, so the corporation paid no instalments for November and December. Assume, however, that it turns out that even your original estimate of income tax for the year was too low, because actual income tax owing was $45,000 for 2023. Also, assume that the corporation pays the full amount owing on the balance-due date. How much interest is payable on that date, if the prescribed rate for the first two quarters of 2023 was 10%; for the second two quarters of 2023, 9%; and for all of 2024, 8%? What is the amount due on that date? (9 minutes)
(d)
If the CRA issues a Notice of Assessment for the 2023 corporate tax return on September 10, 2024, and the interest on the deficient instalments was incorrectly calculated by the CRA, what is the specific date deadline for filing a Notice of Objection? (1 minute)
(e)
What is the specific date deadline for the CRA to issue a Notice of Reassessment for the 2023 corporate return? (1 minute)
Solution 78 (a) Instalments due on last day of each month in 2023: Least of: (i) (ii) (iii)
1/12 × $38,000 1/12 × $40,000 1/12 × $33,000 1/10 × ($40,000 − 2 × $2,750)
= = = =
$ 3,167 $ 3,333 $ 2,750 $ 3,450
(Jan 31, Feb. 28) (Mar. 31 – Dec. 31)
Option (iii) should be used to avoid a deficiency and obtain a better cash flow result than option (ii). OR If Verblonget Ltd. fulfills the following criteria it can pay quarterly instalments: • • •
The company has a perfect compliance history A small business deduction was claimed either last year or this year Verblonget Ltd including all its associated companies in either the current or previous taxation year has taxable income not exceeding $500,000 and taxable capital employed in Canada for the taxation year not exceeding $10,000,000
Assuming all criteria above are met, instalments due on last day of each quarter in 2023: Least of: (i) (ii) (iii)
1/4 × $38,000 1/4 × $40,000 1/4 × $33,000 1/3 × ($40,000 − $8,250)
= = = =
$ 9,500 $10,000 $ 8,250 $10,583
(Mar. 31) (Jun. 30, Sept. 30, and Dec. 31)
(b) Balance due on March 31, 2024 (CCPC eligible for SBD) $45,000 – (2 × $2,750 + 10 × $3,450)
=
$ 5,000
(c) Date Nov. 30/23 Dec. 31/23 Mar. 31/24
Amount Owing Op. Balance Nil $3,476 7,064
Instalment Due $3,450 3,450 5,000
Amount Paid Nil Nil $12,064
Amount Owing Cl. Balance $3,450 6,926 Nil
Interest (1+ .09/365)31 (1 + .08/365)90
$ 26 138 $164
(d) Notice of Objection deadline is December 9, 2024 (i.e., 90 days from date of mailing Notice of Assessment on September 10, 2024) (e) Statute-barred assessment period September 10, 2027 (i.e., three years (CCPC) from date of mailing of Notice of Assessment on September 10, 2024)
Question 79 (15 minutes) [Chapter 14] Ms. Slidon died on July 15, 2023. She was survived by her husband and her daughter. You are the executor of her estate. One of your responsibilities is to determine the tax treatment that results in the lowest possible tax on the estate in respect of the following items. (a)
A rental property, purchased in 2008 with the following tax features, was left to Ms. Slidon's daughter: Asset
Capital Cost
UCC— Dec. 31/2022
FMV— July 15/2023
Land Building
$39,000 66,000
N/A $36,000
$120,000 168,000
(b)
The rental property generated net rental income of $5,300, before CCA, in the period from January 1, 2023 to July 15, 2023.
(c)
Ms. Slidon’s will directed that 100 shares of Underground Airways Ltd., a public corporation, that were purchased in 2013 for $17,300 be transferred to her husband. The shares had a fair market value of $38,700 on July 15, 2023. Ms. Slidon did not have any net capital losses available to offset the unrealized gain at the time of her death.
(d)
The following taxable dividends from a Canadian-controlled private corporation were declared in 2023 from its low-rate income, prior to her death, and paid in 2023, as indicated: Declared January 3 April 6 July 5
Paid January 31 April 30 July 31
Amount $305 330 360
(e)
Ms. Slidon’s accounting practice, which had a December 31 year-end, generated $64,000 of income in the period in 2023 before her death.
(f)
Term life insurance of $100,000, to cover her business debts, was paid to Ms. Slidon's estate on her death.
(g)
Ms. Slidon had declared her husband a beneficiary for her RRSP. As a result, the $73,000 (fair market value) was paid to him.
Required: Determine the income for tax purposes under Division B in a way that will result in the minimum possible tax consequences in the circumstances. Comment on the adjusted cost base or the tax position of the individuals who inherit property after giving effect to Ms. Slidon’s will.
Solution 79 Terminal Return Rental Property Land Building
— TCG(a) — recapture(a) — TCG(a)
Net rental income(b) Shares of public corporation(c) Dividend income(d) Income from business(e) Life insurance(f) RRSP(g)
$40,500 30,000 51,000 5,300 Nil 730 64,000 Nil Nil
Rights or Things Return
$414
Notes to Solution (a) The land will be deemed to have been disposed of at fair market value of the time of Ms. Slidon's death. A taxable capital gain on the land of $40,500 [½ ($120,000 − $39,000)] will be included in Ms. Slidon's terminal return. Ms. Slidon's daughter will be deemed to have acquired the land at its fair market value. Therefore, she will have an adjusted cost base of $120,000. The building will be deemed to have been disposed of at fair market value. The proceeds will be $168,000. Therefore, recapture of $30,000 ($66,000 − $36,000) and a taxable capital gain on the building of $51,000 [½ ($168,000 − $66,000)] will be included in Ms. Slidon's terminal return. Ms. Slidon's daughter will be deemed to have acquired the building at a cost equal to the deemed proceeds of $168,000. (b) The net rental income of $5,300 will be included in Ms. Slidon's terminal return. No CCA can be claimed as the rental property was deemed disposed of immediately before her death. (c) The shares will be deemed disposed of at their adjusted cost base of $17,300 and no capital gain will be realized. Ms. Slidon's husband will be deemed to have acquired the shares for $17,300. Unless she had net capital losses to offset, there would be no benefit in electing the transfer to be at FMV. (d) The dividend paid on January 31 and April 30 will be included in Ms. Slidon's terminal return. The taxable amount would be $730.25 [1.15($305 + $330)]. The dividend declared on July 5, before Ms. Slidon's death, but not paid until July 31, after her death, may be included on a separate rights or things return in the amount of $414 (1.15 × $360), with an additional personal credit. (e) The income of Ms. Slidon's accounting practice of $64,000 must be included in her terminal return. (f) The life insurance is not taxable on Ms. Slidon's terminal return or to the estate. (g) The full amount of Ms. Slidon's RRSPs must be included in her husband’s return for the year of receipt. An election is available to allow a deductible contribution to her husband’s RRSP within 60 days of the end of the year of receipt.
Question 80 (14 minutes) [Chapter 14] Adam, an Ontario taxpayer, has come to you for advice on the payment of income tax instalments. He has provided you with the following information on his actual or estimated combined federal and provincial tax liability and the actual or estimated amounts of withholding by his employer:
Total income tax liability Total income tax withheld
2021 $29,000 28,000
2022 $25,000 22,000
Estimated 2023 $35,000 27,000
Required: (a)
Briefly explain whether Adam is required to make income tax instalments in respect of 2023. (3 minutes)
(b)
Calculate the options for the instalment payments in 2023 and indicate when they are due. (7 minutes)
(c)
Which of these options will be reflected in the Canada Revenue Agency’s Instalment Reminder Notices for the 2023 instalments? (1 minute)
(d)
What are the consequences of not paying the final instalment until Adam files his tax return on April 30, 2024? Assume that the basic prescribed rate on employee or shareholder loans is 1%. (Ignore the effects of any leap year). (3 minutes)
Solution 80 (a) Total income tax liability Total income tax withheld Balance of tax
2021 $ 29,000 (28,000) $ 1,000
2022 $ 25,000 (22,000) $ 3,000
2023 (est.) $ 35,000 (27,000) $ 8,000
Instalments are due in 2023 because the balance of tax owing is at least $3,000 in the current year (2023) and in either of the two preceding years (2022, in this case) (b)
Instalments are computed as the least of: (i)
1/4 × $8,000 (2023 est.)
(ii) 1/4 × $3,000 (2022 act.) (iii) 1/4 × $1,000 (2021 act.) 1/2 × ($3,000 − 2 × $250)
= = = =
$2,000 on Mar. 15/23, June 15/23, Sept. 15/23, and Dec. 15/23 $ 750 on same dates as for (i), above $ 250 on Mar. 15/23 and June 15/23 $1,250 on Sept. 15/23 and Dec. 15/23
(c)
Option (iii) will be reflected in CRA’s instalment reminder notices. Understand that in reality, CRA does not know the estimated tax for 2023 and can only base its determination on the actual 2023 balance of tax owing. Therefore CRA will not issue instalment reminders for 2023. If in fact the 2023 balance of tax owing is $3,000 or greater, CRA will start issuing instalment reminders in 2024. So in reality, CRA’s instalment reminders lag behind the legal liability to pay instalments by one full taxation year. It is CRA’s position that they will not charge interest for late or deficient instalments if no CRA instalment reminder has been issued to a taxpayer.
(d)
Interest compounded daily from December 15, 2023 to April 30, 2024, at a rate of 5% (i.e., 1% + 4%) will result in an amount owing on April 30, 2024 computed as follows: $1,250 (1 + .05/365)137 − $1,250 = $24
Question 81 (30 minutes) [Chapters 14, 15, 16] The following are short independent questions. 1.
Consider the following asset mix for PPM Manufacturing Limited and HOL Ltd. PPM Limited: Assets used in an active business carried on in Canada Investment in shares of HOL Ltd. Other assets
25% 30% 45% 100%
HOL Limited: (owned 100% by PPM Manufacturing Limited) Assets used in an active business carried on in Canada Other assets
95% 5% 100%
Required: (6 minutes) Does PPM Limited satisfy the “basic asset test” or the “modified asset test” (i.e., the third test) in the definition of “qualified small business corporation shares”? Support your conclusion with the facts given above. Assume that the proportions of the fair market values of assets shown have remained constant for at least the preceding 24 months. Do not consider the SBC or Holding Period Tests in the QSBCS definition. 2.
Michael had a balance of personal federal tax owing (after tax withheld at source) in 2021 of $7,000, a balance owing for 2022 of $2,500, and expects to have a balance owing for 2023 of $8,500. Required: (5 minutes) a) Is Michael required to make individual income tax instalment payments for the 2023 taxation year? Explain. b) Assuming that he is required to make instalment payments for the 2023 taxation year, calculate the options for the instalment payments and indicate when they are due.
3.
SmithCo has a December 31 year-end. For 2021, its federal corporate tax payable was $152,000, while for 2022 the amount was $104,000. For 2023, it is estimated that federal corporate tax payable will be $67,000. The company is not eligible for quarterly instalments. Required: (4 minutes) a) Calculate the options for the monthly instalment payments for SmithCo for the 2023 taxation year. b) When are the monthly instalments due?
4.
Anita Day died on February 15, 2023. Her 2022 income included income from an unincorporated business. Required: (4 minutes) a) What is the filing deadline for her 2022 personal income tax return? b) What is the filing deadline for her 2023 personal income tax return?
5.
MML Ltd. issued its first 100,000 shares at a price of $1.10 each. Two years later, an additional 50,000 shares were issued for $1.35. During the current year, a further 30,000 shares were issued for $1.82. All shares were issued from treasury. One of the investors in the company acquired 2,400 shares of the first group of shares issued, and an additional 3,850 shares from the most recent issue. Required: (6 minutes) Determine the total PUC of this investor’s shares.
6.
The following situations deal with Canadian-controlled private corporations and their non-arm’s length shareholders. Each of the two (2) transactions described below are separate and distinct. a) A Inc. issued, to the son of its only shareholder, redeemable/retractable preferred shares with a redemption/retraction value of $10,000. A Inc. added $10,000 to the paid-up capital of its shares as a result of this transaction. The son paid $500 for these shares. b) Mr. B, the sole common shareholder of B Ltd. is considering returning capital to himself in the form of a return of paid-up capital in the amount of $18,000. The common shares that he holds have a fair market value of $50,000 and a paid-up capital of $10,000. Mr. B’s adjusted cost base in his common shares of B Ltd. is $20,000. Required: (5 minutes) Discuss the tax consequences of the above transactions.
Solution 81 Part 1: Basic asset test: 1. only 25% of the assets of PPM are used directly in its own active business; 2. therefore, test not met because needs to be at least 50% used directly Modified asset test: 1. HOL has 95% of its assets used directly in its own active business 2. because HOL has at least 50% of its assets used in its own active business for the entire 24-month holding period then a. the investment in HOL held by POP is a qualified asset to use for modified asset test 3. POP has 25% used directly and 30% qualified investment in HOL = 55% total qualified assets 4. therefore, modified asset test IS met because a. one of the companies, HOL, has greater than 90% qualified assets AND b. the other company, POP has greater than 50% qualified assets Part 2: Yes instalments are owing for 2023 — because current year (2023) balance of tax owing is > $3,000 plus at least one of the previous two years (2021) balance of tax owing is also > $3,000 Instalments are the least of: − ¼ × $8,500 = $2,125 each − ¼ × $2,500 = $625 each − ¼ × $7,000 = $1,750 for first two instalments; $2,500 – (2 × $1,750) = $0 for remaining 2 instalments Instalments are due: Mar. 15; June 15; Sept. 15; Dec. 15 Part 3: Instalments are the least of: 1 /12 × $67,000 = $5,583 each for 12 instalments 1 /12 × $104,000 = $8,667 1 /12 × $152,000 = $12,667 for first two instalments; 1/10 × [$104,000 – (2 × $12,667)] = $7,867 last 10 instalments Instalments are due the last day of each month of the year starting January 31. Part 4: a) 2022 return due six months from February 15 which is August 15, 2023 b) 2023 return due June 15, 2024 since she earned unincorporated business income Part 5: Paid-up capital =
100,000 × 1.10 = $110,000 50,000 × 1.35 = 67,500 30,000 × 1.82 = 54,600 180,000 $232,100 = 1.28944/share × 6,250 shares = $8,059
Part 6: a) Deemed dividend [ssec. 84(1)]
b) Deemed dividend [ssec. 84(4)]
Reduce ACB of shares by
$10,000 increase in PUC (500) increase in net assets $ 9,500 $18,000 return of capital (10,000) PUC $ 8,000 $10,000 tax-free return of capital
Question 82 (31 minutes) [Chapter 16] Hal Rock is the sole shareholder of Microcosm Ltd., a corporation with an October 31 year-end. Microcosm Ltd. produces trivia games. Hal started the corporation with an initial capital investment of $30,000 for which he received 1,000 shares. Hal is a resident of Canada for tax purposes. Hal has let it be known that he wants to sell his business to enable him to build up a new tax consulting business. As a result, Hal has received two separate offers, both from individuals and both effective January 1, 2024. Offer One Tao Yang is willing to pay $1,000,000 for the shares of Microcosm Ltd. Offer Two Gisele Doucet is willing to buy the assets through an existing corporation that she owns. Gisele’s offer is as follows: Asset Marketable securities Accounts receivable Inventory Land Building Equipment Goodwill Total offer
Offer 14,000 60,000 254,000 372,000 330,000 12,000 180,000 $1,222,000
$
Both Tao and Gisele are residents of Canada for tax purposes. You have been given the following additional information. 1. Details of the assets and liabilities of Microcosm Ltd. Assets Cash Marketable securities, adjusted cost base Accounts receivable face value $62,000 Less: allowance (6,000) Inventory, cost amount Land, adjusted cost base Building undepreciated capital cost (UCC) (capital cost is $235,000) Equipment, UCC (capital cost is $65,000) Goodwill, UCC Class 14.1 (cost is $38,000; acquired 2020) Liabilities Trade payables Bank loan
Tax Value $ 15,000 26,000 56,000 230,000 144,000 203,000 22,000 33,500
47,000 118,000
2. The paid-up capital of the outstanding shares in Microcosm Ltd. is $30,000. 3. The capital dividend account of Microcosm Ltd. is $94,000 before any sale of assets under the offer above.
4. The non-eligible refundable dividend tax on hand balance of Microcosm Ltd. was $18,000 on October 31, 2023. 5. Hal and Gisele have agreed to file an election under section 22 of the Income Tax Act for the transfer of the accounts receivable should they eventually agree to a deal. 6. Microcosm Ltd. has the following tax rates: a) 13% on active business income up to the small business deduction limit (there are no associated companies); b) 40% on aggregate investment income (before the 10⅔% additional refundable tax) The GRIP balance of Microcosm Ltd. was $0 on October 31, 2023. 7. Hal pays personal tax at the top marginal combined federal and provincial rate of 42.5% on cash dividends from the low-rate income of a Canadian-controlled private corporation and 50% on all other income. 8. Hal utilized all of his capital gains exemption on a previous sale of the shares of a qualified small business corporation.
Required: Advise Hal as to which offer will provide him with the most after-tax funds.
Solution 82 After-tax retention on Tao Yang’s offer for shares: Proceeds ACB Capital gain Taxable capital gain Personal tax @ 50%
$1,000,000 (30,000) $ 970,000 $ 485,000 $ 242,500
Cash retained
$ 757,500
Gisele Doucet’s offer for assets: Asset Opening Cash Mkt. Sec A/R
$ 15,000 14,000 60,000
Inventory Land Building Equip Goodwill
254,000 372,000 330,000 12,000 180,000
Liab.
(165,000)
Tax
$1,072,000 (121,845)
NERDTOH
Proceeds
ABI
$
Inv. Inc.
CDA $94,000
$ (6,000)
(6,000)
114,000 47,500
114,000 47,500
71,000
71,000
$226,500 × 50⅔%
$320,500
NERDTOH $18,000
6,000 (2,000) 24,000
32,000 (10,000) 4,500
$54,500 × 13%
69,460
87,460
$87,460
$1,037,615 Sale of Goodwill Proceeds Cost Capital gain Taxable capital gain (50%) UCC Lower of cost and proceeds
Recapture
$180,000 38,000 $142,000 $71,000 $33,500 (38,000) (4,500) 4,500
Funds available PUC Deemed dividend on winding up Capital dividend Taxable dividend
$1,037,615 (30,000) 1,007,615 (320,500) $ 687,115
Funds available Less: deemed dividend Proceeds ACB Capital gain/loss
$1,037,615 (1,007,615) $30,000 (30,000) $ Nil
Funds distributed
$1,037,615
Tax on dividend 42.5% × $687,115 After-tax retention (proceeds less tax)
292,024 $ 745,591
Conclusion: Hal retains slightly more cash on the share sale.
Question 83 (29 minutes) [Chapter 16] Your client, I.M. Dunn, a Canadian resident, owned all of the issued shares of Beenthere Dunnit Ltd. (BDL), which carries on an electrical service business. The taxation year-end of the corporation was September 30. On your advice, he agreed to sell all of the assets of the company (except the cash) to one purchaser for $1,215,000. The sale was effective September 30, 2023. In the 2023 taxation year, the business broke even for tax purposes. The following was the balance sheet for BDL with the fair market value (FMV) of assets as indicated. Beenthere Dunnit Ltd. BALANCE SHEET As at September 30, 2023 Assets Current: Cash Marketable securities Accounts receivable Less: reserve for doubtful debts Inventories, at cost Property and plant Land, at cost Buildings & equipment, at cost (Note 1) Less accumulated amortization Intangibles, at cost (Note 1) Less accumulated amortization Liabilities & Shareholder's Equity Current liabilities Future income taxes Shareholder's equity Common share capital Authorized — 50,000 shares Issued — 1,000 shares Retained earnings (Note 2)
FMV $ $ 176,000 6,000
$ 750,000 290,000 $ 100,000 57,500
74,000 25,000
$
15,000
170,000 230,000 $ 499,000
172,000 240,000
60,000
110,000
460,000
490,000
42,500 $1,061,500
188,000 $1,215,000
$ 208,000 20,000
$
1,000 832,500
833,500 $1,061,500
Additional Information: 1.
The tax values of all assets are identical to amounts for book purposes, except for the building and equipment and the intangibles. The following pertains to these assets: Building Equipment Intangibles – Class 14.1
Cost $600,000 150,000 $750,000 $100,000
UCC $304,000 76,000 $380,000 $ 88,000
FMV $423,000 67,000 $490,000 $188,000
The intangibles consist of a client list that was acquired in 2020. The fair market value of the client list is $120,000. The fair market value of goodwill is $68,000. 2.
As of the balance sheet date, the non-eligible RDTOH balance for the company is $13,000. The CDA balance is $12,000.
3.
BDL pays corporate tax at a 13% rate on active business income eligible for the small business deduction and at a 40% rate on aggregate investment income, before the 10⅔% additional refundable tax. BDL has a GRIP balance of $0 at September 30, 2023.
4.
BDL and the purchaser elected under section 22 with respect to the accounts receivable.
5.
The cost of the BDL shares to I.M. Dunn was $1,000.
Required: (a)
Compute the amount available for distribution to Mr. Dunn on the sale of assets. (22 minutes)
(b)
Determine the components of the distribution to Mr. Dunn on a winding-up of the corporation. (7 minutes)
Solution 83 Part (A) — Funds available for distribution: Proceeds Opening Cash Mkt. secs. A/R Inventories Land Buildings Equipment Intangibles Cur. Liabs. Inc. Tax NERDTO H
ABI
Investment
CDA $12,000
$ 74,000 15,000 172,000 $ 2,0001 240,000 10,000 110,000 423,000 119,000 67,000 (9,000) 188,000 12,0002 $ 1,289,000 (208,000) (49,847)4 $134,000 32,627
$(5,000)
(5,000)
25,000
25,000
44,000
44,0003 19,6275 $32,627
$64,000
$1,063,780 1
2
$76,000
Reserve inclusion Business loss ($176K − $172K) Net business income
$
Class 14.1 UCC Less: Lower of cost and proceeds
$
6,000 (4,000) $ 2,000
Recapture
88,000 (100,000) (12,000) $ 12,000
3
Intangibles Proceeds Cost Gain ½ × gain
$188,000 (100,000) $ 88,000 $ 44,000
4
ABI: Inv.:
$ 17,420 32,427 $ 49,847
5
30⅔% of $64,000
13% of $134,000 50⅔% of $64,000
NERDT OH $13,000
[s. 22 election made]
$ 19,627
Part (B) — Components of distribution: Deemed dividend Funds available for distribution Less: PUC Deemed dividend (s. 84(2)) Less: Capital Dividend (s. 83(2)) Deemed taxable dividend
$1,063,780 (1,000) 1,062,780 (76,000) $ 986,780
Capital gain (loss) Proceeds Deemed dividend Proceeds of disposition ACB Capital gain (loss)
$1,063,780 (1,062,780) 1,000 (1,000) $ 0
Version Two using Problem-solving process for tax and incorporates HST
Question 83b (80 minutes) Your client, Ivan Trumpit, a Canadian resident, owned all of the issued shares of Bedlam Electric Ltd. (BEL), which carries on an electrical service business. The taxation yearend of the corporation is September 30. Today’s date is September 1, 2023. Ivan is considering a sale of all of the assets of the company (including the cash) to an unrelated purchaser for $1,289,000. The sale will be effective October 1, 2023. It is projected that the company will not have any taxable income for 2023. The following is the projected balance sheet for BEL with the fair market value (FMV) of assets as indicated. Bedlam Electric Ltd. BALANCE SHEET As at September 30, 2023 Assets Current: Cash Marketable securities Accounts receivable Less: reserve for doubtful debts Inventories, at cost Property and plant Land, at cost Buildings & equipment, at cost (Note 1) Less accumulated amortization Intangibles, at cost (Note 1) Less accumulated amortization
Liabilities & Shareholder's Equity Current liabilities Future income taxes Shareholder's equity Common share capital Authorized — 50,000 shares Issued — 1,000 shares Retained earnings (Note 2)
FMV $
$176,000 6,000
$750,000 290,000 $100,000 57,500
74,000 $74,000 25,000 $ 15,000
170,000 230,000 $ 499,000
172,000 240,000
60,000
110,000
460,000
490,000
42,500 188,000 $1,061,500 $1,289,000
$ 208,000 20,000
$
1,000 832,500
833,500 $1,061,500
Additional Information: 1.
The tax values of all assets are identical to amounts for book purposes, except for the building and equipment and the intangibles. The following pertains to these assets:
Building Equipment Intangibles – Class 14.1
Cost $600,000 150,000 $750,000 $100,000
UCC $304,000 76,000 $380,000 $ 88,000
FMV $423,000 67,000 $490,000 $188,000
The intangibles consist of a client list that was acquired in 2020. The fair market value of the client list is $120,000. The fair market value of goodwill is $68,000. 2.
The provincial corporate tax rate is 4% for income eligible for the small business deduction and 12% on all other income. BEL is projected to have a general rate income pool (“GRIP”) balance of $3,000 at September 30, 2023.
3.
BEL and the purchaser will elect under section 22 with respect to the accounts receivable if possible.
4.
Ivan was issued the shares of BEL on incorporation in 2006 for $1,000. The relative fair market values of the assets of the business have been consistent for several years.
5.
Ivan currently pays himself $250,000 of salary from BEL. After the sale of BEL, he will continue to work for the business under a consulting contract for 2 years and will earn $150,000 annually. Following that, he will retire permanently. He has registered retirement savings plans (RRSPs) and non-registered investments that will provide him with approximately $80,000 of pre-tax income to fund his retirement. While he is still working, the consulting income will provide sufficient cash flow to pay for Ivan’s living expenses.
6.
Ivan has never used his capital gains exemption.
7.
Ivan does not have a cumulative net investment loss (CNIL) balance and has not deducted allowable business investment losses (ABILs) in prior years.
8.
The cash balance in the corporation is required for the company’s business operations.
9.
As of the balance sheet date, the non-eligible refundable dividend tax on hand (“RDTOH”) balance for the company is projected to be $13,000. The capital dividend account (“CDA”) balance is projected to be $12,000.
Required: 1. Describe qualitatively the tax treatment of the asset sale to the unrelated purchaser. 2. Calculate the after-tax cash available for distribution to Ivan following the sale of the assets of the business by BEL. 3. Calculate the capital dividend account and RDTOH balances of BEL following the asset sale.
4. Describe qualitatively the tax treatment of a wind up of BEL following an asset sale. 5. Calculate the personal after-tax cash available to Ivan following the winding up of BEL. 6. Explain qualitatively the pros and cons to Ivan of retaining the corporation. Identify tax effective ways that Ivan could access funds from BEL if he decides to retain the corporation. 7. Explain the HST considerations with regards to the sale of assets to the unrelated purchaser. 8. If instead of selling assets, Ivan decides to sell his shares of the corporation for $1,000,000 describe qualitatively the tax treatment of the share sale. Determine if Ivan can use his capital gains exemption to shelter the gain. 9. Determine if Ivan will have more after-tax cash if he sells the shares of BEL for $1,000,000 compared to the above-described asset sale followed by a wind up of BEL. 10. What would be the minimum share price Ivan would be willing to accept for the shares of BEL? 11. Provide a summary of recommendations for Ivan.
Version Two Question 83b 1. Describe qualitatively the tax treatment of the asset sale to the unrelated purchaser • •
• • • •
The assets of the business are disposed of for tax purposes at fair market value to the unrelated purchaser. This will result in a realization of capital gains/losses on non-depreciable capital properties, capital gains, recapture or terminal losses on depreciable capital properties and business income on inventory disposed of by BEL to be reported on the 2023 corporate tax return for the company. The untaxed portion of capital gains will increase the capital dividend account for the corporation. The net taxable capital gains will be included in aggregate investment income and will result in refundable Part I tax to be added to the non-eligible RDTOH account for the corporation. The non-eligible RDTOH can be refunded when the corporation pays dividends. A section 22 election can be filed for the transfer of the accounts receivable because all or substantially all of the property used in carrying on the business will be sold to a purchaser who proposes to continue the business. o This will result in a business loss for BEL on the A/R o offset by business income for the prior year’s bad debt reserve.
2. Calculate the after-tax cash available for distribution to Ivan following the sale of the assets of the business by BEL. [1 mark] • Funds available for distribution = $1,031,153 3. Calculate the capital dividend account and RDTOH of BEL following the asset sale. [30 marks] • CDA $76,000, non-eligible RDTOH $32,627 Proceeds Opening Cash Mkt. secs. A/R Inventories Land Buildings Equipment
$ 74,000 15,000 172,000 240,000 110,000 423,000 67,000
ABI
AII
CDA 12,000
(5,000)
(5,000)
25,000
25,000
2,0001 10,000 119,000 (9,000)
RDTOH 13,000
Intangibles Cur. Liabs. Inc. Tax
After-tax $ from asset sale
188,000 $ 1,289,000 (208,000) (49,847)4
12,0002
44,000
$134,000 @13%
$ 64,000 @50.67%
$17,420
$32,427
$1,031,153
44,0003 19,6275
$76,000
$32,627
Dividend to get full refund $85,114
Note 1
Reserve inclusion Business loss ($176K − $172K) Net business income
$ 6,000 (4,000) $ 2,000
Note 2
UCC Less: Lower of cost and proceeds Recapture
$ 88,000 (100,000) (12,000) $ 12,000
Note 3
Proceeds Cost Gain ½ × gain
$188,000 (100,000) $ 88,000 $ 44,000
Note 4
ABI: 13% of $144,800 Inv.: 50⅔% of $64,000
$ 17,420 32,427 $ 49,847
Note 5
30⅔% of $64,000
$ 19,627
4. Describe qualitatively the tax treatment of a winding up of BEL following an asset sale. • On a winding up of a corporation resident in Canada there is a deemed dividend equal to the funds or property of the corporation distributed in excess of the paid up capital of the shares of the corporation. • If the corporation has a capital dividend account, the portion of the winding up dividend that does not exceed the capital dividend account is deemed for purposes
• •
•
of a capital dividend election to be a separate dividend and can be received by the shareholder tax-free. The remainder of the dividend will be taxed at the shareholders marginal tax rate for dividends. Where the corporation has a general rate income pool (GRIP) balance, a dividend can be designated as an eligible dividend i.e., $3,000 in this case o It will be subject to a tax rate of 31% for Ivan. o The rest of the dividend will be non-eligible and subject to a tax rate of 42.5%. o Currently, Ivan is in the top tax bracket as he earns in excess of $221,709 of annual taxable income. There may also be a capital gain/loss on the disposition of the shares for capital gains purposes, if the adjusted cost base of the shares differs from the paid-up capital of the shares.
5. Calculate the personal after-tax cash available to Ivan following the winding up of BEL [10 marks] After-tax $ from asset sale
$1,031,153
Non-eligible RDTOH After-tax cash available for distribution
32,627 $1,063,780
Components of distribution: Deemed dividend Funds available for distribution Less: PUC Deemed dividend (s. 84(2)) Less: Capital Dividend (s. 83(2)) Deemed taxable dividend
$1,063,780 (1,000) 1,062,780 (76,000) $ 986,780
Capital gain (loss) Proceeds Deemed dividend Proceeds of disposition ACB Capital gain (loss)
$1,063,780 (1,062,780) 1,000 (1,000) $ $0
After-tax cash to Ivan can be calculated as follows assuming $3,000 of the dividend is designated to come from GRIP. Eligible dividend $3,000 @ 31% = $930 Non-eligible dividend $986,780 @ 42.5% = $419,382
[Dividend is sufficient to clear the non-eligible RDTOH pool.] After-tax personal cash = $643,468 [$1,063,780 - $419,382- $930]
6. Explain qualitatively the pros and cons to Ivan of retaining the corporation. Identify tax effective ways that he could access the funds from BEL if he decides to retain the corporation. Pros • If Ivan retains the corporation, he can defer the $420,312 of tax ($930 + $419,382) on the taxable dividend • He will save tax as he will be in a lower tax bracket in the future. His income in future years will be $150,000 for 2 years and $80,000 thereafter. • The tax rate on a winding-up dividend will be as low as 22.4% for the portion of the non-eligible dividend in the $50,198 to $100,392 tax bracket. • He can still access the $76,000 of CDA and $1,000 of PUC tax free. • He can also pay an eligible dividend of $3,000, paying tax of $930 at 31%. As the company does not have any eligible RDTOH, a dividend refund will not result. • He does not require cash for his living expenses Cons • • • • •
Tax filing/administrative costs of maintaining a corporation. More difficult to access funds in a corporation. Investment income is taxed at a high rate of 50.67%. and results in a prepayment of tax relative to earning investment income personally. There is a tax cost to earning investment income in a corporation relative to earning it personally. Can’t invest in a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA) in a corporation.
7. Explain the HST considerations with regards to the sale of assets. HST exempt – Cash, A/R, Goodwill, Marketable securities HST applicable – Inventories, land, building, equipment, client list Section 167 election – Eligible - Business established or carried on by the supplier (Bedlam) - Recipient (Unrelated purchaser) acquires ownership or use of all or substantially all of the property needed - for the recipient to carry on the business (ignoring exempt assets) - Recipient (Unrelated purchaser) needs to be a registrant (Bedlam should confirm)
-
Joint GST 44 election filed by the recipient by the due date of the HST return for the period of the supply.
8. If instead of selling assets, Ivan decides to sell his shares of the corporation for $1,000,000 describe qualitatively the tax treatment of the share sale. Determine if Ivan can use his capital gains exemption (CGE) to shelter the gain There will be a capital gain on the disposition of the shares of the corporation of $999,000 and a taxable capital gain of $499,500. Ivan can use his capital gains exemption if the shares are qualified small business corporation (QSBC) shares. To be QSBC shares, three tests must be met; 1) The company must be a small business corporation (SBC) at the time of sale. a. Canadian-controlled private corporation (CCPC) b. 90% or more of the fair market value of the gross assets must be assets used principally in an active business carried on primarily in Canada. c. Non-active business assets i.e. Marketable securities make up only 1% of the gross assets. d. Therefore, BEL is a SBC. 2) Ivan must have held the shares for 24 months prior to sale. a. He has owned the shares since 2006. 3) The Basic Asset Test must be met. a. More than 50% of the fair market value of the gross assets must be assets used principally in an active business carried on primarily in Canada for the 24 months prior to the share sale. b. The relative fair market values/asset type have not changed in the prior 24 months, so this test is met. He does not have a CNIL balance or prior year ABILs Therefore, the shares appear to be QSBC shares and Ivan will be able to claim the capital gains exemption to offset the taxable capital gain on the sale.
9. Determine if Ivan will have more after-tax cash if he sells the shares of BEL for $1,000,000 compared to the above-described asset sale? If Ivan can use his capital gains exemption, he will have a taxable capital gain after the exemption of $13,905 [$499,500-$485,595] and tax of $13,905 x 50% = $6,953. This will leave him with $993,047 [$1,000,000 - $6,953] of after-tax cash.
This compares to $643,468 of after-tax cash if he sells the assets and winds up the corporation 10. What would be the minimum share price he would be willing to accept for the shares? The minimum share price he would accept would be $643,468 which would result in $643,468 of after-tax proceeds. •
Capital gain would be $643,468 - $1,000 = $642,468
•
Taxable capital gain of $321,234
•
He would use $321,234 of his capital gains deduction leaving $164,361 for future use.
•
Net tax payable would be $0
Alternatively, Ivan could have the company pay him a $12,000 capital dividend tax-free and then accept $631,468 for the shares. This would preserve an additional $6,000 of capital gains deduction for future use.
11. Provide a summary of recommendations for Ivan. [6 marks] If Ivan decides to sell the assets of the business to BEL, he should file a joint Section 22 election with the purchaser for the A/R. If the company is wound up after the sale, $3,000 of the taxable dividend should be designated as an eligible dividend to take advantage of a lower marginal tax rate. A joint GST 44 form (or 167 election) should be filed with the purchaser to eliminate the requirement to collect and remit the HST on the sale. Ivan should consider retaining the corporation after the asset sale to defer and save tax on the winding up dividend until he is in a lower tax bracket in the future. If Ivan retains the corporation after the asset sale, he should pay out PUC and CDA if he requires personal funds to invest. Ivan should consider a share sale to take advantage of the capital gains deduction and maximize his after-tax proceeds from the sale of the business. He should not accept less than $643,468 for a share sale to be in the same position as an asset sale/wind up.
Question 84 (16 minutes) [Chapter 16] The following transactions pertain to independent Canadian-controlled private corporations and their shareholders. Each transaction described below is separate and distinct from the other transactions. (a)
Ethan Ltd. issued 150 preferred shares for $11,000 cash plus assets with a fair market value of $3,000. The paid-up capital (PUC) was increased by $100 per share, as a result of the share issue. (6 minutes)
(b)
Maya Ltd. redeemed its preferred shares for $15,000. The shares have a paid-up capital of $11,000 and an adjusted cost base (“ACB”) of $10,000. (10 minutes)
Assume that the corporation has no general rate income pool (“GRIP”) balance at all relevant times. Required: For each of the above transactions, calculate: (i)
the income of the shareholder,
(ii)
the PUC of the shares to the corporation after the transaction, and
(iii)
the ACB of the shares to the shareholder after the transaction.
Show all calculations.
Solution 84 (a)
(b)
(i)
Income increase in PUC of shares (150 × $100) increase in net assets ($11,000 + $3,000) s. 84(1) deemed dividend Gross-up dividend (1.15 x $1,000)
$15,000 (14,000) $ 1,000 $ 1,150
(ii)
PUC
$15,000
(iii)
ACB
($11,000 + $3,000 + $1,000)
$15,000
(i)
Income redemption proceeds PUC s. 84(3) deemed dividend Grossed-up dividend (1.15 × $4,000)
$15,000 (11,000) $ 4,000 $ 4,600
redemption proceeds deemed dividend proceeds of disposition ACB capital gain taxable capital gain
$15,000 (4,000) 11,000 (10,000) $ 1,000 $ 500
(ii)
PUC
($11,000 − $11,000)
$0
(iii)
ACB
($10,000 − $10,000)
$0
Question 85 (17 minutes) [Chapter 16] Adam intends to wind up his corporation, ARFL Inc., a Canadian Controlled Private Corporation (CCPC). He recently caused ARFL Inc. to sell all of its assets for cash and to pay off all of its liabilities, including its income tax liability. As a result, the following account balances remain in the corporation: Cash $450,000 Paid-up Capital (PUC) 25,000 Capital Dividend Account (CDA) 20,000 Non-eligible Refundable Dividend Tax on Hand (NERDTOH) 35,000 General Rate Income Pool 0
Adam had purchased the shares at their fair market value many years ago for $15,000 from the person who had originally incorporated the corporation. Required: Compute the net cash that Adam will retain from a winding-up of ARFL Inc. in 2023. Assume a combined federal and provincial personal tax rate of 50% and a provincial dividend tax credit of 4/13 of the gross-up on any (non-eligible) dividend. Show all calculations.
Solution 85 Cash Non-eligible RDTOH Total cash available for distribution Less: PUC s. 84(2) deemed dividend (sufficient to clear non-eligible RDTOH) Less: capital dividend Taxable dividend
$450,000 35,000 $485,000 25,000 $460,000 20,000 $440,000
Total cash available for distribution Less: s. 84(2) deemed dividend Proceeds of disposition Less: adjusted cost base Capital gain
$485,000 460,000 $ 25,000 15,000 $ 10,000
Net cash retained Total cash distributed Less: income tax Grossed-up dividend (1.15 × $440,000) Taxable capital gain (½ × $10,000) Income Tax @ 50% (combined) Less: dividend tax credit (combined) [(9/13 + 4/13) of 15% of $440,000] Net cash
$485,000 $506,000 5,000 $511,000 $255,500 ( 66,000)
(189,500) $ 295,500
Question 86 (14 minutes) [Chapter 16] Julstan Multi-Enterprise Limited (JML) is a Canadian-controlled private corporation. It has operated with a December 31 year-end. At its December 31, 2017 tax year-end, the balance in its capital dividend account was “0”, with no negative amounts carried for future offset. The following transactions occurred in the indicated taxation years thereafter. May 24, 2018: sale of shares held in a public corporation for proceeds of $48,000; the shares had cost $72,000 and JML paid a sales commission of $2,000 June 30, 2019: acquisition of an unlimited-life franchise for $49,000 August 20, 2020: received $25,000 as a dividend from the capital dividend account of a wholly owned subsidiary October 31, 2021: sold the following assets pertaining to the franchise
Investments Land Building Equipment Franchise rights Goodwill
June 9, 2022:
Proceeds of Disposition $ 36,000 40,000 118,000 12,000 55,000 30,000
Original Cost $47,000 26,000 92,000 17,000 49,000 -
UCC n/a n/a 87,000 10,500 31,500 -
Selling Costs $1,000 2,000 6,000 -
received $100,000 from a life insurance policy on the life of a key employee; the corporation had paid total premiums of $19,000 on the policy
July 22, 2023: elected to pay a dividend of $75,000 out of the capital dividend account Required: Compute the balance in JML’s capital dividend account at December 31, 2023. Show all supporting calculations.
Solution 86
2018 2020 2021
2022 2023
shares capital dividend investments land building equipment franchise goodwill life insurance capital dividend Totals
untaxed net CG $(13,000)1
cap. div. received
untaxed life ins.
cap. div. paid
$ 25,000 (6,000)2 6,0003 10,0004 0 3,0005 15,0006 $ 81,0007 $
15,000
Balance: $49,000
Supporting calculations: 1
½ × ($48,000 − $72,000 − $2,000)
2
½ × ($36,000 − $47,000 − $1,000)
3
½ × ($40,000 − $26,000 − $2,000)
4
½ × ($118,000 − $92,000 − $6,000)
5
½ × ($55,000 − $49,000)
6
½ × ($30,000 − $0)
7
$100,000 − $19,000
$ 25,000
$ 81,000
$(75,000) $(75,000)
Question 87 (36 minutes) [Chapter 16] Les Canadiens Ltd. is a Canadian-controlled private corporation started about 20 years ago by Molson Habitant. Molson’s initial investment in the common shares of the corporation was $10,000. Molson is the only shareholder of the corporation and would like to retire while his business is at a peak. He is considering his alternatives for the sale of the business to help finance his retirement. The following is a projected balance sheet with estimated fair market values (FMV) at the expected date of disposition, late in December of 2023. LES CANADIENS LTD. BALANCE SHEET December 31, 2023 Assets Current assets: Cash Marketable securities, at cost (FMV: $13,000) Accounts receivable (net of $5,000 reserve; FMV: $43,000) Inventory, at cost (FMV: $57,000) Fixed assets: Land, at cost (FMV: $400,000) Building, at UCC (FMV: $975,000, cost: $280,000) Equipment, at UCC (FMV: $25,000, cost: $70,000 Intangibles, at UCC (FMV: $430,000; cost: $320,000)
$10,000 20,000 40,000 50,000 $120,000 160,000 136,000 34,000 282,000 $732,000
The intangibles consist of a customer list purchased from a competitor going out of business, in 2020. Liabilities and Shareholder’s Equity Current liabilities: Accounts payable Bank indebtedness Future income taxes Shareholder’s equity: Common share paid-up capital Other retained earnings
$ 15,000 35,000 50,000 57,000 10,000 615,000 $732,000
The corporation is taxable at a total corporate rate of 13% on active business income eligible for the small business deduction and an initial 40% rate on aggregate investment income, before the 10⅔% additional refundable tax on investment income. Assume that business operations broke even for the fiscal year ended December 31, 2023, before a sale of assets takes place. The corporation will have a “0” balance in the General Rate Income Pool (GRIP) at the time of a winding-up. The projected balance in the non-eligible refundable dividend tax on hand (NERDTOH) at December 31, 2023 is $30,000 and the projected Capital Dividend Account (CDA) is $25,000.
Required: (a)
If Molson sells the assets on the open market (i.e., no single buyer) in 2023 and winds up the corporation early in 2024, what would be the net amount available for distribution to him after paying all liabilities? (27 minutes)
(b)
If the funds are distributed to Molson, determine the amount and nature of the components of the distribution to him for tax purposes. (6 minutes)
(c)
Determine the amount that Molson would retain from this distribution in (b) after tax. Assume that Molson’s marginal tax rate is 50% (including provincial tax) on income other than dividends and 42.5% (federal and provincial combined rate after dividend gross-up and related tax credit) on the cash amount of non-eligible dividends. (3 minutes)
Solution 87 (a)
Asset Opening Cash Mkt. Secs. A/R1 Inventory Land Building
Proceeds
ABI
Income Investment
$ 25,000 $
10,000 13,000 43,000 57,000 400,000 975,000
$
$ (3,500) (1,000)
(3,500) (1,000)
144,000
120,000 347,500
120,000 347,500
55,000
5,000 7,000
Equipment Intangibles2 Bank & A/P
25,000 430,000 (50,000)
(9,000) 38,000
55,000
Income tax Non eligible RDTOH
(286,503) 188,853
$185,000
$518,000
$1,805,350
(c)
Noneligible RDTOH $ 30,000
158,853 $188,853 $543,000
× .13 $ 24,050
(b)
CDA
/ .3833
= $492,704
× 50⅔% $262,453
Funds available for distribution Less: PUC Deemed dividend on winding-up Less: capital dividend Taxable dividend (sufficient to clear NERDTOH)
$1,805,350 10,000 $1,795,350 543,000 $1,252,350
Funds available for distribution Less: deemed dividend on winding-up P of D Less: ACB CG (CL)
$1,805,350 1,795,350 10,000 10,000 $ 0
Funds distributed Less: tax on taxable dividend @ 42.5% of $1,252,350 After-tax cash from distribution
$1,805,350 532,249 $1,273,101
Notes: 1.
Section 22 is not available, since the assets are not being purchased by a purchaser who will carry on the business. The reserve is reversed to active business income. The loss is a capital loss, only ½ allowable.
2.
UCC Lower of cost and proceeds Negative balance Recapture Proceeds Cost Gain Taxable capital gain & CDA
$282,000 (320,000) (38,000) $38,000 $430,000 (320,000) $110,000 $ 55,000
Question 88 (76 minutes) [Chapter 17] Ms. Maya Regierk wants to transfer the assets of her unincorporated wholesaling business to a newly incorporated company of which she is the only shareholder. She has just received the pro forma financial statements that you prepared as at December 31, 2023 and wants to transfer the assets by January 1, 2024. Maya wants to avoid triggering any income tax on the transfer. Liabilities of the proprietorship, except for the mortgage, are to be assumed by the corporation, first, in payment for assets transferred to the corporation other than under a subsection 85(1) election and, then, in payment for assets transferred to the corporation by a subsection 85(1) election. The mortgage is to be assumed by the corporation in partial payment for the land and the building. New debt is to be issued (to the nearest $100) by the corporation to the maximum that will permit a full deferral of unrealized income on assets transferred. She will own only common shares after the transfer. The following is the pro forma balance sheet of Maya Wholesaling, as at December 31, 2023, along with expected fair market values at that time. The proprietorship has used the same asset values and depreciation for accounting and tax purposes. Maya Wholesaling (a sole proprietorship) Pro Forma Balance Sheet as at December 31, 2023 Assets Cash Marketable securities, at cost Accounts receivable (face value: $138,800; reserve: $10,900) Inventory Prepaid insurance Land in Waterloo held for speculation, at cost Fixed assets (see schedule below)
Book Value $ 14,200 13,000 127,800 28,400 3,300 54,600 182,300 $423,600
Liabilities and Proprietor’s Equity Bank loan Accounts payable and accrued liabilities Mortgage on land and buildings
FMV $ 14,200 7,600 109,300 40,400 3,300 273,000 298,700 $746,500
$ 68,800 95,100 101,600 265,500 158,100 $423,600
Owner's capital
Maya has indicated that she has recently received an unsolicited offer of $746,500 for all of the assets of his business together (without the assumption of liabilities). This amount appears to be a good indication of the fair market value of her business. Schedule of Fixed Assets Land Class 1 (building) Class 8 (office furniture) Class 10 (automotive equipment; no accrued capital gains on any asset) Class 12 (computer software) Class 14.1 (intangibles)
Cost $ 87,400 60,100 54,600 41,200 5,500 9,800
UCC $ 47,000 24,000
FMV $103,800 92,900 20,800
17,500 $0 6,400
15,300 2,200 63,700
Required: Analyze in technical detail the following issues in preparation of your advice to Maya. (a)
With respect to the assets described above consider: (i)
which assets should not be transferred to the corporation, with a very brief explanation of why;
(ii)
which assets should be transferred to the corporation, but cannot or should not be transferred to the corporation under a subsection 85(1) election, with a very brief explanation and an indication of how these assets should be transferred and what amount of assumed and new (if any) debt consideration should be taken for each such asset; and
(iii)
which assets should be transferred to the corporation under a subsection 85(1) election and the consideration that should be received for each asset so transferred. (45 minutes) (b)
Compute the adjusted cost base (ACB) and the paid-up capital (PUC) for tax purposes of the common share consideration, showing the technical details of your calculation of these amounts. (7 minutes)
(c)
Maya’s good friend, Janna, who considers herself somewhat of a tax expert, has indicated that it would be a good idea for income splitting purposes to have Maya’s husband incorporate the company and subscribe for 100 common shares with $100 of his own funds, since he is in the lower tax bracket. Then, Maya would take, as consideration for the assets transferred under a subsection 85(1) election, preferred shares with a fair market value of $60,000 and no common shares. Explain, briefly, to Maya, with any numbers derived technically or conceptually, as necessary, the immediate tax consequences of her friend’s advice. (9 minutes)
(d)
Assume that, eleven years from now, the common shares issued to Maya in part (a)(iii), above, plus some additional common shares issued to her on a later capital contribution of $25,000 in cash are worth $325,000. The only change to the adjusted cost base or paidup capital computed in part (b), above, will be as a result of this one additional issue of common shares. Maya will have fully utilized her capital gains exemption on other shares. At that time in 11 years, Maya will want to freeze the value of her investment in the corporation using a capital reorganization under section 86 in which she receives debt of the corporation, if possible, and preferred shares. What is the maximum amount of debt (to the nearest $100) that she can receive without realizing any income, using section 86? What are the fair market value, adjusted cost base and paid-up capital of the preferred shares that she will receive under section 86? Show all technical calculations necessary to prove your answers to these questions. (15 minutes)
Solution 88 (a) (i) Assets not transferred to the corporation: Asset Marketable securities Land held for speculation
Explanation not needed by corporation; loss would be denied to individual not needed by corporation; land held as inventory not eligible for s. 85 election; no deferral
(ii) Assets transferred to the corporation other than by s. 85(1) election: Asset Cash
Tax Value $ 14,200
A/R
138,800
Ppd ins.
3,300
Class 8
24,000
Class 10
17,500 $197,800
FMV
Transfer Assumed Explanation for not transferring by s. 85(1) Price Debt election $ 14,200 $ 14,200 $ 14,200 - not eligible; no income to defer - s. 22 better; allows full business loss of $29,500, 109,300 109,300 109,300 which offsets the reserve inclusion of $10,900; corporation eligible for reserve and /or write-off 3,300 3,300 3,300 - not eligible; no income to defer - no income to defer; terminal loss of $3,200 denied, 20,800 20,800 20,800 but eligible for CCA deducted by individual - no income to defer; terminal loss of $2,200 denied, 15,300 15,300 15,300 but eligible for CCA deducted by individual $162,900 $162,900 $162,900
There is $1,000 (i.e., $68,800 + $95,100 − $162,900) of assumed debt left as consideration for assets transferred under s. 85(1), exclusive of the mortgage ($101,600) which was specifically directed to be taken back as partial consideration for the transfer of the land and building. (iii) Assets transferred to the corporation by s. 85(1): Asset
Tax Value
FMV
Inventory Land Building Comp. Soft. Intangibles
$ 28,400 87,400 47,000 0 6,400 $169,200
$ 40,400 103,800 92,900 2,200 63,700 $303,000
(b)
Elected Amount $ 28,400 87,400 47,000 1 6,400 $169,201
ACB of common shares: Elected amount Allocated to debt consideration: Assumed debt New debt ACB of common shares PUC of common shares: Legal stated capital (LSC) before reduction $133,800
Assumed Debt $ 1,000 87,400 14,200
$102,600
New Common Debt Shares $ 27,400 $ 12,000 16,400 32,800 45,900 2,200 6,400 57,300 $66,600 $133,800
$169,201 $102,600 66,600 $
169,200 1
Income 0 0 0 $1 0
s. 85(2.1) reduction: (1) Increase in LSC (2) elected amount less: boot excess, if any Tax PUC
(c)
$133,800 (A) $169,201 169,200 1 (B)
Benefit (may be derived conceptually) to husband: FMV of property transferred Less: greater of (i) FMV of all consideration ($102,600 + $66,600 + $60,000) (ii) Elected amount Greater amount Benefit
(133,799) $ 1
$303,000
$229,200 $169,201 229,200 $ 73,800
• reasonable to regard this as a benefit that Maya desired to confer on her husband (related person) • must step up elected amount by $73,800, resulting in income subject to tax on the transfer • cost of assets to corporation can be increased • no increase in ACB of shares of either Maya or her husband, resulting in future tax on gain in value of his common shares • the PUC of Maya’s shares will increase by $73,800, reflecting the increase in tax-paid cost as a result of the increase in the elected amount
(d)
Maximum debt Preferred shares
FMV LSC ACB PUC
$ 25,000 300,000 300,000 0 0
Issuance of new shares: (1) Reduced PUC [s. 86(2.1)(a)] LSC of preferred shares Less: PUC of old common ($1 + $25,000) Less: boot PUC reduction Tax PUC ($300,000 − $299,999)
(2)
$ 300,000 $25,001 25,000
Cost of preferred shares ACB of old common ($1 + $25,000) Less: FMV of non-share consideration Cost of preferred shares
1 $ 299,999 $ 1 $25,001 25,000 $ 1
Redemption of old shares: (1) Deemed dividend Proceeds on redemption of old shares FMV of boot Reduced PUC of preferred shares Less: PUC of old common Deemed dividend
$25,000 1
$ 25,001 25,001 $ 0
(2)
Capital gain (capital loss) Proceeds on redemption of old shares Cost of preferred shares Add: FMV of boot Proceeds of redemption Less: deemed dividend Adjusted P of D ACB Capital gain (loss)
$ 1 25,000 $ 25,001 0 $ 25,001 25,001 $ 0
Question 89 (9 minutes) [Chapter 17] Rudolph Holdings Limited (“Rudolph”) has received an offer from Dasher Inc. (“Dasher”) to purchase all of Rudolph’s common shares in its wholly owned subsidiary, Reindeer Operations Limited (“Reindeer”). All three corporations are Canadian-controlled private corporations and have December 31 year-ends. The common shares of Reindeer have an adjusted cost base (ACB) of $1,000,000, a paid-up capital (PUC) of $100,000, and a fair market value of $4,500,000. Reindeer has realized and retained income for tax purposes of $1,500,000 since 1971. All of this realized income was derived from active business assets. Dasher Inc. cannot afford to pay $4,500,000 for the shares of Reindeer. The real estate in Reindeer is valued at $2,500,000 and does not have any accrued gains or recapture. Dasher Inc.’s proposal to purchase Reindeer is as follows: 1. Reindeer will distribute the real estate as a dividend-in-kind to Rudolph. 2. After the above distribution, the value of Reindeer will drop by $2,500,000 to $2,000,000. 3. Dasher Inc. will pay Rudolph $2,000,000 for the shares of Reindeer. Required: On the basis of the fact that the “dividend-in-kind” is taxable in exactly the same manner as a cash dividend, advise Rudolph as to the tax implications of the proposed transactions.
Solution 89 A portion of the dividend will be reclassified as proceeds of disposition. Proceeds of disposition Add: Dividend paid to Rudolph Less: safe income (realized retained earnings since 1971) Adjusted proceeds Less: ACB of shares Capital gain Taxable capital gain
$2,000,000 $2,500,000 (1,500,000)
1,000,000 $3,000,000 (1,000,000) $2,000,000 $1,000,000
Question 90 (28 minutes) [Chapter 16] Ms. Shlemeel was the sole proprietor of a business that retailed specialty coffees. The business has a December 31 year-end. With the advice of her lawyer, Mr. Shlemozzel, she proposes to transfer the assets of the business on January 2, 2024 to a newly incorporated company called Shlemeel Coffees Unlimited Ltd., the common shares of which are owned by her husband. This corporation has a December 31 year-end. Ms. Shlemeel has provided you with the following balance sheet and additional information concerning her proprietorship. SHLEMEEL COFFEES BALANCE SHEET December 31, 2023 Current Assets Cash
$15,000
Accounts receivable
$35,000
Less: Reserve for doubtful debts
13,000
22,000
Inventory (not real estate), at cost (FMV$40,000)
37,000
Shares in Koffee Kart Ltd., at cost (FMV: $32,000)
45,000
Prepaid rent
2,000 $121,000
Fixed assets Land, at cost (FMV: $210,000)
60,000
Building, at cost (FMV: $180,000)
$160,000
Less: accumulated amortization
95,000
Equipment, at cost (FMV: $49,000)
$100,000
Less: accumulated amortization
54,000
Computer system, at cost (FMV: $12,000) Less: accumulated amortization Less: accumulated amortization
46,000
$25,000 8,000
Computer software, at cost (FMV: $4,000)
65,000
17,000
$6,000 6,000
$309,000
Current liabilities Accounts payable
$20,000
Current portion of mortgage
27,000 $47,000
Long-term debt Mortgage payable Less: current portion
$115,000 27,000
88,000 $135,000
Proprietor's equity
174,000 $309,000
FMV = fair market value
Additional Information 1.
Income for tax and financial accounting purposes have always been the same.
2.
The proprietorship has developed goodwill that has a fair market value of $71,000.
3.
Liabilities are to be assumed by the new corporation. In addition, Ms. Shlemeel wants to take, as consideration for the transfer of assets under subsection 85(1), the maximum (to the nearest multiple of $1,000) in notes payable by the corporation to permit the maximum deferral of taxation on the transfer. She wants the remainder of the maximum fair market value of consideration in voting preferred shares. The shares will be retractable with a legal stated capital equal to their fair market value and sufficient votes to control the corporation.
4.
Koffee Kart Ltd. is an arm's length Canadian-controlled private corporation. All of the corporation's assets are used in an active business carried on in Canada. Ms. Shlemeel owns 15% of the shares of Koffee Kart Ltd.
Required: Ms. Shlemeel has come to you, her accountant, for income tax advice on this proposed transaction. (a)
Identify, with a brief explanation, the business assets that: (12 minutes) (i)
should not be transferred to the corporation at all, and
(ii)
should be transferred to the corporation, but cannot or should not be transferred under a subsection 85(1) election and the amount and type of consideration that should be received for each asset.
(b)
For the assets that should be transferred under a subsection 85(1) election to the corporation, indicate the maximum amount of debt (to the nearest multiple of $1,000) that can be taken. Also, indicate the amount of the shares that can be taken as consideration to defer all possible capital gains, losses and other income and to avoid other adverse tax consequences. (13 minutes)
(c)
Compute the adjusted cost base (ACB) of the consideration and the paid-up capital (PUC) for tax purposes of the shares received from the corporation on the transfer under a subsection 85(1) election. (3 minutes)
Version using the Problem-solving Process for Tax/Incorporates HST issues [Chapter 13, 17, 21] Question 90b (100 minutes) Marlene Irvine, age 40, is the sole proprietor of a business that distributes high-end specialty coffee and espresso makers. She lives in Waterloo, Ontario and has been a client of your firm for several years. The business has a December 31 year-end. With the advice of her lawyer, she is proposing to transfer the assets of the business on January 2, 2024 to a newly incorporated company called Irvine Beans Limited, the common shares of which are owned by her husband, age 51. This corporation has a December 31 year-end. She has asked for advice on the most tax effective method of transferring the assets to the corporation. Marlene has provided you with the following balance sheet and additional information concerning her proprietorship. IRVINE BEANS BALANCE SHEET December 31, 2023 Current Assets Cash Accounts receivable Less: Reserve for doubtful debts
$15,000 $35,000 13,000
22,000
Inventory (not real estate), at cost (FMV$40,000)
37,000
Shares in Koffee Kart Ltd., at cost (FMV: $32,000)
45,000
Prepaid rent
2,000 $121,000
Fixed assets Land, at cost (FMV: $210,000)
60,000
Building, at cost (FMV: $180,000)
$160,000
Less: accumulated amortization
95,000
Equipment, at cost (FMV: $49,000)
$100,000
Less: accumulated amortization
54,000
Computer software, at cost (FMV: $4,000) Less: accumulated amortization
65,000 46,000
$6,000 6,000
$292,000
Current liabilities Accounts payable
$20,000
Current portion of mortgage
27,000 $47,000
Long-term debt Mortgage payable Less: current portion
$115,000 27,000
88,000 $135,000
Proprietor's equity
157,000 $292,000
Additional Information 1. The net book value of each depreciable asset in the financial statement is equivalent to its undepreciated capital cost balance. 2. The proprietorship has developed goodwill that has a fair market value of $71,000. 3. Koffee Cart Ltd. is an arm's length Canadian-controlled private corporation. All of the corporation's assets are used in an active business carried on in Canada. 4. Marlene owns 5% of the shares of Koffee Cart Ltd. Marlene would like advice on minimizing income tax and HST to the extent possible on the transfer of assets to the corporation. Liabilities are to be assumed by the corporation. She would like to be able to remove funds from the corporation easily in the future and her lawyer is recommending taking back a note and preferred shares on the transfer. She is wondering how much of each should be taken back and what the terms of the shares should be. She would also like our advice on what will happen if she redeems or sells the shares in the future for fair market value. Marlene’s husband has not been and will not be involved in the business. He works full-time for a technology company in Waterloo. His salary is $75,000 per year. He was issued 100 common shares of Irvine Beans Limited for $30,000 of his own funds at the time of incorporation. Marlene would like to split income by paying dividends and salary to her husband in the future. She is wondering if that will be possible and how much she can/should pay. She is expecting the business to earn $200,000 of pre-tax income after paying a $100,000 salary to herself. She is wondering what the best mix of salary/dividends should be on a annual basis to herself and her husband. Assume a provincial corporation tax rate of 4% on income eligible for the small business deduction and 12% on income above the small business limit. Required: Part A [18 marks] Assess the situation Identify the issues Part B (Memorandum to the Tax Partner) [66 marks] Analyze the issues Advise/recommend Please format Part B as a memorandum to the tax partner. You may use point form for the qualitative analysis. However, please ensure that what you write is well organized and understandable. You are being assessed on your communication skills.
Solution 90 (a)
(i)
Item not transferred to the corporation at all Shares of Koffee Kart Ltd. not needed by corporation; loss would be denied to individual
(ii)
Items transferred to the corporation, but not under s. 85(1) FMV
(b)
$15,000 30,000
Prepaid rent Computer system
2,000 12,000 $59,000
(not eligible property; no income to defer) (use s. 22; allows full business loss of $5,000; corporation eligible for reserve and/or write-off) (not eligible property; no income to defer) (no income to defer; terminal loss of $5,000 denied) (take back debt for this total)
Items transferred to the corporation under s. 85(1) Asset Inventory Land Building Equipment Software Goodwill
(c)
Cash Accounts receivable
Tax value $ 37,000 60,000 65,000 46,000 0 0 $208,000
FMV
EA
$ 40,000 210,000 180,000 49,000 4,000 71,000 $554,000
$ 37,000 60,000 65,000 46,000 1 1 $208,002
Assumed debt $ 37,000 60,000 38,000 $135,000
New debt $27,000 46,000 $73,000
Pref. shares $ 3,000 150,000 115,000 3,000 4,000 71,000 $346,000
Income $1.00 $0.50
ACB of preferred shares received Elected amount Allocated to: Assumed debt New debt Preferred shares
$ 208,002 $135,000 73,000 $
(208,000) 2
PUC for tax purposes of preferred shares LSC s. 85(2.1) reduction in PUC (a) LSC (b) Elected amount Boot Excess, if any (A − B) Tax PUC
$ 346,000 $346,000 (A) $208,002 (208,000) 2 (B) $
(345,998) 2
Version using the Problem-solving Process for Tax/Incorporates HST issues Q90b Solution Assess the Situation: 1. Draw a diagram identifying all stakeholders, e.g., corporate org chart
Marlene, age 40
Marlene’s husband, age 51
100 Common Shares
Irvine Beans Business
Irvine Beans Ltd.
2. Identify the relationships among the stakeholders e.g., related, affiliated, associated, connected Marlene & husband – related, affiliated Marlene & husband – related, affiliated with Irvine Beans Ltd. 3. Identify the profile of each stakeholder e.g., tax features, risk profile Marlene & husband – individuals, Canadian residents Irvine Beans Ltd. – Canadian-controlled private corporation, paid-up capital (PUC) of common shares is $30K, will earn $200K pre-tax active business income and be subject to a tax rate of 13% on that income. December 31 year end 4. Fully understand the decision maker and their objectives Client: Marlene Objectives: Transfer assets to Irvine Beans Ltd. Minimize tax (income & HST) on the transfer. Corporation will assume liabilities of the business. Remove funds from the corporation without tax implications Consider whether to pay salary or dividends to husband. Consider whether to pay salary or dividends above her $100,000 salary
Take back note/preferred shares on transfer Take back optimal amount of note. Determine terms of the shares Understand tax consequences on sale or redemption of shares. 5. Identify the relevant past transaction/events or planned future transactions/events and create a timeline. December 31 year end of business January 2, 2024 – date of proposed asset transfer Future – salary and possibly dividends to Marlene, possibly salary and/or dividends to husband. Identify the Issues: Issue 1: Tax treatment of asset transfer to Irvine Beans Ltd. • Eligibility for use of a section 85 election • Determination of assets to transfer with or without Section 85 • Determination of assets to retain personally • Determination of elected amount for assets to be transferred • Determination of appropriate amount/type of consideration Issue 2: Tax attributes/terms of preferred shares and tax treatment of future redemption/sale Issue 3: Corporate attribution Issue 4: Salary/Dividend mix considerations Issue 5: Tax on split income Issue 6: HST Considerations Analysis of Issues Issue 1: Tax treatment of asset transfer to Irvine Beans Ltd. • Eligibility for use of a section 85 election • Determination of assets to transfer with or without Section 85 • Determination of elected amount for assets to be transferred • Determination of appropriate amount of consideration • Determination of tax attributes of preferred share consideration. • Determination of terms of the preferred shares Issue 2: Future redemption/sale of shares Issue 3: Corporate attribution Issue 4: Salary/Dividend mix considerations Issue 5: Tax on split income Issue 6: HST
Issue 1: Tax treatment of asset transfer to Irvine Beans Ltd. Qualitative analysis: •
Eligibility for use of a section 85 election Marlene is a taxpayer transferring eligible property to a taxable Canadian corporation for consideration that includes share consideration. A joint election can be filed.
•
Determination of assets to transfer with or without Section 85 Eligible property includes inventory (other than land inventory) and capital property. The A/R, inventory, shares of Koffee Kart Ltd., land, building, equipment are all eligible property. Cash and prepaids are not eligible property. A/R has a loss and should not be included in the Section 85 election. Instead, they should be transferred to the corporation and a Section 22 election filed. Section 22 is available because all or substantially all of the assets of the business are being sold to the purchaser who will continue the business. This allows Marlene to claim the $5,000 loss as a business loss instead of a capital loss. She will have a $13K income inclusion for the prior year’s reserve for doubtful debts deducted in computing business income. The section 22 election allows Irvine Beans Ltd. to claim reserves and bad debts related to the A/R in future years. Irvine Beans Ltd. will have a $5,000 income inclusion in the year the A/R is transferred.
• Determination of assets Marlene should keep and hold personally. The shares of Koffee Kart Ltd. are not needed in the corporation and there is a loss of $13,000 on the investment. The shares should not be included in a Section 85 election. This loss would be denied on a transfer as Marlene would be transferring the shares to an affiliated corporation. The superficial loss would be added to the ACB of the shares held by the corporation and the corporation would acquire the shares at $45,000. As the company is not a connected small business corporation (SBC), if the shares were transferred to Irvine Beans Ltd. the SBC status of the shares of Irvine Beans Ltd. will also be impacted. If would be beneficial to include the inventory, land, building, equipment, and goodwill in the section 85 election to defer business income, taxable capital gains and recapture on the disposition of the properties. •
Determination of elected amount for assets to be transferred To maximize the taxable capital gains/recapture deferred on the transfer of the above assets, the elected amount should be the tax cost of the asset transferred. The goodwill should have an elected amount of $1 as the tax cost of those properties is 0.
•
Determination of appropriate amount of consideration Non-share consideration up to the elected amount can be taken back on the transfer. $135,000 of the business debts will be assumed by the corporation. The remainder will be taken back as a note by Marlene. This will maximize the amount that she will be able to remove from the corporation on a tax-free basis in the future. The remaining consideration consists of preferred shares. The fair market value of all of the consideration must equal the fair market value of the property transferred to avoid a benefit conferred on the husband.
Quantitative analysis: Items transferred to the corporation, but not under s. 85(1) FMV Cash $15,000 (not eligible property; no income to defer) Accounts receivable 30,000 (use s. 22; allows full business loss of $5,000; (A/R) corporation eligible for reserve and/or write-off) Prepaid rent 2,000 (not eligible property; no income to defer) $47,000 (take back new or assumed debt for this total)
Items transferred to the corporation under s. 85(1) Asset Inventory Land Building Equipment Goodwill
Tax value $ 37,000 60,000 65,000 46,000 0 $208,000
FMV
EA
$ 40,000 210,000 180,000 49,000 71,000 $550,000
$ 37,000 60,000 65,000 46,000 1 $208,001
Assumed debt $ 37,000 60,000 38,000 $135,000
New debt $27,000 46,000 $73,000
Pref. shares $ 3,000 150,000 115,000 3,000 71,000 $342,000
Income $0.50
Conclusion: A Section 85 election should be filed to minimize tax and maximize the deferral of business income, capital gains and recapture to future years. Consideration should consist of $135,000 assumed debt, a $120,000 note ($47,000 on non section 85 assets and $73,000 on section 85 assets) and $342,000 of preferred shares. A $0.50 taxable capital gain should be reported on Marlene’s 2022 personal tax return. A section 22 election should be filed for the transfer of A/R. Marlene should recognize $13,000 of business income related to the A/R netted with a $5,000 business loss on her 2023 personal return. Issue 2: Tax attributes/terms of/Future redemption/sale of shares Qualitative analysis: •
Determination of tax attributes of preferred share consideration. The paid up capital and adjusted cost base of the preferred shares will be $1 equal to the difference between the elected amount of $208,001 and the non-share consideration of $208,000.
•
Determination of terms of the preferred shares The preferred shares should be voting and carry sufficient votes to provide her with voting control. The shares should be redeemable and retractable at the option of the holder and have a redemption value of $342,000 to ensure that there is not a benefit conferred on the husband. The preferred shares can have a dividend rate attached to provide the option to pay dividends to Marlene in future years.
Quantitative analysis: ACB of preferred shares received Elected amount Allocated to: Assumed debt New debt Preferred shares
$ 208,001 $135,000 73,000
PUC for tax purposes of preferred shares LSC s. 85(2.1) reduction in PUC (a) LSC (b) Elected amount $208,001 Non-share consideration (208,000) Excess, if any (A − B) Tax PUC
$
(208,000) 1
$ 342,000 $342,000 (A)
1 (B) $
(341,999) 1
If the preferred shares were sold in the future, there would be a capital gain on the disposition of $341,999 [$342,000 Proceeds of disposition - $1 ACB] and a taxable capital gain of $170,999. If Marlene has capital gains exemption available at the time and the shares are qualified small business corporation (QSBC) shares she would be able to shelter the taxable capital gain with her capital gains deduction. If the preferred shares are redeemed in the future, there will be a deemed dividend of $341,999. There will not be a capital gain or loss on the disposition. The dividend will be a non-eligible dividend and if taxed in the highest tax bracket would be subject to a 42.5% marginal tax rate. Tax on split income (TOSI) is not a concern per below. Conclusion: The preferred shares will have a redemption value of $342,000, PUC and ACB of $1. The shares should be retractable, voting and have a dividend rate attached to them. The sale of the shares in the future would result in the lowest tax cost to Marlene especially if she can utilize her capital gains deduction. Issue 3: Corporate attribution Qualitative analysis: Corporate attribution is an issue because Marlene (an individual) will be transferring property to a corporation and one of the main purposes of the transfer may reasonably be considered to reduce her income and benefit her husband (a designated person). She will have an interest benefit calculation on the FMV of the property transferred of $597,000 for any period throughout which the husband is a specified shareholder (owns not less than 10% of the shares) and the corporation was not a small business corporation (SBC). As long as Irvine Beans Ltd. retains its SBC status, corporate attribution will not be a concern. Conclusion: Corporate attribution is an issue, but the SBC status of corporation should be monitored.
Issue 4: Salary/Dividend mix considerations Qualitative analysis: Salaries paid to Marlene’s husband must be reasonable to be deductible to the corporation. Her husband may not be performing any employment duties for Irvine Beans Ltd. If so, it would not be tax effective to pay salary to him. Double taxation will result as the deduction would be denied and the salary would be included in his income. If Marlene chooses not to pay salary or dividends to her husband, they can take advantage of a tax deferral as the corporation will pay tax at a rate of 13% on income eligible for the small business deduction relative to the 41% tax rate she will pay on additional salary. However, she may want to maximize her registered retirement savings plan (RRSP) contributions. She would need to pay an additional $71,000 of salary (using the 2023 RRSP limit) to maximize her RRSP contribution room. She will already maximize her Canada Pension Plan (CPP) contributions with the $100,000 salary to be paid to her. There will not be any additional payroll deduction costs associated with the additional income. Dividends paid to Marlene will be non-eligible dividends and will be taxed at a rate of either 22.4% or 32.2% in her tax bracket ($100,000 less RRSP deduction will result in taxable income in the 2 nd tax bracket or $171,000 of salary less RRSP deduction will result in taxable income in the 3rd tax bracket for 2023). Dividends are not deductible to the corporation. However, as the corporation tax rate is 13%, there is perfect integration (13%) and there is minimal difference in tax cost/savings between salary & dividends. Conclusion: Do not pay salary to the husband. Consider salary to Marlene to maximize RRSP room. Retain funds in the corporation to maximize the tax deferral benefit.
Issue 5: Tax on Split Income Qualitative analysis: Both Marlene and her husband are specified individuals as both are Canadian residents. Dividends paid to both Marlene and her husband would be split income (as the dividends would be taxable dividends received in respect of shares of a private corporation) unless the dividends meet the definition of an excluded amount. An excluded amount for an individual who has attained the age of 24 includes; 1) Amounts not derived from a related business. Test not met → The Irvine Beans business is a related business for Marlene’s husband as a source individual (Marlene related person) carries on the business. The Irvine Beans business is not a related business for Marlene as a source individual (husband - related person) does not carry on the business or own shares of the corporation that make up 10% of the fair market value of the shares of the corporation. 2) Amounts derived from an excluded business. The husband would not meet this exception as he is not involved in the business. The business is an excluded business for Marlene as she was actively engaged in the business in any 5 prior taxation years. 3) Income from excluded shares of the individual. Marlene’s husband may own shares that provide him with 10% of the votes of the corporation. However, he will not initially own shares that have a fair market value of 10% of all of the issued and outstanding shares as the shares will be worth only $30,000 relative to the fair market value of the preferred shares of $342,000 i.e., 8%. In the future as the common shares increase in value, TOSI will be less of a concern. 4) Amounts that are a “reasonable return” with regard to factors related to contributions of work performed, property contributed, risks assumed in respect of the related business. It is a question of fact as to how much dividends would be reasonable in relation to the $30,000 property contribution the husband made to Irvine Beans Ltd. Conclusion: TOSI will not apply to dividends paid to Marlene on her preferred shares. The husband will be subject to TOSI until his common shares become excluded shares i.e., are worth at least 10% of the fair market value of all of the issued shares of the corporation. Issue 6: HST Considerations Qualitative analysis: HST exempt properties to be transferred include Cash, A/R and Goodwill HST applicable properties include all of the other properties transferred. Section 167 election is available if both Marlene and Irvine Beans Ltd. are registrants as Irvine Beans Ltd. is acquiring ownership and use of all or substantially all of the properties needed to carry on the business. A joint GST 44 election form must be filed by Irvine Beans Ltd for the reporting period of the transfer.
Conclusion: Irvine Beans Ltd. should register for HST as soon as possible. A Section 167 election should be filed for the transfer to exempt the transfer for HST.
Summary of Recommendations/Steps: Marlene Irvine can transfer her coffee business to Irvine Beans Limited on January 2, 2024 on a taxdeferred basis using a Section 85 election. HST can be eliminated on the transfer. The following needs to happen to ensure tax is minimized; 1) A joint section 85 election must be filed to transfer the inventory, land, building and equipment at tax cost to the corporation. 2) Irvine Beans Ltd. must register for HST prior to the transfer of the assets. 3) A joint GST 44 section 167 election form must be filed by Irvine Beans Ltd to eliminate the requirement to collect HST on the transfer of the inventory and equipment. 4) We should instruct the lawyer to issue a demand note for $120K and preferred shares with a redemption value of $342K to Marlene as consideration for the transfer. Following the transfer, the SBC status of the corporation should be monitored regularly to alleviate corporate attribution concerns and to ensure the shares would qualify as QSBC shares on a future disposition. Marlene’s husband should not receive salary from the company in the future unless he provides services to the business and dividends should only be paid if they are a reasonable return on his $30,000 investment or his shares increase in value to at least 10% of the fair market value of all of the shares. Missing information, risks or assumptions made UCC = NBV – should be confirmed Valuation of goodwill – business valuation required Check Marlene’s capital gains exemption (CGE) availability Should have a price adjustment clause for preferred shares taken back in case of a valuation an issue.
Question 91 (71 minutes) [Chapter 17] Mr. Nicolas, age 40 is the proprietor of a small toy manufacturing business. He would very much like to get Mrs. Nicolas, age 42, involved in the business from an ownership perspective. To this end, Mr. Nicolas has come up with the following plan. Mr. and Mrs. Nicolas are both residents of Canada for tax purposes. 1. Mrs. Nicolas will incorporate Jolly Old Nicolas Ltd. (JON Ltd.) and subscribe for all of the common shares. 2. Mr. Nicolas will transfer the assets of his current proprietorship to JON Ltd. utilizing subsection 85(1) of the Income Tax Act. 3. JON Ltd. will pay Mr. Nicolas for the transfer of the proprietorship assets by assuming all of the existing proprietorship liabilities, issuing a note to Mr. Nicolas for the maximum possible amount and issuing preferred shares to Mr. Nicolas for the balance. Mr. Nicolas has informed you that his objectives with respect to the transfer of his business are to defer all possible capital gains and other income and any other possible adverse tax consequences while at the same time maximizing the amount of non-share consideration payable to him. The assets and liabilities of the proprietorship, as at December 31, 2023, are as follows: Assets Cash Accounts receivable Inventories Shares in Public Co. Shares in Elf Services Ltd. Land Building Equipment Goodwill Liabilities Bank loan Accounts payable Mortgage on building
Book value $20,000 90,000 86,000 50,000 150,000 200,000 15,000 35,000 0 $646,000
Fair market value $20,000 85,000 92,000 20,000 325,000 339,000 75,000 5,000 60,000
$69,000 23,000 18,000 $110,000
Mr. Nicolas has provided the following additional information: (1) The accounts receivable are net of a reserve for doubtful accounts of $6,000. This was the closing reserve for the previous fiscal period. (2) Elf Services Ltd. is a Canadian-controlled private corporation that carries on an active business that provides consulting and other related services to toy manufacturers. Mr. Nicolas owns 15% of the common shares in this corporation and is not involved in the company’s business operations. The common shares are the only shares outstanding in Elf Services Ltd. and no one related to Mr. Nicolas owns any of the 85% remaining common shares. Mr. Nicolas has been assured by the corporation’s tax advisors that Elf Services Ltd. is a qualified small business corporation as that term is defined in the Income Tax Act. The book value of these shares represents the amount paid by Mr. Nicolas for the shares. The paid-up capital (PUC) of these shares is $1,000. (3) Mr. Nicolas has never utilized any of his available capital gains deduction. (4) The book value of the land is its original cost. This land is the property upon which the building is situated and represents the only site of the business operations.
(5) The book value of the building and equipment represents original cost less accumulated financial accounting depreciation. The tax data related to the building are as follows: Building Equipment
Original Cost $60,000 80,000
Undepreciated Capital Cost $15,000 35,000
Assume that Mr. Nicolas does wish to transfer the bank balance from his proprietorship to JON Ltd. in order to have some ready cash in the account of the new corporation. Required: a) Very briefly explain to Mr. Nicolas the purpose of subsection 85(1) of the Income Tax Act, and the benefit to him of utilizing this subsection for the transfer of some or all of his proprietorship assets. Do not do any calculations; a qualitative explanation is all that is required. (4 minutes) b) Indicate to Mr. Nicolas which asset(s) should not be transferred to JON Ltd. at all. Provide a brief explanation for each such asset. (7 minutes) c) Indicate to Mr. Nicolas which asset(s) should be transferred to JON Ltd. but cannot or should not be transferred under subsection 85(1) and briefly explain why. For each such asset, indicate the type and maximum amount of consideration that should be paid to Mr. Nicolas for the transfer. (14 minutes) d) For each asset that should be transferred to JON Ltd. under subsection 85(1), indicate the elected transfer price, the maximum amount of non-share consideration (rounded to the nearest $100), as well as the value of preferred shares that should be received by Mr. Nicolas. (21 minutes) e) What is Mr. Nicolas’s cost of the preferred shares received for the transfer of his assets under subsection 85(1)? (2 minutes) f) What is the PUC for tax purposes of the preferred shares that Mr. Nicolas receives for the transfer of his assets? (2 minutes) g) What is the tax cost to JON Ltd. of each of the assets transferred to it under subsection 85(1)? (9 minutes)
h) Mr. Nicolas wishes to sell his shares in Elf Services Ltd. (ESL) to his mother-in-law, Mrs. Scrooge. Mrs. Scrooge has indicated that she wishes to purchase the shares indirectly by having her wholly owned corporation, Scrooge Holdings Limited (SHL), purchase the shares from Mr. Nicolas. Mrs. Scrooge is a resident of Canada. Mr. Nicolas is proposing to sell his shares in ESL to SHL for a note payable equal to the fair market value of his shares. Describe the tax implications to Mr. Nicolas of a sale of his shares in ESL to SHL for the proposed consideration. Provide any suggestions you have for Mr. Nicolas to improve the transaction in order to minimize and/or eliminate any taxable income that otherwise results from his proposed plan. (13 minutes)
Solution 91 a) The purpose of subsection 85(1) is to allow a taxpayer to defer gains that are accrued on certain eligible assets transferred to a Canadian corporation. b) Should not be transferred at all • Shares in Public Co. because this is not a business asset and/or because holding this investment may cause problems with the qualified small business corporation (QSBC) status of JON Ltd. • Shares in Elf Services Ltd. because this is not a business asset and/or it is a personal investment c) Should be transferred but cannot or should not use section 85 Asset Cash A/R
Reason • Not an eligible asset • No gain to defer, OR • Section 22 better • No gain to defer, OR • Accrued terminal loss
Equipment
Consideration $20,000 note or assumed liabilities $85,000 note or assumed liabilities $5,000 note or assumed liabilities $110,000 note or assumed liabilities
d) Assets transferred using section 85 Asset Inventory Land Building Goodwill
Tax Value $86,000 200,000 15,000 0 $301,000
FMV $92,000 339,000 75,000 60,000 $566,000
ETP $86,000 200,000 15,000 1 $301,001
Liabilities $86,000 24,000
$110,000
Note 176,000 15,000 $191,000
Preferred Shares $6,000 139,000 60,000 60,000 $265,000
e) Cost of the preferred shares = $1 f) PUC of the preferred shares =$1 g) Tax cost to JON Ltd. of the assets Asset Inventory Land Building Goodwill
UCC
$15,000 1
Capital cost/ACB/Cost $ 86,000 200,000 60,000 1
h) Subsection 84.1 will apply (this can be implicit if students do the deemed dividend) Fair market value of note Less: greater of: PUC ($1,000) & “hard cost” of old shares ($150,000) Deemed dividend (ss 84.1)
$325,000 (150,000) $175,000
Capital gain Proceeds Less: deemed dividend above Deemed proceeds Less: adjusted cost base (ACB) Capital gain
$325,000 (175,000) $150,000 (150,000) $ 0
To avoid the deemed dividend, Mr. N should limit his non-share consideration ie. the note to $150,000 (greater of PUC and “hard cost” of shares) and take share consideration for the balance of $175,000 to equal FMV.
Tax on split income (“TOSI”) will apply to the deemed dividend resulting through the application of 84.1 unless the dividend meets the definition of an excluded amount. Where an individual has reached the age of 17 before the year, income for the year from property that is NOT derived directly or indirectly from a related business in respect of an individual in the year is not subject to TOSI. A related business is one in which a source individual (a related person) carries on the business operated by the corporation or a business of a corporation where a source individual owns 10% of the fair market value of the shares of the corporation. In this case, the other 85% of the shares of Elf Services Ltd. are owned by unrelated persons and a person related to Mr. Nicolas is not carrying on the business of Elf Services Ltd. Therefore, the deemed dividend would be an excluded amount and would not be subject to TOSI.
Question 92 (64 minutes) [Chapter 17] Mr. Dundastard began to operate Dundas Plumbing, a residential plumbing services business, as a proprietorship, choosing a December 31 year-end. Until quite recently, he has been withdrawing virtually all of the income of the business for personal purposes. Since the debt of the business was fully secured, there was no good reason to incorporate. However, the business has become very profitable, and Mr. Dundastard can see the benefit of deferring tax on income retained in the business. Therefore, he intends to incorporate the proprietorship, effective January 2, 2024. The corporate name will become Dundas Manufacturing Inc. Mr. Dundastard wants to accomplish the incorporation without any immediate tax consequences. Liabilities of the proprietorship are to be assumed by the corporation, in return for assets transferred to the corporation by the subsection 85(1) election. New debt is to be issued (to the nearest $100) by the corporation to the maximum that will permit a full deferral of unrealized income on assets transferred. Mr. Dundastard will receive 1,000 of the authorized common shares of the corporation. Expected balance sheet amounts at December 31, 2023 are as follows: Assets Cash Marketable securities, at cost (FMV: $5,000) Accounts receivable (FMV: $190,000) Less: reserve for doubtful debts (deducted for tax in 2022) Inventory, at lower of cost or market (FMV: $62,000) Prepaid insurance Land held for speculation, at cost (FMV: $25,000) Fixed assets (Note 1) Goodwill (FMV: $80,000)
$ 20,000 9,000 $215,000 15,000
Liabilities and Proprietor Equity Bank loan Accounts payable and accrued liabilities Equipment loan Mortgage on land and building
$ 20,000 10,000 65,000 35,000 $130,000 407,000 $537,000
Proprietor equity
Note to Balance Sheet data: 1. Land Building (Class 1) Machinery and equipment (Class 29) Furniture and fixtures (Class 8) Computer hardware (Class 50) Computer software (Class 12)
FMV = fair market value UCC = undepreciated capital cost
200,000 54,000 4,000 5,000 245,000 $537,000
Cost $ 60,000 40,000 125,000 80,000 30,000 7,000 $342,000
Net book value $ 60,000 30,000 78,000 52,000 20,000 5,000 $245,000
UCC $ 28,600 53,000 36,800 17,300 $135,700
FMV $100,000 75,000 70,000 30,000 16,000 3,000 $294,000
Required: Analyze in technical detail, showing all calculations, the following issues in preparation of your advice to Mr. Dundastard. (a)
With respect to the assets described above consider: (36 minutes) (i)
which assets should not be transferred to the corporation, with a very brief explanation of why;
(ii)
which assets should be transferred to the corporation, but cannot or should not be transferred to the corporation under a subsection 85(1) election, with a very brief explanation and an indication of how these assets should be transferred and what amount of new debt consideration should be taken for each such asset; and
(iii)
which assets should be transferred to the corporation under a subsection 85(1) election and the consideration that should be received for each asset so transferred.
(b)
Compute the adjusted cost base (ACB) and the paid-up capital (PUC) for tax purposes of the common share consideration, showing the details of your calculation of these amounts. (7 minutes)
(c)
Assume that, thirteen years from now, the common shares issued to Mr. Dundastard in part (a)(iii), above, are worth $550,000. Also assume that there have been no changes to the adjusted cost base or paid-up capital computed in part (b), above. Finally, assume that Mr. Dundastard will have fully utilized his capital gains exemption. At that time, Mr. Dundastard will want to freeze the value of his investment in the corporation using a capital reorganization under section 86 in which he receives debt of the corporation, if possible, and preferred shares. What is the maximum amount of debt that he can receive without realizing any income, using section 86? What are the fair market value, adjusted cost base and paid-up capital of the preferred shares that he will receive under section 86? Show all calculations necessary to prove your answers to these questions. (12 minutes)
Solution 92 (a)(i) Assets not transferred to the corporation: Asset Marketable securities Land held for speculation
Explanation not needed by corporation; loss would be denied to individual land held as inventory not eligible for s. 85 election; even if eligible, no income to defer OR not a business asset
(ii) Assets transferred to the corporation other than by s. 85(1) election: Asset Cash A/R
Tax Value $20,000 215,000
$20,000 190,000
Transfer New Price Debt $20,000 $20,000 190,000 190,000
Ppd. ins. Class 8
4,000 36,800
4,000 30,000
4,000 30,000
4,000 30,000
Class 50
17,300
16,000
16,000
16,000
$293,100
FMV
Explanation for not transferring by s. 85(1) election - not eligible; no income to defer - s. 22 better; allows full business loss of $25,000; corporation eligible for reserve and /or write-off - not eligible; no income to defer - no income to defer; terminal loss of $6,800 denied, but CCA deductible by individual - no income to defer; terminal loss of $1,300 denied, but CCA deductible by individual
$260,000 $260,000 $260,000
(iii) Assets transferred to the corporation by s. 85(1): Asset Inventory Land Building M&E Comp. Soft. Goodwill
(b)
Tax Value $ 54,000 60,000 28,600 53,000 0 0 $195,600
FMV
Assumed Debt $ 54,000 60,000 16,000
New Debt
$ 62,000 100,000 75,000 70,000 3,000 80,000
Elected Amount $ 54,000 60,000 28,600 53,000 1 1
$390,000
$195,602
$130,000
$65,600
12,600 53,000
Common Shares $ 8,000 40,000 46,400 17,000 3,000 80,000
Income/TCG
$194,400
ACB of common shares: Elected amount Allocated to debt consideration: Assumed debt New debt ACB of common shares
$195,602 $130,000 65,600 $
195,600 2
PUC of common shares: Legal stated capital (LSC) before reduction s. 85(2.1) reduction: (1) Increase in LSC (2) elected amount less: boot excess, if any Tax PUC
(c)
Maximum debt** Preferred shares
FMV LSC ACB PUC
** PUC of existing common shares
$ 194,400 $194,400 (A) $195,602 195,600 2 (B)
$ 2 549,998 549,998 0 0
(194,398) $ 2
$1.00 $0.50
Issuance of new shares: (1)
(2)
Reduced PUC [s. 86(2.1)(a)] LSC of preferred shares Less: PUC of old common Less: non-share consideration PUC reduction Tax PUC ($549,998 − $549,998)
$549,998 $2 2
Cost of preferred shares ACB of old common Less: FMV of non-share consideration Cost of preferred shares
0 $549,998 $ 0 $ $
2 2 0
Redemption of old shares: (1) Deemed dividend Proceeds on redemption of old shares FMV of boot Reduced PUC of preferred shares Less: PUC of old common Deemed dividend
(2)
Capital gain (capital loss) Proceeds of disposition (P of D) of old common shares Cost of preferred shares Add: FMV of boot Proceeds of redemption Less: deemed dividend Adjusted P of D ACB Capital gain (loss)
$2 0
$ $
2 2 0
$ 0 2 $ 2 0 $ 2 2 $ 0
Question 93 (40 minutes) [Chapters 17] Carter T. David decided to retire and sell his shares of David Inc., which meet all the tests for qualified small business corporation (QSBC) shares. His son, Brian, was interested in buying the company and they both agreed on the appraised value of $1,050,000, which is clearly the fair market value for the shares owned by Carter on the proposed transaction closing date of November 30, 2023. Carter’s shares have a paid-up capital (PUC) of $500 and an adjusted cost base (ACB) of $1,000. Carter has used all but $750,000 of his capital gains exemption. (a)
(b)
If Brian buys these shares through a holding company (Holdco), in which he owns all of the common shares, Carter will transfer his shares of David Inc. to Holdco. As consideration, Carter will receive from Holdco debt of $751,000 and retractable, redeemable, non-voting preferred shares with a legal stated capital and fair market value of $299,000. Carter and Holdco will elect under subsection 85(1) to have an elected amount of $751,000, in order to use up Carter’s remaining capital gains exemption. (15 minutes) (i)
Ignoring the tax consequences of recent changes to SS 84.1 in Par. 84.1(2)(e) what are the income tax consequences to Carter of the above transactions? Show all calculations.
(ii)
Very briefly indicate what should be done to avoid any immediate income tax consequences?
If the capital structure of David Inc. is reorganized, Carter will trade his common shares of David Inc. for debt of $751,000 issued by David Inc. and retractable, redeemable, non-voting preferred shares of David Inc., with a legal stated capital and fair market value of $299,000. (13 minutes) (i)
What are the income tax consequences to Carter of the above transactions? Show all calculations.
(ii)
Very briefly indicate what should be done to avoid any immediate income tax consequences?
Solution 93 (a) (i) Tax consequences of transfer to holding corporation (Holdco): Asset
Tax Value
FMV
David Inc. shares
$ 1K
$1,050K
Elected Amount
$751K
Note
Pref. Shares
$751K
$299K
Inc. s. 84.1 deemed div. No capital gain (loss)
PUC reduction [s. 84.1(1)(a)] (a) increase in legal state capital (LSC) of Holdco less: (b) greater of: (i) PUC of David Inc. shares $ 500 (ii) ACB of David Inc. shares $ 1,000 less: FMV of non-share consideration excess, if any PUC reduction (A) − (B)
$299,000 (A)
$
1,000 751,000 0 (B) $299,000
Tax PUC ($299,000 − $299,000) Deemed dividend [s. 84.1(1)(b)] Sum of: (a) increase in LSC of Holdco (b) FMV of non-share consideration (A) + (D) Less sum of: (c) greater of: (i) PUC of David Inc. shares (ii) ACB of David Inc. shares (d) PUC reduction above (E) + (F) Deemed dividend (A) + (D) - [(E) + (F)]
$
0
$ 299,000 (A) 751,000 (D) $1,050,000
$ $
500 1,000
$
1,000 (E) 299,000 (F) 300,000 $ 750,000
Tax on split income (“TOSI”) will apply to the deemed dividend unless it is an excluded amount. The business is not a related business to Mr. David because a source individual (the son) did not carry on the business before the transfer and does not own 10% of the fair market value of all of the shares of the corporation (Holdco) holding the business. Also, Mr. David was likely actively engaged on a regular, continuous and substantial basis in the activities of the business in the year or any 5 prior taxation years. The dividend would be an excluded amount and TOSI would not apply. Note that the changes made to the Act under Bill C-208 would allow for the proposed transaction to occur and for Mr. David to realize a capital gain on the transaction, instead of the deemed dividend calculated above, assuming that the following conditions are met: Brian controls Holdco, Holdco will not dispose of the shares for a minimum of 60 months, and the shares were sold at fair market value. Budget 2023 further amends the rules in section 84.1 to ensure that they only apply where a genuine intergenerational business transfer takes place and requires that the transaction satisfy one of two transfer options: an immediate intergenerational business transfer based on arm’s length sales terms or a gradual intergenerational business transfer based on traditional estate freeze characteristics, but these requirements only apply to transactions that occur on or after January 1, 2024.
Disposition of David Inc. shares Elected amount Less: s. 84.1 deemed dividend Proceeds of disposition Less: ACB Capital gain Less: capital gains exemption Taxable income on transaction
(ii)
$751,000 750,000 $ 1,000 1,000 0 0 $ 0
Avoiding the deemed dividend
Do not take more than $1,000 of debt consideration in this case. This is the greater of the PUC and ACB of the common shares, which is the maximum that can be received on a nonarm’s length sale of shares to a related corporation, without tax consequences. (b) (i) Tax consequences of capital reorganization: Issuance of new shares: (1) Reduced PUC [s. 86(2.1)(a)] LSC of preferred shares Less: PUC of old common Less: non-share consideration PUC reduction
$ 299,000 $
500 751,000
0 $ 299,000
Tax PUC ($299,000 − $299,000)
(2)
$
Cost of non-share consideration (= FMV)
0
$ 751,000
Cost of preferred shares ACB of old common Less: FMV of boot Cost of preferred shares
$
1,000 751,000 $ 0
Redemption of old shares: (1) Proceeds on redemption of old shares Non-share consideration PUC of preferred shares
$ 751,000 0
$ 751,000
Deemed dividend on redemption [s. 84(3)] Proceeds on redemption Less: PUC of old common Deemed dividend
$ 751,000 500 $ 750,500
[TOSI will apply to the deemed dividend unless it is an excluded amount. As the dividend is not derived from a related business (a source individual did not carry on the business) and Mr. David was likely actively engaged on a regular, continuous and substantial basis in the activities of the business in the year or any 5 prior taxation years, the dividend would be an excluded amount and TOSI would not apply.]
(2)
P of D of old common shares Cost of preferred shares Add: cost of non-share consideration Proceeds Less: s. 84(3) deemed dividend P of D
$
Nil 751,000 $ 751,000 750,500 $ 500
Capital gain (loss) P of D for old common shares Less: ACB of old common shares Capital gain (loss)
(ii)
$
500 1,000 $ (500)
Avoiding the deemed dividend
Do not take more than $500 of debt consideration in this case, which is the PUC of the common shares. This is the maximum that can be received on a redemption of shares without tax consequences.
Version Two [Chapters 17, 19] Question 93b (60 minutes)
Part I Lynn Davies, age 56 and a Canadian resident, has decided to retire and freeze the value of all of her common shares of Davies Inc. Davies Inc. is a small business corporation (“SBC”) and the shares are qualified small business corporation (“QSBC”) shares. Lynn owns 100% of the common shares of the company and the shares have a paid-up capital (“PUC” of $500 and an adjusted cost base (“ACB”) of $1,000. Lynn has used all but $450,000 of her capital gains exemption. The company does not have a General Rate Income Pool (“GRIP”) balance. Lynn’s son, Brad, age 35 is interested in taking over the Davies Inc. business operations. They have both agreed on the appraised value of $1,050,000 for Lynn’s common shares of the company. Lynn would like to retain control of Davies Inc. while she is alive. She would also like the company to fund her retirement as she does not have a lot of retirement savings. On her death, Lynn would like her daughter Samantha, age 32, and Brad to benefit equally from any amount representing the remaining portion of the existing fair market value of Davies Inc. Lynn wants Brad alone to benefit from all of the future growth of the business because Samantha will not be involved in the Davies Inc. business. Lynn wants to minimize conflict between Brad and Samantha. Lynn is in the highest tax bracket. She does not have a cumulative net investment loss (“CNIL”) balance and has not deducted allowable business investment losses in the past. The following plans are being considered to transfer the future growth of the business to Brad. Plan A On November 30, 2023, Brad will acquire the shares of Davies Inc. using a newly incorporated holding company (Holdco), in which he will own all of the common shares. Lynn will transfer her shares of Davies Inc. to Holdco for consideration from HoldCo consisting of debt of $451,000 and shares with a fair market value of $599,000. Lynn and Holdco will elect under subsection 85(1) at an elected amount of $451,000, in order to use up Lynn’s remaining capital gains exemption. Plan B The capital structure of Davies Inc. will be reorganized. Lynn will exchange her existing common shares of Davies Inc. for debt of $451,000 issued by Davies Inc. and shares of Davies Inc., with a fair market value of $599,000. Brad will be issued new common shares of Davies Inc. for a nominal amount. Required: 1. Review the steps in each of the above plans from a technical perspective. Identify and qualitatively analyze the applicable Income Tax Act legislation relevant to each step in the plan. Ignore the recent changes to SS84.1 in Par. 84.1(2)(e) in your analysis. Identify and analyze any potential risks and how they can be mitigated. Provide all related calculations using the templates provided.
2. 3.
Identify each of Lynn’s objectives. Discuss if Lynn’s objectives will be met by each of the above plans and what can be done to ensure that they are met. Recommend one of the above plans. Recommend improvements that will minimize tax and/or meet Lynn’s objectives.
Part II (10 marks; 10 minutes) Fast forward 10 years. Lynn Davies (see Part I above) passed away on the evening of December 1, 2023. Mrs. Davies was 66 years old. In Lynn’s last will and testament the shares of Davies Inc. issued to Lynn in Part I above are to be inherited by her children. None of the shares were redeemed before Lynn’s death. The residue of Lynn’s estate is left to Lynn’s husband, Mr. Davies who is still living. Lynn owned some non-registered investments in publicly traded shares at the time of her death that Mr. Davies is to receive as a beneficiary of her estate. Lynn had $600,000 in her registered retirement savings plan (“RRSP”) at the time of her death. Mr. Davies was the named beneficiary of Lynn’s RRSP. Mr. Davies is the executor of the estate. Required: 1. What tax returns should be considered for Lynn with regards to her death and what are the filing due dates for those returns? 2. Describe the tax treatment of the shares of Davies Inc. owned by Lynn at the date of death. 3. Describe the tax treatment of the non-registered investments in publicly traded shares owned by Lynn at the date of death. 4. What tax return must be filed for the estate if income is earned before properties are distributed to the beneficiaries. What option is available to minimize tax? 5. How will Lynn’s registered retirement savings plan (“RRSP”) be treated for tax purposes. How can tax be minimized with regards to the tax treatment of the RRSP on her death?
Version Two Solution 93b Part I 1) Review the steps in each of the above plans from a technical perspective. Show all calculations. Plan A Eligibility for Section 85 election Lynn is eligible to use s.85 as long as a joint election is filed. • taxpayer • transferring “eligible property” • to a taxable Canadian corporation • share consideration received. Applicability of 84.1 • • • •
Lynn (an individual) is transferring shares that are capital property of a Canadian resident corporation (Davies Inc.) to a non-arm’s length corporation (Holdco is non-arm’s length because it is controlled by a person related to Lynn, being her adult son.). Holdco and Davies Inc. will be connected after the transfer. (Davies Inc. is connected with Holdco because Holdco owns 10% of the votes and value of or controls the corporation after the transfer).
A deemed dividend of $450,000 results because non-share consideration in excess of the hard cost of the Davies shares of $1,000 (greater of paid-up capital $500 and adjusted cost base $1,000) is received. The deemed dividend reduces the proceeds of disposition by $450,000 for purposes of calculating any capital gain on the transfer of the shares of Davies to HoldCo. As a result, there is no capital gain and no ability to use the capital gains deduction. The deemed dividend will be a non-eligible dividend and taxed at a rate of 42.5%.
Asset Davies Inc. shares
Tax Value $ 1K
FMV $1,050K
Elected Amount $451K
Note $451K
Shares $599K
Inc. 84.1 DD $450,000
A deemed dividend can be avoided if the non-share consideration (the Note in this case) is limited to $1,000 or less. Share Consideration Paid-Up Capital (“PUC”) The paid-up capital of the share consideration will be calculated under 84.1 and will be $0 [even if non-share consideration is limited to $1,000]. PUC reduction [s. 84.1(1)(a)] (a) increase in legal stated capital (LSC) of Holdco less: (b) greater of: (i) PUC of Davies Inc. shares $ 500 (ii) ACB of Davies Inc. shares $ 1,000 less: FMV of non-share consideration excess, if any PUC reduction (A) − (B)
$599,000 (A)
$
1,000 451,000 0 (B) $599,000
Tax PUC ($599,000 − $599,000) Deemed dividend [s. 84.1(1)(b)] Sum of: (a) increase in LSC of Holdco (b) FMV of non-share consideration (A) + (D) Less sum of: (c) greater of: (i) PUC of Davies Inc. shares (ii) ACB of Davies Inc. shares (d) PUC reduction above (E) + (F) Deemed dividend (A) + (D) - [(E) + (F)] Disposition of Davies Inc. shares Elected amount Less: s. 84.1 deemed dividend Proceeds of disposition Less: ACB Capital gain Less: capital gains exemption Taxable income on transaction
0
$ 599,000 (A) 451,000 (D) $1,050,000
$ $
500 1,000
$
1,000 (E) 599,000 (F) 600,000
$ 450,000
$451,000 450,000 $ 1,000 1,000 0 0 $ 0
Note that the recent changes made to SS 84.1 in Par 84.1(2)(e) would allow for the proposed transaction to occur and for Lynn to realize a capital gain on the transaction, instead of the deemed dividend calculated above, assuming that the following conditions are met: Brad controls
Holdco, Holdco will not dispose of the shares for a minimum of 60 months, and the shares were sold at fair market value. Budget 2023 further amends the rules in section 84.1 to ensure that they only apply where a genuine intergenerational business transfer takes place and requires that the transaction satisfy one of two transfer options: an immediate intergenerational business transfer based on arm’s length sales terms or a gradual intergenerational business transfer based on traditional estate freeze characteristics, but these requirements only apply to transactions that occur on or after January 1, 2024.
Adjusted Cost Base (“ACB”) The ACB of the shares will be equal to the elected amount less the non-share consideration i.e. $451,000 - $451,000 = $0 If the non-share consideration is limited to $1,000, the ACB of the shares will be $450,000. Corporate Attribution The son is not a designated person. Corporate attribution is not an issue. Benefit Conferral As long as fixed value redeemable/retractable preferred shares are taken back by Lynn as consideration for the transfer, a benefit will not be conferred on Brad. The fair market value of the consideration is equal to the fair market value of the property transferred Tax on Split Income (“TOSI”) Mrs. Davies was likely actively engaged on a regular, continuous and substantial basis in the activities of the business in the year or any 5 prior taxation years. As a result any dividends received by her on the redemption of shares, under 84.1 or otherwise would be an excluded amount and TOSI would not apply. Also, the dividend would likely not be derived from a related business as a source individual would not be carrying on the business or hold 10% of the fair market value of all of the issued shares of the corporation. Plan B – Technical Review Eligibility for Section 86 tax free reorganization The capital reorganization would be tax free under Section 86. Section 86 provides for a tax free reorganization of capital where; -
in the course of a capital reorganization a taxpayer has exchanged all of the shares of a class owned by the taxpayer for consideration that includes other shares of the corporation
The exchange of shares would be tax-free as long as the non-share consideration taken
back on the exchange does not exceed the paid-up capital of the shares exchanged. i.e. $500. In the proposed reorganization, a deemed dividend of $450,500 would result. Tax consequences of capital reorganization: Issuance of new shares: (1) Reduced PUC [s. 86(2.1)(a)] Legal stated capital of preferred shares Less: PUC of old common $ 500 Less: non-share consideration 451,000 PUC reduction
$ 599,000 0 $ 599,000
Tax PUC ($599,000 − $599,000) (2)
0
ACB of preferred shares ACB of old common Less: FMV of non-share consideration Cost of preferred shares
Redemption of old shares: (1) Non-share consideration PUC of new shares
(2)
$
$
1,000 451,000 $ 0
$ 451,000 0
Proceeds on redemption Less: PUC of old common Deemed dividend
$ 451,000 500 $ 450,500
ACB of new shares Add: cost of non-share consideration Proceeds of disposition (P of D) of old common shares Less: s. 84(3) deemed dividend P of D for old common shares Less: ACB of old common shares Capital gain (loss)
$
0 451,000 $ 451,000 450,500 $ 500 1,000 $ (500)
2) Consider Lynn’s objectives and determine how they can be met. [20 marks] i. Retire ii. Freeze the value of Davies Inc. As long as the share consideration received by Lynn consists of redeemable/retractable preferred shares the value will be frozen.
iii. Retain control of Davies Inc. while she is living. • Share consideration should be voting • votes should exceed Brad’s votes on his common shares of the holding company. iv. Use the value in the company to support her retirement. • Shares should provide a dividend rate of “up to x%” to allow her to receive dividends and provide flexibility in the amount of dividends that can be paid each year. The rate of the dividend should not exceed a reasonable market rate.
• Utilizing the retraction feature on the shares will provide additional cash as needed to support her retirement. • Lynn could receive salary for any services performed after she retires, as long as the rate of pay to her is reasonable for the work done v. Have both her children benefit from any remaining portion of the existing fair market value of Davies Inc., on her death • Lynn can make her children the beneficiary of her preferred shares in her will. vi. Transfer all of the future growth of the business to Brad. Samantha will not be involved in the Davies Inc. business. • This is achieved as long as Brad owns 100% of the common shares of Davies Inc., either directly or indirectly through HoldCo. vii. Use of capital gains exemption • Not met under either plan as proposed. Can be met under Plan A if the non-share consideration is limited to $1,000. viii. • • 3)
Minimize conflict between Brad and Samantha The preferred shares should be required to be redeemed by Davies Inc. on Lynn’s death to ensure that the company is controlled only by Brad following Lynn’s death. Samantha does not received shares in either reorganization
Recommend one of the above plans. Recommend improvements that will minimize tax and/or meet Lynn’s objectives. Recommend Plan A
Plan A - Limit the debt consideration to $1,000 This plan minimizes tax and allows her to utilize her capital gains exemption Plan B - Limit debt consideration to $500 if plan B is chosen. This plan does not allow Lynn to use her capital gains exemption.
Part II 1)
What tax returns should be considered for Lynn in regards to her death and what are the filing due dates for those returns? a. Terminal return; i. Due date is June 1, 2024 ii. [later of normal filing due date - 6 months after the date of death] b. Rights and things return; i. Due date is the later of one year from the date of death ii. 90 days from the Notice of Assessment date for the final return.
2)
Describe the tax treatment of the shares of Davies Inc. owned by Lynn at the date of death. a. Deemed disposition at FMV on the date of death because the shares are left to her children (not a spouse). b. The children will acquire the shares at FMV. c. The taxable capital gain will be included on the terminal return for Lynn
3)
Describe the tax treatment of the non-registered investments in publicly traded shares owned by Lynn at the date of death. a. Deemed disposition at tax cost (automatic rollover) on death because the shares are left to Lynn’s spouse. b. There is an option to elect out of the automatic rollover if there are losses to use on Lynn’s terminal return. c. Mr. Davies will acquire the shares at the deemed disposition amount.
4)
What tax return must be filed for the estate if income is earned before properties are distributed to the beneficiaries. What option is available to minimize tax? a. The estate is a testamentary trust b. T3 may need to be filed. c. The estate can be designated as Lynn’s graduated rate estate. d. A non-calendar year end can be chosen e. Graduated tax rates apply to income of the estate. f. Status as a gradudated rate estate can be maintained for up to 36 months from the date of death.
5)
How will Lynn’s RRSP be treated for tax purposes. How can tax be minimized in regards to the tax treatment of the plan on her death? a. The $600,000 RRSP is taxable to Mr. Davies. The full amount would be included in income on his 2023 tax return assuming the proceeds were received in 2023. b. If the $600,000 is transferred to Mr. Davies own RRSP by March 1, 2024, an offsetting deduction is available under 60(l).
Question 94 (16 minutes) [Chapter 17] Ethan owned common shares in an operating company, EJK Inc. These shares are qualifying small business corporation shares. On incorporation, in 2009, the shares were issued by EJK Inc. to Ethan for $1,000 in cash. Ethan has worked full-time managing the business since incorporation. At the present time, the shares are valued at $65,000. Ethan was advised to crystallize $50,000 of his capital gains exemption. A holding corporation, Ethyholdco Ltd., was incorporated. He transferred his common shares in EJK Inc. to Ethyholdco Ltd., electing at $51,000 under subsection 85(1). As consideration, Ethan received from Ethyholdco Ltd. a note for $51,000 and common shares valued at $14,000. Required: Describe, supported by detailed technical computations, all of the tax consequences to Ethan of the transfer of the EJK Inc. common shares to Ethyholdco Ltd.
Solution 94 Since the conditions for subsection 84.1 to apply are met, the following would result: PUC reduction (s. 84.1(1)(a)): (1) increase in legal stated capital (LSC) of Ethyholdco Ltd. common shares (FMV = $65,000 − $51,000) less: (2) greater of: (a) Paid up capital (PUC) of EJK Inc. shares $1,000 (b) Modified adjusted cost base (ACB) of EJK Inc. share $1,000 greater amount $1,000 less: fair market value (FMV) of non-share consideration 51,000 excess, if any
$14,000 (A)
0 (B)
PUC reduction to apply to Ethyholdco Ltd. common shares (A) – (B)
$14,000
PUC of Ethyholdco Ltd. commom shares after the reduction
$
0
Deemed dividend (s. 84.1(1)(b)): Sum of: (1) increase in LSC of Ethyholdco Ltd. common shares (2) FMV of non-share consideration (A) + (D) Less sum of: (3) greater of: (a) PUC of EJK Inc. shares $1,000 (b) Modified ACB of EJK Inc. shares $1,000 greater amount $ 1,000 (E) (4) PUC reduction under s. 84.1(1)(a) as calculated above 14,000 (F) (E) + (F) Deemed dividend (A + D) – (E + F)
$14,000 (A) 51,000 (D) 65,000
15,000 $50,000
Tax on split income (“TOSI”) will apply to the deemed dividend unless it is an excluded amount. The deemed dividend would not be derived from a related business and is therefore, an excluded amount.
Capital gain on disposal of EJK Inc. shares: Proceeds of dispostion = Elected amount Less: s. 84.1 deemed dividend Proceeds of disposition Less: ACB Capital gain Less: capital gains exemption Effect on taxable income
$51,000 50,000 1,000 1,000 0 0 $ 0
Question 95 (9 minutes) [Chapter 17] Mrs. Dancer owned 100 common shares in Dancers Unlimited Incorporated (“Dancers”). Dancers reorganized its capital structure during the year. In the course of this reorganization, Mrs. Dancer exchanged all of her common shares for cash and preferred shares. Mrs. Dancer’s common shares had an adjusted cost base (ACB) of $10,000, paid-up capital (PUC) of $5,000 and a fair market value (FMV) of $55,000. As consideration for the exchange of her common shares, Mrs. Dancer received cash of $5,000 and preferred shares with a fair market value and legal stated capital of $50,000. Required: a) What is the adjusted cost base and paid-up capital of the preferred shares received by Mrs. Dancer as partial consideration for the exchange of her common shares? (4 minutes) b) What are the tax implications to Mrs. Dancer of the exchange of her common shares? (5 minutes)
Solution 95 Adjusted cost base of new shares ACB of old shares less non-share consideration = $10,000 − $5,000 = $5,000
PUC of new shares PUC of old shares less non-share consideration = $5,000 − $5,000 = $0
Tax implications on exchange of old shares Redemption of old common shares: Proceeds of redemption (PUC of new shares + non-share consideration = $0 + $5,000) Less: PUC of old shares Deemed dividend
$ 5,000 (5,000) $ 0
Capital gain on disposal of old common shares: Proceeds = ACB of new shares + non-share consideration ($5,000 + $5,000) Less: ACB of old shares Capital gain
$ 10,000 (10,000) $ 0
Question 96 (9 minutes) [Chapter 17] Vixen Limited purchased all of the shares of Comet Limited on June 8, 2017. The cost of the shares to Vixen Limited was $90,000. The current fair market value of the shares of Comet is $175,000. Comet’s only asset is land, which was purchased for a cash amount of $10,000 on October 15, 2008. The land had a value of $100,000 on June 8, 2017, and is currently valued at $175,000. Required: What are the income tax implications to Vixen Limited and Comet Limited of an amalgamation, effective immediately, using section 87 of the Income Tax Act?
Solution 96 The tax implications of the amalgamation to Vixen and Comet Limited are as follows: 1.
Deemed year end for each of Vixen Limited and Comet Limited immediately prior to the amalgamation.
2.
The adjusted cost base (ACB) of Comet’s land can be increased for tax purposes (“bump” is available) Increase in the ACB of the land is the LESSER OF: (i) ACB to Vixen of its shares in Comet less the ACB of the net assets of Comet when it was acquired by Vixen= $90,000 − $10,000 = $80,000 AND (ii) fair market value of land at the time that Vixen acquired Comet less the ACB of the land at that time = $100,000 − $10,000 = $90,000 Lesser is $80,000 Therefore, ACB of land can be increased by $80,000 to $10,000 + $80,000 = $90,000
Question 97 (13 minutes) [Chapter 17] Mr. Alexander owns all of the common shares of Baker’s Dozen Food Products Inc. The adjusted cost base (ACB) and paid-up capital (PUC) of his shares are $25,001, resulting from their issue to him thirteen years ago on the incorporation of the business and a later issue of common shares for a $25,000 cash contribution. The fair market value (FMV) of the shares is now $325,000. Mr. Alexander has fully utilized his capital gains exemption. He wants to freeze the value of his investment in the corporation using a capital reorganization under section 86 in which he receives debt of the corporation, if possible, and preferred shares. Required: What is the maximum amount of debt (to the nearest $100) that he can receive without realizing any income, using section 86? What are the fair market value, adjusted cost base, and paid-up capital of the preferred shares that he will receive under section 86? Show all calculations and/or give all explanations necessary to prove your answers to these questions.
Solution 97 Maximum debt
$ 25,000 (lesser of ACB and PUC of old common shares)
Preferred shares FMV Legal stated capital ACB PUC
300,000 (difference between FMV of old common shares and debt) 300,000 1 1
Issuance of new preferred shares: (1)
Reduction in PUC[s. 86(2.1)(a)] LSC of preferred shares Less: PUC of old common shares ($1 + $25,000) Less: FMV of non-share consideration (debt) PUC reduction
$ 300,000 $25,001 25,000
1 $ 299,999
PUC of new preferred shares ($300,000 − $299,999)
(2)
$
1
ACB ACB of old common shares ($1 + $25,000) Less: FMV of non-share consideration (debt)
$25,001 25,000
Cost of new preferred shares
$
1
Redemption of old common shares: (1)
Deemed dividend Proceeds on redemption of old shares FMV of non-share consideration (debt)
$25,000
PUC of new preferred shares Less: PUC of old common shares Deemed dividend
(2)
1
$ 25,001 25,001 $ 0
Capital gain (capital loss) Proceeds on disposition of old shares ACB of new preferred shares Add: FMV of non-share consideration Proceeds of disposition Less: deemed dividend Adjusted proceeds of disposition Less: ACB of old common shares Capital gain (loss)
$
1 25,000 $ 25,001 0 $ 25,001 25,001 $ 0
Question 98 (43 minutes) [Chapter 19] Jim and Stan formed a tax consulting partnership on February 1, 2020. Each partner contributed $50,000 in return for an equal share of the profits from the partnership. On January 1, 2024, Stan sold his interest to Julie for $150,000. The following is the income statement of the partnership: Jim and Stan Income Statement For the year ended December 31, 2023 Gross revenue Expenses: Office expenses Rent Office salaries Charitable donations Amortization (Note 1) Meals and entertainment
$424,400 $69,000 58,300 74,300 10,600 23,300 15,000
Other income: Gain on sale of shares (Note 2) Dividends from Canadian-resident public corporations Capital dividends
$84,800 40,000 17,000
Net income
250,500 173,900
141,800 $315,700
Notes: 1. Capital cost allowance (CCA) for 2023 was $40,300. 2. The capital gain for tax purposes is the same as the financial accounting gain. In 2023, each partner drew $132,000. Prior year financial statements of the partnership provided the following information for the following years ended December 31: Business income (loss) Taxable capital gains Charitable donations Drawings — Jim Drawings — Stan
2020 $(70,000) 24,000 24,000
2021 $127,300 12,800 4,200 48,000 48,000
2022 $159,100 8,400 60,000 72,000
The following applies to Stan in 2023: (a) he personally received cash dividends (eligible) from Canadian-resident public corporations in the amount of $10,345; (b) he is entitled to the federal personal tax credit of $2,250 for a single person; (c) he has a net capital loss of $80,000 carried forward from 2018; and (d) he will pay personal federal income tax of $18,942 + 26% of the balance of taxable income in excess of $106,717. Required: Compute Stan’s basic federal tax payable for 2023, showing all calculations, including partnership income for the year and the adjusted cost base (ACB) of Stan’s partnership interest immediately before the sale.
Solution 98 Partnership income: Net income per financial statements Add: donations amortization meals and entertainment taxable capital gain on sale of shares Deduct:
CCA book gain on sale of shares capital dividend Income for tax purposes
$315,700 $ 10,600 23,300 7,500 42,400 $ 40,300 84,800 17,000
Stan’s share of partnership income Add: dividend gross-up (.38 × $40,000 × ½) Stan’s income from partnership
83,800 $399,500
142,100 $ 257,400 $128,700 7,600 $136,300
Stan’s ACB of partnership interest: Capital contribution Add: prior years’ partnership income (½ × ($127,300 + $159,100)) $143,200 current year’s partnership income 128,700 prior years’ taxable capital gains (½ × $12,800) 2021 6,400 untaxed portion of TCG in 2021 6,400 curent year untaxed portion of TCG (½ × $42,400) 21,200 current year capital dividend (½ × $17,000) 8,500 Deduct:
prior years’ partnership loss (½ × $70,000) $ 35,000 prior years’ donations (½ × ($4,200 + $8,400)) 6,300 current year’s donations (½ × $10,600) 5,300 prior years’ drawings ($24,000 + $48,000 + $72,000) 144,000 current year’s drawings 132,000
ACB
$ 50,000
314,400 364,400
322,600 $ 41,800
Taxable capital gain on disposition of partnership interest: Proceeds of disposition Less: ACB Capital gain TCG
$150,000 41,800 $108,200 $ 54,100
Stan’s basic federal tax payable for 2023: Income from partnership Personal dividends grossed up (1.38 × $10,345) Division B income Less: net capital losses ($80,000; limited to ½ × $42,400) Taxable income Federal tax ($18,942 + .26 × ($129,376 − $106,717)) Less: personal tax credit donations tax credit (($200 × .15) + ((½ × $10,600) − $200) × .29) dividend tax credit (6/11 × ((.38 × $40,000 × ½) + (.38 × $10,345))) Basic federal tax
$136,300 14,276 150,576 21,200 $129,376 $ 24,833 $2,250 1,509 6,290
(10,049) $ 14,784
The taxable capital gain of $54,100 related to the disposition of the partnership interest must be reported on Stan’s 2024 tax return.
Question 99 (16 minutes) [Chapter 19] Several years ago, Ms. Julie established an inter vivos trust for her son, who is now 23 years old. The terms of the trust provided that the trustees had complete discretion to distribute any portion of the annual income of the trust to the beneficiary. The following income was earned in the trust for its taxation year ended December 31, 2023. Interest Actual dividends from Canadian-resident public corporations (eligible) Capital gains Rental income (after deduction of $3,700 in CCA) Total
$20,500 22,400 12,000 5,300 $60,200
In 2023, 70% of each type of income was paid to the beneficiary, and the other 30% was retained by the trust. The son had no other source of income in 2023 and has used all of his capital gains exemption. He will pay federal income tax at the rate of 15% on taxable income of up to $53,359. He paid tuition fees of $5,000 in the year for eight months of full-time attendance at university. Required: Compute the taxable income and basic federal tax payable of the trust and the son in respect of 2023.
Solution 99 Trust 30%
Son 70%
$ 6,150 6,720 2,554 1,800 1,590
$14,350 15,680 5,958 4,200 3,710
Division B income and taxable income
$18,814
$43,898
Federal tax (trust @ 33% - top marginal federal personal rate) Less: personal tax credit tuition tax credit (15% of $5,000) dividend tax credit (6/11 of gross-up)
$ 6,209 (1,393)
$ 6,585 (2,250) (750) (3,250)
Basic federal tax
$ 4,816
$
Income: Interest Dividend Gross-up @ 38% Taxable capital gain (½ × $12,000) Rental income (trust must deduct CCA)
335
Question 100 (26 minutes) [Chapter 19] Matt, Marcus, Lucas, and Jonathon are partners in a publishing venture, MMLJ Publishing. They each contributed $10,000 to start the venture in October 2015, and thus share equally in the annual income. The following income statement was prepared for MMLJ Publishing for its year ended December 31, 2023. Gross revenues Expenses: Amortization of fixed assets Donations to registered charities Employee salaries and benefits Membership in fitness club for partners Office rent Office supplies
$200,000 $3,750 5,500 39,360 2,500 4,500 1,125
Dividends from private taxable Canadian corporations (non-eligible) Capital gain on sale of investments Net income
56,735 $143,265 12,000 16,000 $171,265
Additional information: (1) Capital cost allowance (CCA) on fixed assets for the year is $3,300. (2) The partners each took drawings of $27,000 during 2023. (3) Matt’s adjusted cost base of his partnership interest was $230,000 as of January 1, 2023. Required: a) What is Matt’s share of the income for tax purposes of the above partnership for 2023? (13 minutes) b) What is the nature of Matt’s share of the income of the partnership for 2023? (i.e., what is/are the source(s) of income?) (5 minutes) c) What is the adjusted cost base of Matt’s partnership interest as of January 1, 2024? (9 minutes)
Solution 100 Net income Add: Amortization Donations Memberships Deduct: CCA Non-taxable ½ of capital gain
$171,265 $3,750 5,500 2,500
11,750 $183,015 (3,300) (8,000) $171,715
Matt’s income from the partnership is ¼ × $171,715
$ 42,929
Matt’s income consists of: Taxable capital gains (¼ × $8,000) Non-eligible dividends (¼ × $12,000) Business income
$2,000 $3,000 $37,929
Adjusted cost base of Matt’s partnership interest is: January 1, 2023 Balance Add: 2023 partnership income Non-taxable portion of 2023 capital gain (¼ × $8,000) Less: Matt’s drawings Matt’s portion of donations (¼ × $5,500) January 1, 2024 Balance
$230,000 42,929 2,000 (27,000) (1,375) $246,554
Question 101 (Chapter 13) You have been assigned to the audit of Allmine Ltd., a Canadian-controlled private corporation, for the 2023 taxation year. Its year end is December 31. At the beginning of the audit, Mr. Ego, the company’s sole shareholder and president, informed you that he has always had a keen interest in taxation and, thus, he has kept the corporate taxation matters well in hand. During the audit which occurred in April 2024, the following items were noted: (a)
Allmine Ltd. declared a bonus of $150,000 payable to Mr. Ego on December 31, 2023. At the time of the audit, the bonus had not been paid. Mr. Ego indicated to you that the bonus will not be paid to him until January 2025 to give him the optimum deferral of tax as he does not have an immediate need for the funds.
(b)
On January 1, 2023, Mr. Ego and his son received the following loans from Allmine Ltd. by virtue of Mr. Ego’s shareholding therein: — a $30,000 loan was received by Mr. Ego to enable him to purchase a fishing boat. The loan agreement, which was signed January 1, 2023, stated that the loan was to bear interest at 4% per annum. The interest is payable annually on each anniversary date of the loan. The principal is repayable December 31, 2025. At the time of the audit, Mr. Ego had not repaid any principal, nor had he paid any interest. —
a $20,000 interest-free loan was received by Mr. Ego’s 25-year old son to enable him to purchase previously unissued fully paid shares of Allmine Ltd. from Allmine Ltd. Mr. Ego’s son is an employee of Allmine Ltd. A promissory note was signed for the loan. The note indicated that the principal would be repaid on the fifth anniversary of the loan.
(c)
On December 31, 2022, Mr. Ego’s wife received a loan from Allmine Ltd. by virtue of her husband’s shareholding therein. The loan was in the amount of $60,000 and was non-interest bearing. Mrs. Ego used the funds to redecorate the family home. She repaid the loan on December 31, 2023.
(d)
Mr. Ego’s wealthy brother, Bob, guaranteed a $1,000,000 loan to Allmine Ltd. on January 1, 2020, when the company originally started operations. The loan guarantee fee is 0.8% annually. No fee has ever been paid on the guarantee, although the company has accrued the fee annually. The fee expense has been deducted in computing the income of the company for each of 2020, 2021, 2022, and 2023.
(e)
Mr. Ego wishes for his wife and his two sons to each have a $1,000 compound-interest Canada Savings Bond. He currently has three such bonds. He thinks that by his wife and children owning the bonds, less income tax will be paid on interest. His two children are currently 16 and 20 years of age. He is considering getting the bonds into their hands by one of the following methods: (i) giving the bonds to them without receiving any financial consideration in return; or (ii) loaning them the funds, interest-free, to enable them to purchase similar bonds.
— REQUIRED
Discuss the income tax implications of the foregoing information, providing any advice to Mr. Ego that you consider necessary. Support your answer with calculations where appropriate. Ignore the effects of leap year. Note: assume the prescribed interest rates for 2023 were: 1st quarter . . . . 2nd quarter . . . 3rd quarter . . . . 4th quarter . . . .
3% 2% 5% 5%
Solution 101 (Chapter 13) (a)
If the $150,000 bonus is not paid by June 28, 2024, Allmine Ltd. cannot deduct the bonus in its 2023 taxation year. Instead, the bonus will be deductible only when paid (ssec. 78(4)).
(b)
The $30,000 loan was not used for a purpose that would exclude it from income under ssec. 15(2.4). Therefore, Mr. Ego must repay this loan by December 31, 2024 or the $30,000 loan will be included in his income for the 2023 taxation year. When Mr. Ego's 2023 tax return is filed, December 31, 2024 will not have passed. Therefore, the $30,000 loan will not be included in his income at that time. Instead, an imputed interest benefit will be included in his 2023 income. If the loan is repaid by December 31, 2024, it will have no further tax consequences other than an imputed interest benefit for 2024 also. If the loan is not repaid by December 31, 2024, a request will be made to amend Mr. Ego's 2023 tax return to remove the imputed interest benefit and include the $30,000 loan. Future repayments of the loan after 2023 will be deductible in computing Mr. Ego's income in the year made (par. 20(1)(j)). The 2023 imputed interest benefit will be calculated as follows (ssec. 80.4(2)): Fishing boat loan $30,000
@ 3% × 90/365 =* @ 2% × 91/365 = @ 5% × 92/365 = @ 5% × 92/365 =
Less interest paid by Mr. Ego by January 30, 2024
$ 222 150 378 378 1,128 $1,128
*The day the loan was granted is counted. The $20,000 loan to Mr. Ego's son was used for one of the purposes specifically exempted and bona fide arrangements were made at the time the loan was made for repayment thereof within a reasonable time (ssec. 15(2.4)). If his son received the loan because of his employment, then there will not be a ssec. 15(2) income inclusion and the son will have an imputed interest benefit in his income for each year the loan remains outstanding. The 2023 imputed interest benefit will be computed as follows (ssec. 80.4(1)): Loan to purchase shares $20,000
@ 3% × 90/365 = @ 2% × 91/365 = @ 5% × 92/365 = @ 5% × 92/365 =
$148 100 252 252 $752
The imputed interest benefit is deemed to be interest paid (sec. 80.5) for the purposes of par. 20(1)(c). Therefore, he will have a deduction in 2023 of $752 for interest expense on the loan to acquire the shares. If the loan was not received by his son because of his employment because other employees were not entitled to similar loans, then the principal would have to be included in income in 2023 if not repaid by December 31, 2024. If the principal of the loan is included in his son’s income, there
will be no imputed interest benefit for any year that the loan remains outstanding and principal repayments will be deductible in the year these are made. (c)
Because the loan to Mrs. Ego was repaid on December 31, 2023 the loan is excluded from being included in income. If the loan was not repaid by December 31, 2023, it would have been included in Mrs. Ego's income for 2022 (ssec. 15(2)) and her return would need to be amended. Mrs. Ego would have an imputed interest benefit of $2,255 included in her income for 2023 (ssec. 80.4(2)): $60,000
(d)
@ 3% × 90/365 = @ 2% × 91/365 = @ 5% × 92/365 = @ 5% × 92/365 =
$ 444 299 756 756 $2,255
2020 accrued fee As the $8,000 of fee expensed by Allmine Ltd. in 2020 was not paid by December 31, 2022, this amount must be included in Allmine Ltd.'s income for 2023 unless Bob and Allmine Ltd. file an agreement in prescribed form by June 30, 2024. If such an agreement is filed, the $8,000 will be deemed to have been paid by Allmine Ltd. and received by Bob on January 1, 2023, and loaned back to Allmine Ltd. by Bob (ssec. 78(1)). If the agreement is filed late (filed after June 30, 2024), $2,000 being 25% of $8,000 will have to be included in Allmine Ltd.'s income in 2023 (ssec. 78(3)). When the $8,000 fee is paid to Bob in a future year, Allmine Ltd. will not receive a deduction for the amount paid.
2021 accrued fee As the $8,000 fee expensed by Allmine Ltd. in 2021 was not paid by December 31, 2023, this amount must be included in Allmine Ltd.'s income for 2024 unless a joint election as described above is filed by Bob and Allmine Ltd. by June 30, 2025. 2022 & 2023 accrued fee The fee expensed by Allmine Ltd. in 2022 and 2023 should be paid by December 31, 2024, and December 31, 2025 respectively to avoid any further tax consequences. (e)
(i)
Gifting the bond to the 20-year-old child will result in the income therefrom being taxed as the child’s income. Income received by children age 18 or older from property transferred to them by way of a gift is not subject to attribution (ssec. 74.1(2)). Gifting the bond to the 16-year-old child will result in the income on the bond being attributed to Mr. Ego until the year the child turns 18. (sec. 74.1(2)). Gifting the bond to his wife would result in the income on the bond being attributed to Mr. Ego and taxed as his income (ssec. 74.1(1)).
(ii)
The income from the bonds purchased by the wife with funds loaned to her by Mr. Ego will attribute to Mr. Ego and be taxed as his income (ssec. 74.1(1)). To avoid attribution, the lesser of a commercial rate of interest and the prescribed rate in effect at the time the loan is made should be charged on the loan and the interest should be paid by Mrs. Ego annually by January 30th of the following year (ssec. 74.5(2)). The income from the bonds purchased by the children with funds loaned to them by Mr. Ego will be attributed to Mr. Ego and taxed in his income. Subsection 74.1(2) applies in the case of the 16-year-old and ssec. 56(4.1) applies in the case of the 20-year-old. Subsection 56(4.1) applies as it may reasonably be considered that one of the main reasons for the loan was to avoid tax. To avoid attribution, the lesser of a commercial rate of interest and the prescribed rate in effect at the time the loan is made should be charged on the loan and the interest should be paid by the children annually by January 30 of the following year (ssec. 74.5(2)).
Question 102 (Chapter 13, 15, 16) Freida, a resident of Baddeck, Nova Scotia, owns all the common shares of Lobsto Corp. which was incorporated in 2007. It is January 15, 2024 and she has come to you for advice regarding the potential share sale of her company. Freida purchased all 100 issued and outstanding Common Shares of Lobsto Corp. for $350,000 in 2019 from the original owner and his family members at the time. The paid-up capital (PUC) of the shares is $150,000. Lobsto Corp is located in Baddeck and is the largest manufacturer of fishing equipment in Canada. It sells to distributors across the country. The following is the balance sheet for the corporation. Lobsto Corp. Balance Sheet As at December 31, 2023
Cash Prepaid Expenses Marketable Securities Accounts Receivable Allowance for Doubtful Accounts Inventory Current Assets Investment in Fisher's Cove Ltd. Property, plant and equipment Less: accumulated depreciation Goodwill Total Assets
360,000 25,000 120,000 300,000 (10,000)
1,984,000 (650,400)
Accounts payable Income taxes payable Total Liabilities Common shares Retained Earnings Total Shareholder's Equity Total Liabilities & Equity
290,000 575,000 1,370,000 45,000
250,000 575,000
1,333,600 126,000 2,874,600
1,200,000 850,000
81,000 12,000 93,000 150,000 2,631,600 2,781,600 2,874,600
FMV = fair market value
FMV 360,000 25,000 120,000
50,000
The investment in Fisher's Cove Ltd was a 2018 acquisition of a 20% interest in a local fishing hook manufacturing facility. All of the assets of the corporation are used in the manufacturing business. The relative values of Lobsto Corp’s assets have remained stable over the past three years. The company consistently has a cash balance of between $340,000 and $400,000. $60,000 of the cash balance fluctuates as it is used for ongoing business operations throughout the year. The marketable securities are not held as part of the corporation’s business activities. The company has a capital dividend account balance of $25,000 and Non-eligible RDTOH balance of $5,000. The adjusted cost base (ACB) of the marketable securities is $110,000. The company does not have any General Rate Income Pool (GRIP). Freida was recently offered $2,800,000 for the shares of Lobsto Corp. Freida is 58 and is considering retirement. She would like to know whether, if she sells her shares of Lobsto Corp, she would be able to claim the capital gains deduction (CGD) on the sale. If the shares do not qualify for the CGD then she wants to know if there is anything that can be done to qualify. She has heard that she may need to remove some cash from the company and would like you to determine the most tax effective options to do so. Frieda would like to maximize the cash available to invest for retirement subsequent to the share sale. She would like to know how much cash she will have available after the sale of the shares. Frieda is in the highest tax bracket. Required: Part A [17 marks] Assess the situation Identify the issues Part B (Memorandum to the Tax Partner) [67 marks] Analyze the issues Advise/recommend Please format Part B as a memorandum to the tax partner. You may use point form for the qualitative analysis. However, please ensure that what you write is well organized and understandable. You are being assessed on your communication skills.
Question 102 Solution QSBC Shares Assess the Situation 1. Draw a diagram identifying all stakeholders, e.g., corporate org charts Frieda 100% Lobsto Corp
20% Fisher's Cove Ltd.
Purchaser 2. Identify the relationships among the stakeholders, e.g., related, affiliated, associated, connected − Freida controls Lobsto Corp so she is related and affiliated with Lobsto Corp − Lobsto Corp has a 20% interest in Fisher’s Cove Ltd so they are connected − Unrelated purchaser 3. Identify the profile of each stakeholder, e.g., tax features, risk profile − Freida 1. Individual 2. A Canadian resident throughout the year 3. In the highest tax bracket 4. Age 58 − Lobsto Corp 1. Canadian-controlled private corporation (CCPC) 2. FMV $2,800,000 3. Shares: PUC $150,000; ACB $350,000 4. Value of assets stable over past 3 years
5. Capital dividend account of $25,000 6. Non-eligible RDTOH of $5,000 7. No GRIP − Fisher’s Cove 1. 20% interest FMV $50,000 2. Uses all of its assets in an active business – small business corporation (SBC) 4. Understand the decision maker and their objectives − Freida is the decision maker Potentially sell shares of Lobsto Corp Determine if she can use her CGD Determine any action she can take to be able to access her CGD? Possibly remove some cash from the company. She wants to maximize her after-tax cash on the sale. She wants to know how much cash she will have available after the sale. 5. Identify the relevant past transactions/events or planned future transactions/events and create a timeline − 2007 Incorporation − 2019 – Frieda purchased the shares in an arm’s length transaction. − Past 3 years – Asset values stable − January 15, 2024 - Now − 2024 - Possible sale of Lobsto Corp shares Identify all of the major tax issues and any non-tax issues Issue 1 - Is Freida eligible to use her Capital Gains Deduction? Issue 2 - Are the shares of Lobsto Corp qualified small business corporation shares (QSBC shares)? − Is Lobsto Corp a SBC − Is the holding period test met? − Does Lobsto Corp meet the basic asset test? Issue 3 - If “no” to any of the tests in 2 above, are there steps that can be taken to have the Lobsto Corp shares qualify as QSBC shares?
Issue 4 - Determine how much cash Freida will have available after the share sale.
Analyze the Major Issues 1. Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act Issue 1 - Does Freida qualify to claim the CGD? − Freida is an individual who is resident in Canada presumably throughout the year − Conclusion: Yes, she qualifies Issue 2 - Are the shares of Lobsto Corp QSBC shares? There are three tests that must be met: (1) SBC Test Is Lobsto Corp an SBC at the time of sale? •
At the time of sale, Lobsto Corp must be an SBC.
•
An SBC is defined as a CCPC having all or substantially all (i.e., at least 90%) of the FMV of its assets either (i) used principally in an active business carried on primarily in Canada, or (ii) being shares or debt of a connected SBC, or (iii) a combination of these two [s. 248(1)].
•
Lobsto Corp is a CCPC since all of the shares are owned by Freida, who is a resident of Canada.
•
Fisher’s Cove is connected to Lobsto Corp, because Lobsto Corp owns 20% of Fisher’s Cove. Fisher’s Cove is an SBC because all of its assets are used in a Canadian active business.
•
As shown in the quantitative analysis below, Lobsto Corp does not meet the 90% test currently, since the marketable securities and $300,000 of cash are not active business assets. The FMV of Lobsto Corp’s active business assets and the shares in Fisher’s Cove (a connected SBC) make up 88% of the total fair market value of Lobsto Corp’s assets. Conclusion: Lobsto Corp. does not meet the SBC test currently since less than 90% of the fair market value of its assets are a combination of (i) assets used principally in an active business carried on primarily in Canada AND (ii) shares of Fisher’s Cove, a connected SBC. (2) Holding Period Test •
Throughout the 24 months preceding the sale, the shares of Lobsto Corp cannot be owned by anyone other than Freida or a person related to Freida.
• Freida has owned the shares of Lobsto Corp. since 2019. Conclusion: This test is met. (3) Basic Asset Test •
In order to meet this test, Lobsto Corp needs to have more than 50% of the FMV of its
assets used in an active business carried on primarily in Canada for the 24 months preceding the sale. •
Lobsto Corp does have more than 50% of its assets used in an active business.
•
Relative asset values have been consistent for past 3 years.
•
It is not necessary to consider the shares of Fisher’s Cove in this determination because Lobsto Corp meets the 50% test with its own active business assets. (Modification is not necessary). Conclusion: The basic asset test is met. 2. Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format Do the shares of Lobsto Corp meet the 90% and 50% tests? ABA = active business asset % shown is determined by FMV of asset dividend by total FMV of all assets
Cash Prepaid Expenses Marketable Securities Accounts Receivable Inventory Investment in Fisher's Cove Ltd. Property, plant and equipment Goodwill Total FMV Assets
FMV 60,000 ABA 300,000 Non-ABA 25,000 ABA 120,000 non-ABA 250,000 ABA 575,000 ABA 50,000 ABA 1,200,000 Shares of connected SBC 850,000 ABA 3,430,000
% 9% 3%
12%
non-ABA %
3. Identify assumptions and uncertain research positions − The variability of the fair market values could impact the relative percentages. − Freida does not have a cumulative net investment loss (should determine) − Freida has not claimed an allowable business investment loss (ABIL) in the past (should determine) − Freida has not claimed CGD in the past (should determine)
Reach a conclusion on each issue − Lobsto Corp meets both the holding period test and the basic asset test, but fails the SBC test. Therefore, the shares of Lobsto Corp are not QSBC shares and thus Freida cannot claim the capital gains deduction, currently. Issue 3 - If the shares of Lobsto Corp are not QSBC shares then determine if there are steps that could be taken to have them qualify
1. Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act •
To be an SBC Lobsto Corp must have 90% of its assets made up of assets used in an active business and/or shares or debt of a connected SBC.
•
Fisher’s Cove Ltd. does meet the test to be a SBC since it uses all of its assets in a Canadian active business.
•
Lobsto Corp. could consider the following options to remove the $300,000 cash that is not used in the business; 1) Pay down liabilities of $93,000, 2) Pay a capital dividend of $25,000, 3) Distribute paid up capital of up to $150,000 4) Pay a non-eligible dividend of $32,000
Option 1 The first three suggestions have no tax consequences. These 3 suggestions combined will reduce the non-active business assets by $268,000 ($93,000 + 25,000 + 150,000). Therefore, the cash that is a non-active business asset will be reduced to $300,000 – 268,000 = $32,000. This represents only 1% of the FMV of total assets as calculated below (See Option 1 in the quantitative analysis). When added to the FMV of the marketable securities, the total non-ABA is reduced to 5%. This will provide Freida with $175,000 of cash available to invest in addition to the net sale proceeds.
Option 2 This option includes Option 1 plus paying a dividend. Paying a dividend has a tax cost. The dividend will be a non-eligible dividend subject to tax (to Freida) at the highest marginal rate of 42.5% (tax of $13,600). However, it will also result in a refund of the (Non-eligible RDTOH) NERDTOH of $5,000, to Lobsto Corp. Overall, there will be a net tax cost of $8,600 for paying a dividend of $32,000. It would be better to pay only $13,043 ($5,000/38.33%) in dividends (personal tax to Freida of $5,543) to obtain the $5,000 refund of the NERDTOH balance in Lobsto Corp. Option 3 In addition to Option 1 and Option 2, it would also be possible to sell the $120,000 of marketable securities. The sale of the marketable securities would result in a capital gain of $10,000. $5,000 would be added to the capital dividend account. $5,000 would be a taxable capital gain and subject to a tax rate of 50.67% (tax of $2,534), to Lobsto Corp. 30.67% of the gain will be added to NERDTOH ($1,533). As a result, $5,000 of the net proceeds of $117,466 [$120,000 - $2,534] could be paid out as a tax-free capital dividend to Freida, a $4,000 non-eligible dividend could be paid (personal tax to Freida of $1,700) to obtain a refund of the NERDTOH of $1,533. This results in a net tax cost of $167 (See Option 3 in the quantitative analysis). This option will provide Freida with an additional $5,000 + $4,000 – 1,700 = $7,300 of cash for a total of $189,800 of cash available to invest in addition to the net sale proceeds. Option 4 In addition to Options 1, 2 and 3 above, a final step could be to pay out all of the remaining non-ABA cash balance so that 100% of the assets of the company are active business assets. This option reduces the risk of a potential challenge of the relative FMVs of the assets of the company. Alternatively, the $300,000 could be used to invest in additional active business assets and/or invest in Fisher’s Cove Ltd as long as the SBC status of the company is maintained.
2. Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format Option 2 - Option 1 plus $13,043 non-eligible dividend (with $5,000 NERDTOH refund) FMV % 60,000 ABA 23,957 Non-ABA 1% 25,000 ABA 120,000 non-ABA 4% 250,000 ABA 575,000 ABA 50,000 Shares of connected SBC 1,200,000 ABA 850,000 ABA 3,153,957 5% non-ABA %
Cash Cash not used in the business Prepaid Expenses Marketable Securities Accounts Receivable Inventory Investment in Fisher's Cove Ltd. Property, plant and equipment Goodwill Total FMV Assets
Cash not used in business = $32,000 (Option 1) - 13,043 (dividend) + 5,000 (non-eligible dividend refund) = $23,957 Cash to Freida = $175,000 (Option 1) + $13,043 dividend – 5,543 (personal tax on dividend) = $182,500 Option 4 – Remove all of the non-ABAs from the corporation i.e., Option 3 plus an additional dividend of $133,956 [$109,999+$23,957]
Cash Cash not used in the business Prepaid Expenses After tax/dividends cash from Sale of Marketable Securities Accounts Receivable Inventory Investment in Fisher's Cove Ltd. Property, plant and equipment Goodwill Total FMV Assets
Cash to Frieda
$
FMV % 60,000 ABA Non-ABA 0% 25,000 ABA non-ABA 0% 250,000 ABA 575,000 ABA 50,000 Shares of connected SBC 1,200,000 ABA 850,000 ABA 3,010,000 0% non-ABA %
266,825
Cash to Freida = $182,500 ($25,000 CDA +$150,000 PUC + $13,043 NE dividend - $5,543 dividend refund for Options 1 & 2) + 5,000 capital dividend + 4,000 non-eligible dividend – 1,700 personal tax on non-eligible dividend (for Option 3) = $189,800
+ $133,956 dividend – 56,931 (tax on dividend) = $266,825
3. Identify risks including missing information, assumptions and uncertain research positions •
Be careful not to become too precise when doing this calculation. Remember, the fair market value of the assets, especially goodwill, is subject to challenge. If your fair market values are too high, then you will not have sold enough securities to meet the 90% test.
•
A least risky alternative is Option 4 which would be to have Lobsto Corp pay out all of the remaining excess cash after the sale of all the marketable securities as non-eligible dividends. However, the trade-off is that she will have $23,643 less after-tax cash to invest due to the tax cost of taking the final step to remove the nonactive cash from the business after all tax-free and tax-efficient minimizing options have been exhausted (See quantitative analysis below).
4. Reach a conclusion based on your analysis of each major issue It is possible to purify Lobsto Corp through the payment of the cash not used in the business to Freida, by paying off $93,000 of liabilities, paying a capital dividend of $25,000, and paying a paid up capital distribution of $150,000. In addition, a dividend of $13,043 could also be paid with a low net overall tax cost. Finally, the marketable securities could be sold and an additional $5,000 capital dividend and $4,000 non-eligible dividend paid again with a low net overall tax cost. Issue 4: Determine how much cash she will have available after the share sale. 1. Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act By purifying the company, Freida will save $242,798 of tax (tax on the now available capital gains deduction of $485,595 @ 50%). The removal of the cash not used in the business through capital dividends, non-eligible dividends (net of the related NERDTOH refund) and paid-up capital distributions will reduce the $2,800,000 proceeds and taxable capital gain on the sale of the shares. Option 2, where $268,000 of excess cash is used to pay down $93,000 of liabilities, distribute $150,000 of paid-up capital and pay a $25,000 capital dividend and an additional $13,043 dividend maximizes the after-tax cash to Freida. She will have $2,438,015 available to her to invest for retirement.
2. Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format Option 2 Maximizes the after-tax cash available to Freida resulting in after tax cash available to Freida of $2,438,015 [$182,500+$2,255,515].
Proceeds ACB Capital Gain TCG CGD Tax (50%) After -tax cash
2,616,957 (200,000) 2,416,957 1,208,479 (485,595) 722,884 361,442 2,255,515
PUC, CDA, Dividend to clear RDTOH [2,800,000-175,000-13,043+5,000]
Option 4 resulting in total after tax cash available to Freida of $2,414,372 [$2,147,548+$266,825]
Proceeds ACB Capital Gain TCG CGD Tax (50%) After -tax cash
2,473,000 (200,000) 2,273,000 1,136,500 (485,595) 650,905 325,453 2,147,548
PUC, CDA, Dividend of all non-ABAs, Sell Marketable, clear RDTOH [2,606,956-23,957-110,000]
3. Identify risks including missing information, assumptions and uncertain research positions She should hire a Chartered Business Valuator (CBV) to value the shares of the company (and the interest in Fisher’s Cove) to ensure that the $2.8M value is reasonable. The FMV of the net assets of the company are $3,337,000 [$3,430,000 - $93,000]. The offer price appears to be too low relative to the fair market value of the net assets of the company. Option 4 has the lowest amount of risk as it involves removing all of the non ABAs from the corporation. The trade-off is $23,643 [$2,438,015 - $2,414,372] less after-tax cash available to Freida to invest relative to Option 2. 4. Reach a conclusion based on your analysis of each major issue Freida will have $2,438,015 available to invest for retirement (assuming Option 2 is chosen). Advise/Recommend: Advise the decision maker, integrating your conclusions on each of the issues with their objectives, giving priority to the most important issues Advise Lobsto Corp to use the cash not used in the business to pay liabilities, capital dividends, make a PUC distribution and pay a dividend sufficient to refund the noneligible RDTOH. Then, at the time of sale, Lobsto Corp will be a qualified small business corporation, meeting the small business corporation test, holding period test and the basic asset test. Freida will be able to use her capital gains exemption to minimize tax on the sale of the shares which saves her $242,798 of tax. As the company will still have the $120,000 of marketable securities and some cash on hand that is not used in the business, making up 5% of total assets, it would be advisable to have a valuation of the assets and goodwill of the company prepared to support the relative fair market values. Alternatively, Freida could sell the marketable securities and pay all of the resulting/remaining excess cash as capital dividends and non-eligible dividends so that 100% of the assets of the company are ABAs. This will eliminate the need for a
valuation and minimize the risk of a CRA reassessment/disallowance of the CGD. However, the after-tax cash available for her retirement will be $23,643 lower. The loss of the $23,643 of retirement funds may be worth the peace of mind to Freida of securing the $242,798 of tax savings. It is also likely less than the cost of a formal business valuation by a CBV. She should discuss the $2.8M share price with a valuator as it seems low. [Please contact Julie Robson at jrobson@uwaterloo.ca if you would like to obtain a marking rubric for this exam question.]
Question 103 [16 marks] (Chapter 13) Fern Stoves Limited (“Fern”) is a Canadian-controlled private corporation (“CCPC”) with a December 31 year-end. The company is a Canadian distributor of corn-fuelled stoves operating from its head office in Milverton, Ontario. Today is December 25, 2023 and Tony Fern, the sole shareholder and president of the company, has requested a meeting with you to discuss various tax issues related to the company’s December 31, 2023 taxation year-end. At the meeting he provided you with the following information. 1. Tony is considering accruing a $150,000 bonus payable to himself in the December 31, 2023 financial statements for Fern. 2. Tony received a $90,000 1% loan, dated July 1, 2023 to enable him to purchase a new home for his own occupancy. Other senior employees of Fern are eligible for, and have received, loans on similar terms. The loan was repayable over 10 years in equal instalments of principal payable on the anniversary date, but with interest payable monthly. Ignore leap years. Required: Provide Mr. Fern with a detailed summary of the tax consequences to him and Fern of the above transactions for the year ending December 31, 2023, with calculations where necessary. Assume that the prescribed interest rate for the first quarter of 2023 was 2%, for the second quarter it was 1%, for the third quarter it was 2%, and for the fourth quarter it was 3%.
Question 103 Solution [20 marks] (1) Bonus to Mr. Fern • Mr. Fern should ensure that the bonus is paid to him by June 28, 2024 (179 days after year-end). √ • If it is not paid by that date, the deduction will not be allowed by Fern until the bonus is paid. √ • The bonus will be included in Mr. Fern’s income in the year received, in 2024. It will be paid to him net of required income tax withholdings and be included on his T4 from Fern for his 2024 personal tax return. √ (2) Loan to Mr. Fern • Subsection 15(2) could apply since the loan is to a shareholder. Mr. Fern will have an income inclusion unless an exception is met√ • To determine which exceptions apply it is necessary to determine whether the loan was received by virtue of employment or shareholdings. √ • The principal amount of the loan will not be included in Mr. Fern ’s income in the 2023 taxation year√ because the exception under paragraph 15(2.4)(b) applies. • The loan was made to enable him to acquire a dwelling for his habitation. √ • The loan was made in his capacity as an employee √ as evidenced by the fact that other arm’s length employees have received a similar loan with similar terms. √ • At the time the loan was made, bona fide arrangements were made for its repayment. √ • Principal repayments are normally deductible under paragraph 20(1)(j) but only if the principal amount of the loan was included in the taxpayer’s income. Since Mr. Fern did not include the loan in his income under subsection 15(2), he will not be able to deduct repayments under paragraph 20(1)(j) √ • Subsection 80.4(1) applies since the loan was made by virtue of his employment. √ • Since the loan is a home purchase loan, the interest benefit on the loan is calculated, on a quarter-by-quarter basis, at the lesser of the prescribed rate when the loan was made (2%) and the prescribed rate in effect for the quarter. √ • Since the prescribed rate at the time the loan was made (2%) is less than the prescribed rate for the fourth quarter, the 2% rate will be used for all of 2023. √ • Mr. Fern will have an interest benefit of $907 √√√ ($90,000 × .02 × 184/365) LESS the interest paid for the year of $454 √ ($90,000 × .01 × 184/365) for a net benefit of $454 • Interest on the loan will not be deductible under 20(1)(c), although deemed to be interest paid by section 80.5, since the purpose is not to produce income. √ • Fern will be required to include the $454 net benefit on Mr’s Fern’s T4 slip for 2023. √ • Fern will include the $454 of interest paid to the company by Mr. Fern in active business income for the year (incidental to earning ABI). √
Question 104 (90 marks; 90 minutes) (Chapter 16) Sam Deitrich, a Canadian resident, owns 100% of the issued shares of Deitrich Contracting Limited (DCL) which carries on a project management contracting business. The taxation yearend of the corporation is December 31st. It is currently January 10, 2024. Sam is retiring and as a result is considering an offer for the sale of all of the assets of his business (including the cash) to an unrelated purchaser for $2,660,000. The sale will be effective February 1, 2024. It is projected that the company will have taxable income for January 2024 of $50,000. Assume that Sam’s income will be taxed in the highest tax bracket for 2023 and 2024. He expects to have approximately $140,000 per year of retirement income starting in 2025. The following is the December 31, 2023, balance sheet for DCL with the fair market value (FMV) of assets as indicated. The shares have been determined to meet the definition of qualified small business corporation shares (QSBC shares). Deitrich Contracting Limited Year Ended December 31, 2023
Assets Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Land Building Equipment Total Assets Liabilities Current liabilities Bank loan Total Liabilities Shareholder's Equity Share capital Retained earnings Total Shareholder's Equity Total Liabilities & Shareholder's Equity
20,000 200,000 (20,000)
180,000 109,000 400,000 550,000 90,000 1,349,000
203,000 470,000 673,000 209,000 467,000 676,000 1,349,000
FMV 20,000 190,000 120,000 650,000 1,200,000 90,000
Additional Information: 1.
The tax values of all assets are identical to amounts for book purposes, except for the following;
Property, plant, equipment Land Building Equipment
Cost 400,000 800,000 100,000
UCC 650,000 60,000
The fair market value of the goodwill of DCL is estimated to be $390,000.
2.
The provincial corporate tax rate is 4% for income eligible for the small business deduction and 12% on all other income. DCL has a general rate income pool (GRIP) balance of $25,000 at December 31, 2023.
3.
Sam was issued the shares of DCL on incorporation in 2004 for $209,000. The paid-up capital (PUC) and adjusted cost base (ACB) of the shares are $209,000. The relative fair market values of the assets of the business have been consistent for several years.
5.
Sam has never used his capital gains deduction. Sam does not have a cumulative net investment loss balance and has not deducted allowable business investment losses in prior years.
6.
The cash balance in the corporation is required for the company’s business operations.
7.
The balance in the corporation’s Eligible RDTOH (ERDTOH) was $10,000, Non-eligible RDTOH (NERDTOH) was $5,000 and its capital dividend account (CDA) was $24,000 as at the above balance sheet date.
8.
The taxable capital of the prior year for DCL was less than $10 million and the adjusted aggregate investment income for the prior year was less than $50,000.
9.
Assume the capital gains deduction limit is the 2023 amount for purposes of your calculations.
Required:
1. Describe qualitatively the tax treatment of the asset sale to the unrelated purchaser. Determine if Sam is eligible to file a Section 22 election and explain the benefit of filing the election to DCL and to the purchaser. 2. Calculate the after-tax cash available for distribution to Sam following the sale of the assets of the business by DCL and before a wind up of the company using the format from class. 3. Calculate the capital dividend account and RDTOH balances of DCL following the asset sale. 4. Describe qualitatively the tax treatment of a wind up of DCL following the asset sale. 5. Calculate the personal after-tax cash available to Sam following the winding up of DCL using the format from class. 6. Explain qualitatively the potential benefits and disadvantages to Sam of retaining the corporation. Identify tax effective ways that Sam could access funds from DCL if he decides to retain the corporation. 7. If instead of selling assets, Sam decides to sell his shares of the corporation for $2,000,000 describe qualitatively the tax treatment of the share sale. 8. Determine if Sam will have more after-tax cash if he sells the shares of DCL for $2,000,000 compared to the above-described asset sale followed by a wind up of DCL. 9. What would be the minimum share price Sam would be willing to accept for the shares of DCL? Show your detailed calculations. 10. Provide a summary of recommendations for Sam.
Question 104 Solution [114 marks Max 90] 1. Describe qualitatively the tax treatment of the asset sale to the unrelated purchaser [16 marks] • •
• • • • • • •
The assets of the business are disposed of to the unrelated purchaser for tax purposes at fair market value. √ This will result in a realization of o capital gains/losses on capital properties, √ o capital gains, recapture or terminal losses on depreciable capital properties √ and o business income on inventory disposed of by DCL The above to be reported on the 2024 corporate tax return for the company. √ The untaxed portion of capital gains will increase the capital dividend account for the corporation. √ The net taxable capital gains will be included in aggregate investment income and will result in refundable Part I tax to be added to the NERDTOH account for the corporation. √ The NERDTOH can be refunded when the corporation pays non-eligible dividends. √ The ERDTOH can be refunded when the corporation pays eligible dividends or non-eligible dividends if the NERDTOH is fully refunded. √ A $25K eligible dividend can designated as paid from GRIP. √ A section 22 election can be filed for the transfer of the accounts receivable√ o because all or substantially all of the property used in carrying on the business will be sold√ o to a purchaser who proposes to continue the business√. o This will result in a business loss for DCL on the A/R √ o offset by business income for the prior year’s bad debt reserve. √ o The purchaser will have to include the business loss in income√ and will be able to deduct bad debt reserves/expenses√ after the purchase.
2. Calculate the after-tax cash available for distribution to Sam following the sale of the assets of the business by DCL. [32 marks] • Funds available for distribution = $1,690,903 3. Calculate the capital dividend account and RDTOH balances of DCL following the asset sale. • CDA $544,000, ERDTOH $10,000, NERDTOH $164,467 [Students need to show the supporting calculation to get more than 1 mark for each.] Assets Opening balances ABI for January 2023 Cash
Sale Proceeds
Note
Income ABI 50,000
Accounts receivable Inventory
1 2
Land Building
3 4
Equipment Goodwill Refundable Part I tax - 30 2/3% x AII Total Proceeds Liabilities Tax Payable After-tax Cash Asset Sale Dividend Refund Available for Distribution
5 6
20,000 190,000 120,000 650,000 1,200,000 90,000
CDA 24,000
125,000 √√√ 200,000 √√√
125,000 √ 200,000 √
195,000 √
195,000 √
520,000 50.67% √ 263,467 √
544,000
ERDTOH 10,000
NERDTOH 5,000
10,000 √√ 11,000 √√ 150,000 √√ 30,000 √√
390,000 2,660,000 √ (673,000) √ (296,097) √ 1,690,903 174,467 √√ 1,865,370
AII √
251,000 13.0% √ 32,630 √
10,000
Dividend to get full refund
159,467 √√ 164,467
455,131 √√
30.67%x520K
A/R Prior Year's Reserve
20,000
Building Proceeds of Disposition
1,200,000
Proceeds
190,000
ACB
(800,000)
Cost
(200,000)
Capital Gain
400,000
Business Loss Sect 22
(10,000)
TCG
200,000
UCC LCP Recapture
650,000 (800,000) (150,000)
Equipment Proceeds of Disposition ACB Capital Gain TCG
90,000 (100,000) -
UCC LCP Recapture
60,000 (90,000) (30,000)
Inventory Proceeds Cost Business Income Land Proceeds of Disposition ACB Capital Gain TCG Goodwill Proceeds of Disposition ACB Capital Gain TCG
120,000 (109,000) 11,000
650,000 (400,000) 250,000 125,000
390,000 0 390,000 195,000
4. Describe qualitatively the tax treatment of a wind up of DCL following an asset sale. [9 marks] •
•
• •
On a winding up of a corporation resident in Canada there is a deemed dividend equal to the funds or property of the corporation distributed in excess of the paid up capital of the shares of the corporation. This is referred to as a winding-up dividend. √ If the corporation has a capital dividend account, the portion of the winding up dividend that does not exceed the capital dividend account is deemed for purposes of a capital dividend election to be a separate dividend and can be received by the shareholder tax-free. √ The remainder of the dividend will be taxed at the shareholders marginal tax rate for dividends. √ Where the corporation has GRIP a dividend can be designated as an eligible dividend i.e., $25,000 in this case √
• • •
o and subject to a tax rate of 31% for Sam. √ The rest of the dividend will be non-eligible √ o and subject to a tax rate of 42.5% for Sam. √ Sam is in the top tax bracket. √ There will also be a capital gain/loss on the disposition of the shares for capital gains purposes √
5. Calculate the personal after-tax cash available to Sam following the winding up of DCL [11 marks] 1,865,370 √ (209,000) √ 1,656,370 (544,000) √ 1,112,370
Funds available for distribution less: PUC Deemed dividend on winding-up less: CDA Taxable dividend (enough for full refund of ERDTOH/NERDTOH) Tax on Eligible dividend @ marginal tax rate Tax on Non-Eligible dividend @ marginal tax rate
31% 42.5%
Funds available for distribution less: deemed dividend on winding-up Adjusted proceeds (=PUC) less: ACB Capital gain (loss)
1,865,370 (1,656,370) √ 209,000 (209,000) √ -
TCG (ACL) Less: CGD Net Taxable Tax on TCG @ Marginal tax rate Funds available for distribution Less: Tax payable on dividend Less: Tax payable on TCG = After-tax personal cash
7,750 √√ 462,132 √√
50%
1,865,370 √ (469,882) √ 1,395,488
6. Explain qualitatively the potential benefits and disadvantages to Sam of retaining the corporation. Identify tax effective ways that Sam could access funds from DCL if he decides to retain the corporation. [12 marks] Retaining the Corporation Benefits • If Sam retains the corporation, he can defer the $469,882 of tax on the taxable dividend √ • He will save tax as he will be in a lower tax bracket in the future. His income in future years starting in 2025 will be $140,000. √ • He can still access the $544,000 of CDA and $209,000 of PUC tax free, in 2024, if he needs the cash personally √√ • He will have flexibility over the timing and amount of dividend distributions from the corporation to save tax. √ • He can also pay an eligible dividend of $25,000 and pay personal tax of $7,750 at the 31% marginal rate (or a lower rate in 2025) and the company will receive a dividend refund of ERDTOH of $9,583√ • This results in an overall increase in after-tax cash of $1,833. √ Disadvantages • • •
•
•
Tax filing/administrative costs of maintaining a corporation. √ More difficult to access funds in a corporation compared to a personal bank account. √ Investment income earned in a corporation is taxed at a relatively high rate of 50.67% and results in a prepayment of tax relative to earning investment income personally. The amount of this prepayment is dependent on the tax rate that Sam would otherwise pay personally on investment income. √ There is an overall tax cost to earning investment income in a corporation relative to earning it personally. The amount of this cost is dependent on the tax rate that Sam would otherwise pay personally on investment income. √ Can’t invest in an RRSP or a TFSA in a corporation. √
7. If instead of selling assets, Sam decides to sell his shares of the corporation for $2,000,000 describe qualitatively the tax treatment of the share sale. [3 marks] There will be a taxable capital gain on the disposition of the shares of the corporation √. Sam can use his capital gains exemption because the shares are QSBC shares√. He will be able to claim the full amount of the deduction because he does not have a CNIL balance or prior year ABILs and has not used any capital gains deduction in the past√
8. Determine if Sam will have more after-tax cash if he sells the shares of DCL for $2,000,000 compared to the above-described asset sale? [7 marks] If Sam can use his capital gains exemption, he will have after-tax cash of $1,795,048 available √ This compares to $1,395,488 of after-tax cash if he sells the assets and winds up the corporation√ Proceeds of Disposition ACB Capital Gain TCG CGD Taxable Amount Tax at 50% After-tax Cash
2,000,000 (209,000) 1,791,000 895,500 (485,595) 409,905 (204,953) 1,795,048
9. What would be the minimum share price he would be willing to accept for the shares? [13 marks] The minimum share price he would accept would be $1,467,254 and would result in $1,395,488 of after-tax proceeds. √ This would utilize all of his CGE √ Alternatively, Sam could have the company pay him a $24,000 capital dividend tax-free and then he could accept a minimum amount of $1,435,254 for the shares. √ Minimum Share Price CD Payment Minimum Share Price No CD Payment
Capital Dividend Proceeds of Disposition ACB Capital Gain Taxable Capital Gain CGD Taxable Amount Tax at 50% After-tax Cash
1,435,254 1,467,254 Capital Dividend 24,000 1,435,254 (209,000) 1,226,254 613,127 (485,595) 127,532 (63,766) 1,395,488
√ √
24k+P-50%x[1/2(P-971,190-209,000)]=1,395,488 √ P = (1,395,488-24,000-.25*971,190-.25*209,000)/.75 √ No Capital Dividend
√ √
√ √
1,467,254 √ (209,000) 1,258,254 629,127 (485,595) 143,532 (71,766) √ 1,395,488
10. Provide a summary of recommendations for Sam. [11 marks] If Sam decides to sell the assets of the business to DCL, he should file a joint Section 22 election with the purchaser for the A/R. √ If the company is wound up after the sale, $25,000 of the taxable dividend should be designated as an eligible dividend. √ A joint GST 44 form (or 167 election) should be filed with the purchaser to eliminate the requirement to collect and remit the HST on the sale. Sam should ensure the purchaser is registered for HST before the asset sale and a warranty is provided in the sale agreement√ Sam should consider retaining the corporation after the asset sale to defer and save tax on the winding-up dividend or paying dividends out over time to take advantage of lower tax brackets in the future. √ If Sam retains the corporation after the asset sale, he should pay out the PUC and CDA if he requires personal funds to invest. √ The capital dividend account should be paid out before any erosion from capital losses. √
If Sam retains the corporation after the asset sale, he should pay out a $25,000 eligible dividend to obtain a refund of ERDTOH. √ Sam should consider a share sale to take advantage of the capital gains exemption and maximize his after-tax proceeds from the sale of the business. √ He should not accept less than $1,467,254 for a share sale to be in the same position as an asset sale/wind up. √ At the minimum share price of $1,467,254, Sam may prefer selling assets of the company because he can defer and lower the tax payable if he sells assets and retains the company because he will be in a lower tax bracket in the future and he can then retain his CGD for future use. √√
Question 105 (60 marks; 60 minutes) (Chapter 17) Brad Pits started a small business, Aniston Hair Products, in 2022 as a proprietorship. The company distributes hair products and styling equipment to hair salons. Given the level of profits he is realizing, he would like to incorporate in January 2024. The revenues for the business for 2023 were $50,000 and as a result Brad registered the business for HST during the year. He is expecting revenues to increase in 2024 to $90,000. The latest balance sheet of his proprietorship as of December 31, 2023 with the estimated values of the assets of the business is as follows. The company’s first taxation year end will be December 31, 2024. Brad and his wife Jennifer will each own 50% of the 100 common shares of the new corporation to be issued to them on incorporation for $50 each. Brad plans to take back preferred shares on the transfer of the business assets to his new corporation. Brad wants to receive the maximum possible non-share consideration on the transfer, without any adverse tax consequences, by assuming existing debt of the business and issuing new debt as a note receivable.
Aniston Hair Products Balance Sheet December 31, 2023
Assets Cash Accounts Receivable Leasehold Improvements (Cost) Office Equipment (Cost)
Liabilities Bank loan Accounts payable Equity
Leasehold Improvements (Class 13) Office Equipment (Class 8)
FMV 5,000 15,000 9,000 10,000 39,000
14,000 7,000 9,500
4,000 5,000 9,000 30,000 39,000
UCC 6,000 9,000
Brad advises you that the current value of the goodwill is $20,000. Brad does not want to pay any tax on the transfer of his business to the corporation. Once incorporated, he would like to use the future taxes method of reporting for income taxes. Assume a provincial corporate tax rate of 4% applicable to income eligible for the small business deduction and 12% on all other income.
Required: 1. Determine the elected amounts, and optimal share and non-share consideration for the properties that can be transferred using a Section 85 election. Your election should eliminate any tax on the transfer for Brad and allow him to easily access cash from the company in the future. 2. Determine the amount and type of consideration for the properties that cannot be transferred using Section 85. 3. Determine adjusted cost base (ACB), capital cost (CC) and undepreciated capital cost (UCC) amounts for the assets owned by the corporation following the transfer. 4. Determine Brad’s adjusted cost base and paid up capital (PUC) of the preferred shares he will take back on the transfer of the properties to the corporation. 5. Advise Brad qualitatively on the related party transaction financial reporting by the new corporation for the properties transferred. 6. Provide Brad with the financial reporting entries to report the purchase of the properties by the corporation and the entry to report future taxes. 7. Prepare a beginning balance sheet for the corporation. 8. What are Brad’s HST filing obligations for 2023 for the proprietorship? 9. Will the corporation need to register for HST and what will the filing requirements for the corporation be? 10. Will HST apply to the asset transfer and is there anything that could be done to eliminate HST on the transfer?
Question 105 Solution [84 marks Max 60] 1. Determine the elected amounts, and optimal share and non-share consideration for the properties that can be transferred using a Section 85 election. Your election should eliminate any tax on the transfer for Brad and allow him to easily access cash from the company in the future. [17 marks] Section 85 rollover Brad has only three assets eligible for a subsection 85(1) rollover: the leasehold improvements, office equipment and the goodwill. Consideration "Boot" - Non-share Asset
Note
Leasehold Improvement Office Equipment Goodwill
Tax Value
FMV
Elected Amt
6,000 √ 9,000 √ Nil √
7,000 √ 9,500 √ 20,000 √
6,000 √ 9,000 √ 1 √
4,000 √ 5,000 √
15,000
36,500
15,001
9,000
Assumed Debt
New Debt
Shares
2,000 √ 4,000 √ $
6,000
Income/TCG
1,000 √ 500 √ 20,000 √
0.5 √
21,500
0.5
To ensure that minimal income arises on transferring these assets to the corporation, the total elected amount to be agreed on between him and the corporation should not exceed $15,001. 2. Determine the amount and type of consideration for the properties that cannot be transferred using Section 85. [7 marks] Assets NOT Transferred under S.85(1) Consideration Asset
Note
Tax Value
Cash Accounts Receivable -
FMV
$ 5,000 √ 14,000 √ 19,000
Assumed Debt
-
New Debt $ 5,000 √ 14,000 √ 19,000
Income
-
FMV in = FMV out
The maximum non-share consideration for the assets elected on using Section 85 and that Brad can receive while deferring the maximum amount of gain is $15,000 including the $9,000 of assumed debt. He will also receive an additional $19,000 related to the cash and A/R transfer. He will be owed a $25,000 note after the transaction.
An election should be filed under section 22 with regards to the transfer of the receivables. √ It will ensure that Brad can claim the $1,000 loss on the A/R as a business loss deductible against any source of income. √ The corporation will need to recognize income of $1,000 and then can claim an offsetting reserve for doubtful accounts. √
3. Determine adjusted cost base, capital cost and undepreciated capital cost amounts for the assets owned by the corporation following the transfer. [9 marks]
Tax Cost to Corporation Leasehold Improvements (Class 13) Office Equipment (Class 8) Goodwill (Class 14.1)
UCC 6,000 9,000 0.5
ACB 9,000 10,000 1
CC 9,000 √√√ 10,000 √√√ 0.5 √√√
[Note that capital cost for the goodwill is $0.50 for purposes of Section 13 only and $1 for all other sections in the ITA] 4. Determine Brad’s adjusted cost base and paid up capital of the preferred shares he will take back on the transfer of the properties to the corporation. [4 marks]
ACB of shares received: Elected amount Allocated to: Assumed debt New debt ACB of pref shares
15,001 √ 9,000 6,000
PUC os shares received: LSC before reduction S85(2.1) PUC reduction (A) Increase in LSC of all shares (B) Elected amount 15,001 Less: Boot (15,000) PUC reduction PUC after reduction
15,000 √ 1
21,500 √ 21,500 (1) 21,499 √ 1
5. Advise Brad qualitatively on related party financial reporting by the new corporation for the properties transferred. [7 marks] The related party transaction has commercial substance. √ The transaction is not in the normal course of operations and would be reported for using the exchange amount where the change in ownership interest is substantive and the exchange amount can be supported with independent evidence. √√√ The change in ownership interest in the item is not substantive because there is not a change of ownership of at least 20% to an unrelated person. √√ The issuance of the preferred shares would be reported as a financial liability. √
6. Provide Brad with the financial reporting entries to report the purchase of the properties by the corporation and the entry to report future taxes. [14 marks] Entries Dr. Cash $5,000√ Dr. Property, plant and equipment (Carrying amount) $19,000√ [Leaseholds $9,000, Equipment $10,000] Dr. Accounts Receivable $15,000√ Dr. Retained Earnings $18,020√ Cr. Allowance for Doubtful Accounts Cr. Note Payable to Brad Cr. Bank Loan Cr. Accounts Payable Cr. Financial liability (PSs) Cr. Future Tax Liability
NBV Property, plant, equipment $19,000√ UCC Property, plant, equipment $15,000√ Future Tax Liability $4,000 x 13% = $520√√
$1,000√ $25,000√ $4,000√ $5,000√ $21,500√ $520√
7. Prepare a beginning balance sheet for the corporation. [10 marks]
Assets Cash Accounts Receivable Less: Allowance for Doubtful Accounts Leasehold Improvements Office Equipment
5,100 √ 15,000 (1,000)
Liabilities Accounts payable Note Payable Bank loan Future Tax Liability Financial Liability
Total Liabilities Shareholder's Equity Retained Deficit Share capital Total Liabilities and Shareholder's Equity
14,000 √ 9,000 √ 10,000 √ 38,100
5,000 √ 25,000 √ 4,000 √ 520 √ 21,500 √ 56,020 -18,020 100 √ 38,100
8. What are Brad’s HST filing obligations for 2023 for the proprietorship? Brad will need to file an HST return for 2023 by his June 15, 2024, filing deadline. √ The net HST owing is due April 30th. √ 9. Will the corporation need to register for HST and what will the filing requirements be? [17 marks] The corporation will have an annual filing requirement and the first return will be due March 31, 2025. √√ 10. Will HST apply to the asset transfer and is there anything that could be done to eliminate HST on the transfer? HST exempt – Cash, A/R, Goodwill √√√ HST applicable – Leasehold improvements, equipment √√
Section 167 election – Eligible√√ - Business established or carried on by the supplier (Brad’s business) √ - Recipient (Aniston) acquires ownership or use of all or substantially all of the property needed for the recipient to carry on the business (ignoring exempt assets) √√ - Recipient (Aniston) needs to be a registrant √ - Joint GST 44 election filed by the recipient by the due date of the HST return for the period of the supply i.e. March 31, 2024 √√
Problem 106 (Chapter 17) Mr. Kelly, a resident of Canada, has come to you for advice concerning the transfer of assets to a newly incorporated corporation, to be wholly owned by him. The transfer took place on October 31, 2023. The assets transferred were as follows: (i) land purchased by him in 2010 for $240,000 which had appreciated in value to $370,000 as at
October 31, 2023, and (ii) a building purchased by him in 2010 for $190,000, which was worth $280,000 as at October 1,
2023. The undepreciated capital cost of the building as at October 31, 2023 was $160,000. Mr. Kelly and the corporation filed a joint election pursuant to s. 85 of the Income Tax Act, electing to transfer the land at $340,000 and the building at $160,000. The election form indicated that the consideration received by Mr. Kelly consisted of common shares with a fair market value of $150,000 that provide Mr. Kelly with control of the corporation and $500,000 cash. [ITA: 84(3), 84.1, 85] — REQUIRED (a) What are the income tax consequences of electing at the transfer prices
indicated for the land and the building? (b) Compute the cost for income tax purposes of the shares received from the corporation. (c) Compute the paid-up capital (PUC) for income tax purposes of the shares received. (d) What are the income tax consequences to Mr. Kelly if: (i) the corporation redeems the shares for $150,000? (ii) Mr. Kelly sells the shares for $150,000?
Question 106 Solution (a)
The ranges for making a sec. 85 election are as follows:
Land (ACB/FMV) . . . . . . . . . . . . . . . . Building (UCC/FMV) . . . . . . . . . . . . .
Lower
Upper
$240,000 160,000
$370,000 280,000
The elected amounts of $340,000 and $160,000 for the land and building respectively, are in these ranges. In addition, the non-share consideration of $500,000 does not exceed the combined elected amounts. The elected amount becomes the proceeds of disposition of the assets transferred by Mr. Kelly. Since his adjusted cost base on the land is $240,000, he will have a capital gain of $100,000. Since the elected proceeds for the building are equal to the UCC of the building, there will be no recapture on the building. The corporation is deemed to acquire the assets at a cost equal to the elected amount. Therefore, the cost of the land to the corporation is $340,000. On the building, the corporation is deemed to have a capital cost of $190,000 and to have taken capital cost allowance of $30,000 (ssec. 85(5)). (b)
The cost of the shares taken as consideration is as follows:
Elected transfer price less: allocated to cash ACB of shares
(c)
$500,000 (500,000) $0
The paid-up capital (PUC) for income tax purposes of the shares received is as follows:
Legal PUC before reduction Ssec. 85(2.1) PUC reduction (i) Increase in legal capital of all shares less (ii) Elected amount less: non-share consideration Excess, if any PUC reduction PUC after reduction
$150,000 $150,000 $500,000 (500,000) 0 (150,000) $0
(d)
The income tax consequences of either a redemption or sale for $150,000 is as follows:
(i) Redemption Proceeds of redemption less: PUC Deemed dividend
$150,000 0 150,000
Proceeds of disposition less: deemed dividend Adjusted proceeds less: ACB Capital gain/loss
150,000 -150,000 0 0 $0
(ii) Sale Proceeds of disposition less: ACB Capital gain/loss
$150,000 0 $150,000
TOSI applies at the highest marginal rate of tax to split income. Split income includes taxable capital gains from the disposition of shares of a private corporation. It also includes taxable dividends from a private corporation (including a deemed dividend on a redemption of shares). As the dividend or taxable capital gain above would not be considered to be derived directly or indirectly from a related business carried on by a source individual, it would be an excluded amount. The dividend/taxable capital gain in this case is derived from the new corporation and its business will be carried on by Mr. Kelly. TOSI will not apply.
Problem 107 (Chapter 17) Mr. Expandit, age 60, is a retailer who incorporated his business in 2011 under the name of Expandit Ltd. The common shares of Expandit Ltd., held by Mr. Expandit, have a paid-up capital (PUC) value and adjusted cost base (ACB) for tax purposes of $2,500 and were issued to Mr. Expandit on incorporation. The present fair market value of the shares is $4,000,000. Mr. Expandit wishes to incorporate a holding company, Holdexpanditco Ltd., for estate planning purposes. His daughter, age 34, will invest $45,000 of her own money in 500 common shares with a total stated value of $10. His wife will invest $12,500 of her own money in 6% voting preferred shares with a total stated value of $100. He will take back as partial consideration for his shares of Expandit Ltd. 3,500 voting, retractable 6% preferred shares with a total retraction value of $3,500,000. In addition, he will take back $500,000 in cash. He will elect with the corporation to transfer his shares of Expandit Ltd. at $500,000 to use up the remainder of his capital gains exemption. He anticipates completing these transactions before December 31, 2023. — REQUIRED (A) Outline the tax consequences of Mr. Expandit’s plan supported by your
computations assuming: (i) an ultimate redemption of the 6% preferred shares at their fair market value; and (ii) an arm’s length sale of the 6% preferred shares. (B) Indicate briefly your recommendations as to how Mr. Expandit might
rearrange his plan to avoid any problems arising from the plan presented.
Question 107 Solution
(A) The amendments made to SS 84.1 in Par. 84.1(2)(e) will not impact this transaction if Mr.
Expandit controls Holdexpanditco Ltd. Budget 2023 allows for an immediate business transfer or gradual business transfer for transactions occurring on or after January 1, 2024 to avoid the application of SS 84.1. A gradual business transfer still requires that Mr. Expandit immediately transfer legal control to his daughter, with a transfer of the balance of voting shares within 36 months of the transaction. Mr. Expandit retains legal control of Expandit Ltd., through Holdexpanditco Ltd., after the freeze and would not qualify under the gradual business transfer rules, even if the transaction was completed on or after January 1, 2024. As a result, section 84.1 will apply to the plan when the preferred shares are redeemed at their fair market value. PUC reduction [par. 84.1(1)(a)] (i) Increase in legal stated capital (LSC) of shares received from the pur-
chaser corporation in respect of the subject shares .............................. $3,500,000 (A) Less (ii) greater of: (1) PUC of subject corporation
shares . . . . . . . . . . . . . . . . . . . . .
(2) modified ACB of subject shares
}
$ 2,500
$ 2,500
$ 2,500
Less: FMV of non-share consideration received . . . . . . . . . . . . . . . . . . . . . .
500,000
Excess, if any . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0) (B)
PUC reduction (A -- B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,500,000 PUC after reduction ($100 -- $100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0
Deemed dividend [par. 84.1(1)(b):] Sum of: (a) Increase in LSC of shares received from the purchaser corporation in
respect of the subject shares
$3,500,000 (A)
(b) FMV of non-share consideration received
500,000 (D)
(A + D)
$4,000,000
Less sum of: (c) Greater of:
(i) PUC of subject corporation shares . . . . . . . . . . . . . . . . . . . . .
$ 2,500
}
$ 2,500 (E) (ii) modified ACB of subject shares (d) PUC reduction under par. 84.1(1)(a)
$ 2,500 3,500,000 (F)
(E + F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deemed dividend (A + D) - (E + F)
3,502,500 $ 497,500
TOSI applies at the highest marginal rate of tax to split income. Split income includes taxable dividends from a private corporation (including deemed dividends) unless the income meets the definition of an excluded amount. As the dividend above would not be considered to be derived directly or indirectly from a related business carried on by a source individual, it would be an excluded amount. The dividend in this case is derived from the Expandit Ltd., and its business was carried on by Mr. Expandit. TOSI will not apply. Ssec. 85(1) election on transfer of subject corporation shares: Elected amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,000 Less: par. (k) of def. ‘‘proceeds of disposition’’ in sec. 54 exclusion from proceeds of sec. 84.1 deemed dividends . . . . . . . . . . . . . . . . 497,500 Adjusted proceeds of disposition of transferred shares . . . . . . . . . . . . . .$ 2,500 .. ACB of transferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,500) . Capital gain (loss) . . . . . . . . . . . . . . . . . .
$0
ACB of purchaser corporation shares received as consideration: Elected amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,000 . Less: FMV of non-share consideration received . . . . . . . . . . . . . . . . . . 500,000 .... $0 (i) Hypothetical redemption of purchaser corporation shares for FMV: Deemed dividend on redemption: Redemption amount .................................................................... $3,500,000 Less: PUC after par. 84.1(1)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . $0 Deemed dividend on redemption [ssec. 84(3)]............................ $3,500,000 Capital loss on redemption Redemption amount .................................................................... $3,500,000 Less: deemed dividend on redemption [ssec. 84(3)] .................... 3,500,000
Adjusted proceeds of disposition [sec. 54] . . . . . . . . . . . . ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0 $0
Capital gain (loss) (loss would not be denied; no longer controlled by Mr. Expandit) . . . . . . . . . . . . . . . . . . . . . . . .
$0
Summary of income effects Sec. 84.1 deemed dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 497,500 Ssec. 84(3) deemed dividend ....................................................... 3,500,000 Capital loss on redemption . . . . . . . . . . . . . . . . . . . . . . .
$0
Ultimate capital gain (loss) to the corporation . . . . . . . . . . . . . . .
$0
Net economic effect (equal to gain: $4,000,000 - $2,500) .......... $3,997,500 (ii) Arm’s length sale of purchaser corporation shares for FMV Proceeds of disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . $3,500,000 ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0
Capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
$3,500,000
Summary of income effects Sec. 84.1 deemed dividend Capital gain Ultimate capital gain (loss) to the corporation . . . . . . . . . . . . . . . Net economic effect (equal to gain: $4,000,000 - $2,500) . . . . . .
$ 497,500 3,500,000 Nil $3,997,500
Similar to above, TOSI will not apply to either the deemed dividend on redemption or the taxable capital gain as Mr. Expandit’s dividend/taxable capital gain is not derived directly or indirectly from a related business in respect to the individual. Mr. Expandit carried on the business of Expandit Ltd. (B) — Take non-share consideration up to $2,500 to avoid paragraph
84.1(1)(b) deemed dividend — Consider section 86 internal freeze, but the fair market value of the boot plus the PUC of the new shares cannot exceed the PUC of the old shares to avoid triggering adverse tax consequences. Section 86 cannot be used if crystallization of the capital gains exemption is an objective.
Problem 108 (Chapter 17) Flogit Ltd. is a Canadian-controlled private corporation that owns all of the shares of Unloaded Ltd., another Canadian-controlled private corporation. The following data pertain to the shares and surpluses of Unloaded Ltd: PUC of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 ACB of shares to Flogit Ltd. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 85,000 FMV of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 875,000 Retained income earned after 1971 . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 REQUIRED Determine the tax consequences in each of the following situations: (A) Unloaded Ltd. pays a dividend of $225,000 to Flogit Ltd., which in turn sells
the shares, then valued at $650,000, to Buyem Ltd. (B) Unloaded Ltd. pays a dividend of $790,000 to Flogit Ltd., which in turn sells
the shares, then valued at $85,000, to Buyem Ltd. (C) Buyem Ltd. subscribes for all of a newly created class of shares in Unloaded
Ltd. for $875,000. Unloaded Ltd. then redeems the old shares owned by Flogit Ltd. for their fair market value of $875,000.
Question 108 Solution (A)
The $225,000 dividend would be received by Flogit Ltd. tax free: — no Part I tax [ssec. 112(1)] — no Part IV tax as long as Unloaded does not receive a dividend
refund on the payment of the dividend — since the dividend is attributable to post-1971 earnings, subsection
55(2) would not apply and a capital gain would be computed as:
(B)
P of D
$650,000
ACB
(85,000)
Capital gain
$565,000
Dividend received Less: dividend attributable to post-1971 income
$790,000 $225,000
dividend subject to Part IV tax
(C)
Nil
(225,000)
Deemed proceeds of disposition [par. 55(2)(b)] Add: actual proceeds of disposition
$565,000 85,000
Total proceeds of disposition
$650,000
Less: adjusted cost base
(85,000)
Capital gain
$565,000
Deemed dividend on redemption: Redemption amount paid
$875,000
Less: PUC
(60,000)
Deemed dividend on redemption [ssec. 84(3)] Less: part of dividend designated as a separate dividend attributable to post-1971 income [par. 55(5)(f )]
$815,000 (225,000)
Other part of dividend deemed not to be a dividend
$590,000
Proceeds of disposition of shares redeemed Redemption amount paid
$875,000
Less: designated deemed dividend
(225,000)
Proceeds of disposition
$650,000
Capital gain or loss on disposition of shares P of D
$650,000
ACB
(85,000)
Capital gain
$565,000
Problem 109 (Chapter 19) Brenda and Sasha are equal partners in an interior decorating business in Kenora, Ontario. Their income statement for the year ended December 31 shows: S&B Interior Decorators INCOME STATEMENT December 31, 2023 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . Expenses Income before gain on asset sale . . . . . . . . . . . . . . . . . . . . .
$320,000 200,000 $120,000
Gain on asset sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,000 $155,000
They have each asked you to prepare their personal income tax return, and to that end have provided you with the following additional information. i) ii) iii)
iv) v)
vi) vii)
viii)
Brenda was paid a salary of $6,000 and it is included in the expenses. A $1,000 donation to a registered charity is included in the expenses. The asset sold was a piece of land they had purchased in hopes of having their own building from which to operate their business; those plans fell through when the bank wouldn’t advance the necessary loans. The $35,000 represents the net gain after real estate broker and legal fees of $5,000. Each partner uses (and personally pays for) his/her own car in the business. Brenda’s auto expenses for business use are $1,500 and Sasha’s is $3,500. The business was originally started by Brenda. Sasha bought in several years later. He borrowed $35,000 from the bank to purchase his partnership interest and has paid $1,800 in interest on the bank loan. Included in revenue is $1,200 in interest earned on a GIC. Sasha’s son is employed in the business and his wages of $2,000 are included in the expenses. He cleans up the store on weekends and does odd jobs. The $2,000 is considered reasonable, no T4 slip has been issued to him by the business. S&B’s December 31 balance sheet shows that Brenda had drawings of $42,000 and Sasha had drawings of $35,000.
You have agreed to do the following: (A) Identify the amount of any income, including the types of income, that each of Brenda and Sasha will
include in their income tax returns. Identify any other items that will be included in their income tax returns. (B) Brenda and Sasha are considering incorporating their partnership. What is the most significant property that needs to be considered on a section 85 rollover of their business?
Question 109 Solution: Partnership Income, Incorporation Part (a)
Notes: The drawings are not relevant in determining income for tax purposes.
1. 2.
The salary paid to Sasha’s son is deductible even though a T4 was not issued, as it is reasonable (section 67).
3.
The gain on the sale of land has been treated as a capital gain. It appears that the primary intention when the land was purchased was to hold it as a capital property. There does not appear to have been a secondary intention at the time of purchase to hold the property as an adventure in the nature of trade.
Part (b) When any proprietorship or partnership incorporates, generally the existence of goodwill is a major consideration. Internally developed goodwill will not be an asset on the existing business’ balance sheet. Therefore, it is frequently overlooked in a rollover/transfer to a corporation. For tax purposes, the transfer of the business to a corporation is a non-arm’s length sale. All assets are deemed to be sold at fair market value. However, section 85 exists to defer the recognition of fair market value by allowing the taxpayer to elect the transfer at tax cost. If goodwill is not included as part of the section 85 election, its transfer will be a taxable event (at FMV) to the transferor. This will result in unexpected tax costs. The issue that arises with regard to goodwill is whether the business has any goodwill that has commercial (i.e., saleable) value. Tax advisers are frequently not in a position to judge that as they are not business valuators. The solution is to elect $1 for the goodwill. This way, if it is nonexistent, the $1 is negligible as a shareholder appropriation of the $1 paid by the corporation. If it does exist, the $1 is the correct agreed amount (between cost and FMV) and does not result in any tax liability on the transfer.