Solutions Manual & TEST BANK for Byrd & Chen's Canadian Tax Principles, 2022-2023, 1st Edition. Volu by welldoneassistant

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 1 Introduction to Federal Taxation in Canada 1.1 Online Exercises 1) The major source of federal revenues is the personal income tax. Indicate three other types of taxes that contribute to federal revenues. Answer: The other sources of federal revenues that are shown in Figure 1-1 of the text are: • Corporate income taxes. • Non-resident income taxes. • GST. • Customs and import duties. • Other excise taxes. • EI premiums. Type: ES Topic: Federal revenue sources

2) What is the meaning of "person" when the term is used in the ITA? Answer: In the ITA, the term "person" refers to an individual, a corporation, a trust or an estate. Type: ES Topic: Definition - "Person" ITA 248(1)

3) Briefly describe the procedures used in calculating provincial or territorial income tax for individuals in other than individuals residing in Quebec. Answer: Provincial or territorial income taxes for individuals are calculated by applying a provincial or territorial income tax rates to taxable income for federal income tax purposes. Provincial or territorial personal income tax credits are then applied to the resulting gross income tax. The provincial and territorial income tax brackets may differ from the federal income tax brackets. In addition, provincial and territorial personal tax credits may be different than the federal personal tax credits. Type: ES Topic: Income tax payable - federal income tax

4) The Canadian income tax system is often used to achieve various economic objectives. Give three examples that illustrate this point. Answer: There are many examples that could be cited. The text divides them into resource allocation (e.g., public health care), distribution effects (e.g., federal GST credit), stabilization effects (e.g., deficit reduction), and fiscal federalism (e.g., allocations to various levels of government). Type: ES Topic: Canadian income tax system - objectives

5) Provide an example of how taxation policy can be used to influence resource allocation. Answer: Examples provided in the text are as follows: • Tax revenues are used to provide public goods and services. • Excise taxes are used to discourage the consumption of alcohol and tobacco products. There are, of course, many other examples that could be cited. Type: ES Topic: Canadian income tax system - objectives

6) The government pays a Canada Child Benefit to the parents of children who are under 18 years of age. The payments are reduced by a percentage of income above a certain amount. What objectives are achieved by this benefit system? Answer: The Canada Child Benefit system is designed to assist low income families with children. The government is encouraging population growth. In addition the benefits are targeted to those most in need being low income families. Type: ES Topic: Canadian income tax system - objectives

7) Indicate three disadvantages of a tax system that uses progressive rates. Answer: There are a number of possibilities here. They include that progressive rates: • Increase the complexity of the system. • Are unfair to individuals with highly variable income streams. • Are unfair to single income family units. • Lead to pressure for various types of tax concessions. • Discourage high income individuals from making additional efforts. • Encourage tax evasion. Type: ES Topic: Canadian income tax system - objectives

8) A regressive tax is one that taxes high income individuals at lower effective rates. Explain why a sales tax levied at a flat rate of 8% can be regressive. Answer: While the sales tax rate is the same for all individuals without regard to their income level, lower income individuals normally spend a higher percentage of their total income. Since the sales tax is charged on the amounts spent, this means that the sales tax paid by lower income individuals represents a larger percentage of their total income. As a consequence, they are generally considered to be regressive in nature. Type: ES Topic: Canadian income tax system - regressive vs progressive rates

9) Distinguish between horizontal equity and vertical equity as these terms are used in describing tax systems. Answer: Horizontal equity is achieved when taxpayers in similar economic circumstances are subject to similar levels of tax. Vertical equity is achieved when taxpayers in different economic circumstances are subject to taxes in a different manner. Type: ES Topic: Canadian income tax system - objectives

10) What are some of the factors that have led to the entrenched use of tax expenditures as opposed to program spending? Answer: The reasons that are listed in the text are as follows: • It is less costly to administer tax expenditures than it is to administer government funding programs. • More decisions are left to the private sector so that funds may be allocated more efficiently. • Tax expenditures reduce the visibility of certain government actions. This is particularly beneficial if some social stigma is attached to the programs. For example, a child tax benefit system is more acceptable than increasing social assistance (welfare) payments. • Tax expenditures reduce the progressivity of the tax system. As many of the tax expenditures, such as tax shelters, are more available to higher income taxpayers, they serve to reduce effective tax rates in the higher rate brackets. Type: ES Topic: Canadian income tax system - objectives

11) While the Sections of the ITA are numbered 1 through 281, there are actually more than 281 Sections. Explain why this is the case. Answer: This situation reflects the fact that when a new Section is added, it has been more convenient to attach a decimal designation to the new Section, as opposed to renumbering all of the Sections that follow the new Section. As an example, over several years, the Department of Finance has added six new Sections after Section 12. They have been numbered Section 12.1 through Section 12.6. If they had used whole numbers for these new Sections, it would have been necessary to renumber all of the remaining Sections in the Act each time a new Section was added. Type: ES Topic: The ITA & income tax reference materials

12) What purposes are served by Canada's international tax treaties? Answer: The purposes of these treaties are as follows: • They impose measures on countries to avoid double taxation where a person is liable for income tax on the same income in both countries • They tare used to create an exchange of information for the purposes of combatting tax evasion. Type: ES Topic: International - income tax treaties

13) List four non-legislative sources of income tax information. Answer: The required four items can be selected from the following: • CRA Web Site • Interpretation Bulletins • Income Tax Folios • Information Circulars • Income Tax Technical News • CRA News Releases, Tax Tips, and Fact Sheets • CRA Guides • Advance Income Tax Rulings • Technical Interpretations Type: ES Topic: The ITA & income tax reference materials

14) What is the meaning of "taxation year" as the expression is used in the ITA? Answer: For individuals and trusts (except graduated rate estates), the taxation year is the calendar year of January 1 to December 31. In contrast, the taxation year for corporations are defined in terms of a fiscal period which generally relates to a business. A fiscal period can end on any date, with the only constraint being that it cannot exceed 53 weeks. Graduated rate estates are permitted to use a non-calendar taxation year. Type: ES Topic: Definition - "Taxation Year" ITA 249

15) Under what circumstances will a person who is not resident in Canada be liable for Canadian income tax? Answer: • The non-resident person earns employment income in Canada. • The non-resident person carries on a business in Canada. • The non-resident person has a gain on the disposal of taxable Canadian property. Type: ES Topic: Non-resident liability for income tax

16) What is the importance of residence in Canadian income taxation? Answer: As stated in the text, residence is the cornerstone of Canadian income taxation. If a person is considered a resident of Canada in a given year, that person will be subject to Canadian income tax for that year on all sources of income. Alternatively, if the person is a non-resident, Canadian Part I tax will only apply to Canadian employment income, Canadian business income, and gains on the disposition of Taxable Canadian Property. Type: ES Topic: Residency - general concepts

17) When an individual leaves Canada, the CRA may take the position that the individual has retained Canadian residence status. What are the three primary factors that the CRA considers in determining whether an individual has, in fact, ceased to be a resident of Canada? Answer: As stated in S5-F1-C1, the primary factors that will be considered by the CRA are as follows: • Whether the individual is continuing to maintain a dwelling in Canada. • Whether the spouse or common-law partner of the individual remains in Canada. • Whether the individual has dependants who remain in Canada. Type: ES Topic: Residential ties

18) List three factors that would be considered in the determination of whether or not an individual is a resident of Canada. Answer: The main factors here would be: • Does the individual have a dwelling in Canada? • Does the individual's spouse or common-law partner live in Canada? • Do the dependants of the individual live in Canada? Other factors that could be mentioned include: • Owning personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles). • Social ties with Canada (such as memberships in Canadian recreational and religious organizations). • Economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts). • Hospitalization and medical insurance coverage from a province or territory of Canada. • A driver's license from a province or territory of Canada. • A vehicle registered in a province or territory of Canada. • A seasonal dwelling place in Canada or a leased dwelling place. • Holding a Canadian passport. • Membership in Canadian unions or professional organizations. Type: ES Topic: Residential ties

19) If an individual leaves Canada for a temporary absence, this raises the question of whether the individual was a Canadian resident during the period of absence, particularly if some residential ties have been retained. What are the major factors that are considered in determining whether an individual continues to be a Canadian resident during a temporary absence? Answer: As noted in the text, S5-F1-C1 identifies the following factors: Intent - The issue is whether the individual intended to permanently sever residential ties with Canada. If, for example, the individual has a contract for employment, if and when the individual returns to Canada, this could be viewed as evidence that the individual did not intend to permanently depart. Another factor would be whether the individual complied with the rules related to permanent departures (i.e., as noted in Chapter 8, there is a deemed disposition of an individual's property at the time of departure from Canada, resulting in the need to pay income tax on certain gains). Frequency of Visits - If the individual continues to visit Canada on a regular and continuing basis, particularly if other secondary residential ties are present, this would suggest that the individual did not intend to permanently leave Canada. Residential Ties Outside of Canada - A further consideration is whether or not the individual establishes residential ties in another country. If someone leaves Canada and travels for an extensive period of time without settling in any one location, it will be considered as evidence that the individual has not permanently departed from Canada. Type: ES Topic: Residency - general concepts

20) One of your friends is leaving Canada and would like to know when he will no longer be considered a Canadian resident. Briefly explain the general rules related to terminating an individual's status as a Canadian resident. Answer: A Canadian resident normally becomes a non-resident on the latest of the following days: • on leaving Canada, • when a spouse and/or dependants leave Canada, and • on becoming a resident of another country. Type: ES Topic: Residency - general concepts

21) For the current year, Jane Doe, a resident of the U.S., spent 210 days in Canada. Since she was physically present in Canada for 183 days or more (e.g. sojourned in Canada) she is deemed to be a resident of Canada. In addition, Jack Fawn, a long-time resident of Manitoba, was considered a part year resident for the first 210 days, after which he permanently departed from Canada. Explain how these two individuals will be taxed in Canada. Answer: As a sojourner, Jane would, as a deemed resident, be liable for Canadian income tax on her world wide income for the entire year. As she would not be considered a resident of a province, she would be charged an additional federal income tax of 48% based on her federal income tax payable. In contrast, Jack would only be liable for Canadian income tax on his world wide income for the 210 day period prior to his departure from Canada. In addition, he would be liable for provincial income tax in Manitoba for the same 210 day period. Jack would be considered a non-resident of Canada for the remainder of the year. Type: ES Topic: Residency - general concepts

22) It is possible that an individual could be considered resident in more than one country. In such situations, "tie-breaker" rules are used to deem the individual to be resident in one of the two countries. These tie-breaker rules are designed to avoid the individual being subject to taxation in both countries. List and describe three of the tie-breaker rules common to Canada's income tax treaties. Answer: The tie-breakers rules are as follows: Permanent Home - If the individual has a permanent home available in only one country, the individual will be considered a resident of that country. A permanent home means a dwelling, rented or purchased, that is continuously available at all times. For this purpose, a home that would only be used for a temporary period would not be considered a permanent home. Centre of Vital Interests - If the individual has permanent homes in both countries, or in neither, then this test looks to the country in which the individual's personal and economic relations are greatest. Such relations are virtually identical to the ties that are examined when determining factual residence for individuals. Habitual Abode - If the first two tests do not yield a determination, then the country where the individual spends more time will be considered the country of residence. The number of days spent in each country is often used in applying this test. Citizenship - If the tie-breaker rules still fail to resolve the issue, then the individual will be considered a resident of the country where the individual is a citizen. Competent Authority - If none of the preceding tests resolve the question of residency then, as a last resort, the so-called "competent authority procedures" are used. Without describing them in detail, these procedures are aimed at opening a dialogue between the two countries for the purpose of resolving the conflict. Type: ES Topic: Residency - tax treaty tie-breaker rules for individuals

23) Is a corporation incorporated in Canada that carries on a business always considered to be resident in Canada or is the location where the business is carried on relevant? Explain your conclusion. Answer: The carrying on of a business by a corporation is generally irrelevant to the determination of whether the corporation is a resident of Canada. Corporate residency is determined on a factual or deemed basis and a corporation may also be deemed to be a non-resident of Canada if the corporate tiebreaker rule of a tax treaty concludes that the corporation is only a resident of the other country and not Canada. Corporations are factually resident where their Board of Directors regularly meets. Corporations are deemed to be resident in Canada if the corporation was in Canada after April 26, 1965. However, if the company is incorporated in Canada prior to April 27, 1965, it will only be considered resident in Canada in those situations where it either: • it carried on business in Canada at any time after that date; or • was factually resident in Canada at any time after that date. In general the corporate tie-breaker rule in Canada's income tax treaties generally provides that the corporation is resident in the country in which it was incorporated. Type: ES Topic: Residency - tax treaty tie-breaker rules for corporations

24) Limon Inc. was incorporated in the U.S. five years ago. However, all of the members of the Board of Directors meet in Montreal. In which country would Limon Inc. be taxed? Answer: Limon Inc. is a U.S. resident because it was incorporated in the U.S. It is however considered a factual resident of Canada based on where the Board of Directors meet. In such dual residency cases, the corporate tie-breaker rule of the Canada/U.S. tax treaty deem the corporation to be a resident of the country in which it was incorporated. That means that Limon Inc. would be considered a non-resident of Canada and only subject to Canadian income tax under Part I if it carried on a business in Canada or disposed of Taxable Canadian property, both of which are subject to other tax treaty provisions. Type: ES Topic: Residence of corporations

25) What are the components of net income? Answer: The components of net income are employment income or loss, business income or loss, property income or loss, net taxable capital gains (taxable capital gains minus allowable capital losses), other miscellaneous sources of income, subdivisions e deductions and allowable business investment losses. Type: ES Topic: Net income - ITA 3

26) ITA 3(b) reads that a taxpayer should "determine the amount, if any", by which taxable capital gains exceeds allowable capital losses.Does this wording mean that negative amounts are not possible? Answer: ITA 257 adds a rule that says to ignore negative numbers unless the context requires otherwise. The phrase "the amount, if any" is generally used throughout the ITA to indicate that only positive or nil amounts are acceptable. Type: ES Topic: Net income - ITA 3

27) What is the difference between tax avoidance and tax deferral? Answer: Tax avoidance is a form of tax planning in which a taxpayer, through means that are acceptable for income tax purposes, arranges their affairs to avoid the payment of income tax. Tax planning to achieve tax deferral involves either the delayed recognition of income, or the accelerated recognition of deductions. The ultimate payment of tax is delayed, as opposed to permanently avoided. Type: ES Topic: Administration - tax evasion vs tax avoidance

28) What is income splitting? Under what circumstances will it provide tax benefits to an individual? Answer: Income splitting involves efforts to share or split income of an individual with family members or other related persons. It will only benefit an individual who is in a high tax bracket in those circumstances where there are family members or other related persons who are in lower tax brackets. Type: ES Topic: Income tax planning - Income splitting

29) Contributions to a Registered Retirement Savings Plan (RRSP) can be deducted to reduce the income taxes of an individual in the year that they are made. However, these contributions will be subject to income tax when they are withdrawn from the plan. What type of tax planning is involved in this arrangement? Answer: The basic type of tax planning that is involved in RRSPs is tax deferral – a tax savings results from making contributions that will have to be paid back at a later point in time. There may also be an element of avoidance in that, after retirement, an individual may be in a lower tax bracket than he was during his working years. If this is the case, there will be an absolute reduction in taxes. Type: ES Topic: Income tax savings & deferral - general concepts

30) Your client, a government employee, would like to reduce their income tax. The client is trying to decide whether to contribute $5,000 to an RRSP this year. The client has an RRSP as does their spouse, a part time employee at a day care centre. Briefly describe the basic goals of tax planning. What advice would you give your client regarding his RRSP contribution? Explain your conclusion. Answer: The basic goals of tax planning can be summarized as follows: • Tax avoidance - To permanently avoid the payment of some amount of tax. • Tax deferral - To delay the recognition of certain types of income or accelerate the timing of certain deductions. • Income splitting - To have a family aggregate taxable income allocated as evenly as possible among family members. The client should contribute the $5,000 to a spousal RRSP. By contributing to a spousal RRSP income tax will be deferred. By contributing to a spousal RRSP income splitting is achieved and there may be possible tax avoidance if the spouse is taxed at a lower rate when the funds are eventually withdrawn. Type: ES Topic: Income tax savings & deferral - general concepts

31) A partnership is a taxable entity for income tax purposes. Answer: FALSE Explanation: A taxpayer must be a person. Partnerships are not persons. In general only individuals, corporations, trusts and estates are taxable entities for income tax purposes. Type: TF Topic: Definition - "Person" ITA 248(1)

32) A partnership is a taxable entity for GST purposes. Answer: TRUE Explanation: Partnerships engaged in commercial activity are specifically included as taxable entities for GST purposes. Type: TF Topic: GST/HST - liability for GST/HST

33) In general, provincial income taxes for individuals are based on a specified percentage of federal income tax payable. Answer: FALSE Explanation: In general, provincial income taxes are based on a specified percentage of federal taxable income. Type: TF Topic: Residency - provincial or territorial residence of individuals

34) The federal government does not collect personal or corporate income taxes for Ontario or Quebec. Answer: FALSE Explanation: The federal government collects personal and corporate income taxes for Ontario. Type: TF Topic: Income tax payable - federal income tax

35) A sales tax is a regressive tax even when it is applied at a single rate on all transactions. Answer: TRUE Explanation: Even if the rate is the same on all transactions, it will be a higher rate on the taxable income of lower income individuals because they spend a larger percentage of their income. Type: TF Topic: Canadian income tax system - regressive vs progressive rates

36) A major advantage of progressive tax rates is that their use encourages economic growth. Answer: FALSE Explanation: Progressive rates discourage both employment and investment, thereby limiting economic growth. Type: TF Topic: Canadian income tax system - regressive vs progressive rates

37) Tax expenditures are less costly to administer than direct funding programs. Answer: TRUE Explanation: Tax expenditures are less costly to administer than direct funding programs. Type: TF Topic: Canadian income tax system - objectives

38) Part I of the ITA is the largest and most important part. Answer: TRUE Explanation: Part I of the ITA is the largest and the most important part. Type: TF Topic: The ITA & income tax reference materials

39) The citation ITA 61(4)(b)(ii) would be read Paragraph 61, Subparagraph 4, Section b, Subsection ii. Answer: FALSE Explanation: The citation ITA 61(4)(b)(ii) would be read Section 61, Subsection 4, Paragraph b, Subparagraph ii. This is often shortened by referring to the last description such as subparagraph 61(4)(b)(ii). Type: TF Topic: The ITA & income tax reference materials

40) Any taxpayer can choose the calendar year as their taxation year. Answer: TRUE Explanation: While individuals and inter vivos and testamentary trusts (with the exception of Graduated Rate Estates (GRE)) must use a calendar taxation year, other taxpayers, corporations and GREs, can choose to use the calendar year as their taxation year. Type: TF Topic: Definition - "Taxation Year" ITA 249

41) If there is a conflict between an income tax treaty and the ITA, the ITA overrides the tax treaty. Answer: FALSE Explanation: The provisions of an income tax treaty override the ITA. Type: TF Topic: International - income tax treaties

42) An income tax is payable for each taxation year on the taxable income of every person resident in Canada at any time in the year. Answer: TRUE Explanation: An income tax is payable for each taxation year on the taxable income of every person resident in Canada at any time in the year. ITA 2(1) Type: TF Topic: Liability for income tax

43) Canadian citizens are required to file a Canadian income tax return, without regard to where they reside. Answer: FALSE Explanation: Canadian income taxes under Part I are assessed on residents of Canada. Type: TF Topic: Liability for income tax

44) When an individual is absent from Canada for some period of time, the length of their absence is an important factor in determining whether they continued to be a Canadian resident during the period of their absence. Answer: FALSE Explanation: S5-F1-C1 makes it clear that the length of the period of time during which the individual is absent from Canada is not a determining factor with respect to residency. Type: TF Topic: Residency - general concepts

45) If an individual moves to Canada and is here less than 183 days prior to the end of the year, that individual will be subject to Part I tax on their worldwide income for the entire year. Answer: FALSE Explanation: Such part year residents will only be taxed on their worldwide income for the portion of the year subsequent to their moving to Canada. Type: TF Topic: Residency - general concepts

46) The residency of a trust depends on the country in which the central management and control of the trust takes place, not where the beneficiaries reside. Answer: TRUE Type: TF Topic: Residence of a Trust

47) If an individual leaves Canada, the three most significant factors in determining whether the individual has ceased to be a resident are: • Whether he continues to own a dwelling in Canada. • Whether he is accompanied by his spouse or common-law partner. • Whether he maintains social ties in Canada. Answer: FALSE Explanation: Whether the individual continues to maintain social ties is not one of the three most significant factors. the three factors are (1) having a dwelling in Canada, (2) having a spouse or commonlaw partner in Canada and (3) having other dependants in Canada. Type: TF Topic: Residence of individuals

48) If an individual returns to Canada after an absence of less than two years the individual will be considered to have retained Canadian residency during his absence. Answer: FALSE Explanation: The length of the period of absence from Canada is not considered a factor in determining whether an individual has remained a resident. Type: TF Topic: Residency - general concepts

49) A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year. Answer: TRUE Explanation: A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year. In other words the individual is not resident for all 365 days of the year (366 for leap years). Type: TF Topic: Residency - general concepts

50) A sojourner is any individual who has been present in Canada for 183 consecutive days in one year. Answer: FALSE Explanation: The 183 days do not have to be consecutive. Type: TF Topic: Residency - general concepts

51) Canadian citizens are automatically subject to income tax on their worldwide income. Answer: FALSE Explanation: Canadian Citizens are only taxable on their world wide income if they are residents of Canada Type: TF Topic: Residency - general concepts

52) U.S. Citizens are never subject to Canadian income tax. Answer: FALSE Explanation: U.S. citizens are taxable in Canada if they are either (1) resident in Canada or (2) earn income in Canada. Type: TF Topic: Residency - general concepts

53) Partnerships are required to file an annual T4 income tax return. Answer: FALSE Explanation: Partnerships are not a taxable entity and therefore an annual income tax return is not required. However a partnership may be required to file an information return which is different than an income tax return. A T4 is an information slip provided to individuals earning employment income. It is not an income tax return. Type: TF Topic: Liability for income tax

54) Sole proprietorships are taxable entities that must file an annual income tax return. Answer: FALSE Explanation: The individual sole proprietor is the taxable entity that must include the profits or losses of a business carried on as a sole proprietorship in that individual's annual T1 income tax return. Type: TF Topic: Liability for income tax

55) Which of the following types of taxes is not currently in use by the federal government of Canada? A) Excise Taxes B) Custom Duties C) Head Tax D) Transfer Tax Answer: C Explanation: C) Head Tax Type: MC Topic: Canadian income tax system

56) Which of the following is NOT a taxable entity for Canadian income tax purposes? A) Darklyn Ltd., a Canadian resident corporation. B) Ms. Sarah Bright, a Canadian resident. C) Walters and Walters, a CPA partnership. D) The Martin family trust. Answer: C Explanation: C) Walters and Walters, a group of CPAs operating as a partnership. Type: MC Topic: Liability for income tax

57) Which of the following could be required to file a GST return? A) Chan's Clothing Store (a business carried on as a sole proprietorship) B) The Chan Foundation (a registered charity) C) Min Chan (an individual) D) All of the above could be required to file a GST return. Answer: D Explanation: D) All of the above could be required to file a GST return. Type: MC Topic: GST/HST - liability for GST/HST

58) Which of the following forms of taxation provides the largest component of federal government taxation revenues? A) Personal income tax B) Corporate income tax C) GST D) Employment insurance premiums Answer: A Explanation: A) Personal income tax Type: MC Topic: Canadian income tax system

59) With respect to provincial income taxes, other than Quebec, which of the following statements is NOT correct? A) Each province can apply different rates to as many brackets for individuals as it wishes. B) The federal government collects the provincial income tax for individuals for every province except Quebec. C) Each province can establish its own tax credits to apply against income tax payable for individuals. D) Each province can establish rules for determining the taxable income of individuals. Answer: D Explanation: D) Each province can establish rules for determining the Taxable Income of individuals. Type: MC Topic: Income tax payable - federal income tax

60) Which of the following groups of entities are all subject to income tax? A) Individuals, proprietorships and corporations B) Proprietorships, corporations and trusts C) Individuals, trusts and corporations D) Individuals, partnerships and corporations Answer: C Explanation: A) Proprietorships are not entities B) Same as A C) Individuals, trusts and corporations D) Partnerships are not taxpayers Type: MC Topic: Canadian income tax system

61) Which of the following statements with respect to Canadian tax policy is NOT correct? A) The economic burden of a particular tax may not fall on the same group that has the legal liability to pay the tax. B) Extremely high rates of tax will always encourage individuals to work harder so that they will have more after tax income. C) The inability to harmonize the GST in some provinces has increased the complexity of tax compliance. D) A progressive tax system is unfair to individuals with incomes that fluctuate significantly from year to year. Answer: B Explanation: B) Extremely high rates of tax will always encourage individuals to work harder so that they will have more after tax income. Type: MC Topic: Canadian income tax system - income tax policy concepts

62) Which of the following goals is NOT a current economic policy objective of the Canadian tax system? A) Ensure the continued provision of public goods. B) Redistribute income and wealth among taxpayers. C) Ensure fairness in the allocation of resources to different levels of government. D) Economic stabilization such as stimulating the economy or creating jobs. Answer: C Explanation: C) Ensure fairness in the allocation of resources to different levels of government. Type: MC Topic: Canadian income tax system - income tax policy concepts

63) Which of the following can be considered an advantage of an income tax system based on progressive rates? A) A progressive rate system is simpler to administer. B) A progressive rate system provides greater stability in the context of changing economic conditions. C) A progressive system discourages tax evasion. D) A progressive system encourages greater effort on the part of individuals. Answer: B Explanation: B) A progressive rate system provides greater stability in the context of changing economic conditions. Type: MC Topic: Canadian income tax system - regressive vs progressive rates

64) Which of the following statements accurately describes a regressive tax? A) A tax which results in higher effective tax rates for higher income taxpayers. B) A tax which results in lower effective tax rates for higher income taxpayers. C) A tax in which the same effective rate applies to all levels of income. D) A tax that is shifted to consumers through price increases on the goods purchased. Answer: B Explanation: B) A regressive tax is one which results in lower effective tax rates for higher income taxpayers. Type: MC Topic: Canadian income tax system - regressive vs progressive rates

65) Which of the following statements with respect to using tax expenditures rather than program spending is NOT correct? A) It is more costly to administer tax expenditures as opposed to program spending. B) Tax expenditures reduce the visibility of government actions. C) Tax expenditures leave fewer decisions in the hands of the private sector, thereby providing for more efficient allocation of resources. D) Tax expenditures reduce the impact of progressive rates on higher income taxpayers. Answer: A Explanation: A) It is more costly to administer tax expenditures as opposed to program spending. Type: MC Topic: Canadian income tax system - objectives

66) "Taxpayers who earn $100,000 in dividends should pay the same amount of tax as taxpayers who earn $100,000 in capital gains." This statement reflects which of the following qualitative characteristics of an effective tax system? A) Vertical equity. B) Neutrality. C) Flexibility. D) Horizontal equity. Answer: D Explanation: D) Horizontal equity. Type: MC Topic: Canadian income tax system - objectives

67) Which of the following statements with respect to tax reference materials is correct? A) Income Tax Folios are a legislative source of guidance. B) Income Tax Regulations are gradually being replaced by Income Tax Folios. C) Interpretation Bulletins are gradually being replaced by Information Circulars. D) The ITA is the most important source of information for dealing with matters related to the federal income tax. Answer: D Explanation: D) The Income Tax Act is the most important source of information for dealing with matters related to the federal income tax. Type: MC Topic: The ITA & income tax reference materials

68) With respect to the structure of the ITA, which of the following statements is correct? A) The major components of the ITA are called Divisions. B) The ITA has Parts numbered I through XVII, reflecting the fact that there are 17 Parts in the Act. C) All Parts of the ITA have Divisions. D) All Parts of the ITA contain at least one Section. Answer: D Explanation: D) All Parts of the ITA contain at least one Section. Type: MC Topic: The ITA & income tax reference materials

69) Of the following publications, indicate the one that is NOT a legislative source. A) Income Tax Act. B) Income Tax Folios. C) Income Tax Application Rules. D) International Tax Treaties. E) Income Tax Regulations. Answer: B Explanation: B) Income Tax Folios. Type: MC Topic: The ITA & income tax reference materials

70) Of the following publications, indicate the one that is NOT published by the CRA. A) Income Tax Folios. B) Information Circulars. C) Court decisions. D) Income Tax Technical News. Answer: C Explanation: C) Court decisions. Type: MC Topic: The ITA & income tax reference materials

71) Where would an individual find the formula for determining the prescribed rate? A) The Income Tax Act. B) The Income Tax Regulations. C) A CRA Income Tax Folio. D) A CRA Information Circular. Answer: B Explanation: B) The Income Tax Regulations. Type: MC Topic: The ITA & income tax reference materials

72) Which of the following statements is NOT correct? A) Most major income tax changes are introduced in the annual Federal Budget. B) Outstanding legislation that has not been passed may be affected by a Federal election. C) Proposed changes in tax law are usually introduced to parliament in the form of a Notice of Ways and Means Motion. D) When there is a conflict between the ITA and an international agreement, the terms of the ITA override the treaty. Answer: D Explanation: D) When there is a conflict between the ITA and an international agreement, the terms of the ITA override the treaty. Type: MC Topic: International - income tax treaties

73) Of the following statements related to liability for Canadian income tax, which statement is NOT correct? A) As used in the ITA, the term person refers to individuals, trusts, and corporations. B) Corporations must use the calendar year as their taxation year. C) Part I tax is assessed on residents of Canada. D) Part I tax is assessed on Canadian employment income earned by a non-resident. Answer: B Explanation: B) Corporations must use the calendar year as their taxation year. Type: MC Topic: Liability for income tax

74) An individual is liable for income tax in Canada if the individual: A) is a resident of Canada. B) is a citizen of Canada. C) has lived in Canada at any time during the year. D) All of the above are required. Answer: A Explanation: A) is a resident of Canada. Type: MC Topic: Liability for income tax

75) Which of the following persons is NOT liable for Part I income tax? A) Pheap Chom, an individual who has resided in Canada for the past 15 years. B) Chom Incorporated, a resident corporation. C) Phon Im, a resident of the United States who earns employment income in Canada. D) Bunly Im, a resident of the United States who earns investment income that is interest in Canada. Answer: D Explanation: D) Bunly Im, a resident of the United States who investment income that is interest in Canada. Type: MC Topic: Liability for income tax

76) Which of the following types of income earned by a non-resident is NOT subject to income tax under Part I of the ITA? A) Employment income earned in Canada B) Business income earned in Canada C) Rental income earned in Canada D) Income from the disposition of Canadian real estate Answer: C Explanation: C) Rental income earned in Canada Type: MC Topic: Liability for income tax

77) Which of the following is an essential factor in determining whether an individual has ceased to be a resident of Canada? A) The individual has closed his Canadian savings account. B) The individual has given up his membership in the Canadian club. C) The individual has become a resident of another country. D) The individual has given up their provincial or territorial driver's licence. Answer: C Explanation: C) The individual has become a resident of another country. Type: MC Topic: Residence of individuals

78) All of the following statements are true, except: A) Canadian residents must report their worldwide income for income tax purposes. B) If an individual is a resident of Canada for part of a calendar year, that individual only has to report worldwide income for that part of the year. C) An individual who immigrates to Canada during the year is a resident of Canada for income tax purposes for the full calendar year. D) An individual can be a resident of Canada for income tax purposes, even if the individual is not a Canadian citizen. Answer: C Explanation: C) An individual who immigrates to Canada during the year is a resident of Canada for tax purposes for the full calendar year. Type: MC Topic: Residence of individuals

79) Of the following individuals, who would be a resident or deemed resident of Canada for income tax purposes this year? • Alex is a U.S. citizen who commutes each day to Canada for employment purposes. • Bob is a U.S. citizen who lives in Canada during the week for employment purposes, but returns to the U.S. on weekends to the house he shares with his wife and children. • Charles is a Canadian citizen who lived in Toronto until March of last year, at which time he left for a four year aid mission in Africa under an agreement with the Canadian International Development Agency. • Richard is a Canadian citizen who goes to school in the U.S. for eight months of each year but returns to Canada to live with his parents each summer. A) Alex, Bob and Charles. B) Bob, Charles and Richard. C) Bob and Charles. D) Alex and Richard. Answer: B Explanation: B) Bob, Charles, and Richard. Type: MC Topic: Residence of individuals

80) With respect to the residency of an individual, which of the following statements is NOT correct? A) To be a resident for income tax purposes, an individual must be a Canadian citizen. B) If an individual permanently departs or enters Canada with the intention of permanently staying in Canada in the current year, the individual will be considered a part-year resident for income tax purposes. C) An individual is a Canadian resident for income tax purposes if their principal residential ties are in Canada. D) An individual is considered to be a Canadian resident for income tax purposes if the individual visits for 183 days or more in a calendar year. Answer: A Explanation: A) To be a resident for income tax purposes, an individual must be a Canadian citizen. Type: MC Topic: Residence of individuals

81) Which of the following factors would NOT be relevant under the Canada/U.S. tax treaty tie-breaker rules for determining the residence of an individual? A) The country in which the individual carries on a business. B) The country in which the individual is a citizen. C) The country in which the individual has a permanent home available to him. D) The country in which the individual has a habitual abode. Answer: A Explanation: A) The country in which the individual carries on a business. Type: MC Topic: Residence of individuals

82) Jamal, his wife and two teenage children are all Canadian citizens. For the last 2 years he and his family have been living in Mexico while he works for the Mexican subsidiary of a Canadian company. Jamal still owns his house in Canada but has purchased a home in Mexico. His wife and children visit Canada for 2 months in the summer and he spends 4 weeks a year in Canada. The rest of the time the house is empty as his wife visits family in Canada regularly. Jamal has no intention to return to Canada and loves living in Mexico. However, since his mother-in-law is very ill, it is possible that his wife will have to return to Canada for at least 6 months to nurse her mother. Which of the following statements is correct? A) Jamal is considered a part-time resident of Canada for the 4 weeks he spends in Canada. B) If Jamal's wife returns alone to Canada to care for her mother, Jamal is considered a part-time resident of Canada for the 6 months she is in Canada. C) Jamal is considered a non-resident of Canada. D) Since Jamal owns a house in Canada that is not rented out under a long-term lease he is considered a Canadian resident for income tax purposes. Answer: C Explanation: C) Jamal is considered a non-resident of Canada. Type: MC Topic: Residence of individuals

83) Of the following individuals, who is most likely to be considered a part-year resident of Canada for the current taxation year? A) Ravi is a citizen of India, where he was born and lived until moving to Canada on March 1 of the current year with his wife and child. He was transferred by his employer to its Canadian head office. B) Helga had lived and worked in Canada for 10 years. She was transferred by her employer to its flagship hotel in Switzerland on March 1 of the current year for a 1 year training assignment. Her husband remained in Canada to complete his MBA. C) Marc is a French citizen who lives in Paris. On March 1 of the current year he begins work as a translator in Ottawa. It is a 1 year assignment. D) Billy Bob is a U.S. Marshall on loan to the RCMP detachment in Nunavut. It is a 9 month assignment. Answer: A Explanation: A) Ravi is a citizen of India, where he was born and lived until moving to Canada on March 1 of the current year. He was transferred by his employer to its Canadian head office. Type: MC Topic: Residence of individuals

84) Dominique, a Canadian citizen, lives in Buffalo, NY, USA. Throughout the current year she commutes to Fort Erie, Ontario, Canada, where she is the bartender at the Cross Border Bar. She normally works 7 pm to 3 am Tuesday through Saturday. She never stays overnight in Canada. Dominique is: A) a deemed resident (sojourner). B) a non-resident. C) a full-time resident. D) a part-year resident. Answer: B Explanation: B) A non-resident Type: MC Topic: Residence of individuals

85) Which of the following corporations would NOT be considered a resident of Canada? Ignore treaty implications. A) Dram Inc. was incorporated in Alberta in 2006. While it carries on business in both the U.S. and Canada, its central management has always been located in New York. B) Craser Ltd. was incorporated in Ontario in 2011 where it carries on its only business. Its central management is located in Toronto. C) Alor Inc. was incorporated in British Columbia in 2005. The company carries on most of its business in Canada but its central management is situated in Seattle. D) Exeter Ltd. was incorporated in Alberta in 1957. However, it has never carried on business in Canada and its central management has always been situated in Montana. Answer: D Explanation: D) Exeter Ltd. was incorporated in Alberta in 1957. However, it has never carried on business in Canada and its central management has always been situated in Montana. Type: MC Topic: Residence of corporations

86) Of the persons described, which one would NOT be considered a Canadian resident? A) A person who lives in Leamington, Ontario and commutes to work each day in Detroit, Michigan. B) A corporation that was incorporated in North Dakota, but carries on all of its business in southern Manitoba. C) A member of the Canadian armed forces who has, for the last 3 years, been stationed in Germany. D) A corporation that was incorporated in Winnipeg, but carries on all of its business in North Dakota. Answer: B Explanation: B) A corporation that was incorporated in North Dakota but carries on all of its business in southern Manitoba. Type: MC Topic: Residence of individuals and corporations

87) In which of the following situations is the person likely to be considered a non-resident of Canada, in 2022, for income tax purposes? A) James Arder, a recently qualified CPA, based in Montreal, accepted a transfer to an office in Sydney, Australia for the period May 1, 2022 to August 31, 2022. James is not married and had lived at his parent's house in Montreal. B) Karen Cotin, a computer programmer, had been employed by ABC Systems Ltd. in Toronto. In 2021, she accepted a minimum two-year contract with CS Services Inc. in London, England. Her position with CS Services Inc. started October 1, 2021. Before moving to England, where she will join her fiance, Karen terminated the lease on her apartment in Toronto and sold her car. It is her intention to remain in England. C) N Limited was incorporated in Canada in 1998 and, until May 2022, its manufacturing plant was located in Mississauga, Ontario. In May 2022, it moved all of its operations, including the manufacturing plant, to North Carolina, U.S.A. D) B. Bath, a member of the Canadian Armed Forces, who was stationed in Lahr, Germany from September 1, 2020 to February 1, 2023. Answer: B Explanation: B) Karen Cotin, a computer programmer, had been employed by ABC Systems Ltd. in Toronto. In 2021, she accepted a minimum two-year contract with CS Services Inc. in London, England. Her position with CS Services Inc. started October 1, 2021. Before moving to England, where she will join her fiance, Karen terminated the lease on her apartment in Toronto and sold her car. It appears Karen has severed all ties with Canada. Type: MC Topic: Residence of individuals and corporations

88) Which of the following statements accurately describes the ITA view of income? A) Net income is determined by adding revenue based on recognition at the point of sale and deducting expenses which are determined based on generally accepted accounting principles. B) Net income is based on the source concept that matches revenue with expenses based on the type of activity. C) Net income is the amount paid to an employee after an employer deducts CPP, EI, income taxes and any other source deductions from employee pay. D) Net income is the total increase in a taxpayer's net worth or overall wealth for the year. Answer: B Explanation: B) Net income is based on the source concept that matches revenue with expenses based on the type of activity. Type: MC Topic: Alternative concepts of income

89) With respect to the determination of net income (ITA 3), which of the following statements is correct? A) Property losses are deducted from business income before the deduction of RRSP contributions. B) Allowable capital losses can be deducted to the extent of other positive sources of income. C) If not used during the current period, all subdivision e deductions can be carried forward to subsequent periods. D) If a business loss exceeds all other sources of income, net income will be equal to nil. Answer: D Explanation: D) If If a business loss exceeds all other sources of income, net income will be equal to nil. Type: MC Topic: Net income - ITA 3

90) With respect to the calculation of net income (ITA 3), which of the following statements is NOT correct? A) Subdivision e deductions are subtracted from the total of all positive sources of income. B) Allowable capital losses for the year can only be deducted to the extent of taxable capital gains for the year. C) Business losses can be netted against employment income in determining the positive amounts to be included under ITA 3(a) and 3(b). D) Property losses can only be deducted after the subtraction of Subdivision e deductions. Answer: C Explanation: C) Business losses can be netted against employment income in determining the positive amounts to be included under ITA 3(a) and 3(b). Type: MC Topic: Calculation of net income

91) Minjie Liu has the following sources of income and deductions: Employment income Interest income Taxable amount of dividend income Taxable capital gain Allowable capital loss Subdivision e deductions

$35,000 5,000 7,000 5,000 12,000 2,000

What is Minjie's net income? A) $47,000 B) $40,000 C) $45,000 D) $49,000 Answer: C Explanation: A) $47,000 (this answer does not deduct the subdivision e deductions of $2,000) B) $40,000 (this answer incorrectly deducts the full amount of allowable capital loss C) $45,000 D) $49,000 (this answer adds the subdivision e deductions instead of subtracting them). Type: MC Topic: Net income - ITA 3

92) Tanya Turek has the following sources of income and deductions: Gross Salary Employment income Business loss Taxable capital gain Allowable capital loss

$35,000 34,000 14,000 4,000 2,000

What is Tanya's net income? A) $23,000 B) $22,000 C) $36,000 D) $24,000 Answer: B Explanation: A) $ 23,000 (This answer incorrectly uses Gross salary) B) $ 22,000 ($34,000 + ($4,000 - $2,000) - $14,000) C) $36,000 (this answer does not deduct the business loss) D) $24,000 (this answer fails to deduct the allowable capital loss) Type: MC Topic: Net income - ITA 3

93) Fadel Ghanem has the following sources of income and deductions: Employment income Property income Business loss Taxable capital gain Allowable capital loss

34,000 6,000 54,000 4,000 2,000

What is Fadel's net income? A) $40,000 Income B) Nil C) $44,000 Income D) $12,000 Loss Answer: B Explanation: B) Nil, with a business loss that can be used in either the previous 3 years or in the next 20 future years of $12,000 (34,000 + 6,000 + 4,000 — 2,000 — 54,000) D) Net income means a positive amount or nil. Negatives or not recognized. Type: MC Topic: Net income - ITA 3

94) ITA 3(b) requires the taxpayer to "determine the amount, if any, by which taxable capital gains exceed allowable capital losses". The rule that is established by this phrase is: A) that allowable capital losses in excess of taxable capital gains during a year are never deductible from net income. B) that the current year allowable capital losses can only be deducted to the extent that there are taxable capital gains during the current year. C) that taxable capital gains are only included in income in a year when there are also allowable capital losses that can be used to reduce the effect on income. D) that unused allowable capital losses are deductible against any type of income in one of the past 3 years or in a future year. Answer: B Explanation: B) That the current year allowable capital losses can only be deducted to the extent that there are taxable capital gains during the current year. Type: MC Topic: Net income - ITA 3

95) Fred Hopkins has employment income of $45,000, a business loss of $14,000, capital gains of $20,000, capital losses of $12,000, and subdivision e deductions of $3,000. Fred's net income is: A) $36,000. B) $50,000. C) $39,000. D) $32,000. Answer: D Explanation: D) $32,000 [$45,000 + (1/2)($20,000 - $12,000) - $3,000 - $14,000] Type: MC Topic: Net income - ITA 3

96) Which one of the following items is a taxable income deduction? A) A deduction for spousal support payments made during the year. B) A deduction for the extra costs related to living in prescribed areas of the Canadian north (ITA 110.7). C) Current year allowable capital losses in excess of current year taxable capital gains. D) Current year business losses in excess of other positive sources of income. Answer: B Explanation: B) A deduction for the extra costs related to living in prescribed areas of the Canadian north. (ITA 110.7) Type: MC Topic: Taxable income deductions

97) Which of the following amounts is NOT a taxable income deduction? A) Losses of other years. B) The capital gains deduction. C) A stock option deduction. D) The excess of allowable capital losses over taxable capital gains for the year. Answer: D Explanation: D) The excess of allowable capital losses over taxable capital gains for the year. Type: MC Topic: Taxable income deductions

98) Which of the following items does not result in tax avoidance? A) Use of the capital gains deduction. B) Employer contributions to group disability plans. C) Employer contributions to private health service plans (PHSP). D) Accelerated depreciation (CCA). Answer: D Explanation: D) Accelerated depreciation (CCA). Type: MC Topic: Tax avoidance

99) Providing employees with private health service plan (PHSP) benefits involves what type of tax planning? A) Tax evasion. B) Tax deferral. C) Income splitting. D) Tax avoidance. Answer: D Explanation: D) Tax avoidance. Type: MC Topic: Tax planning

100) Making contributions to an RRSP always involves what type of tax planning? A) Tax avoidance and tax deferral. B) Tax deferral. C) Tax avoidance. D) Income splitting. Answer: B Explanation: A) Tax avoidance may occur depending on the circumstances but it will not always occur. B) Tax deferral. Type: MC Topic: Tax planning

101) Which of the following will always result in tax avoidance? A) Making contributions to a registered retirement savings plan (RRSP). B) Making contributions to an employer's registered pension plan (RPP). C) Claiming the capital gains deduction. D) Claiming maximum capital cost allowance (CCA) deductions. Answer: C Explanation: C) Claiming the capital gains deduction. Type: MC Topic: Tax planning

102) Which of the following entities could be required to file an income tax return? • Sally Forbes (an individual) • Forbes Boutique (a sole proprietorship) • Forbes and Delaney (a partnership) • The Forbes family trust (a trust) • Forbes Ltd. (a corporation) • The Forbes Foundation (an unincorporated charity) Answer: Sally Forbes, the Forbes family trust, and Forbes Ltd. could be required to file income tax returns. Forbes Boutique, Forbes and Delaney, and the Forbes Foundation are not taxable entities for income tax purposes. These latter entities may be required to file information returns with the CRA but not actual income tax returns. Type: ES Topic: Taxable entities for income tax purposes

103) Which of the following entities could be required to file a GST return? • Sally Forbes (an individual) • Forbes Boutique (a sole proprietorship) • Forbes and Delaney (a partnership) • The Forbes family trust (a trust) • Forbes Ltd. (a corporation) • The Forbes Foundation (an unincorporated charity) Answer: Under the ETA, all of the listed entities could be required to file a GST return. Where only individuals, corporations and trusts can be required to file an income tax return, the definition of a person (i.e., taxable entity) is much broader for GST purposes. As is explained in detail in Chapter 21, whether an entity is required to file a GST return is dependent on the level of commercial activity. Type: ES Topic: Taxable entities for GST/HST purposes

104) Joan Smith has taxable income of $37,500. For the current year her federal income tax rate is 15%, while the corresponding provincial rate is 8.2%. Determine Ms. Smith's combined federal and provincial income tax payable, before consideration of any available credits against income tax payable. Answer: Federal Tax Payable [(15%)($37,500)] $5,625 Provincial Tax Payable [(8.2%)($37,500)] 3,075 Total Tax Payable [(15% + 8.2%)($37,500)] $8,700 Type: ES Topic: Federal and provincial/territorial income taxes payable

105) Karla Ho has taxable income of $26,700. For the current year her federal income tax rate is 15% and the corresponding provincial rate is 10%. Determine Ms. Ho's combined federal and provincial income tax payable, before consideration of any available credits against income tax payable. Answer: Federal Tax Payable [(15%)($26,700)] $4,005 Provincial Tax Payable [(10%)($26,700)] 2,670 Total Tax Payable [(15% + 10%)($26,700)] $6,675 Type: ES Topic: Federal and provincial/territorial income taxes payable

106) Ms. Michelle Walker, a U.S. citizen, has Canadian employment income of $42,000 and U.S. employment income of $40,000 Canadian. She lives in Seattle, Washington and is a resident of the United States for the entire year. Ms. Walker does not believe that she is subject to taxation in Canada. Is she correct? Explain your conclusion ignoring the tax treaty. Answer: She is not correct. As a non-resident of Canada she would be subject to ITA 2(3) which imposes Canadian income tax on non-residents who earn employment income in Canada. As a non-resident Canada would have no right to tax her U.S. employment income. Type: ES Topic: Non-resident liability for income tax

107) Daniel Bourne is a U.S. citizen who lives in Fargo, North Dakota. For many years, he has had a cottage on Manitoba's Lake Winnipeg. In recent years, however, he has made little use of this property and, given this, he has sold the property. While there was a gain of $50,000 on the sale, Daniel assumes that he will not pay Canadian taxes on this amount because he is a U.S. citizen. Is he correct? Explain your conclusion ignoring the tax treaty. Answer: He is not correct. As a non-resident of Canada he would be subject to ITA 2(3) which imposes Canadian income tax on non-residents who dispose of Taxable Canadian Property. Type: ES Topic: Non-resident liability for income tax

108) At the end of the current year, Michael Resner departed from Canada when he accepted permanent employment in Mexico. He was accompanied by his common-law partner and their children, as well as their personal property that had not been sold. He has no intention of returning to Canada except to visit friends and family on occasion. He was unable to sell his residence at a satisfactory price and decided instead to rent it out for a period of two years. He retained his membership in the CPA (Chartered Professional Accountants) Alberta. After his departure, would he still be considered a Canadian resident for income tax purposes? Explain your conclusion. Answer: Based on the facts the intention to sever residency with Canada and establish residency in Mexico is supported by the facts. One would normally expect and individual to dispose of their principal residence if their is no intention to return however circumstances must first be considered in evaluating why the residence was not sold. Examples include situations where the market is in a downturn and expected to recover in years to come or when an individual decides that keeping a Canadian residency effectively provides an opportunity for a vacation property or the individual simply sees the residence as a viable investment. In this case the market appears to be at a low point which supports a delayed sale. In the interim rental income is being earned. The retention of his membership in the CPA Alberta would not be viewed as a relevant consideration given the facts. The facts support a conclusion that the individual severed Canadian residency on his departure from Canada. Type: ES Topic: Residential ties

109) Mary is a Canadian citizen who is employed by a corporation operating in Canada and the U.S. While she has worked for many years in the Canadian office of this organization, she agreed to transfer to the corporation's U.S. head office in New York City. Before leaving, she disposed of her residence and other personal property that she did not wish to move. She canceled her Saskatchewan driver's licence and health care card, and closed all of her Canadian banking and brokerage accounts. Because her boyfriend remained in Regina, she found herself flying back to Canada at least once a month. After two years, she concluded that between the high cost of living in New York City and the travel required to maintain the relationship with her boyfriend, she would return to Canada. Would Mary be considered a Canadian resident during the two years that she was absent from Canada? Explain your conclusion. Answer: Residency determinations begin with the intent of an individual which is then evaluated in terms of whether the intent matches ones actions. In this case the actions to dispose of the principal residence and personal property are supportive of an intent to sever residency with Canada. She would therefore be considered a non-resident of Canada on her departure and re-establishing Canadian residency once she decided to return to Canada and took action to re-establish the connection with Canada. Type: ES Topic: Residency - temporary absences

110) John Acheever is employed by Research In Limbo. He has worked for a number of years in their office in Kitchener, Ontario. However, he has become convinced that he would have greater advancement opportunities if he transferred to their office in New York City. He requests this transfer and moves in September, 2021. Before leaving he cancels his apartment lease, sells all of the personal property that he does not wish to move, and cancels his Ontario driver's licence. However, he retains his Canadian banking and brokerage accounts and, because of concerns about the cost of U.S. health care, he does not cancel his Ontario health care card (he changes the address to that of his parents in Waterloo, Ontario). He has also left his dog, Bart with his parents. After the move, he is shocked to realize how much he misses Bart. He finds himself flying back to Kitchener at least twice a month to spend the weekend caring for Bart. By February, 2023, after not being able to find a suitable dog-friendly apartment in New York City, John returns to his position in Kitchener. He has no plans to return to the U.S. Would John be considered a Canadian resident during the 18 months that he was absent from Canada? Explain your conclusion. Answer: Residency determinations begin with the intent of an individual which is then evaluated in terms of whether the intent matches ones actions. Based on the facts it would appear that John has severed Canadian residency. This is further supported by his actions including continuing to find accommodation in New York that would accept pets. Retaining Canadian bank accounts is not a significant tie and is often quite common until one has settled in another country. Cancelling one's driver's license and not cancelling healthcare coverage in the same province would alert the provincial government that there is a potential concern. The Ontario government allows individuals who spend little time in Canada to retain their healthcare coverage for up to a couple of years as long as the individual's primary place of residency is in Ontario. The fact that the individual may not legally be entitled to retain Ontarion healthcare coverage is not determinative as to the individual's residency status for income tax purposes. In summary the facts suggest that he became a non-resident of Canada when he departed for New York. Type: ES Topic: Residency - temporary absences

111) Melissa is a Canadian citizen who has been employed in Vancouver for the last five years. She has accepted new employment in the United States and, as of March 15 of the current year, flies to New Mexico to begin her responsibilities. She has been granted a green card to enable her to work in the U.S. Her husband remains behind with the children until July 1, after the end of their school year. On that date, they fly to New Mexico to join Melissa. Their residence is sold on August 1 of the current year, at which time a moving company picks up their furniture and other personal possessions. The moving company delivers these possessions to their new house in New Mexico on August 15. Explain Melissa residency status with Canada during the current year. Answer: Melissa became a non-resident of Canada in the current year. The question however would be at what point in time during the current year that she actually became a non-resident of Canada. The answer depends upon the facts together with the laws of the two countries. In Canada the CRA has a general policy that an individual severs Canadian residency at the latest of (1) the date the individual leaves Canada, (2) the date the individual establishes residency in the other country and (3) the date that members of the immediate family leave Canada (e.g. spouse, common-law partner and dependants). The period of Canadian residency would be the period January 1 through July 1, the date that her husband and children fly to the U.S. July 1 would be the latest of: the date that Melissa leaves Canada (March 15), the date that Melissa establishes U.S. residency (March 15), and the date that her husband and children depart Canada (July 1). Type: ES Topic: Part year residence

112) Barton Vader is a Canadian citizen who has always lived in London, Ontario. He has a spouse and two school-aged children. As of May 2021, he accepts a permanent employment in Akron, Ohio. On October 1, 2021, he moves to Akron to locate housing for his family. In order for his children to finish the school term, his family remains in London until January 1, 2022. When they move, John severs all residential ties with Canada other than the family home. The home is put up for sale in January, 2022. However, it remains unsold as of December 31, 2022. While Barton was scheduled to begin working in the U.S. in early 2022, he is unable to obtain the required residency documents until July 1, 2022. Explain Barton's Canadian residency status for 2021 and 2022. Answer: For residency purposes the CRA has a general policy designed to assist individuals in determining the actual date that the individual has become a non-resident of Canada. This administrative policy recognizes that the specific facts determine that date but that individuals can rely upon this policy if they so choose. The CRA policy is that an individual is considered to have ceased being a resident of Canada at the latest of three dates: 1. The date the individual leaves Canada. 2. The date the individual's family leaves Canada. 3. The date the individual establishes residency in another country. In Barton's case the latest of the dates would be July 1, 2022, the date on which he receives the required residency documents. Given this, Barton would be considered a Canadian resident for all of 2021. In addition, he would be a part year resident for the period January 1, 2022 through June 30, 2022. Note that thus date may cause issues where there is residency overlap with the U.S. Type: ES Topic: Part year residence

113) Mary Sothor is the Canadian ambassador to Tanzania. She was a resident of Canada immediately prior to her appointment as ambassador. Living with her in Tanzania's capital city are her husband and two children. Her husband was born in Canada and was a Canadian resident at the time of their marriage. He is exempt from Tanzanian taxation because he is the spouse of a foreign diplomat. Her 25 year old son was born in Canada and works for a Tanzanian company. His income exceeds $30,000 annually. Her 16 year old son was born in Kenya and is a full time student with no income of his own. Which of these individuals would be considered Canadian residents for income tax purposes? Explain your conclusions. Answer: Under ITA 250(1)(c)(i), Mrs. Sothor would be a deemed Canadian resident because of her position as a Canadian ambassador and the fact that she was a Canadian resident at the time she was appointed to this post. As her husband is exempt from Tanzanian taxation due to his relationship to a deemed resident, he is a deemed resident of Canada under ITA 250(1)(g). Of her two children, the younger son would be a deemed resident under ITA 250(1)(f) as he is a Canadian ambassador's dependent child. However, the older son would not be a deemed resident because his income exceeds the base for the BPA for 2022 of $14,398 and he would therefore not be considered a dependant. Type: ES Topic: Individual residency

114) Ms. Sharon Washton was born 26 years ago in Bahn, Germany. She is the daughter of a Canadian High Commissioner serving in that country. Her father still holds this position. However, Ms. Washton is now working in Prague, Czechoslovakia. The only income that she earns in the year is from her Prague marketing job and is subject to taxes in Czechoslovakia. She has never visited Canada. Determine the residency status of Sharon Washton. Answer: While Ms. Washton is the child of a Canadian High Commissioner, it appears that she is no longer a dependant of this individual. It would also appear that she has income in excess of the base for the BPA for 2022 of $14,398. As a consequence, she would not be considered a deemed resident under ITA 250(1). Type: ES Topic: Individual residency

115) Nixon Inc. was incorporated as an Ontario corporation in 2013. However, since 2016, all of the Company's business has been carried on outside of Canada. Determine the residency status of Nixon Inc. Answer: As the Company was incorporated in Canada after April 26, 1965, it would be deemed to be a Canadian resident under ITA 250(4). While the problem does not provide enough information to determine this, it is possible that the Company has dual residency with the country or countries where it carries on business. This could result in resorting to a tax treaty to resolve any dual residency issues. Note that the location of where a corporation carries on its business is not relevant to a residency determination. Type: ES Topic: Corporate residency

116) Wolfhowl Ltd. was incorporated in Banff, Alberta in 1961. The company has never carried on business in Canada. However, until 1971, all meetings of the Board of Directors were held in Banff. Since 1971, all board of directors meetings have been held in the U.S. in Wyoming. Determine the residency status of Wolfhowl Ltd. Answer: As Wolfhowl Ltd. was incorporated in Canada prior to April 27, 1965, it will only be considered to be a Canadian resident if it carried on business in Canada or was a factual resident of Canada subsequent to April 26, 1965. As the director's meetings were held in Canada until 1971, this would suggest that the "mind and management" of the Company was in Canada during this period and therefore that the company was a factual resident. As a result the company would be considered a deemed resident of Canada. However, as the mind and management of the corporation is in the United States, it would be considered a factual resident of the U.S. In such dual residency situations, the Canada/U.S. tax treaty tie breaker rules would consider the company to be a resident of the country of incorporation, which in this case would be Canada. Type: ES Topic: Corporate residency

117) Acton Enterprises was incorporated in Montana in 1964. Until 2016, all of the company's directors were residents of Bozeman, Montana, with all meetings held in that city. However, in 2016, all of the directors moved to Calgary, Alberta, with all subsequent meetings held in that city. Determine the residency status of Acton Enterprises for the taxation year ending December 31, 2022. Answer: While Acton Enterprises was not incorporated in Canada, it would appear that the "mind and management" of the Company is now situated in Canada and as a result the company would be considered a factual resident of Canada for its 2022 taxation year. However, as it was incorporated in the U.S., it would also be considered a resident of that country. In such dual residency situations, the tie breaker rules would consider the company to be a resident of the country in which it was incorporated. This would mean that Acton Enterprises would be deemed to be a non-resident of Canada for its 2022 taxation year. Type: ES Topic: Corporate residency

118) Ms. Sonia Nexus is a computer specialist with employment income of $66,000. During the current year she has: • a taxable capital gain on the sale of land of $13,500, • an allowable capital loss on the sale of shares of $24,000, • interest income of $10,250, • rental loss of $6,750, and • a loss from a business carried on as a sole proprietorship of $28,000. In addition, she makes deductible spousal support payments of $14,000 and makes a deductible contribution to her RRSP of $3,000. Determine her net income for the current year and indicate the amount and type of any loss carry overs that are available for the year. Show all of your calculations. Answer: Ms. Nexus' current year net income would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Loss Balance from ITA 3(a) and (b) ITA 3(c) Deductions: Spousal Support RRSP Contributions

$66,000 10,250 $13,500 (24,000)

$76,250

Nil $76,250 (14,000) (3,000)

ITA 3(c) Deductions under ITA 3(d): Rental Loss Business Loss Net Income

$59,250 (6,750) (28,000) $24,500

She has a current year net capital loss n of $10,500 ($24,000 - $13,500). Type: ES Topic: Net income - ITA 3

119) Harvey Nicastro has current year employment income of $45,000. In addition, he has the following additional sources of income, gains, and losses: • A loss from a business carried on as a sole proprietorship of $23,000. • Interest income of $4,500. • A taxable capital gain of $13,500. • An allowable capital loss of $18,200. • Deductible spousal support paid of $24,000. • A rental loss of $14,500. Determine Harvey's minimum current year net income and indicate the amount and type of any loss carry overs for the year. Show all of your calculations. Answer: Mr. Nicastro's current year net income would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Loss Balance from ITA 3(a) and (b) ITA 3(c) Deductions: Spousal Support ITA 3(c) Deductions under ITA 3(d): Business Loss Rental Loss Net Income

$45,000 4,500 $13,500 (18,200)

$49,500

Nil $49,500 (24,000) $25,500 (23,000) (14,500) Nil

At the end of this year, Mr. Nicastro would have a current year net capital loss of $4,700 ($13,500 $18,200). In addition, he would have a current year non-capital loss of $12,000 (($23,000 + $14,500) $25,500). Type: ES Topic: Net income - ITA 3

120) Mr. Jack Bronson makes a $5,000 contribution to his RRSP. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: This transaction involves tax deferral, in that the contribution will be deductible and the earnings on the contribution within the RRSP trust will accumulate on a tax free basis. However, all of these amounts will be taxable when they are withdrawn from the RRSP trust. There may also be tax avoidance. This will happen if Mr. Bronson is taxed at a lower rate when the funds become taxable. There could also have been income splitting had a contribution been made to a spousal or common-law partner RRSP where the spouse or common-law partner was in a lower tax bracket than the contributing spouse. Type: ES Topic: Tax planning

121) Ms. Sarah Bloom convinces her employer to provide her with a private drug plan instead of additional salary. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: This transaction involves tax avoidance in the sense that Ms. Bloom can receive the benefit of having the employer pay for the drug plan insurance premiums without the benefit being included in her employment income as a taxable benefit. In comparison the additional salary would have been taxable. Type: ES Topic: Tax planning

122) Mr. John Lenonovitz is an unemployed poet. As Mr. Lenonovitz has no sources of income, his spouse Natasha, a successful painter, has decided to make contributions to an RRSP on his behalf, rather than making contributions to her own plan. What type of tax planning is involved in this decision? Explain your conclusion. Answer: Natasha is involved in income splitting, tax deferral, and possibly tax avoidance. She is getting the deduction from net income immediately and her spouse will only be subject to income tax on amounts subsequently withdrawn from the RRSP. The tax deferral occurs as the contribution is currently deductible and the earnings on the contribution within the RRSP trust will accumulate on a tax free basis. However, all of these amounts will be taxable when they are withdrawn from the plan. Tax avoidance will occur if the income tax rate to John at the time of withdrawal is less than Natasha's income tax rate for the year in which she claimed an RRSP deduction. Type: ES Topic: Tax planning

123) Ms. Tricia Jones makes contributions to an RPP (Registered Pension Plan) sponsored by her employer. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: Employee contributions to an RPP are deductible in the year in which they are made. The contributions with the RPP trust are not subject to income tax until retirement benefits are received under the terms of the plan. This involves tax deferral and, if Ms. Jones is subject to income tax at a rate that is lower than the rate in effect when he made the contributions then there will also be tax avoidance. Type: ES Topic: Tax planning

124) Mrs. Janice Theil gives $50,000 in Canada Savings Bonds to her 27 year old, unemployed daughter. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: This transaction involves income splitting. It would appear that her daughter is likely in a lower income tax bracket than Mrs. Theil. This means that the interest income on the Canada Savings Bonds will be subject to income tax at a lower rate than would have applied had the bonds not been gifted to the daughter. Type: ES Topic: Tax planning

125) Since it came into power in 2015, the Liberal government has made a number of changes in the Canadian tax system. A brief description of three of these changes follows. Reduction to tax Free Savings Account (TFSA) Contributions Limit — The TFSA provision allows nondeductible contributions to be made to a registered account where earnings accumulate on a tax free basis. Withdrawals from these accounts are not taxed. For 2016 and subsequent years, the maximum annual contribution has been reduced from $10,000 to $5,500. Small Business Tax Rate — For many years, the federal tax rate on active business income earned by CCPCs was 11%, 4 percentage points less than the rate applicable to most other corporate income. In 2015, the government announced that the rate would gradually be reduced to 9%. The rate was reduced to 10.5% for 2016 but the further planned reductions were cancelled. However, in 2017, the planned reductions were re -instated, with the rate going to 10% for 2018 and 9% for 2019. Early Child Educator School Supply Tax Credit — The government introduced a new tax credit equal to 15% of eligible expenditures for supplies (e.g., paper, glue, paint for art projects, etc.). The maximum base for the credit will be $1,000 of eligible supplies in each year. To qualify, the individual taxpayer must have a certificate or diploma in early childhood education. Required: Analyze each of the described changes using two of the qualitative characteristics of tax systems that are listed in your text. For your convenience, the list of qualitative characteristics presented in the text is as follows: • equity or fairness • neutrality • adequacy • flexibility • simplicity and ease of compliance • certainty • balance between sectors • international competitiveness

Answer: Note — The descriptions of these tax measures are significantly simplified. The objective of this problem is to present the basic ideas so they can be understood by students at this introductory level, while still providing a basis for discussion. It is obvious that there is no definitive solution to this problem. The analysis provided below is intended to be no more than suggestive of possible points that could be made. There are, of course, many alternative solutions. Reduction In Contributions to TFSAs Possible comments here would be as follows: Adequacy — The reduction in the 22% tax bracket to 20.5% and several new and expensive programs have increased the government's need for additional revenues. Reducing this limit on the amount of investment income that can be earned tax free will increase revenues. Balance Between Sectors — As this provision is only available to individuals, the ability to earn tax free investment income reduces taxes for this group of taxpayers. A reduction in the maximum contribution has the effect of increasing taxes for the group. This serves to increase the already heavy tax burden on this group of individual taxpayers. Small Business Tax Rate Possible comments here would be as follows: Certainty — The fact that the reductions were scheduled, cancelled, and then reinstated has reduced certainty Neutrality — As changes in the small business rate affect specific taxpayers, the reductions in this rate are not neutral. They favour the shareholders of the corporations that qualify for this rate. Early Child Educator School Supply Tax Credit Possible comments here would be as follows: Simplicity And Ease Of Compliance — The large number of existing tax credits and the fact that new ones are added nearly every year, has greatly increased the complexity of the Canadian tax system. Another addition will exacerbate this problem. Additional complexity is also created by issues such as defining eligible supplies and determining who qualifies for the credit. Neutrality — This credit results in a benefit related to the costs associated with being a particular type of employee. It is not neutral in that it does not provide similar benefits for the costs associated with other types of employment (e.g., construction workers cannot deduct the cost of protective clothing). Type: ES Topic: Qualitative characteristics

126) Mr. Desmond Morris has spent his entire working life with his current employer, the Alcorn Manufacturing Company. In his first years with the Company, he was located in Winnipeg, Manitoba as a production supervisor. More recently, he was transferred to the Company's Calgary based subsidiary, where he has served as a manufacturing vice president until the current year. Early in the current year, Mr. Morris was asked to move to the United States by April 1 to oversee the construction of a new manufacturing operation in Sarasota, Florida. It is expected that when the facility is completed, Mr. Morris will remain as the senior vice president in charge of all of the Florida operations. He does not have any intention of returning to live in Canada during the foreseeable future. On April 1, Mr. Morris left Canada. In preparation for his departure, he had taken care to sell his residence, dispose of most of his personal property, and resign from all memberships in social and professional clubs. However, because Mr. Morris and his wife had three school age dependent children, it was decided that they would remain in Canada until the end of the current school year. As a consequence, Mrs. Morris and the children did not leave Canada until June 30. Until their departure, they resided in a small furnished apartment, rented on a month to month basis. Required: For purposes of determining Canadian income taxes, determine when Mr. Morris ceased to be a Canadian resident and the portion of his annual income which would be subject to Canadian income tax. Explain your conclusions. Answer: Mr. Morris would fall under the part year resident rules and would only be liable for Canadian income taxes on worldwide income during the portion of the year prior to his ceasing to be a resident of Canada. By selling his house, disposing of other personal property, and resigning from various social and professional clubs, Mr. Morris's actions support an intention to establish that he had made a clean break from Canada as of April 1. However, S5-F1-C1 indicates that, in general, the CRA will view an individual as becoming a non-resident on the latest of three dates: • The date the individual leaves Canada. • The date the individual's spouse or common-law partner and dependants leave Canada. • The date the individual becomes a resident of another country. Because of the continued presence in Canada of the spouse and dependent children of Mr. Morris, he would be considered a resident of Canada until June 30, the latest of the relevant dates. In terms of income tax consequences, he would be subject to Canadian income taxes on his salary until March 31. He would then be subject to U.S. taxes on income earned in that country after March 31. However, he would also be liable for Canadian income taxes during the period April 1 through June 30. While he would be eligible for a tax credit for U.S. taxes paid on this income, the fact that Canadian taxes are generally higher than those in the U.S. would probably result in a liability for Canadian taxes during this period until his family departs from Canada. Note that the facts suggest that he became a nonresident of Canada on his departure April 1 which when properly supported would avoid some of these difficulties. Type: ES Topic: Residency after departure from Canada

127) Mr. Valone is a U.S. citizen. However, since obtaining permanent residence status in Canada in 2008, he has been employed on a full time basis in London, Ontario. His employer is a Canadian subsidiary of a multi-national corporation that operates in a number of different countries. The head office of the company is in the United States. Mr. Valone has been very successful in his position with the Canadian subsidiary. Based on this, he has been offered a promotion which involves a significant increase in salary. However, this promotion is conditional on his moving to the company's head office in Philadelphia no later than March 1, 2022. Given the sizable increase in remuneration, Mr. Valone finds this offer too good to pass up. As he is a U.S. citizen, he has no difficulty getting the appropriate documentation to establish his residency in the U.S. He relinquishes his Canadian driver's licence, as well as his provincial health care card. As required by his employer, he is at his desk in the new work location in the U.S. on March 1, 2022. Mr. Valone and his spouse have two children who are attending a private school in London Ontario. The current semester at this school lasts until June 15, 2022. In order to provide continuity in their education, Mrs. Valone decides that she and the children will remain in Canada until the current semester is finished. They depart on June 20, 2022. The real estate market in London has been somewhat slow of late. As a consequence, the Valone's house is not sold until October 5, 2022. Required: Determine when Mr. Valone ceased to be a resident of Canada and the portion of his annual income which would be subject to Canadian income taxes. Explain your conclusions.

Answer: Solution According to Textbook Mr. Valone would be considered a part year resident and would only be subject to Canadian income tax on worldwide income during the portion of the year prior to his ceasing to be a resident of Canada. S5-F1-C1 indicates that, in general, the CRA will view an individual as becoming a non-resident on the latest of three dates: • The date the individual leaves Canada. • The date the individual's spouse or common-law partner and dependants leave Canada. • The date the individual becomes a resident of another country. While Mr. Valone departed from Canada on March 1, 2022, he will be considered a Canadian resident until his family's departure on June 20, 2022 if he abides by the CRA administration policy. The fact that he did not sell his Canadian home until that date would provide additional support. His Canadian salary from January 1, 2022 to March 1, 2022 would be subject to Canadian income tax. In addition, his U.S. salary for the period March 1, 2022 through June 20, 2022 will be subject, first to U.S. income tax, and Canadian income tax. In calculating his Canadian income tax, he will receive a credit for the U.S. taxes which he has paid on this income. However, because Canadian tax rates at a given income level are usually higher than those which prevail in the U.S., it is likely that he will be required to pay some Canadian income taxes in addition to U.S. income tax. Note To Instructors The preceding solution reflects the content of the text with respect to departures from Canada and students should be evaluated on that basis. However, S5-FI-C1 qualifies the general departure rules as follows: Paragraph 1.22 - An exception to this will occur where the individual was resident in another country prior to entering Canada and is leaving to re-establish his or her residence in that country. In this case, the individual will generally become a non-resident on the date he or she leaves Canada, even if, for example, his or her spouse or common law partner remains temporarily behind in Canada to dispose of their dwelling place in Canada or so that their dependants may complete a school year already in progress. On the assumption that Mr. Valone was a resident of the U.S. prior to his working years in Canada, this exception would mean that he would cease to be a resident of Canada on March 1, 2021, the date that he departs from Canada. The textbook does not deal with the residency rules of countries other than Canada. Although this solution concludes that June 20 is the date residency is terminated in Canada, it is probable that the foreign jurisdiction (the U.S.) would consider Mr. Valone to be resident under their own rules effective March 1. In effect, the period between March 1 and June 20 would become a dual residency period. We would not expect students to come to this conclusion, but include this to illustrate the complexities of international issues in taxation. Type: ES Topic: Residency after departure from Canada

128) For each of the following persons, determine the residency status of the individuals, whether they will be subject to income tax in Canada and the income that would be subject to Canadian income tax in 2022. Case A — John is a citizen of the U.K. who has landed immigrant status in Canada. He has lived and been employed in Canada for over 15 years. In 2021, he won $1.5 million in a lottery. He has decided to use the winnings to spend two years touring Europe and Asia. His wife and children will remain at the family home in New Brunswick. He was not physically present in Canada during any part of 2022. Case B — In 2021, Jane's Canadian employer asked her to spend three years working in their Hong Kong office. Her employment contract requires her to return to Canada in 2024. Jane severs all of her residential ties with Canada and moves to Hong Kong in November, 2021. She is not physically present in Canada during any part of 2022. Case C — Laura is married to a member of the Canadian armed forces who is serving in Ghana. She is a citizen of Ghana and has never visited Canada. She is not subject to income tax in Ghana because of an exemption in the tax treaty between Canada and Ghana as a result of her spouse's employment with the Canadian government. Case D — Martha Mendoza is a U.S. citizen who lives in Buffalo, New York. In 2022 she is employed 5 days per week in Fort Erie, Ontario. Her 2022 salary is $52,000. In addition, she has $2,000 (Canadian) of interest on a savings account with a U.S. bank. Case E — Barry Long is a Canadian citizen who has lived and worked in Canada all of his life. He is offered a significant increase in salary if he accepts a permanent employment position in Spain. He accepts the offer and moves to Spain on March 1, 2022, While he immediately establishes residency in Spain, he is not joined by his wife and children until July 1, 2022. As they are unable to sell their Canadian home at an acceptable price, the property is rented under a long-term residential lease to an arm's length person.

Answer: Case A John's 2 year tour would be considered a temporary absence from Canada. Given the facts, it appears his intent is not to permanently sever residential ties with Canada. This position is evidenced by the fact his tour is for a limited time and he will not be establishing residency in another country. John remain a factual Canadian resident during his tour and would be subject to Canadian income tax on his worldwide income during 2022. Case B Because she has an employment contract that requires her to return to Canada in three years, she will be viewed as having retained Canadian residency. Although she has severed her ties with Canada, the requirement to return would show that she does not intend to permanently leave Canada. Jane will be subject to Canadian income tax on her worldwide income during 2022. Case C As she is exempt from taxation in Ghana because she is the spouse of a deemed Canadian resident, Laura would be a deemed resident of Canada for income tax purposes in 2022 [(ITA 250(1)(g)]. Laura would be subject to Canadian income tax on her worldwide income in 2022. Case D Commuting from the U.S. for employment purposes does not make an individual a deemed resident under the sojourner rules. Therefore, Martha would be considered a non-resident of Canada. She would be exempted by the Canada/U.S. tax treaty under ITA 2(3) if the amount of employment income was less than $10,000, or if she was physically present in Canada for less than 183 days. Her employment income was more than $10,000 and, because she was working 5 days a week, it appears that she was physically present in Canada for more than 183 days. Given these facts, she would not be exempted from Canadian taxation because of the Canada/U.S. tax treaty. Martha would be subject to Canadian income tax on her 2022 Canadian employment income. She would not be subject to Canadian income tax on her U.S. savings account interest since she is a non-resident of Canada. Case E Residency terminates at the latest of: • the date the individual leaves Canada; • the date the individual's family leaves Canada; and • the date that individual establishes residency elsewhere. As Barry's family did not leave Canada until July 1, 2022, Barry would be considered a Canadian resident until that date if he accepts to choose the CRA administrative policy. Provided he has no intention of returning to Canada, he would be subject to Canadian income tax on his worldwide income for the period January 1, 2022 through July 1, 2022. In addition, he would be subject to Canadian income tax on his 2022 rental income. The rental income will be subject to Canadian income tax under Part XIII (discussed in Chapter 20). Type: ES Topic: Residence of individuals - mini-cases

129) Indicate which of the corporations described in the following Cases would be considered factual or deemed residents of Canada or deemed non-residents for the current year. Explain the basis for your conclusion. Case A — Bonix Ltd. was incorporated in Canada in 1982. While the company carried on business in Canada for a number of years, its central management and control relocated to the United States in 2009. Case B — Dorad Inc. was incorporated in Ohio in 2004. For several years, all of its directors were residents of Canada, with board meetings being held in Windsor, Ontario. However, in 2009, all of the directors moved to Toledo, Ohio where all meetings are held. Case C — Upton Inc. was incorporated in Delaware in 2009. However, the head office of the corporation is in Halifax, Nova Scotia. All of the directors of the corporation are Canadian residents and all meetings of the board of directors are held in Halifax. Case D — Carlin Inc. was incorporated in Canada in 2006. However, its directors have always been residents of the United States, where Board Of Directors meetings are held. Answer: Canada/U.S. Tax Treaty Tie Breaker Rule In cases of dual residency for corporations, where a corporation could be considered a resident of both countries, the Canada/U.S. tax treaty resolves the situation by deeming the corporation to be resident in the country in which it was incorporated. Case A While Bonix is no longer carrying on business in Canada, it was incorporated in Canada and, as a result, it is deemed to be a resident of Canada. However, as the mind and management of the Company is currently situated in the United States, the Company would be a factual resident of the U.S. Using the tax treaty tie breaker rule, Bonix will be considered a resident of Canada only. Case B Dorad Inc. was not incorporated in Canada and its mind and management are not currently situated in Canada. As a result the company is neither a deemed or factual resident of Canada. Dorad would be considered a non-resident of Canada. Case C The central mind and management of Upton Inc. is situated in Canada and, as a result, the company is a factual resident of Canada. However, as Upton Inc. was incorporated in the U.S., it is also a resident of the U.S. Using the tax treaty tie breaker rule, Upton Inc. will be considered a resident of the U.S. and a deemed non-resident of Canada. Case D Carlin Inc. was incorporated in Canada which means Carlin is a deemed resident of Canada. However, because the central mind and management of the Company is in the U.S., it is a factual resident of the U.S. Using the tax treaty tie breaker rule, Carlin Inc. will be considered a resident of Canada only. Type: ES Topic: Residence of corporations - mini-cases

130) For each of the following individuals and corporations, determine their residency status. Your answer should explain whether the individual or corporation is a Canadian resident, what income would be subject to Canadian income tax and the basis for your conclusions. A. Molly London was born in Salmon Arm, British Columbia. On October 31, she quit her job, left Salmon Arm and moved all her belongings to San Diego, California. B. Daryl Bennett is a Canadian citizen living and working in Sault Ste. Marie, Michigan. He has a summer cottage in Sault Ste. Marie, Ontario, where he spent July and August. As his only sister lives in Sault Ste. Marie, Ontario, he spent a total of 27 days during the year staying with her in her home. C. Tweeks Inc. was incorporated in Vermont in 1981 by two U.S. citizens who were residents of Quebec. All of the directors are residents of Quebec and all meetings of the Board of Directors have been held in Montreal since incorporation. D. Bordot Industries Ltd. was incorporated in British Columbia on September 29, 1974. However, the directors of the corporation have always lived in Blaine,Washington. All of their meetings have been held at a large waterfront property just south of Blaine. Answer: A. Molly London would be considered a part year resident of Canada until October 31, the date of her departure and would be subject to Canadian income tax on her worldwide income for this period. Since she was not visiting Canada prior to her departure the sojourning rules would not have applied. B. Daryl Bennett is a factual resident of the U.S. and a non-resident of Canada. would not be considered a Canadian resident. He could have been subject to the deemed residency sojourner rule had he spent 183 days or more visiting Canada but that is not the case for the current year. As a result, none of his income would be subject to Canadian income tax. His Canadian citizenship would not affect his residency status. C. The company is a factual resident of Canada since the central mind and management are situated in Canada. The company is also a resident of the U.S. since it was incorporated in the U.S. As a result the company is a dual resident (resident of both Canada and the U.S.). Given this dual residency, the tax treaty tie-breaker rules resolve the issue by considering the company to be a resident of the U.S. only where the company was incorporated/ The company would therefore be a deemed non-resident of Canada. D. Bordot Industries would be deemed to be a resident of Canada because it was incorporated in Canada subsequent to April 26, 1965 [ITA 250(4)(a)]. However, because the central mind and management of the Company is in the U.S., the company would be a factual resident of the U.S. As a result the company is a dual resident. The tax treaty tie-breaker rules would resolve the situation by considering the Company a resident of Canada where it was incorporated. This would make Bardot Industries a resident of Canada, with its worldwide income taxed in Canada. It would be a non-resident of the U.S. Type: ES Topic: Residence of individuals & corporations - mini-cases

131) Pertinent facts are given for a different individual or corporation in each of the Parts of this problem. For each Part, indicate whether or not the individual or corporation would be considered a resident of Canada for income tax purposes during the current year. Briefly explain your conclusion. Part A — Dorothy is married to Jack, who is a member of the Canadian armed forces serving in Indonesia. Other than a brief visit to Jack's parents' home in Halifax, she has never been to Canada in her life. Because Jack is a member of the Canadian armed forces, neither he nor his wife is subject to taxation in Indonesia. Part B — Alice is a U.S. citizen living in Seattle,Washington. While she leaves many of her belongings at her parent's home in Seattle, she spends at least four days every week living with her boyfriend in Burnaby, British Columbia. They plan to be married at some future date. Part C — Last year, John transferred to the Cayman Islands office at the request of his Canadian employer for a three year period. His three year employment contract calls for him to return to work in Canada after its completion. On his departure from Canada, he severed all residential ties with Canada except for his medicare coverage. Part D — Millicent is a U.S. citizen who, until last year, had lived and worked in Canada as a landed immigrant for over 20 years. Last year, after winning $2 million in an Ontario lottery, she left Canada on a two year pleasure trip that will take her to virtually every country in the world. Her husband and children, all Canadian citizens, continue to live at the family home in Port Hope, Ontario. Part E — Berkly Management Inc. was incorporated in Alberta in 1964. Until 1990, its only director resided in Alberta. In that year, the director was replaced by an individual resident in Fresno, California. Part F — Lorris Ltd. was incorporated in Wisconsin in 1986. Until 1995, all of the directors of the corporation lived and met in Kenora, Ontario. Beginning in 1995, all of the directors have been residents of Green Bay, Wisconsin where all the meetings are currently held.

Answer: Part A As she is exempt from income tax in Indonesia because she is related to a deemed resident of Canada, Dorothy would be a deemed resident of Canada for income tax purposes during the current year under ITA 250(1)(g). Part B As she is present in Canada on a temporary basis for 183 days or more in the year she would be considered a sojourner. Under ITA 250(1)(a), this would make her a Canadian resident for income tax purposes for all of the current year subject to the tax treaty between Canada and the U.S. Part C Because he has an employment contract that requires him to return to Canada, he will be a Canadian resident for income tax purposes during the current year. Although he has severed his ties with Canada, the requirement to return would show that he does not intend to permanently leave Canada. Part D Millicent would be a factual resident of Canada for income tax purposes during the current year. An individual is not considered to have departed from Canada until the latest of the departure date, the date of departure for their spouse and children, and the date on which residence is established in a different country. As her family is staying in Canada and Millicent will not be establishing residency in another country, she will remain a Canadian factual resident during her trip. Part E ITA 250(4)(c) deems a corporation incorporated in Canada prior to April 27, 1965 to be resident in Canada if it either carried on business, or was factually resident in Canada, in any taxation year ending after April 26, 1965. Since those conditions were met the company would be deemed to be a resident of Canada. The company is also a factual resident of the U.S. since its central management and control is situated in the U.S. In this case the company is therefore a dual resident. The tie-breaker rule of the tax treaty deems the corporation to only be resident in the country in which it is incorporated. Given this, Berkley Management would be a resident of Canada. Part F The company was not incorporated in Canada and the central mind and management of the company is not in Canada. As a result the company the company would not be a deemed or factual resident of Canada/ Lorris Ltd. is a non-resident of Canada. Type: ES Topic: Residence of individuals & corporations - mini-cases

132) The following two Cases make different assumptions with respect to the amounts of income and deductions of Ms. Leslie Burke for the current taxation year: Case A — Ms. Burke had employment income of $17,000 and rental income of $8,500. She carries on a business as a sole proprietor and experienced a current year business loss of $12,300. As the result of dispositions of capital property, she realized taxable capital gains of $17,400 and allowable capital losses of $19,200. Her Subdivision e deductions for the year totalled $6,300. Fortunately for Ms. Burke, she won $1,000,000 in a lottery on March 3. Case B — Ms. Burke had employment income of $42,100, interest income of $8,200, and a loss from a business she carries on as a sole proprietor of $51,000. As the result of dispositions of capital property, she realized taxable capital gains of $22,400 and allowable capital losses of $19,200. Her Subdivision e deductions for the year amounted to $4,200. Required: For both Cases, calculate Ms. Burke's current year net income. Indicate the amount and type of any current year loss carry overs.

Answer: Case A The Case A solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance From ITA 3(a) And (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income for the current year

$17,000 8,500 $17,400 (19,200)

$25,500

Nil $25,500 (6,300) $19,200 (12,300) $ 6,900

In this Case, Ms. Burke has a current year net capital loss of $1,800 ($19,200 - $17,400). The lottery winnings are not considered a source of income. Case B The Case B solution would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance From ITA 3(a) And (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income for the current year

$42,100 8,200 $22,400 (19,200)

$50,300

3,200 $53,500 (4,200) $49,300 (51,000) Nil

In this Case, Ms. Burke's current year net income is nil. There would be a current year non-capital loss of $1,700 ($51,000 - $49,300). Type: ES Topic: Net income - ITA 3

133) The following two Cases make different assumptions with respect to the amounts of income and deductions that are available to Carl Suzak, a Canadian resident, for the current year. Case A — Carl had employment income of $126,100, as well as income from a business carried on as a sole proprietorship of $14,100. A rental property owned by Carl experienced a loss of $4,600. Dispositions of capital property during the current year had the following results: Capital Gains $56,400 Capital Losses 72,300 In compliance with the terms of his divorce agreement, Carl paid deductible spousal support of $7,200. In addition to the preceding items, Carl had a winning lottery ticket which resulted in his receiving a prize of $562,000. Case B — Carl had employment income of $89,000, interest income of $3,100, and rental income of $8,600. Carl also carried on a business as a sole proprietor. Unfortunately, during the current year, it experienced a loss of $187,400. Dispositions of capital property during the current year had the following results: Capital Gains $46,200 Capital Losses 26,300 Also during the current year, Carl made deductible contributions of $8,600 to his RRSP. Required: For each Case, calculate Carl's current year net income. Indicate the amount and type of any current year loss carry overs.

Answer: Case A The Case A solution would be calculated as follows: Income under ITA 3(a): Employment Income Business Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($56,400)] Allowable Capital Losses [(1/2)($72,300)] Balance from ITA 3(a) and (b) Spousal Support Payments ITA 3(c) Deduction under ITA 3(d): Rental Loss Net Income

$126,100 14,100

$140,200

$28,200 (36,150) $140,200

Nil (7,200) $133,000 (4,600) $128,400

In this Case, Carl has a current year net capital loss of $7,950 ($36,150 - $28,200). The lottery winnings would not be included in income because it is not a source of income. Case B The Case B solution would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Rental Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($46,200)] Allowable Capital Losses [(1/2)($26,300)] Balance from ITA 3(a) and (b) Deductible RRSP Contribution ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$89,000 3,100 8,600

$100,700

$23,100 (13,150)

9,950 $110,650 (8,600) $102,050 (187,400) Nil

In this Case, Carl has a current year non-capital loss of $85,350 ($187,400 - $102,050). Type: ES Topic: Net income - ITA 3

134) Karla Gomez is a Canadian resident who lives in Toronto. In the following two Cases, different assumptions are made with respect to the amounts and types of current year income and deductions. Case One — Karla had employment income of $62,350. Unfortunately, her flower shop business that she carries on as a sole proprietor suffered a business loss of $115,600. In contrast, she had a very good year in the stock market, realizing the following gains and losses: Capital Gains $97,650 Capital Losses 5,430 Also during the current year, Karla made deductible contributions of $4,560 to her RRSP. Case Two — Karla had employment income during the year of $45,600, business income of $27,310 and a rental loss of $4,600. As part of a divorce agreement from a previous year, Karla paid spousal support of $7,200 during the current year to her former common-law partner, Lucretia Smart. She realized the following results in the stock market during the year: Capital Gains $31,620 Capital Losses 41,650 While Karla does not gamble on a regular basis, she enjoys the ambiance of the local casino. Given this, two or three times a year, she spends an evening dining and gambling with friends there. In March of this year, she got very lucky, winning $46,000 by hitting a slot machine jackpot. Required: For each Case, calculate Karla's current year net income. Indicate the amount and type of any current year loss carry overs.

Answer: Case One The Case One solution would be calculated as follows: Income under ITA 3(a): Employment Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($97,650)] Allowable Capital Losses [(1/2)($5,430)] Balance from ITA 3(a) and (b) Subdivision e Deduction: Deductible RRSP Contribution ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$62,350

$48,825 (2,715)

46,110 $108,460 (4,560) $103,900 (115,600) Nil

In this Case, Karla has a current year non-capital loss of $11,700 ($115,600 - $103,900). Case Two The Case Two solution would be calculated as follows: Income under ITA 3(a): Employment Income Business Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($31,620)] Allowable Capital Losses [(1/2)($41,650)] Balance from ITA 3(a) and (b) Subdivision e Deduction: Spousal Support Payments ITA 3(c) Deduction under ITA 3(d): Rental Loss Net Income

$45,600 27,310

$72,910

$15,810 (20,825)

Nil $72,910 (7,200) $65,710 (4,600) $61,110

In this Case, Karla has a current year net capital loss of $5,015 ($20,825 - $15,810). As Karla's gambling activity does not appear to be substantial enough to be considered a business, the $46,000 in winnings would not be considered a source of income. Type: ES Topic: Net income - ITA 3

135) The following four Cases make different assumptions with respect to the amounts of income and deductions of Kirsten for the current year:

Employment Income Business Income (Loss) Rental Income (Loss) Taxable Capital Gains Allowable Capital Losses Subdivision e Deductions

Case A $75,660 (15,990) 7,020 41,080 (16,120) (5,330)

Case B $107,380 (10,920) 15,860 20,280 (30,420) (7,020)

Case C $60,710 (80,990) 3,380 15,080 (13,910) (15,080)

Case D $43,420 (60,060) (23,790) 30,030 (32,110) (7,280)

Required: For each Case, calculate Kirsten's current year net income. Indicate the amount and type of any current year loss carry overs, or state that no carry overs are available.

Answer: Case A The Case A solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$75,660 7,020 $41,080 (16,120)

$ 82,680

24,960 $107,640 (5,330) $102,310 (15,990) $ 86,320

In this Case, Kirsten has no current year loss carry overs. Case B The Case B solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$107,380 15,860 $20,280 (30,420)

$123,240

Nil $123,240 (7,020) $116,220 (10,920) $105,300

In this Case, Kirsten has a current year net capital loss of $10,140 ($30,420 - $20,280).

Case C The Case C solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$60,710 3,380 $15,080 (13,910)

$64,090

1,170 $65,260 (15,080) $50,180 (80,990) Nil

In this Case, Kirsten would have a current year non-capital loss of $30,810 ($80,990 - $50,180). Case D The Case D solution would be calculated as follows: Income under ITA 3(a): Employment Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Rental Loss Net Income

$43,420 $30,030 (32,110)

Nil $43,420 (7,280) $36,140 (60,060) (23,790) Nil

Kirsten would have a current year non-capital loss of $47,710 ($60,060 + $23,790 - $36,140) and current year net capital loss of $2,080 ($32,110 - $30,030). Type: ES Topic: Net income - ITA 3

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 2 Procedures and Administration 2.1 Online Exercises 1) An individual can request that an employer reduce the amounts withheld for income taxes. What conditions must be met for this request to be granted? Provide an example of a situation where the request would be granted. Answer: For the CRA to grant this request, the reason for the reduction must be documented in a reasonable fashion and it must be recurring. Form T1213 would be required to be filed with the CRA. Common examples that lead to a request for a reduction include RRSP contributions, child care expenses and deductible spousal support payments. Type: ES Topic: Administration - reduction in withholdings

2) In some situations, an employee may request an increase in the amounts that are withheld for future income taxes. What circumstances might lead an employee to make such a request? Answer: While there are other possibilities, the ones that are mentioned in the text are: • Normal withholding is based on rates in a low tax rate province, but the individual resides in a high tax rate province (e.g., the individual works in Alberta, but lives in Saskatchewan). • An individual receives large amounts of taxable spousal support payments that are not subject to withholding. Type: ES Topic: Administration - increase in withholdings

3) Under what circumstances must an individual make income tax instalment payments during the current year? Answer: Individuals are required to make instalment payments if their net tax owing is greater than $3,000 ($1,800 in Quebec) in the current year and in either of the two preceding years. Type: ES Topic: Administration - individual tax instalments

4) If an individual is required to make quarterly instalment payments, how is the required amount of the instalments determined? Answer: An individual can choose from three different methods in determining their instalment payments: Method 1 - The instalments could be based on one-quarter of the estimated net tax owing for the current year. Method 2 - The instalments could be based on one-quarter of the net tax owing for the first preceding year. Method 3 - The first two instalments could be based on one-quarter of the net tax owing for the second previous year, with the third and fourth instalments based on one-half of the net tax owing for the first preceding year, less the sum of the first two instalments paid. Type: ES Topic: Administration - individual tax instalments

5) By making all instalments on the basis of the CRA's instalment reminder, the taxpayer is assured that no interest will be assessed for deficient instalments. However, this may not be the best alternative for making instalment payments. Explain why this is true. Answer: The CRA's instalment reminder generally results in total instalment payments equal to the net tax owing in the first preceding year. If the estimated net tax owing for the current year is less, lower instalments could be paid using the estimated current year net tax owing as the base. Type: ES Topic: Administration - individual tax instalments

6) One of your clients has received an instalment notice and has asked your advice as to whether instalments should be made. Provide the requested advice. Answer: If the client has debt on which he is paying non-deductible interest (e.g., interest on personal use credit cards), you should determine the applicable rates. If the client is paying interest at a rate in excess of the rate charged on deficient instalments (i.e., the prescribed rate plus 4%), the client might consider paying down the debt instead of making instalment payments. Alternatively, if the interest rate on the personal debt is lower, then an effort should be made to pay instalments. The excess penalty under ITA 163.1 would also have to be taken into consideration if the instalment payments are large. Type: ES Topic: Administration - individual tax instalments

7) How is interest on late instalments calculated? Answer: Interest on later instalments is calculated using the highest prescribed rate (the regular rate plus 4%) applied for the period from the date the instalment is due until the balance due date for the income tax payable for the year. Type: ES Topic: Administration - interest on late or deficient instalments

8) On April 30 of the current year, her filing due date, Nicole Houde finds that she has a significant tax balance owing. She will not be able to pay this until the beginning of July. She doesn't want to file her return until she has the funds available to pay the balance. What advice would you give Ms. Houde in this regard? Answer: She should file the return on the due date, regardless of whether she has the funds to pay the balance owing. Whether or not she files, she will have to pay interest on the balance owing. However, if she delays filing until early July, she will not only have to pay the non-deductible interest, she will also be subject to an immediate penalty of 5% of the balance owing, plus an additional 1% per complete month for a maximum of 12 months. Filing in July will result in a penalty of 7% for the period from April 30 to June 30. If, within the last three years, there has been another late filing of her return, the penalty will double to an immediate 10%, plus 2% for each complete month. The monthly penalty will be assessed for a maximum of 20 months. Type: ES Topic: Administration - penalties and interest for individuals

9) Under what circumstances must a corporation make income tax instalment payments during its current taxation year? Answer: Corporations are generally required to make either monthly or quarterly instalment payments throughout their taxation year. The only exception to this is when the estimated taxes payable for the current year, or the taxes payable in the first preceding year, are $3,000 or less. Type: ES Topic: Administration - corporate tax instalments

10) If a corporation that is not a small CCPC is required to make instalment payments on their income taxes, how are the required amounts determined? Answer: A corporation that is not a small CCPC can choose from three different methods in determining their instalment payments: Method 1 - The instalments can be based on one -twelfth of the estimated taxes payable for the current taxation year. Method 2 - The instalments can be based on one -twelfth of the taxes payable for the first preceding taxation year. Method 3 - The first two instalments can be based on one -twelfth of the taxes payable for the second preceding year. The remaining 10 instalments will then be based on the taxes payable for the first preceding year reduced by the amounts paid in the first two instalments, with the net amount divided by 10. Type: ES Topic: Administration - corporate tax instalments

11) If a corporation that is a small CCPC is required to make quarterly instalment payments. How are the required instalments determined? Answer: A corporation that is a small CCPC can choose from three different methods in determining their instalment payments. Method 1 - The instalments can be based on one -fourth of the estimated taxes payable for the current taxation year. Method 2 - The instalments can be based on one -fourth of the taxes payable for the first preceding taxation year. Method 3 - The first instalment can be based on one -fourth of the taxes payable for the second preceding taxation year. The remaining three instalments will then be based on the taxes payable for the first preceding taxation year reduced by the amount paid in the first instalment, with the net amount divided by 3. Type: ES Topic: Administration - corporate tax instalments

12) A corporation's balance due date is not the same as its filing due date. Explain how these dates differ. Answer: Corporate income tax returns must be filed within six months of the end of the corporation's taxation year. In contrast, the balance due date is either 2 months after the end of the corporation's taxation year (general rule) or 3 months after the end of the corporation's taxation year (qualifying CCPCs). As a consequence, payment is always required prior to the due date for filing the corporate income tax return. Type: ES Topic: Administration - corporate filing requirements

13) The normal reassessment period is 3 years for individuals and CCPCs and 4 years for other corporations. Indicate two situations where a reassessment can occur outside the normal reassessment period. Answer: There are a number of situations that could be cited. The ones listed in the text are as follows: • Reassessment can occur at any time if the taxpayer or person filing the return has made any misrepresentation that is attributable to neglect, carelessness or wilful default, or has committed any fraud in filing the return or in supplying information under the ITA. • Reassessment can occur at any time if the taxpayer has filed a waiver of the normal time limit. A taxpayer can revoke such a waiver at any time but it remains valid for six months from the date of revocation. • Reassessment can occur outside the normal reassessment period if a request has been made to reduce taxes, interest, or penalties. The ability to use this provision is limited to ten years measured from the end of the relevant taxation year. The ability to request a refund however is generally restricted to individuals and Graduated Rate Estates (GRE). • Reassessment can occur beyond the normal reassessment period when reassessment within the normal period affects a balance outside of this period. • Reassessment can occur outside the normal reassessment period in situations where the taxpayer is claiming certain specified deductions, such as a loss carry back for that year. Type: ES Topic: Administration - normal reassessment period

14) Cases can be heard by the Tax Court of Canada using either the general or the informal procedures. How do these two procedures differ? Answer: The general and informal procedures differ as follows: • Under the informal procedures, the total federal income tax and penalties for a specific year must be less than $25,000, or the loss in question for a specific year is less than $50,000. • Under the informal procedures, an individual can represent themselves, or be represented by someone other than a lawyer (e.g., an accountant). • Under the informal procedures, the taxpayer cannot be assessed court costs. • Under the informal procedures, if the taxpayer loses, there is no appeal to a higher court. • Informal procedures usually resolve a dispute much more quickly than the general procedures. Type: ES Topic: Administration - tax court of Canada procedures

15) Briefly describe the difference between tax evasion and tax avoidance. Answer: Tax evasion is described on the CRA web site as follows: Tax evasion occurs when an individual or business intentionally ignores Canada's tax laws. This includes falsifying records and claims, purposefully not reporting income, or inflating expenses. A less clear description of tax avoidance is as follows: results when actions are taken to minimize tax, while within the letter of the law, those actions contravene the object and spirit of the law. Tax avoidance would include all unacceptable and abusive tax planning whereas aggressive tax planning would be considered to "push the limits" of acceptable tax planning. Type: ES Topic: Administration - tax evasion vs tax avoidance

16) If an individual believes that the amount of income taxes withheld by an employer is greater than the amount that the individual will have to pay in a particular year, a request to the CRA can be made to authorize the employer to reduce the source deductions no matter the reason for the difference. Answer: FALSE Explanation: The deficiency must be recurring, not just for a particular year. Type: TF Topic: Administration - reduction in withholdings

17) Because the taxation year of an individual must be based on the calendar year, all individuals will have the same filing due date. Answer: FALSE Explanation: There are two filing due dates for individuals. April 30 or, for individuals, their spouses or common earning business income, June 15. In addition, deceased individuals may also have a different filing date. Type: TF Topic: Administration - individual due dates

18) If an individual dies after October in a particular taxation year, the legal representatives must file the income tax return for that year by the later of his normal filing due date and six months after the date of death. Answer: TRUE Type: TF Topic: Administration - individual due dates

19) If quarterly instalments must be paid by an individual, they can be calculated as one-quarter of the net tax owing for the first preceding year. Answer: TRUE Type: TF Topic: Administration - individual tax instalments

20) If an individual is required to make income tax instalment payments, it is acceptable to base each payment on one-quarter of the estimated income tax payable for the current year. Answer: FALSE Explanation: The acceptable approach is to use one-quarter of the net tax owing for the current year. Type: TF Topic: Administration - individual tax instalments

21) The interest rate applicable on refunds to individuals is 4 percentage points less than the interest rate applicable on amounts owing to the CRA. Answer: FALSE Explanation: The interest rate applicable on refunds to individuals is 2 percentage points less than the interest rate on amounts owing to the CRA. Type: TF Topic: Administration - interest on refunds and/or amounts owing (Individuals)

22) The penalty for an individual making insufficient instalment payments is 5% of the total unpaid tax at the filing date, plus 1% for each complete month to a specified maximum number of months. Answer: FALSE Explanation: There is no penalty for late payment of instalments. The 5% penalty is for late filing of the income tax return. Type: TF Topic: Administration - interest on late or deficient instalments

23) Without regard to whether an individual's filing due date is April 30 or June 15, any income tax balance owing must be paid by April 30. Answer: TRUE Type: TF Topic: Administration - individual due dates

24) All corporations must file their income tax returns no later than six months after the end of their taxation year, and pay any balance of income tax owing no later than three months after the end of their taxation year. Answer: FALSE Explanation: Corporations, other than some CCPCs, must pay the balance of tax owing no later than two months after the end of their taxation year. Type: TF Topic: Administration - corporate filing requirements

25) The notice of objection for a corporation must be filed within 90 days from the date of mailing of the notice of assessment. Answer: TRUE Type: TF Topic: Administration - notice of objection

26) Interest and penalties may be waived or reduced in extraordinary circumstances, such as those involving natural disasters or serious illness. Answer: TRUE Explanation: Taxpayer relief provisions Type: TF Topic: Administration - taxpayer relief provisions

27) Which of the following statements is NOT correct? A) If an individual has business income during the year, the due date for filing the income tax return is June 15 of the following calendar year. B) An income tax return may be required of an individual, without regard to their age. C) If an individual has no taxable income for the year, they never have to file an income tax return. D) If an individual sells a capital property during the year, they are required to file an income tax return, even if there is no gain or loss on the transaction. Answer: C Explanation: C) If an individual has no taxable income for the year, they do not have to file an income tax return. This is because they would presumably have no income tax payable but there are other reasons why an income tax return has to be filed. Type: MC Topic: Administration - individual filing requirements

28) Which of the following statements is correct? A) When an individual dies in a year, an income tax return must be filed for that year within 6 months of the date of death. B) Only residents of Canada are required to file Canadian income tax returns. C) An individual with business income during the year must pay any income tax balance owing by June 15 of the following year. D) An individual sole proprietor with a business loss for the year may not have to file an income tax return for the year. because there would be no income tax payable. Answer: D Explanation: D) An individual sole proprietor with a business loss for the year may not have to file an income tax return for the year. because there would be no income tax payable. Type: MC Topic: Administration - individual filing requirements

29) With respect to the filing of an individual income tax return, which of the following statements is correct? A) An individual is required to file an income tax return if their only source of income is business income, even if no tax is payable. B) An individual is required to file an income tax return if they have reached the age of 18 by the end of the year. C) If an individual has disposed of a capital property during the year, they are required to file an income tax return, even if no tax is payable. D) An individual is not required to file an income tax return if no tax is payable for the year. Answer: C Explanation: C) If an individual has disposed of a capital property during the year, they are required to file an income tax return, even if no tax is payable. Type: MC Topic: Administration - individual filing requirements

30) For the 2022 taxation year, John Bookman had a taxable capital gain of $45,000 and a business loss of $45,000, resulting in net and taxable income of nil. Which of the following statements is correct? A) John is not required to file an income tax return for 2022 . B) John must file an income tax return on or before June 15, 2023. C) John must file an income tax return on or before December 31, 2023. D) John must file an income tax return on or before April 30, 2023. Answer: B Explanation: B) John must file a tax return on or before June 15, 2023. Type: MC Topic: Administration - individual filing requirements

31) John Barron carries on a business as a sole proprietor and plans to file his 2022 income tax return on June 15, 2023. His balance-due day is: A) April 30, 2022. B) April 30, 2023. C) June 15, 2023. D) June 15, 2022. Answer: B Explanation: B) April 30, 2023. Type: MC Topic: Administration - individual filing requirements

32) Bunly Im carries on a business as a sole proprietor. Which of the following dates are correct for the date by which his income tax return for a year must be filed (1st item) and his due date for the payment of any income taxes owing (2nd item)? A) April 30, April 30. B) June 15, April 30. C) April 30, June 15. D) June 15, June 15. Answer: B Explanation: B) June 15, April 30. Type: MC Topic: Administration - individual filing requirements

33) Ms. Deveco's 2022 income tax return is due on April 30, 2023. While she is too busy to file her income tax return on that date, she remits a cheque to the government for $10,000, her estimated amount of income tax owing a few days prior to April 30, 2023. The CRA acknowledges receipt on her My Account before April 30, 2023. She has never filed a late return before. She prepares and files her income tax return on May 31, 2023. At this time, the return shows that her actual income tax owing was $9,800. Assuming that the interest rate applicable to late payment of taxes is one-half percent per month without daily compounding, how much will she owe in penalties and interest as a result of the late filing? A) $ 49. B) $490. C) $588. D) $637. E) Nil. Answer: E Explanation: E) Nil. The late filing penalty is applied to any unpaid amount as of the filing due date of April 30, 2023. Since Ms. Deveco has paid more than income tax balance by April 30, 2023, no penalties or interest would be charged even though her income tax return was late filed. Type: MC Topic: Administration - individual filing requirements

34) Mr. Finlay, a retired individual whose only source of income was pension income, dies on August 15, 2022. By what date must Mr. Finlay's final income tax return be filed? A) April 30, 2023. . B) February 28, 2023. C) February 15, 2023. D) December 31, 2022. E) None of the above. Answer: A Explanation: A) The final income tax return of individuals who die between January 1 and October 31 and who had not carried on business must be filed no later than April 30 of the following year. The 6month filing extension provided by ITA 150(1)(b) only applies where an individual dies between November 1 of the year and April 30 (or June 15 where a business was carried on) of the following year. Type: MC Topic: Administration - individual filing requirements

35) Ms. Ali, an individual who carried on a music education business as a sole proprietor, dies on November 15, 2022. What is the latest filing date for her 2021 income tax return? A) April 30, 2023. B) May 15, 2023. C) May 30, 2023. D) June 15, 2023. Answer: D Explanation: D) June 15, 2022. The later of June 15, 2023 and six months after the date of death. Type: MC Topic: Administration - individual filing requirements

36) Mr. Khan, who carried on a construction business as a sole proprietor, dies on April 1, 2022. What is the latest filing date for his final 2022 income tax return? A) April 30, 2023. B) June 15, 2023. C) October 1, 2023. D) December 31, 2023. Answer: B Explanation: B) June 15, 2023, his regular filing date for his 2022 income tax return. His 2022 income tax return filing is not affected by the six month extension because he did not die between November 1, 2022 and June 15, 2023. His 2021 income tax return however would have been eligible for the six month extension. Type: MC Topic: Administration - individual filing requirements

37) Ms. Loren dies on February 1, 2023. All of her income is from employment and she does not have a spouse or common-law partner. What is the latest date for filing her 2022 income tax return? A) April 30, 2023. B) June 15, 2023. C) August 1, 2023. D) June 30, 2023. Answer: C Explanation: C) August 1, 2023 which is the latest of April 30, 2023 and six months after the date of death. Type: MC Topic: Administration - individual filing requirements

38) Greta died on September 10, 2022. She has never carried on a business. By what date must her final income tax return be filed? A) April 30, 2023. B) April 30, 2024. C) March 10, 2023. D) June 15, 2023. Answer: A Explanation: A) April 30, 2023 Type: MC Topic: Administration - individual filing requirements

39) Which of the following individuals did NOT have to pay instalments in 2022? A) Jane Austen, who had business income of $50,000 in both 2020 and 2022 and a $1,000 business loss in 2021. B) Charlotte Bronte, who realized capital gains of $3,500 in 2021 and $4,000 in 2022. Her only other income during the years 2020 through 2022 was $5,000 in employment income. C) George Eliot, who had rental income of $50,000 in the years 2020 through 2022 and an allowable capital loss of $50,000 in 2021. D) Emily Bronte, who received spousal support payments of $20,000 per year in each of the years 2020 through 2022. Answer: B Explanation: B) Charlotte Bronte, who realized capital gains of $3,500 in 2021 and $4,000 in 2022. With her only other income during the years 2019 through 2022 being $5,000 in employment income, the net tax owing on the taxable one-half of the capital gains plus the employment income would be less than $3,000. A. is not correct. Although there is a requirement to pay instalments, the minimum instalment would be nil because the prior year's net tax owing was nil. Type: MC Topic: Administration - individual tax instalments

40) Ms. Marston has net tax owing for 2020 of $4,500, net tax owing for 2021 of $8,000, and estimated net tax owing for 2022 of $7,500. If she wishes to pay the minimum total amount of instalments for the 2021 taxation year, her first payment on March 15, 2022 will be for what amount? A) Nil. B) $1,125. C) $1,875. D) $2,000. Answer: C Explanation: C) $1,875 ($7,500 ÷ 4). Type: MC Topic: Administration - individual tax instalments

41) Jason Marks has to pay income tax instalments as a result of significant investment income. His net tax owing in 2020 was $13,600. In 2021, it was $15,000. His estimate for 2022 is $17,000. If he decides to pay his 2022 income tax instalments according to the first preceding year option, how much should he pay on September 15, 2022? A) $3,400. B) $3,750. C) $4,250. D) $6,500. Answer: B Explanation: B) $3,750 ($15,000 ÷ 4). Type: MC Topic: Administration - individual tax instalments

42) All of the following individuals will have to pay tax by instalments this year, except: A) Jane White, who received a one-time bonus of $60,000 last year and, because her employer had not deducted enough tax, found herself with net tax owing of $8,200. B) Karen Phillips, who has started to earn investment income, which resulted in net tax owing of $3,100 last year. Her investment income is expected to be even greater this year. C) Blake Fortin, who began a business as a sole proprietor two years ago. Blake had a very successful first year and, as result, he had net tax owing that year of $85,000. Business dropped in his second year, resulting in net tax owing of only $1,500. This year, business has picked up again and he expects to have net tax owing of $53,000. D) Terri Jones, who has had net taxable capital gains on real estate in excess of $40,000 in each of the last two years, and who expects to have similar gains this year. Answer: A Explanation: A) Jane White, who received a one-time bonus of $60,000 last year and, because her employer had not deducted enough tax, found herself with net tax owing of $8,200. Type: MC Topic: Administration - individual tax instalments

43) Larry Short had business income of $62,000 in 2022. Prior to 2022, he was employed full-time and his employer's withholdings more than covered his income tax liability for tall years such that he received an income tax refund. Larry estimates that, based on his business income, his net tax owing for 2022 will be $8,000. Which of the following statements is true? A) Larry must file his return for 2022 by April 30, 2023. B) Larry should pay instalments in 2022. C) Larry must pay his income tax for 2022 by June 15, 2023. D) If Larry has as much business income in 2023 as he had in 2022, he will have to pay instalments in 2023. Answer: D Explanation: D) If Larry has as much business income in 2023 as he had in 2022, he will have to pay instalments in 2023. Type: MC Topic: Administration - individual tax instalments

44) Individuals are required to pay instalments: A) when net tax owing is over $3,000 for any one of the past two years. B) when net tax owing is over $3,000 for the current year and both of the two prior years. C) when net tax owing is over $3,000 for the current year and one of the two prior years. D) when net tax owing is over $3,000 for the current year only. Answer: C Explanation: C) When net tax owing is over $3,000 for the current year and one of the two prior years. Type: MC Topic: Administration - individual tax instalments

45) One way to ensure that no interest will be assessed for late instalments is: A) to pay the amounts provided by the CRA in their instalment reminder on or before the required dates. B) to pay the lowest amount calculated using the three alternative calculations on or before the required dates. C) to pay the estimated tax owing for the current year on the first instalment due date. D) to pay the average of the three amounts calculated using the three alternative calculations on or before the required dates. Answer: A Explanation: A) To pay the amounts provided by the CRA in their instalment reminder on or before the required dates. B is wrong as the estimate for the current year may be too low. Type: MC Topic: Administration - interest on late or deficient instalments

46) Dora Chen has determined that her minimum tax instalments for 2022 are $8,000 per quarter. She also owes $30,000 on her credit card, which carries an interest rate of 20%. She has destroyed her credit card, so no more can be put on it. Dora is unable to pay both the entire instalment amounts and her credit card balance, but she does have $8,000 in cash each quarter for her debts. Which of the following would be the best choice for Dora from a financial planning perspective? A) Dora should pay off her credit card balance before making instalment payments. B) Dora must make all her instalment payments, even if it means she cannot pay anything off on her credit card this year. C) Dora should split her payments equally between the credit card balance and the instalment liability, in order to show the CRA that she is trying her best to meet her obligations to them. D) Dora should pay her first two instalments and then make payments on her credit card balance. Answer: A Explanation: A) Dora should pay off her credit card balance before making instalment payments. Type: MC Topic: Administration - interest on late or deficient instalments

47) Lang Lang Ltd., a CCPC eligible for the small business deduction, has a March 31 year end. Due to the death of the owner/manager, the tax return for the year ended March 31, 2021 was not filed until May 12, 2023. The unpaid tax on March 31, 2021 was $15,500. Lang Lang Ltd. has never filed an income tax return late before. What is the total late filing penalty that the corporation is required to pay? (Do not include any interest payable.) A) $1,705. B) $2,635. C) $1,860. D) $3,720. Answer: B Explanation: B) The penalty for a first offence is 5% + 1% per full month late to a maximum of 12 months. Since the return was more than 19 months late, the maximum penalty is 17% of $15,500 = $2,635. A = (11%)($15,500) = $1,705 C = (12%)($15,500) = $1,860 D = (24%($15,500) = $3,720 Type: MC Topic: Administration - late filing penalty

48) Which of the following scenarios will result in a penalty being charged by the CRA? A) A taxpayer pays less than the required amount of instalments. B) A taxpayer who is owed a refund files their tax return late. C) A taxpayer who has a balance owing files their tax return late, with the payment enclosed. D) A taxpayer who has a balance owing files their tax return on time, but does not include a payment. Answer: C Explanation: C) A taxpayer who has a balance owing files their tax return late, with the payment enclosed. Type: MC Topic: Administration - late filing penalty

49) Which of the following statements with respect to corporations is NOT correct? A) Corporate income tax returns must be filed within 6 months of the end of the taxation year. B) All corporations must file their income tax returns electronically. C) If the corporation is a CCPC, the due date for any balance owing is three months after the end of the taxation year. D) If a corporation has foreign operations, it can determine its Canadian tax liabilities on the basis of financial statements prepared in the corporation's functional currency. Answer: B Explanation: B) All corporations must file their income tax returns electronically. If their gross revenues are less than $1,000,000, they can file a paper return. Type: MC Topic: Administration - corporate filing requirements

50) For corporations, the filing deadline for income tax returns is: A) April 30. B) the taxation year end. C) three months after the taxation year end. D) three months after the taxation year end if the small business deduction is claimed, otherwise two months after the taxation year end. E) six months after the taxation year end. Answer: E Explanation: E) Six months after the taxation year end. Type: MC Topic: Administration - corporate filing requirements

51) PS Swim Inc. has a year end of November 30. It is a small CCPC. For its 2022 taxation year, its income tax return is due on: A) January 31, 2023. B) February 28, 2023. C) April 30, 2023. D) May 31, 2023. E) None of the above. Answer: D Explanation: D) The return would be due on May 31, 2023, six months after the taxation year end. Type: MC Topic: Administration - corporate filing requirements

52) For its 2022 taxation year, its first year of operation, PS Swim Inc. filed its income tax return three months late. The unpaid income tax at the due date for the return was $2,500. This amount was not paid until the income tax return was filed. What would its penalty be? A) Nil. B) $175. C) $125. D) $200. E) $500. Answer: D Explanation: D) The penalty would be 5% of the tax unpaid at the date the return was due to be filed, plus 1% per month for three months, a total of 8%. This amounts to $200 [(8%)($2,500)]. Type: MC Topic: Administration - late filing penalty

53) The balance due date for a corporation is: A) April 30 of the following year. B) the same as the filing deadline. C) three months after the end of the taxation year, or two months after the end of the taxation year if the corporation is a small CCPC. D) two months after the end of the taxation year, or three months after the end of the taxation year if the corporation is a small CCPC. Answer: D Explanation: D) Two months after the end of the taxation year, or three months after the end of the taxation year if the corporation is a small CCPC. Type: MC Topic: Administration - corporate filing requirements

54) A Canadian public company has income tax payable of $62,000 in 2020, $95,000 in 2021, and $75,000 in 2022. The company would like to minimize its 2022 instalments. What would its instalments be? A) One monthly payment of $5,167 per month, followed by eleven monthly payments of $8,167 per month. B) Twelve payments of $5,167 per month. C) Twelve payments of $6,250 per month. D) Two monthly payments of $5,167 per month, followed by ten monthly payments of $8,467 per month. Answer: C Explanation: C) Twelve payments of $6,250 per month. Type: MC Topic: Administration - corporate tax instalments

55) PP Ltd., a client of your firm, has a November 30 taxation year end and has requested you to advise them on what its monthly instalments for the 2022 taxation year will be. Its income tax payable for its November 30, 2020 and November 30, 2021 taxation years were $13,800 and $13,200, respectively. Its estimated income tax payable for the November 30, 2022 year are $14,400. PP Ltd. wants to pay the lowest amount possible, without incurring interest penalties. What would its instalments be? A) Twelve payments at $1,200 per month. B) Twelve payments at $1,100 per month. C) Twelve payments at $1,150 per month. D) Two monthly payments at $1,150 each, followed by ten monthly payments at $1,090 each. E) None of the above. Answer: B Explanation: B) Its preceding year's taxes payable of $13,200, divided by twelve months. Type: MC Topic: Administration - corporate tax instalments

56) A Canadian public corporation had federal income taxes payable in each of 2020 and 2021 exceeding $3,000. One correct option it has with respect to its 2022 instalments is to pay: A) equal instalments, on a quarterly basis, based on its 2021 federal income taxes payable. B) on a monthly basis, instalments equal to 1/12th of its estimated 2022 income taxes payable. C) one lump-sum payment, within three months of its 2022 year end. D) on a monthly basis, instalments equal to 1/12th of its 2020 federal income taxes payable. Answer: B Explanation: B) The only correct approach listed is to pay monthly instalments equal to 1/12th of the current year's estimated income tax liability. Type: MC Topic: Administration - corporate tax instalments

57) If a Canadian public corporation is experiencing a year-to-year decrease in income tax, the most advantageous calculation of instalments that would be allowed is: A) monthly, based on the estimated income tax for the current year. B) quarterly, based on the estimated income tax for the current year. C) monthly, based on the estimated income tax for the first preceding year. D) quarterly, based on the estimated income tax for the first preceding year. E) monthly, based on the estimated income tax for the second preceding year and the immediately preceding year. F) quarterly, based on the estimated income tax for the second preceding year and the immediately preceding year. Answer: A Explanation: A) Monthly, based on the estimated income tax for the current year. Type: MC Topic: Administration - corporate tax instalments

58) Which of the following is NOT one of the criteria for a CCPC to be considered a small CCPC eligible to pay instalments on a quarterly basis? A) Taxable income cannot exceed $500,000 for the corporation and its associated corporations for the current taxation year and the two previous years. B) The corporation has claimed the small business deduction in the current or previous year. C) The corporation has a perfect compliance record during the last 12 months. D) The corporation and its associated corporations do not have Taxable Capital Employed in Canada that exceeds $10 million for the current or previous year. Answer: A Explanation: A) Taxable income cannot exceed $500,000 for the corporation and its associated corporations for the current taxation year and the two previous years. Type: MC Topic: Administration - corporate tax instalments

59) Dora Burch files her 2022 income tax return on March 2, 2023. She receives an original notice of assessment dated June 3, 2023. However, on December 28, 2023, she receives a reassessment indicating that she owes a substantial amount of additional tax. She would like to object to this reassessment. What is the latest date for her to file a notice of objection? She does not carry on a business. (Ignore the effect of leap year if applicable.) A) March 2, 2024. B) April 30, 2024. C) March 28, 2024. D) December 28, 2024. Answer: B Explanation: B) April 30, 2024. The later of 90 days from the notice of reassessment dated December 28, 2023 or March 28, 2024 and one year from the filing due date for the 2022 taxation year. or April 30, 2024. Type: MC Topic: Administration - notice of objection

60) Which of the following statements is NOT correct? A) When the person filing the income tax return has made any misrepresentation due to neglect, carelessness or wilful default, the normal reassessment period can be extended beyond 3 years. B) A taxpayer can choose to file a waiver to extend the 3 year time limit. C) When a return has been reassessed once, no further reassessments are permitted. D) Reassessment can occur outside the normal reassessment period when reassessment within the normal period affects a balance outside of the normal period. Answer: C Explanation: C) When a return has been reassessed once, no further reassessments are permitted. Type: MC Topic: Administration - normal reassessment period

61) Which of the following is NOT one of the criteria that must be met before an adjustment to a previous year tax return is permitted? A) The CRA must be satisfied that the previous assessment was incorrect. B) The change is based on a successful appeal to the courts by another taxpayer. C) The taxpayer's return was filed within 3 years of the end of the year to which it relates. D) The reassessment must be made within the normal assessment period, or under certain permitted extensions to this period. Answer: B Explanation: B) The change is based on a successful appeal to the courts by another taxpayer. Type: MC Topic: Administration - assessments and appeals

62) Tom Arnold filed his 2022 income tax return on March 1, 2023. The CRA mailed the original notice of assessment to Tom dated May 15, 2023, and Tom received it on May 30, 2023. If Tom disagrees with the notice of assessment, what is the latest date he has to file a notice of objection? Tom does not carry on a business. A) 90 days from March 1, 2023. B) 90 days from April 30, 2023. C) 90 days from May 15, 2023. D) 90 days from May 30, 2023. E) None of the above. Answer: E Explanation: E) For individuals, the notice of objection must be filed before the later of: 90 days from the date of the notice of assessment or reassessment, and one year from the filing due date for the return under assessment or reassessment. The later date would have been April 30, 2023. Type: MC Topic: Administration - notice of objection

63) Minnie Belanger is retired. She filed her 2022 income tax return on March 5, 2023. She received a portion of the income tax refund claimed for 2022 and an original notice of assessment, dated April 19, 2023, which set out the difference between the amount claimed and the amount of the refund. As Minnie disagrees with the notice of assessment, she wishes to file a notice of objection. What is the latest date she has to file a notice of objection? Minnie does not carry on a business. A) March 5, 2024. B) April 19, 2024. C) April 30, 2024. D) July 18, 2023. E) June 15, 2024. Answer: C Explanation: C) Her notice of objection must be filed before the later of: 90 days from the date of the notice of assessment (July 18, 2023), and one year from the filing due date for the return (April 30, 2024). Type: MC Topic: Administration - notice of objection

64) For a public corporation, which of the following statements is correct with respect to filing a notice of objection? A) It must be filed no later than 180 days from the date on the original notice of assessment. B) It must be filed the later of 90 days after the date on the notice of assessment and one year from the filing date for the return under assessment. C) It must be filed the later of 180 days after the date on the notice of assessment and one year from the filing date for the return under assessment. D) It must be filed no later than 90 days after the date on the notice of assessment. Answer: D Explanation: D) It must be filed no later than 90 days after the date of the notice of assessment. Type: MC Topic: Administration - notice of objection

65) Marc Mayer filed his 2022 income tax return on March 1, 2023. Neither he nor his spouse has business income in any year. The CRA mailed an original notice of assessment to Marc dated May 5, 2023 and Marc received it on May 14, 2023. If Marc disagrees with the notice of assessment, he has until which one of the following dates to file a notice of objection? A) August 3, 2023. B) August 12, 2023. C) March 1, 2024. D) April 30, 2024. Answer: D Explanation: D) April 30, 2024. Type: MC Topic: Administration - notice of objection

66) An individual who resides in Saskatchewan has not filed her 2017, 2018 and 2019 income tax return because the individual was told that withholdings for source deductions were sufficient and that no tax would be owing for the three years. The individual has since learned that the withholdings for source deductions were excessive and that the individual is entitled to a refund for all three years. The individual files all three income tax returns on September 29, 2022. Refunds will be issued for the following years: A) 2017 & 2018 B) All three years C) 2019 D) None of the years Answer: C Explanation: C) ITA 164(1) provides that refunds will only be issued if a request for the refund is made by filing an income tax return no later than three years from the end of the taxation year. As a result the return for 2017 and 2018 would have had to have been filed by December 31, 2020 and 2021 respectively. The individual is however within the time limit of December 31, 2022 for the 2019 taxation year. Type: MC Topic: Administration - statute-barred refunds

67) An individual carries on a business as a sole proprietor. The individuals files his 2022 income tax return on June 2, 2023 which indicates he is entitled to a refund of $7,200. Assuming that he receives the full refund on July 12, 2023 interest will be included for what period of time? A) June 2, 2023 to July 12, 2023 B) April 30, 2023 to July 12, 2023 C) July 2, 2023 to July 12, 2023 D) No interest will be received Answer: C Explanation: C) July 2, 2023 to July 12, 2023. ITA 164(3) requires interest on refunds to begin at the later of (1) 30 days after the balance due day of April 30, 2023 and (2) 30 days after the income tax return has been filed which would be July 2, 2023. Type: MC Topic: Administration - interest on refunds and/or amounts owing (Individuals)

68) BarkCo is a CCPC with a December 31 taxation year end. The company expects a large refund when it files its income tax return for the 2022 taxation year. For what period of time will Interest on the refund begin to accrue if the company files its 2022 income tax return on (1) June 10, 2023? Answer: The company's filing due date is six months after its taxation year end which is June 30, 2023 for the 2022 taxation year. ITA 164(3) establishes the date on which refund interest begins as the later of (1) 120 days after the taxation year end which would be April 30, 2023 and (2) 30 days after the income tax return is filed but only if the return is filed after the filing due date of June 30, 2023. Since the income tax return was filed before the filing due date the limitation is April 30, 2023 only. Type: ES Topic: Administration - interest on refunds and/or amounts owing (Corporations)

69) BarkCo is a CCPC with a December 31 taxation year end. The company expects a large refund when it files its income tax return for the 2022 taxation year. For what period of time will Interest on the refund begin to accrue if the company files its 2022 income tax return on July 10, 2023? Answer: The company's filing due date is six months after its taxation year end which is June 30, 2023 for the 2022 taxation year. ITA 164(3) establishes the date on which refund interest begins as the later of (1) 120 days after the taxation year end which would be April 30, 2023 and (2) 30 days after the income tax return is filed but only if the return is filed after the filing due date of June 30, 2023. Since the income tax return was filed after the filing due date interest begins to accrue from August 9, 2023 which is 30 days after the return was actually filed. Type: ES Topic: Administration - interest on refunds and/or amounts owing (Corporations)

70) Mark Brown's 2022 net income includes business income. When is his 2022 income tax return due? By what date must any 2022 income tax owing be paid in order to avoid interest? Answer: While Mr. Brown's 2022 income tax return does not have to be filed until June 15, 2023, any amount owing must be paid by April 30, 2023 in order to avoid any interest charges. Type: ES Topic: Administration - individual due dates

71) Ms. Jeanine Farrel has 2022 net income which includes business income. When is her 2022 income tax return due? In addition, indicate when any income tax owing must be paid to avoid interest charges. Answer: While Ms. Farrel's 2022 income tax return does not have to be filed until June 15, 2023, she must pay any income tax owing by April 30, 2023 to avoid interest charges. Type: ES Topic: Administration - individual due dates

72) George Klause dies on March 1, 2023. All of his 2022 income is from the carrying on of a business. By what date must his representative file his 2022 income tax return? Explain your answer. Answer: Mr. Klause's 2022 income tax return must be filed by the later of six months after the date of his death and his normal filing date if he dies between November 1, 2022 and June 15, 2023. Since he died within this period the later date of six months that is September 1, 2023 applies rather than the regular filing due date which would have been June 15, 2023. Type: ES Topic: Administration - deceased individual taxpayer due date

73) Gloria Klump dies on December 1, 2022. Much of her 2022 income is from the carrying on of a business. By what date must her representatives file her 2022 income tax return? Explain your answer. Answer: Ms. Klump's 2022 income tax return must be filed by the later of six months after the date of her death and her normal filing date if she died between November 1, 2022 and her regular filing due date of June 15, 2023. Since she dies within that period of time her 2022 income tax return can be filed the later of the filing due date of June 15, 2023 and six months after her death which would be June 1, 2023. Given this, the later date is June 15, 2023. Type: ES Topic: Administration - deceased individual taxpayer due date

74) At the beginning of 2022, the following information relates to Sarah Elmsley: Year 2020 2021 2022 (Estimated)

Net Tax Owing $1,800 6,400 3,600

Indicate whether Ms. Elmsley is required to make instalment payments in 2022. Explain your conclusion and, if your answer is yes, indicate the minimum instalments that will be required and the instalment payment dates. Answer: As the net tax owing for the current year and one of the two preceding years exceeds $3,000, she is required to make instalment payments for 2022. The best alternative for instalment payments would be to use the current year estimate. This would result in required instalment payments of $900 ($3,600 ÷ 4) to be paid on March 15, June 15, September 15, and December 15 of 2022. Note, however, that if the estimated net tax owing is below actual net tax owing for 2022, instalment interest may be charged. Type: ES Topic: Administration - individual tax instalments

75) Horace Greesom filed his 2021 income tax return on time. At the beginning of 2022, the following information relates to Mr. Greesom:

Year 2020 2021 2022 (Estimated)

Taxes Payable $56,000 49,000 65,000

Amounts Withheld $45,000 46,200 45,000

What amounts will be shown on CRAs Instalment Reminder notices for 2022 and when will the amounts be due? Should he pay those amounts? Explain your conclusion. Answer: The net tax owing amounts can be calculated as follows: 2020 $11,000 ($56,000 - $45,000) 2021 $2,800 ($49,000 - $46,200) 2022 $20,000 ($65,000 - $45,000) As the net tax owing exceeds $3,000 in the current year and the second preceding year, instalments are required. The CRA Instalment Reminder will have March 15 and June 15 instalments of $2,750 each ($11,000 ÷ 4). There would be no further instalments required for 2022 as his net tax owing for 2021 is only $2,800 and he would already have paid $5,500 [(2)($2,750)]. The best alternative for instalment payments would be to use the prior year option. This would result in required instalment payments of $700 ($2,800 ÷ 4) to be paid on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments

76) At the beginning of 2022, the following information relates to Jerry Farrow:

Year 2020 2021 2022 (Estimated)

Taxes Payable $83,000 76,000 63,000

Amounts Withheld $78,000 77,200 59,000

Is Mr. Farrow required to make instalment payments during 2022? If he is required to make instalment payments, indicate the amounts that would be required under each of the three alternative methods of calculating instalments. Indicate which alternative would be preferable. Answer: The net tax owing amounts can be calculated as follows: 2020 $5,000 ($83,000 - $78,000) 2021 Nil ($76,000 - $77,000). Note Negative amount are not recognized. 2022 $4,000 ($63,000 - $59,000) As the net tax owing exceeds $3,000 in the current year and the second preceding year, instalments are required to be determined. The three alternatives for calculating instalment payments are as follows: • Based on the estimate for the current year, the instalments would be $1,000 ($4,000 ÷ 4). • Based on the estimate for the preceding year, the instalments would be nil. • Based on the second preceding year, the first two instalments would each be $1,250 ($5,000 ÷ 4). As the net tax owing for the previous year is nil, no further instalments would be required. The best alternative would be to base the payments on the previous year, resulting in instalments of nil. This is perfectly acceptable. Type: ES Topic: Administration - individual tax instalments

77) Despite the fact that her net tax owing has been between $7,000 and $8,000 in the two previous years, and is expected to be a similar amount during 2022, Marsha Fields has made no instalment payments for 2022. While her normal filing date would be April 30, 2023, she does not file her 2022 income tax return or pay the balance owing until August 24, 2023. Marsha has filed her income tax return on time in all previous years. What amounts of penalties and interest will be charged for the 2022 taxation year? Answer: Given the size of her net tax owing, ITA 163.1 will not apply and there will be no penalties for late instalments. However, a penalty of 8% of the income taxes owing will be charged for filing three complete months late (5%, plus 1% per month). Interest will be assessed on the deficient instalments, the balance owing on her filing due date, and the penalty assessed for late filing. It will be assessed at the prescribed base rate plus 4% for the period May 1 through August 24, 2023. Type: ES Topic: Administration - penalties and interest for individuals

78) As his taxable income in 2021 was nil, Mark Felton did not make any income tax instalment payments in 2022. In completing his income tax return for 2022, he finds that he has net tax owing of $22,500. While his normal filing date would be April 30, 2023, he does not file his return or pay the balance owing until September 12, 2023. What penalties and interest will be charged for the 2022 taxation year? Answer: A penalty of 9% of the income tax amount owing will be charged for filing four complete months late (5%, plus 1% per month). There will be no interest on late income tax instalments because, with the previous year's net tax owing of nil no instalments would have been required. This would also mean that the ITA 163.1 penalty would not apply. Interest at the prescribed base rate plus 4% will be charged on the amount owing on his filing due date and the penalty assessed for late filing for the period May 1 through September 12, 2023. If, in one of the three preceding taxation years he has also late filed, the penalty could be 18% (10 percent, plus % per month) if the individual has received a notice from the CRA demanding that the 2022 income tax return be filed. Type: ES Topic: Administration - penalties and interest for individuals

79) Lemar Ltd. has a December 31 year end. It is not a small CCPC. For 2020, its income taxes payable were $71,500, while for 2021, the amount was $93,600. For 2022, its estimated taxes payable are $114,700. What would be the minimum instalment payments for the 2022 taxation year and when would the instalments be due? How would your answer differ if Lemar Ltd. qualified as a small CCPC? Answer: Not Small CCPC — The first two instalments would be based on the second preceding year and would be $5,958.33 each ($71,500 ÷ 12). The remaining 10 instalments would be based on the preceding year, less the $11,916.66 paid in the first two instalments. The amount would be $8,168.33 [($93,600 - $11,916.66) ÷ 10]. The instalments would be due on the last day of each month in 2022 beginning January 31. Small CCPC — In this case, the first instalment would be based on the second preceding year and would be $17,875 ($71,500 ÷ 4). The remaining 3 instalments would be based on the preceding year, less the $17,875 paid for the first instalment. The amount would be $25,241.67 [($93,600 - $17,875) ÷ 3]. The instalments would be due on the last days of March, June, September, and December of 2022. Note that when the initial instalment(s) are based on the second preceding year, the total amount of instalments will be the same as when all of the instalments are based on the first preceding year. However, using the second preceding year is preferable in that it provides some deferral of taxes. Type: ES Topic: Administration - corporate tax instalments

80) Chemco Inc. has a December 31 year end and is not a small CCPC. For 2020, its income taxes payable were $146,300, while for 2021, the amount was $94,650. In 2022, its estimated income taxes payable are $52,300. What would be the minimum instalment payments for the 2022 taxation year and when would they be due? How would your answer differ if Chemco Inc. qualified as a small CCPC? Answer: Not Small CCPC — The minimum instalments would be based on the estimated income taxes payable for 2022. The amount would be $4,358.33 ($52,300 ÷ 12). The instalments would be due on the last day of each month in 2022 beginning January 31. Note that, if the estimate for 2022 is too low, interest will be charged on the deficiency. Small CCPC — In this case, all four instalments would be based on the estimated income taxes payable for 2022. The amount would be $13,075 ($52,300 ÷ 4). The instalments would be due on the last days of March, June, September, and December of 2022. Note that when the initial instalment(s) are based on the second preceding year, the total amount of instalments will generally be the same as when all of the instalments are based on the first preceding year. However, using the second preceding year is preferable in that it provides some deferral of taxes if the income taxes payable for each taxation year are increasing each year. Type: ES Topic: Administration - corporate tax instalments

81) Dustin Inc. has a September 30 year end and is not a small CCPC. Its income tax payable for the taxation year ending September 30, 2020 was $33,500. $93,400 for its September 30, 2021 taxation year and it is estimated that its income tax payable for the current year ending September 30, 2022 will be $56,200. What is the minimum income tax instalment payments for the current year ending September 30, 2022 and when would the payments be due? How would your answer differ if Dustin Inc. qualified as a small CCPC? Answer: Not Small CCPC — Minimum instalments would be based on the estimate for the current year. The monthly amount would be $4,683.33 ($56,200 ÷ 12). If the second previous year was used, the first two installments would be lower. However, as the remaining instalments would be based on the previous year's $93,400, the total would be significantly larger. The instalments would be due on the last day of each month during the period October, 2021 through September, 2022. Note that, if the estimate for 2022 is too low, interest will be charged on the deficiency. Small CCPC — Minimum instalments would be based on the estimate for the current year. The monthly amount would be $14,050 ($56,200 ÷ 4). The instalments would be due on the last day of December, 2021, March, 2022, June, 2022, and September, 2022. Type: ES Topic: Administration - corporate tax instalments

82) The taxation year end for Grange Inc. is March 31, 2022. It is a CCPC that claims the small business deduction and had taxable income for the year ending March 31, 2021 of $165,000. Indicate the date on which the corporate income tax return for the taxation year ending March 31, 2022 must be filed, as well as the date on which any final payment of income taxes is due. Answer: Grange Inc.'s income tax return is due six months after its year end, on September 30, 2022. As it is a CCPC that claims the small business deduction, and its taxable income for the preceding taxation year did not exceed $500,000, the final tax payment is due three months after the year end. This would be June 30, 2022. Type: ES Topic: Administration - corporate due dates

83) The taxation year end for Lawnco Inc. is January 31, 2022. Lawnco Inc. is a Canadian public company. Indicate the date on which the corporate tax return must be filed, as well as the date on which any final payment of income taxes is due. Answer: Lawnco Inc.'s income tax return is due six months after its year end, on July 31, 2022. As Lawnco is a public company that is not eligible for the small business deduction, the final tax payment is due two months after the year end, on March 31, 2022. Type: ES Topic: Administration - corporate due dates

84) The taxation year end for Breyson Ltd., a CCPC, is June 30, 2022. The company claims the small business deduction and had taxable income for the year ending June 30, 2021 of $132,000. Indicate the date on which the corporate income tax return for the taxation year ending June 30, 2022 must be filed, as well as the date on which any final payment of income tax is due. Answer: Breyson's tax return is due December 31, 2022, six months after its year end of June 30, 2022. As it is a CCPC that claims the small business deduction, and its taxable income for the preceding taxation year did not exceed $500,000, its final income tax payment is due three months after the year end on September 30, 2022. Type: ES Topic: Administration - corporate due dates

85) Nancy Forth filed her 2022 income tax return as was required on April 30, 2023. Her Notice of Assessment dated May 15, 2023 indicated that her return was accepted as filed. On July 12, 2024, she receives a Notice of Reassessment dated July 2, 2024 indicating that she owes additional income taxes, as well as interest on the unpaid amounts. What is the latest date for filing a notice of objection ? Explain your answer. Answer: A notice of objection must be filed by the later of: • 90 days after the date of July 2, 2024 on the Notice of Reassessment (September 30, 2024); or • one year after the due date for filing the return that is being reassessed (April 30, 2024). The later of these two dates is September 30, 2024. Type: ES Topic: Administration - notice of objection

86) Norman Foster filed his 2022 income tax return as was required on June 15, 2023. His Notice of Assessment dated August 28, 2023, indicated that his 2022 income tax return was accepted as filed. On March 15, 2024, he receives a Notice of Reassessment dated March 8, 2024 indicating that he owes additional income tax, as well as interest on the unpaid amounts. What is the latest date for filing a notice of objection for this reassessment? Explain your answer. Answer: A notice of objection must be filed by the later of: • 90 days after the March 8, 2024 date on the Notice of Reassessment (June 6, 2024); or • one year after the due date for filing the return that is reassessed (June 15, 2024). The later of these two dates is June 15, 2024. Type: ES Topic: Administration - notice of objection

87) In the three independent cases which follow, assume that Barry Levenor's income tax payable before withholdings for each of the three years is as follows: 2020 $14,256 2021 15,776 2022 (Estimated) 16,483 The amount Barry's employer withholds for the three independent cases is as follows: Case 1 - $11,800 in 2020, $14,150 in 2021, and $12,400 (estimated) in 2022. Case 2 - $14,920 in 2020, $11,400 in 2021, and $13,226 (estimated) in 2022. Case 3 - $11,220 in 2020, $13,275 in 2021, and $12,873 (estimated) in 2022. Required: A. For each of the three cases: • indicate whether instalments are required for the 2022 taxation year; • in those Cases where instalments are required, calculate the amount of the instalments that would be required under each of the three acceptable methods; and • in those cases where instalments are required, indicate which of the three acceptable methods would be the best alternative. B. For those Cases where instalments are required, indicate the dates on which the payments will be due. Answer: Part A - Case 1 Barry's net tax owing in each of the three years is as follows: 2020 = $2,456 ($14,256 - $11,800) 2021 = $1,626 ($15,776 - $14,150) 2022 = $4,083 ($16,483 - $12,400) Estimated While the net tax owning in the current year is expected to exceed $3,000, it did not exceed $3,000 in either of the two preceding years. The payment of instalments is not required.

Part A - Case 2 Barry's net tax owing in each of the three years is as follows: 2020 = Nil ($14,256 - $14,920) Note that a negative number are not recognized. 2021 = $4,376 ($15,776 - $11,400) 2022 = $3,257 ($16,483 - $13,226) Estimated As his net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the instalments are required. Instalments under the three acceptable alternatives would be as follows: Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $814.25 ($3,257 ÷ 4), for a total amount of $3,257. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $1,094 ($4,376 ÷ 4), for a total amount of $4,376. Alternative 3 - Using the net tax owing for the second previous year would result in the first two instalments being nil. The remaining two instalments would be $2,188 ($4,376 ÷ 2), a total of $4,376. The best choice would be Alternative 1. While the first two instalments are lower under Alternative 3, the total for the year under Alternative 3 is $1,119 ($4,376 - $3,257) higher. Part A - Case 3 Barry's net tax owing in each of the three years is as follows: 2020 = $3,036 ($14,256 - $11,220) 2021 = $2,501 ($15,776 - $13,275) 2022 = $3,610 ($16,483 - $12,873) Estimated As his net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2020, the payment of instalments is required. Instalments under the three acceptable alternatives would be as follows: Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $902.50 ($3,610 ÷ 4), for a total amount of $3,610. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $625.25 ($2,501 ÷ 4), for a total amount of $2,501. Alternative 3 - Using the net tax owing for the second previous year would result in the first two instalments being $759 ($3,036 ÷ 4) each, a total of $1,518. The remaining two instalments would be $491.5 [($2,501 - $1,518) ÷ 2], a total of $983. When combined with the first two instalments, the total for the year would be $2,501 ($1,518 + $983). The best choice would be Alternative 2. While the total for the year under Alternative 3 is the same, the first two instalments are lower under Alternative 2, allowing for a small amount of tax deferral. Part B In Case Two and Case Three, the required instalments would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

88) For 2020, Mr. Mason Boardman has combined federal and provincial income tax payable of $62,350. The employer withheld $61,600. For 2021, his combined federal and provincial income tax payable is $29,760. The employer withheld $13,740. In 2022, he anticipates having combined federal and provincial income tax payable of $52,370. Withholdings are expected to be $47,390. In January, 2022, you are asked to provide tax advice to Mr. Boardman. He has asked you whether it will be necessary for him to pay instalments in 2022 and, if so, what the minimum amount should be and the dates the amounts are due. Required: Provide the information requested by Mr. Boardman. Show all your calculations. Answer: Need For Instalments Instalments are required when an individual's "net tax owing" exceeds $3,000 in the current year and in either of the two preceding years. In somewhat simplified terms, "net tax owing" is defined as the combined federal and provincial income taxes payable, less amounts withheld. Mr. Boardman's net tax owing for each of the three years are as follows: 2020 = $750 ($62,350 - $61,600) 2021 = $16,020 ($29,760 - $13,740) 2022 = $4,980 ($52,370 - $47,390) Estimated As Mr. Boardman's net tax owing in 2022 (the current year) and his net tax owing in 2021 (one of the two preceding years) is greater than $3,000, he is required to determine instalment payments. Amounts If Mr. Boardman bases the first two quarterly payments on the 2020 net tax owing, they would only be $187.50 each ($750 ÷ 4). However, the payments for the last two quarters would be $7,822.50 each {[$16,020 - (2)($187.50)] ÷ 2}, resulting in total instalment payments of $16,020. A preferable alternative would be to base the payments on the estimated net tax owing for 2022. These payments would be $1,245 each ($4,980 ÷ 4), for a total of $4,980. Payment Dates The quarterly payments would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

89) For the three years ending December 31, 2020 through December 31, 2022, a corporation's combined federal and provincial income tax payable is as follows: 2020 = $153,640 2021 = $186,540 2022 = $172,340 (Estimated) Case One The taxpayer is a small CCPC. Case Two The taxpayer is a small CCPC. Assume that its combined federal and provincial income taxes payable for the year ending December 31, 2021 were $163,420, instead of the $186,540 given in the problem. Case Three The taxpayer is a publicly traded corporation. Case Four The taxpayer is a publicly traded corporation. Assume that its combined federal and provincial income taxes payable for the year ending December 31, 2021 were $163,420, instead of the $186,540 given in the problem. Required: For each of the preceding independent Cases, provide the following information: 1. Indicate whether instalments are required during 2021. Provide a brief explanation of your conclusion. 2. Calculate the amount of instalments that would be required under each of the acceptable methods available. 3. Indicate which of the available methods would best serve to minimize instalment payments. Answer: Case One 1. As the corporation's tax payable for both the current and the first preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $43,085 ($172,340 ÷ 4) based on the current year estimate. • Quarterly instalments of $46,635 ($186,540 ÷ 4) based on the first preceding year. • One instalment of $38,410 ($153,640 ÷ 4) based on the second preceding year, followed by three instalments of $49,376.67 [($186,540 - $38,410) ÷ 3], a total of $186,540. 3. The best alternative in terms of minimum instalments would be four instalments of $43,085, for total payments of $172,340. The instalments are due on March 31, June 30, September 30, and December 31 of 2022.

Case Two 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $43,085 ($172,340 ÷ 4) based on the current year estimate. • Quarterly instalments of $40,855 ($163,420 ÷ 4) based on the first preceding year. • One instalment of $38,410 ($153,640 ÷ 4) based on the second preceding year, followed by three instalments of $41,670 [($163,420 - $38,410) ÷ 3], a total of $163,420. 3. The best alternative would be one payment of $38,410, followed by three payments of $41,670. While the total instalments are the same $163,420 in both the second and third alternatives, the third alternative is preferable because the first payment is lower. This provides a small amount of tax deferral. The instalments are due on March 31, June 30, September 30, and December 31 of 2022. Case Three 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $14,361.67 ($172,340 ÷ 12) based on the current year estimate. • Monthly instalments of $15,545 ($186,540 ÷ 12) based on the first preceding year. • Two monthly instalments of $12,803.33 ($153,640 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $16,093.33 {[($186,540 - (2)($12,803.33)] ÷ 10}, a total of $186,540.03. 3. The best alternative in terms of minimum instalments would be 12 instalments of $14,361.67, resulting in a total of $172,340 of instalment payments. The instalments would be due on the last day of each month, beginning January 31, 2022. Case Four 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $14,361.67 ($172,340 ÷ 12) based on the current year estimate. • Monthly instalments of $13,618.33 ($163,420 ÷ 12) based on the first preceding year. • Two monthly instalments of $12,803.33 ($153,640 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $13,781.33 {[$163,420 - (2)($12,803.33)] ÷ 10}, a total of $163,420. 3. The best alternative would be two payments of $12,803.33, followed by ten payments of $13,781.33. While the total instalments are the same $163,420 in both the second and third alternatives, the third alternative is preferable because the first two payments are lower. This provides a small amount of tax deferral. The instalments would be due on the last day of each month, beginning January 31, 2022. Type: ES Topic: Administration - corporate tax instalments (comprehensive)

90) For the three years ending December 31, 2022, Galina Skurnick's combined federal and provincial taxes payable are as follows: 2020 $28,800 2021 23,040 2022 (Estimated) 21,600 Assume Ms. Skurnick's employer withholds combined federal and provincial income tax for each year as follows: Case One $19,200 in 2020, $16,000 in 2021, and $16,000 in 2022. Case Two $11,200 in 2020, $24,000 in 2021, and $14,400 in 2022. Case Three $27,500 in 2020, $16,200 in 2021, and $18,200 in 2022. Required: For each of the preceding independent Cases, calculate the minimum instalment payments that are required to be made towards the settlement of the income tax payable for the year ending December 31, 2022. Show all required calculations. If instalments must be paid, your answer should include the date that each instalment is due. Note that, in answering this question, you should state a conclusion as to whether instalments may be required even if the most favourable alternative results in nil instalments. Answer: While there are alternatives in all Cases, the following answers represent the "minimum" instalments, as required in the problem. Case One Ms. Skurnick's net tax owing in each of the three years is as follows: 2020 = $9,600 ($28,800 - $19,200) 2021 = $7,040 ($23,040 - $16,000) 2022 = $5,600 ($21,600 - $16,000) Estimated As her net tax owing is expected to exceed $3,000 in 2021 and was more than $3,000 in both 2020 and 2021, the payment of instalments is required. Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $1,400 ($5,600 ÷ 4) for a total of $5,600. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $1,760 ($7,040 ÷ 4), for a total amount of $7,040. Alternative 3 - Using the net tax owing for the second preceding year would result in a figure of $2,400 ($9,600 ÷ 4) for the first two instalments. The remaining two instalments would be $1,120 each {[$7,040 (2)($2,400)] ÷ 2]. This would result in total instalments of $7,040. The best choice would be Alternative 1 with total instalments of $5,600. They would be due on March 15, June 15, September 15, and December 15 of 2022.

Case Two Ms. Skurnick's net tax owing in each of the three years is as follows: 2020 = $17,600 ($28,800 - $11,200) 2021 = Nil ($23,040 - $24,000) 2022 = $7,200 ($21,600 - $14,400) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2020, the conditions for instalments have been met and instalments payments may be required. Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $1,800 ($7,200 ÷ 4) for a total of $7,200. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments nil. Alternative 3 - Using the net tax owing for the second preceding year would result in a figure of $4,400 ($17,600 ÷ 4) for the first two instalments. As the first two instalments total more than the nil balance for 2021, no further instalments are required. The best choice would be Alternative 2 with no required instalments. Case Three Ms. Skurnick's net tax owing in each of the three years is as follows: 2020 = $1,300 ($28,800 - $27,500) 2021 = $6,840 ($23,040 - $16,200) 2022 = $3,400 ($21,600 - $18,200) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the payment of instalments is required. Instalments under the three acceptable alternatives would be as follows: Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $850 ($3,400 ÷ 4) for a total of $3,400. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $1,710 ($6,840 ÷ 4), for a total amount of $6,840. Alternative 3 - Using the net tax owing for the second preceding year would result in a figure of $325 ($1,300 ÷ 4) for the first two instalments. The remaining two instalments would be $3,095 each {[$6,840 (2)($325)] ÷ 2]. This would result in total instalments of $6,840. The best choice would be Alternative 1. While the first two instalments are lower under Alternative 3, the total for the year under Alternative 3 is $3,340 ($6,840 - $3,400) higher. They would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

91) For both income tax and accounting purposes Ledux Inc. has a January 31 taxation year end. Ledux is a publicly traded Canadian company. For the year ending January 31, 2020, Ledux Inc. had federal income tax payable of $193,420. During the following year ending January 31, 2021, the federal income tax payable was $215,567. While final figures are not available at this time, it is estimated that federal income tax payable for the year ending January 31, 2022 will be $203,345. Required: A. Calculate the instalment payments that are required for the year ending January 31, 2022 under each of the three alternative methods available. Indicate which of the alternatives would be preferable. B. If the Company did not make any instalment payments towards its 2022 income tax payable, and did not file its corporate income tax return or pay its income tax payable on time, indicate how the interest and penalty amounts would be determined (a detailed calculation is not required). Answer: Part A Under ITA 157(1), Ledux Inc. would have three alternatives with respect to the calculation of its instalment payments. The alternatives and the relevant calculations are as follows: Current Year Base — The instalment payments could be 1/12th of the estimated income tax payable for the current year. In this case the resulting instalments would be $16,945.42 per month ($203,345 ÷ 12). Preceding Year Base — The instalment payments could be 1/12th of the income tax payable in the first preceding year. The resulting instalments would be $17,963.92 ($215,567 ÷ 12). First and Second Preceding Years — The third alternative would be to base the first two instalments on 1/12th of the Tax Payable in the second preceding year and the remaining instalments on 1/10th of the income tax payable in the first preceding year, less the total amount paid in the first two instalments. In this case, the first two instalments would be $16,118.33 ($193,420 ÷ 12) each, a total of $32,236.66. The remaining 10 instalments would be $18,333.03 [($215,567 - $32,236.66) ÷ 10] each. The total instalments under this alternative would be $215,567. While the third approach would provide the lowest payments for the first two instalments, the payments would total $215,567. As this is larger than the $203,345 total when the instalments are based on the current year's estimated income tax payable, the current year alternative would be the best alternative.

Part B If the Company failed to make instalment payments towards its 2022 income tax payable, it would be liable for interest from the date each instalment should have been paid to the balance due date, March 31, 2022. Assuming the actual 2022 income tax payable is $203,345, it would be the least of the amounts described in ITA 157(1), and interest would be calculated based on the current year instalment alternative. The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular base rate plus 4%. There is a penalty on large amounts of late or deficient instalments. This penalty is specified in ITA 163.1 and is equal to 50% of the amount by which the interest owing on the late or deficient instalments exceeds the greater of $1,000 and 25% of the interest that would be owing if no instalments had been made. While detailed calculations are not required, we would note that this penalty would apply in this case. Interest on the entire balance of $203,345 of income tax payable would be charged beginning on the balance due date, March 31, 2022, two months after the end of the 2022 taxation year. The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular base rate plus 4%. There is also a penalty for late filing the income tax return. If the income tax return is not filed by the filing due date of July 31, 2022, the penalty amounts to 5% of the amount owing at the filing due date plus 1% per complete month of the unpaid income tax for a maximum period of 12 months. This penalty is in addition to any interest charged due to late payment of instalments or balance due. In addition, interest would also be charged on any penalties until such time as the income tax return is filed or the amount owing is paid. The late file penalty could be doubled to 10%, plus 2% per month for a maximum of 20 months for a second offence within a three year period if the CRA has sent a notice demanding that the income tax return be filed. Type: ES Topic: Administration - instalments, interest and penalties for corporations

92) For the three taxation years ending December 31, 2022, Gloria Sloan had combined federal and provincial income tax payable as follows: 2020 $23,600 2021 25,400 2022 (Estimated) 27,200 Using this information consider the following three independent cases. Case One Ms. Sloan's employer withholds $23,100 in 2020, $21,100 in 2021, and $23,300 in 2022. Case Two Ms. Sloan's employer withholds $24,100 in 2020, $18,600 in 2021, and $23,700 in 2022. Case Three Ms. Sloan's employer withholds $19,100 in 2020, $20,200 in 2021, and $24,300 in 2022. Required: A. For each of the three cases: • indicate whether instalments are required for the 2022 taxation year. Show all of the calculations required to make this decision; • in those cases where instalments are required, indicate the amount of the instalments that would be required under the approach used in the CRA's instalment reminder; and • in those cases where you have calculated the instalments required under the CRA's instalment reminder, indicate whether you believe there is a better alternative and calculate the required instalments under that alternative. B. For those Cases where instalments are required, indicate the dates on which the payments will be due. Answer: While there are alternatives in all Cases, the following answers represent the "minimum" instalments, as required in the problem. In all three Cases, the current year alternative is the best, but you should note that if the estimated net tax owing is lower than the actual net tax owing, she may be charged interest on the insufficient amounts of the instalments if the interest totals more than $25. Part A - Case One Ms. Sloan's net tax owing in each of the three years is as follows: 2020 = $500 ($23,600 - $23,100) 2021 = $4,300 ($25,400 - $21,100) 2022 = $3,900 ($27,200 - $23,300) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the conditions for instalments have been met. Under the CRA approach, the first two instalments would be $125 [($500 ÷ 4)] each, for a total of $250. The remaining two instalments would be $2,025 [($4,300 - $250) ÷ 2], for a total of $4,050. This would bring the total instalments for the year to $4,300 ($250 + $4,050). A better solution would be to base the instalments on the estimated 2022 results. Each instalment would be $975 ($3,900 ÷ 4). The resulting total of $3,900 would be less than the $4,300 total under the CRA reminder.

Part A - Case Two Ms. Sloan's net tax owing in each of the three years is as follows: 2020 = Nil ($23,600 - $24,100) 2021 = $6,800 ($25,400 - $18,600) 2022 = $3,500 ($27,200 - $23,700) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the conditions for the payment of instalments has been met. Under the CRA approach, no payment would be required for the first two instalments. However, the remaining two instalments would be $3,400 each [($6,800 - Nil) ÷ 2], bringing the total for the year to $6,800. A better solution would be to base the instalments on the estimated 2022 results. Each instalment would be $875 ($3,500 ÷ 4). The resulting total of $3,500 would be less than the $6,800 total under the CRA approach. Part A - Case Three Ms. Sloan's net tax owing in each of the three years is as follows: 2020 = $4,500 ($23,600 - $19,100) 2021 = $5,200 ($25,400 - $20,200) 2022 = $2,900 ($27,200 - $24,300) Estimated As her net tax owing is not expected to exceed $3,000 in 2022, the conditions for the payment of instalments has not been met and no instalments are required. Part B In Case One and Case Two, the required instalments would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

93) For the taxation year ending December 31, 2020, a corporation's combined federal and provincial income tax payable is $57,600. The corresponding figure for 2021 is $67,900. For the year ending December 31, 2022, it is estimated that combined federal and provincial income tax payable will be $62,900. Case One The taxpayer is a publicly traded corporation. Case Two The taxpayer is a publicly traded corporation. Assume that its combined federal and provincial income tax payable for the year ending December 31, 2021 were $61,400, instead of the $67,900 given in the problem. Case Three The taxpayer is a small CCPC. Case Four The taxpayer is a small CCPC. Assume that its combined federal and provincial income tax payable for the year ending December 31, 2021 were $61,400, instead of the $67,900 given in the problem. Required: For each of the preceding independent Cases, provide the following information: 1. Indicate whether instalments are required during 2022. Provide a brief explanation of your conclusion. 2. Calculate the amount of instalments that would be required under each of the three acceptable alternative methods. 3. Indicate which of the available methods would best serve to minimize instalment payments during 2022. If instalments must be paid, indicate the dates on which they are due. Answer: Case One 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $5,241.67 ($62,900 ÷ 12) based on the current year estimate. • Monthly instalments of $5,658.33 ($67,900 ÷ 12) based on the first preceding year. • Two monthly instalments of $4,800 ($57,600 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $5,830 {[($67,900 - (2)($4,800)] ÷ 10}, a total of $67,900. 3. The best alternative in terms of minimum instalments would be 12 instalments of $5,241.67, resulting in a total of $62,900 of instalment payments. The instalments would be due on the last day of each month, beginning in January 31, 2022.

Case Two 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $5,241.67 ($62,900 ÷ 12) based on the current year estimate. • Monthly instalments of $5,116.67 ($61,400 ÷ 12) based on the first preceding year. • Two monthly instalments of $4,800 ($57,600 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $5,180 {[($61,400 - (2)($4,800)] ÷ 10}, a total of $61,400. 3. The best alternative would be two payments of $4,800, followed by ten payments of $5,180. While the total instalments are the same $61,400 in both the second and third alternatives, the third alternative is preferable because the first two payments are lower. This provides a small amount of tax deferral. The instalments would be due on the last day of each month, beginning in January 31, 2022. Case Three 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $15,725 ($62,900 ÷ 4) based on the current year estimate. • Quarterly instalments of $16,975 ($67,900 ÷ 4) based on the first preceding year. • One instalment of $14,400 ($57,600 ÷ 4) based on the second preceding year, followed by three instalments of $17,833.33 [($67,900 - $14,400) ÷ 3], a total of $67,900. 3. The best alternative in terms of minimum instalments would be four instalments of $15,725, for total payments of $62,900. The instalments are due on March 31, June 30, September 30, and December 31 of 2022. Case Four 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $15,725 ($62,900 ÷ 4) based on the current year estimate. • Quarterly instalments of $15,350 ($61,400 ÷ 4) based on the first preceding year. • One instalment of $14,400 ($57,600 ÷ 4) based on the second preceding year, followed by three instalments of $15,667.67 [($61,400 - $14,400) ÷ 3], a total of $61,400. 3. The best alternative would be one payment of $14,400, followed by three payments of $15,667.67. While the total instalments are the same $61,400 in both the second and third alternatives, the third alternative is preferable because the first payment is lower. This provides a small amount of tax deferral. The instalments are due on March 31, June 30, September 30, and December 31 of 2022. Type: ES Topic: Administration - corporate tax instalments (comprehensive)

94) Mr. James Simon has asked for your services with respect to dealing with a Notice of Reassessment requesting additional tax for the 2018 taxation year which he says he has just received. Your first interview takes place a week later, on April 25, 2022, and Mr. Simon informs you that he has had considerable difficulty with the CRA in past years and, on two occasions in the past five years, he has been required to pay penalties as well as interest. With respect to the current reassessment, he assures you that he has complied with the law and that there is a misunderstanding on the part of the assessor. After listening to him describe the situation, you decide it is likely that his analysis of the situation is correct. Required: Indicate what additional information should be obtained during the interview with Mr. Simon and what steps should be taken if you decide to accept him as a client. Answer: The following additional information would be relevant in considering Mr. Simon's situation: A. Determination of the date of the Notice of Reassessment. A notice of objection must be filed prior to the later of: • 90 days from the date of the Notice of Reassessment; and • one year from the due date for the return under reassessment. In this case, the later date is 90 days after the date of the Notice of Reassessment. B. Determination of the date of the Notice of Assessment for the 2018 taxation year. A three year time limit applies from the date of the Notice of Assessment. As the Notice of Assessment for 2018 could have been sent in early April, 2019, this reassessment could be within the three year limit. C. Determination of whether Mr. Simon has signed a waiver of the three year time limit or if he is guilty of fraud or misrepresentation attributable to neglect, carelessness or wilfil default. If the reassessment is not within the three year time limit, Mr. Simon would not usually be subject to reassessment. However, if Mr. Simon has signed a waiver of the three year time limit, or if fraud or misrepresentation is involved, he becomes subject to reassessment, regardless of the time period involved. If the preceding determinations indicate that the reassessment is valid and you decide to accept Mr. Simon as a client, the following steps should be taken: • You should have Mr. Simon authorize you to represent him in his affairs with the CRA and/or authorize you to access his file through the online Represent a Client service. • A notice of objection should be filed before the expiration of the 90 day time limit. • You should begin discussions of the matter with the relevant assessor at the CRA. Type: ES Topic: Administration - appeals (Comprehensive)

95) For each of the following independent cases, indicate whether you believe any penalty would be assessed under ITA 163.2 on any of the parties involved. Explain your conclusion. Case 1 In preparing a income tax return for one of his established clients, an accountant relies on the financial statements that another accountant has prepared for the client's business income. Nothing in these statements seemed unreasonable. On audit, the CRA finds that the business income financial statements prepared by the other accountant contained material misrepresentations. Case 2 An accountant is asked to prepare an income tax return for a new client. The accountant had no previous acquaintance with the individual. The client provides statements, showing business income of $45,000 and no other income. He indicates that, during the current year, he made a $32,000 contribution to a registered Canadian charity, but has lost the receipt and has requested a duplicate. As it is now April 29, in order to avoid a late filing penalty, the accountant e-files the tax return, claiming a tax credit for the contribution without seeing the receipt. Case 3 An accountant has been engaged by a new client to use client provided records to prepare an income statement and to use the information in this statement to prepare an income tax return. As part of this engagement, the accountant reviews both the expense and revenue information that has been provided to him by the new client. Revenues are $285,000 and expenses $201,000. The information used to arrive at these figures seems reasonable and, given this, the accountant files the required income tax return. When the client is audited, the CRA finds a large proportion of the expenses claimed cannot be substantiated by adequate documentation and may not have been incurred. Furthermore, it appears that the client has a substantial amount of unreported revenues. Case 4 An accountant who lives in an expensive neighbourhood notices that the house next door has just been sold. It was listed for $1 million. The accountant introduces himself to the new neighbour and they become friends. At tax time the friend hires the accountant to prepare his income tax return. The accountant is given a T4 with $25,000 in income reported. Thinking that the gross income is on the low side, the accountant asks if this is all the income and the individual answers yes. The accountant is still not satisfied with the answer as the income seems to be out of proportion with the living standard of the friend, so he then asks him if he has received money from any source other than his employment and the friend replies that he received a substantial inheritance from his mother last year. The accountant does not ask any further questions and prepares and files the income tax return. When the friend is audited it is discovered that he has over $200,000 in unreported income.

Case 5 Units in a new limited partnership tax shelter are being sold by a company. The company has established this limited partnership by acquiring a software application in the open market for $100,000. However, the prospectus prepared by the company states that the fair market value of the application is $5,000,000, a value that was supported by an independent appraiser. The tax shelter is registered with the CRA and is available as an investment opportunity in the current year. On audit, the CRA determines that the $100,000 that was paid for the software application is, in fact, its fair market value on the date of the transfer. In discussing the matter with the independent appraiser, the CRA finds that the appraisal was not prepared using normal valuation procedures. In addition, the appraiser based his work entirely on assumptions and facts that were provided by the company. The appraiser was paid $50,000 for the appraisal. Case 6 (Requires Basic GST/HST Knowledge) An accountant is asked to file an HST return for a client who has not kept records of the HST paid or payable on purchases for a business carried on as a sole proprietor. However, the client does have financial statements for her business which, after a brief review, the accountant concludes is reasonable. In his review, the accountant found that these statements contain large amounts for wages and interest expense, as well as a significant amount of purchases that are zero-rated. (HST is not paid on any of these types of expenditures). In preparing the HST return, the accountant applies a factor of 13/113 to all of the expenses shown in the income statement. This results in an overstatement of input tax credits reported on the HST return which significantly reduces the HST payable.

Answer: Case 1 While the use of the other accountant's business income statements resulted in the income tax return that was filed, the tax return preparer would be entitled to the good faith defense since he relied, in good faith, on information provided by another professional on behalf of the client. Therefore, he would not be subject to the preparer penalty. The third party penalties may be applied to the other accountant if he or she knew or would be expected to know, but for circumstances amounting to culpable conduct, that the financial statements contained false statements. Case 2 Since the tax return preparer e-filed the taxpayer's return without viewing the charitable donation receipt, the CRA would consider assessing the tax return preparer with the preparer penalty. Given that the size of the donation is so disproportionate to the taxpayer's apparent resources as to defy credibility, to proceed unquestioningly in this situation would show wilful blindness and thus an indifference as to whether the ITA is complied with. Case 3 In view of the business that the taxpayer is in, there was nothing in the income statement that would have made the accountant question the validity of the information provided to him. Therefore, he could rely on the good faith reliance exception and would not be subject to the preparer penalty. Case 4 The accountant would not be subject to the penalties for participating or acquiescing in the understatement of an income tax liability. The facts were highly suspect until the accountant asked pointed questions to clear up any doubt. The client response appeared plausible given the circumstances. Case 5 The prospectus prepared by the company contains a false statement (overstated fair market value of the software) that could be used for income tax purposes to reduce the income tax liability of investors. The company knew or would reasonably be expected to know, but for culpable conduct, that the fair market value of the software was false. The CRA would consider assessing the company and the appraiser with third party civil penalties. Case 6 The issue here is whether the accountant is expected to know that HST is not payable on wages, interest expense, and zero-rated purchases. It is clear that the accountant should have known that no HST could be claimed on these expenditures. Given this, in filing a claim that includes an HST refund the accountant made a false statement, either knowingly, or in circumstances amounting to culpable conduct. Consequently, the CRA would consider assessing the accountant with the third party civil penalty, specifically, the preparer penalty. Type: ES Topic: Administration - tax preparer's penalties

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 3 Income or Loss from an Office or Employment 3.1 Online Exercises 1) Explain how a bonus arrangement can be used to defer the taxes paid by an employee. Answer: The ability to use a bonus arrangement to defer tax on employment income is based on the fact that, while business income is accrual based, employment income is on a cash basis. This means that the business can deduct the bonus at the time a legal obligation to make the payment arises irrespective of the fact that the payment may be delayed. On the other hand the employee will only include the bonus in income when actually received. If the bonus is declared in one year and paid in the following year, this provides a one year deferral to the employee. Note, however, the bonus must be paid by the 179th day of the year end of the employer. If it is not paid by that date the employer will not be able to deduct the bonus until it is actually paid (ITA 78(4)). Type: ES Topic: Employment - bonus arrangements

2) List and briefly describe the major factors that will be considered in determining whether an individual is working as an employee or as an independent contractor. Answer: As noted in your text, the first step in making this distinction is to determine the intent of both parties. Both the worker and the payer must be clear as to whether there is a contract of service (employment relationship) or alternatively, a contract for services (business relationship). In many cases, the intent may be clear. However, the worker and payer must ensure that their intent is reflected in the actual terms and conditions of their relationship. In making this determination, the following factors will be considered by the CRA and the courts: Control — In an employer/employee relationship, the employer usually controls, directly or indirectly, the way the work is done and the work methods used. The employer assigns specific tasks that define the real framework within which the work is to be done. Ownership of Tools and Equipment — In an employment relationship, the employer usually supplies the equipment and tools required by the employee. In addition, the employer covers the following costs related to their use: repairs, insurance, transport, rental, and operations (e.g., fuel). In some trades, however, it is customary for employees to supply their own tools. This is generally the case for garage mechanics, painters, and carpenters. Similarly, employed computer scientists, architects, and surveyors sometimes supply their own software and instruments. Ability to Subcontract or Hire Assistants — If the individual must personally perform the services, this weighs in favour of an employment relationship. Alternatively, if the individual can hire assistants, with the payer having no control over the identity of the assistants, this fact will weigh in favour of a contractual business relationship self-employed. Financial Risk — In general, employees will not have any financial risks associated with their work. In contrast, in a business relationship the provider bears any risk and can incur losses. Responsibility for fixed monthly costs is another factor that weighs in favour of a business relationship. Responsibility for Investment and Management — The absence of capital investment in the business and no presence in management points to an employment relationship. This factor is generally viewed by the courts as looking to answer the question of Who's business is it?" Opportunity For Profit — In an employment relationship, the employer alone normally assumes the risk of loss. The employer also usually covers operating costs, which may include office expenses, employee wages and benefits, insurance premiums, and delivery and shipping costs. The employee does not assume any financial risk, and is entitled to their salary or wages regardless of the financial health of the business. Correspondingly, an employee will have little or no opportunity for profit. While there may be productivity bonuses for exceptional work, such amounts are not profits of the worker's own business. Type: ES Topic: Employee vs. self-employed

3) The income tax consequences of being classified as an employee rather than as an independent contractor can be significant. As a result, it is not uncommon to find controversy and, in some cases, litigation resulting from the need to make this distinction. Explain the importance, from the point of view of an employee, of the distinction between being classified as an employee versus being classified as an independent contractor. Answer: The importance of this distinction largely relates to the deductibility of expenses. The number and types of expenses which can be deducted against employment income are very limited. In contrast, if an individual is an independent contractor then they are carrying on their own business often as a sole proprietor where the amounts allowed as deductible expenses for income tax purposes are considerably much broader. In addition if the individual is considered to be an employee, then the employer will have to withhold income taxes, Canada Pension Plan contributions, and Employment Insurance premiums. This would not be the case if the individual is an independent contractor. An independent contractor is responsible for quarterly tax instalments, if necessary, and for both the employer's and employee's portions of CPP contributions. Such individuals may or may not have to make EI contributions, depending on whether they elect to participate in the EI program. There are also GST/HST implications where the provider of the services is an independent contractor GST/HST may have to be charged and remitted. This would not be the case where the individual is in an employment relationship. Type: ES Topic: Employee vs. self-employed

4) Briefly described the advantages to an employer of hiring independent contractors, as opposed to hiring employees. Answer: The major advantages include the following: • Using independent contractors eliminates the need for payments for CPP, EI, and payroll taxes (where applicable). • Independent contractors are not entitled to employee fringe benefits. • Employers are not committed to retaining independent contractors for the long-term as in the case with employees. • Employers are, in general, not legally responsible for the work of independent contractors. Type: ES Topic: Employee vs. self-employed

5) List two types of employee benefits that involve tax deferral and two types of benefits that involve tax avoidance. Answer: Examples involving tax deferral include employee contributions to RPPs and bonus arrangements that are paid within 180 days of the employer's year end. Examples involving tax avoidance include insurance premium payments for private health care, non-cash gifts under $500 and employer contributions to RPPs. Type: ES Topic: Employment - taxable benefits (general concepts)

6) London Wholesalers employs over 50 full time salespeople, all of whom are provided with a company car. While the cars are used primarily for business purposes, all of the sales staff drive them at least 20,000 kilometers per year for personal purposes. As controller of the Company you are aware that there are income tax rules that could result in a substantial taxable benefits as a result of the use of a company car. Indicate some of the ways in which the Company and the sales staff might legitimately reduce the amount of the taxable benefit associated with having the use of an employer provided car. Answer: While there may be other possibilities, the tax planning suggestions that were included in the text are as follows: Require Return of Car — During extended periods of time when an employee does not use an employer provided vehicle, the vehicle will be considered available for use unless the employer REQUIRES it to be returned to their premises. Given this, the employer should have a policy of requiring vehicles to be returned during periods of non-use by the employee. There should be justification for this policy such as for insurance purposes or where available cars are shared amongst employees. Record Keeping — In the absence of detailed records, an employee can be charged with the full standby charge and 100% personal use. To avoid this result, it is essential that records be kept of both employment related and personal kilometers driven. Apps exist to assist in the process. Leasing Vs. Buying — In many cases, a lower taxable benefit will result when the employer leases rather than purchasing a car. One adverse aspect of leasing arrangements should be noted. Lease payments are made up of a combination of both interest and principal payments on the car. As the taxable benefit is based on the total lease payment, the interest portion becomes, in effect, a part of the taxable benefit. Minimizing the Standby Charge — This can be accomplished in a variety of ways including longer lease terms, lower trade-in values for old vehicles in purchase situations, larger deposits on leases, and the use of higher residual values in leasing arrangements. Note that refundable deposits in excess of $1,000 on leases can reduce the deductible lease costs. Cars costing more than $30,000 — With the taxable benefit to the employee based on the full cost of the car and any portion of the cost in excess of $30,000 not being deductible to the employer as depreciation (e.g. CCA), it is difficult to imagine situations in which it would make economic sense for a profit oriented employer to provide any employee with a luxury car. As the taxable benefit to the employee is based on the actual cost of the car, while the deductible amount is limited to $30,000, a situation is created in which the employee is paying taxes on the portion of a benefit attributable to a cost that is nondeductible to the employer for income tax purposes. Employee Owned Automobile — The alternative to the employer provided automobile is to have the employer compensate the employee for using their own automobile. In many cases, this may be preferable to providing an automobile. For example, in those situations where employment related use is less than 50% providing an employee with an employer-provided vehicle will result in the maximum benefit which may exceed the cost of the personal use portion. These issues may be favourably resolved by providing employees with structured allowances for the use of their own vehicles. Type: ES Topic: Employment - automobile benefits (planning & general concepts)

7) Because of the formula used to calculate the taxable benefit when an employer owned vehicle is provided to an employee, the amount of the benefit can exceed the value of the vehicle. Explain this statement. Answer: The formula requires a benefit of 2% of the cost of the vehicle per month of use. This benefit continues, without regard to the length of time the car is used by the employee. At this rate, after 50 months, the taxable benefit is equal to the value of the vehicle [(2%)(50) = 100%]. If the vehicle is used for more than 50 months, the amount of the benefit will exceed 100% of the cost of the vehicle. Type: ES Topic: Employment - automobile benefits (planning & general concepts)

8) What is the difference between an allowance and a reimbursement? Answer: A reimbursement is an amount paid to an employee to compensate the employee for actual costs incurred on behalf of the employer in performing their employment duties. The amount paid will equal the costs incurred. In contrast, an allowance is a payment designed to cover, in a general way, the costs of some specified type of activity (e.g., a per diem allowance to cover food and lodging while traveling). Type: ES Topic: Employment - allowances and reimbursements

9) An employee may be paid a flat rate monthly amount for using their own automobile for employment purposes. Alternatively, employees may be paid a reasonable amount based on the actual number of kilometers driven for employment purposes. From the point of view of both the employer and the employee, explain the difference in the income tax treatment of these two alternatives. Answer: From the point of view of the employer, the full amount of any monthly allowance will be deductible as an employment related expense. With respect to the use of a kilometre based allowance, there are prescribed limits on what they employer may deduct. (These are discussed in Chapter 6.) From the point of view of the employee, the flat rate monthly allowance will have to be included in employment income for the year since the ITA deems any allowance not solely based on a per kilometre allowance to be unreasonable and therefore required to be included in income. Given this, the employee would then be in a position to deduct their actual costs of using their own vehicle (an appropriate percentage of interest, CCA, and operating costs). Alternatively, if an employee receives a per kilometer based allowance, the allowance is only required to be included in employment income if the allowance is not reasonable which is a question of fact. If the allowance is included in income then once again the employee would be in a position to be able to deduct a portion of their expenses related to their employment use. Type: ES Topic: Employment - allowances and reimbursements

10) Briefly explain the tax consequences resulting from being a member of an employer sponsored group disability insurance plan. Answer: Depending on the plan, the employer may pay all of the premiums, part of the premiums, or none of the premiums. As long as the plan provides periodic benefits that compensate for lost employment income, the premiums paid by the employer are not considered to be taxable benefits to the employee regardless of the amount paid by the employer. Employer paid premiums are fully deductible to the employer. Amounts paid by the employee are not deductible to the employee when paid by may be deductible when disability receipts are received (see the next paragraph). If the employer has made any contribution towards the plan premiums that does not create a taxable benefit, the full amount of any disability benefits received must be included in the income of the employee. This amount can be reduced to the extent of the cumulative amount of premiums paid by the employee prior to the receipt of the benefits, as well as those paid during the year the benefits are received. Type: ES Topic: Employment - disability insurance benefits

11) List the factors that will have to be considered in determining whether a particular low interest or interest free loan is an effective form of employee compensation. Answer: The factors that would have to be considered are as follows: • the employer's rate of return on alternative uses for the funds • the employer's tax rate • the employee's tax rate • the prescribed rate • the rate available to the employee on a similar arm's length loan Type: ES Topic: Employment - loans to employees

12) Briefly describe the calculation of the taxable benefit that is assessed on loans to employees that are not considered to be housing loans. Answer: The taxable benefit on non-housing loans is calculated using the prescribed rate that is applicable to each calendar quarter. The amount of the benefit is reduced by any interest paid on the loan by the employee during the year or within 30 days of the end of the year. Type: ES Topic: Employment - loans to employees

13) Under what circumstances is an individual entitled to a stock option deduction equal to one-half of the stock option benefit that would be required to be included in employment income as the result of exercising rights under a stock option plan or selling stock option shares? Answer: If the issuing corporation is a publicly traded Canadian company with gross revenues of $500 million or less, the deduction is only available when the option price is equal to or greater than the FMV of the shares at the time the options were issued. New rules, effective July 1, 2021 with respect to stock option issued as of that date, may restrict access to the stock option deduction for employees of large mature public corporations with gross revenues in excess of $500 million. Employees of such mature public companies are limited to the stock option deduction based upon a $200,000 annual vesting limit which depends on the FMV of the stock option shares at the time the option was granted and depending on when the options become exercisable. The employer may also designate the stock options as nonqualifying meaning that no stock option deduction could be claimed by a recipient employee of the stock option plan. The benefit of the designation treatment by the corporate employer is that the employer is permitted to claim the stock option benefit amount to the employee on non-qualifying stock option shares as a deduction. If the issuing corporation is a CCPC, the deduction is available if the shares are held for two years, without regard to whether the option price was above or below the fair market value of the shares at the time the options were issued. However, if the shares are not held for two years, the availability of the deduction is subject to the same condition that is applicable to non-CCPCs other than those affected by the new stock option deduction rules. That is, the option price must be equal to or greater than the fair market value of the shares at the time they were issued. The new stock option deduction rules are not intended to apply to CCPCs. Type: ES Topic: Employment - employee stock options

14) The number of deductions that can be made in computing employment income is fairly limited. Further, certain types of expenses must meet specified conditions in order to be eligible for deduction. Indicate the conditions that must be met in order for a salesperson to deduct expenses in computing employment income. In addition, Indicate the conditions that must be met in order for travel costs to be deducted in computing employment income. Answer: ITA 8(1)(f) indicates that four conditions must be met before the deduction of expenses for salespersons will be allowed. These are as follows: 1. The salesperson must be required by the employer to pay their own expenses. This must be supported by form T2200 signed by the employer. 2. The salesperson must be ordinarily required to carry out their employment duties away from the employer's place of business. 3. The salesperson must not receive an expense allowance that is not required to be included in employment income. 4. The salesperson must receive at least part of their remuneration in the form of commissions. ITA 8(1)(h) indicates that any employee can deduct travel expenses, with meals and entertainment subject to the 50% limit, provided three conditions are met. These are as follows: 1. The employee must be required by the employer to pay their own travel costs. This must be supported by Form T2200 signed by the employer. 2. The person must be ordinarily required to carry on their employment duties away from the employer's place of business. 3. The person must not receive an allowance for travel costs that is not required to be included in employment income. Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

15) Many employees maintain a work space in their home. Describe the kinds of home related expenses that can be deducted by an employee. Answer: All employees who qualify to deduct work space in the home costs can deduct an appropriate portion of: • Maintenance or operating costs such as water and electricity • Minor repairs In those cases where the employee has commission income, he can also deduct an appropriate portion of: • Property taxes • Insurance Note that, under no circumstances, can an employee deduct CCA on the home, or any portion of interest on a mortgage on the home. Type: ES Topic: Employment - home office expenses (ITA 8(13))

16) Employment income is the salary, wages, and other remuneration, including gratuities, that are receivable by an individual during the year. Answer: FALSE Explanation: Employment income is the salary, wages, and other remuneration, including gratuities, that are received by an individual during the year. Type: TF Topic: Employment income (comprehensive)

17) If properly constructed, bonus arrangements can result in tax deferral for employees. Answer: TRUE Type: TF Topic: Employment - bonus arrangements

18) One of the advantages of being an independent contractor (carrying on a business) rather than an employee is that you do not have to make CPP contributions. Answer: FALSE Explanation: Independent contractors have to make a double contribution to CPP. Type: TF Topic: Employee vs. self-employed

19) Employers generally prefer contracting out as it avoids the cost of CPP and EI contributions. Answer: TRUE Type: TF Topic: Employee vs. self-employed

20) Payments by employers of premiums on life insurance for employees are not taxable benefits. Answer: FALSE Explanation: Such payments are a taxable benefit for employees. Type: TF Topic: Employment - taxable benefits

21) When an employee pays all of the premiums for disability insurance coverage, the payments are not deductible and the benefits received are tax free. Answer: TRUE Type: TF Topic: Employment - disability insurance benefits

22) Payments of premiums by employers to private health care service (PHSP) plans are not taxable benefits and are therefore any benefits received under such plans are tax free. Answer: TRUE Type: TF Topic: Employment - taxable benefits

The questions below relate to the following facts: An employee is given a $10,000 interest free loan from an employer on January 1 to buy a car to be used for employment purposes. Due to a serious illness, the car is only used for nine months of the year. Assume that the prescribed rate is 2% for the entire year.

23) Her taxable benefit from the loan is $200 for the year. Answer: TRUE Explanation: Her taxable benefit from the loan is $200 for the year. Her use for only nine months is irrelevant. Type: TF Topic: Employment - loans to employees

24) She pays her employer $1,000 on September 30 to decrease the loan. Her taxable benefit from the loan is $180 for the year. Answer: FALSE Explanation: Her taxable benefit is $195 [(2%)(9/12)($10,000)] + [(2%)(3/12)($9,000)]. Type: TF Topic: Employment - loans to employees

25) In calculating her minimum standby charge, the imputed interest from the loan is part of her operating costs. Answer: FALSE Explanation: There would be no minimum standby charge as the company does not own the car. Type: TF Topic: Employment - loans to employees

26) A corporate director is subject to the employment income rules such that any fees received are included in employment income. Answer: TRUE Explanation: The employment income rules apply to employment and those individuals who hold an "office". An individual holding an office includes directors of corporations. In addition directors fees are included in employment income at ITA 6(1)(c). Type: TF Topic: Employment - director fees

27) An employee worked overtime at the end of December 2022 earning an additional $2,500. The employer processed the payment which was deposited to the employee's bank account on January 4, 2023. The overtime will be included in the employee's income for the 2022 taxation year. Answer: FALSE Explanation: Employees are required to include remuneration in their income for the calendar year in which it was received which was only in 2023. Type: TF Topic: Employment - received basis

28) An employee worked overtime at the end of December 2022 earning an additional $2,500. The employer processed the payment which was mailed out on December 30, 2022. The employee only received the mail on January 4, 2023. The overtime will be included in the employee's income for the 2022 taxation year. Answer: TRUE Explanation: While employees are required to include remuneration in their income for the calendar year in which it was received ITA 248(7) establishes a rule that deems an employee to have received the amounts based on the date the payment was mailed which is the 2022 calendar year. Type: TF Topic: Employment - received basis

29) Which of the following considerations is NOT relevant in the determination of whether an individual performing work is an employee or an independent contractor? A) Opportunity for profit. B) Hours per week spent at work site. C) Ability to subcontract to others. D) Ownership of tools. Answer: B Explanation: B) How much work is performed at a particular site. Type: MC Topic: Employee vs. self-employed

30) Veronica mows lawns during the summer. In 2022 she was paid directly by homeowners for her work, in some case on the basis of the completed job, in other cases at an hourly rate. Her friend Jonathon does the same work. However, he is paid at an hourly rate by a lawn maintenance company. Which of the following statements is correct? A) Veronica earns business income and Jonathon earns employment income. Veronica will be able to deduct more expenses than Jonathon. B) Veronica and Jonathon both earn employment income. C) Veronica earns business income and Jonathon earns employment income. Their deductible expenses will be the same. D) Veronica and Jonathon both earn business income. Answer: A Explanation: A) Veronica earns business income and Jonathon earns employment income. Veronica will be able to deduct more expenses than Jonathon. Type: MC Topic: Employee vs. self-employed

31) Which of the following groups of factors are used by the courts in order to determine a taxpayer's status as an employee or a self-employed contractor? A) Intent, control test, ownership of tools test, number of hours worked per week B) Intent, ability to subcontract test, the type of work being undertaken, ownership of tools test C) Intent, control test, ownership of tools test, opportunity for profit D) Intent, ability to subcontract test, the location of the work site, opportunity for profit Answer: C Explanation: B) The nature of the work performed can weigh in favour of a contractual business relationship but it is not a separately established test. C) intent, control test, ownership of tools test, opportunity for profit Type: MC Topic: Employee vs. self-employed

32) In 2022, Nellie Ward receives from her current employer: • A $400 gift certificate for online retailer Amazon. • A $600 reclining easy chair for outstanding customer service during the year. • A set of 4 coffee mugs with the employer's logo etched on the side. These mugs cost the employer $20. • An Easter basket of gourmet treats valued at $245. • A cash award of $300 in recognition of 10 years of service with the employer. What is the amount that will be included in Nellie's 2021 employment income with respect to these gifts? A) $800. B) $1,000. C) $1,300. D) $700. Answer: C Explanation: A) $800 ($400 + $600 - $500 + $300) B) $1,000 ($400 + $600) C) $1,300 ($400 + $600 + $300) D) $700 ($400 + $300) Type: MC Topic: Employment - taxable benefits

33) Indicate which of the following benefits provided by an employer is NOT considered part of employment income. A) Reimbursement of moving expenses as a result of an employer required move. B) Travel expenses of the employee's spouse where the spouse's presence was not required. C) Periodic payments from wage loss replacement plan designed to replace employment income. D) Premiums paid by an employer on life insurance policies. E) Individual premiums under provincial hospitalization plans. Answer: A Explanation: A) Reimbursement of moving expenses. Type: MC Topic: Employment - taxable benefits

34) Indicate which of the following benefits provided by an employer is considered part of employment income. A) Subsidized meals provided in employer facilities where the employees pays an amount equal to or greater than the employer's cost. B) Low rent housing in non-remote or non-special work sites. C) Premiums under private health services plans. D) Uniforms and special clothing required to protect employees from hazards. Answer: B Explanation: B) Low rent housing in non-remote or non-special work sites. Type: MC Topic: Employment - taxable benefits

35) Which of the following is NOT a taxable benefit? A) A cash Christmas gift to an employee from the employer. All the employees received a cash bonus of $150. B) Payment of the tuition for an employee completing a general interest degree on a part-time basis that has no benefits to the employer. C) A 20% discount on employer merchandise, available to all employees. The employer's mark-up is 50%. D) Low rent housing provided by the employer in non-remote or non-special work sites. Answer: C Explanation: C) A 20% discount on the employer's merchandise is not considered a taxable benefit unless the employee is permitted to purchase the item below the employer's cost. Type: MC Topic: Employment - taxable benefits

36) Which one of the following benefits received from an employer would NOT result in a taxable benefit or taxable allowance to the employee? A) A reasonable allowance of $0.45 per kilometer for driving on employer business. B) An interest free loan used to acquire shares of the employer. C) Employer paid life insurance premiums for $20,000 of employee coverage. D) Use of the employer's vehicle which is used 95% for employment purposes. Answer: A Explanation: A) The allowance is not taxable to the employee as long as it is reasonable. Type: MC Topic: Employment - taxable allowances and benefits

37) In which one of the following lists are ALL items relevant to the determination of employment income? A) Employee RPP contributions; signing bonus on accepting employment; use of an employer-owned automobile. B) Monthly automobile allowance; dental plan premiums paid for by the employer; promotional cost incurred in selling the employer's products. C) Subsidized meals at an employer's remote work site; life insurance paid by the employer; legal fees incurred to collect unpaid salary. D) Tips and gratuities; dental insurance premiums paid by the employer; exercise of options to purchase shares of the publicly traded employer. Answer: A Explanation: A) In B, dental plan premium payments are not a taxable benefit if the plan is a PHSP. In C, subsidized meals at an employer's remote work site do not create a taxable benefit. In D, dental insurance premiums is not a taxable benefit as long as the plan qualifies as a PHSP. Type: MC Topic: Employment - taxable allowances and benefits

38) An employee has been offered a choice of an increase in salary of $100,000 or a combination of salary and other benefits with a cost to the employer of $100,000. Assuming that the employee would purchase the listed benefits with their own funds if they were not provided in the benefits package, which of the following packages would be the most advantageous from an income tax perspective? A) A dental plan plus a leased automobile that would be used only for personal purposes by the employee. B) Life insurance plus a leased automobile that would be used only for personal purposes by the employee. C) Salary plus life insurance. D) Salary only. Answer: A Explanation: A) A dental plan plus a leased automobile that would be used only for personal travel by the employee. Dental premiums would not be taxable as long as the plan qualifies as a PHSP and the automobile benefit would only cost the employee the income tax on the addition to income. Type: MC Topic: Employment - taxable benefits

39) Which of the following is NOT a tax-free benefit for the employee when it is provided by an employer? A) Premiums for private health services plans (PHSP). B) A gift of a digital camera that cost $390 for an employee's wedding. No other gifts were received by the employee in the year. C) Employer reimbursement for the cost of tools required by the employee to perform their employment duties. D) Employer contributions to an RPP. Answer: C Explanation: C) Employer reimbursement for the cost of tools required to perform work. Type: MC Topic: Employment - taxable benefits

40) Which of the following is a taxable benefit? A) Payment of the tuition for an employee taking a course that will benefit the employer. B) A $350 VISA gift card given as a Christmas present to all employees. C) A 15% discount on the employer's merchandise, available to all employees. The discounted amount is above the employer's cost. D) Low priced meals in the company cafeteria where the prices are equal to the cost of the meals. Answer: B Explanation: B) The Christmas gift is a near-cash gift. Type: MC Topic: Employment - taxable benefits

41) With respect to employment related automobile costs and benefits, which of the following statements is correct? A) When an employee is provided with an automobile that is purchased by the employer for $50,000, the taxable benefit to the employee will be based on the Class 10.1 prescribed limit of $30,000. B) An employee who uses their own vehicle for employment purposes cannot deduct any financing costs related to the purchase of the car. C) An employee who is provided with a vehicle owned by the employer can deduct CCA to the extent that the vehicle is used for employment purposes. D) If an employee drives an employer provided vehicle for 20,004 kilometers or more for personal purposes during a year, there will be no reduction of the basic standby charge. Answer: D Explanation: C) Only the employer owner can claim CCA not the employee. D) If an employee drives an employer provided vehicle for 20,004 kilometers or more for personal purposes during a year, there will be no reduction of the basic standby charge. Type: MC Topic: Employment - automobile benefits (planning & general concepts)

The questions below are based on the following information: The cost of the automobile is $20,000 including HST. If the car is leased, the monthly lease payment is $500 including HST. The car is driven for a total of 26,000 km during 2022 and the operating costs for the year are $4,000.

42) Assume the car is purchased. It was used by an employee for the whole year. The employee drives it for personal purposes for a total of 9,000 kms. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,520. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: H Explanation: H) Standby charge = [(12)(2%)($20,000)(9,000/20,004)] = $2,160 Operating costs - Lesser of: • [(9,000)($0.29)] = $2,610 • [(1/2)($2,160)] = $1,080 Total of $2,160 and $1,080 = $3,240 Standby Charge Operating Costs Benefit H - right Total Benefit

$2,160 1,080 $3,240

E - wrong, no operating cost benefit = $2,160 M - wrong, no reduction = $4,800

Type: MC Topic: Employment - taxable benefits - employer owned automobile

43) Assume the car is leased. It is used by the employee for 11 months of the year. In the other month, he was required to return the automobile to his employer's premises in accordance with company policy. He drives it for personal purposes for a total of 6,000 km. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,455. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: C Explanation: C) Standby charge = [(2/3)(11)($500)(6,000/18,337)] = $1,200 Operating costs - Lesser of: • [(6,000)($0.29)] = $1,740 • [(1/2)($1,200)] = $600 Total of $1,200 and $600 = $1,800 Standby Charge Operating Costs Benefit C - right Total Benefit

$1,200 600 $1,800

B - wrong - 20,004 km as denominator in standby reduction = $1,650 D - wrong - 2 months usage = $1,964 Type: MC Topic: Employment - taxable benefits - employer leased automobile

44) Assume the car is purchased. It is used by the employee for 10 months of the year. In the other months, he was required to return the car to his employer's premises per company policy. He drives it for personal purposes for a total of 11,000 km. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,455. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: K Explanation: K) Standby charge = [(10)(2%)($20,000)(11,000/16,670)] = $2,639 Operating costs - Lesser of: • [(11,000)($0.29)] = $3,190 • [(1/2)($2,639]) = $1,320 Total of $2,639 and $1,320 = $3,959 Standby Charge Operating Costs Benefit K - right- Total Benefit

$2,639 1,320 $3,959

J - wrong - 20,004 km as denominator in standby reduction = $3,300 L - wrong - 12 months usage = $4,752 Type: MC Topic: Employment - taxable benefits - employer owned automobile

45) Assume the car is leased. It is used by the employee for 11 months of the year. In the other month, he was required to return the car to his employer's premises in accordance with company policy. He drives it for personal purposes for a total of 7,500 km and reimburses the employer $1,100 ($100 per month) for the use of the car. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,455. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: A Explanation: A) Standby charge = [(2/3)(11)($500)(7,500/18,337)] = $1,500 Operating costs - Lesser of: • [(7,500)($0.29)] = $2,175 • [(1/2)($1,500)] = $750 Total of $1,500 and $750, less $1,100 = $1,150 Standby Charge Operating Costs Benefit Repayment F - wrong - Ignore repayment = $2,250 G - wrong - 12 months usage = $2,455

$1,500 750 (1,100) $1,150 A - right - Total Benefit

Type: MC Topic: Employment - taxable benefits - employer leased automobile

46) Mr. Brown's employer provides him with an automobile for his personal use, and pays all operating costs for that vehicle. The vehicle, used by Mr. Brown throughout 2022, cost his employer $31,500, including GST of $1,500 (no provincial sales tax was charged on the vehicle purchase). Mr. Brown drove the vehicle 45,000 km during the year, of which 9,000 km were for personal purposes and 36,000 for employment purposes. His employer paid $7,750 in operating costs for the year. Mr. Brown paid nothing to his employer for the use of the vehicle. Which one of the following amounts represents the minimum taxable benefit that Mr. Brown must include in his employment income for the use of this vehicle in 2022? A) $2,268. B) $4,859. C) $5,102. D) $5,831. Answer: C Explanation: C) The minimum taxable benefit that Mr. Brown must include in his employment income for the use of this vehicle in 2022 is $3,401 [(2%)(12)($31,500)(9,000/20,004)], plus $1,701 [(1/2)($3,401)], a total of $5,102. Standby Charge (2%)(12)($31,500)(9,000/20,004) Operating Costs Benefit (1/2)(3401) C - Total Benefit

$3,401 1,701 $5,102

Errors A. 45,000 km as denominator in reduction formula = $2,268 B. Used $30,000 as cost of vehicle = $4,859 D. Used $3401 [(2%)(12)($31,500)(9,000/20,004)] + $ (0.27)(9,000) as operating cost benefit = $5,831 Type: MC Topic: Employment - taxable benefits - employer owned automobile

47) The following facts relate to an employer provided automobile. Original cost of automobile, including HST Replacement value of car at time of providing it to employee CCA claimed by employer Personal use kilometers driven by employee during the year Total kilometers driven by employee during the year Number of months automobile was used by employee

$40,000 $30,000 $ 3,000 2,000 km 30,000 km 12

Which one of the following amounts represents the employee's minimum standby charge in 2022? A) $720. B) $960. C) $640. D) $9,600. Answer: B Explanation: B) $960 [(2%)(12)($40,000)(2,000/20,004)]. A. $30,000 as cost of vehicle = $720 C. 30,000 as denominator = $640 D. No reduction = $9,600

Type: MC Topic: Employment - taxable benefits - employer owned automobile

48) Omar is employed by Sansauto Corp. and uses his own car for employment purposes. Which of the following may NOT be claimed as an employment expense? A) Gas (employment related portion) B) Auto insurance (employment related portion) C) Standby charge (employment related portion) D) Oil change (employment related portion) Answer: C Explanation: C) Standby charge (employment related portion). Standby charge only applies when an employee uses the employer's automobile for personal use. It is an employment income inclusion (not an expense). Type: MC Topic: Employment - employee provided vehicle

49) Which of the following employee reimbursements would result in an increase in employment income? A) Housing loss reimbursement of $20,000 B) Moving costs reimbursement of $20,000 for employer required move. C) Travel expense reimbursement of $20,000 for employer related travel. D) Employment related tuition reimbursement of $20,000 Answer: A Explanation: A) Housing loss reimbursement of $20,000. $2,500 of the housing loss reimbursement would be a taxable benefit [$20,000 — 15,000) × 50%] Type: MC Topic: Employment - allowances and reimbursements

50) With respect to the determination of employment income, which of the following statements is correct? A) If an allowance is included on an employee's T4, any expenses related to the allowance cannot be deducted for tax purposes. B) One-half of reimbursed meals are required to be included in employment income. C) Reasonable vehicle allowances are not included in income. D) All allowances are included in income, all reimbursements are not included in income. Answer: C Explanation: C) Reasonable vehicle allowances are not included in income. Type: MC Topic: Employment - allowances and reimbursements

51) With respect to loans to employees, which of the following statements is correct? A) If the rate on the loan is less than the market rate for similar types of debt, the employee will have a taxable benefit equal to the difference. B) If the proceeds from the loan are used to purchase investments the imputed interest benefit on the loan will be deductible in determining the employee's income from those investments. C) When the loan is to assist an employee with a home purchase, the taxable benefit must always be calculated using each quarterly value for the prescribed rate. D) The taxable benefit on an employee loan will not be altered by the amount of interest payments the employee makes to the employer. Answer: B Explanation: B) If the proceeds from the loan are used to purchase investments the imputed interest benefit on the loan will be deductible invested in income producing assets, the interest benefit on the loan will be deductible in determining the employee's income from those investments. Type: MC Topic: Employment - loans to employees

52) T. Adams commenced employment at Moana Sales Ltd. on February 1, 2022. He had lived in an apartment until May 2022, at which time he purchased a new house. Under the terms of his employment, he received a housing loan on May 1, 2022 of $80,000 at a rate of 2%. He pays the interest on the loan on a monthly basis. Assume the 2022 prescribed interest rates applicable to employee loans are as follows: First quarter Second quarter Third quarter Fourth quarter

5% 4% 3% 3%

What is T. Adams' taxable benefit on the above loan for 2022 using number of days? A) Nil. B) $267.40. C) $670.68. D) $1,073.97. E) $2,147.95. Answer: C Explanation: C) $670.68 {[$80,000][(61/365)(4% - 2%) + (184/365)(3% - 2%)]}. Type: MC Topic: Employment - loans to employees (home purchase loan)

53) Sam borrowed $50,000 from her employer at an annual rate of 1% interest last year for personal purposes. Assume that at the time the loan was made, the prescribed rate of interest was 3% and this rate has not changed. Sam is subject to a combined federal/provincial income tax rate of 30%. What is the after tax cost of the loan to Sam for the current year? A) $300 B) $500 C) $800 D) $1,500 Answer: C Explanation: C) $800 Tax cost of benefit of $300 [($50,000)(3% - 1%)(30%)] + interest paid of $500 [($50,000)(1%)] = $800 A. $300 ($1,000 × 30%) B. $500 ($50,000 × 1%) D. $1,500 ($500 + $1,000)

Type: MC Topic: Employment - loans to employees

54) Which of the following statements with respect to stock options is correct? A) If the stock option price for shares is less than the FMV at the date the option is granted then simply granting the options will automatically create a taxable benefit to the employee. B) If shares in a CCPC are acquired through the exercise of stock options, there will be a deduction equal to one-half of the employment income inclusion, provided the shares were held for at least two years. C) When options to acquire the shares of a Canadian public corporation are exercised, there are no immediate income tax consequences for the employee. D) When shares in a CCPC that have been acquired through the exercise of options are sold, any loss on the sale can be used to offset any stock option employment benefit that results from the exercise of the options. Answer: B Explanation: B) If shares in a Canadian controlled private corporation are acquired through the exercise of stock options, there will be a deduction equal to one-half of the employment income inclusion, provided the shares were held for at least two years. Type: MC Topic: Employment - employee stock options

55) Ms. Joan Hanson is an employee of a CCPC. In 2021, she is granted options to purchase 500 shares of her employer's common stock at a price of $22 per share. At this time, the FMV of the shares are estimated to be $20.50. In 2022, she exercises all of the options purchasing 500 shares. At this time, the estimated FMV of the shares are $31.50 per share. On December 1, 2022, she sells the shares for $38.75 per share. The net effect of the transactions on her 2022 taxable income would be: A) an increase of $1,812.50. B) an increase of $2,375.00. C) an increase of $4,187.50. D) an increase of $4,750.00. E) an increase of $6,562.50. Answer: C Explanation: C) An increase of $4,187.50. This would be calculated as follows: Employment Income [($31.50 - $22.00)(500)] $4,750.00 Deduction under ITA 110(1)(d) ( 2,375.00) Taxable Capital Gain [($38.75 - $31.50)(500)(1/2)] 1,812.50 Net increase in 2022 taxable income $4,187.50 Type: MC Topic: Employment - employee stock options

56) An employee of a public Canadian corporation is granted an option to purchase 1,000 of the employer's common shares at $20 per share in June, 2021. At this time, the FMV of the stares are $19 per share. In March, 2022, when the FMV is $26 per share, she exercises the option and immediately sells the shares. What is the net increase to her 2022 taxable income? A) $1,000. B) $3,000. C) $3,500. D) $6,000. Answer: B Explanation: B) The increase in taxable income is $3,000 [ITA 7(1) (1,000)($26 - $20) - ITA 110(1)(d) (1/2)(1,000)($26 - $20)]. Type: MC Topic: Employment - employee stock options

The questions below are based on the following information: Scott Bicycle Manufacturing Ltd. (SBM) is a CCPC. Brian Mills, one of SBM's employees, was granted stock options on January 15, 2019 for 10,000 shares at $3 per share. The FMV on January 15, 2019 was $4 per share. Brian exercised the stock options on September 30, 2019, when the FMV was $6 per share. In June, 2022, Brian purchased a new home and sold the shares for $7 each.

57) What is the effect of these facts on Brian's Taxable Income? A) An increase of $15,000 in 2019 B) An increase of $15,000 in 2022. C) An increase of $30,000 in 2019. D) An increase of $20,000 in 2022. E) None of the above. Answer: D Explanation: D) Employment Income [(10,000)($6 - $3)] $30,000 Deduction under ITA 110(1)(d.1) (15,000) Taxable capital gain [(10,000)($7 - $6)(1/2)] 5,000 Net increase in 2021 taxable income $20,000 Since the Company is a CCPC, the stock option benefit is only included in employment income when the stock option shares are disposed of. The stock option deduction is available as long as the shares were owned for at least two years even though the FMV of the shares was greater than the option price at the time of issue, Type: MC Topic: Employment - employee stock options

58) What is the adjusted cost base (ACB) to Brian of the SBM shares at the time of sale in June, 2022? A) $30,000. B) $45,000. C) $60,000. D) $70,000. E) None of the above. Answer: C Explanation: C) The ACB of the shares is $60,000 ($6 per share). This equals the $30,000 paid for the shares plus an ACB addition under ITA 53(1)(j) to take the employee stock option benefit of $30,000 into account. Type: MC Topic: Employment - employee stock options

The questions below are based on the following information: Mr. Morra commenced employment with Peoples Bank Ltd., a public corporation, on January 1, 2020. On December 31, 2020, he was granted options to purchase 500 shares of Peoples Bank Ltd. stock for $15 per share. The FMV of these shares on December 31, 2020 was $16 per share. Mr. Morra exercised all of the stock options on May 31, 2021, purchasing 500 shares for $15 per share when the FMV was $17 per share. On September 1, 2022, Mr. Morra sold the shares for $24 each. 59) What is the effect of the above transactions on Mr. Morra's 2021 taxable income? A) Nil. B) An increase of $250. C) An increase of $500. D) An increase of $1,000. Answer: D Explanation: D) An increase in employment income of $1,000 [($17 - $15)(500)]. No stock option deduction is available as the FMV of the shares was greater than the option price when the options were granted. Type: MC Topic: Employment - employee stock options

60) What is the effect of the above transactions on Mr. Morra's 2022 taxable income? A) Nil. B) An increase of $1,750. C) An increase of $2,750. D) An increase of $3,500. Answer: B Explanation: B) A taxable capital gain of $1,750 [($24 - $17)(500)(1/2)]. Type: MC Topic: Employment - employee stock options

The questions below are based on the following information: Parminder is an employee of a public Canadian corporation. On April 1, 2021 she was granted stock options to purchase 5,000 shares of her employer's common shares at a price of $75 per share. She exercised her options and purchased 5,000 shares on November 1, 2021. She sold all of her shares on February 1, 2022. The market price of her employer's common shares was $74 per share on April 1, 2021; $79 per share on November 1, 2021 and $85 per share on February 1, 2022. 61) The effect on her 2021 net and taxable income is: A) increase in net iand taxable income of $12,500. B) increase in net income of $25,000 and an increase in taxable income of $12,500. C) increase in nat and taxable income of $10,000. D) increase in net income of $20,000 and an increase in taxable income of $10,000. Answer: D Explanation: D) Increase in net income of $20,000 and an increase in taxable income of $10,000. The exercise of options results in an increase in employment income of $20,000 [5,000 shares × ($79 - $75)], less the stock option deduction of $10,000 ($20,000 × 50%). A & B. [ 5,000 shares × ($79 - $74) ] = $25,000 × 50% = $12,500 Type: MC Topic: Employment - employee stock options

62) The effect on her 2022 net and taxable income is: A) increase in net and taxable income of $15,000. B) increase in net income of $30,000 and an increase in taxable income of $15,000. C) increase in net and taxable income of $25,000. D) increase in net income of $50,000 and an increase in taxable income of $25,000. Answer: A Explanation: A) Increase in net and taxable income of $15,000. [ 5,000 shares × ($85 - $79) ] = $30,000 × 50% = $15,000 taxable capital gain C & D [ 5,000 shares × ($85 - $75) ] = $50,000 × 50% = $25,000 Type: MC Topic: Employment - employee stock options

63) Gail works for a Canadian public corporation. Three years ago she was granted an option to purchase 100 shares at $30 per share from her employer. The FMV on the day the option was granted was $33 per share. Gail exercised her option by purchasing 100 shares in the current year at a time the FMV was $42 per share. She has not yet sold the shares. What is the effect on Gail's current year net income? A) $1,200 increase B) $900 increase C) $600 increase D) No effect. Answer: A Explanation: A) 100 × ($42 - $30) = $1,200 increase B = 100 × ($42 - $33) = $900 C = 100 × ($42 - $30)(1/2) = $600

Type: MC Topic: Employment - employee stock options

64) Which of the following statements about expense deductions for employees is NOT correct? A) In order for an employee to deduct work space in the home costs it must be the place where that individual principally carries on their employment duties. B) If an employee uses their own automobile to carry out his employment duties, they can deduct a pro rata share of the interest paid on a loan to finance the automobile. C) In order to deduct travel costs, an employee must ordinarily be required to carry on their employment duties away from the employer's place of business. D) If an employed salesperson who earns commission income acquires a cell phone, he cannot claim CCA on the phone. Answer: A Explanation: A) In order for an employee to deduct work space in the home costs it must be the place where that individual principally carries on their employment duties. Type: MC Topic: Employment - employee expenses (General)

65) Roger is employed by an Internet based corporation as a technical support representative and is paid a salary of $40,000 per year. He is required to work from home and estimates that the work space use represents 200 square feet of his 1,000 square foot apartment exclusively for this purpose. Total expenses for 2022 were as follows: Apartment rent Tenant's insurance Apartment utilities Office Supplies

$18,000 500 850 100

Roger's maximum employment expense deduction for 2021 is: A) $3,890. B) $3,970. C) $3,870. D) $3,790. Answer: C Explanation: A) ($18,000 + 500 + 850 + 100) × 20% = $3,890 B) [($18,000 + 500 + 850) × 20%] + 100 = $3,970 C) $3,870 [($18,000 + $850) × 20%] + 100 = $3,870 D) ($18,000 + 850 + 100) × 20% = $3,790 Type: MC Topic: Employment - home office expenses (ITA 8(13))

66) Nancy is employed by a large corporation as a sales representative. She is paid a salary of $70,000 in 2022. She is required to have a home office and she estimates that her work related use at 375 square feet of her 1,500 square foot house. Total costs for 2022 were as follows: Mortgage payments (40% principal, 60% interest) Home owner's insurance Utilities Roof repair Property tax

$24,000 900 1,500 800 5,000

As Nancy's compensation does not include any commissions, she is unable to claim some of these expenses as an employment expense. If instead, her compensation of $70,000 was in the form of commissions, she would be able to claim extra employment expenses of: A) $1,675. B) $3,600. C) $5,075. D) $1,475. Answer: D Explanation: A) [($800 + 900 + 5,000) × 25%] = $1,675 B) ($24,000 × 60% × 25%) = $3,600 C) ($24,000 × 60% × 25%) + [($900 + 5,000) × 25%] = $5,075 D) $1,475 [($900 + 5,000) × 25%] Type: MC Topic: Employment - home office expenses (ITA 8(13))

67) John secured employment as a commissioned salesman in July, 2022. In 2022, he received a base salary of $60,000, and $5,000 of commissions. A further $6,000 of commissions earned in December 2022 was paid to him in January, 2023. John worked away from the office negotiating sales contracts, and he is required to pay his own vehicle and promotional expenses. His employer has signed a Form T2200 certifying that requirement, and certifying that no reimbursements are paid for any expenses John incurs to earn commissions. John incurred the following costs from July through December 2022: Meals and entertainment for potential customers Driving costs (90% of driving was for employment purposes): Fuel Insurance Repairs Leasing costs ($500 per month)

$14,000 4,000 750 2,250 3,000

What is the maximum deduction John may claim for employment expenses in 2022? A) $5,000. B) $9,000. C) $11,000. D) $16,000. Answer: B Explanation: B) If John claims under ITA 8(1)(f) as a commission salesperson, the total eligible expenses would be $16,000 (one-half of the client meals and entertainment of $14,000, plus 90% of the driving costs of $10,000). However, under this provision he would be limited to his $5,000 in commission income. The alternative that would maximize his deduction would be to use ITA 8(1)(h.1). While he could not deduct the client meals and entertainment costs under this provision, his deduction would not be limited to his commission income. This would allow a deduction of $9,000 (90% of the driving costs of $10,000). Type: MC Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

68) Which of the following criteria is NOT necessary in order for a salesperson to deduct home office costs? A) Must pay own expenses. B) Must carry on employment duties away from the employer's place of business. C) Must not receive an allowance that is not required to be included in income. D) Must receive all remuneration as commissions. Answer: D Explanation: D) Must receive all remuneration in commissions. Type: MC Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

69) Connely Ltd. has an August 31 year end. On August 31, 2022, the company declares a bonus of $250,000 payable to Ms. Sara Connely, the founder of the Company. The bonus is payable on April 1, 2023. Describe the income tax consequences of this bonus to both Connely Ltd. and Ms. Sara Connely. Answer: The bonus will be included in Ms. Connely's 2023 employment income when received. With respect to Connely Ltd., the bonus is not payable by the 179th day after its taxation year ending August 31, 2022. As a consequence, Connely Ltd. will not be able to deduct the bonus in the year ending August 31, 2022. It will only be deducted in the year ending August 31, 2023 when it is actually paid. Type: ES Topic: Employment - bonus arrangements

70) Brock Inc. has a taxation year that ends on September 30. On July 1, 2022 the company declared a bonus of $100,000 payable to Stan Gable. The bonus will be paid on February 1, 2023. Describe the income tax consequences of the declaration of the bonus and payment on both Stan Gable and Brock Inc. Answer: The bonus will be included in the 2023 employment income of Mr. Gable's based on the calendar year of receipt. The declaration of the bonus for its 2022 taxation year would normally entitle the employer to an expense for the bonus whether paid immediately or not. ITA 78(4) however requires that the employer can only deduct the bonus in the year incurred (2022) if the bonus is actually paid by the 179th day following its 2022 taxation year end. As it is paid by the 179th day the Company will be able to deduct the bonus in its 2022 taxation year ending September 30, 2022. Type: ES Topic: Employment - bonus arrangements

71) Mr. John Lamarche, as the result of an outstanding sales achievement within his organization, is awarded two airline tickets to Vancouver. His employer pays a travel agent $5,275, plus $264 in GST for the tickets. What is the amount of Mr. Lamarche's taxable benefit? Answer: Mr. Lamarche's taxable benefit would be $5,539, the $5,275 cost of the tickets, plus the additional $264 in GST. The benefit would not be reduced by $500 for the CRA concessions since the gift was based on performance and is considered equivalent to salary and other remuneration. Type: ES Topic: Employment - GST on taxable benefits

72) In 2022 Ms. Robin Nestor is provided with an automobile that is owned by her employer. The employer purchased the car in 2021 for $54,000, plus $7,020 in HST. During 2022, she drives the car a total of 72,000 kilometers, of which 67,000 kilometers were for employment purposes and 5,000 for personal use. The automobile was available to Ms. Nestor for 268 days during 2022. Calculate Ms. Nestor's minimum taxable automobile benefit. Answer: Rounded to the nearest whole number, 268 days results in 9 months of availability. Further, Ms. Nestor's employment use is over 50% and the monthly average personal use is well below 1,667, entitling her to a reduction in the full standby charge. Although she can use the alternative one -half of the standby charge calculation of the operating cost benefit, she would not do so as it results in a higher benefit. Given these factors, the taxable benefit would be calculated as follows: Standby Charge [(2%)(9)($54,000 + $7,020)(5,000/15,003*)] Operating Cost Benefit - Lesser of: • [($0.29)(5,000)] = $1,450 • [(1/2)($3,660)] = $1,830 Total Automobile Benefit

$3,660

1,450 $5,110

*[(9)(1,667)]

Type: ES Topic: Employment - taxable benefits - employer owned automobile

73) Mr. Robert Rhodes is provided with an automobile that is owned by his employer. The car was acquired by the employer in 2020 for $63,000, plus $3,150 in GST. In 2022, it was available to Mr. Rhodes for 8 months. The car was driven 53,000 kilometers in 2022, of which 22,000 were for employment purposes and 31,000 for personal use. Calculate Mr. Rhodes' minimum taxable automobile benefit. Answer: As Mr. Rhodes' employment related use is less than 50% of total kilometers driven the reduced standby charge is not available. In addition, he cannot use the alternative one -half of the standby charge calculation of the operating cost benefit. Given this, the taxable benefit would be calculated as follows: Standby Charge [(2%)(8)($63,000 + $3,150)] Operating Cost Benefit [($0.29)(31,000)] Total Automobile Benefit

$10,584 8,990 $19,574

Type: ES Topic: Employment - taxable benefits - employer owned automobile

74) In 2022, Mr. Sam Warren is provided with an automobile that is leased by his employer. The monthly lease payment is $791 per month which includes $91 in HST. During the year, the car was available to Mr. Warren for a total of 310 days. During this period, he drives the car a total of 40,000 kilometers, 22,000 of which are for employment purposes and 18,000 for personal use. Calculate Mr. Warren's minimum taxable automobile benefit. Answer: Rounded to the nearest whole number, 310 days results in 10 months of availability. As Mr. Warren's employment related use is more than 50%, he is eligible for a reduction in the full standby charge. The reduction however will not reduce the benefit since the average monthly personal use of 1,800 kilometers ($18,000/10) exceeds 1,667 monthly average required of the formula. He is also eligible for the alternative one-half of the standby charge calculation of the operating cost benefit. Given these factors, the taxable automobile benefit would be calculated as follows: Standby Charge [(2/3)($791)(10)(16,670*/16,670*)] Operating Cost Benefit - Lesser of: • [($0.29)(18,000)] = $5,220 • [(1/2)($5,273)] = $2,637 Total Benefit

$5,273

2,637 $7,910

*[(10)(1,667)] - the numerator cannot exceed the denominator

Type: ES Topic: Employment - taxable benefits - employer leased automobile

75) Ms. Sarah Wexler is provided with a car by her employer. It is leased by the employer for $728 per month, including $78 of HST. The lease payment also includes a payment of $50 per month to cover insuring the vehicle. In 2022, the car is available to Ms. Wexler for 10 months. She drives the car 76,000 kilometers of which 53,000 kilometers are for employment purposes and 23,000 for personal use. Calculate Ms. Wexler's minimum automobile benefit. Answer: As Ms. Wexler's employment use is more than 50 %, she is eligible for a reduction in the basic standby charge. However since her average monthly personal kilometer use exceeds the formula maximum of 1,667 kilometers she will not benefit from a reduction of the standby charge. She is also eligible for the alternative one -half of the standby charge calculation of the operating cost benefit. Given these factors, the taxable automobile benefit would be calculated as follows: Standby Charge [(2/3)($728 - $50)(10)(16,670*/16,670*)] Operating Cost Benefit - Lesser of: • [($0.29)(23,000)] = $6,670 • [(1/2)($4,520)] = $2,260 Total Automobile Benefit

$4,520

2,260 $6,780

*[(10)(1,667)] - the numerator cannot exceed the denominator

Type: ES Topic: Employment - taxable benefits - employer leased automobile

76) Mr. Rudy Jackson is required by his employer to use his own automobile in the course of carrying oon his employment duties. To compensate him for that use, he is paid an annual flat rate allowance of $350 per month or $4,200 for the year. In 2022, he drove his automobile a total of 26,720 kilometers, of which 8,150 were for employment purposes and 18,570 for personal use. His total automobile costs for the year, including lease costs, are $8,623. What amounts will Mr. Jackson include and deduct from his 2021 employment income related to the use of his automobile? Answer: As the car allowance is not based solely on kilometers the allowance is deemed to be unreasonable resulting in a requirement to include the allowance in employment income (ITA 6(1)(b)). He can also deduct the employment related portion of his actual automobile expenses since the allowance was required to be included in employment income. The expense would be $2,630 [($8,623)(8,150 ÷ 26,720)]. The net increase in employment income would be $1,570 ($4,200 - $2,630). Type: ES Topic: Employment - employee provided vehicle

77) Ms. Rhonda Jewel's employer provides her with a flat rate annual allowance of $6,500 to compensate her for the fact that she uses her own automobile for employment purposes. In 2022, she has total automobile related costs, including her monthly lease payments, of $12,472. In 2021 she drove 42,000 kilometers, of which 18,000 kilometers were for employment purposes and 24,000 for personal use. Indicate how the allowance and the use of her own automobile affect for 2022 employment income? Answer: As the $6,500 allowance is not based solely on kilometers driven the allowance is deemed to be unreasonable requiring that it be included in employment income. As the allowance is included in employment income, she can deduct a proportionate share of her automobile expenses. The deductible amount is $5,345 [($12,472)(18,000 ÷ 42,000)]. Her net effect on her employment income is an increase of $1,155 ($6,500 - $5,345). Type: ES Topic: Employment - employee provided vehicle

78) Ms. Jessica Tremblay is a member of a group disability plan sponsored by her employer. Contributions are made by both the employees and the employer. The plan provides periodic benefits that compensate for lost employment income. In 2021, Ms. Tremblay was required to pay $324 in premiums. In 2022, Ms. Tremblay received benefits under the plan of $6,940. Ms. Tremblay's contributions to the plan for 2022 totalled $250. In 2022, her employer's share of the annual premium was $2,175. What amount will Ms. Tremblay include in her 2022 employment income? Answer: As her employer contributes to the plan, and the contributions do not create a taxable benefit, the $6,940 in benefits received during the year will be included in her employment income when received. This will be reduced by the $574 ($324 + $250) in contributions that she made in 2021 and 2022, leaving a net inclusion of $6,366 ($6,940 - $574). Type: ES Topic: Employment - disability insurance benefits

79) John Tertiak's employer sponsors a group disability plan for its employees. The plan provides periodic benefits that compensate for lost employment income. The annual premium on this plan is $3,200, with this cost being shared equally by the employer and the employee. Because John became disabled in January, 2022, he did not make any contribution in that year. In the years prior to 2022, John had total contributions of $16,000. In 2022, because of his disability, John receives benefit under the plan totaling $24,000. What amount will John include in his 2022 employment income as a result of the disability receipts? Answer: Because his employer contributes to the group disability plan, and the employer contributions do not create a taxable benefit, the $24,000 in benefits that he receives in 2022 will be included in his employment income. However, this amount received will be reduced by the $16,000 of contributions that he made in previous years, leaving a net employment inclusion of $8,000 ($24,000 - $16,000). Type: ES Topic: Employment - disability insurance benefits

80) On January 1, 2022, Mr. Packard receives a $135,000 loan from his employer to assist him in purchasing a home. The loan requires annual interest at a rate of 3.1%, which he pays on December 31, 2022. Assume that the relevant prescribed rate is 5% during the first quarter of 2022, 6% during the second quarter, and 4%. What is the amount that Mr. Packard's is required to add to his 2022 employment income as a result of the employee loan? Answer: The ITA 80.4(1) benefit is calculated as follows: The Lesser of: • [($135,000)(5%)(1/4) + ($135,000)(6%)(1/4) + ($135,000)(4%)(2/4)] = $6,413 • [($135,000)(5%)] = $6,750 Less Interest Payment [($135,000)(3.1%)] Employment Benefit

$6,413 ( 4,185) $2,228

As this is a home purchase loan, the annual benefit cannot exceed the benefit that would result from applying the 5% rate that was in effect when the loan was made. Note that the 5% rate is not compared to the prescribed rate on a quarter-by- quarter basis, but on an annual basis. The lower figure of $6,413 would then be reduced by the $4,185 in interest paid. Type: ES Topic: Employment - loans to employees (home purchase loan)

81) On May 1, 2022, Ms. Ponti receives a $210,000 interest free loan from her employer in order to assist her in purchasing a new home. The loan must be repaid in annual instalments of $30,000 on December 31 in each of the years 2023 through 2029. Assume that the relevant prescribed rate is 4% during the first two quarters of 2022, but is reduced to 3% in the third quarter, and to 2% in the fourth quarter. What is the amount that is required to be included in Ms. Ponti's 2022 employment income as a result of the employee loan? Answer: The ITA 80.4(1) benefit is calculated as follows: The Lesser of: • [($210,000)(4%)(2/12) + ($210,000)(3%)(1/4) + ($210,000)(2%)(1/4)] = $4,025 • [($210,000)(4%)(8/12)] = $5,600 $4,025 Interest Payments Nil Employment Benefit

Type: ES Topic: Employment - loans to employees (home purchase loan)

$4,025

82) A senior executive asks her employer for a $240,000 interest free housing loan. At this time, the employer has investment opportunities involving a rate of return of 8.2% before income taxes. Assume the relevant prescribed rate for the period is 3%, while the going market rate for home mortgages is 5%. The employee is subject to a marginal income tax rate of 44%, while the employer pays corporate income taxes at a marginal rate of 28%. Should the employer grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion. Answer: In the absence of the interest free loan, the employee would borrow $240,000 at 5%, requiring an annual interest payment of $12,000. The after tax cash outflow associated with the employer providing sufficient additional salary to carry this loan would be calculated as follows: Required Salary [$12,000 ÷ (1 - 0.44)] Corporate income tax savings from deducting the salary [($21,429)(28%)] Employer's after tax cash flow - Additional Salary

$21,429 ( 6,000) $15,429

Alternatively, if the loan is provided, the employee will have a taxable benefit of $7,200 [(3%)($240,000)], resulting in taxes payable of $3,168 [(44%)($7,200)]. To make this situation comparable to the straight salary alternative, the employer will have to provide the employee with both the loan amount and sufficient additional salary to pay the income taxes on the imputed interest benefit. The amount of this additional salary would be $5,657 [$3,168 ÷ (1 - 0.44)]. The employer's after tax cash flow associated with providing the additional salary and the loan amount would be calculated as follows: Required Salary [$3,168 ÷ (1 - 0.44)] Corporate income tax savings from deducting the salary [($5,657)(28%)] After Tax Cost of Salary Employer's lost earnings [(8.2%)(1 - 0.28)($240,000)] Employer's after tax cash flow - Loan

$ 5,657 (1,584) $ 4,073 14,170 $18,243

Given these results, providing the additional salary appears to be the better alternative. Type: ES Topic: Employment - loan benefits (tax planning)

83) John Baxter is a highly valued employee of Stern Inc. His marginal income tax rate is 46% and he would like to acquire a vacation property. To assist with this purchase, he has asked the management of Stern for a $350,000 interest free loan. At this time the mortgage rate for vacation properties is 4.5% and the prescribed rate is 2%. Stern is subject to a marginal income tax rate of 26% and has alternative investment opportunities that earn 7% before income taxes. Should Stern Inc. grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion. Answer: In the absence of the interest free loan, John would have to borrow $350,000 at 4.5 %, resulting in an annual interest cost of $15,750 [(4.5%)($350,000)]. In order to pay this after tax amount, John would need additional salary of $29,167 [($15,750 ÷ (1 - 0.46)]. The after tax cash outflow of providing this salary is calculated as follows: Additional salary [($15,750 ÷ (1 - 0.46)] Corporate income tax savings [($29,167)(26%)] Employer's after tax cash flow - Additional Salary

$29,167 (7,583) $21,584

If the loan is provided, John will have a taxable benefit of $7,000 [($350,000)(2%)], resulting in income tax of $3,220 [($7,000)(46%)]. In order to pay the additional income tax John will need additional salary of $5,963 [$3,220 ÷ (1 - 0.46)]. For Stern, the after tax cash outflows associated with this additional salary and the loan would be calculated as follows: Additional salary [$3,220 ÷ (1 - 0.46)] Corporate income tax savings [($5,963)(26%)] After tax cost of salary Employer's lost earnings [(7%)(1 - 0.26)($350,000)] Employer's after tax cash flow - Loan

$ 5,963 (1,550) $ 4,413 18,130 $22,543

Based on these results, the payment of additional salary appears to be the better alternative. Type: ES Topic: Employment - loan benefits (tax planning)

84) Ms. Mary Mason is employed by a large public company. In 2020, she was granted stock options to acquire 1,000 shares of her employer's common stock at a price of $23 per share. At the time the options were granted, the shares were trading at $20 per share. In May, 2022, when the shares are trading at $45 per share, she exercises her options and acquires 1,000 shares. What is the effect of the exercise of the options on Ms. Mason's 2022 employment income? Answer: The employment income inclusion is $22,000 [(1,000)($45 - $23)]. There would also be a taxable income stock option deduction under ITA 110(1)(d) equal to $11,000. Type: ES Topic: Employment - employee stock options

85) Ms. Mary Mason is employed by a CCPC. In 2020, she was granted options to acquire 1,000 shares of her employer's common shares at a price of $23 per share. At the time the options were granted, the shares had a FMV of $20 per share. In May, 2022, when the shares had a FMV of $45 per share, she exercises her options and acquires 1,000 shares. What is the effect of the exercise of the stock options on Ms. Mason's 2022 employment income? Answer: Stock options issued by a CCPC are not required to be included in employment income when the options are exercised but are instead deferred until such time as the shares are actually sold. As a result, the exercise of the stock options does not affect her 2022 employment income. Type: ES Topic: Employment - employee stock options

86) Mr. John Savage has been employed for many years by a Canadian public company. Several years ago, Mr. Savage was granted options to acquire 4,000 shares of his employer for $54 per share. At this time, the FMV of the shares was $50 per share. On July 15, 2021, Mr. Savage exercises all of these options. At this time, the FMV of the shares is $82 per share. In February, 2022, he sells all of the shares for $97 per share. Calculate the effect of these transactions that took place during 2021 and 2022 on Mr. Savage's net income and taxable income. Where relevant, identify the effects separately. Answer: The increase in 2021 net income and taxable income resulting from the exercise of the options would be calculated as follows: FMV at exercise [(4,000)($82)] Cost of shares [(4,000)($54)] Employment income = Increase in 2021 net income Stock option deduction ITA 110(1)(d) [(1/2)($112,000)] Increase in 2021 taxable income

$328,000 ( 216,000) $112,000 (56,000) $ 56,000

When the shares are sold in 2022, the results will be as follows:

POD [(4,000)($97)] ACB [(4,000)($82)] Capital Gain Inclusion Rate Taxable Capital Gain

$388,000 (328,000) $ 60,000 1/2 $ 30,000

This $30,000 taxable capital gain will be both the increase in 2022 net and taxable income. Type: ES Topic: Employment - employee stock options

87) Mr. John Savage has been employed for many years by a CCPC. Several years ago, Mr. Savage was granted options to acquire 4,000 shares of his employer for $54 per share. At that time, the FMV of the shares was $50 per share. On July 15, 2021, Mr. Savage exercises all of these options. At this time, the FMV of the shares is $82 per share. In February, 2022, he sells all of the shares for $97 per share. Calculate the effect of the transactions that took place during 2021 and 2022 on Mr. Savage's employment income, net income and taxable income. Where relevant, identify these effects separately. Answer: As Mr. Savage's employer is a CCPC, the exercise of the options has no effect on his Taxable Income in 2021. When the shares are sold in 2022, the total increase in net income and taxable income is calculated as follows: FMV at exercise [(4,000)($82)] Cost of Shares [(4,000)($54)] Employment income POD [(4,000)($97)] ACB [(4,000)($82)] Capital Gain Inclusion Rate Increase in net income Stock option deduction ITA 110(1)(d) [(1/2)($112,000)] Stock option deduction ITA 110(1)(d.1) Increase in taxable income

$328,000 (216,000) $112,000

$388,000 (328,000) $ 60,000 1/2

30,000 $142,000 (56,000) N/A $ 86,000

As the option price was greater than the FMV of the shares at the time of issue, he is allowed the deduction under ITA 110(1)(d). If this had not been the case, although Mr. Savage's employer is a CCPC, he would not have been able to make this deduction under ITA 110(1)(d.1) as he did not own the shares for at least two years. Type: ES Topic: Employment - employee stock options

88) Several years ago, Mr. Kerry Johnson's corporate employer granted him options to purchase 1,000 shares of the employer at a price of $13.25 per share. At that time, the shares were trading at $13.25 per share. The employer is a publicly traded company. In June of 2022, Mr. Johnson exercises the options. At this time, the shares are trading at $18.50 per share. Prior to the end of the year, Mr. Johnson sells the shares for $19.75 per share. Determine the effect of these transactions on Mr. Johnson's net and taxable income. Where relevant, identify these effects separately. Answer: The effect of these transactions would be calculated as follows: Employment income [(1,000)($18.50 - $13.25)] Taxable Capital Gain [(1/2)(1,000)($19.75 - $18.50)] Increase in net income Stock option deduction Under ITA 110(1)(d) [(1/2)($5,250)] Increase in taxable income Type: ES Topic: Employment - employee stock options

$5,250 625 $5,875 (2,625) $3,250

89) Joan Smithers has been employed by a Canadian public company for several years. In 2020, she was granted options to acquire 2,200 of her employer's shares at $10.50 per share. At that time, the shares were trading at $10.00 per share. In 2021, when the shares are trading at $15 per share, she exercises all of these options. In 2022 she sells 1,000 of the shares for $13 per share. Indicate the income tax consequences of each of the stock option events in 2020, 2021, and 2022 on Ms. Smithers' net and taxable income. Where relevant, identify these effects separately. Answer: The granting of the options in 2020 does not affect either net or taxable income. As a public company is involved, the exercise of the options in 2021 will have the following income tax consequences: FMV at exercise [(2,200)($15)] $33,000 Cost of Shares [(2,200)($10.50)] (23,100) Employment income (Increase in net income) $ 9,900 Stock option deduction Under ITA 110(1)(d) [(1/2)($9,900)] (4,950) Increase in taxable income $ 4,950 When the shares are sold in 2022, the income tax consequences are as follows: POD [(1,000)($13)] ACB [(1,000)($15)] Capital Loss Inclusion Rate Allowable Capital Loss

$13,000 (15,000) ($2,000) 1/2 ($1,000)

This loss can only be deducted in the determination of net income to the extent that Ms. Smithers has net taxable capital gains in 2022. Note to Instructor - Depending on what has been covered in your course, students may or may not be expected to comment on the ability to carry the capital loss back or forward as follows: If she has taxable capital gains in the previous 3 years or any year in the future, the loss could be carried back or carried forward and deducted in the determination of Taxable Income. It is important that the students realize that the allowable capital loss can not be offset against the employment income from the stock options in 2021. Type: ES Topic: Employment - employee stock options

90) Jerry Farrow is employed by a CCPC. In 2020, he was granted options to acquire 625 of his employer's shares at $92 per share. At that time, it was estimated that the FMV of the shares was $90. In 2021, when the estimated FMV of the shares is $95 per share, he exercises all of these options. In 2022, he sells 125 of the shares for $85 per share. Indicate the income tax consequences of the events in 2020, 2021, and 2022 on Mr. Farrow's employment income. net income and taxable income. Where relevant, identify these effects separately. Answer: The granting of the options in 2020 does not affect employment income, net income or taxable income. As a CCPC is involved, the exercise of the options does not affect employment income, net income or taxable income. However, the employment income inclusion for all 625 shares is measured in 2021 (see 2022 results). When 125 of the 625 shares are sold in 2022, the income tax consequences are as follows: Deferred Employment Income: FMV at exercise [(125)($95)] Cost of shares [(125)($92)] Employment Income (Increase in net income) Stock option deduction Under ITA 110(1)(d) [(1/2)($375)] Increase in taxable income

$11,875 ( 11,500) $375 (188) $187

There is also an allowable capital loss, calculated as follows: POD [(125)($85)] ACB [(125)($95)] Capital Loss Inclusion Rate Allowable Capital Loss

$10,625 (11,875) ($1,250) 1/2 ($625)

This loss can only be deducted in the determination of net income to the extent that Mr. Fallow has net taxable capital gains in 2022. Note to Instructor - Depending on what has been covered in your course, students may or may not be expected to comment on the ability to carry the capital loss back or forward as follows: If she has taxable capital gains in the previous 3 years or any year in the future, the loss could be carried back or carried forward and deducted in the determination of Taxable Income. It is important that the students realize that the allowable capital loss can not be offset against the employment income from the stock options in 2021. Type: ES Topic: Employment - employee stock options

91) Mrs. Joan Conway is a commission salesperson. During the current year, her gross salary was $46,700. In addition, she earned $9,200 in commissions. Her employment related costs during the year were advertising costs of $6,150, client entertainment costs of $8,850, and travel costs of $9,325. She is required to pay her own expenses and does not receive any allowance from her employer. What is Mrs. Conway's maximum employment expense for the current year? Show your calculations. Answer: Her potential deduction is $19,900 [$6,150 + (1/2)($8,850) + $9,325]. However, this total exceeds her commission income and cannot be deducted under ITA 8(1)(f). If she claims a deduction under ITA 8(1)(h) there is generally no limit to the amount that can be claimed. The problem here is that she cannot deduct the advertising or entertainment costs under this Paragraph. Further, she cannot claim a deduction under ITA 8(1)(h) if she claims a deduction under ITA 8(1)(f). As the travel costs that are deductible under ITA 8(1)(h) exceed the ITA 8(1)(f) ceiling of $9,200 in commission income, her maximum deduction is the $9,325 in travel costs under ITA 8(1)(h). Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

92) Barton Ho is a commission salesperson. During the current year, in addition to his salary of $92,500, he earns and receives $14,700 in commissions. His costs for advertising were $12,200 and, in addition, he spent $6,400 on client entertainment. Because of the extensive travel required for his employment, his travel costs totaled $16,100. He is required to pay his own expenses and does not receive any allowance from his employer. What is Mr. Ho's maximum employment expense for the current year? Show your calculations. Answer: Mr. Ho's total potential deductions are $31,500 [$12,200 + (1/2)($6,400) + $16,100]. However, this total exceeds his commission income and cannot be deducted under ITA 8(1)(f). While he cannot deduct the advertising or entertainment under ITA 8(1)(h), the travel costs can be deducted without limit. As these costs exceed Mr. Ho's commission income, his maximum deduction is the $16,100 in travel costs that can be deducted under ITA 8(1)(h). Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

93) Doug Evans works for a company that sells video equipment. His records for the current year contain the following information: Salary Received Commissions Received Total Employment Income

$61,250 6,250 $67,500

Advertising and Promotion Traveling expenses CCA on Van* Interest on Van financing* Total Employment Expenses

$ 1,250 7,500 1,875 625 $11,250

*The van is used exclusively for employment purposes. Mr. Evans meets the conditions for deducting employment expenses. Given the preceding information, determine Mr. Evans' minimum employment income for the current year. Explain your conclusions. Answer: As Doug Evans receives a portion of his income in the form of commissions, all of the $11,250 in listed expenses are potentially deductible under ITA 8(1)(f) (advertising and travel) and 8(1)(j) (CCA and interest on van). However, if he makes the deduction under ITA 8(1)(f), his expenses other than CCA and interest on the car, are limited to $6,250, the amount of his commission income. As a result, he can deduct $8,750 ($6,250 + $1,875 + $625). Alternatively, he can deduct all of the expenses except the advertising and promotion costs under ITA 8(1)(h), (h.1) and (j). As these deductions are not limited by commissions or total employment income, he will be able to deduct a total of $10,000 ($7,500 + $1,875 + $625). Note that, if he claims a deduction under ITA 8(1)(h) and ITA 8(1)(h.1), he cannot claim a deduction under ITA 8(1)(f). Therefore, his maximum deduction is $10,000 and his minimum employment income is $57,500 ($67,500 - $10,000). Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

94) Deborah Ekert is employed as a salesperson and receives some of her compensation in the form of commissions. During the current year, her salary totaled $85,000 and her commissions totaled $8,400. Her employment related expenses during this period were as follows: CCA On Car* Interest on Car Loan* Traveling expenses Promotion and Advertising Client Entertainment [(1/2)(Actual Costs Of $5,200)] Total Available Expenses

$ 2,850 1,075 10,300 5,600 2,600 $22,425

*The car is used exclusively for employment purposes. Ms. Ekert meets the conditions for deducting employment expenses. Given the preceding information, determine Ms. Ekart's minimum employment income for the current year. Explain your conclusions. Answer: As Ms. Ekart receives some of her employment income in the form of commissions, all of the $22,425 in listed expenses is potentially deductible under ITA 8(1)(f) (travel, promotion, and entertainment) and 8(1)(j) (CCA and interest on car). However, under ITA 8(1)(f), all of the expenses other than the CCA and interest on the car are limited to her commission income of $8,400. This would result in a maximum deduction under ITA 8(1)(f) and 8(1)(j) of $12,325 ($8,400 + $2,850 + $1,075). Alternatively, under ITA 8(1)(h) and ITA 8(1)(h.1), she can deduct the traveling expenses, of $10,300 but not the promotion, advertising and entertainment. However, when the traveling expenses are added to the car costs that are deductible under ITA 8(1)(j), her total deduction would be $14,225 ($10,300 + $2,850 + $1,075). Using this would produce a minimum employment income calculated as follows: Salary Commissions Deductible Expenses ($10,300 + $2,850 + $1,075) Employment income

$85,000 8,400 (14,225) $79,175

Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

95) Each of the following independent Cases involves a Canadian public company paying a bonus to a key executive named Christine Lane. Case A — The company's year end is August 31. The bonus is declared on August 31, 2022 and paid on December 31, 2022. Case B — The company's year end is July 31. The bonus is declared on March 2, 2022 and paid on January 1, 2023. Case C — The company's year end is December 31. The bonus is declared on December 1, 2022 and paid on July 1, 2023. Case D — The company's year end is September 30. The bonus is declared on October 31, 2022 and paid October 31, 2026. Required: For each of these Cases, indicate the taxation year in which the Company can deduct the bonus, as well as the taxation year in which Ms. Lane will include it in her employment income. Answer: Case A The company will deduct the bonus in the year ending August 31, 2022 since the bonus is paid by the 179th day following August 31, 2022. Christine will include it in income in the calendar year ending December 31, 2022 since it was received in that year. Case B In this case, the bonus is paid by the 179th day measured from July 31, 2022 therefore the bonus is deductible to the company for its 2022 taxation year ending July 31. However, Christine will include the bonus in the calendar year in which it was received which is 2023. Case C In this case, the bonus is not paid by the 179th day of June 28, 2023 and as a result the company is only entitled to an expense in the taxation year in which the bonus is actually paid which is its 2023 taxation year ending December 31. Christine will include the bonus in income in the year in which it is received which is also 2023. Case D As the bonus is not paid within three years of the end of the year in which the services were rendered, the bonus is considered a salary deferral arrangement. The company will deduct the bonus in its 2023 taxation year ending September 30, 2023. However, as it was earned in 2022, Christine will have to include the bonus in her employment income for 2022. Type: ES Topic: Employment - bonus arrangements

96) Jerry Field was hired by Larson Wholesalers at the end of 2021 to fill an executive position in the company. He is scheduled to begin work on January 2, 2022. Larson Wholesalers plans to transfer him to their Hong Kong office after two years. As part of his compensation package, Jerry has considered having the Company provide him with a car for his personal use. He does not require the vehicle for his employment duties and, as a consequence, it will be used for personal use only. Jerry anticipates that he will drive the car about 80,000 kilometers in each of 2022 and 2023. He is considering two different cars and has collected the following information on them: Lexus ES $45,000 $0.30 $20,000

Purchase Price Estimated Operating Costs per Kilometer Estimated Trade In at the end of 2 Years

Lexus LS $100,000 $0.40 $40,000

The Company has agreed to provide an additional $100,000 in compensation and they offer Jerry the following alternatives. Option 1 — They will purchase either car and allow Jerry to use it for the calendar years 2022 and 2023. If Jerry prefers the Lexus ES, the Company will provide a signing bonus of $55,000, the difference in the cost of the two cars. The bonus will be paid when the car is delivered on January 2, 2022. Option 2 — They will provide Jerry with an $100,000 signing bonus. This bonus will be paid on January 2, 2022. He will use the funds to purchase one of the cars personally. If the Company buys either car, Jerry will pay his own operating costs and the Company will take possession of the car after the 2 years. Jerry's combined federal/provincial marginal income tax rate is expected to be 48% in both 2022 and 2023. Assume that the prescribed operating cost benefit will be $0.27 per kilometer for both 2022 and 2023. Required: Advise Jerry as to which option he should choose if decides that he wants: A. the Lexus ES. B. the Lexus LS. In both parts of this question your advice should be based on non-discounted cash outflows. Ignore GST and HST considerations in your solution.

Answer: Part A - Jerry Chooses The Lexus ES If Jerry chooses the Lexus ES and selects Option 1, the employment benefit will be calculated as follows: Standby Charge [(2%)(12)($45,000)] Operating Cost Benefit (Jerry pays his own costs) Total Taxable Benefit Number of Years Total Taxable employment benefit - Option 1

$10,800 Nil $10,800 2 $21,600

Given this, the after tax cash flow associated with Option 1 would be calculated as follows: Signing Bonus Income Tax Consequences: Signing Bonus Taxable Benefit Increase in Taxable Income Jerry' Marginal Income Tax Rate Net Cash Inflow (Outflow)

$55,000 ($55,000) (21,600) ($76,600) 48%

(36,768) $18,232

Alternatively, the after tax cash flow associated with Option 2 would be as follows: Signing Bonus Purchase Price of the car Tax Consequences: Signing Bonus Jerry' Marginal Tax Rate Trade in proceeds Net Cash Inflow (Outflow)

$100,000 (45,000) ($100,000) 48%

(48,000) 20,000 $27,000

With respect to the Lexus ES alternative, selecting Option 2, is the better alternative. Note that, as Jerry pays his own operating expenses in both Option 1 and Option 2, this factor can be ignored in our calculations.

Part B - Jerry Chooses the Lexus LS If Jerry chooses the Lexus LS and selects Option 1, the taxable benefit will be calculated as follows: Standby Charge [(2%)(12)($100,000)] Operating Cost Benefit (Jerry Pays His Own Costs) Total Taxable Benefit Number of years Total Taxable Employment Benefit - Option 1

$24,000 Nil $24,000 2 $48,000

Given this, the after tax cash flow associated with Option 1 would be calculated as follows: Signing Bonus Income Tax Consequences: Taxable Benefit Signing Bonus Increase in Taxable Income Jerry' Marginal Income Tax Rate Net Cash Inflow (Outflow)

Nil ($48,000) Nil (48,000) 48%

($23,040) ($23,040)

Alternatively, the after tax cash flow associated with Option 2 would be as follows: Signing Bonus Purchase Price of the car Tax Consequences: Signing Bonus Jerry' Marginal Income Tax Rate Trade In Proceeds Net Cash Inflow (Outflow)

$100,000 (100,000) ($100,000) 48%

(48,000) 40,000 $ 8,000

Once again, operating costs are ignored in that Jerry pays his own operating costs in both Option 1 and Option 2. As was the case with the Lexus ES, Option 2 is the preferred alternative. The economic basis for this result is the fact that in Option 2, Jerry benefits from the trade in value of the car, while in Option 1, this benefit goes to the Company. Although the requirements of the problem ask that only the cash flows be considered, we would note that the alternative of purchasing the car carries more uncertainty. Both the resale value and the actual operating costs are estimates. If there was a large variation from the estimate for either or both of these amounts, it could substantially affect the total cash outflow of the purchase alternative. Type: ES Topic: Employment - employer owned vs. employee owned vehicle

97) Ms. Sharon Herzog is employed with a large, publicly traded company. Her employment duties require her to travel and the employer provides her with an automobile. Sharon is allowed to use the automobile for personal use. However, there are some periods during the year when she does not need the car for employment purposes and during these periods she is required to return the car to her employer's premises where it can be used by other employees. The car that she will use was purchased by her employer in 2020 for $45,200, including $5,200 in HST. During the years 2020 and 2021, the company claimed maximum CCA. In 2022, Sharon drove the car a total of 37,000 kilometers. The company pays all of her operating costs which, in 2022 totaled $11,340. Required: Indicate the minimum automobile benefit in each of the following independent Cases: Case 1 — The car is available for 9 months of the year. Personal use during the year totals 6,000 kilometers with 31,000 kilometers for employment purposes. Case 2 — The car is available for 11 months of the year. Personal use during the year totals 28,000 kilometers with 9,000 kilometers for employment purposes. Case 3 — The car is available for 7 months of the year. Employment use during the year totals 18,600 kilometers and personal use 18,400 kilometers.

Answer: Case 1 In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($45,200)(9)(6,000/15,003*)] Operating Cost Benefit - Lesser of: • [(6,000)($0.29)] = $1,740 • [(1/2)($3,254)] = $1,627 Total Automobile Benefit *[(9)(1,667)]

$3,254

1,627 $4,881

As Sharon's usage is more than 50% employment related, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit, but it is not advantageous for her to do so. Case 2 In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($45,200)(11)] Operating Cost Benefit [(28,000)($0.29)] Total Automobile Benefit

$ 9,944 8,120 $18,064

As Sharon's employment use was less than 50%, there is no reduction in the basic standby charge. This also means that Sharon cannot elect to use the alterative calculation of the operating costs benefit as onehalf of the standby charge. Case 3 In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($45,200)(7)(11,669/11,669*)] Operating Cost Benefit - Lesser of: • [(18,400)($0.29)] = $5,336 • [(1/2)($6,328)] = $3,164 Total Automobile Benefit *[(7)(1,667)] - the numerator cannot exceed the denominator

$6,328

3,164 $9,492

As Sharon's usage is more than 50% employment use, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit. Type: ES Topic: Employment - taxable automobile benefits employer owned vehicle (Multiple Cases)

98) Klaxton Inc. provides an automobile to Ms. Roxanne Smith for her to use in carrying out her employment duties. Ms. Smith is given full possession of the car and is allowed to use it for personal purposes. However, when she is not using it for employment or personal use, it must be returned to Klaxton's premises so that it can be used by other employees. The automobile was purchased in 2020 for $42,000 and, during the years 2020, 2021, and 2022, the Company claimed maximum CCA. In 2022, Ms. Smith drove the car 48,000 kilometers, with the Company paying for all of the operating costs. These costs totaled $9,850 during the year. Required: Ignore all GST/PST & HST implications. Indicate the minimum automobile benefit in each of the following Cases: Case A — The car was available for 11 months of the year. Personal use during the year totals 4,000 kilometers and employment use 44,000 kilometers. Case B — The car was available for 10 months of the year. Personal use during the year totals 23,000 kilometers with 25,000 kilometers of employment use. Case C — The car was available for 8 months of the year. Employment use during the year totals 4,000 kilometers with 44,000 kilometers of personal use.

Answer: Case A In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($42,000)(11)(4,000/18,337*)] Operating Cost Benefit - Lesser of: • [(4,000)($0.29)] = $1,160 • [(1/2)($2,016)] = $1,008 Total Automobile Benefit *[(11)(1,667)]

$2,016

1,008 $3,024

As Ms. Smith's employment use is more than 50%, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit. Case B In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($42,000)(10)(16,670*/16,670*)] Operating Cost Benefit - Lesser of: • [(23,000)($0.29)] = $6,670 • [(1/2)($8,400)] = $4,200 Total Automobile Benefit *[(10)(1,667)]

$ 8,400

4,200 $12,600

As Ms. Smith's employment use is more than 50% she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit. Case C In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($42,000)(8)] Operating Cost Benefit [(44,000)($0.29)] Total Automobile Benefit

$ 6,720 12,760 $19,480

As Ms. Smith's employment usage was less than 50%, there is no available reduction in the basic standby charge. This also means that Ms. Smith cannot elect to use the alterative calculation of the operating costs benefit as one-half of the standby charge. Type: ES Topic: Employment - taxable automobile benefits employer owned vehicle (Multiple Cases)

99) Fred Ethridge is a valued employee of a large Canadian company. He is in the process of negotiating a new compensation package for the coming year. As he is looking to purchase a new residence, one of the alternatives that is being considered is an interest free loan that would be used to purchase this property. Fred needs $350,000 to comfortably finance this purchase. As he has an excellent credit rating, a commercial bank is prepared to extend the $350,000 on a 5 year, closed mortgage at a rate of 4.75%. The company has indicated that they will extend a $350,000, 5 year, interest free loan in lieu of a raise. The Company's accounting department will calculate the after tax cost of providing the loan and his employer will offer Fred the alternative of additional salary that has the same after tax cost to the Company. The Company is subject to income tax at a combined federal/provincial rate of 29%. When funds are available, the Company has alternative investment opportunities that earn a pre-tax rate of 10%. Because of Fred's current high salary, any additional compensation will be taxed at a combined federal/provincial income tax rate of 49%. Assume that the prescribed interest rate on loans for the current year is 2%. Required: A. Determine the income tax consequences to Fred and the cost to the Company, in terms of lost after-tax earnings, of providing Fred with a $350,000 interest free loan for the first year of the loan. B. Determine the amount of additional salary that could be provided to Fred for the same after tax cost to the Company that you calculated in Part A. C. Which alternative would you recommend that Fred accept? Explain your conclusion.

Answer: Part A The first year income tax consequences for Fred would be that he would be assessed a taxable benefit on the loan of $7,000 [(2%)($350,000)] for the current year. This would result in an increase in his income tax of $3,430 [(49%)($7,000)]. The cost of the loan to the company for the first year would be calculated as follows: Lost Earnings on Funds Loaned [(10%)($350,000)] Corporate Taxes on Imputed Earnings (at 29%) Net Cost to Company - Loan

$35,000 (10,150) $24,850

This will result in Fred having the use of $350,000 at a tax cost to himself of $3,430 and an annual cost of $24,850 to the Company. Part B If instead of giving Fred the $350,000, the Company pays him the potentially lost annual earnings of $35,000, the after tax cost to the Company will be the same, as shown in the following calculation: Additional Salary Savings in Corporate Taxes (at 29%) Net Cost to Company - Additional Salary

$35,000 (10,150) $24,850

Part C Fred can borrow on a loan at a rate of interest of 4.75%. This means that the annual interest payments on $350,000 would amount to $16,625 [(4.75%)($350,000)]. If he receives the additional salary, his after tax income would be as follows: Additional Salary Income Tax (at 49%) Net Increase in Cash

$35,000 (17,150) $17,850

Fred should accept the additional salary of $35,000 per year as it results in an annual cash inflow of $1,225 ($35,000 - $17,150 - $16,625) after paying the income tax and the mortgage interest. This compares to a cash outflow of $3,430 if the company lends the money to Fred. Type: ES Topic: Employment - loan benefits (tax planning)

100) Albert Lee is an employee of a large Canadian company. As he has performed exceptionally well in recent years and has become sought after by competitors, the Company is planning to increase his compensation in an effort to retain him. Mr. Lee has developed a growing interest in investing in options and, in order to finance this activity, he is looking to borrow $500,000. His bank has indicated that they would be prepared to loan this amount to him at a rate of 6%. This is attractive in that he anticipates that his activity in the options market will generate a pre-tax return of at least 15%. Given this situation,Mr. Lee has indicated to his employer that, instead of additional remuneration in the form of salary, he would be prepared to accept a $500,000 interest free loan for 3 years. He would fully invest this in options. The Company is subject to income tax at a combined federal/provincial income tax rate of 27%. When funds are available, the Company has alternative investment opportunities that earn a pre-tax rate of 9%. Any additional compensation for Mr. Lee will be taxed at a combined federal/provincial income tax rate of 46%. Assume that the prescribed interest rate for employee loans for the current year is 2%. Required: A. Determine the income tax consequences to Mr. Lee and the cost to the Company, in terms of lost aftertax earnings, of providing Mr. Lee with a $500,000 interest free loan for the first year of the loan. B. Determine the amount of additional salary that could be provided to Mr. Lee for the same after tax cost to the Company that you calculated in Part A. C. Which alternative would you recommend that Mr. Lee accept? Explain your conclusion.

Answer: Part A Mr. Lee would include an interest benefit on the loan of $10,000 [(2%)($500,000)] for the current year. However, under ITA 80.5, this would be deemed interest paid where the funds are used for investment purposes. This means that the interest benefit will be added to employment income and he would be entitled to an interest expense when calculating his investment income or loss. The cost of the loan to the company for the first year would be calculated as follows: Lost Earnings on Funds Loaned [(9%)($500,000)] Corporate Income Tax on Imputed Earnings (at 27%) Net Cost to Company - Loan

$45,000 (12,150) $32,850

This will result in Mr. Lee having the use of $500,000 at no tax cost to himself and an annual cost of $32,850 to the Company. Part B If instead of giving Mr. Lee the $500,000, the Company pays him the potentially lost annual earnings of $45,000, the after tax cost to the Company will be the same, as shown in the following calculation: Additional Salary Savings Ii Corporate Taxes (at 27%) Net Cost to Company - Additional Salary

$45,000 (12,150) $32,850

Part C Mr. Lee can borrow on a loan at a rate of interest of 6%. This means that the annual interest payments on $500,000 would amount to $30,000 and would be deductible in determining his investment income or loss. If he receives the additional salary, his after tax income would be as follows: Additional Salary Deductible Interest on Investment Loan Increase in net income Income Tax (at 46%) Net Increase in Cash

$45,000 (30,000) $15,000 (6,900) $ 8,100

Mr. Lee should accept the additional salary of $45,000 per year as it results in an annual cash increase of $8,100. Type: ES Topic: Employment - loan benefits (tax planning)

101) Opting Inc. has a very generous stock option plan that allows all of their long term employees to participate. Sandra has worked for the Company for over 10 years and has participated in this plan on a regular basis. With regards to the last options granted to her, the following information is relevant: • On January 1, 2020, Sandra was granted options to acquire 275 of the Company's shares at a price of $15.00 per share. • At a later point in time, when Sandra exercises these options, the Company's shares have a FMV of $17.50 per share. • On December 1, 2022, all of the shares acquired with the options are sold. Required: Indicate the income tax consequences to Sandra of the transactions that took place during 2020, 2021, and 2022 under each of the following independent Cases. Your answer should include the effect on employment income, net income and taxable income. Where relevant, identify these effects separately. Case A — Opting is a CCPC. At the time the options were granted, the FMV of the Company's shares was $16.00 per share. The options are exercised on February 28, 2020. When the shares are sold, the proceeds of disposition are $20.25 per share. Case B — Opting is a Canadian public company. At the time the options were granted, the Company's shares were trading at $16.00 per share. The options are exercised on February 28, 2020. When the shares are sold, the proceeds of disposition are $16.00 per share. Case C — Opting is a Canadian public company. At the time the options were granted, the Company's shares were trading at $14.00 per share. The options are exercised on July 1, 2021. When the shares are sold, the proceeds of disposition are $19.75 per share. Case D — Opting is a CCPC. At the time the options were granted, the Company's shares had a FMV of $14.00 per share. The options are exercised on July 1, 2021. When the shares are sold, the proceeds of disposition are $21.50 per share.

Answer: Case A The required information under the assumption that Opting Inc. is a CCPC is as follows: • Year of granting and year of exercise - No income tax consequences. • Year of sale - As the option price was less than the FMV of the shares at the time the options were granted, no stock option deduction is available under ITA 110(1)(d). However, Sandra owned the shares for more than two years and, as a consequence, she can claim a stock option deduction under ITA 110(1)(d.1). The income tax consequences would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income Taxable Capital Gain [(275)($20.25 - $17.50)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) Stock Option Deduction ITA 110(1)(d.1) [(1/2)($687.50)] Increase in Taxable Income

$4,812.50 (4,125.00) $ 687.50 378.13 $1,065.63 Nil (343.75) $ 721.88

Case B The required information under the assumption that Opting Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - As the option price was less than the FMV of the shares at the time the options were granted, the ITA 110(1)(d) stock option deduction is not available. As Opting is a public company, no stock option deduction is available under ITA 110(1)(d.1). The income tax consequences would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) Increase In net income and taxable income

$4,812.50 (4,125.00) $ 687.50 Nil $ 687.50

• Year of sale - There would an allowable capital loss calculated as follows: POD [(275)($16.00)] ACB [(275)($17.50)] Capital Loss Inclusion Rate Allowable Capital Loss

$4,400.00 (4,812.50) ($ 412.50) 1/2 ($ 206.25)

The effect on both net income and taxable income would be nil. Note to Instructor: Depending on what has been covered in your course, students may or may not be expected to comment on the ability to carry the capital loss back or forward as follows: If she has taxable capital gains in the previous 3 years or any year in the future, the loss could be carried back or carried forward and deducted in the determination of taxable income. It is important that students realize that the capital loss cannot be used to offset employment income from stock option benefits.

Case C The required information under the assumption that Opting Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - The results for this year would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($687.50)] Increase in Taxable Income

$4,812.50 (4,125.00) $ 687.50 (343.75) $ 343.75

As the option price was greater than the FMV of the shares at the time the options were granted, the ITA 110(1)(d) stock option deduction is available. • Year of sale - There would a taxable capital gain calculated as follows: POD [(275)($19.75)] ACB [(275)($17.50)] Capital Gain Inclusion Rate Taxable Capital Gain

$5,431.25 (4,812.50) $ 618.75 1/2 $ 309.38

This would be both the increase in Net Income and the increase in Taxable Income for the year. Case D The required information under the assumption that Opting Inc. is a CCPC is as follows: • Year of granting - No income tax consequences. • Year of exercise - No income tax consequences. • Year of sale - The tax effects would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income Taxable Capital Gain [(275)($21.50 - $17.50)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($687.50)] Increase in Taxable Income

$4,812.50 (4,125.00) $ 687.50 550.00 $1,237.50 (343.75) $ 893.75

As the option price was greater than the FMV of the shares at the time the options were granted, the ITA 110(1)(d) stock option deduction is available. Type: ES Topic: Employment - employee stock options (multiple cases)

102) During January, 2020, Lastech Inc. issued options to their employee, Ms. Marianne Black. The options allowed Ms. Black to acquire 1,500 of the Company's common shares at an option price of $23 per share. At the point in time when the options were exercised, the FMV of the shares was $25 per share. All of the shares that are acquired through the options are sold on December 31, 2022 at a price of $28 per share. Required: Indicate the income tax consequences on Ms. Black of the transactions that took place during 2020, 2021, and 2022 under each of the following independent Cases. Your answer should include the effect on both net income and taxable income. Where relevant, identify these effects separately. Case A — Lastech Inc. is a Canadian public company. At the time the options were granted, the shares were trading at $22 per share. The options were exercised on July 1, 2021. Case B — Lastech Inc. is a Canadian public company. At the time the options were granted, the shares were trading at $24 per share. The options were exercised on July 1, 2021. Case C — Lastech Inc. is a CCPC. At the time the options were granted, the Company's shares had a FMV of $23 per share. The options were exercised on July 1, 2021. Case D — Lastech Inc. is a CCPC. At the time the options were granted, the Company's shares had a FMV of $24 per share. The options were exercised on July 1, 2020.

Answer: Case A The required information under the assumption that Lastech Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - The results for this year would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($3,000)] Increase in Taxable Income

$37,500 (34,500) $3,000 (1,500) $1,500

As the option price was greater than the FMV of the shares at the time the options were issued, the ITA 110(1)(d) stock option deduction is available. • Year of sale - The income tax consequences would be as follows: POD [(1,500)($28)] ACB [(1,500)($25)] Capital Gain Inclusion Rate Taxable Capital Gain

$42,000 (37,500) $ 4,500 1/2 $ 2,250

This $2,250 would be both the increase in Net Income and the increase in Taxable Income for the 2022 year. Case B The required information under the assumption that Lastech Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - As the option price was less than the FMV of the shares at the time the options were issued, the ITA 110(1)(d) stock option deduction is not available. The income tax consequences would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) Increase in Net Income and Taxable Income

$37,500 (34,500) $ 3,000 Nil $ 3,000

• Year of sale - The income tax consequences would be as follows: POD [(1,500)($28)] ACB [(1,500)($25)] Capital Gain Inclusion Rate Taxable Capital Gain

$42,000 (37,500) $ 4,500 1/2 $ 2,250

This $2,250 would be both the increase in Net Income and the increase in Taxable Income for the 2021 year. Case C The required information under the assumption that Lastech Inc. is a CCPC is as follows: • Year of granting - No income tax consequences. • Year of exercise - No income tax consequences. • Year of sale - The income tax consequences would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income Taxable Capital Gain [(1,500)($28 - $25)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($3,000)] Increase in Taxable Income

$37,500 (34,500) $ 3,000 2,250 $ 5,250 (1,500) $ 3,750

Case D The required information under the assumption that Lastech Inc. is a CCPC is as follows: • Year of granting and exercise - No income tax consequences. • Year of sale - As the option price was less than the FMV of the shares at the time the options were granted, no stock option deduction is available under ITA 110(1)(d). However, Ms. Black owned the shares for more than two years and, as a consequence, she can claim a stock option deduction under ITA 110(1)(d.1). The income tax consequences would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income Taxable Capital Gain [(1,500)($28 - $25)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) Stock Option Deduction ITA 110(1)(d.1) [(1/2)($3,000)] Increase in Taxable Income

Type: ES Topic: Employment - employee stock options (multiple cases)

$37,500 (34,500) $ 3,000 2,250 $5,250 Nil (1,500) $3,750

103) Alicia Arden has established herself as a very effective sales representative for products related to health care services. While she has worked independently for a number of years, she has received two very attractive offers of employment. Both of these offers would require that she begin work on January 2, 2022 Offer One This offer would provide her with a fixed salary of $225,000 per year with no commissions on her sales. The employer would provide an allowance of $30,000 per year to cover hotel, meals, and airline costs. The employer believes that the CRA will consider this allowance to be reasonable in the circumstances. With respect to advertising and promotion expenses, no allowance or reimbursement would be provided. This employer would provide her with an automobile which would be leased at a cost of $850 per month, including a $75 per month payment for insurance. The employer will pay all of the operating costs of the automobile. This employer would provide her with a $200,000 interest free loan that she will use to purchase investments. The loan will have to be repaid after five years. Offer Two This offer would provide her with a fixed salary of $175,000 per year, plus a commission on all of her sales. Ms. Arden estimates that for 2022, commissions will total $85,000. The employer would reimburse her hotel, meal, and airline costs. With respect to advertising and promotion expenses, no allowance or reimbursement would be provided. The employer will not provide her with an automobile but will provide her with an allowance for using her own automobile of $1,500 per month. Ms. Arden estimates that for 2022 the total costs associated with driving her own automobile will be as follows: Operating Costs CCA Financing Costs Total

$10,600 4,500 1,800 $16,900

Other Information The following information is applicable to either of the alternative offers. 1. She estimates that her employment related expenses during 2022 would be as follows: Travel Costs (Hotel and Airline Costs) Travel Costs (Meals) Advertising and Promotion

$18,000 8,500 23,000

2. Whether it is the employer's automobile or her own automobile, she would use the car throughout 2022. She expects to drive this vehicle a total of 53,000 kilometers during 2022, with 37,000 of these kilometers for employment purposes and 16,000 kilometers for personal use. 3. Both offers include a group disability insurance plan for which the company will pay all of the premiums. The plan provides periodic benefits that compensate for lost employment income. This will cost the employer $4,500 per year.

4. Both offers include a $1,000,000 face value life insurance policy. All of the premiums, which will total $3,800 per year, will be paid by the employer. 5. Assume that the prescribed interest rate on employee loans is 2% throughout 2022. Required: A. Based on the estimates made by Ms. Arden, calculate Ms. Arden's minimum 2022 employment income for each of the two offers. Ignore PST and GST/HST considerations. B. Discuss the factors that Ms. Arden should consider in deciding between the two alternatives. Answer: Part A The calculations for employment income would be as follows:

Salary Commissions Hotel, Meal, and Airline Allowance (Note One) Hotel, Meal, and Airline Reimbursement (Note Two) Automobile Benefit (Note Three) Automobile Allowance [(12)($1,500)] Automobile Costs [(37,000/53,000)($16,900)] Loan Benefit [(2%)($200,000)] Disability Insurance Benefit (Note Four) Life Insurance Benefits (Note Four) Advertising Expense (Note Five) Employment Income

Offer One $225,000 Nil Nil N/A 7,439 N/A N/A 4,000 Nil 3,800 Nil $240,239

Offer Two $175,000 85,000 N/A N/A N/A 18,000 (11,798) N/A Nil 3,800 (23,000) $247,002

Note One — The $30,000 per year allowance is considered reasonable and, as a consequence, it does not have to be included in employment income. Note Two — Reimbursements have no effect on employment income. They are neither deducted nor included in the determination of employment income. Note Three — The taxable benefit associated with the automobile provided under Offer One would be calculated as follows: Standby Charge [(2/3)($850 - $75)(12)(16,000 ÷ 20,004*)] Operating Cost Benefit - Lesser of: • [(16,000)($0.29)] = $4,640 • [(1/2)($4,959)] = $2,480 Total Automobile Benefit * [(12)(1,667)]

$4,959

2,480 $7,439

Note Four — The payment of disability insurance premiums by an employer does not create a taxable benefit for employees if the plan provides periodic benefits that compensate for lost employment income. However, the payment of life insurance premiums does create a taxable benefit.

Note Five — As Ms. Arden does not receive any commissions under Offer One, she cannot deduct her advertising costs. She can deduct the full amount under Offer Two as the $23,000 total is less than her commissions of $85,000. Part B The actual amount of annual cash to be received from the employer under the two offers would be calculated as follows: Offer One $225,000 Nil 30,000 N/A N/A $255,000

Salary Commissions - Estimated Hotel, Meal, and Airline Allowance Reimbursements Automobile Allowance Total Cash

Offer Two $175,000 85,000 N/A 26,500 18,000 $304,500

The fact that Offer Two has significantly higher cash flows and a higher employment income suggests that Offer Two is preferable. A major factor in this result is that the absence of commissions in Offer One results in the $23,000 in advertising and promotion expenses not being deductible. This could easily be fixed at no cost to the employer by having an appropriate amount of the $30,000 allowance treated as a reimbursement of advertising and promotion expenses. This would leave the unreimbursed hotel, meal, and airline costs which could be deducted by Ms. Arden without a requirement to have commission income. In addition, other factors that have not been considered in this simple analysis include: • Offer One includes the provision of an automobile while Offer Two does not. This means that, under Offer One, Ms. Arden could get rid of her personal automobile, resulting in a significant annual savings. • Offer Two requires using estimates of costs for her personal automobile. There is uncertainty with respect to the amount of these costs. They could be higher or lower than estimated. • Offer One includes a $30,000 travel allowance that would not require receipts. Offer Two will reimburse all travel costs which would require all receipts. The additional paperwork would make Offer Two less attractive. However, Offer Two would be more attractive if her actual travel costs total more than $30,000. If they total less, than Offer One would allow her to keep the difference. • Offer One includes an interest free loan that will be invested. The fact that these funds will be invested means that there will be an interest expense available to offset any investment income. In addition, Ms. Arden’s cash flows are likely to be improved by some amount of return on the investment of the $200,000 in loan proceeds. • Offer Two contains an estimate of commissions. Unlike the fixed salary provided in Offer One, there is uncertainty with respect to the amount of these commissions. They could be higher or lower than estimated. There could also be uncertainty related to the timing of the payment of the commissions. Given these latter considerations, it is difficult to come to a firm conclusion on the two offers. If the invested funds earn a substantial return, she may be better off with Offer One. Correspondingly, it is difficult to quantify the cash flows associated with not owning a personal automobile. In addition, there could be a disadvantage with Offer Two if commission income did not reach the predicted level of $85,000. Type: ES Topic: Employment - evaluating alternative employment offers (comprehensive)

104) On January 2, 2022, Ms. Shirley Kantor moves from London, Ontario, to Thunder Bay, Ontario, in order to begin employment with Northern Enterprises Ltd. (NEL). Her salary for the year was $142,000. NEL withheld the following amounts from her earnings: Federal and Provincial Income Tax Registered Pension Plan (RPP) Contributions (NEL Makes a matching contribution) EI Premiums CPP Contributions United Way Donations Professional Association Dues

$32,500 3,200 953 3,500 450 1,250

Other Information: 1. Shirley's moving expenses total $6,800. NEL reimbursed Shirley for 100% of these costs. 2. For the year ending December 31, 2022, Shirley was awarded a bonus of $32,000. Of this total, $25,000 was paid during 2022, with the remainder of $7,000 paid in January, 2023. 3. NEL provided Shirley with a car to be used for employment purposes and paid the operating costs for the year that totalled $8,100. The cost of the car was $39,550, including HST of $4,550. The car was available to Shirley throughout 2022. She drove a total of 63,000 kilometers. This included 8,000 kilometers of personal use and 55,000 for employment purposes. 4. In negotiating her new position with NEL, Shirley had asked for a $50,000 interest free loan as one of her benefits. NEL's human resources department indicated that the CEO would not approve any employee loans. However, they agreed to advance $50,000 of her 2023 salary as of November 1, 2022. 5. In her employment related travels, Shirley has accumulated over 100,000 Aeroplan points. In 2022, she and her partner Diane used 50,000 of these points for a weekend flight to New York City. If she had purchased them, the tickets would have cost a total of $940. The accumulation of the points is not considered an alternative means of remuneration. 6. NEL provided Shirley with the following additional benefits: Allowance for acquiring clothing Squash Club membership (No Employment Related Use) Financial Advisor Fees

$4,800 2,800 1,200

7. Shirley's previous employer was a CCPC. In 2021, she was granted options to buy 500 of the company's shares at $20 per share. This option price was higher than the estimated FMV of the company's shares at the time the options were granted. On January 2, 2022, Shirley exercised these options. At this time the FMV of the shares was $28 per share. Shirley immediately sells the shares for $28 per share. 8. Shirley was required by her employer to acquire a laptop computer to be used for employment purposes. At the beginning of 2022, she purchased a computer at a cost of $1,356, including HST of $256. In 2022, her expenditures for computer related supplies totalled $150. Required: Determine Shirley's 2022 employment income.

Answer: Ms. Shirley Kantor's 2022 employment income would be calculated as follows: Salary Federal and Provincial Income Tax RPP Contributions EI Premiums CPP Contributions United Way Donations Professional Dues Bonus - Item 2 Car Benefit - Item 3 Salary Advance - Item 4 Allowance for Acquiring Clothing - Item 6 Squash Club Membership - Item 6 Financial Advisor Fees - Item 6 Stock Option Benefit - Item 7 Computer Related Supplies - Item 8 2022 Employment Income

$142,000 Nil (3,200) N/A N/A N/A (1,250) 25,000 5,694 50,000 4,800 2,800 1,200 4,000 (150) $230,894

Item 1 — The reimbursement of moving expenses is not a taxable benefit. However, as the costs were reimbursed, Shirley cannot claim a moving expense deduction. Item 2 — As employment income is determined on a cash basis, only the portion of the bonus that was received in 2022 will be included in employment income. Item 3 — The taxable benefit on the car would be calculated as follows: Standby Charge [(2%)($39,550)(12)(8,000/20,004*)] Operating Cost Benefit - Lesser of: [($0.29)(8,000)] = $2,320 [(1/2)($3,796)] = $1,898 Total Automobile Benefit *[(12)(1,667)]

$3,796

1,898 $5,694

Item 4 — Even though the $50,000 advance is earned in 2023, it is paid in 2022 and, because employment income is on a cash basis, it must be included in income in the year received. Item 5 — The use of Aeroplan points earned on employment related travel does not create a taxable benefit. Item 6 — While employer provided specialized clothing is not a taxable benefit, regular clothing would not fit this description, resulting in the inclusion of this allowance in employment income. As the squash club membership is not used at all for employment related purposes, it would be considered a taxable benefit. While mental or physical health counseling is not considered a taxable benefit, this is not the case with financial counseling. Item 7 — While there is no employment income resulting from the exercise of the CCPC stock options, the benefit is required to be included in employment income when the stock option shares are sold. The result is an increase in employment income of $4,000 [(500)($28 - $20)]. A stock option deduction of $2,000 [(1/2)($4,000)] would be available but this does not affect employment income. Item 8 — While Shirley cannot deduct CCA on the computer, she can deduct the cost of the supplies. Type: ES Topic: Employment income (comprehensive)

105) Ms. Martha Gobel is a linguist, specializing in Asian languages. As the daughter of a Canadian diplomat, she has become familiar with the many customs and practices found throughout Asia. In 2021, a headhunting firm in B.C. connected her with Golden Mountain Experiences (GME), a public company, which had begun operations in Whistler, B.C. GME had need of a representative to promote their Canadian services to Asian tour operators and executives. When her mother was diagnosed with a terminal illness, Martha moved into her house in Ottawa to help care for her. Her mother died in early 2020, leaving Martha her considerable estate, including her house. When GME offered her a position in November, 2021 with a start date of January 1, 2022, she immediately accepted. The final income tax return of her mother stated the FMV of her house was $525,000 on March 3, 2021. When Martha put the house on the market on November 15, 2021, the listing price was only $450,000 because of a nearby landfill. At the urging of the listing agent she accepted an offer for $390,000 in April, 2022, resulting in a $135,000 loss on the property. Other Information: Other information relevant to 2022 is as follows: 1. GME owned a suite hotel and offered her the use of a unit there at a rate of $2,000 per month. The regular monthly rate for the unit was $5,000 per month. She moved in on January 1, 2022. Through contacts, she finds a large townhouse in Whistler that she purchases on May 15, 2022 for $1,600,000. After doing extensive renovations, she moves out of the hotel and into her townhouse on July 1, 2022. 2. As an incentive to accept the position, GME agreed to compensate her for one-half of any loss on the sale of her Ottawa home. The $67,500 [(1/2)($135,000)] payment was made on May 30, 2022. 3. In order to help Martha with the purchase of her new townhouse, GME provided her with a $100,000 interest free housing loan. The funds are provided to Martha on May 1, 2022. Assume that the prescribed interest rate for employee loans for all of 2022 is 2%. 4. In 2022, Martha earned a salary of $175,000. This included several large bonuses due to her exceptional sales ability. The Company withheld the following amounts from her salary: Income Taxes CPP EI RPP Contributions Payment for personal use of automobile

$53,000 3,500 953 2,500 1,200

5. GME contributed $2,500 on Martha’s behalf to the Company’s RPP. 6. GME provides group medical coverage to all of its employees. The PHSP premiums paid by GME on Martha’s behalf cost $1,115 for the year. 7. During the year, Martha received two non-cash gifts from GME, a season ski pass worth $1,000 and a Christmas gift certificate redeemable at many restaurants in Whistler Village for $100.

8. Her favourite uncle visited her and went skiing with a day pass that Martha provided. He died after falling and hitting his head on a boulder while skiing out of bounds. GME provided Martha with grief counseling services worth $665. 9. Up until her uncle's death, Martha purchased many day passes at Whistler for friends and families using GME's 15% corporate discount. A statement from GME stated that Martha had saved a total of $1,050 using the discount in 2022. 10. Martha was granted options to buy 100 of the company's shares at $100 per share when she joined the staff of GME. At that time, the shares were trading at $94 per share. On May 10, 2022, the shares are trading at $123 per share. She acquires 50 shares for cash of $5,000 on that date. She still owns the shares on December 31, 2022. 11. GME provided Martha with a membership in the exclusive Blackcomb Ski Club And Spa. The cost of the annual membership was $5,000. Martha took her clients there for meals and drinks. GME paid all the charges on her account as they were related to potential clients of GME. In 2022, this amounted to $22,200. 12. GME provides Martha with a luxury vehicle that she uses to drive her clients on tours and to and from the airport. It was purchased in late 2021 for $120,000, including GST and PST. The vehicle was used by Martha throughout 2022. During the year, she drove the vehicle a total of 102,000 kilometers, of which 90,000 were for employment purposes and 12,000 for personal use. GME pays all operating and maintenance costs, a total of $23,000 during the year. GME withheld $1,200 from her December salary to pay for her personal use of the vehicle for 2022. 13. Martha’s demanding job requires her to meet with clients at all hours of the day and night because many of them are on international flights. GME will provide her with a signed form T2200 stating that she is required to pay for certain employment expenses without reimbursement and use a portion of her home for employment purposes. Martha has renovated in order to have a separate area in her townhouse to be used exclusively to entertain her clients, in addition to signing the contracts. She has no receipts for the renovations she did. She was unable to find a contractor who would invoice and accept cheques. Since she needed the work finished quickly, Martha reluctantly paid cash. She used this work space between July 1 and December 31, 2022. This work space occupied 600 square feet of the 2,222 square feet available in her townhouse. Work space related expenditures are as follows: Monthly Maintenance Fee (For 6 Months) Hydro (For 6 Months) Property Insurance (6 Months) Property Tax (6 months) Big screen TV used solely for the entertainment of clients (promotional videos, ski races, etc.) Office Furniture Furniture for client's entertainment area

$5,400 450 575 2,600 2,600 5,600 12,400

14. Martha received an allowance of $400 per month for 6 months to cover the costs of maintaining a workspace in her home. Required: Determine Martha’s net employment income for 2022. Answer: Martha Gobel's net employment income would be calculated as follows: Item 1 - Lodging Benefit (Note 1) Item 2 - Housing Loss Reimbursement (Note 2) Item 3 - Imputed Interest On Housing Loan (Note 3) Item 4 - Salary Received (Note 4) Item 4 - RPP Contributions Item 5 - Employer's RPP Contribution (Note 5) Item 6 - Group Medical Coverage (Note 6) Item 7 - Excess Gift From Employer (Note 7) Item 8 - Grief Counseling (Note 8) Item 9 - Employer Discount (Note 9) Item 10 - Stock Option Benefit (Note 10) Item 11 - Club Dues (Note 11) Item 12 - Automobile Benefit (Note 12) Item 13 - Workspace in Home Costs (Note 13) Item 14 - Workspace in Home Allowance (Note 14) 2022 Employment Income

$ 18,000 26,250 1,333 175,000 (2,500) Nil Nil 600 Nil Nil 1,150 Nil 19,557 (1,580) 2,400 $240,210

Note 1 — If an employer provides an employee with subsidized lodging, the benefit is the FMV reduced by any amounts paid by the employee. In Martha's case, the benefit is $18,000 [($5,000 - $2,000)(6)]. Note 2 — Employer-reimbursed housing losses fall into two categories – regular housing losses and eligible housing losses. Eligible housing losses occur when there is an eligible relocation which generally means a relocation or move the expenses of which would qualify for a moving expense deduction had they been paid by the employee. In this case the move is an eligible relocation meaning that the reimbursement qualifies as an eligible housing loss. The employer reimbursed $67,500. The taxable portion of the loss reimbursement is $26,250 [(1/2)($67,500 - $15,000)]. The remaining tax free amount of $41,250 can be calculated as ($67,500 - $26,250) or [$15,000 + (1/2)($67,500 - $15,000)]. Note 3 — The imputed interest on this loan could be calculated as $1,342 [($100,000)(2%)(245 ÷ 365)]. An acceptable alternative calculation would be $1,333 [($100,000)(2%)(8 ÷ 12)]. Since it is lower, we will use the alternative calculation. Note 4 — While the withholdings generate a tax credit against income tax payable, CPP and EI payments are not deductible. In addition, income tax payments are not deductible. The CPP tax credit would be $3,039 and there would be an expense of $461 which reduces net income but is not an employment expense. Note 5 — An employer's contributions to an employee's RPP is not a taxable benefit. Note 6 — Employer's contributions to group health services plans are not a taxable benefit for the employee.

Note 7 — Non-cash gifts of up to $500 can be received by an employee on a tax free basis. Amounts in excess of $500 are taxable. The excess $600 ($1,100 - $500) will be included in Martha’s employment income. Note 8 — Under ITA 6(1)(1)(iv), mental health counselling services are excluded from employment income. Grief counselling would be included in this category of services. Note 9 — Employee discounts do not generally result in taxable benefits. Note 10 — At time of exercise, Martha will have an employee benefit of $1,150 [($123 - $100)(50 Shares)]. As the option price exceeded the FMV when the options were granted Martha will be able to claim a stock option deduction of $575 [(1/2)($1,150)] in the determination of taxable income, but this deduction will not affect employment income. Note 11 — While club dues cannot be deducted by an employer, they do not create a taxable benefit for an employee, provided the membership is primarily of benefit to the employer. Since GME paid the charges on her account, they would be no income tax consequences for her. Note 12 — The automobile benefit would be calculated as follows: Standby Charge [(2%)(12)($120,000)(12,000 ÷ 20,004*)] Operating Cost Benefit - Lesser Of: • [($0.29)(12,000)] = $3,480 • [(1/2)($17,277) = $8,639 Total Benefit Reimbursement To Employer Total Automobile Benefit *[(12)(1,667)]

$17,277

3,480 $20,757 (1,200) $19,557

Note 13 — Based on floor space, the workspace in the home office occupies 27% of the apartment (600 ÷ 2,222). The work space in the home expenses that may be claimed for the period July 1 to December 31 are the following: Monthly Maintenance Fee (For 6 Months) Hydro (For 6 Months) Total Eligible Expenses Home Office Use Deductible Expense

$5,400 450 $5,850 27% $1,580

As employees cannot take CCA on furniture or electronics (the TV), there is no deduction for the cost of these capital expenditures. Employees cannot deduct the cost of property insurance or property tax on a home office. Note 14 — Allowances received are included in employment income unless the allowance is specifically excluded by ITA 6(1)(b). There is no exclusion for this allowance. The amount is $2,400 [(6)($400)]. Type: ES Topic: Employment income (comprehensive)

106) Ms. Matilda Bracken is a Certified Financial Planner (CFP) with many years of successful experience. In 2020, she decided that she was not adequately appreciated in her current position with a large financial institution in Windsor, Ontario. Given this, she resigned on November 1, 2021. After several months of investigation, she accepted employment with Retirement Planners Ltd. (RPL), a CCPC located in London, Ontario. She commenced working for RPL on May 1, 2022. She owned a home in Windsor which she had acquired several years ago for $375,000. Because of the depressed real estate market in this area, she was eventually forced to sell the property for $275,000 in October, 2021, resulting in a $100,000 loss on this property. Because of the uncertainty surrounding the sale of her Windsor property, she moved into an apartment when she arrived in London on May 1, 2022. The apartment was rented on a monthly basis until November 30, 2022. After she accepts an offer to purchase her Windsor house, she finds a home in London that she purchases on November 1, 2022 for $420,000. She moves into this new home on December 1, 2022. Other Information: Other information relevant to 2022 is as follows: 1. Because of her strong professional reputation, RPL paid her a signing bonus of $12,000. The signing bonus was paid on June 1, 2022. 2. During the period May 1, 2022 through December 31, 2022, Matilda earned salary of $124,000. Of these earnings, $120,125 was paid in 2022 with the remainder of $3,875 paid in 2023. The Company withheld the following amounts from her salary: Income Taxes CPP EI RPP Contributions Payment For Personal use of automobile

$18,650 3,500 953 3,700 880

3. RPL contributed $3,500 on Matilda's behalf to the Company's RPP. 4. RPL provides group medical coverage to all of its employees. The PHSP premiums paid by RPL on Matilda's behalf cost $562 for the year. 5. On December 12, 2022, a bonus of $10,600 was accrued for Matilda. Matilda received $5,300 of this bonus on December 29, 2022, with the remainder being paid on January 17, 2023. 6. During the year, Matilda received two non-cash gifts, a birthday gift worth $350 and a Christmas gift worth $300. 7. Because of the need to invest some of her additional income, RPL provided Matilda with financial counseling services. The value of these services was $1,200. 8. In order to assist her move, RPL agreed to compensate her for one-half of the $100,000 loss on the sale of her Windsor home. The $50,000 payment was made on December 1, 2022.

9. In order to help Matilda with financing her new London residence, RPL provided her with a $220,000 interest free housing loan. The funds are provided to Matilda on November 1, 2022. Assume that the prescribed interest rate on employee loans for all of 2022 is 2%. 10. RPL has a stock option plan for its employees. Under this plan, employees are permitted to acquire a limited number of option shares at 10% below their FMV on December 1 of each year. The company hires valuators to determine the FMV at each of those dates. Matilda acquires 200 shares on December 1, 2022 for cash of $7,200. On December 15, she sells 100 of these shares for $4,100. 11. Matilda paid $1,600 in CFP dues in 2020. RPL’s policy is to reimburse 50% of such professional dues. RPL reimbursed her $800 in December, 2022. 12. RPL provides its professional employees with a membership in the London Curling Club. They believe this is a useful venue for entertaining clients of the Company. The cost of this annual membership was $1,300. 13. RPL provides Matilda with a vehicle that was purchased in 2022 for $45,200, including HST. The vehicle was available to Matilda for all months during the period May 1, 2022 through December 31, 2022. During this period, she drove the vehicle a total of 52,000 kilometers, of which 40,000 were for employment purposes and 12,000 for personal use. RPL pays all operating and maintenance costs, a total of $8,900 for the same period that Matilda used the car. RPL withheld $110 per month from her salary to pay for her personal use of the vehicle. 14. Matilda’s new job requires her to meet with clients outside of regular office hours throughout the week. RPL will sign form T2200 stating that she is required to pay for certain employment expenses without reimbursement and use a portion of her home for employment purposes. Matilda has set aside a separate room in her apartment to be used exclusively to meet with clients. She used this office space between May 1 and November 30, 2022. This home office occupied 150 square feet of the 1,250 square feet available in her apartment. The home office in the residence she moved into on December 1, 2021 will not be available for use until 2023. RPL has agreed to let Matilda use head office space as needed during December 2022. Home office related costs are as follows: Monthly Rent Office Furniture Computer Purchase Stationery and Office Supplies Purchased Monthly Phone Line Charge (for 7 Months) Employment Related Long Distance Calls (for 7 Months) Electricity Charge (For 7 Months) Paint for Apartment Property Insurance (7 Months)

$2,200 3,400 896 147 210 110 350 165 175

15. Matilda received an allowance of $325 per month for 7 months to cover the costs of maintaining a workspace in her home.

Required: Determine Matilda’s 2022 employment income. Answer: Matilda Bracken's net employment income would be calculated as follows: Item 1 - Signing Bonus (Note 1) Item 2 - Salary Received (Note 2) Item 2 - RPP Contributions Item 3 - Employer's RPP Contribution (Note 3) Item 4 - Group Medical Coverage (Note 4) Item 5 - Bonus Received (Note 5) Item 6 - Excess Gift (Note 6) Item 7 - Financial Counseling (Note 7) Item 8 - Housing Loss Reimbursement (Note 8) Item 9 - Imputed Interest on Housing Loan (Note 9) Item 10 - Stock Option Benefit (Note 10) Item 11 - CFP Dues (Note 11) Item 12 - Club Dues (Note 12) Item 13 - Automobile Benefit (Note 13) Item 14 - Stationery and Supplies (Note 14) Item 14 - Long Distance Calls (Note 14) Item 14 - Workspace in the Home Costs (Note 14) Item 15 - Home Office Allowance (Note 15) Employment Income

$ 12,000 120,125 (3,700) Nil Nil 5,300 150 1,200 17,500 735 400 ( 800) Nil 8,881 (147) (110) (1,910) 2,275 $161,899

Note 1 — Amounts received prior to, during or after employment are required to be included in employment income when received. Note 2 — Salary and other forms of remuneration such as bonuses are included in income when received regardless of when earned. While the withholdings generate a credit against income tax payable, $461 of CPP contributions are eligible for a deduction in determining net income that does not affect employment income. The remaining CPP and all of the EI premiums are eligible for an income tax credit that affects income tax payable. Note 3 — An employer's contributions to an employee's RPP is not a taxable benefit. Note 4 — Employer's contributions to group private health services plan is not a taxable benefit for the employee. Note 5 — Only the amount of the bonus that was received during 2021 will be included in Matilda's 2022 employment income. Note 6 — Non-cash gifts of up to $500 can be received by an employee on a tax free basis. Amounts in excess of $500 are required to be included in employment income. The excess $150 ($650 - $500). Note 7 — The provision by an employer of financial counseling services is considered to be a taxable benefit.

Note 8 — Employer-reimbursed housing losses fall into two categories – regular housing losses and eligible housing losses. Eligible housing losses occur when there is an eligible relocation which generally means a relocation or move the expenses of which would qualify for a moving expense deduction had they been paid by the employee. In this case the move is an eligible relocation meaning that the reimbursement qualifies as an eligible housing loss. The employer reimbursed $50,000 [(50%)($100,000)]. The taxable portion of the loss reimbursement is $17,500 [(1/2)($50,000 - $15,000)]. The remaining tax free amount of $32,500 can be calculated as ($50,000 - $17,500) or [$15,000 + (1/2)($50,000 - $15,000)]. Note 9 — The imputed interest on this loan would be $735 [($220,000)(2%)(61 ÷ 365)]. An acceptable alternative calculation would be $733 [($220,000)(2%)(2 ÷ 12)]. Note 10 — Despite the fact that the option price was 10% below FMV, the granting of the stock options does not create a benefit. However, when she exercises the option by purchasing shares, there is a benefit as follows: FMV at Exercise Date ($7,200 ÷ 90%) Option Price Stock option benefit (200 Shares)

$8,000 (7,200) $ 800

Per Share Benefit ($800 ÷ 200)

$4 Per Share

Since RPL is a CCPC, this benefit can be deferred until the shares are sold. As 100 shares are sold in 2022, $400 [(100)($4 benefit per share)] of this benefit will be included in Ms. Bracken's 2022 employment income. In addition to this benefit, there is also a taxable capital gain of $50 {[1/2][$4,100 - (1/2)($8,000)]}. However, such gains are not employment income. Note 11 — Professional dues are generally deductible to the extent they have not been reimbursed Note 12 — While club dues cannot be deducted by an employer, they do not create a taxable benefit for an employee, provided the membership is primarily a benefit to the employer. Note 13 — The automobile benefit would be calculated as follows: Standby Charge [(2%)(8)($45,200)(12,000 ÷ 13,336*)] Operating Cost Benefit - Lesser of: • [($0.29)(12,000)] = $3,480 • [(1/2)($6,507) = $3,254 Total Benefit Reimbursement To Employer [(8)($110)] Total Automobile Benefit *[(8)(1,667)]

$6,507

3,254 $9,761 (880) $8,881

Note 14 — Based on floor space, the home office occupies 12% of the apartment (150 ÷ 1,250). The work space in the home expenses that may be claimed for the period June 1 to November 30 are the following: Rent Paid [(7)($2,200)] Electricity Paid Paint Total Eligible Expenses Home Office Use Deductible Expense

$15,400 350 165 $15,915 12% $ 1,910

The stationary and supplies, as well as the business related long distance calls are deductible. As employees cannot take CCA on office furniture or computers, there is no deduction for the cost of these capital expenditures. Unless a phone is used only for employee related purposes, the monthly cost for its use is not deductible. Finally, employees cannot deduct the cost of property insurance on a home office. Note 15 — Allowances received are included in employment income unless the allowance is specifically excluded by ITA 6(1)(b). There is no exclusion for this allowance. The amount is $2,275 [(7)($325)]. Type: ES Topic: Employment income (comprehensive)

107) Olin Packett has been employed for over 10 years by a large Canadian public corporation. He works in their Victoria office. For the 2022 year, his gross salary is $75,000. While he does not receive commissions, he was awarded a bonus of $15,000 in 2022 based on his sales performance. One-half of the bonus is paid in December, 2022, and the other half paid in February, 2023. In 2022, Olin's employer withheld the following amounts from his gross wages: Federal Income Tax EI Premiums CPP Contributions RPP Contributions Donations to the United Way Union Dues Payments for personal use of company car Premiums for Group Life Insurance Policy

$14,350 953 3,500 3,100 750 275 1,500 200

Other Information 1. Olin is provided with a car that the company leases at a rate of $723 per month, including both GST and PST. The company pays for all of the operating costs of the car and these amounted to $4,200 during 2022. Olin drove the car a total of 33,000 kilometers during 2022, 27,500 kilometers of which were carefully documented for employment purposes and 5,500 for personal use. The car was available to him for 10 months of the year. 2. Olin was granted options to acquire 500 shares of his employer's common stock at a price of $31.00 per share 2 years ago. On the date the options were granted, the shares were trading at $29.50 per share. These options were exercised by Olin on February 16, 2022, when the shares were trading at $34.75 per share. Olin does not plan to sell the shares for at least 2 years. 3. In order to assist Olin in acquiring a new residence in Victoria, his employer granted him a three year, interest free loan of $175,000. The loan was granted and received on July 1, 2022 and, at this point in time, the interest rate on open five year mortgages was 4.5%. Assume the relevant prescribed interest rate on employee loans was 2% on this date. Olin purchases a house for $327,000 on October 2, 2022. 4. On his birthday, Olin received several gifts including a hoverboard and drone. In his enthusiasm for his new toys, he flew the drone over his neighbour's swimming pool while maneuvering the hoverboard on the sidewalk in front of the two homes to watch it. The result was a concussion, a broken leg, a shattered wrist and a drowned drone. He was unable to work for a period of two months. As his employer provides disability insurance coverage, he received benefits during this period totaling $8,500. All of the premiums for this insurance plan are paid for by the employer and totaled $560 for 2022. The plan provides periodic benefits that compensate for lost employment income.

5. Other disbursements made by Olin include the following: Tuition Fee for Operations Management Course Tuition Fee for Medieval History Course Fees Paid to Employer recommended Financial Planner

$1,300 950 450

Olin's employer reimbursed for the tuition fees for both the operations management course and the medieval history course, as well as the fees paid to the financial planner. 6. Olin's employer made a payment to the group life insurance policy on his behalf. The premiums for 2022 totalled $200. Required: Calculate Olin's 2022 employment income. Answer: Mr. Packett's employment income would be calculated as follows: Gross Salary Additions: Bonus (Amount received) Personal Benefit on Car (Note 1) Stock Option Benefit [($34.75 - $31.00)(500)] (Note 2) Home Purchase Loan Benefit (Note 3) Disability Insurance Receipts (Note 4) Tuition Fee for Medieval History Course (Note 5) Fees paid to Financial Planner (Note 6) Premiums on Life Insurance (Note 7) Deductions: RPP Contributions Union Dues 2022 Employment Income

$75,000 $7,500 885 1,875 1,750 8,500 950 450 200

($3,100) (275)

22,110 $97,110

(3,375) $93,735

Note 1 — The employee benefit on the company car would be as follows: Standby Charge [(2/3)(10)($723)(5,500/16,670)*] Operating Cost Benefit - Lesser of: • [(5,500)($0.29)] = $1,595 • [(1/2)($1,590)] = $795 Less: Payments Withheld By Employer Total Automobile Benefit *[(10)(1,667)]

$1,590

795 (1,500) $ 885

Note 2 — Although Olin would qualify for the stock option deduction under ITA 110(1)(d), it would not affect the calculation of employment income. Note 3 — The taxable benefit associated with the home purchase loan would be calculated as follows: [($175,000)(2% - Nil)(6/12)] = $1,750

Note 4 — As all of the premiums were paid by the employer and were not considered to be a taxable benefit, benefits received under this coverage must be included in employment income. Note 5 — As it is reasonable to assume that the operations management course would primarily benefit his employer the amount reimbursed would not be considered an employee benefit. However, a course in medieval history does not appear to be business related and, as a consequence, there would be a taxable benefit for the tuition paid by the employer. Note 6 — While fees paid for some types of counseling do not create a taxable benefit, counseling related to an employee's finances is not on the list. As a result, the reimbursement of the fees is a taxable benefit. Note 7 — The cost of providing life insurance to employees is a taxable benefit as specified in ITA 6(4). Although premiums paid by Olin have no tax effect as they are not deductible, the employer's payment on his behalf is added to employment income. Type: ES Topic: Employment income (comprehensive)

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 4 Taxable Income and Tax Payable for Individuals 4.1 Online Exercises 1) Tax legislation requires that amounts received under the workers' compensation program be included in the determination of net income, despite the fact that these same amounts will be deducted in the determination of taxable income. If the intent was not to subject these amounts to income tax, why didn't the legislation simply exclude these amounts from net income in the first place? Answer: The reason for this is that "net income" is used as a measure to determine access to a number of financial incentives provided through the ITA. As a result it is important that the net income amount represent all of the income of a taxpayer (specifically individuals who benefit from the largest amount of incentives) regardless of whether there is an intention to subject the amounts to income tax. For example, the amount of the age tax credit is reduced by an individual's net income in excess of a specified amount ($39,826 for 2022). Type: ES Topic: Net income - ITA 3

2) Explain briefly the general rules for determining the province or territory in which an individual will be subject to provincial or territorial income tax. From the point of view of tax planning, is the province or territory in which an individual is subject to income tax an important issue? Answer: An individual's income for the entire taxation (calendar) year, other than business income, is subject to tax in the province or territory in which the individual resides on December 31 of that year. Given that provincial and territorial income tax rates and personal tax credits vary considerably the province or territory in which an individual is subject to income tax is an important consideration. The distinction can influence where an individuals decides to live particularly where one's employment is situated close to a provincial or territorial border. Type: ES Topic: Residency - provincial or territorial residence of individuals

3) Briefly explain the difference between an income tax deduction and an income tax credit. Answer: A "tax deduction" is generally an amount subtracted in the determination of net income. The reduction also causes an equal reduction in taxable income reducing income tax payable by the amount of the deduction, multiplied by the relevant income tax rate. For example an individual with salary of $40,000 who decides to make an RRSP contribution of $1,000 will have net income and taxable income of $39,000. The federal income tax savings would be 15% of $1,000 or $150. In contrast, an "income tax credit" provides a direct reduction in the amount of income tax payable. For example the BPA for 2022 is $14,398 which when multiplied by the tax credit percentage of 15%.results in a reduction in federal income tax of $2,159.70. Type: ES Topic: Tax credits vs tax deductions

4) Describe the relationships that are eligible for the Canada caregiver amount of $7,525 for 2022. Answer: The $7,525 Canada caregiver credit is available for infirm dependants who are spouses or common-law partners, or parents, grandparents, brothers, sisters, aunts, uncles, nieces, nephews, and children of the claimant or of their spouse or common-law partner as long as the dependants are over 17 years of age at any time in the year. Type: ES Topic: Tax credits - Canada caregiver

84) Betty Masters has 2022 taxable income of $15,123. She attends university in London, England during 2022, paying a total amount for tuition of $26,800 (Canadian dollars). Her only tax credit, other than the tuition credit, is her BPA. Determine Betty's tuition credit and indicate how much of this total could be transferred to a supporting parent and how much would be carried forward. Assume that she will claim the $750 Canada Training Credit for the first time in 2022. Answer: The tuition credit for the year would be calculated as follows: Tuition Amount ($26,800 - $750) Rate Available Tuition Credit (Maximum Transfer = $750)

$26,050 15% $ 3,908

Income Tax Act Approach — The $750 maximum transfer of the tuition credit must be reduced by Betty's income tax payable of $109 [(15%)($15,123 - $14,398)]. This will leave a maximum transfer of $641 ($750 $109) and a carry forward credit of $3,158 ($3,908 - $109 -$ 641). Tax Return Approach — The $5,000 maximum transfer of the tuition amount must be reduced by $725 ($15,123 - $14,398), the excess of Betty's Taxable Income over her BPA. This results in a maximum transfer of $4,275 ($5,000 - $725) and would leave a carry forward of $21,050 ($26,050 - $725 - $4,275). This would give the same $3,158 [(15%)($21,050)] credit as under the alternative calculation. Type: ES Topic: Tax credits - transfer of tuition credit (ITA 118.8)

85) Carl Bond is a student at the University of Michigan in the U.S. on a full time basis in 2022. Carl is thirty-two years of age and qualifies for the Canada Training credit. His tuition fees total $31,400 (Canadian dollars). In 2022, he has taxable income of $16,000. Other than his tuition credit, his only tax credit is the BPA. Determine Carl's tuition credit and indicate how much of this total could be transferred to a supporting parent and how much would be carried forward. Assume that he will claim the $750 Canada Training Credit limit in 2022 for the first time. Answer: The available tuition credit for the year would be calculated as follows: Tuition Amount ($31,400 - $750 Canada Training) Rate Available Tuition Credit (Maximum Transfer = $750)

$30,650 15% $ 4,598

Income Tax Act — Approach The $750 maximum transfer of the tuition credit must be reduced by Carl's income tax payable of $240 [(15%)($16,000 - $14,398)]. This will leave a maximum transfer of $510 ($750 $240) and a carry forward credit of $3,848 ($4,598 - $240 -$510). Tax Return Approach — The $5,000 maximum transfer of tuition amount must be reduced by $1,602 ($16,000 - $14,398), the excess of Carl's taxable income over his BPA. This results in a maximum transfer of $3,398 ($5,000 - $1,602) and would leave a carry forward of $25,650 ($30,650 - $1,602 - $3,398). This would give the same $3,848 [(15%)($25,650)] credit as under the alternative calculation. Type: ES Topic: Tax credits - transfer of tuition credit (ITA 118.8)

86) Mrs. Rhonda Lee is 65 years old and has net income of $53,500. Of this total, $30,600 was from a life annuity that she purchased with funds in her RRSP. Her spouse is 68 years old and has no net income as he is ineligible for OAS, and is attending university on a full time basis. His tuition fees for the year were $3,450 and he was in attendance for 3 months of 2022. Determine Mrs. Lee's maximum tax credits for 2022. Ignore the possibility of splitting her pension income with her spouse. Answer: The Canada Training credit would not apply since the spouse is over 65 years of age. Her tax credits would be calculated as follows: BPA Spousal Amount Age [$7,898 - (15%)($53,500 - $39,826)] Pension Income Spousal Age Transfer Spousal Tuition Amount - Lesser of: • $5,000 • $3,450 Credit Base Rate Total Tax Credits

$14,398 14,398 5,847 2,000 7,898

Type: ES Topic: Tax credits - determining available credits (comprehensive)

3,450 $47,991 15% $ 7,199

87) John Trask is 67 years old and his spouse is 66 years old. He has net income of $63,200, largely from various pension funds. His spouse has no net income as she is not eligible for OAS payments. In 2022, his spouse attended university on a full time basis. Her tuition fees for the attendance were $8,200 and, in addition, she spent $800 on textbooks. Determine John's maximum tax credits for 2022. Ignore the possibility of splitting his pension income with his spouse. Answer: The Canada Training credit would not apply since the spouse is over 65 years of age. John's tax credits would be calculated as follows: BPA Spousal Amount Age [$7,898 - (15%)($63,200 - $39,826)] Pension Income Spousal Age Transfer Spousal Tuition Amount - Lesser of: • $5,000 • $8,200 Credit Base Rate Total Tax Credits

$14,398 14,398 4,392 2,000 7,898

Type: ES Topic: Tax credits - determining available credits (comprehensive)

5,000 $48,086 15% $ 7,213

88) Mr. Allen Dion contributes $826 to the Canadian Political Alliance, a registered federal political party. Determine the amount of his federal political contributions tax credit. Answer: Mr. Dion's $500 credit would be calculated as follows: First Next Remaining Maximum Tax Credit

Contributions $400 350 76 $826

Credit Rate 3/4 1/2 1/3

Type: ES Topic: Tax credits - political contributions (ITA 127(3))

Tax Credit $300 175 25 $500

89) In 2022, Mr. Chris Mackey has net and taxable income of $28,248. Mr. Mackey and his common-law partner, Emily, have total medical expenses of $10,325. Emily has no net income. Determine Mr. Mackey's minimum 2022 federal income tax payable. Answer: The regular medical expense credit would be calculated as follows: Medical Expenses Lesser of: • [(3%)($28,248)] = $847 • 2022 Threshold Amount = $2,479 Allowable Amount of Medical Expenses Rate Total Medical Expense Tax Credits

$10,325

( 847) $ 9,478 15% $ 1,422

The refundable supplement would be calculated as follows: Lesser of: • $1,316 (2022 Maximum) • [(25/15)($1,422)] = $2,370 Reduction [(5%)($28,248 - $29,129)] Refundable Medical Expense Supplement

$1,316 Nil $1,316

Mr. Mackey's total federal income tax payable (Refund) would be calculated as follows: Income tax payable before credits [(15%)($28,248)] Non-Refundable Credits: BPA Common-Law Partner Allowable Medical Expenses Total Rate Tax before Refundable Supplement Refundable Supplement Income tax Refund

$4,237 $14,398 14,398 9,478 $38,274 15%

( 5,741) Nil* ( 1,316) ($1,316)

* Income tax payable before the refundable supplement can only be reduced to nil, the net result cannot be negative for this subtotal. Type: ES Topic: Tax credits - determining available credits (comprehensive)

90) For 2022, Mr. Oliver Clemens has employment income of $70,200, receives EI payments of $9,460, and receives $7,700 in OAS. No amount was withheld from the OAS payments because he had very low income in the previous two years due to large business losses. Determine Mr. Clemens' 2022 net income. Answer: Mr. Clemens' income before deducting either the EI or OAS repayment would be calculated as follows: Employment Income EI Benefits OAS Benefits Income before Deductions

$70,200 9,460 7,700 $87,360

Dealing first with the EI repayment, Mr. Clemens would have to repay the lesser of: • $2,838 [(30%)($9,460)] • $3,596 [(30%)($87,360 - $75,375)] Using this deduction, the clawback of the OAS payments would be the lesser of: • $7,700 • $414 [(15%)($87,360 - $2,838 - $81,761)] As a result, Oliver's 2022 net income would be as follows: Income before deductions ITA 60(v.1) Deduction (EI) ITA 60(w) Deduction (OAS) 2022 Net Income

$87,360 ( 2,838) ( 414) $84,108

Type: ES Topic: Net income deductions - EI and OAS clawbacks