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Net Income for Tax Purposes

Read the following information and then answer the related questions. If you have difficulty completing this assignment, go back and closely review the assigned material again.
Question 1 (25 Marks)
Each of the following independent cases describes a situation with a proposed tax treatment. For each case, indicate whether the treatment is correct, and justify your conclusion.

Case A:
Can an employer compensate an individual for a loss on a home that was sold because the employee was required to move, without creating a taxable benefit for the employee? Explain your conclusion.

Case B
For a number of years, Mr. David Jones has owned a rural cottage property that has been used for his personal enjoyment. The cottage cost $ 150,000 in 2016 and, on July 1, 2020, it has a fair market value of $ 250,000. Mr. David Jones estimates that the fair market value of the land on which the cottage is located is $ 40,000 on both of these dates. It will not be designated as his principal residence for any of the years owned. On July 1, 2020, he rents the property to an arm’s length party for an amount of $ 1,000 per month for a period of three years. Net rental income for the year ending December 31, 2020, before the deduction of any CCA, is $ 4,500. What is the maximum amount of CCA that he can deduct for 2020?

Case C
Several years ago, Mr. Bob Banks transferred four sports cars, with a $ 245,000 total fair market value, to a corporation, in return for all of the shares of the company. The cars were used for display purposes only and were not expensed/written off by the company. During the current year, all of the cars were destroyed in a fire on Mr. Bob Banks’ estate. Unfortunately, the company did not insure the sports cars and, as a consequence, no compensation was available for the loss. The corporation had no assets other than the cars, therefore, there was no reason for Mr. Bob Banks to continue to hold the shares. Consequently, he sold the shares for $ 500 to a friend who needed a corporate shell for some business operations. Mr. Bob Banks used the $ 122,250 allowable capital loss [1/2 X ($ 245,000 – $ 500)] to offset his taxable capital gains arising from real estate transactions.

Case D
In 2020, Susan Sand sold her daughter 2 items, a chair for $ 1,300 and a painting for $ 700. These selling prices equaled their estimated fair market value. Several years ago, Susan Sand purchased the chair for $ 1,800 and the painting for $ 500. She did not report any capital gain or loss on her 2020 individual income tax return.

Case E:
Jenny Brown has owned a triplex for a number of years and, throughout this period, all three of the units were rented. In determining her income from this property, she deducted maximum CCA in each year. During the current year, Jenny Brown’s son moved into one of the three units [he will be paying no rent] and, as a result, Jenny Brown will be reporting reduced rental revenue on her income tax return. As Jenny Brown has not sold any property, she will not report any capital gains or losses for the current year.

Question 2 (20 Marks)
Cole Cane owned 100,000 shares of ABC Ltd., a publicly traded Canadian corporation. These shares, including brokerage fees, were acquired at a cost of $ 500,000. Based on current trading values, these shares are now worth $ 800,000.
The following four cases make different assumptions as to the identity of the purchaser, the circumstances of the sale, and the proceeds of disposition. In each case, assume that the purchaser immediately resold the shares for their fair market value of $ 800,000.
Case 1
Cole Cane sold the shares to his brother for $ 300,000 to create a loss, as Cole Cane had realized significant capital gains during the current year. Since his brother had no other source of income, Cole’s brother would be taxed on the gain from the resale at the minimum federal rate.
Case 2
Cole Cane’s mother had realized a large amount of capital gains during the current year. To help his mother, Cole Cane sold the shares to her for $ 2,000,000. Cole’s mother planned to use the loss on the immediate resale to offset her capital gains.
Case 3
Because Cole Cane needed funds to acquire a house for his grandmother, he sold the shares to an arm’s length party for $ 800,000.
Case 4
Cole Cane gifted the shares to his 17-year-old daughter.

Required:
For each of the cases, advise Cole Cane of the tax consequences that will result from the disposition, and indicate the tax consequences to the purchaser of the shares when they are resold. In addition, in cases 1 and 2, indicate whether the stated tax planning objective was achieved.

Question 3 (25 Marks)
In each of the following independent cases, determine the maximum amount of 2020 personal tax credits, including transfers from a spouse or dependant, that can be applied against federal tax payable by the taxpayer. Ignore, where relevant, the possibility of pension income splitting.

A calculation of Tax Payable is NOT required, only the applicable credits.

Case A
Samuel Parsons is 72 years old and has Net Income for Tax Purposes of $ 61,000. This total is made up of OAS payments and pension income from his former employer. His wife is 60 years old and has Net Income for Tax Purposes of $ 4,700.

Case B
Mary Miles was divorced from her husband several years ago. She has custody of their four children, ages 6, 8, 11, and 14. Her Net Income for Tax Purposes consists of spousal support payments totaling $ 65,000 per year. The children are all in good health. The oldest child has Net Income for Tax Purposes of $ 12,000 during the year.

Case C
Mike More has Net Income for Tax Purposes of $ 140,000, all of which is rental income. His wife has Net Income for Tax Purposes of $ 1,400. They have three children, ages 11, 13, and 18. All of these children are in good health and continue to live at home. The 18-year-old child has Net Income for Tax Purposes of $ 8,400. During the current year, Mike More paid the following medical expenses:

Mike     $ 4,240
His Spouse  3,450
11-Year-Old Child   1,860
13-Year-Old Child   2,450
18-Year-Old Child   6,720
Total   $18,720

Case D
Jack Alpine has Net Income for Tax Purposes of $ 92,000, none of which is employment income or income from self-employment. His spouse has Net Income for Tax Purposes of $ 7,000. Their daughter is 14 years old, lives with them, and has Net Income for Tax Purposes of $ 2,000. Their son is 21 years old and, because of a physical disability, continues to live with them. He has no income of his own. His disability is not severe enough to qualify for the disability tax credit.

Case E
James Calder has Net Income for Tax Purposes of $ 90,000, all of which is employment income. His employer withholds maximum CPP contributions and EI premiums. He is married to Betty, whose Net Income for Tax Purposes is $ 3,200. They have three children aged 6, 8, and 10. All of the children are in good health and none of them have income of their own.
Question 4 (30 Marks)
Betty Best is a salesperson for Candy Ltd., a Canadian public corporation. The company produces various sweets such as candy and chocolate bars.

Betty is divorced and has two children: Rose who is 12 and Joe who is 18.

Betty’s 2020 employment contract states that she will be paid an annual base salary of $ 80,000 plus a commission of 2% of her annual cash sales. Her 2019 sales totaled $ 3,500,000, with
$ 250,000 of this total collected by the company in 2020. Her 2020 sales amounted to $ 2,900,000, but the company had yet to collect $ 330,000 of these by December 31, 2020.

In 2020, her employer paid Betty her base salary plus her commission income. A review of her last pay stub for 2020 reveals the following was withheld from her salary:

Contributions to Her Company Pension Plan   $ 3,000
CPP Contributions    2,732
EI Premiums     856
Premiums for The Company's Dental and Health Plan*  1,500
Federal Income Tax Withheld     20,000
* The plan is funded 50/50 by the employees and the employer.

Betty is covered by the company’s group term life insurance. Her coverage is equal to her annual base salary. The company pays a premium of $ 5 for every $1,000 of coverage to the ABC Insurance Company.

In 2020, Betty won the employee of the year award and received a $ 3,000 vacation to Disneyland.

In October 2019, her employer transferred her from Vancouver to Victoria. Her employer paid for all her moving expenses. Unfortunately, due to the sale of her Vancouver home, she incurred a
$ 40,000 loss on its sale. Candy Ltd. agreed to reimburse her $ 25,000 of the $ 40,000 loss, but only in January of 2020. Betty received the $ 25,000 on March 11 2020.

In May of 2019, Betty’s employer granted her the right to purchase up to 5,000 shares of the company for $ 17 per share under the employee stock option plan. At the time the option was granted, the shares were trading for $ 15. On February 01, 2020, when the shares were trading at
$ 20 per share, she exercised her option on 3,000 shares.

In order to purchase the 3,000 shares, Betty negotiated an interest free loan from Candy Ltd. for the purchase price. The loan was received on February 01, 2020. Betty repaid the loan on December 31, 2020.

Throughout 2020 her employer provided her with an automobile, which it leased for $ 500 per month. The automobile was available for her personal use. During the year, Betty drove a total of 40,000 kilometers, 10,000 of which were personal. Except for $ 2,200 of car insurance, Candy Ltd. did not pay for any of her automobile operating expenses as these were Betty’s responsibility.

Betty is responsible for her salesperson expenses (including the automobile operating expenses). During the year she incurred the following:

Total Automobile Expenses (Excluding Insurance)     $ 5,500
Meals and Entertainment with Clients     2,800
Hotels  1,600

Betty is a member of the Confectioners’ Association of Canada, a professional association. Her annual membership dues are $ 1,600, which she paid on January 29, 2020.

Betty meets all of the conditions of ITA 8(1)(f) of the Income Tax Act (deductible salesperson expenses).

Betty has a sideline business which is called Cool Cookies. She started her business venture a few years ago and has continued it in Victoria. Betty prepares and sells cookies from her home. Most of her sales are made for social events which are typically held on weekends.

Betty provides you with the following information for 2020 with respect to her business:

Sales Revenues  $ 45,000
Supplies (Flour, Sugar, Boxes, Etc.) Purchased  14,000
Purchase of New Commercial Oven
(For Business Use Only)     2,400
Purchase of New Automobile for Cash  70,000
Automobile Operating Expenses   4,000

With respect to the supplies, she had an opening inventory of $ 1,600. On December 31, 2020, she had $ 900 of supplies on hand.

Early in January, 2020, Betty sold her old automobile for $ 12,000. It had cost $ 60,000. Both the old and the new automobiles were used solely for her business, as she uses the employer provided automobile for the little bit of personal travel that she does do.

Her son, Joe, helps in the business. He does the cookie deliveries to customers. Betty has not offered him any monetary compensation.

Betty uses 20 percent of the space in her home for the business. Her 2020 household expenses include the following:

All Utilities    $ 5,600
Property Taxes  4,000
Maintenance     2,000
Phone Line Dedicated to The Business    900
Insurance on Her Home    3,000
Mortgage Interest   14,000 

The UCC balances at January 1, 2020 are as follows:
Class 8 $ 3,100
Class 10.1 9,000

Betty does not claim CCA on her home as she realizes that if she did, this would result in future recapture and capital gains implications.

Her daughter Rose is in high school and has no income of her own.

Her son, Joe, was enrolled part-time (4 months) at a local college. Betty agreed to pay his tuition of $ 2,000 as long as Joe transferred the related credit to her. Joe also worked part-time at a hamburger restaurant; Joe’s 2020 Net Income for Tax Purposes was $ 7,200.

During the year, Betty paid $ 6,000 for orthodontic work (braces) for Rose. Betty was reimbursed 50% of the amount through the company’s dental and health plan.

During 2020, Betty made $ 2,000 of contributions to registered charities.

Assume the prescribed rate for benefits during all four quarters of 2020 is 1 percent.

For the 2020 taxation year, calculate Betty Best’s minimum:

  1. Net Income for Tax Purposes
  2. Taxable Income
  3. Federal Tax Liability
    In determining these amounts, ignore GST, PST and HST considerations.

Sample Solution

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