Skip to content
Textbook Guides

Canadian Income Taxation, 2018/2019, 21st Edition Solution Manual

Canadian Income Taxation, 2018/2019, 21st Edition Solution Manual is the perfect textbook guide, offering thorough solutions to all your textbook exercises.

Preview 10 of 32 pages

See the first 10 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 1 COMPREHENSIVE CASE SOLUTIONS NOTE : The cases related to these solutions are on Connect. They are not printed in the text. Solution to COMPREHENSIVE CASE ONE Comparison of two employment offers received by John Smith 1) Offer of employment from ABC Co. a. Salary of $45,000 is included in income when received [ITA 5(1)] b. Stock option: The option is “in the money” at the date of grant; exercise price = $20; value at grant date = $25. If ABC Co is not a Canadian - controlled private corporation (CCPC): • there will be an employment income inclusion on the exercise date to the extent the value at the exercise date exceeds $20 [ITA 7(1)] • the stock option deduction will not be available [ITA 110(1)(d)] • John will have a capital gain or loss on the disposition of the shares based on the difference between the selling price and the value at the date of exercise If ABC Co is a CCPC: • the employment income inclusion is deferred until the date of disposition [ITA 7(1.1)] • if John does not dispose of the ABC Co shares within two years after acquiring them, John is entitled to the stock option deduction which is equal to ½ of the stock option employment benefit [ITA 110(1)(d.1)] • John will have a capital gain or loss on the disposition of the shares based on the difference between the selling price and the value at the date of exercise c. Home purchase loan: John will have an imputed interest benefit included in his employment income. The benefit is calculated by multiplying the loan principal by the prescribed rate of interest. The benefit is reduced by the 1% interest paid by John, provid ed the interest is paid by 30 days after the end of the calendar year. If the prescribed rate increases, the loan benefit will continue to be calculated using the 2% prescribed rate in effect at the time the home purchase loan was received (for a period of five years) [ITA 80.4]. d. Private health services plan: The annual premium for prescription drugs, dental, and vision coverage does not result in a taxable benefit [ITA 6(1)(a)].

  2. Page 2
  3. Page 3
    Read page 3 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 2 e. Tax deductions: John will be able to claim the following deductions relating to his car in computing his employment income. CCA $25,000 (includes HST) x 15% (CCA rate in the first year; 30% thereafter) $ 3,750 8(1)(j) Interest Lesser of : (i) Amount paid $3,000 (ii) $300 per 30 - day period = $3,600 3,000 8(1)(j) 67.2 Gasoline 5,000 8(1)(h.1) Insurance 2,000 8(1)(h.1) $13,750 Employment usage 33% $4,583 2) Offer of employment from DEF Co. a) Salary of $60,000 is included in income when received [ITA 5(1)]. b) The group term life insurance premiums are included in income [ITA 6(4)]. c) The fitness club membership results in a taxable benefit [ITA 6(1)(a)]. d) The phone is a capital asset and therefore CCA cannot be claimed for the purposes of computing employment income. e) Taxable benefit with respect to the car is calculated below for 201 8 and 201 9 . 2018 2019 Monthly lease payments $700 $700 x 2/3 X 2/3 Number of months car available 1 12 Standby Charge $467 $5,600 Personal kilometers 1,200 14,400 Operating benefit at $ 0.26 per personal km. $ 3 12 $3, 744 TOTAL $ 769 $ 9,344 The reduced standby charge is not available because the car is not used primarily for employment purposes. The employment offer that provides John with the greatest amount of disposable income after tax should be accepted. Discussion with Bob Johnson, CFO of GHI Inc. Stock - based compensation is not deductible [ITA 7(3)(b)]. The bonuses declared by GHI Inc. in 2017 will not be deductible in 2017 because they were not paid in 2017 or by June 29, 2018 (180 days [ITA 78(4)]. The bonuses will be deductible in 2018 or when paid.

  4. Page 4
    Read page 4 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 3 Solution to COMPREHENSIVE CASE TWO Part 1 Ursula’s employment income for 2018 is $ 177, 5 8 3 . Below are the details. Employment Income calculation Comments Salary $180,000 5(1) - taxed when received EI/CPP/ income tax - Not deductible; must get all 3 correct RPP (employee portion) (8,000) 8(1)(m) Gym membership - Not deductible 8(2) Golf membership 2,500 6(1)(a); used for recreation so employer is not primary beneficiary Group term life insurance 900 6(4) Private health insurance - 6(1)(a)(i) RPP (employer portion) - 6(1)(a)(i) Commission 10,000 5(1) - taxed when received Bonus - 5(1) - taxed when received Champagne - T4130; non - cash gifts and awards under $500 are not taxable Gift card 200 T4130; cash and cash equivalent gifts/awards taxable (even if under $500) Samantha salary (6,000) 6(1)(i) Rachel salary - 67; amount is not reasonable since no work is performed Car Lease payments (3,254) 8(1)(h.1) and 67.3; max is $ 800/mo nth plus tax ( $ 800*1.13*6) prorated for 60% employment usage Standby charge 3,797 $ 70 , 000*1.13*2%*6*((1 , 667*6*40%)/(1 , 667*6)) O perating benefit 1, 0 4 0 Lesser of [ $ 0.26 x 1 , 667 x 40% x 6] and half of standby charge Spouse airfare 2,000 6(1)(a) Employee operating costs (3,600) 8(1)(h) ; P rorated for 60% employment usage Transportation (5,000) 8(1)(h) Sales expenses - Ursula is better off claiming car and travel expenses under 8(1)(h)/(h.1) rather than sales expenses (lease costs, operating costs, transport, 50% of meals, and advertising & promo) under 8(1)(f) because of the commission income limitation ($10,000). Tablet - Capital expenditure Stock option benefit 3,000 7(1); calculated as ( $ 18 - $ 15) x 1 , 000 Employment income $177, 5 8 3

  5. Page 5
    Read page 5 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 4 Part 2 Deco’s business income for tax purposes for the 2018 taxation year is $6, 696 ,580. The detailed calculation is below. Business income Comments Accounting income $5, 268 ,000 9(1) Donation 10,000 18(1)(a) Amortization 1,100,000 18(1)(b) Stock based compensation 400,000 7(3) Commissions - will be paid within 180 days of year end Bonuses - will be paid within 180 days of year end Golf memberships 37,500 18(1)(l) Interest paid to CRA 4,750 18(1)(t) Financing fee 5,680 20(1)(e); add back 80% since 100% was deducted for accounting Remaining interest expense - 20(1)(c) Site investigation - 20(1)(dd) Client meals/ entertainment 51,750 67.1(1); add back 50% since 100% was deducted for accounting Holiday party - 67.1(2)(f) Landscaping - 20(1)(aa) Warranty accrual 1,000,000 18(1)(e) Actual warranty claims (650,000) Foreign advertising to Canadians 200,000 19(1) Audit fee - ordinary expense incurred to earn income General corporate legal fees - ordinary expense incurred to earn income Legal fees re: overdue receivables - ordinary expense incurred to earn income Legal fees re: issuance of shares (20,000) 20(1)(e); was not deducted for accounting purposes, but deductible for tax purposes over 5 years Travel costs (meals) 400 67.1(1); add back 50% since 100% was deducted for accounting Allowance for doubtful accounts 200,000 18(1)(e); not based on specific doubtful accounts CCA (983,500) See calculation below Recapture 100,000 See calculation below Terminal loss (150,000) See calculation below Loss on disposal of assets 122,000 Business income $6, 696 ,580

  6. Page 6
    Read page 6 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 5 Capital cost allowance (CCA) is determined as follows: Class 1 8 10 12 10.1 Total Rate 6% 20% 30% 100% 30% Opening UCC $ 5,000,000 $ 3,200,000 $ 400,000 - - Additions 300,000 325,000 - - $ 30,000 Disposals (at lower of cost and proceeds) - (25,000) (250,000 ) $ (100,000 ) - Net additions (additions less disposals) 300,000 300,000 - - 30,000 Half year CCA on net additions (9,000) (30,000) - - (4,500) $ (43,500) Full rate CCA on opening UCC (300,000) (640,000) - - - (940,000) Recapture (terminal loss) - - (150,000 ) 100,000 - (50,000) Closing balance $ 4,991,000 $ 2,830,000 - - $ 25,500 $ (1,033,500)

  7. Page 7
    Read page 7 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 6 Solution to COMPREHENSIVE CASE THREE Part 1 The tax implications to Losses Limited (LL) resulting from the acquisition of control by GI, assuming that no elective provisions of the Income Tax Act (ITA) are used , are as follows: a) The business loss for tax purposes for the period January 1, 2018 through June 30, 2018 is $840,000, calculated as follows: Operating loss (given) $(240,000) Manufacturing equipment deemed CCA (350,000) Inventory write down (250,000) Business loss $(840,000) b) The tax values for each of the assets owned by LL on July 1, 2018 will be as follows: ACB UCC Cost Land $ 700,000 - Building 1,200,000 $720,000 Manufacturing equip 1,500,000 500,000 Inventory - - $550,000 Securities 32,000 - Patent 118,000 35,000 c) There are net capital losses of $37,000 available as at June 30, 2018 . These losses expire on July 1, 2018 . Opening balance $(28,000) writedown of marketable securities (9,000) net capital losses at June 30, 2018 $(37,000) d) In order for the non - capital losses incurred up to June 30, 2018 to be used in the December 31, 2018 and future taxation years, the following conditions must be met: • The dietary supplement business must be carried on throughout the taxation year • N on - capital losses are to be utilized for a profit or with a reasonable expectation of profit e) Assuming the conditions described in Part d) are met, the maximum amount of non - capital losses available would be $1,960,000. business loss calculated in (a) $ (840,000) non - capital loss ( 2015 ) (90,000) non - capital loss ( 2016 ) (430,000) non - capital loss ( 2017 ) (600,000) $(1,960,000) The non - capital loss from property expires and, therefore, is not included.

  8. Page 8
    Read page 8 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 7 Part 2 The following comments assume a paragraph 111(4)(e) election will be made to utilize expiring losses. a) The following assets are eligible for the election: land, building, and patents. b) I recommend that the election be made on the land. Electing on either of the other two assets would result in recapture which would result in using up non - capital losses that are not expiring. c) The elected proceeds for the land should be $934,000, as determined below. Original ACB $700,000 Plus expiring losses: Expiring property loss $80,000 Net capital losses 37,000 117,000 x 2 234,000 Elected proceeds $934,000 d) The benefit of making the election is that the adjusted cost base of the land is increased to $934,000 which will reduce the capital gain on a future sale of the land. Part 3 The amalgamation of the two companies will not meet the objective of utilizing losses since a gym operation is not similar to a dietary supplement manufacturing business. Therefore, the amalgamation of the two companies is not recommended.

  9. Page 9
    Read page 9 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 8 Solution to COMPREHENSIVE CASE FOUR The following comments relate to the incorporation of Emily’s business, effective November 1, 2018 . 1. A section 85 election cannot be used for the following assets: a. Cash b. Land #2 c. Furniture & fixtures Cash and land #2 are not eligible property as defined in subsection 85(1.1). Land #2 is inventory since it is a vacant lot acquired to resell to a condo developer in the future. A section 85 election cannot be made for the furniture/fixtures since the value is less than the undepreciated capital cost {ITA 13(21.2)]. 2. Although a section 85 election can be used for the transfer of the accounts receivable, it should not be. A section 22 election is beneficial for both Emily and Opco. The section 22 election permits Emily to deduct the $20,000 loss on the receivables as a business loss. Without the section 22 election, the loss would be a capital loss and would be denied as a superficial loss since Emily and Opco are affiliated persons. Under section 22, Emily’s loss is included in Opco’s income and Opco is allowed to claim an allowance for doubtful accounts on the receivables transferred. Should some of the receivables transferred turn out not to be collectable in the future, section 22 permits Opco to deduct the face value of uncollected receivables as a bad debt instead of a capital loss. 3. a) The following table sets out the elected amount and the consideration that should be taken for each of the assets on which a section 85 elections is made. FMV Elected amount Non - share Share Inventory $ 30,000 $ 25,000 $ 25,000 $ 5,000 Land #1 100,000 65,000 65,000 35,000 Building (class 1) 140,000 100,000 100,000 40,000 Small tools (class 12) 10,000 1 0 10,000 TOTAL $280,000 $190,001 $190,000 $90,000 b) Preferred shares of Opco worth $90,000 are received by Emily. The adjusted cost base of these shares is $1. The paid - up capital of these shares is also $1. c) The section 85 election is due by June 15 , 2019 . The e lection is due on the earliest filing deadline of the tax returns of Emily and Opco. Emily is self - employed and therefore has a June 15 filing deadline. Opco is a corporation and has a filing deadline of six months after the December 31 year end.

  10. Page 10
    Read page 10 as text

    Buckwold and Kitunen , Canadian Income Taxation, 2018 - 2019 Ed. Solutions Manual Comprehensive Cases 9 Solution to COMPREHENSIVE CASE FIVE Part 1 - ABC’s Part I tax payable for its 2019 fiscal year is $ 96,053, as calculated below . Net income for tax purposes $857,000 Dividends from Canadian corporations (37,000) Donations (45,000) Net capital losses (35,000) Non-capital losses (50,000) Taxable income $690,000 Active business income Net income for tax purposes 857,000 Less: dividends received (37,000) Less: taxable capital gains (80,000) Less: interest on 5-year bonds (30,000) Active business income 710,000 Aggregate investment income Taxable capital gains 80,000 Net capital losses (35,000) Interest on 5-year bonds 30,000 75,000 Part I tax Basic federal tax - 38% 262,200 Abatement - 10% (69,000) 193,200 Small business deduction - 19% x least of (i) ABI 710,000 (ii) TI 690,000 (iii) Business limit (500k - 80k) 420,000 420,000 (79,800) General tax reduction - 13% of Taxable income 690,000 Less: Income subject to SBD (420,000) Less: AII (75,000) 195,000 (25,350) Refundable tax on investment income 10 2/3% times the least of: AII 75,000 TI - income subject to SBD 270,000 75,000 8,003 PART I TAX 96,053

22 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Taxation study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.