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

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases1COMPREHENSIVE CASE SOLUTIONSNOTE:The cases related to these solutions are onConnect.They are not printed in the text.Solution to COMPREHENSIVE CASE ONEComparison of two employment offers received by John Smith1)Offer of employment from ABC Co.a.Salaryof $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 tothe 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 sharesbased on the difference between the selling price and the value at thedate of exerciseIf ABC Co is a CCPC:•theemploymentincomeinclusionisdeferreduntilthedateofdisposition [ITA 7(1.1)]•if John does not dispose of the ABC Co shares within two years afteracquiring them, John is entitled to the stock option deduction which isequal to ½ of the stock option employment benefit [ITA110(1)(d.1)]•John will have a capital gain or loss on the disposition of the sharesbased on the difference between the selling price and the value at thedate of exercisec.Home purchase loan: John will have an imputed interest benefit included in hisemployment income. The benefit is calculated by multiplying the loan principalby the prescribed rate of interest. The benefit is reduced by the 1% interest paidby John, provided the interest is paid by 30 days after the end of the calendaryear.If the prescribed rate increases, the loan benefit will continue to be calculatedusing the 2% prescribed rate in effect at the time the home purchase loan wasreceived (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)].

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases2e.Tax deductions:John will be able to claim the following deductions relating tohis car in computing his employment income.CCA$25,000 (includes HST) x 15%(CCA rate in the first year; 30%thereafter)$ 3,7508(1)(j)InterestLesser of :(i) Amount paid $3,000(ii) $300 per 30-day period = $3,6003,0008(1)(j)67.2Gasoline5,0008(1)(h.1)Insurance2,0008(1)(h.1)$13,750Employment usage 33%$4,5832)Offer of employment from DEF Co.a)Salaryof $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 ataxable benefit [ITA 6(1)(a)].d)The phone is a capital asset and therefore CCA cannot be claimed for the purposesof computing employment income.e)Taxable benefit with respect to the car is calculated below for2018and2019.20182019Monthly lease payments$700$700x 2/3X 2/3Number of months car available112Standby Charge$467$5,600Personalkilometers1,20014,400Operating benefit at $0.26per personal km.$312$3,744TOTAL$769$9,344The reduced standby charge is not available because the car is not used primarilyfor employment purposes.The employment offer thatprovides John with the greatest amount of disposable income aftertax 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. in2017will not be deductible in2017because they werenot paid in2017or by June 29,2018(180 days [ITA 78(4)]. The bonuses will be deductible in2018or when paid.

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases3Solution to COMPREHENSIVE CASE TWOPart 1Ursula’s employment income for2018is $177,583. Below are thedetails.Employment Income calculationCommentsSalary$180,0005(1)-taxed when receivedEI/CPP/ income tax-Not deductible; must get all 3 correctRPP (employeeportion)(8,000)8(1)(m)Gym membership-Not deductible 8(2)Golf membership2,5006(1)(a); used for recreation so employer is not primarybeneficiaryGroup term lifeinsurance9006(4)Private healthinsurance-6(1)(a)(i)RPP(employerportion)-6(1)(a)(i)Commission10,0005(1)-taxed when receivedBonus-5(1)-taxed when receivedChampagne-T4130; non-cash gifts and awards under $500 are nottaxableGift card200T4130; 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 isperformedCar Lease payments(3,254)8(1)(h.1) and 67.3; max is$800/monthplus tax($800*1.13*6)prorated for 60% employment usageStandby charge3,797$70,000*1.13*2%*6*((1,667*6*40%)/(1,667*6))Operating benefit1,040Lesser of [$0.26x 1,667 x 40% x 6] and half ofstandby chargeSpouse airfare2,0006(1)(a)Employee operatingcosts(3,600)8(1)(h);Prorated for 60% employment usageTransportation(5,000)8(1)(h)Sales expenses-Ursula is better off claiming car and travel expensesunder8(1)(h)/(h.1) rather than sales expenses (leasecosts, operatingcosts, transport, 50% ofmeals, andadvertising & promo) under8(1)(f) because of thecommission income limitation ($10,000).Tablet-Capital expenditureStock option benefit3,0007(1); calculated as ($18-$15) x 1,000Employment income$177,583

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases4Part 2Deco’s business income for tax purposes for the2018taxation year is $6,696,580. The detailedcalculation is below.BusinessincomeCommentsAccounting income$5,268,0009(1)Donation10,00018(1)(a)Amortization1,100,00018(1)(b)Stock basedcompensation400,0007(3)Commissions-will be paid within 180 days of year endBonuses-will be paid within 180 days of year endGolf memberships37,50018(1)(l)Interest paid to CRA4,75018(1)(t)Financing fee5,68020(1)(e); add back 80% since 100% wasdeducted for accountingRemaining interestexpense-20(1)(c)Site investigation-20(1)(dd)Client meals/entertainment51,75067.1(1); add back 50% since 100% wasdeducted for accountingHoliday party-67.1(2)(f)Landscaping-20(1)(aa)Warranty accrual1,000,00018(1)(e)Actual warranty claims(650,000)Foreign advertising toCanadians200,00019(1)Audit fee-ordinary expense incurred to earn incomeGeneral corporate legalfees-ordinary expense incurred to earn incomeLegal fees re: overduereceivables-ordinary expense incurred to earn incomeLegal fees re: issuanceof shares(20,000)20(1)(e); was not deducted for accountingpurposes,but deductible for tax purposes over 5yearsTravel costs (meals)40067.1(1); add back 50% since 100% wasdeducted for accountingAllowance for doubtfulaccounts200,00018(1)(e); not based on specific doubtfulaccountsCCA(983,500)See calculation belowRecapture100,000See calculation belowTerminal loss(150,000)See calculation belowLoss on disposal ofassets122,000Business income$6,696,580

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases5Capital cost allowance (CCA) is determined as follows:Class18101210.1TotalRate6%20%30%100%30%Opening UCC$5,000,000$3,200,000$400,000--Additions300,000325,000--$30,000Disposals (at lower of costand proceeds)-(25,000)(250,000)$(100,000)-Net additions (additionsless disposals)300,000300,000--30,000Half year CCA on netadditions(9,000)(30,000)--(4,500)$(43,500)Full rate CCA onopeningUCC(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)

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases6Solution to COMPREHENSIVE CASE THREEPart 1The tax implications to Losses Limited (LL) resultingfromthe 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 1,2018through June 30,2018is $840,000, calculated as follows:Operating loss (given)$(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 1,2018will be as follows:ACBUCCCostLand$700,000-Building1,200,000$720,000Manufacturing equip1,500,000500,000Inventory--$550,000Securities32,000-Patent118,00035,000c)There are net capital losses of $37,000 available as at June 30,2018. These lossesexpire on July 1,2018.Opening balance$(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 30,2018to be used in theDecember 31,2018and future taxation years, the following conditions must be met:•The dietary supplement business must be carried onthroughoutthe taxation year•Non-capital losses are to be utilized for a profit or with a reasonable expectation ofprofite)Assuming the conditions described inPartd) 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.

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases7Part 2The following comments assume a paragraph 111(4)(e) election will be made to utilize expiringlosses.a)Thefollowing 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 twoassets would result in recapture which would result in using up non-capital losses thatare not expiring.c)The elected proceeds for the land should be $934,000, as determined below.Original ACB$700,000Plus expiring losses:Expiring property loss$80,000Net capital losses37,000117,000x 2234,000Elected proceeds$934,000d)The benefit of making the election is that the adjusted cost base of the land is increasedto $934,000 which will reduce the capital gain on a future sale of the land.Part 3The amalgamation of the two companies will notmeettheobjective of utilizing losses sinceagym operationisnot similar toa dietarysupplementmanufacturingbusiness. Therefore, theamalgamation of the two companies is not recommended.

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases8Solution to COMPREHENSIVE CASE FOURThe 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.Cashb.Land #2c.Furniture & fixturesCash and land #2 are noteligible propertyas defined in subsection 85(1.1). Land #2 isinventory 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 lessthan 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 thereceivables asa business loss. Without the section 22 election, the loss would be a capital loss andwould 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 toclaim 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 baddebt instead of a capital loss.3.a) The following table sets out the elected amount and the consideration that should betaken for each of the assets on which a section 85 elections is made.FMVElected amountNon-shareShareInventory$30,000$ 25,000$ 25,000$ 5,000Land #1100,00065,00065,00035,000Building (class 1)140,000100,000100,00040,000Small tools (class 12)10,0001010,000TOTAL$280,000$190,001$190,000$90,000b)Preferred shares of Opco worth $90,000 are received by Emily. The adjusted costbase of these shares is $1. The paid-up capital of these shares is also $1.c) The section 85 election is due by June15,2019. The election is due on the earliestfiling deadline of the tax returns of Emily and Opco. Emily is self-employed and thereforehasaJune 15 filing deadline. Opco is a corporation and has a filing deadline of sixmonths after the December 31 year end.

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Buckwold and Kitunen, Canadian Income Taxation,2018-2019Ed.Solutions Manual Comprehensive Cases9Solution to COMPREHENSIVE CASE FIVEPart 1-ABC’s Part I tax payable for its2019fiscal year is $96,053, as calculated below.Net income for tax purposes$857,000Dividends from Canadian corporations(37,000)Donations(45,000)Net capital losses(35,000)Non-capital losses(50,000)Taxable income$690,000Active business incomeNet income for tax purposes857,000Less: dividends received(37,000)Less: taxable capital gains(80,000)Less: interest on 5-year bonds(30,000)Active business income710,000Aggregate investment incomeTaxable capital gains80,000Net capital losses(35,000)Interest on 5-year bonds30,00075,000Part I taxBasic federal tax - 38%262,200Abatement - 10%(69,000)193,200Small business deduction - 19% x least of(i) ABI710,000(ii) TI690,000(iii) Business limit (500k - 80k)420,000420,000(79,800)General tax reduction - 13% ofTaxable income690,000Less: Income subject to SBD(420,000)Less: AII(75,000)195,000(25,350)Refundable tax on investment income10 2/3% times the least of:AII75,000TI - income subject to SBD270,00075,0008,003PART I TAX96,053

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