Professional Documents
Culture Documents
To provide practice in problem solving , these are the Self Study Problems for Volume 1 which
includes Chapters 1 to 10. The detailed solutions to these problems are available in both the
print and online Study Guide.
For additional practice in problem solving , there are Supplementary Self Study Problems with
detailed solutions available for each chapter. These problems and solutions are available in
this file after the Self Study problems for each Chapter.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 2
Self Study Problem One - 2
Required: Explain how a tax system with a single rate can be viewed as regressive.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 3
Self Study Problem One - 3
Required: Analyze each of the described changes using two of the qualitative characteris-
tics 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
• elasticity
• flexibility
• simplicity and ease of compliance
• certainty
• balance between sectors
• international competitiveness
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 4
Self Study Problem One - 5
Required: List and briefly describe these other sources of information on Canadian income
tax matters.
Required: Assess whether or not Paul became a non-resident of Canada, and if Paul will be
taxed in Canada for the period during which he was living and working in the U.S.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 5
Self Study Problem One - 7
Required: All of the preceding individuals were in Canada for a total of 192 days. Explain
their residence status for income tax purposes in the current year and their liability for Cana-
dian income taxes.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 6
Self Study Problem One - 9
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 7
Self Study Problem One - 11
Case A Mr. Dorne had employment income of $50,000 and interest income of
$12,000. His unincorporated business lost $23,000 during this period. As the result
of dispositions of capital property, he had taxable capital gains of $95,000 and allow-
able capital losses of $73,000. His Subdivision e deductions for the year totalled
$8,000. He also experienced a loss of $5,000 on a rental property that he has owned
for several years.
Case B Mr. Dorne had employment income of $45,000, net rental income of
$23,000, and a loss from his unincorporated business of $51,000. As the result of
dispositions of capital property, he had taxable capital gains of $25,000 and allowable
capital losses of $46,000. His Subdivision e deductions for the year amounted to
$10,500. Fortunately for Mr. Dorne, he won $560,000 in a lottery on February 24.
Required: For both Cases, calculate Mr. Dorne’s Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the
end of the current year, or state that no carry overs are available.
Required For each Case, calculate Mr. Marks' Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the
end of the current year, or state that no carry overs are available.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Self Study Problems Volume 1 Page 8
Self Study Problem One - 12
Required For each Case, calculate Mr. Haynes’ Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the
end of the current year, or state that no carry overs are available.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Problems Volume 1 Page 9
SSS Problem One - 1
Required: Indicate a significant tax advantage, other than the benefits associated with
international harmonization, that would result from introducing each of the proposed
changes. In addition, analyze each proposed change using two of the qualitative characteris-
tics 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
• elasticity
• flexibility
• simplicity and ease of compliance
• certainty
• balance between sectors
• international competitiveness
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Problems Volume 1 Page 10
SSS Problem One - 2
A. Martin Judge was born in Kamloops, British Columbia in 1987. In 1992, Martin’s family
moved to southern California and, until October 1, 2017, Martin did not return to
Canada. On October 1, 2017, Martin accepted a position with an accounting firm in
London, Ontario. He returned to Canada and began working at his new job on this date.
C. Roberto Salinas is the 12 year old son of Ms. Gloria Salinas (see Part B). Roberto has lived
with his mother in Mexico since his birth.
D. Kole Ltd. was incorporated in Alberta in 1962 and, until December 31, 2012, carried on
most of its business in that province. However, on January 1, 2012 the head office of the
corporation moved to Oregon and the Company ceased doing business in Canada in all
subsequent years.
E. Forman Inc. was incorporated in Syracuse, New York during 2015. However, the head
office of the corporation is in Smith Falls, Ontario and all meetings of the Board of Direc-
tors are held in that city.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Problems Volume 1 Page 11
SSS Problem One - 3
Case A Brad is a U.S. citizen who has been living in Seattle, Washington. Through
an online dating service, he meets Sarah in 2016. She is a Canadian citizen who lives
and works in Vancouver. After several face-to-face meetings they conclude that they
should marry and, after much discussion, they decide that they will live in Seattle after
the marriage. Since Sarah is committed to remaining in her position in Vancouver
until September, 2017, in December, 2016, Brad takes a 10 month leave of absence
from his job and gives up his apartment in Seattle. On January 1, 2017, they move in
together sharing an apartment in Vancouver which is leased on a month-to-month
basis. On September 15, 2017, they get married, terminate the Vancouver lease, and
move to a newly purchased house in Seattle.
Case B Helen is a single individual who makes her living painting portraits of
wealthy individuals. She is a U.S. citizen and has, in recent years, worked in
Burlington, Vermont. Of late, business has dropped off and, as a consequence, she
decided to try working in Montreal. Because of the uncertainty involved in her line of
work, she does not sell her Burlington residence, asking a friend to watch it while she
is absent. On April 15, 2017, she moves to Montreal. She lives in various Montreal
hotels until January 15, 2018. At this time she concludes that the work situation is no
better in Montreal than it was in Burlington. Given this, she returns to Burlington.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Problems Volume 1 Page 12
SSS Problem One - 5
Required: For both Cases, calculate Christophe’s Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the
end of the current year.
Required For each Case, calculate Mr. Oakley ’s Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the
end of the current year, or state that no carry overs are available.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 13
SSS Solution One - 1
A. A big advantage here would be the likelihood that Canadian tax revenues would increase.
In terms of qualitative characteristics, two possibilities would be:
• More neutrality, as businesses would no longer make location decisions based on the
tax status of the shipping point.
• Complexity would be added in terms of finding a mechanism to enforce collections.
C. A major advantage would likely be increased revenues as the ability to use multiple corpo-
rate structures for tax planning purposes would be reduced. In terms of qualitative
characteristics, two possibilities would be:
• More neutrality, as it would remove the incentive to make investment decisions on the
basis of multiple corporate structures.
• There would be greater ease of compliance as only one tax return would be required.
D. The major advantage here would likely be greater ease of compliance for business. In
terms of qualitative characteristics, two possibilities would be:
• Simplicity and ease of compliance would be improved.
• Certainty would be improved, in that taxpayers would be more aware of the amounts
to be paid, without having to do the additional calculations required for input tax
credits.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 14
SSS Solution One - 2
Case B
Ms. Gloria Salinas would not be considered a Canadian resident. As a result, none of her
income would be subject to Canadian taxes. ITA 250(1)(c)(i) indicates that an ambassador of
Canada will be deemed to be a Canadian resident only if she was resident in Canada immedi-
ately prior to her appointment to the position.
Case C
Roberto Salinas would not be considered a Canadian resident. As a result, none of his income
(if any) would be subject to Canadian taxes. While ITA 250(1)(f) indicates that a child of an
ambassador who is a deemed resident under ITA 250(1)(c)(i) is also a deemed resident,
Roberto’s mother is not such a deemed resident. Therefore, Roberto would not be considered
a Canadian resident.
Case D
Kole Ltd. would be considered resident in Canada based on ITA 250(4)(c), which indicates
that a corporation is resident in Canada if it was incorporated in Canada prior to April 27,
1965 and carried on business, or was resident in Canada, in any year ending after April 26,
1965. Based on the location of its mind and management, it would also be considered a resi-
dent of the U.S. Given this dual residency, the tie breaker rule in the Canada/U.S. tax treaty
would resolve the situation by making the Company a resident of its country of incorporation.
This would result in Kole Ltd. being considered a resident of Canada, the country of
incorporation.
Case E
Forman Inc. would be considered resident in Canada because of the location of its mind and
management. However, as Forman was incorporated in the U.S., it would also be considered
a resident of that country. Given this dual residency, the tie breaker rule in the Canada/U.S.
tax treaty would resolve the situation by making the Company a resident of its country of
incorporation. This would result in Forman being considered a resident of the U.S., and a
non-resident of Canada.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 15
SSS Solution One - 3
Case B
Because Helen is temporarily in Canada for more than 183 days in 2017, she would be consid-
ered a deemed resident of Canada under the sojourner rules. As this makes her a dual resident
of the U.S. and Canada, the tie-breaker rules would come into play.
Since it appears that Helen has a permanent home in Burlington, the tie-breaker rules would
indicate that she is a resident of the United States. The hotels would not be considered to be a
permanent home given that Helen never intended to stay for a long period of time.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 16
SSS Solution One - 4
In this Case, Christophe has rental and business loss carry overs of $12,380 ($47,130 -
$22,250 - $37,260). The provincial lottery winnings would not be included in Christophe’s
Net Income For Tax Purposes as they are not subject to tax.
Case B
The Case B solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $75,400
Interest Income 4,560 $79,960
Income Under ITA 3(b):
Taxable Capital Gains $8,725
Allowable Capital Losses ( 9,460) Nil
Balance From ITA 3(a) And (b) $79,960
Child Care Costs ( 4,520)
RRSP Contributions ( 6,570)
Spousal Support Payments ( 3,600)
Balance From ITA 3(c) $65,270
Deduction Under ITA 3(d):
Net Rental Loss ( 12,200)
Net Income For Tax Purposes (Division B Income) $53,070
In this Case, Christophe has an allowable capital loss carry over of $735 ($8,725 - $9,460).
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 17
SSS Solution One - 5
In this Case, Mr. Oakley has no loss carry overs at the end of the year.
Case B
The Case B solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $92,000
Rental Income 16,000 $108,000
Income Under ITA 3(b):
Taxable Capital Gains $18,000
Allowable Capital Losses ( 32,000) Nil
Balance From ITA 3(a) And (b) $108,000
Subdivision e Deductions ( 12,000)
Balance From ITA 3(c) $ 96,000
Deduction Under ITA 3(d):
Business Loss ( 22,000)
Net Income For Tax Purposes (Division B Income) $ 74,000
In this Case, Mr. Oakley has a carry over of $14,000 ($32,000 - $18,000) in unused allowable
capital losses.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 18
SSS Solution One - 5
Case C
The Case C solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $46,000
Business Income 21,000 $67,000
Income Under ITA 3(b):
Taxable Capital Gains $22,000
Allowable Capital Losses ( 53,000) Nil
Balance From ITA 3(a) and (b) $67,000
Subdivision e Deductions ( 16,000)
Balance From ITA 3(c) $51,000
Deduction Under ITA 3(d):
Rental Loss ( 42,000)
Net Income For Tax Purposes (Division B Income) $ 9,000
In this Case, Mr. Oakley would have an allowable capital loss carry over in the amount of
$31,000 ($53,000 - $22,000).
Case D
The Case D solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $57,000
Business Income 16,000 $73,000
Income Under ITA 3(b):
Taxable Capital Gains $31,000
Allowable Capital Losses ( 35,000) Nil
Balance From ITA 3(a) And (b) $73,000
Subdivision e Deductions ( 17,000)
Balance From ITA 3(c) $56,000
Deduction Under ITA 3(d):
Rental Loss ( 92,000)
Net Income For Tax Purposes (Division B Income) Nil
Mr. Oakley would have a carry over of unused business losses in the amount of $36,000
($92,000 - $56,000) and of unused allowable capital losses in the amount of $4,000 ($35,000
- $31,000).
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Self Study Problems Volume 1 Page 19
Self Study Problem Two - 2
Required:
A. Indicate whether Ms. Birch has an obligation to make instalment payments during the
2017 taxation year. Explain your conclusion.
B. If Ms. Birch is required to make instalment payments, indicate the minimum amounts that
should be paid and the dates on which the amounts are payable. Your answer should
include the calculations for all the alternatives that are available to Ms. Birch, as well as an
indication as to which alternative is preferable.
C. Ms. Birch would like your advice as to whether or not she should make the recommended
instalment payments. Explain your conclusion.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Self Study Problems Volume 1 Page 20
Self Study Problem Two - 3
Case One The taxpayer is an individual whose employer withholds combined federal and
provincial taxes of $73,700 in 2015, $83,200 in 2016, and $75,000 in 2017.
Case Two The taxpayer is an individual whose employer withholds combined federal and
provincial taxes of $65,100 in 2015, $90,100 in 2016, and $71,900 in 2017.
Case Three The taxpayer is a small CCPC with a taxation year that ends on December 31.
Case Four The taxpayer is a publicly traded corporation with a taxation year that ends on
December 31. Assume that its combined federal and provincial taxes payable
for the year ending December 31, 2016 were $74,500, instead of the $89,400
given in the problem.
Required: For each of the preceding independent Cases, provide the following
information:
1. Indicate whether instalments are required during 2017. Provide a brief explanation of
your conclusion. This explanation should be provided even if the amount of the required
instalments is nil.
2. If instalments are required, calculate the amount of instalments that would be required
under each of the acceptable methods available.
3. If instalments are required, indicate which of the available methods would best serve to
minimize instalment payments during 2017. If instalments must be paid, indicate the
date on which they are due.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Self Study Problems Volume 1 Page 21
Self Study Problem Two - 5
Required: For each of the Cases, state whether instalments are required for the 2017 taxa-
tion year, even if one of the methods results in required instalments of nil. Explain your
conclusion. If instalments are required, indicate:
• the best alternative for calculating the instalments,
• the amount of the instalments under that alternative showing all calculations, even if the
optimum solution is obvious,
• the dates on which the payments will be due, and
• any consequences of the 2017 estimated taxes being lower than the actual taxes payable.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Self Study Problems Volume 1 Page 22
Self Study Problem Two - 7
Required: Indicate the procedures that may be used in dealing with this dispute between
the CRA and Mr. Coffee.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Problems Volume 1 Page 23
SSS Problem Two - 2
For 2017, she estimates that her combined federal and provincial taxes payable will be
$14,000 and that her employer will withhold a total of $9,850 in income taxes.
She has asked you whether it will be necessary for her to pay instalments in 2017 and, if so,
what the minimum amounts that should be paid are, and when they are due.
Required: Advise Ms. Garond as to whether or not she is required to make instalment
payments for 2017. If instalments are required, calculate the alternative amounts that could
be paid. Indicate which alternative would be best and the dates on which the payments
should be made.
He has asked you whether it will be necessary for him to pay instalments in 2017 and, if so,
what is the minimum he has to pay and when.
Required: Provide the information requested by Mr. Gore. Your answer should include a
conclusion on whether or not instalments are required. If instalments are required, indicate
the alternative amounts that could be remitted, the best alternative to use, and the dates on
which the instalments should be paid.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Problems Volume 1 Page 24
SSS Problem Two - 3
Case D The taxpayer is a publicly traded corporation with a December 31 year end.
Assume that its combined federal and provincial taxes payable for the year ending
December 31, 2015 are estimated to be $78,100, instead of the $93,000 given in the
problem.
Required: For each of the preceding independent Cases, provide the following
information:
1. Indicate whether instalments are required during the year ending December 31, 2017,
including a brief explanation of your conclusion. This explanation should be provided
even if the amount of the required instalments is nil.
2. Calculate the amount of instalments that would be required under each of the acceptable
methods available.
3. Indicate which of the acceptable methods would best serve to minimize instalment
payments during 2017. If instalments must be paid, indicate the date on which they are
due.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Problems Volume 1 Page 25
SSS Problem Two - 5
Required:
A. Calculate the instalment payments that are required for the year ending October 31, 2017
under each of the alternative methods available. Indicate which of the alternatives would
be preferable.
B. If the Company did not make any instalment payments towards its 2017 taxes payable,
and did not file its corporate tax return or pay its taxes payable on time, indicate how the
interest and penalty amounts assessed against it would be determined (a detailed calcula-
tion is not required).
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Solutions Volume 1 Page 26
SSS Solution Two - 1
As Ms. Garond’s net tax owing in all three of the years exceeds $3,000, she is required to make
instalment payments.
Alternative Amounts
There are three possible alternatives for remitting instalments. These are as follows:
• Quarterly instalments of $1,037.50 ($4,150 ÷ 4) based on the current year estimate.
• Quarterly instalments of $2,075.00 ($8,300 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $3,125.00 ($12,500 ÷ 4) based on the second preceding
year, followed by two instalments of $1,025.00 {[$8,300 - (2)($3,125)] ÷ 2}.
Best Alternative
The best alternative would be four instalments of $1,037.50.
Payment Dates
The quarterly payments would be due on March 15, June 15, September 15, and December
15.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Solutions Volume 1 Page 27
SSS Solution Two - 2
Alternative Amounts
There are three possible alternatives for remitting instalments. These are as follows:
• Quarterly instalments of $875 ($3,500 ÷ 4) based on the current year estimate.
• Quarterly instalments of Nil based on the first preceding year.
• Two quarterly instalments of $875 ($3,500 ÷ 4) based on the second preceding year. No
further instalments will be required.
Best Alternative
The best alternative would be four instalments of Nil, i.e. no instalments being paid.
Payment Dates
If payments were required, they would be due on March 15, June 15, September 15, and
December 15. However, since the prior year's net tax owing was nil, no instalments are
required.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Solutions Volume 1 Page 28
SSS Solution Two - 3
Case B
1. The individual’s net tax owing for the relevant three years is as follows:
2015 $1,500 ($93,000 - $91,500)
2016 $9,300 ($108,000 - $98,700)
2017 $4,200 ($82,500 - $78,300)
As the net tax owing exceeds $3,000 in the current year and one of the two preceding
years, instalments are required.
2. The three alternatives would be:
• Quarterly instalments of $1,050 ($4,200 ÷ 4) based on the current year estimate.
• Quarterly instalments of $2,325 ($9,300 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $375 ($1,500 ÷ 4) based on the second preceding
year, followed by two instalments of $4,275 {[$9,300 - (2)($375)] ÷ 2}.
3. The best alternative would be quarterly instalments of $1,050, for a total of $4,200. This
is much lower than the total of $9,300 required under the other two alternatives.
The instalments are due on March 15, June, 15, September 15, and December 15.
Case C
1. As the corporation’s tax payable for both the current and the preceding year exceeds
$3,000, instalments are required. As the corporation is a small CCPC, quarterly instal-
ments can be used.
2. The three acceptable alternatives would be as follows:
• Quarterly instalments of $20,625 ($82,500 ÷ 4) based on the current year estimate.
• Quarterly instalments of $27,000 ($108,000 ÷ 4) based on the first preceding year.
• One quarterly instalment of $23,250 ($93,000 ÷ 4) based on the second preceding
year, followed by three instalments of $28,250 [($108,000 - $23,250) ÷ 3], a total of
$108,000.
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Chapter 2 Supplementary Self Study (SSS) Solutions Volume 1 Page 29
SSS Solution Two - 3
3. The best alternative would be quarterly instalments of $20,625 based on the current year
Tax Payable estimate. The total would be $82,500, significantly less than the $108,000
total under the other two methods.
The instalments are due on March 31, June 30, September 30, and December 31.
Case D
1. As the corporation’s 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 instal-
ments are required.
2. The three acceptable alternatives would be as follows:
• Monthly instalments of $6,875 ($82,500 ÷ 12 based on the current year estimate.
• Monthly instalments of $9,000 ($108,000 ÷ 12) based on the first preceding year.
• Two monthly instalment of $6,508.33 ($78,100 ÷ 12) based on the second
preceding year, followed by 10 monthly instalments of $9,498.33 {[$108,000 -
(2)($6,508.33) ÷ 10]}, a total of $108,000.
3. The best alternative would be monthly instalments of $6,875, based on the current year
Tax Payable estimate. The total would be $82,500, significantly less than the $108,000
total under the other two methods.
The instalments would be due on the last day of each month, beginning in January.
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Chapter 2 Supplementary Self Study (SSS) Solutions Volume 1 Page 30
SSS Solution Two - 4
Current Year Base The instalment payments could be 1/12th of the estimated taxes
payable for the current year. In this case the resulting instalments would be $12,000
per month ($144,000 ÷ 12).
Preceding Year Base The instalment payments could be 1/12th of the taxes payable
in the immediately preceding taxation year. The resulting instalments would be
$12,750 ($153,000 ÷ 12).
Preceding And Second Preceding Years The third alternative would be to base the
first two instalments on 1/12th of the taxes payable in the second preceding year and
the remaining 10 instalments on 1/10th of the taxes payable in the preceding year less
the total amount paid in the first two instalments.
In this case, the first two instalments would be $14,000 ($168,000 ÷ 12) and the
remaining 10 instalments would be $12,500 [($153,000 - $28,000) ÷ 10]. The total
instalments under this approach would be $153,000.
As the Company has been experiencing a decline in its taxes payable over this three year
period, the payments based on the current year’s estimated taxes payable would be the most
favorable in terms of minimizing cash outflows.
Part B
If the Company failed to make instalment payments towards the 2017 taxes payable, it would
be liable for interest from the date each instalment should have been paid to the balance due
date, December 31, 2017.
Assuming the actual 2017 taxes payable are $144,000, it would be the least of the amounts
described in ITA 157(1), and interest would be calculated based on this instalment alternative.
The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister,
the regular rate plus 4 percentage points.
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 percent of the amount by which the interest owing on the late or
deficient instalments exceeds the greater of $1,000 and 25 percent of the interest that would
be owing if no instalments were made. While detailed calculations are not required, we
would note that this penalty would be applicable in this case.
Interest on the entire balance of $144,000 of taxes payable would be charged beginning on
the balance due date, December 31, 2017. The rate charged would be the one prescribed in
ITR 4301 for amounts owed to the Minister, the regular rate plus 4 percentage points.
There is also a penalty for late filing . If no return is filed by the filing date, the penalty amounts
to 5 percent of the tax that was unpaid at the filing date, plus 1 percent per complete month of
the unpaid 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 return is filed or the instalments (balance due)
paid.
The late file penalty could be doubled to 10 percent, plus 2 percent per month for a maximum
of 20 months for a second offence within a three year period.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 2 Supplementary Self Study (SSS) Solutions Volume 1 Page 31
SSS Solution Two - 5
Part A
Accountant X is not liable for participating in an understatement of Client A's taxes payable
because Accountant X did not know the expense receipt was personal in nature, and would
not be reasonably expected to know, but for circumstances amounting to culpable conduct,
that this was the case. This is because X relied in good faith on the information provided by A.
Part B
Based on these facts, Accountant X would be liable for a third party penalty. However, if
Accountant X had determined that there was a reasonable basis upon which the Tax Court
decision could be overturned by a higher court, the penalty would not apply.
Part C
Based on these facts, if X were to prepare and EFILE Z's return without obtaining the charitable
donation receipt, X would be liable for a third party penalty. Given that the size of the dona-
tion is so disproportionate to Z's apparent income as to defy credibility, to EFILE the return
without verifying the amount of the receipt would show an indifference as to whether the Act
is complied with or would show a wilful, reckless, or wanton disregard of the law.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 32
Self Study Problem Three - 2
Required: For each of the following cases, indicate the taxation year in which the Company
could deduct the bonus, as well as the taxation year in which Ms. Betz would have to include it
in her taxable income.
Case A The bonus is paid on November 1, 2017.
Case B The bonus is paid on January 1, 2018.
Case C The bonus is paid on June 30, 2018.
Case D The bonus is paid on January 1, 2021.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 33
Self Study Problem Three - 3
Required: Calculate the minimum taxable car benefit that will be included in Ms. Vines’
employment income for the year ending December 31, 2017.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 34
Self Study Problem Three - 4
Required: Calculate the minimum amount of the taxable benefit for the current year that
will accrue to each of these executives as the result of having the cars supplied by the
Company. In making these calculations, ignore GST/HST/PST considerations. From the point
of view of tax planning for management compensation, provide any suggestions for the
Carstair Manufacturing Company with respect to these cars.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 35
Self Study Problem Three - 5
Required: On the basis of undiscounted cash flows, advise John as to whether he should
purchase the car assuming:
A. ML purchased the car for $35,000.
B. ML purchased the car for $70,000.
Ignore GST/HST considerations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 36
Self Study Problem Three - 7
Required: Evaluate Mr. Malone’s suggestion of providing him with an interest free loan in
lieu of salary from the point of view of the cost to the Company. How will the deductibility of
the interest affect your conclusion?
Required: For each of the following Cases, calculate the tax consequences of the transac-
tions that took place during 2015, 2016, and 2017 on both the Net Income For Tax Purposes
and the Taxable Income of Ms. Wu. Where relevant, identify these effects separately.
Case A Imports Ltd. is a public company.
Case B Imports Ltd. is a Canadian controlled private corporation.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 37
Self Study Problem Three - 8
Required: Indicate the tax effect on Ms. Balzac of the transactions that took place during
2015, 2016, and 2017 under each of the following independent Cases. Your answer should
include the effect on both Net Income For Tax Purposes and Taxable Income. Where relevant,
identify these effects separately.
A. Borden Ltd. is a Canadian controlled private corporation. At the time the options were
granted, the Company’s shares had a fair market value of $7.50 per share. The options
were exercised on October 1, 2016.
B. Borden Ltd. is a Canadian public company. At the time the options were granted, the
shares were trading at $7.50 per share. The options were exercised on October 1, 2016.
C. Borden Ltd. is a Canadian public company. At the time the options were granted, the
shares were trading at $8.25 per share. The options were exercised on October 1, 2016.
D. Borden Ltd. is a Canadian controlled private corporation. At the time the options were
granted, the Company’s shares had a fair market value of $9.00 per share. The options
were exercised on October 1, 2015.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 38
Self Study Problem Three - 9
Required: Compute Sam Jurgens’ minimum net employment income for the year ending
December 31, 2017.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 39
Self Study Problem Three - 10
Required: Calculate Ms. Kline’s minimum net employment income for the year ending
December 31, 2017. Ignore all GST and PST considerations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 40
Self Study Problem Three - 11
Other Information:
1. At Christmas, the Company gives all of its employees a mini iPad. Each mini iPad costs the
Company $350, including all applicable taxes. The Company deducts this amount in full
in its corporate tax return.
2. During 2016, Ms. Firth received stock options from Hadley to acquire 1,000 shares of its
common stock. The option price is $5.00 per share and, at the time the options are issued,
the shares are trading at $4.50 per share. In June, 2017, the shares have increased in value
to $7.00 per share and Ms. Firth exercises her options to acquire 1,000 shares. She is still
holding them at the end of the year and has no intention of selling them.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 41
Self Study Problem Three - 11
3. The Company provides Ms. Firth with a membership in the Mountain Tennis Club. The
cost of this membership for the year is $2,500. During the year, Ms. Firth spends $6,500
entertaining clients at this club. The Company does not reimburse her for these entertain-
ment costs.
4. Ms. Firth had travel costs related to her employment activities as follows:
Meals $1,300
Lodging 3,500
Total $4,800
Her employer provides her with a travel allowance of $300 per month ($3,600 for the
year) which is included on her T4 for the year.
Required: Calculate Ms. Firth’s minimum net employment income for the year ending
December 31, 2017. Provide reasons for omitting items that you have not included in your
calculations. Ignore any GST or PST implications.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 42
Self Study Problem Three - 12
Required: Determine Mr. Jones’ net employment income for the 2017 taxation year.
Ignore all GST and PST implications.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 43
Self Study Problem Three - 13
Mr. Worthy ’s car was purchased, used, several years ago for $28,000. Twenty percent of the
milage on the car is for personal matters. He is required by his employer to maintain an office
in his home and is eligible to deduct work space in the home costs. Mr. Worthy has received
no reimbursement from his employer for any of the amounts listed.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 44
Self Study Problem Three - 14
Other Information:
1. Given Mitch’s high grades at the University Of Alberta, Oxford Associates offered Mitch
$10,000 to convince him to sign a five year employment contract. After Mitch accepted,
he received the cheque in February, 2017. During the period April 1, 2017 through
December 31, 2017, Mitch earned salary of $63,700. Of these earnings, $62,550 was
paid during this period as Oxford Associates holds back one week’s pay. The Company
withheld the following amounts from his salary:
Income Taxes $11,400
CPP 2,564
EI 836
RPP Contributions 1,200
Payment For Personal Use Of Automobile 600
2. On December 16, 2017, a bonus of $7,450 was accrued for Mitch. Mitch received
$2,000 of this bonus on December 21, 2017, with the remainder being paid on February
17, 2018.
3. A few months into the new job Mitch became quite depressed. His employer suggested he
take advantage of the company assistance program. He went to four appointments in
October and November and felt much better. Oxford Associates paid $700 for Mitch’s
counselling services.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 45
Self Study Problem Three - 14
4. Oxford Associates provides group medical coverage to all of its employees. The premiums
paid by Oxford Associates on Mitch’s behalf cost $410.
5. Oxford Associates contributed $1,200 on Mitch’s behalf to the Company’s RPP.
6. Mitch is a Certified Financial Planner and paid $785 in professional dues in 2017. Oxford
Associates’ policy is to reimburse 80 percent of such annual professional dues. Oxford
Associates reimbursed him $628 in November 2017.
7. When Mitch was married in November he received non-cash wedding gifts valued at
$850. Half of the amount was contributed by his employer and the balance from other
employees.
8. Oxford Associates discovered years ago that many existing clients frequent certain recre-
ational and sporting clubs. To encourage contacts with potential clients, employees have
their choice among five such clubs. Since Mitch enjoys squash, he chose a free member-
ship at a local squash club. The annual membership fee is $915.
9. Oxford Associates reimbursed Mitch for 80 percent of the $22,000 ($147,000 -
$125,000) loss that he experienced on the sale of his Red Deer home.
10. Mitch had $35,000 for a down-payment on his new Ottawa home. Since he had no
previous work experience, the banks were reluctant to provide him a mortgage at favour-
able terms. His employer stepped in and agreed to an interest-free housing loan of
$200,000 beginning on December 1, 2017. Mitch agreed to reduce his salary slightly with
respect to this benefit. The loan requires annual payments of $7,500 due at the end of
November beginning in 2018. The loan is required to be paid if Mitch dies, sells the home
or terminates his employment. Assume that the prescribed interest rates for such benefits
are 2 percent in each of the first two quarters of 2017 and 1 percent in the third and fourth
quarters.
11. Oxford instituted a stock option plan for its employees in 2016. The plan eligibility
requires six months of service. Employees are permitted to acquire a limited number of
option shares at 20 percent below their fair market value on either May 1 or November 1.
The company hires valuators to determine the fair market value at each of those dates.
Mitch acquires 200 shares November 1, 2017 for $12,800. Low on cash and wanting to
buy Janice a nice wedding ring, he is forced to sell 80 of the shares. He sells them on
December 16, 2017 for $8,960.
12. Oxford Associates has an arrangement with a local dealership to lease a minimum number
of new automobiles each year at favourable rates. Mitch receives his leased automobile
May 1, 2017. It has 162 kilometers on it when it is received. The odometer reads 19,414
kilometers on December 31, 2017. Mitch estimates that he drove 5,198 kilometers for
personal purposes, including drives to and from home to the office. Oxford Associates
pays monthly lease payments (including HST) of $430. The cost of gas, oil, insurance,
repairs and maintenance and other charges total $2,175 for 2017. Oxford Associates
requires each employee provided with an automobile to pay $75 each month for the
personal use of the automobile which is withheld directly from their pay.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Self Study Problems Volume 1 Page 46
Self Study Problem Three - 14
13. Mitch prepared a separate room in his apartment to be used exclusively for a home office.
He used the office space between June 1 and November 30, 2017. A home office was not
ready in his newly purchased home until February, 2018. The apartment office space is
exactly 100 square feet. The total apartment space is 1,176 square feet. Home office
related costs are as follows:
Required: Determine Mitch’s net employment income for the year 2017. Provide explana-
tions for all amounts including reasons for omitting items not included in your calculations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Problems Volume 1 Page 47
SSS Problem Three - 2
Required: For each of the following cases, indicate the taxation year in which the Company
can deduct the bonus, as well as the taxation year in which Mr. Lange will have to include it in
his taxable income.
Required: Ignore all GST/PST/HST implications. For each of the following cars, calculate
the minimum taxable benefit to the employees for the current year ending December 31.
Car A is purchased for $30,000. It is used by Aaron Abbott for the whole year. He
drives it for personal purposes for a total of 9,000 kilometers.
Car B is leased for $635 per month. It is used by Babs Bentley for 11 months of the
year. She drives it for personal purposes for a total of 6,000 kilometers and pays
Cancar Company $500 for the use of the car.
Car C is purchased for $30,000. It is used by Carole Cantin for 10 months of the year.
She drives it for personal purposes for a total of 7,000 kilometers.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Problems Volume 1 Page 48
SSS Problem Three - 4
Required: Evaluate, from the point of view of the cost to the Company, Ms. Lee’s suggestion
of providing her with an interest free loan in lieu of sufficient salary to carry a commercial loan
at the rate of 5 percent. Assume that the cost of the renovations will be fully deductible in the
year in which they are made.
Required: Indicate the tax effect on Ms. Bytech with respect to the granting of the options,
their exercise, and the sale of the shares under each of the following independent assump-
tions. Your answer should include the effect on both Net Income For Tax Purposes and Taxable
Income. Where relevant, identify these effects separately.
A. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the
options were granted, the Company’s shares had a fair market value of $14 per share.
B. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the
options were granted, the Company’s shares had a fair market value of $18 per share.
C. Merlin Industries Ltd. is a Canadian public company. At the time the options were
granted, the shares were trading at $15 per share.
D. Merlin Industries Ltd. is a Canadian public company. At the time the options were
granted, the shares were trading at $18 per share.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Problems Volume 1 Page 49
SSS Problem Three - 5
Other Information:
1. During 2017, Mrs. Smiles is provided with an automobile that has been leased by her
employer. The lease payments are $1,220 per month, an amount which includes a $127
per month payment for insurance. The car is used by her for ten months of the year and,
during the period of non-use, she is required to return the car to her employer's premises.
During 2017, she drives it a total of 67,000 kilometers. Of this total, 63,000 kilometers
were for travel required in pursuing the business of her employer, and the remainder was
for personal use. She reimbursed her employer $1,400 for her personal use of the
automobile.
2. During 2017, Mrs. Smiles was hospitalized for a month. The disability plan which
provides periodic benefits to compensate for lost employment income paid her benefits
of $2,650 during this period. Mrs. Smiles began making contributions to this plan in 2016
and paid $260 for that year.
3. On July 1, 2017, Mrs. Smiles received a $50,000 loan from her employer. The loan
requires annual interest payments at a rate of 1 percent and Mrs. Smiles pays the interest
for 2017 on January 18, 2018. Assume that at the time the loan was granted and for the
remainder of the year, the prescribed rate was 2 percent. The loan is still outstanding at
the end of the year.
4. Mrs. Smiles was given options to buy 200 shares of her employer’s stock at a price of $32
per share 3 years ago. At the time the options were issued, the shares had a fair market
value of $30 per share. On June 1, 2017, Mrs. Smiles exercises the options. At the time of
exercise, the shares had a fair market value of $45 per share. She does not plan to sell the
shares for at least 2 years.
5. During the year, Mrs. Smiles traveled extensively on business. She had travel costs of
$3,365 in air fares, $4,880 in travel lodging, and $2,450 in meals while on the road. She
also spent $2,720 to entertain clients. Her employer reimbursed her fully for these costs
on presentation of the receipts.
Required: Calculate Mrs. Smiles’ minimum net employment income for the year ending
December 31, 2017. Provide reasons for omitting items that you have not included in your
calculations. Ignore all GST and PST considerations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Solutions Volume 1 Page 50
SSS Solution Three - 1
In Case A, the bonus is deducted when accrued because it is paid within 180 days of Lange
Enterprises’ 2017 year end. It is taxed when received.
In Case B, the bonus is deducted when accrued because it is paid within 180 days of Lange
Enterprises’ 2017 year end. It is taxed when received.
In Case C, the bonus is not paid within 180 days of Lange Enterprises’ year end. As a conse-
quence, it cannot be deducted until the year ending September 30, 2018. However, as it is
paid within 3 years of Lange Enterprises’ 2017 year end it is not a salary deferral arrangement.
This means it does not have to be included in Mr. Lange’s Taxable Income until 2018.
In Case D, the bonus is not paid until more than 3 years after the end of the calendar year in
which Mr. Lange rendered the services. This makes it a salary deferral arrangement, resulting
in Mr. Lange having to include it in his 2017 Taxable Income. Lange Enterprises will deduct
the bonus in the fiscal year ending September 30, 2017.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Solutions Volume 1 Page 51
SSS Solution Three - 2
Car A
Standby Charge [(2%)($30,000)(12)] $7,200
Operating Cost Benefit [(9,000)($0.25)] 2,250
Total Taxable Benefit $9,450
Car B
*[(11)(1,667)]
Car C
*[(10)(1,667)]
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Solutions Volume 1 Page 52
SSS Solution Three - 3
Conclusion
On the basis of the preceding analysis, it can be concluded that the Company should provide
an additional $5,000 in salary rather than providing Ms. Lee with an interest free loan of
$100,000. This alternative results in a net cost to the Company which is $3,600 ($7,200 -
$3,600) lower. The major factor that pushed the outcome in this direction is the high rate of
return that HER expects on invested funds.
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Chapter 3 Supplementary Self Study (SSS) Solutions Volume 1 Page 53
SSS Solution Three - 4
Case B
As the option price at the time of the grant is less than the fair market value of the shares on that
date, no deduction is available under ITA 110(1)(d). Further, as Ms. Bytech has not held the
shares for two years, no deduction is available under ITA 110(1)(d.1). Given this, the required
information under the assumption that Merlin Industries Ltd. is a Canadian controlled private
corporation is as follows:
• Year Of Granting - No tax effect.
• Year Of Exercise - No tax effect.
• Year Of Sale - The tax effects would be as follows:
Fair Market Value At Exercise [(200,000)($22)] $4,400,000
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income $1,400,000
Taxable Capital Gain [(200,000)($28 - $22)(1/2)] 600,000
Increase In Net Income For Tax Purposes $2,000,000
Deduction Under ITA 110(1)(d) N/A
Deduction Under ITA 110(1)(d.1) N/A
Increase In Taxable Income $2,000,000
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Solutions Volume 1 Page 54
SSS Solution Three - 4
Case C
The required information under the assumption that Merlin Industries Ltd. is a Canadian
public company is as follows:
• Year Of Granting - No tax effect.
• Year Of Exercise - As the option price was greater than the fair market value of the shares at
the time the options were issued, the ITA 110(1)(d) deduction can be taken. The results
for this year would be as follows:
Fair Market Value At Exercise [(200,000)($22)] $4,400,000
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income
= Increase In Net Income For Tax Purposes $1,400,000
Deduction Under ITA 110(1)(d) [($1,400,000)(1/2)] ( 700,000)
Increase In Taxable Income $ 700,000
• Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax
Purposes and the increase in Taxable Income for the year. The taxable capital gain
would be calculated as follows:
Proceeds Of Disposition [(200,000)($28)] $5,600,000
Adjusted Cost Base [(200,000)($22)] ( 2,800,000)
Capital Gain $1,200,000
Inclusion Rate 1/2
Taxable Capital Gain $ 600,000
Case D
As the option price at the time of the grant is less than the fair market value of the shares on that
date, no deduction is available under ITA 110(1)(d). Further, as Merlin Industries Ltd. is a
public company, no deduction could have been available under ITA 110(1)(d.1). Given this,
the required information is as follows:
• Year Of Granting - No tax effect.
• Year Of Exercise - The tax effects would be as follows:
Fair Market Value At Exercise [(200,000)($22)] $4,400,000
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income
= Increase In Net Income For Tax Purposes $1,400,000
Deduction Under ITA 110(1)(d) N/A
Increase In Taxable Income $1,400,000
• Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax
Purposes and the increase in Taxable Income for the year. The taxable capital gain
would be calculated as follows:
Proceeds Of Disposition [(200,000)($28)] $5,600,000
Adjusted Cost Base [(200,000)($22)] ( 2,800,000)
Capital Gain $1,200,000
Inclusion Rate 1/2
Taxable Capital Gain $ 600,000
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 3 Supplementary Self Study (SSS) Solutions Volume 1 Page 55
SSS Solution Three - 5
Note One The contributions to the group disability plan are not deductible, but can be
applied against the $2,650 received under the plan during the year. Since the employer’s
contributions to this plan are not a taxable benefit, the $2,650 in benefits received must
be included in employment income. However, this benefit can be reduced by the $472
($260 + $212) in total contributions that she has made in 2016 and 2017.
Note Two Based on the fact that Mrs. Smiles’ employment related usage is more than 50
percent, the automobile benefit is calculated as follows:
*[(10)(1,667)]
Note Three The benefit on the low interest loan would be calculated as follows:
While most students will use the quarterly calculation, the use of actual days would result
in the following acceptable alternative:
[($50,000)(2% - 1%)(184 ÷ 365)] = $252
Note Four As a Canadian controlled private corporation is involved and she is still
holding the shares, Mrs. Smiles does not recognize an employment income inclusion in
2017.
Note Five Since all of her travel and entertainment costs were reimbursed based on
actual receipts, there is no effect on her income. Her employer will have to apply the 50
percent limit on meals and entertainment to the reimbursed costs.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 4 Self Study Problems Volume 1 Page 56
Self Study Problem Four - 1
Required: For each Case, determine the combined federal Tax Payable for Barbra and Sally
Hines for the 2017 taxation year.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 4 Self Study Problems Volume 1 Page 57
Self Study Problem Four - 2
1. Leonard Wilkins has Net Income For Tax Purposes of $104,300, all of which is rental
income. His spouse has Net Income For Tax Purposes of $8,720. Their daughter is 13
years old, lives with them, and has Net Income For Tax Purposes of $3,240. Their son is 24
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.
2. Pete Webb has Net Income For Tax Purposes of $74,200 all of which is employment
income. His employer withheld the maximum EI premium and CPP contribution. He is
married to Eva Aguilar whose Net Income For Tax Purposes is $3,920. They have three
children aged 6, 10, and 12. All of the children are in good health and none of them have
income of their own.
3. Candace Hall is 78 years old and has Net Income For Tax Purposes of $69,420. This total
is made up of OAS payments of $7,000 and pension income from her former employer.
Her husband is 62 years old and has Net Income For Tax Purposes of $5,130.
4. Gladys Crawford has Net Income For Tax Purposes of $126,470, all of which is rental
income. Her husband has Net Income For Tax Purposes of $2,600. They have three chil-
dren, ages 10, 14, and 20. All of these children are in good health and continue to live at
home. The 20 year old child has Net Income For Tax Purposes of $9,130. During the
current year, Ms. Crawford pays the following medical expenses:
Gladys $ 5,150
Her Spouse 4,240
10 Year Old Child 2,040
14 Year Old Child 3,220
20 Year Old Child 8,840
Total $23,490
5. Austin Schneider was divorced from his wife several years ago. He has custody of their
four children, ages 5, 8, 11, and 14. The children are all in good health. His Net Income
For Tax Purposes consists of spousal support payments totaling $62,000. Only the 14 year
old child had any income for the year. The 14 year old had Net Income For Tax Purposes
of $10,350 during the year.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 4 Self Study Problems Volume 1 Page 58
Self Study Problem Four - 3
Case A Ms. Sykes is a single mother. She has a son, John, who is 10 years old and
lives with her. All of Ms. Sykes’ income is from spousal support payments. During
2017, Ms. Sykes attends university for 10 months of the year on a part time basis. Her
tuition fees total $5,640.
Case B Ms. Sykes is not married and has no dependants. All of her income is from
employment. In December, she wins $2,000,000 in the provincial lottery. She
donates $150,000 of this amount to the church where she prayed for a winning lottery
ticket. She plans to claim $35,000 of this donation for a tax credit in 2017. She is not
eligible for the first-time donor's super credit.
Case C Ms. Sykes is married and her husband, Buff has Net Income For Tax Purposes
of $7,600. All of her income is from rental properties. They have one child, Martin.
He is 10 years old, has no income of his own, and qualifies for the disability tax credit.
Buff’s 73 year old father, Harry, lives with them. His Net Income For Tax Purposes was
$17,600. He is not mentally or physically infirm.
Case D Ms. Sykes is married and her husband, Buff has Net Income For Tax
Purposes of $2,540. All of her income is employment income. Wanda and Buff have
two children, Janice who is 10 years of age, and Mark who is 20 years of age. Both chil-
dren are in good health. As Mark has been unable to find full-time employment, he
still lives at home. Mark had Net Income For Tax Purposes of $2,460 from part-time
employment. Janice had no income during the year. During 2017, Ms. Sykes paid for
the following medical expenses:
Wanda $ 2,100
Buff 360
Janice 3,645
Mark 4,520
Total $10,625
Case E Ms. Sykes is married and her husband, Buff is 66 years old. All of her income
is from employment. Wanda and Buff have two children, a son aged 12 and a
daughter aged 14. Both children are in good health and have no income of their own.
Buff is disabled and qualifies for the disability tax credit. His Net Income For Tax
Purposes consists of $9,600 in pension income from his former employer. He is not
eligible for OAS. He attends university on a full time basis for 8 months of the year and
his tuition costs for 2017 are $8,450.
Required: In each Case, calculate Ms. Sykes’ minimum federal Tax Payable for 2017. Indi-
cate any carry forwards available to her and her dependants and the carry forward provisions.
Ignore any tax amounts that Ms. Sykes might have had withheld or paid in instalments.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 4 Self Study Problems Volume 1 Page 59
Self Study Problem Four - 4
Required: Calculate Mr. Lane’s federal tax payable (refund) for 2017.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 4 Self Study Problems Volume 1 Page 60
Self Study Problem Four - 5
Other Information:
For the 2017 taxation year, the following items were relevant.
1. Mr. Barth’s employer withheld the following amounts from his income:
Federal Income Tax $16,000
Employment Insurance Premiums 836
Canada Pension Plan Contributions 2,564
United Way Donations 2,000
Registered Pension Plan Contributions 3,200
Payments For Personal Use Of Company Car 3,600
2. During the year, Mr. Barth is provided with an automobile owned by his employer. The
cost of the automobile was $47,500. Mr. Barth drove the car a total of 10,000 kilometers
during the year, of which only 4,000 kilometers were related to the business of his
employer. The automobile was used by Mr. Barth for ten months of the year. During the
other two months, he was out of the country and he was required to leave the automobile
with one of the other employees of the corporation.
3. During the year, the corporation paid Mega Financial Planners a total of $1,500 for
providing counseling services to Mr. Barth with respect to his personal financial situation.
4. In order to assist Mr. Barth in purchasing a ski chalet, the corporation provided him with a
5 year loan of $150,000. The loan was granted on October 1 at an interest rate of 1
percent. Mr. Barth paid the corporation a total of $375 in interest for 2017 on January 20,
2018. Assume that, at the time the loan was granted and throughout the remainder of the
year, the relevant prescribed rate was 2 percent.
5. Mr. Barth was required to pay professional dues of $1,800 during the year.
6. On June 6, 2017, when Mr. Barth exercised his stock options to buy 1,000 shares of his
employer’s common stock at a price of $15 per share, the shares were trading at $18 per
share. When the options were issued, the shares were trading at $12 per share. During
December, 2017, the shares were sold at $18 per share.
7. Mr. Barth lives with his wife, Lynda. Lynda is blind and qualifies for the disability tax
credit. She has Net Income For Tax Purposes of $1,250.
8. His 22 year old dependent daughter, Marg, is a full time student for 8 months of the year.
She has Net Income For Tax Purposes and Taxable Income of $15,300. She had withheld
from her employment income EI premiums of $249 [(1.63%)($15,300)] and CPP contri-
butions of $584 [(4.95%)($15,300 - $3,500)]. Mr. Barth paid Marg’s tuition for 2017 of
$6,300. She has agreed to transfer the maximum tuition amount to her father.
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Self Study Problem Four - 6
9. Mr. Barth paid the following medical costs during the year:
For Himself $ 200
For His Wife 3,550
For Marg 720
Total $4,470
10. Because of donations in previous years, he does not qualify for the first-time donor's super
tax credit.
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Chapter 4 Self Study Problems Volume 1 Page 62
Self Study Problem Four - 7
5. Mr. Kern donated $500 to the Canadian Cancer Society in 2016, but forgot to claim the
donation in 2016. He has found the donation receipt in his files. He is not eligible for the
first-time donor's super credit.
6. Mr. Kern lives with his wife and 23 year old son, David. His wife has Net Income For Tax
Purposes of $3,660. David is a full time student at university for 8 months of the year and
has Net Income For Tax Purposes of $5,780. Mr. Kern has paid David’s tuition for 2017 of
$6,700, and in return, David has agreed to transfer the maximum tuition amount to his
father.
7. Mr. Kern paid the following medical costs:
For Himself $2,100
For His Wife 770
For David 3,260
Total $6,130
Required: Calculate, for the 2017 taxation year, Mr. Kern’s minimum Taxable Income and
federal Tax Payable (Refund). Indicate any carry forwards available to him and his depend-
ants and the carry forward provisions. Ignore all GST considerations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 4 Self Study Problems Volume 1 Page 63
Self Study Problem Four - 7
3. Mr. Strong’s employer encourages its employees to take university courses by paying their
tuition fees. During 8 months of 2017, Mr. Strong was in part time attendance for two
university courses. The first course was devoted to 16th century liturgical chants and the
second was a course in spoken French. The tuition for each course was $600, with the
employer paying the full amount. The employer was particularly interested in the French
course as it would allow Mr. Strong to deal more effectively with francophone clients.
4. Mr. Strong incurred $4,600 in travel costs during 2017, all of which were reimbursed by
his employer.
5. When Mr. Strong began working for his employer in the previous year, he put his house on
the market. Due to a major rezoning issue, his house did not sell until 2017. Mr. Strong
purchased a heritage home that was 50 kilometers closer to his employer’s main office. To
assist with the relocation, on April 1, 2017, his employer provided an interest free loan of
$150,000. It must be repaid in full on April 1, 2020. Assume that during the first two quar-
ters of 2017 the prescribed rate was 2 percent and that during the last two quarters it
declined to 1 percent.
6. During 2017, Mr. Strong pays for the following eligible medical costs:
For Himself $1,250
For His Spouse 2,300
For His Two Children 850
For His Mother 1,960
Total Medical Costs $6,360
7. During 2017, Mr. Strong donates cash of $1,200 to his church. He also donates carpenter
services with a market value of $1,500. He does not qualify for the first-time donor's super
tax credit.
Required:
A. Determine Mr. Strong’s minimum Net Income For Tax Purposes for the 2017 taxation
year.
B. Determine Mr. Strong’s minimum Taxable Income for the 2017 taxation year.
C. Based on your answer in Part B, determine Mr. Strong’s federal Tax Payable for the 2017
taxation year. Ignore any amounts that might have been withheld by his employer or paid
in instalments.
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Chapter 4 Self Study Problems Volume 1 Page 64
Self Study Problem Four - 8
Other Information
1. Mr. Bosworth’s employer provides him with an automobile that is leased for $925 per
month, including a $75 per month payment for insurance. During 2017, the automobile
is driven a total of 62,000 kilometers, of which 41,000 involve employment related activi-
ties. Mr. Bosworth paid all of the $10,300 in 2017 operating costs and is not reimbursed
by his employer. The automobile was used by Mr. Bosworth throughout 2017.
2. In 2016, Mr. Bosworth received options to acquire 5,000 shares of his employer’s
common stock at a price of $9.75 per share. This was the market price of the shares at the
time the options were granted. On July 1, 2017, when the shares were trading at $12.35,
Mr. Bosworth exercises all of these options. He is still holding the acquired shares at the
end of 2017.
3. Mr. Bosworth is not reimbursed for advertising, entertainment or travel costs. In addition
to the operating costs for his vehicle, he paid for the following employment related costs:
Meals While Traveling $ 6,420
Hotels 10,350
Advertising 12,400
Entertainment 6,500
Total $35,670
4. Mr. Bosworth’s employer provides all employees with a luxury weekend at a local resort.
The cost of the gift is $2,500 for each employee.
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Chapter 4 Self Study Problems Volume 1 Page 65
Self Study Problem Four - 8
5. Mr. Bosworth pays for the following medical expenses during 2017:
For Himself $ 1,200
For His Spouse 2,250
For His Son 2,340
For His Daughter (including $9,000 in attendant care) 11,250
Total $17,040
6. Because of his ongoing interest in Elizabethan drama, Mr. Bosworth enrolls in a course on
Shakespeare’s tragedies at the local university. His tuition was $1,670 and his required
textbooks cost $165. The duration of the course was 4 months.
7. Mr. Bosworth is not eligible for the first-time donor's super credit.
Required:
A. Determine Mr. Bosworth’s minimum Net Income For Tax Purposes for the 2017 taxation
year.
B. Determine Mr. Bosworth’s minimum Taxable Income for the 2017 taxation year.
C. Based on your answer in Part B, determine Mr. Bosworth’s federal Tax Payable for the
2017 taxation year. Ignore any amounts that might have been withheld by his employer,
any amount paid in instalments and any considerations related to HST, GST, or PST.
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Chapter 4 Supplementary Self Study (SSS) Problems Volume 1 Page 66
SSS Problem Four - 1
1. Jack Brown has Net Income For Tax Purposes of $97,000, all of which is employment
income. His employer has withheld and remitted the required EI and CPP amounts. He is
married to Janice Brown whose Net Income For Tax Purposes is $7,250. They have three
children aged 7, 9, and 11. All of the children are in good health. None of them have
income of their own.
2. Marion Barkin was divorced from her husband several years ago. She has custody of their
three children, ages 9, 12, and 15. The children are all in good health. Her Net Income
For Tax Purposes consists of spousal support payments totaling $48,000 per year. Only
the 15 year old child had any income for the year. The 15 year old had Net Income For Tax
Purposes of $9,500 during the year.
3. John Appleton has Net Income For Tax Purposes of $86,500, none of which is employ-
ment income or income from self-employment. His spouse has Net Income For Tax
Purposes of $5,650. Their daughter is 15 years old, lives with them, and has Net Income
For Tax Purposes of $1,550. Their son is 22 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.
4. Sarah Pale is 67 years old and has Net Income For Tax Purposes of $52,500. This total is
made up of OAS payments and pension income from her former employer. Her husband
is 62 years old and has Net Income For Tax Purposes of $4,840. Ignore the possibility of
splitting Sarah's pension income.
5. Martin Land has Net Income For Tax Purposes of $126,420, all of which is rental income.
His wife has Net Income For Tax Purposes of $1,200. They have three children, ages 14,
16, and 19. All of these children are in good health and continue to live at home. The 19
year old child has Net Income For Tax Purposes of $7,240. During the current year, Mr.
Land pays the following medical expenses:
Himself $ 2,450
His Spouse 3,240
14 Year Old Child 2,620
16 Year Old Child 1,450
19 Year Old Child 4,560
Total $14,320
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Chapter 4 Supplementary Self Study (SSS) Problems Volume 1 Page 67
SSS Problem Four - 2
Case 1 Bob Barnes is 52 years old, has employment income of $75,000, and makes
contributions of $4,500 to registered charities. Bob qualifies for the first-time donor's
super credit. He is not married and has no dependants.
Case 2 Bob Barnes is 58 years old and has employment income of $75,000. His
common-law partner is 53 years old and has income of $6,480. They have an adopted
son who is 19 years old and lives at home. Bob and his partner have medical expenses
of $4,300. Medical expenses for the son total $5,600. The son has Net Income For
Tax Purposes of $4,200.
Case 3 Bob Barnes is 58 years old and has income from investments of $95,000. He
is divorced and has been awarded custody of his 21 year disabled son. The son quali-
fies for the disability tax credit. He has Net Income For Tax Purposes of $8,000, and is
dependent on his father for support.
Case 4 Bob and his wife Gabrielle are both 67 years of age. Gabrielle is sufficiently
disabled that she qualifies for the disability tax credit. The components of the income
earned by Bob and Gabrielle are as follows:
Bob Gabrielle
Interest $ 750 $ 750
Canada Pension Plan Benefits 8,600 Nil
Old Age Security Benefits 7,000 7,000
Income From Registered Pension Plan 34,500 1,450
Total Net Income $50,850 $9,200
Case 5 Bob Barnes is 46 years old and has employment income of $162,000. His
wife Gabrielle is 48 years old and has Net Income For Tax Purposes of $8,400. They
have a 20 year old son who lives at home. He is dependent because of a physical infir-
mity. However, he is able to attend university on a full time basis for 8 months during
2017. Bob pays his tuition fees of $7,900, as well as $725 for the textbooks that he
requires in his program. The son has Net Income For Tax Purposes of $10,000. He
agrees to transfer the maximum tuition amount to his father.
Case 6 Bob Barnes is 43 years old and has rental income of $95,000. His wife died last
year. He has two children. Summer is 12, is in good health, and has no income during the
year. His son, Martin is 15 and is physically infirm, but not sufficiently to qualify for the
disability tax credit. He has income from part time work designing websites of $7,250.
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Chapter 4 Supplementary Self Study (SSS) Problems Volume 1 Page 68
SSS Problem Four - 3
Case 7 Bob Barnes is 45 years old and has employment income of $75,000. His
wife Gabrielle is 37 years old and has Net Income For Tax Purposes of $4,600. They
have no children. However, they provide in home care for Gabrielle's father who is 62
years old, dependent because of a physical infirmity and has no income of his own.
His disability is not severe enough to qualify for the disability tax credit. Also living
with them is Bob's 67 year old father. He is in good physical and mental health and has
Net Income For Tax Purposes of $18,300.
Required: In each Case, calculate Bob Barnes' minimum federal Tax Payable for 2017.
Indicate any carry forwards available to him and his dependants and the carry forward provi-
sions. Ignore any amounts Bob might have had withheld or paid in instalments.
Ms. Bradmore is divorced and has custody of her 12 year old son and 10 year old daughter,
both of whom live with her. Her daughter, who is legally blind, has no income of her own
during 2017. Her son has summer job employment income of $2,350.
Other Information
1. Ms. Bradmore’s employer provides her with an automobile that has a cost of $47,460,
including applicable HST. During 2017, the automobile is driven 53,000 kilometres, of
which 48,000 were for employment related activities. Ms. Bradmore pays all of the oper-
ating costs for the car. For 2017, these totaled $7,950, with no reimbursement from her
employer. The automobile was used by Ms. Bradmore’s throughout 2017.
2. Because of the high level of her salary, Ms. Bradmore is required to pay her own adver-
tising and travel costs. In addition to the operating costs for her vehicle, she paid for the
following employment related costs:
Meals While Travelling $ 4,500
Hotels 9,000
Advertising 11,000
Entertainment 5,000
Total $29,500
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Chapter 4 Supplementary Self Study (SSS) Problems Volume 1 Page 69
SSS Problem Four - 3
3. Ms. Bradmore received options to acquire 2,500 shares of her employer’s common stock
2 years ago. The option price was $50 per share, the market value of the common shares
at the time the options were granted. During July, 2017, after the market price of the
shares reaches $72 per share, Ms. Bradmore exercises all of these options. She is still
holding the shares at the end of the year.
4. Her employer provides all employees with gifts on their birthday. For 2017, Angelina
received a $250 certificate for a massage and facial at a local spa along with $200 in cash.
5. Ms. Bradmore contributes $5,000 to the Save The Children Fund, a registered Canadian
charity. As Ms. Bradmore makes some amount of charitable contributions each year, she
is not eligible for the first-time donor's super credit.
6. Ms. Bradmore pays for the following medical expenses during 2017:
For Herself $ 4,800
For Her Son 3,200
For Her Daughter (All Attendant Care) 2,400
Total $10,400
7. In order to improve her ability to deal with people, Ms. Bradmore enrolled in a part time,
human resources program at a local university. Her 2017 tuition totalled $1,890 and she
was required to purchase textbooks with a cost of $220. The duration of the course was 4
months.
Required:
A. Determine Ms. Bradmore’s minimum Net Income For Tax Purposes for the 2017 taxation
year.
B. Determine Ms. Bradmore’s minimum Taxable Income for the 2017 taxation year.
C. Determine Ms. Bradmore’s federal Tax Payable for the 2017 taxation year. Ignore any
amounts that might have been withheld by her employer or paid in instalments.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 70
SSS Solution Four - 1
Note The eligible dependant credit can be taken for any child. It should not be
claimed for the 15 year old as the amount of the credit would be reduced due to his
income.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 71
SSS Solution Four - 1
Note that, because her income is below the income threshold, there will be no claw-
back of Ms. Pale’s OAS receipts.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 72
SSS Solution Four - 2
Note As none of his income is taxed at 33 percent, this rate will not be applicable to
the calculation of the charitable donations tax credit.
Case 2
The solution for this Case is as follows:
Tax On First $45,916 $ 6,887
Tax On Next $29,084 ($75,000 - $45,916) At 20.5 Percent 5,962
Federal Tax Before Credits $12,849
Basic Personal Amount ($11,635)
Spousal ($11,635 - $6,480) ( 5,155)
EI ( 836)
CPP ( 2,564)
Canada Employment ( 1,178)
Medical Expenses (See Note) ( 7,524)
Credit Base ($28,892)
Rate 15% ( 4,334)
Federal Tax Payable $ 8,515
Note The base for the medical expense tax credit would be calculated as follows:
Bob And His Partner $4,300
Reduced By The Lesser Of:
• [(3%)($75,000)] = $2,250
• 2017 Threshold Amount = $2,268 ( 2,250)
Son’s Medical Expenses $5,600
Reduced By The Lesser Of:
• [(3%)($4,200)] = $126
• $2,268 ( 126) 5,474
Total Credit Base $7,524
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 73
SSS Solution Four - 2
Case 3
The solution for this Case can be completed as follows:
Tax On First $91,831 $16,300
Tax On Next $3,169 ($95,000 - $91,831) At 26 Percent 824
Federal Tax Before Credits $17,124
Basic Personal Amount ($11,635)
Eligible Dependant Including Infirm Amount
($11,635 + $2,150 - $8,000) ( 5,785)
Additional Caregiver Amount (Note) ( 1,098)
Transfer Of Son's Disability ( 8,113)
Credit Base ($26,631)
Rate 15% ( 3,995)
Federal Tax Payable $13,129
Note As the income adjusted eligible dependant amount is less than the regular Canada
caregiver amount, there is an additional amount of $1,098 ($6,883 - $5,785).
Case 4
The solution for this Case is as follows:
Tax On First $45,916 $6,887
Tax On Next $4,934 ($50,850 - $45,916) At 20.5 Percent 1,011
Federal Tax Before Credits $7,898
Basic Personal Amount ($11,635)
Spousal Including Infirm Amount
($11,635 + $2,150 - $9,200) ( 4,585)
Additional Caregiver Amount (Note) ( 2,298)
Age [$7,225 - (15%)($50,850 - $36,430)] ( 5,062)
Pension ( 2,000)
Spouse’s Age ( 7,225)
Spouse’s Disability ( 8,113)
Spouse’s Pension (= RPP Payments) ( 1,450)
Credit Base ($42,368)
Rate 15% ( 6,355)
Federal Tax Payable $ 1,543
Note As the income adjusted spousal amount is less than the regular Canada caregiver
amount, there is an additional amount of $2,298 ($6,883 - $4,585).
The Old Age Security and Canada Pension Plan receipts are not eligible for the pension
income credit, only the Registered Pension Plan income is eligible. As Gabrielle’s income is
below the income threshold, there is no reduction in her age credit.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 74
SSS Solution Four - 2
Case 5
The solution for this Case can be completed as follows:
Tax On First $142,353 $29,436
Tax On Next $19,647 ($162,000 - $142,353) At 29 Percent 5,698
Federal Tax Before Credits $35,134
Basic Personal Amount ($11,635)
Spousal ($11,635 - $8,400) ( 3,235)
Canada Caregiver - Son ( 6,883)
EI ( 836)
CPP ( 2,564)
Canada Employment ( 1,178)
Transfer From Son (Note) ( 5,000)
Credit Base ($31,331)
Rate 15% ( 4,670)
Federal Tax Payable $30,464
The son's Tax Payable is completely eliminated by his basic personal credit. He can
transfer a maximum of $5,000 of his tuition amount to his father. The remaining
$1,900 can be carried forward indefinitely, but must be used by the son.
Case 6
The solution for this Case is as follows:
Tax On First $91,831 $16,300
Tax On Next $3,169 ($95,000 - $91,831) At 26 Percent 824
Federal Tax Before Credits $17,124
Basic Personal Amount ($11,635)
Eligible Dependant - Summer ( 11,635)
Canada Caregiver For Child ( 2,150)
Credit Base ($25,420)
Rate 15% ( 3,813)
Federal Tax Payable $13,311
Note Bob has claimed Summer as his eligible dependant because her income is less
than Martin's. This means that there is no erosion of the base for the eligible dependant
credit.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 75
SSS Solution Four - 2
Case 7
The solution for this Case can be completed as follows:
Tax On First $45,916 $ 6,887
Tax On Next $29,084 ($75,000 - $45,916) At 20.5 Percent 5,962
Federal Tax Before Credits $12,849
Basic Personal Amount ($11,635)
Spousal ($11,635 - $4,600) ( 7,035)
Canada Caregiver - Gabrielle's Father ( 6,883)
Canada Caregiver - Bob's Father Nil
EI ( 836)
CPP ( 2,564)
Canada Employment ( 1,178)
Credit Base ($30,131)
Rate 15% ( 4,520)
Federal Tax Payable $ 8,329
Because he is infirm, Gabrielle's father is eligible for the Canada caregiver credit.
However, as Bob's father is in good health, he is not eligible for this credit.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 76
SSS Solution Four - 3
Note 1 Only the $16,000 [(1/2)($32,000)] of the bonus that was received during the
year is included in her income for the current year.
All of these costs can be deducted under ITA 8(1)(f). However, the total deduction is
limited to her commission income which is only $12,000. Alternatively, the car oper-
ating costs, meals, and hotels, can be deducted under ITA 8(1)(h) and (h.1). As shown
above, this total would be $18,450. As Angelina cannot simultaneously use ITA 8(1)(f)
and the combination of ITA 8(1)(h) and (h.1), she will minimize her Net Income For
Tax Purposes by deducting $18,450 under the latter provisions.
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 77
SSS Solution Four - 3
Part B
Ms. Bradmore’s minimum Taxable Income would be calculated as follows:
Net Income For Tax Purposes $310,557
Stock Option Deduction [(1/2)($55,000)] ( 27,500)
Taxable Income $283,057
Part C
Based on the Taxable Income calculated in Part B, Ms. Bradmore’s federal Tax Payable would
be calculated as follows:
Tax On First $202,800 $46,966
Tax On Next $80,257 ($283,057 - $202,800) At 33 Percent 26,485
Federal Tax Before Credits $73,451
Basic Personal Amount ($11,635)
Eligible Dependant
($11,635 + $2,150) (Note 5) ( 13,785)
Transfer Of Daughter’s Disability ( 8,113)
Disability Supplement (Note 6) ( 4,733)
EI Premiums ( 836)
CPP Contributions ( 2,564)
Canada Employment ( 1,178)
Tuition ( 1,890)
Medical Expenses (Note 7) ( 8,132)
Credit Base ($52,866)
Rate 15% ( 7,930)
Charitable Donations (Note 8) ( 2,010)
Federal Tax Payable $63,511
Note 5 Ms. Bradmore will designate her daughter as her eligible dependant
because if she designated her son, the base for credit would be eroded by his income.
As the daughter is infirm, she is eligible for the extra infirm amount of $2,150. This
latter point, however, is not a factor in choosing her as the eligible dependant. If she
had not been designated as the eligible dependant, the same $2,150 would have been
available as the Canada caregiver for an infirm minor child.
Note 6 Since the attendant care costs claimed as medical expenses are less than the
threshold, there is no reduction in the disability supplement.
Note 7 The base for Ms. Bradmore’s medical expense credit can be calculated as
follows:
Eligible Medical Expenses $10,400
Lesser Of:
• [(3%)($310,557)] = $9,317
• 2017 Threshold Amount = $2,268 ( 2,268)
Allowable Medical Costs $ 8,132
Note 8 The charitable donations credit for the total donations of $6,200 ($5,000 +
$1,200) would be calculated as follows:
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Chapter 4 Supplementary Self Study (SSS) Solutions Volume 1 Page 78
SSS Solution Four - 3
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Self Study Problems Volume 1 Page 79
Self Study Problem Five - 1
During 2017, the cost of additions to Class 10 amounted to $374,000, while the proceeds
from dispositions in this class totalled $234,000. In no case did the proceeds of disposition
exceed the capital cost of the assets retired and there were still assets in Class 10 on December
31, 2017.
There were no acquisitions or dispositions in either Class 1 or Class 8 during 2017.
Required:
A. Calculate the maximum CCA that could be taken by Northcote Ltd. for the taxation year
ending December 31, 2017. Your answer should include the maximum that can be
deducted for each CCA class.
B. As Northcote’s tax advisor, indicate how much CCA you would advise the Company to
take for the 2017 taxation year, and the specific classes from which it should be deducted.
Provide a brief explanation of the reasons for your recommendation. In providing this
advice, do not take into consideration the possibility that losses can be carried either
forward or back.
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Chapter 5 Self Study Problems Volume 1 Page 80
Self Study Problem Five - 2
Other Information:
1. During the year ending December 31, 2017, Mr. Marker’s business acquired additional
Class 8 equipment at a total cost of $52,000. This new equipment replaced equipment
that had an original cost of $75,000, which was sold during the year for total proceeds of
$35,000.
2. During the year ending December 31, 2017, Mr. Marker acquired a used automobile to
be used in his business for a total cost of $8,000. Also during this year, Mr. Marker sold
one of the trucks that was used in his business for proceeds of $25,000. This truck, which
had an original capital cost of $20,000, had achieved a high value as the result of its extra
features, which were no longer available on later models.
3. As the result of a decision to lease its premises in future years, Mr. Marker sold his building
for total proceeds of $260,000. Of the $260,000 received, $150,000 is for the land on
which the building is situated. The adjusted cost base of the land was equal to the
$150,000 proceeds of disposition.
Required: Calculate the total effect of all of the preceding information on Mr. Marker’s Net
Income For Tax Purposes for the year ending December 31, 2017. Your answer should include
the maximum CCA that can be deducted by Mr. Marker for each class. In addition, calculate
the January 1, 2018 UCC balance for each Class.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Self Study Problems Volume 1 Page 81
Self Study Problem Five - 3
Required: For each of the fiscal years 2012 through 2017, calculate CCA, recapture, or
terminal loss for Golden Dragon’s fleet of cars. In addition, indicate the January 1 UCC for
each of the years 2013 through 2018.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Self Study Problems Volume 1 Page 82
Self Study Problem Five - 4
Acquisitions During the year ending December 31, 2017, the following acquisitions of
assets were made.
Class 1 - Building (Note 1) $258,000
Class 8 - Office Furniture And Equipment 72,000
Class 10 - Vehicles (Note 2) 63,000
Class 13 - Leasehold Improvements 58,000
Class 50 - Computer Hardware 17,000
Note 1 The $423,000 total cost of the Building was allocated $258,000 to the building
itself, and $165,000 to the land. The Building is new and will be used 100 percent for
non-residential activity, none of which involves manufacturing and processing activity. It
will be allocated to a separate Class 1.
Note 2 The addition to Class 10 was made up of three passenger vehicles, with a cost of
$21,000 each.
Other Information:
1. The Company leases its main office building for $47,000 per year. The lease was negoti-
ated on January 1, 2015 and had an original term of eight years. There are two renewal
options on the lease, each for a period of two years. The Company made $125,000 of
leasehold improvements immediately after signing the lease. No further improvements
were made until the current year.
2. During the year ending December 31, 2017, some of the Company’s office furniture and
equipment was destroyed in a small fire. At the time of the accident, the fair market value
of the destroyed property was $19,000. However, proceeds from the Company’s insur-
ance policy amounted to only $11,000. The original cost of the destroyed property was
$18,000.
3. Maximum CCA has always been taken by Burton Steel.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Self Study Problems Volume 1 Page 83
Self Study Problem Five - 5
Required: Calculate the maximum CCA that can be taken by Burton Steel Ltd. on each class
of assets for the year ending December 31, 2017, and calculate the UCC for each class of
assets on January 1, 2018. In addition, determine the amount of any capital gain, recapture,
or terminal loss that arises. Ignore GST/HST/PST considerations.
Case One During 2017, Traxit acquires two businesses. With the first acquisition, a
payment is made for goodwill of $56,000. With the second, a payment of $124,000 is
made for goodwill. Both businesses are absorbed into the other operations of Traxit.
During 2018, Traxit sells a portion of its business and, as a consequence, receives a
payment for goodwill of $97,000.
Case Two During 2017, Traxit acquires two businesses. With the first acquisition, a
payment is made for goodwill of $34,000. With the second, a payment of $47,000 is
made for goodwill. Both businesses are absorbed into the other operations of Traxit.
During 2018, Traxit sells a portion of its business and, as a consequence, receives a
payment for goodwill of $85,000.
Required: Determine the tax consequences for the years 2017 and 2018 in each of these
two cases. Your answer should include the January 1, 2019 UCC balance for Class 14.1.
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Chapter 5 Self Study Problems Volume 1 Page 84
Self Study Problem Five - 6
Required:
A. Calculate the maximum CCA write-off that could be taken by Kars Ltd. for the taxation
year ending December 31, 2017.
B. As Kars’ tax advisor, indicate how much CCA you would advise them to take for the 2017
taxation year and the specific classes from which it should be deducted. Provide a brief
explanation of the reason for your recommendation. In providing this advice, do not take
into consideration the possibility that losses can be carried either back or forward.
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Chapter 5 Self Study Problems Volume 1 Page 85
Self Study Problem Five - 7
Required:
A. Calculate the maximum total CCA that can be deducted for 2017. Your answer should
include the maximum that can be deducted for each CCA class.
B. Determine the capital cost for the goodwill in Class 14.1 on January 1, 2017.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Self Study Problems Volume 1 Page 86
Self Study Problem Five - 8
Other Information:
1. The Company leases a building for $27,000 per year that houses a portion of its manufac-
turing operations. The lease was negotiated on January 1, 2014 and has an original term of
eight years. There are two renewal options on the lease. The term for each of these
options is four years. The Company made $78,000 of leasehold improvements immedi-
ately after signing the lease. No further improvements were made until the current year.
2. On February 24, 2015, one of the Company’s cars was totally destroyed in an accident. At
the time of the accident, the fair market value of the car was $12,300. The proceeds from
the Company’s insurance policy amounted to only $8,000. The original cost of the car
was $17,000.
3. The Atlantic Manufacturing Company was organized in 2012 and has no balance in its
cumulative eligible capital account on December 31, 2016. During March, 2017, the
Company granted a manufacturing licence for one of its products to a company in
southern Ontario. This licensee paid $87,000 for the right to manufacture this product for
an unlimited period of time.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Self Study Problems Volume 1 Page 87
Self Study Problem Five - 8
Required: Calculate the maximum 2017 CCA that can be taken on each class of assets, the
January 1, 2018 UCC balance for each class, and any other 2017 income inclusions or deduc-
tions resulting from the information provided in the problem.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 5 Supplementary Self Study (SSS) Problems Volume 1 Page 88
SSS Problem Five - 1
Required: For each of the taxation years 2014 through 2017, calculate the maximum avail-
able CCA deduction. In addition, determine the amount of any capital gain, recapture, or
terminal loss that arises on any of the transactions that occurred during these years. Ignore
GST/HST/PST considerations.
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Chapter 5 Supplementary Self Study (SSS) Problems Volume 1 Page 89
SSS Problem Five - 2
Required:
A. Calculate the maximum CCA that could be taken by Brownlee Company for the taxation
year ending December 31, 2017. Your answer should include the maximum that can be
deducted for each CCA class.
B. As Brownlee’s tax advisor, indicate how much CCA you would advise them to take for the
2017 taxation year and the specific classes from which it should be deducted. Provide a
brief explanation of the reason for your recommendation. In providing this advice, do not
take into consideration the possibility that losses can be carried either back or forward.
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Chapter 5 Supplementary Self Study (SSS) Solutions Volume 1 Page 90
SSS Solution Five - 1
As the business was established on November 1, 2014, its operations were carried out for 61
days in 2014, and only a proportionate share of the annual CCA charge may be taken. We
would call your attention to the fact that it is the length of the taxation year, not the period of
ownership of the assets, that establishes the fraction of the year for which CCA is to be
recorded.
2015 Solution
The required calculations are as follows:
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Chapter 5 Supplementary Self Study (SSS) Solutions Volume 1 Page 91
SSS Solution Five - 1
2016 Solution
With respect to Class 10 cars, the required calculations are as follows:
With respect to the two S Class Mercedes, each would have to be allocated to a separate Class
10.1. Further, the addition to each Class 10.1 would be limited to $30,000. The required
calculations would be as follows:
Mercedes 1 Mercedes 2
Class 10.1 Class 10.1
Acquisitions $30,000 $30,000
One-Half Net Additions ( 15,000) ( 15,000)
CCA Base $15,000 $15,000
CCA [(30%)($15,000)] ( 4,500) ( 4,500)
One-Half Net Additions 15,000 15,000
UCC For January 1, 2017 $25,500 $25,500
2017 Solution
The required calculations for the Class 10 vehicles are as follows:
After all of the assets in Class 10 have been retired there is still a $221,339 balance in the UCC.
This results in a terminal loss that will be deducted in full from the other income of Barbara’s
Messenger Service. The terminal loss will also be deducted from the UCC balance.
With respect to the two Class 10.1 assets, no recapture or terminal losses can be recorded on
these assets. However, in the year of disposal, taxpayers are allowed to deduct one-half year
of CCA. Given the short fiscal final year, this means that on each of the Class 10.1 vehicles
there would be a CCA deduction of $943 [(1/2)(30%)($25,500)(90/365)] for a total of $1,886.
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Chapter 5 Supplementary Self Study (SSS) Solutions Volume 1 Page 92
SSS Solution Five - 2
This gives a maximum amount for CCA of $45,400 for the taxation year ($13,150 + $14,400
+$17,850).
Part B
Since the Company only has Net and Taxable Income before CCA of $23,500 and the problem
states that loss carry overs should not be considered, maximum CCA would not be deducted
as this would produce a loss. Only $23,500 in CCA should be taken in order to reduce the
Taxable Income to nil.
With respect to the classes from which it should be taken, the usual procedure is to deduct the
required amount from the classes with the lowest rates. By leaving the classes with higher
rates untouched, larger amounts of CCA can be deducted in later periods as required.
Taking this approach, the recommended CCA deductions would be as follows:
The deduction of this amount of CCA would serve to reduce Taxable Income to nil.
Note that if there were immediate plans to sell the building for more than its opening UCC, this
could affect the choice of Classes to deduct CCA from as any additional CCA taken on Class 1
would have to be added to income as recaptured CCA when the building is sold.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 93
Self Study Problem Six - 1
Required: How would the preceding information affect the calculation of Dr. Allworth’s
business income for 2017?
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Chapter 6 Self Study Problems Volume 1 Page 94
Self Study Problem Six - 2
2017 During its first year, the business had sales of delivered merchandise and
services totaling $185,000. Of this total, $65,000 had not been collected on
December 31, 2017. Olivia anticipates that $5,000 of these sales will be
uncollectible.
In addition to these sales of delivered merchandise and services, she received
$23,000 in advances for merchandise to be delivered in 2018.
Olivia purchased a large supply of landscaping materials from the trustee of a bank-
rupt landscaping business at a very good price. Since she is unlikely to use them in the
next few years, she has arranged to sell these materials for $50,000. These materials
have a cost of $40,000, resulting in a total gross profit of $10,000. Because of the size
of this sale, she has agreed to accept a down payment of $$30,000, followed by two
annual instalments of $10,000. The instalments are due on December 31, 2018 and
December 31, 2019.
2018 During 2018, $5,500 of accounts receivable had to be written off. All of the
merchandise for which advances had been received was delivered, and the $10,000
instalment on the large project was received.
Sales of delivered merchandise and services totaled $240,000. Of this total, $50,000
was still on account at December 31, 2018. Olivia anticipates that $3,500 of this
amount will be uncollectible.
In addition to the 2018 sales of delivered merchandise and services, she receives
$13,400 in advances for merchandise to be delivered in 2019.
Required: How would the preceding information affect the calculation of Olivia Smith’s
business income for the 2017 and 2018 taxation years? Include the full details of your calcula-
tions, not just the net result for each year.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 95
Self Study Problem Six - 3
Required:
A. Can Ms. Hart deduct work space in the home costs? Briefly explain your conclusion.
B. Compute the minimum net business income or loss that Veronica must report in her 2017
personal income tax return.
C. Briefly describe any issues that should be discussed with Veronica concerning the work
space in her home costs and business costs.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 96
Self Study Problem Six - 4
Required:
A. Calculate the maximum amount of expenses that would be deductible by Ms. Wise for
2017 assuming:
i. She is an employee of a manufacturing company. Her employment income of
$137,000 includes $15,000 in commissions.
ii. She represents a group of manufacturers with a diversified product line. During 2017,
she earned total commissions of $137,000.
In making these calculations, ignore GST and PST considerations.
B. Comment on the desirability of taking CCA on Ms. Wise’s personal residence.
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Chapter 6 Self Study Problems Volume 1 Page 97
Self Study Problem Six - 5
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 98
Self Study Problem Six - 6
Required: Advise Jerry as to which of the alternatives he should accept. Base your decision
on the undiscounted cash flows associated with the two alternatives.
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Chapter 6 Self Study Problems Volume 1 Page 99
Self Study Problem Six - 7
On December 31, the end of her first year of operation, the inventory on hand amounts to
6,000 units. It is estimated that these units have a replacement cost of $51 per unit and a net
realizable value of $58 per unit.
Required: Calculate the various closing inventory values that could be used to determine
business income for tax purposes. Your answer should indicate the valuation method being
used, as well as the resulting value.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 100
Self Study Problem Six - 8
Required: Calculate the minimum net business income for Yossarian Tools that will be
included in Mr. Yossarian’s tax return for the year ending December 31, 2017. Indicate why
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 101
Self Study Problem Six - 8
you have not included any of the preceding items in your calculations. Ignore GST and PST
considerations.
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Chapter 6 Self Study Problems Volume 1 Page 102
Self Study Problem Six - 9
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 103
Self Study Problem Six - 9
There are no refundable deposits associated with the lease and the lease payments do not
include any amounts for insurance or licensing. All of these amounts are expensed in the
determination of the Company’s accounting income. The manufacturer’s suggested list
price for the car is $128,000. Mike has use of the car throughout the year. He drives it a
total of 92,000 kilometers, of which 38,000 kilometers were employment related.
Required: For Barnes Industries Ltd.’s 2017 taxation year, determine Net Income For Tax
Purposes. Indicate why you have not included any of the preceding items in your calcula-
tions. Ignore any GST/HST implications.
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Chapter 6 Self Study Problems Volume 1 Page 104
Self Study Problem Six - 10
1. The income tax expense was $55,000, including $7,000 in future income tax expense.
2. The Company spent $95,000 on landscaping for its main office building. This amount was
recorded as an asset in the accounting records and, because the work has an unlimited
life, no amortization was recorded on this asset.
3. The Company spent $17,000 on advertisements in Fortune Magazine, a U.S. based publi-
cation. Approximately 90 percent of its non-advertising content is original editorial
content. The advertisements were designed to promote sales in Canadian cities located
on the U.S. border.
4. The amortization expense was $623,000. At the beginning of 2017, the Company has a
balance in Class 1 of $1,000,000, representing the UCC of its headquarters buildings. The
Company has owned this building since 2001.
In general, other buildings are leased. However, in February, 2017, a policy change
results in the acquisition of a new store building at a cost of $650,000, of which $125,000
is allocated to land. This building is used 100 percent for non-residential purposes and is
allocated to a separate Class 1. None of the usage is for manufacturing and processing .
The January 1, 2017 balance in Class 8 was $4,200,000. During 2017, there were addi-
tions to this class in the total amount of $700,000. In addition, Class 8 assets with a cost of
$400,000 were sold for proceeds of $550,000. The net book value of these assets in the
accounting records was $325,000, and the resulting gain of $225,000 was included in the
accounting income for the year. There are numerous assets remaining in the class at the
end of the 2017 taxation year.
At the beginning of 2017, the UCC in Class 10 was $800,000, reflecting the Company’s
fleet of cars. As the Company is changing to a policy of leasing its cars, all of these cars
were sold during the year for $687,000. The capital cost of the cars was $1,200,000, and
their net book value in the accounting records was equal to the sale proceeds of
$687,000.
5. Included in travel costs deducted in 2017 for accounting purposes was $12,000 for airline
tickets and $41,400 for business meals and entertainment.
6. The Company paid, and deducted, for accounting purposes, a $2,500 initiation fee for a
corporate membership in the Highland Golf And Country Club.
7. The Company paid, and deducted, property taxes of $15,000 on vacant land that was
being held for possible future expansion of its headquarters site.
Required: Calculate Darlington Inc.’s minimum Net Income For Tax Purposes for the 2017
taxation year. In addition, calculate the January 1, 2018 UCC balances for each CCA class.
Indicate why you have excluded some items from your calculations.
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Chapter 6 Self Study Problems Volume 1 Page 105
Self Study Problem Six - 11
Part I The three partners have sought your advice on a number of issues related to the tax
procedures to be used by their business. Provide the requested advice on each of the
following issues:
A. Explain to the partners how business income from partnerships is taxed in Canada.
B. The partners have not picked a partnership year end and would like to know what options
they have.
C. Designer gowns, for which there are no production economies of scale, are designed and
made by private seamstresses who work in their own homes. Montpetit supplies the fabric
and accessories, and pays a previously agreed fixed amount upon satisfactory completion
of each gown. The partners are uncertain as to the need for source deductions (income
tax, EI and CPP contributions) on these amounts.
Part II The partners would like you to review the following transactions that occurred
during their first fiscal year of business ending on December 31, 2017. Advise the partners on
the taxability of income amounts in the calculation of net business income for the year. Simi-
larly, for expenditures, provide advice on the specific deductions (with amounts) that can be
claimed.
A. Legal fees of $2,400 were paid for the drafting of a partnership agreement.
B. Five industrial sewing machines were acquired at the beginning of the year at a cost of
$2,500 each. Sewing accessories (thread, needles, scissors, etc.) were also acquired for a
total of $8,500.
C. Each partner contributed $10,000 to get the business off the ground. On July 1, 2017,
each partner loaned the partnership $15,000. Interest of 4 percent per year on the loans
was paid by the partnership for the last six months of the year. In addition to the interest,
the partners are planning to deduct the $10,000 payments on their personal income tax
returns for the current year.
D. At year-end, designer clothes with a retail price of $260,000 are held on consignment by
boutiques throughout the city. The cost of making these clothes was $50,000 in labour
and $45,000 in fabric.
E. Montpetit paid $15,000 for the exclusive right to distribute Dali sweaters for five years.
F. During 2017, payments totalling $3,250 were made to the Champs Elysee Club. Of this
amount, $1,100 was for the annual membership fee and the remaining $2,150 was for
charges in the Crepe Suzette Diner. Of the dining charges, $1,500 was spent for enter-
taining clients and the remainder was for the personal use of the three partners.
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Chapter 6 Self Study Problems Volume 1 Page 106
Self Study Problem Six - 12
On June 1, 2017, Christine bought a used car for business and personal use. The total
purchase price of the car was $18,000, financed with a $3,000 cash down-payment and a
$15,000 term loan. Her detailed records show that she uses the car 70 percent for business.
The automobile costs include:
Down Payment On Car Purchase $3,000
Gasoline And Oil 1,100
Licence And Registration 200
Insurance 800
Interest On Car Loan 700
Total Automobile Costs $5,800
On July 15, 2017, Christine purchased computer equipment for $5,000 and various applica-
tions software for $1,200. On August 1, she purchased several pieces of office furniture for
$2,000. All of these assets were acquired solely for business use.
Her revenues and other costs for the period June 1, 2017 to December 31, 2017 were as
follows:
Revenues
Collected $22,000
Billed, but not collected 4,000
Unbilled work-in-progress 1,500
Costs
Legal and business licence fees $1,000
Business meals and entertainment with clients 500
Office and computer supplies 650
Printing sub-contract fees 1,800
Required: Calculate the minimum net business income Christine would include in her
2017 personal income tax return. In preparing your solution, ignore GST/HST/PST
implications.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 107
Self Study Problem Six - 13
Required: Calculate the minimum net business income Carla would include in her 2017
personal income tax return. In preparing your solution, ignore GST and PST implications.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 108
Self Study Problem Six - 14
Required:
A. Indicate the tax effects, for both George Pentel and Molly Stone, of the disposition of the
accounts receivable and the subsequent 2017 collections and write-offs, assuming:
• that no election is made under ITA 22.
• that they make an election under ITA 22.
B. Indicate, from the point of view of each taxpayer, whether making the election would be a
desirable course of action.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 109
Self Study Problem Six - 15
During 2017, Ms. Compton makes donations to registered charities of $1,250, as well as
contributions to registered federal political parties in the amount of $350. Because Lacy
makes such contributions on a regular basis, she is not eligible for the first-time donor's super
credit.
Ms. Compton is employed as a salesperson by a large Canadian public company. For 2017,
her salary is $68,000. In addition, she earns $13,500 in commissions during the year. For the
year ending December 31, 2017, her employer withholds the following amounts from her
income:
RPP Contributions* $2,800
EI Premiums 836
CPP Contributions 2,564
Professional Association Dues 250
Payments For Personal Use Of Employer’s Car 1,800
*Ms. Compton’s employer makes a matching contribution of $2,800 to her RPP.
The car that she used during 2017 cost her employer $32,000. During 2017, it was used by
her for 11 months of the year. It was driven a total of 27,000 kilometres, of which 22,500 was
for employment related activities. During the 1 month that she did not use the car, her
employer required that she return it to the company garage.
She is required by her employer to maintain an office in her home. During 2017, this office
occupied 15 percent of the floor space in her home. The cost of the house (excluding the land)
is $335,000. Her 2017 costs for 100 percent of the floor space were as follows:
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Self Study Problems Volume 1 Page 110
Self Study Problem Six - 15
In conjunction with her sales activities, she incurred costs for meals and entertainment of
$4,350. These were not reimbursed by her employer.
In addition to her employment activities, Ms. Compton owns and manages an unincorporated
retail business. The fiscal year of the business ends on December 31 and, for 2017, the busi-
ness had accounting Net Income of $53,500. Other information related to the business is as
follows:
1. As the business is unincorporated, no taxes were deducted in calculating Net Income.
2. During 2017, the business spent $8,600 landscaping its premises. For accounting
purposes, this amount is being amortized over 10 years on a straight line basis.
3. At the beginning of 2017, Ms. Compton owned depreciable assets used in the busi-
ness with the following UCC balances:
Class 1 Class 8 Class 10
January 1, 2017 UCC $233,000 $41,500 $27,000
Required: Calculate Ms. Compton’s 2017 Net Income For Tax Purposes, her 2017 Taxable
Income, and her minimum 2017 federal Tax Payable without consideration of any income tax
withheld by her employer. Ignore GST and PST considerations.
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Chapter 6 Self Study Problems Volume 1 Page 111
Self Study Problem Six - 16
Ms. Arden’s work requires fairly extensive travel. To cover the costs of hotels and meals, her
employer provides an allowance of $1,100 per month. Her actual costs during 2017 were as
follows:
Hotels $7,700
Business Meals 6,200
Ms. Arden uses her own car for her employment related travel. It was acquired on January 1,
2017 at a cost of $37,000 two years ago. During 2017, she drove the car a total of 38,000 kilo-
meters, of which 32,500 were employment related. Her total operating costs for the year
were $6,800. To assist her with these costs, her employer provided an allowance of $600 per
month.
Ms. Arden’s employer granted her options to acquire 2,200 shares of its common shares at a
price of $4.25 per share two years ago. At the time the options were granted, the Gowan
Enterprise shares were trading at $4.00 per share. In January, 2017, Ms. Arden exercises the
options. At this time, the Gowan Enterprise shares were trading at $9.50 per share. Ms. Arden
is still holding the acquired shares on December 31, 2017.
Because of her interest in hockey, on January 1, 2017, Ms. Arden opened a retail operation to
sell hockey related merchandise. Ms. Arden invests $320,000 of her savings in this unincor-
porated business. Of this amount $272,000 was used to purchase a new store building , with
the remaining $48,000 invested in fixtures for the store.
She estimates that $78,000 of the $272,000 paid for the store represents the value of the land.
The business is called The Puck Place and, as the retail operation is only a few blocks from her
residence, Ms. Arden makes no use of her car in this business.
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Chapter 6 Self Study Problems Volume 1 Page 112
Self Study Problem Six - 16
As Ms. Arden has had no formal training as an accountant, she keeps the records for The Puck
Place on a cash basis. As at December 31, 2017, the business had accumulated total cash of
$56,500. Ms. Arden’s informal records indicate that at December 31, 2017, the business had
receivables from customers of $5,200, inventories with a cost of $18,700, and liabilities to
suppliers of $8,240. The business had no other debt obligations on this date.
During 2017, Ms. Arden paid medical expenses as follows:
Alicia $ 3,940
Maria 2,450
Helen 7,250
Jeff 1,260
Total $14,900
Required: Calculate Ms. Arden’s 2017 Net Income For Tax Purposes, her 2017 Taxable
Income, and her minimum 2017 federal Tax Payable without consideration of any income tax
withheld by his employer. Ignore GST and PST considerations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 113
SSS Problem Six - 1
Required: How would the preceding information affect the calculation of Olaf Swensen’s
business income for the 2017 and 2018 taxation years? Include the full details of your calcula-
tions, not just the net result for each year.
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Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 114
SSS Problem Six - 2
On December 31, the end of the Company ’s taxation year, the inventory on hand amounts to
950 shirts. It is estimated that these units have a replacement cost of $126 per unit and a net
realizable value of $142 per unit.
Required: Calculate the various closing inventory values that could be used to determine
business income for tax purposes. Your answer should indicate the valuation method being
used, as well as the resulting value.
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Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 115
SSS Problem Six - 3
Sales $3,000,000
Cost Of Sales ( 1,570,000)
Gross Margin $1,430,000
Other Expenses (Not Including Taxes) ( 755,000)
Operating Income Before Taxes $ 675,000
Other Income And Losses 275,000
Income Before Taxes $ 950,000
Other Information:
1. During the year, the Company spent $5,200 for landscaping its head office grounds. For
accounting purposes this was treated as a capital expenditure, but was not amortized
during the current year.
2. The Other Expenses (Not Including Taxes) account included the following amounts:
Bond Discount Amortization $ 500
Interest On Deficient Corporate Tax Instalments 1,700
Reserve For Future Inventory Declines 96,300
Interest Paid On Bonds Issued 22,000
Amortization Expense 36,500
Cost Of Advertising In Magazine Distributed Only In Jamaica 18,000
Charitable Donations 19,100
Cost Of Sponsoring Local Hockey Teams 3,200
Cost Of Advertising Circulars (One-Half Have Been Distributed) 15,000
3. The Other Income And Losses account contains the following items:
Damages Paid For Breach Of Contract $18,000
Loss From Theft 2,800
Cost Of Appraisal Of Property To Be Sold 3,800
4. Maximum CCA has been calculated to be $57,500 for the current year. The policy of the
Company is to deduct maximum CCA in each taxation year.
Required: Using the preceding information, calculate Swindex Incorporated’s Net Income
For Tax Purposes for the current year. In addition, provide reasons for any items that were
excluded from your calculations.
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Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 116
SSS Problem Six - 4
Other Information:
1. The following items were deducted (added) during the year:
Current Income Tax Expense $210,000
Future Income Tax Benefit ( 23,000)
Interest Expense
(Includes $3,500 In Discount Amortization) 22,000
Interest On Deficient Corporate Tax Instalments 1,250
Reserve For Future Inventory Declines 12,600
Amortization Expense 51,500
Charitable Donations 14,500
Cost Of Sponsoring Local Soccer Team 4,600
Loss From Employee Theft 5,200
Loss On The Sale Of Vehicles 36,200
Cost Of Appraisal Of Building To Be Sold 2,600
2. On January 1, 2017, the Company has the following UCC balances:
Class 1 (All Assets Acquired in 2005) $325,236
Class 8 226,964
Class 10 87,468
Class 13 29,322
During the year ending December 31, 2017, the Company acquired furniture and fixtures
at a cost of $262,000. Furniture and fixtures with a cost of $275,000 and a fair market
value of $189,000 were traded in on the new assets.
The balance in Class 10 reflects the Company ’s fleet of delivery vehicles. In the
accounting records, their net book value was $92,700. During the year ending December
31, 2017, all of these vehicles were sold and replaced with leased vehicles. The sale
proceeds amounted to $56,500, with the amount received for each vehicle being less
than its cost.
The Class 13 assets relate to a lease that was signed on January 1, 2013. At that time, the
cost of the improvements on the leased property was $36,400. The basic term of the lease
is 10 years and there are two 4 year renewal options.
Prior to 2017, all the computer equipment was leased. During 2017, computer equip-
ment and systems software was purchased for $20,000.
3. On December 31, 2017, the Company acquired an unincorporated business. The
purchase price included a $55,000 payment for goodwill. As the acquisition was late in
the year, none of the acquired assets were amortized for accounting purposes.
Required: Calculate Voxit Inc.’s minimum Net Income For Tax Purposes for the year ending
December 31, 2017.
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Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 117
SSS Problem Six - 5
Required:
A. Indicate the tax effects, for both Mr. Brownstone and Ms. Pilsner, of the disposition of the
accounts receivable and the subsequent 2017 collections and write-offs, assuming:
• that no election is made under ITA 22.
• that they make an election under ITA 22.
B. Indicate, from the point of view of each taxpayer, whether making the election would be a
desirable course of action.
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Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 118
SSS Problem Six - 6
Mr. Archer’s employer requires him to use his own car for traveling to clients. The car that Mr.
Archer is currently using was acquired on January 1, 2017 at a cost of $28,500. During 2017,
Mr. Archer drove the car a total of 21,000 kilometers, of which 18,500 were employment
related. The other 2,500 kilometers involved personal use. His total operating costs for the
year were $3,750. Global Inc. provided an allowance of $500 per month to reimburse him for
the use of the car.
His employment related travel did not require overnight stays and, as a consequence, he has
no hotel expenses. However, he spent $7,200 during 2017 on meals and entertainment for
clients. These amounts were fully reimbursed by his employer.
Mr. Archer’s employer granted him options to acquire 1,000 shares of the Global Inc. stock for
$12 per share a year ago. At the time the options were granted, the Global Inc. shares were
trading at $10 per share. During 2017, Mr. Archer exercises the options. At the time of exer-
cise, the Global Inc. shares were trading at $18.25 per share. He is still holding the shares at
the end of the year.
Mr. Archer has a spouse and two children. During 2017, his spouse, Jan, had Net Income For
Tax Purposes of $7,500. His 22 year old son, Ron, is dependent on Mr. Archer because he is
disabled. However, the disability is not severe enough to create a marked restriction in his
daily activities. Ron has no income during 2017. His 18 year old daughter, Mona, was in full
time attendance at a Canadian university for 8 months during 2017. While she has 2017 Net
Income For Tax Purposes of $4,750, Mr. Archer paid her tuition fees of $9,200. Mona has
agreed to transfer her tuition tax credit to Mr. Archer.
During 2017, Mr. Archer paid medical expenses as follows:
Allen $ 3,780
Jan 2,000
Ron 6,400
Mona 1,500
Total $13,680
Because of his interest in antiques, Mr. Archer opened a retail operation to sell antiques on
January 1, 2017. Mr. Archer invests $239,000 of his savings in this unincorporated business.
Of this amount $183,000 was used to purchase a new store building , with the remaining
$56,000 invested in fixtures for the store. He estimates that $42,000 of the $183,000 paid for
the store represents the value of the land. The business is called Allen’s Oldies and, as the
retail operation is only a few blocks from his residence, Mr. Archer makes no use of his car in
this business.
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Chapter 6 Supplementary Self Study (SSS) Problems Volume 1 Page 119
SSS Problem Six - 6
As Mr. Archer has had no formal training as an accountant, he keeps the records for Allen’s
Oldies on a cash basis. As at December 31, 2017, the business had accumulated total cash of
$32,800. Mr. Archer’s informal records indicate that at December 31, 2017, the business had
receivables from customers of $2,600, inventories with a cost of $12,600, and liabilities to
suppliers of $5,750. The business had no other debt obligations on this date.
Required: Calculate Mr. Archer’s 2017 Net Income For Tax Purposes, his 2017 Taxable
Income, and his minimum 2017 federal Tax Payable without consideration of any income tax
withheld by his employer. Ignore GST and PST considerations.
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Chapter 6 Supplementary Self Study (SSS) Solutions Volume 1 Page 120
SSS Solution Six - 1
2017 2018
Cash Sales ($215,000 - $85,000) $130,000
Cash Sales (Given) $145,000
Note: In order to deduct a reserve for unpaid amounts on sales that are not of land, some
part of the proceeds must be due more than two years after the date of the related sale. In
this case, the proceeds are due 4 months after the sale and, as a consequence, no reserve
for unpaid amounts can be deducted.
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Chapter 6 Supplementary Self Study (SSS) Solutions Volume 1 Page 121
SSS Solution Six - 2
While it is not an acceptable practice under GAAP, the CRA will accept the use of market
values, without regard to their relationship to cost.
Cost Determination
In the determination of cost, taxpayers are permitted to use specific identification (this would
not appear to be practical here), a First In, First Out (FIFO) assumption, or Average Cost.
Using the First In, First Out method, the appropriate value for the ending inventory would be
determined as follows:
Based on average cost, the ending inventory value would be calculated as follows:
For accounting purposes, only the last two values would be acceptable.
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SSS Solution Six - 3
Note 1 Only those reserves that are specified in the Income Tax Act can be deducted
for tax purposes. Reserve for inventory declines is not listed.
Note 3 While the problem states that this item was deducted in the calculation of
accounting income, this would not be in compliance with generally accepted
accounting principles. Generally accepted accounting principles would require that
the appraisal costs on the property to be sold be added to the cost of the relevant prop-
erty. Regardless of the treatment accorded to this item in the accounting records of
Swindex, it is clear that it could not be deducted for tax purposes. These costs will be
added to the adjusted cost base of the property and serve to reduce any gain (increase
any loss) resulting from the sale of the property.
Other Items Further explanation related to the items not included in the preceding calcula-
tion of Net Income For Tax Purposes is as follows:
Bond Interest The interest would be deductible as the bonds are a liability of the
business.
Loss From Theft Losses of this type, unless they result from the activity of senior
officers, are considered to be deductible as a normal cost of doing business.
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SSS Solution Six - 4
Note 3 Generally accepted accounting principles would require that the appraisal
costs on the property to be sold be added to the cost of the relevant property. Regard-
less of the treatment accorded to this item in the accounting records of Voxit, it is clear
that it could not be deducted for tax purposes and would be added to Class 1.
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SSS Solution Six - 4
Class 8
Class 8 Opening Balance $226,964
Additions $262,000
Disposal - Lesser Of:
• Proceeds = $189,000
• Cost = $275,000 ( 189,000) 73,000
One-Half Net Addition ( 36,500)
CCA Base $263,464
Rate 20%
Class 8 CCA $ 52,693
Class 10
Class 10 Opening Balance $87,468
Dispositions - Lesser Of
• Capital Cost (Not Given)
• Proceeds = $56,500 ( 56,500)
Ending Balance With No Remaining Assets = Terminal Loss $30,968
The cost of each individual vehicle was not provided in the problem. However, the
problem did state that no vehicle had proceeds of disposition that was greater than its
cost. Given this, the capital cost is not required.
Class 14.1
The CCA calculation for this Class would be as follows:
Class 14.1 UCC Opening Balance Nil
Acquisition Of Goodwill $55,000
One-Half Net Additions ( 27,500)
CCA Base $27,500
Rate 5%
Class 14.1 CCA $ 1,375
Total CCA
Note that the January 1 Class 13 balance shows that less than the maximum CCA for
this class has been claimed in the past.
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SSS Solution Six - 4
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SSS Solution Six - 5
Note that the $18,000 allowable capital loss can only be deducted to the extent of Mr. Brown-
stone’s taxable capital gains. In the absence of such capital gains, the income inclusion would
have been $31,000.
If the ITA 22 election is not made, the tax consequences to Ms. Pilsner would be as follows:
Proceeds Of Disposition (Amount Collected) $433,000
Adjusted Cost Base ( 427,000)
Capital Gain $ 6,000
Non-Taxable One-Half ( 3,000)
2017 Income Inclusion $ 3,000
Part A - Election
If the ITA 22 election is made, the tax consequences for Mr. Brownstone would be as follows:
Add: 2016 Reserve For Doubtful Debts $31,000
Deduct: Business Loss ($463,000 - $427,000) ( 36,000)
2017 Deduction From Income ($ 5,000)
If the ITA 22 election is made, the tax consequences to Ms. Pilsner would be as follows:
Add: Face Value - Price Paid ($463,000 - $427,000) $36,000
Deduct: Actual Write-Offs ($463,000 - $433,000) ( 30,000)
2017 Income Inclusion $ 6,000
Part B
For Mr. Brownstone, the ITA 22 election is clearly desirable, converting a $13,000 income
inclusion into a $5,000 deduction.
For Ms. Pilsner, the fact that actual collections ($433,000) exceed the estimated value of the
Accounts Receivable on the date of the sale ($427,000), means that the ITA 22 election would
not be desirable. It would double her income inclusion from $3,000 to $6,000.
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SSS Solution Six - 6
Since the meals and entertainment expenses were fully reimbursed by his employer,
they have no effect on Mr. Archer’s employment income. As it is not deductible for tax
purposes, the amount withheld for parking has no effect on Mr. Archer’s employment
income.
*It would appear that the new building will be used exclusively for non-residential
purposes. Given this it will be eligible for the 6 percent CCA rate, provided that it is
kept in a separate Class 1.
Taxable Income
The required calculation is as follows:
Net Income For Tax Purposes $137,400
Stock Option Deduction [($6,250)(1/2)] ( 3,125)
Taxable Income $134,275
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SSS Solution Six - 6
Tax Payable
The required calculations are as follows:
Tax On First $91,831 $16,300
Tax On Next $42,444 ($134,275 - $91,831) At 26 Percent 11,035
Tax Before Credits $27,335
Tax Credits:
Basic Personal Amount (Mr. Archer) ($11,635)
Spouse ($11,635 - $7,500) ( 4,135)
Canada Caregiver - Ron ( 6,883)
EI ( 836)
CPP ( 2,564)
Canada Employment ( 1,178)
Transfer Of Tuition - Lesser Of:
• Absolute Limit Of $5,000
• Actual Tuition Of $9,200 ( 5,000)
Medical Expenses (Note) ( 11,269)
Total Credit Base ($43,500)
Rate 15% ( 6,525)
Federal Tax Payable $20,810
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Chapter 7 Self Study Problems Volume 1 Page 129
Self Study Problem Seven - 1
Case A John Artho owns 1,000 shares of Bee Ltd., a publicly traded company. He also owns
a personal use condominium that was financed with borrowed money. Mr. Artho sells the
1,000 shares of Bee Ltd. and uses the proceeds to pay down the mortgage on the condo-
minium. He subsequently borrows money to acquire another 1,000 shares of Bee Ltd. Would
the interest on the new loan be deductible? Explain your conclusion.
Case B Meridee Burns borrows $225,000 and acquires an income producing property for
$225,000. She subsequently sells the property for $275,000 and, without repaying the funds
borrowed to acquire the first property, uses the proceeds to acquire two other properties. The
cost of property A is $50,000, while the cost of property B is $225,000. How will the
$225,000 in borrowing be linked to the two new properties?
Case C Meridee Burns borrows $225,000 and acquires an income producing property for
$225,000. She subsequently sells the property for $190,000 and, without repaying the funds
borrowed to acquire the first property, uses the proceeds to acquire two other properties. The
cost of property A is $60,000, while the cost of property B is $130,000. How will the
$225,000 in borrowing be linked to the two new properties?
Case D Jason Bridges borrows $320,000 and invests the entire amount in the shares of Loser
Inc. Six months later, he sells these shares for $175,000. The proceeds of the sale are used to
pay off $175,000 of the loan, leaving an ongoing balance of $145,000. Can he continue to
deduct the interest payments on this $145,000 balance? Explain your conclusion.
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Chapter 7 Self Study Problems Volume 1 Page 130
Self Study Problem Seven - 2
Required: Calculate Net Rental Income for each of the two years 2016 and 2017. Also,
determine her UCC balances on January 1, 2018. Include in your solution any tax conse-
quences associated with the sale of the furniture and appliances.
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Chapter 7 Self Study Problems Volume 1 Page 131
Self Study Problem Seven - 3
Required: For each investment alternative, determine the after tax return that Mr. Forsythe
will earn during the year ending December 31, 2017.
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Chapter 7 Self Study Problems Volume 1 Page 132
Self Study Problem Seven - 4
Required: For each investment alternative, determine the after tax return that Ms. Bagley
will earn during the year ending December 31, 2017.
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Chapter 7 Self Study Problems Volume 1 Page 133
Self Study Problem Seven - 5
Required: Write a brief memorandum providing investment advice to Ms. Holmes on the
three alternatives.
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Chapter 7 Self Study Problems Volume 1 Page 134
Self Study Problem Seven - 6
Required: Determine Mrs. Norton’s minimum Net Income For Tax Purposes for the year
ending December 31, 2017. Ignore GST/HST/PST considerations and the need to make CPP
contributions by Ms. Norton.
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Chapter 7 Self Study Problems Volume 1 Page 135
Self Study Problem Seven - 7
Required: Calculate the amount of Taxable Income and Tax Payable that will result from the
distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of
the two trust units on December 31, 2017.
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Self Study Problem Seven - 8
At the beginning of 2017, Ms. Spring owns two residential rental properties, both acquired in
1995. On January 1, 2017, the UCC of property A was $156,000. The cost of this property
was $245,000, including $40,000 for the land. Property B had a cost of $426,000, including
$100,000 for the land. Its January 1, 2017 UCC was $276,000.
On June 1, 2017, property A was sold for $201,000, including $40,000 for the land. On that
same date, a new residential rental property was acquired at a cost of $322,000, including
$75,000 for the land. During 2017, Ms. Spring received rents of $42,000 and had rental
expenses, other than CCA, of $32,500.
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Chapter 7 Self Study Problems Volume 1 Page 137
Self Study Problem Seven - 8
Ms. Spring owns shares of Canadian public companies which paid eligible dividends of
$9,300 during 2017. She also owns shares in a foreign company which paid dividends of
$5,600 (Canadian). The government in the foreign country withheld taxes of $840, giving Ms.
Spring a net receipt of $4,760.
Required: Calculate Ms. Spring’s 2017 minimum Net Income For Tax Purposes, her 2017
minimum Taxable Income, and her 2017 minimum federal Tax Payable without consideration
of any income tax withheld by her employer. Ignore GST/HST/PST considerations.
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Chapter 7 Self Study Problems Volume 1 Page 138
Self Study Problem Seven - 9
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Chapter 7 Self Study Problems Volume 1 Page 139
Self Study Problem Seven - 9
Debt Security On July 1, 2016, Derek purchases a debt security with a maturity
value of $100,000. The security matures on June 30, 2021 and bears interest at 8
percent per annum. Interest for the first 18 months is paid on December 31, 2017,
with the remaining interest due when the security matures on June 30, 2021.
Foreign Term Deposit On January 1, 2017, Derek owns a foreign currency term
deposit with a maturity value of $250,000. During the year, the term deposit earns
interest of $20,000. Taxation authorities in the foreign jurisdiction withhold $8,000
of this amount. All amounts are in Canadian dollars.
Required: Calculate Mr. Fontaine’s 2017 minimum Net Income For Tax Purposes, his 2017
minimum Taxable Income, and his 2017 minimum federal Tax Payable. Ignore GST/HST/PST
considerations and the need to make CPP contributions by Derek and Emily.
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SSS Problem Seven - 1
Case A Martin Duck borrows $300,000 and invests the entire proceeds of the loan
in publicly traded securities. After 3 months, the value of the securities has fallen to
$110,000. At this point, Mr. Duck sells the securities and uses the proceeds to reduce
the loan to $190,000.
Now that he no longer owns the securities, can he still deduct the interest on the loan?
Explain your conclusion.
Case B Janet Forest owns a portfolio of securities with a current value of $190,000.
Using her margin balance available from her stockbroker, she borrows $30,000 to
finance the purchase of a sailboat. During the period the margin loan is outstanding ,
she pays interest of $900.
Can she deduct this interest against the $5,000 in income earned during this period
on her portfolio of securities? Explain your conclusion.
Case C Martin Brock borrows $42,000 and uses the funds to acquire an income
producing property. He later sells the property for $110,000. He uses these proceeds
to purchase two properties. Property A costs $45,000 and property B costs $65,000.
How will the $42,000 in borrowing be linked to the two properties?
Case D Chuck Masters borrows $100,000 and uses the funds to acquire an income
producing property. He later sells the property for $80,000. He uses the $80,000 to
purchase two properties. Property A costs $20,000 and property B costs $60,000.
How will the $100,000 in borrowing be linked to the two properties?
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Chapter 7 Supplementary Self Study (SSS) Problems Volume 1 Page 141
SSS Problem Seven - 2
Furniture The furniture was used in the building at 18 Prince Street. It had a capital
cost of $15,000, a UCC of $8,000 at the beginning of the year, and was sold during the
year for $5,000.
18 Prince Street This building had a capital cost of $42,000. It was sold on August 1.
For CCA purposes, it was included in the same Class 1 pool as 4 McManus Street. Of
the sale proceeds, $60,000 was allocated to the building . From January 1 to July 31,
the building generated rents of $6,000 and incurred property taxes of $1,200,
interest charges of $1,750, and other expenses (excluding CCA) of $1,000.
4 McManus Street This building has a capital cost of $45,000. At the beginning of
the year, the UCC of this Class 1 pool, which included both 4 McManus Street and 18
Prince Street, was $50,000. During the year, it generated rents of $5,000 and
incurred property taxes of $1,550, interest charges of $650, and other expenses
(excluding CCA) of $2,500.
94 George Street This building has a capital cost of $650,000. Its UCC at the begin-
ning of the year was $550,000. During the year, it generated rents of $42,000 and
incurred property taxes of $5,200, interest charges of $7,800, and other expenses
(excluding CCA) of $8,500.
125 West Street This building has a capital cost of $102,000. Its UCC at the begin-
ning of the year was $98,000. During the year, the unit generated rents of $10,000
and incurred property taxes of $1,750, interest charges of $5,000, and other
expenses (excluding CCA) of $4,000.
Within the next year, Mr. Stanton expects to sell 4 McManus and 125 West for double what he
paid for the properties.
Required: Calculate Mr. Stanton’s net rental income for 2017. You should provide a sepa-
rate calculation for each property. Specify how much CCA should be taken for each building .
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SSS Problem Seven - 3
Federal Provincial
Tax Bracket Tax Bracket
Bill Martin 15.0 Percent 6.0 Percent
Dave Martin 20.5 Percent 9.5 Percent
Charles Martin 29.0 Percent 14.0 Percent
The provincial dividend tax credit on eligible dividends is equal to 30 percent of the dividend
gross up.
For a number of years, they have been interested in the securities of Moland Industries, a
Canadian public corporation, and, on January 1 of the current year, they are considering two
securities of the Company that are currently outstanding . These securities and their invest-
ment characteristics are as follows:
Bonds The Company has a large issue of debenture bonds that has a coupon
interest rate of 6 percent. They are selling at par value and mature in 18 years.
Preferred Stock The Company has an issue of preferred shares that is offering an
eligible dividend of 4 percent based on the current market price. The dividend is
cumulative, but not participating .
The income from these investments would not move any brother to a higher federal or provin-
cial tax bracket. Each brother has sufficient income to use all of his available tax credits.
Required: Advise each of the Martin brothers as to which investment they should make. As
part of your recommendation, calculate the after tax income that would be generated for each
of the brothers during the current year, assuming that they invested their $20,000 in:
A. the Moland Industries bonds.
B. the Moland Industries preferred stock.
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Chapter 7 Supplementary Self Study (SSS) Problems Volume 1 Page 143
SSS Problem Seven - 4
• 2,500 units of the Realty Income Trust. The cost is $35.00 per unit for a total cost of
$87,500.
• 3,500 units of the Pickett Global Fund, a mutual fund trust. The cost is $54.00 per unit
for a total cost of $189,000.
During 2017, the Realty Income Trust makes an annual distribution of $2.75 per unit, of which
$.75 is designated as a return of capital. The remaining $2.00 is ordinary income. Irwin has
elected to use the Trust’s DRIP and, as a consequence, the entire distribution is reinvested in
new trust units at a cost of $36.00 per unit.
Also during 2017, the Pickett Global Fund makes a distribution of $4.50 per unit. This distri-
bution is made up of capital gains of $2.00, eligible dividends of $1.75, and a return of capital
of $0.75. The entire distribution is reinvested in Pickett Global Fund units at a cost of $50.00
per unit.
Irwin has other investment income that places him in the 29 percent federal tax bracket. Taxes
on this income are sufficient to use all of his available tax credits before considering the effects
of the two investments described above. He lives in a province where the maximum rate is 13
percent and the tax credit on eligible dividends is 24 percent of the gross up.
Required: Calculate the amount of Taxable Income and Tax Payable that will result from the
distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of
the trust units on December 31, 2017.
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Chapter 7 Supplementary Self Study (SSS) Problems Volume 1 Page 144
SSS Problem Seven - 5
Foreign Currency Term Deposit A £225,000 term deposit which pays interest at 5
percent per annum. On December 31, 2017, interest of £11,250 is paid on this term
deposit. The taxation authorities in the U.K. withhold 25 percent of this payment,
with the remaining 75 percent being remitted to Bradley. Assume that throughout
2017, £1 = $1.70.
Income Trust Units 4,500 units of Canadian Realty Trust at $56 per unit. The total
cost is $252,000.
Mutual Fund Units 6,200 units of Fidelitee Large Cap at $32 per unit. The total cost
is $198,400.
During the year ending December 31, 2017, the following additional transactions occur:
Canadian Realty Trust This trust has a distribution of $5.20 per unit. Of this total,
$2.40 represents a return of capital, with the remainder being business income. Mr.
Temrik reinvests the entire amount that he receives in additional units at a cost of $59
per unit.
Fidelitee Large Cap This mutual fund has a distribution of $3.75 per unit. This is
made up of capital gains of $1.00 per unit, interest of $1.25 per unit, and eligible divi-
dends of $1.50 per unit. All of this distribution is reinvested to acquire additional
units of Fidelitee at $28 per unit.
Bradley has other investment income that places him in the 29 percent federal tax bracket.
Taxes on this income are sufficient to use all of his available tax credits before considering the
effects of the investments described above. He lives in a province where the maximum rate is
16 percent and the tax credit on eligible dividends is 30 percent of the gross up.
Required: Calculate the amount of Taxable Income and Tax Payable that will result from the
interest on the term deposit and the distributions by the two trusts. In addition, indicate the
per unit adjusted cost base for each of the two trust units on December 31, 2017. Ignore any
tax implications resulting from the Canada/U.K. tax treaty.
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Chapter 7 Supplementary Self Study (SSS) Problems Volume 1 Page 145
SSS Problem Seven - 6
During 2017, Jean makes contributions to registered charities of $4,450 and contributions to
the federal Conservative Party in the amount of $870. He is not eligible for the first time donor
super credit.
For many years Jean was employed as an engineer by a large Canadian public company. He
retired when he turned 65 and, during 2017, receives income from this employer’s pension
plan of $37,000. In addition, he has retained options to acquire 5,000 of his employer’s
shares at a price of $12 per share. When the options were granted the shares were trading at
$12 per share.
On July 1, 2017, Jean exercises all of these options. At this time the shares are trading at $21
per share and Jean immediately sells the shares for that price. The employer did not deduct EI
premiums or CPP contributions on behalf of Jean.
Jean received CPP benefits of $10,000 in 2017. Since Jean has had income of over $150,000
for the last five years and anticipates income at this level for the rest of his life, he has not
applied to receive OAS benefits.
During 2017, Jean received the following dividends (all amounts in Canadian dollars):
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Chapter 7 Supplementary Self Study (SSS) Problems Volume 1 Page 146
SSS Problem Seven - 6
The building contains office furniture and fixtures that were acquired at a cost of $25,000. On
January 1, 2017, they have a UCC of $22,579.
During 2017, he spends $28,000 on improving and upgrading the building . In addition, he
sells the old furniture and fixtures for $12,500 and acquires replacement furniture and
fixtures for $42,100.
As Jean has no reason to keep detailed accounting records, he records business income on a
cash basis. For 2017, his net cash flow from operations was $67,500. Relevant figures for the
beginning and end of 2017 are as follows:
January 1 December 31
Billed Receivables $12,800 $15,400
Unbilled Work In Process 15,600 17,800
Accounts Payable 4,500 5,250
Until 2017, Jean has used his personal vehicle for business purposes. However, as of January
1, 2017, he leases an automobile with a manufacturer’s list price of $47,000. The lease
payment, which does not include any payment for insurance, is $810 per month. No down
payment or security deposit is required on the lease and he is not required to purchase the car
at the end of the lease term. The lease payments were deducted in the determination of his
net cash flow from operations. The car is used 100 percent for business activity.
Required: Calculate Mr. Benoit’s 2017 minimum Net Income For Tax Purposes, his 2017
minimum Taxable Income, and his 2017 minimum federal Tax Payable. Ignore GST/HST/PST
considerations and the possibility of pension income splitting .
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SSS Solution Seven - 1
Case B
While the loan is secured by income producing assets, the direct purpose of the loan was not
income producing . The interest cannot be deducted.
Case C
Since the proceeds exceed the borrowings, Mr. Brock has complete flexibility with respect to
linking . He could allocate all of the $42,000 to property A or B or alternatively, $21,000 to
each. Any allocation totaling $42,000 would be acceptable.
Case D
When the value of the replacement property is less than the amount borrowed, the taxpayer
must use a pro-rata allocation of the borrowed money. In this case, the result would be an allo-
cation of $25,000 [($20,000 ÷ $80,000)($100,000)] to property A and an allocation of
$75,000 [($60,000 ÷ $80,000)($100,000)] to property B.
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SSS Solution Seven - 2
CCA Deduction
As 18 Prince and 4 McManus each cost less than $50,000, they can be grouped into a single
CCA Class 1. The opening UCC in this Class 1 would be $50,000 and, when the $42,000
capital cost of 18 Prince is deducted, a balance remains. This means that there will be no
recapture on the sale of 18 Prince.
Maximum available CCA would be calculated as follows:
4 McManus [(4%)($50,000 - $42,000)] $ 320
94 George [(4%)($550,000)] 22,000
125 West [(4%)($98,000)] 3,920
Total Available $26,240
As the deduction of CCA cannot be used to create a rental loss and, as a consequence, the
actual deduction would be limited in this situation to $19,100, the net amount of rental
income on the 4 properties. This is less than the maximum available of $26,240, resulting in a
situation in which there are various possibilities with respect to how much of the $19,100 will
be deducted from the buildings in each Class 1.
In general, CCA should be taken on assets with a lower rate first in order to leave more flexi-
bility in the future. However, in this case, all the rates are the same.
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SSS Solution Seven - 2
Since Mr. Stanton intends to sell 4 McManus and 125 West in the near future for proceeds that
are greater than the UCC in their respective Class 1 pools, he should not take CCA on those
Classes this year as it would increase the recapture in the following year.
Even if he did not plan on selling any of the properties, it would probably leave him more
future flexibility if the $19,100 was taken from 94 George Street, the Class with the largest
UCC.
Note that even though 125 West generated a net rental loss of $750, CCA could still be taken
on that Class as there was rental income before CCA when all rental properties were
considered.
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Chapter 7 Supplementary Self Study (SSS) Solutions Volume 1 Page 150
SSS Solution Seven - 3
Part B
The after tax returns resulting from an investment in the Moland Industries Preferred Stock
begins with the calculation of the federal and provincial Tax Payable:
Based on the preceding calculations of federal and provincial Tax Payable, the after tax returns
on the preferred shares are calculated as follows:
Bill (21%) Dave (30%) Charles (43%)
Dividends [(4%)($20,000)] $800 $800 $800
Tax Savings (Tax Payable) 25 ( 74) ( 218)
After Tax Return $825 $726 $582
Comparison
A comparison of the after tax rates of return can be made as follows:
Recommendation
For each of the brothers, the bonds are the preferable investment as the after tax return is
higher. While the problem does not require comment on this, we would note that the bonds
are also the lower risk alternative.
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SSS Solution Seven - 4
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Chapter 7 Supplementary Self Study (SSS) Solutions Volume 1 Page 152
SSS Solution Seven - 5
Note - Foreign Source Property Income As required, 100 percent of the foreign
interest is included in Net Income For Tax Purposes. However, for individuals, the
credit against Tax Payable that is provided under ITA 126(1) is limited to a maximum of
15 percent of the foreign source non-business income. Since the withheld amount
exceeds 15 percent, the excess is deducted and does not qualify for treatment as a
foreign tax credit.
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SSS Solution Seven - 6
Capital Gains
While Jean sold the shares he acquired through stock options, they were sold immediately,
resulting in no capital gain or loss on the disposition.
Property Income
Jean's property income is calculated as follows:
Eligible Dividends Received $ 9,250
Gross Up Of Eligible Dividends (38%) 3,515
Non-Eligible Dividends Received 4,670
Gross Up Of Non-Eligible Dividends (17%) 794
Gross Foreign Dividends ($7,785 ÷ 90%) 8,650
Interest 8,742
Property Income $35,621
Note 1 Since Jean is an engineer, he cannot use the “billed basis of income recogni-
tion”. As a result, he must include unbilled work in progress in his income.
Note 2 The CCA for the furniture and fixtures (Class 8) would be calculated as
follows:
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SSS Solution Seven - 6
As the building was acquired new and was used 100 percent for non-residential
purposes, it is eligible for the 6 percent CCA rate. The fact that it was the only building
owned by the business would result in it automatically being allocated to a separate
class, but it must remain in a separate Class 1 to continue to qualify for the 6 percent
rate.
Note 3 The total deductible car lease payment is the least of:
• $9,720 [(12)($810)] - the actual amount paid
• $9,600 [($800)(12)] - the annual limit using the $800 monthly maximum
• $7,299 {[($810)(12)] [$30,000 ÷ (85%)($47,000)]} - the deductible limit using
the $47,000 manufacturer’s list price
Using the manufacturer’s list price limit, the amount that must be added back to
income for the year is $2,421 ($9,720 - $7,299).
Taxable Income
Jean’s Taxable Income would be calculated as follows:
Net Income For Tax Purposes $179,476
Stock Option Deduction [(1/2)($45,000)] ( 22,500)
Taxable Income $156,976
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SSS Solution Seven - 6
Tax Payable
Tax Payable would be calculated as follows:
Tax On First $142,353 $29,436
Tax On Next $14,623 ($156,976 - $142,353) At 29 Percent 4,241
Tax Before Credits $33,677
Tax Credits:
Basic Personal Amount (Jean Benoit) ($11,635)
Spouse ($11,635 - $6,250) ( 5,385)
Canada Caregiver - Sylvie ( 6,883)
Jean’s Age Credit [$7,225 - (15%)($179,523 - $36,430)] Nil
Jean’s Pension Credit ( 2,000)
Canada Employment ( 1,178)
Transfer Of Spouse’s Age Credit
[$7,225 - (15%)($6,250 - $36,430) ( 7,225)
Transfer Of Spouse’s Pension Credit ( 2,000)
Transfer Of Spouse’s Tuition - Lesser Of:
• Actual Tuition Cost Of $7,800
• Absolute Maximum Of $5,000 ( 5,000)
Transfer Of Sylvie’s Disability Credit ( 8,113)
Medical Expenses (Note 4) ( 17,692)
Total Credit Base ($67,111)
Rate 15% ( 10,067)
Charitable Donations (Note 5)
[(15%)($200) + (29%)($4,450 - $200)] ( 1,263)
Dividend Tax Credit On:
Eligible Dividends [(6/11)($3,515)] ( 1,917)
Non-Eligible Dividends [(21/29)(17%)($4,670)] ( 575)
Foreign Tax Credit (Amount Withheld = 10 Percent) ( 865)
Political Contributions [(3/4)($400) + (1/2)($350) + (1/3)($120)] ( 515)
Federal Tax Payable $18,475
Note 5 As none of his income is taxed at 33 percent, this rate will not be applicable
to the calculation of the charitable donations tax credit.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 8 Self Study Problems Volume 1 Page 156
Self Study Problem Eight - 1
Required: Determine the amount of the taxable capital gain or allowable capital loss that
would arise from:
• the sale on November 8, 2011,
• the sale on February 3, 2014, and
• the sale on March 15, 2017.
Ignore transaction costs in all of your calculations.
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Chapter 8 Self Study Problems Volume 1 Page 157
Self Study Problem Eight - 2
Required: Describe the tax effects associated with the sale of the land and the guarantee
provided by Mr. Rowe at the time the land is sold and with the payment that he is required to
make on December 1, 2017. Include the effects of this payment on the Tax Payable of other
years.
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Chapter 8 Self Study Problems Volume 1 Page 158
Self Study Problem Eight - 3
Required: Calculate the capital gains taxation effects of this sale, assuming that Ms. Fabrice
deducts the maximum capital gains reserve in 2017 and subsequent years.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 8 Self Study Problems Volume 1 Page 159
Self Study Problem Eight - 4
Required: Compare the capital gains taxation effects of this sale for each of the years 2017
through 2021 assuming:
A. The down payment was 45 percent of the sales price.
B. The down payment was 15 percent of the sales price.
Ignore the interest that would be received on mortgage.
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Self Study Problem Eight - 5
Required: Determine the 2016 and 2017 tax effects resulting from the preceding events.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 8 Self Study Problems Volume 1 Page 161
Self Study Problem Eight - 6
Required: Calculate the tax effects of the transactions that took place during 2017 through
2020 on Lawrence Wallack's Net Income For Tax Purposes.
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Chapter 8 Self Study Problems Volume 1 Page 162
Self Study Problem Eight - 7
Required: Describe how the residences should be designated in order to accomplish Ms.
Stewart’s goal. In addition, calculate the total amount of the gain that would arise under the
designation that you have recommended.
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Chapter 8 Self Study Problems Volume 1 Page 163
Self Study Problem Eight - 8
Required: Indicate the tax consequences of each of these dispositions. In addition, indi-
cate the total amount that will be included in Rita's Net Income For Tax Purposes, as well as any
carry over amounts that can be used in previous or subsequent years.
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Chapter 8 Self Study Problems Volume 1 Page 164
Self Study Problem Eight - 9
Required: Calculate the minimum amount that will have to be included in Ms. Laval’s Net
Income For Tax Purposes for 2017 as a result of these transactions.
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Chapter 8 Self Study Problems Volume 1 Page 165
Self Study Problem Eight - 10
Required: Determine the maximum CCA that can be deducted by Ms. Detweiler in 2015,
2016, and 2017 and the January 1, 2018 UCC of the building . In addition, indicate any other
tax consequences that will result from the changes in use of this property.
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Chapter 8 Self Study Problems Volume 1 Page 166
Self Study Problem Eight - 11
Required: For each of the two taxation years 2016 and 2017, indicate the amounts that
would be included in Mr. Blake’s Net Income For Tax Purposes as the result of the preceding
transactions and events. Assume that Mr. Blake does not designate this property as his prin-
cipal residence in any of the years under consideration.
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Chapter 8 Self Study Problems Volume 1 Page 167
Self Study Problem Eight - 12
Required: Determine the amount of the taxable capital gain or allowable capital loss that
Mr. Lange will report in his Canadian income tax return for the current year as a result of his
departure from Canada. Assume that the usual rules apply, with no elections being made by
Mr. Lange.
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Self Study Problem Eight - 13
Required: For both Cases, determine the maximum permitted capital gains deferral, as well
as the adjusted cost base of the replacement shares.
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Chapter 8 Self Study Problems Volume 1 Page 169
Self Study Problem Eight - 14
Required: Explain how the preceding transactions will affect the balance in the Company ’s
UCC during the period January 1, 2017 through January 1, 2019.
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Chapter 8 Self Study Problems Volume 1 Page 170
Self Study Problem Eight - 15
The building is used more than 90 percent for non-residential use other than manufacturing
and qualifies for the 6 percent CCA rate.
The Company would like to minimize any capital gains or recapture resulting from the sale of
the Vancouver property. The Company ’s tax year ends on December 31, 2017, and it does
not own any buildings or equipment on this date.
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the
Company’s 2017 tax return.
B. Indicate how the results in Part A could be altered through the application of ITA 44(1) (to
defer capital gains) and ITA 13(4) (to defer recapture) in an amended 2017 return. Do not
consider the use of the election under ITA 44(6) (to reallocate the proceeds of
disposition).
C. Determine the adjusted cost base and, where appropriate, the UCC of the replacement
properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections.
D. Indicate the maximum amount of any reduction in the amended 2017 Net Income For Tax
Purposes that could result from the use of the ITA 44(6) election. Determine the adjusted
cost base and, where appropriate, the UCC of the replacement properties, that would
result from electing to use this amount. Should the Company make the election? Explain
your conclusion.
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Chapter 8 Self Study Problems Volume 1 Page 171
Self Study Problem Eight - 16
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the
2017 tax return of Fraser Industries Ltd.
B. Indicate how the results in Part A could be altered through the application of ITA 44(1) (to
defer capital gains) and ITA 13(4) (to defer recapture) in an amended 2017 return. Do not
consider the use of the election under ITA 44(6) (to reallocate the proceeds of
disposition).
C. Determine the adjusted cost base and, where appropriate, the UCC of the replacement
properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections.
D. Indicate the maximum amount of any reduction in income in the amended 2017 Net
Income For Tax Purposes that could result from the use of the ITA 44(6) election and
determine the adjusted cost base and, where appropriate, the UCC of the replacement
properties, that would result from electing to use this amount. Should the Company make
the election? Explain your conclusion.
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Chapter 8 Self Study Problems Volume 1 Page 172
Self Study Problem Eight - 17
During 2017, Laura makes contributions to registered charities in the amount of $1,600. She
does not qualify for the first-time donor's super credit.
During the first 6 months of 2017, Laura operated a successful retail business out of a building
which she owned. She keeps her accounting records on a cash basis and, for the 6 month
period ending June 30, 2017, her net cash inflow was $53,000. Information on inventories
and accruals are as follows:
January 1, 2017 June 30, 2017
Accounts Receivable $10,000 $ 8,000
Accounts Payable 14,000 16,000
Inventories 22,000 18,000
On July 1, 2017, the capital assets were sold for their fair market value, with Laura paying
$17,320 in sales commissions on the disposition of the land and building . The Accounts
Receivable and Inventories were sold for their carrying values, with part of the proceeds being
used to pay off the Accounts Payable.
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Chapter 8 Self Study Problems Volume 1 Page 173
Self Study Problem Eight - 17
On July 3, 2017, she is employed by a large public company as a sales consultant. Her salary
for the period July 3, 2017 through December 31, 2017 is $56,000. In addition, because of
her excellent performance she is awarded a $12,000 bonus. The bonus will be paid on April
30, 2018.
During 2017, her employer withholds the following amounts from her income:
RPP Contributions $2,500
EI 836
CPP 2,564
Because her employer has withheld the maximum amount for 2017, Laura will not have to
make CPP contributions on the income from her unincorporated business.
Laura’s employer also contributes $2,500 to her RPP. In addition, the employer provides her
with an automobile that cost $62,000. The car was used by her for the period July 3, 2017
through December 31, 2017 and, during this period she drives the car 22,000 kilometers,
18,000 of which were employment related.
Information on Laura’s investments is as follows:
Dividends Eligible dividends received during 2017 total $5,600.
Interest 2017 interest on Laura’s GICs is $4,275.
Income Trusts At the beginning of 2017, Laura had income trust units with an
adjusted cost base of $56,000. During the year, she receives distributions of $6,800,
of which $2,600 is designated as a return of capital with the remainder designated as
property income. On December 15, 2017, she sells all of the trust units for $63,000.
Mutual Funds In January, 2017, Laura acquires 1,000 units of the New World Equity
Fund at $9.65 per unit. On June 30, 2017, the fund has a distribution of interest
income of $0.50 per unit. At this time the units are trading at $9.40 and Laura chooses
to have the distribution re-invested. On December 10, 2017, she sells all of the units
for $9,000.
To assist with her investment decisions, during 2017, Laura pays fees to a professional invest-
ment counsellor of $875.
Required: Calculate Ms. Barnes’ minimum 2017 Net Income For Tax Purposes, her 2017
minimum Taxable Income, and her minimum 2017 federal Tax Payable. Ignore provincial
income taxes, any instalments she may have paid during the year, any income tax withhold-
ings that would be made by her employer, and GST/HST/PST considerations.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 8 Self Study Problems Volume 1 Page 174
Self Study Problem Eight - 18
Family Information
Lorenzo is married to Maria Desoto. She is 37 years old and has 2017 income of $6,300. Now
that her children are in their teens, Maria attends university on a full time basis during 8
months of the year. Her tuition for 2017 was $9,300.
The Desotos have two children, both born on April 1. Their son Gianni is 16 and has Net
Income For Tax Purposes of $6,200, largely from part-time summer jobs. Their daughter Anita
is 14 and is sufficiently disabled that she qualifies for the disability tax credit. Anita has no
2017 Net Income For Tax Purposes.
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Chapter 8 Self Study Problems Volume 1 Page 175
Self Study Problem Eight - 18
Other Information
1. Lorenzo owns a glass sculpture with an adjusted cost base of $800. During 2017, he sells
this sculpture for $39,000.
2. Lorenzo owns a cottage on a local lake. It had cost $105,000, including an estimated
value for the land of $42,000. While the family has made good use of the property, at the
beginning of 2017, he decides to convert the cottage to a rental property. It is estimated
that, at this time, the cottage is worth $350,000, with $100,000 of this amount attribut-
able to the land. During 2017, net rental income before the deduction of CCA equals
$12,000. Lorenzo does not intend to designate the cottage as his principal residence in
any of his years of ownership.
3. Lorenzo owns 500 units of the Real Property Income Trust. The adjusted cost base of
these units on January 1, 2017 is $56.00 per unit. During 2017, the trust distributions
total $2.40 per unit, with all of this amount being property income. The entire distribu-
tion was reinvested in additional units on the basis of $58.50 per unit. During December
2017, all of these Trust units were sold for $60.25 per unit.
4. For several years, Lorenzo has owned a tract of land with an adjusted cost base of
$78,000. His intent was to eventually construct a rental property on this site. However,
with the conversion of the cottage to a rental property, he decides to reduce his real estate
holdings. To this end, the land is sold for $180,000. The buyer provides an immediate
payment of $54,000, with the balance payable in annual instalments of $18,000 begin-
ning in 2018.
5. During 2017, Lorenzo received eligible dividends of $4,200.
Required: Calculate Mr. Desoto’s minimum 2017 Net Income For Tax Purposes, his 2017
minimum Taxable Income, and his minimum 2017 federal Tax Payable. Ignore provincial
income taxes, any instalments he may have paid during the year, any income tax withholdings
that would be made by his employer, and GST/HST/PST considerations.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 176
SSS Problem Eight - 1
Required: Determine the amount of any taxable capital gain or allowable capital loss
resulting from the 2017 sale of Alcor Ltd. shares.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)
Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 177
SSS Problem Eight - 2
Required: Calculate the tax effects of the transactions that took place during 2017 through
2020 on Ms. Hanson's Net Income For Tax Purposes.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 178
SSS Problem Eight - 3
She has asked you to determine the minimum taxable capital gain that would result from the
sale of the two properties during 2017.
Required: Describe how the residences should be designated in order to accomplish Miss
Stern’s goal. In addition, calculate the amount of the taxable capital gain that would arise
under the designation that you have recommended.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 179
SSS Problem Eight - 4
Required: Determine the net taxable capital gain that Mrs. Vargo will include in her income
for the current year. Indicate any carry over amounts that can be used in previous or subse-
quent years.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 180
SSS Problem Eight - 5
Required: Calculate the minimum amount that will have to be included in Ms. Nobel’s Net
Income For Tax Purposes for 2017 as a result of these transactions.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 181
SSS Problem Eight - 6
The monthly rent was set at $1,900 per month, payable at the beginning of each month. The
tenant paid all amounts required during 2017.
Required: For the year ending December 31, 2017, determine Ms. Houston’s minimum net
rental income (loss). Your calculations should include the maximum available CCA, without
regard to whether the full amount can be deducted. Indicate any other tax consequences that
will result from the change in use.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 182
SSS Problem Eight - 7
Case A On June 30, 2017, Jonathan sells his common shares in Corporation A, which is
an eligible small business corporation. His proceeds of disposition are $585,000 and his
adjusted cost base is $371,000. On September 13, 2017, Jonathan invests $472,000 in
common shares of Corporation B, which is a new eligible small business corporation.
Required: For both Cases, determine the maximum permitted capital gains deferral, as well
as the adjusted cost base of the replacement shares.
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 183
SSS Problem Eight - 8
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Chapter 8 Supplementary Self Study (SSS) Problems Volume 1 Page 184
SSS Problem Eight - 9
As the building is not a new structure, it is not eligible for the 6 percent CCA rate for Class 1
assets.
The Company would like to defer any capital gains or recapture resulting from the sale of the
Toronto property. The Company ’s tax year ends on December 31, 2017, and it does not own
any buildings or equipment on this date.
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the
Company’s 2017 tax return. In addition, indicate how these tax effects could be altered in
an amended 2017 return by using the elections available under ITA 44(1) (to defer capital
gains) and ITA 13(4) (to defer recapture), but without the use of the election under ITA
44(6) (to reallocate the proceeds of disposition). Also indicate the adjusted cost base and,
where appropriate, the UCC of the replacement properties, subsequent to the applica-
tion of the ITA 44(1) and ITA 13(4) elections.
B. Indicate the maximum amount of any reduction in income in the amended 2017 Net
Income For Tax Purposes that could result from the use of the ITA 44(6) election and
calculate the UCC balance that would result from electing to use this amount.
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 185
SSS Solution Eight - 1
Given the preceding , the July, 2017 sale would result in a taxable capital gain calculated as
follows:
Proceeds Of Disposition [(200)($14.00)] $2,800.00
Adjusted Cost Base [(200)($12.57)] ( 2,514.00)
Capital Gain $ 286.00
Inclusion Rate 1/2
Taxable Capital Gain $ 143.00
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 186
SSS Solution Eight - 2
As no provision can be made for the estimated cost of the warranty, the total Net Income For
Tax Purposes inclusion for 2017 would be $407,143.
2018 Results
During this year, Ms. Hanson will include $150,000 [(5%)($3,000,000)] of interest in her Net
Income For Tax Purposes.
In addition, Ms. Hanson will include the 2017 reserve in income and deduct a new reserve for
2018. The calculations are as follows:
2017 Reserve Added To Income $2,035,714
2018 Reserve - Lesser Of:
• [($2,850,000)($2,000,000 ÷ $4,200,000)] = $1,357,143
• [($2,850,000)(20%)(4 - 1)] = $1,710,000 ( 1,357,143)
Capital Gain $ 678,571
Inclusion Rate 1/2
Taxable Capital Gain $ 339,286
The total Net Income For Tax Purposes inclusion for 2018 would be $489,286 ($150,000 +
$339,286).
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 187
SSS Solution Eight - 2
2019 Results
During this year, Ms. Hanson will include $100,000 [(5%)($2,000,000)] of interest in her Net
Income For Tax Purposes.
Ms. Hanson will include the 2018 reserve in income and deduct a new reserve for 2019. She
will also deduct the $400,000 required payment to the developer. As this payment is required
by a warranty on a capital asset, this will be a capital loss. The calculations are as follows:
2018 Reserve Added To Income $1,357,143
2019 Reserve - Lesser Of:
• [($2,850,000)($1,000,000 ÷ $4,200,000)] = $678,571
• [($2,850,000)(20%)(4 - 2)] = $1,140,000 ( 678,571)
Capital Gain $ 678,572
Capital Loss On Warranty ( 400,000)
Net Capital Gain $ 278,572
Inclusion Rate 1/2
Net Taxable Capital Gain $ 139,286
The total Net Income For Tax Purposes inclusion for 2019 would be $239,286 ($100,000 +
$139,286).
2020 Results
With the bankruptcy of the developer, no interest will be collected in 2020 and the balance of
the loan must be written off as a bad debt, resulting in a capital loss of $1,000,000.
Ms. Hanson will include the 2019 reserve of $678,571 in income. Since the loan was to be
paid off in 2020, there would have been no new reserve to be deducted, regardless of the
bankruptcy.
The net effect of these items is an allowable capital loss of $160,714 [(1/2)($678,571 -
$1,000,000)]. Note that this loss can only be deducted in 2020 to the extent of taxable capital
gains in that year. However, it can be carried back to be applied to the capital gains that were
recognized in previous years.
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 188
SSS Solution Eight - 2
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 189
SSS Solution Eight - 3
Note that, when both properties are owned for the same length of time (15 years in this
example), there is no need to calculate an annual gain for each property.
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 190
SSS Solution Eight - 4
As losses on personal use property are not deductible under any circumstances, no consider-
ation is given to the sale of the boat.
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 191
SSS Solution Eight - 4
Summary
The total addition to Net Income For Tax Purposes would be as follows:
Personal Use Property
Gain On Automobile $1,850
Gain On Clock 650
Loss On Boat N/A $2,500
Listed Personal Property
Gain On Painting $ 50
Loss On Listed Personal Property (Note) ( 50) Nil
Net Capital Gains $2,500
Inclusion Rate 1/2
Addition To Net Income For Tax Purposes $1,250
Note The losses on listed personal property total $1,080 ($350 + $730). However,
they can only be deducted to the extent of the gain on listed personal property of $50.
The remaining loss of $1,030 ($1,080 - $50) can be carried over to other years. As is
discussed in Chapter 11, such losses can be carried back 3 years and forward for 7
years.
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 192
SSS Solution Eight - 5
There is a foreign exchange gain under ITA 39(1.1), resulting from the increase in the value of
the euro between March and September. The amount would be $3,880. As Ms. Nobel is an
individual, she is eligible to deduct the first $200 of foreign exchange gains under ITA 39(1.1).
As the securities would be considered capital assets, this net foreign exchange gain of $3,680
would be a capital gain.
Ms. Nobel’s income inclusion would be $37,050.
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Chapter 8 Supplementary Self Study (SSS) Solutions Volume 1 Page 193
SSS Solution Eight - 6
Since the problem requires that the minimum rental income (loss) be calculated, CCA has
been deducted. While maximum CCA would be $4,300, a rental loss cannot be created
through the deduction of CCA. As a consequence, the actual CCA deduction is limited to
$1,350, the amount of net rental income before the deduction of CCA.
For individuals, since the calendar year is considered the fiscal year for property income
purposes, there is no adjustment for a short fiscal period in the year of acquisition.
Additional Tax Consequences
As no election was made under ITA 45(2), the usual change in use procedures will be appli-
cable. This will result in taxable capital gains calculated as follows:
Land Building
Proceeds Of Disposition
Land $112,000
Building ($392,000 - $112,000) $280,000
Adjusted Cost Base/Capital Cost
Land ( 85,000)
Building ($235,000 - $85,000) ( 150,000)
Capital Gains $ 27,000 $130,000
Inclusion Rate 1/2 1/2
Taxable Capital Gains $ 13,500 $ 65,000
As it appears that the property was Ms. Houston’s only principal residence during all of the
years that she owned the property, it is likely that this can eliminated through the use of the
principal residence exemption.
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SSS Solution Eight - 7
Case A
The capital gain on the disposition is $214,000 ($585,000 - $371,000). As the cost of the
replacement shares is only $472,000, the permitted deferral would be $172,663
[($472,000 ÷ $585,000)($214,000)].
The adjusted cost base of the replacement shares would be $299,337 ($472,000 - $172,663).
Case B
The capital gain on the disposition is $531,000 ($1,253,000 - $722,000). As the cost of the
replacement shares is greater than the qualifying cost of the proceeds of disposition, the entire
$531,000 capital gain can be deferred.
This would leave the adjusted cost base of the replacement shares at $815,000 ($1,346,000 -
$531,000). Note that the deferral election can be made because the replacement shares were
acquired within 120 days after the end of the year.
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SSS Solution Eight - 8
The total income inclusion for 2017 would be $765,000 ($737,000 + $28,000). The
$737,000 and $28,000 would be added back to the relevant CCA classes, leaving each of
them with a January 1, 2018 balance of nil.
Part B
For both types of assets, the replacement cost exceeded the amount of recapture recorded in
2017. Given this, the maximum amendment on the building would be the $737,000 in recap-
ture that was recorded in 2017. Similarly, the maximum amendment on the furniture and
fixtures would be the $28,000 that was recorded as recapture on that class in 2017.
The maximum 2018 CCA figures and the January 1, 2019 UCC would be based on the capital
cost of the new assets, reduced by the amount of the amended recapture. The first year rules
would be applicable to both classes. The relevant calculations would be as follows:
Furniture
Building And Fixtures
UCC - January 1, 2018 Nil Nil
Additions
Building ($925,000 - $737,000) $188,000
Furniture And Fixtures
($235,000 - $28,000) $207,000
Deduct: One-Half Net Additions ( 94,000) ( 103,500)
CCA Base $ 94,000 $103,500
CCA - Building [($94,000)(4%)] ( 3,760)
CCA - Class 8 [($103,500)(20%)] ( 20,700)
Add: One-Half Net Additions 94,000 103,500
UCC - January 1, 2019 $184,240 $186,300
Part C
The rules for voluntary dispositions differ from those for involuntary dispositions in two ways:
• In the case of voluntary dispositions, in order to elect under ITA 13(4), the replacement
must occur within the first taxation year after the disposition took place. With involuntary
dispositions, the taxpayer has two years to replace the property. As Farnham Inc. replaced
both types of assets in the year following the disposition, this constraint would not alter
the Part B results.
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SSS Solution Eight - 8
• In the case of voluntary distributions, ITA 13(4) is only available on real property. This
means that Farnham Inc. would not be able to make the ITA 13(4) election on the Class 8
assets. Because of this, there would be no amendment of the $28,000 in 2017 recapture
that was recorded on these assets.
Since there was no amendment of the recapture on the Class 8 assets, the 2018 CCA on these
assets would be $23,500 [($235,000)(1/2)(20%)], rather than the $20,700 that was recorded
in Part B when the ITA 13(4) election was available. This would result in a January 1, 2019
UCC of $211,500 ($235,000 - $23,500). There would be no change from the Part B results in
the CCA or the UCC of the building .
Part D
If the replacement cost had been $700,000 (less than the 2017 recapture), ITA 13(4) would
not be able to reverse all of the recapture on the building . This is shown in the following
calculation.
January 1, 2017 UCC Of Building $113,000
Deduction:
Lesser Of:
• Proceeds Of Disposition = $850,000
• Capital Cost = $850,000 ($850,000)
Reduced By The Lesser Of:
• Normal Recapture = $737,000
• Replacement Cost = $700,000 700,000 ( 150,000)
Amended 2017 Recapture On Building ($ 37,000)
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SSS Solution Eight - 9
If the ITA 44(1) election is used in 2018, the amended 2017 capital gain would be $519,000,
the lesser of:
• $635,000 (regular capital gain); and
• $519,000 (the excess of the $772,000 proceeds of disposition for the old land over
the $253,000 cost of the replacement land).
The taxable amount would be $259,500 [(1/2)($519,000)] and this would be included in the
revised 2017 Net Income For Tax Purposes. The original gain of $635,000 would be elimi-
nated in the revised return.
If the ITA 44(1) election is used in 2018, the deemed adjusted cost base of the replacement
land would be calculated as follows:
Actual Cost $253,000
Capital Gain Reversed By Election ($635,000 - $519,000) ( 116,000)
Deemed Adjusted Cost Base Of Replacement Land $137,000
Note that the deemed adjusted cost base of the replacement land has been reduced to the
adjusted cost base of the old land.
Part A - Building
As reported in the Company ’s 2017 tax return, the capital gain and recapture on the building
would be as follows:
Proceeds Of Disposition $989,000
Adjusted Cost Base ( 605,000)
Capital Gain $384,000
Inclusion Rate 1/2
Taxable Capital Gain - 2017 Tax Return Inclusion $192,000
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SSS Solution Eight - 9
If the ITA 44(1) election is used in 2018, the amended 2017 capital gain would be nil, the
lesser of:
• $384,000 (regular capital gain); and
• Nil (reflecting the fact that there was no excess of the $989,000 proceeds of disposi-
tion for the old building over the $1,042,000 cost of the replacement building).
Based on this, the deemed capital cost of the replacement building would be calculated as
follows:
Actual Cost $1,042,000
Capital Gain Reversed By Election Under ITA 44(1) ( 384,000)
Deemed Capital Cost Of Replacement Building $ 658,000
This result reflects the capital cost of the old building ($605,000), plus the $53,000
($1,042,000 - $989,000) of additional funds required to purchase the new building .
If the ITA 13(4) election is used in 2018, the amended 2017 recapture would be calculated as
follows:
January 1, 2017 UCC Balance $342,000
Deduction:
Lesser Of:
• Proceeds Of Disposition = $989,000
• Capital Cost = $605,000 $605,000
Reduced By The Lesser Of:
• Normal Recapture = $263,000
• Replacement Cost = $1,042,000 ( 263,000) ( 342,000)
Recapture Of 2017 CCA (Amended) Nil
These new nil figures for the capital gain and the recapture on the disposition of the old
building will replace the old figures of $384,000 and $263,000 that were included in the orig-
inal 2017 return.
If the ITA 44(1) and ITA 13(4) elections are made, the UCC of the replacement building would
be calculated as follows:
Deemed Capital Cost $ 658,000
Recapture Reversed By Election Under ITA 13(4) ( 263,000)
UCC - Replacement Building $ 395,000
Note that the UCC for the new building is equal to the UCC of the old building ($342,000),
plus the additional $53,000 ($1,042,000 - $989,000) in funds required for its acquisition.
Part A - Equipment
As this is a voluntary disposition, the equipment does not qualify as “former business prop-
erty ” and, as a consequence, neither the ITA 44(1) nor the ITA 13(4) election can be used.
However, as there were no other assets in the class at the end of 2017, there will be a terminal
loss of $13,000 ($127,000 - $114,000). The new equipment has a capital cost equal to its
actual cost of $205,000. This is also equal to the UCC.
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SSS Solution Eight - 9
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SSS Solution Eight - 9
Part B - Comparison
The table which follows compares the results of using only ITA 44(1) and ITA 13(4) with the
results that arise when the ITA 44(6) election is also used.
No ITA 44(6) With ITA 44(6)
Capital Gains
Land $519,000 $466,000
Building Nil Nil
Replacement Property
Adjusted Cost Base Of Land $ 137,000 $137,000
Capital Cost Of Building 658,000 605,000
UCC 395,000 342,000
Note that this election is not made without a cost. Had the $53,000 been left as a capital gain,
tax would have applied on only one-half of the total. While we have eliminated this $26,500
in income, we have given up future CCA for the full amount of the $53,000. In other words,
we have given up $53,000 in future deductions in return for eliminating $26,500 of income in
2017.
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Self Study Problem Nine - 1
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Chapter 9 Self Study Problems Volume 1 Page 202
Self Study Problem Nine - 1
His expenses for the period November 11 through December 1 are as follows:
Required: Determine the amount of Leonard’s maximum 2017 deduction for moving
expenses. In addition, indicate the amount of any carry forward that is available at the end of
the year.
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Self Study Problem Nine - 2
Required: Determine the maximum amount of child care expenses that can be deducted
by Mr. Pleasant and by Mrs. Pleasant for the year ending December 31, 2017.
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Self Study Problem Nine - 3
Required: Determine the maximum amount that can be deducted by Maureen and Sue for
child care costs for the year ending December 31, 2017.
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Self Study Problem Nine - 4
Required: John would like to split his 2017 pension income with Fatima. Calculate the
maximum amount of 2017 federal tax savings that would result from this tax planning strategy.
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Self Study Problem Nine - 5
Required: Compare the 2017 Amount Owing to the CRA, ignoring provincial income taxes,
by Jean and Carole assuming:
A. Jean does not split his pension income.
B. Jean splits his pension income with Carole on a 50:50 basis.
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Self Study Problem Nine - 6
Required:
A. Determine the minimum Net Income For Tax Purposes that Mr. Masters will have to report
for his 2017 taxation year. Provide reasons for omitting items that you have not included
in your calculations.
B. Provide any advice you feel would assist him in planning future actions concerning his
son’s RESP.
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Self Study Problem Nine - 7
Required: For each of the alternatives under consideration, advise Bryant of the tax conse-
quences that will result from the disposition. In addition, in those cases where the property is
resold by the transferee, indicate the tax consequences of the sale to that individual.
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Self Study Problem Nine - 8
Required: For each of the two scenarios, indicate the tax consequences for the transferor
that result from the sale. In addition, indicate the tax values that will be used by the transferee
subsequent to the transfer.
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Self Study Problem Nine - 9
Required:
A. For each of the following cases, indicate the tax effects to be included in Ms. Kneebone’s
tax return as a result of the 2017 deemed disposition at her death, as well as the tax effects
associated with the 2018 sale of the property.
Case 1 Her will leaves the apartment building to Alice. During 2017, Alice
continues to operate the building and takes maximum CCA for that year.
Case 2 Her will leaves the apartment building to Chester. During 2017, he
continues to operate the building and takes maximum CCA for that year.
B. Assume that in Case 2, the proceeds of the 2018 sale of the property by Chester were allo-
cated $435,000 to the land and $349,000 to the building. Calculate the tax effects
associated with the sale of the property for Chester.
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Self Study Problem Nine - 10
Required: Each of the following independent Cases involves a transfer by Mr. Tucker to a
member of his family. Indicate for both Mr. Tucker and the transferee, the 2016, 2017, and
2018 tax effects of:
• the transfer on December 31, 2016,
• the assumed 2017 receipt of the dividends, and
• the assumed 2018 disposition by the transferee.
Case A Mr. Tucker gives the securities to his wife and does not elect out of the provisions of
the ITA 73(1) spousal rollover.
Case B Mr. Tucker’s wife uses money from her savings account to purchase the securities for
their fair market value of $123,000. Mr. Tucker does not elect out of the provisions of the ITA
73(1) spousal rollover.
Case C Mr. Tucker’s wife uses money from her savings account to purchase the securities for
$95,000. Mr. Tucker elects out of the provisions of the ITA 73(1) spousal rollover.
Case E Mr. Tucker’s son, Martin, uses funds from his stock trading account to purchase his
father’s securities at their fair market value of $123,000.
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Self Study Problem Nine - 11
Required: For each of the assets, provide the tax consequences if the property is gifted to:
1. her husband and she does not elect out of ITA 73(1).
2. her husband and she does elect out of ITA 73(1).
3. her 13 year old daughter, Mary.
4. her 27 year old son, Barry.
The "tax consequences" should include:
• the income that will be recognized by Mrs. Long at the time of the transfer;
• the tax cost of the asset in the hands of the transferee;
• the tax treatment of any income earned on the asset, including dividends, rental income
or farm income; and
• the income that will be recognized by Mrs. Long and/or the recipient of the gift when the
asset is sold 2 years after it was gifted.
Ignore the possibility that either the lifetime capital gains deduction or the tax on split income
is applicable to any of these transactions. (These provisions are covered in Chapter 11 of the
text.)
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Self Study Problem Nine - 12
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Self Study Problem Nine - 12
Carolyn’s new employer is a large Canadian public company. Her basic salary is $5,000 per
month and, during 2017, her employer withheld the following amount from her earnings.
RPP Contributions $2,600
EI 836
CPP 2,564
United Way Contributions 600
Her employer makes a matching contribution to her RPP of $2,600. As Carolyn makes regular
contributions to the United Way, she is not eligible for the first-time donor's super credit.
Her employer provides her with an automobile that the company acquired on April 1, 2017 at
a cost of $42,000. During 2017, she drove the car a total of 46,000 kilometers, of which
38,000 were employment related. The company paid all of the operating costs of the vehicle,
a total of $7,200 during 2017. The car was used by Carolyn from April 1, 2017, through
December 31, 2017.
Her employer provides an allowance for food and lodging while traveling on company busi-
ness. The allowance is $600 per month, a total of $5,400 for the 9 months that Carolyn was
traveling for her employer during 2017. Her actual cost for employment related food and
lodging in 2017 totaled $5,700.
Her employer also provides a moving cost allowance of $10,000. In addition, the employer is
reimbursing Carolyn for the $4,000 loss on the sale of her Lethbridge home, as well as
providing a $7,500 payment to assist with the higher housing costs she has encountered in
Edmonton.
During 2016, Carolyn is given a group of securities by her father. The adjusted cost base of
these securities was $45,000 in the hands of her father. At the time of the gift, their fair market
value was $62,000. During 2017, these securities pay eligible dividends of $5,800. In
December, 2017, Carolyn sells these securities for $74,000.
In June, 2017, Carolyn's mother dies, leaving her with a rental property that has a fair market
value of $320,000, of which $50,000 represents the value of the land. At the time of her
mother's death, the UCC of the building was $240,000 and it was not occupied by a tenant.
Her mother had purchased the property several years ago for $400,000. At the time her
mother acquired the property it was estimated that the value of the land was $100,000.
Carolyn was not able to find a tenant and, in December, 2017, she sells the property for
$340,000. An appraiser indicates that the value of the land at this time is unchanged at
$50,000.
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Self Study Problem Nine - 13
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Self Study Problem Nine - 13
While living in Carleton Place, Chantale incurred child care costs of $300 per week for 32
weeks. After moving to Ottawa, these costs increased to $350 per week and were incurred for
16 weeks. The children spent four weeks during the summer at a camp near Montreal. The
camp cost $400 per week for each child.
In November, 2017, Chantale was overjoyed to find that she had won $1,500,000 in an
Ontario provincial lottery. Because she had been praying for this result and felt that her
prayers had been answered, she immediately donated $200,000 of this amount to her
church. The balance was invested in GICs which pay no interest until 2017. Because she
makes regular contributions to her church, she is not eligible for the first-time donor's super
credit.
Ignore GST and HST considerations, as well as any amounts of income tax that would have
been withheld by Chantale’s employer.
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SSS Problem Nine - 1
As part of the divorce settlement, Yolanda received the family residence. She sells it in
November, 2017 for $327,000. She uses $212,000 of the proceeds to pay off the existing
mortgage on the property. Because of her desire for a very quick sale, she sells the house for
$30,000 less than her cost. Costs associated with the sale are as follows:
Real Estate Commissions $16,350
Legal Fees 425
Unpaid Property Taxes To Date Of Sale 1,100
Cost Of Cleaning And Minor Repairs Prior To Sale 2,750
In order to clean up various business and personal issues, she remains in Regina for 7 days
subsequent to the sale of the house. On November 16, Yolanda leaves for Ottawa by air. As
her new apartment does not become available until December 1, she spends the next 14 days
in a hotel in Calgary.
Her expenses for the period November 9 through December 1 are as follows:
Hotel In Regina (7 Nights At $160) $9,100
Food In Regina (7 Days - Total) 410
Air Fare - One Way 400
Hotel In Calgary (14 Nights At $215) 3,010
Food In Calgary (14 Days - Total) 950
Yolanda contracts a car moving company to transport her car to Calgary and it is delivered on
November 17. The cost for this service is $500.
A moving company takes care of moving Yolanda's personal belongings to Calgary. The
invoice for this service is $2,800, In addition, there is a $900 charge for storing these belong-
ings until the Calgary apartment becomes available.
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SSS Problem Nine - 1
Yolanda begins working at the new location on December 1, 2017. Her salary is $7,500 per
month, with the first 11 months of 2017 being paid by the Regina office, the remaining one
month being paid by the Calgary office.
Yolanda's employer has agreed to the following to provide assistance with the move:
• They will provide her with a $12,000 allowance to cover her general moving costs.
• They will compensate her for $20,000 of the loss on the sale of her Regina home.
All of these amounts will be paid by the Calgary office during December, 2017.
Yolanda will use the simplified method of determining food costs in calculating her moving
expenses. Assume that the flat rate for meals is $51 per day.
Required: Determine the amount of Yolanda’s maximum 2017 deduction for moving
expenses. In addition, indicate the amount of any carry forward that is available at the end of
the year.
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SSS Problem Nine - 2
Required: Determine the maximum amount that can be deducted by Mr. and Mrs. Harris
for child care costs for the year ending December 31, 2017.
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SSS Problem Nine - 3
Required: Calculate the amount of 2017 federal tax savings that would result from the
pension income splitting .
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SSS Problem Nine - 4
A. The 5,000 shares are sold to Alex Bolton at a price of $75 per share.
B. The 5,000 shares are sold to Alex Bolton at a price of $125 per share.
C. The 5,000 shares are sold to Alex Bolton at a price of $105 per share.
D. The 5,000 shares are given to Alex Bolton as a gift.
Required: For each of these four alternatives, determine the effect on Net Income For Tax
Purposes of John Bolton and Alex Bolton for the current year. Include in your solution the
adjusted cost base that will apply for Alex Bolton.
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SSS Problem Nine - 5
Required: For each of the two cases, indicate the tax consequences for the transferor that
result from the sale. In addition, indicate the tax values that will be used by the transferee
subsequent to the transfer.
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SSS Problem Nine - 6
Required: Indicate the tax effects to be included in Mr. Forsyth’s tax return as a result of the
2017 deemed disposition at his death and calculate the tax effects associated with the 2018
sale of the building in both of the following Cases:
Case A His will leaves the apartment building to his 23 year old daughter, Eileen.
During 2017, she continues to operate the building and takes maximum CCA for that
year.
Case B His will leaves the apartment building to his wife, Christine. During 2017,
she continues to operate the building and takes maximum CCA for that year.
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SSS Problem Nine - 7
Required: Determine the amount of income that will be attributed to Mr. Langdon for the
current taxation year as the result of the non-interest bearing loans.
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SSS Problem Nine - 8
Required: You have been hired as a tax consultant to Mr. Goodby. He would like a report
that would detail, for each of the four properties, the tax consequences to him of making a gift
of the item to his wife or to either one of his children. Your report should include:
• the tax consequences to Mr. Goodby at the time of the gift;
• the tax cost of the properties to the recipient of the gift;
• the tax treatment of any income on the property subsequent to the gift; and
• the tax consequences that would result from a subsequent sale of the gifted property at
$40,000 more than its fair market value at the time of the gift (assume that there is still no
change in the value of the land).
In preparing your answer, assume that Mr. Goodby does not elect out of ITA 73(1) when the
gifts are made. Assume that the recipient of the rental property does not take CCA prior to the
subsequent sale of the property.
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SSS Solution Nine - 1
Note 1 Under ITA 6(20), one-half of any housing loss reimbursement in excess of
$15,000 must be included in income. As the total reimbursement was $20,000, the
inclusion would be $2,500 [(1/2)($20,000 - $15,000)].
Deductible Expenses
Deductible moving expenses can be calculated as follows:
Real Estate Commission - Regina Home $16,350
Legal Fees - Regina Home 425
Other Regina Home Costs (Not Deductible) Nil
Car Moving Costs 500
Moving Company Costs ($2,800 + $900) 3,700
Costs Of Lodging (Note 2):
House Hunting Trip (3 Nights At $225) 675
In Calgary (12 Nights At $215) 2,580
Food - Maximum (15 Days At $51 Flat Rate) 765
Costs Of Airfare On Move To Calgary 400
Moving Expense Deductions Available $25,395
Note 2 Costs for food and lodging at or near an old or new residence are limited to a
maximum period of 15 days. As soon as the lease is signed (assuming that the person
doesn’t back out before the lease actually begins) the premises is a new residence.
Yolanda has a total of 24 days; 3 days after she signs the lease in Calgary at $225 per
day, 7 days in Regina at $160 per day, and 14 days in Calgary at $215 per day.
As they are the most expensive days, she will deduct the first 3 days in Calgary at $225
per day for a total of $675 [(3)($225)], followed by the remaining 12 days in Calgary at
$215 per day. The total here is $2,580 [(12)($215)].
Actual Deduction
The actual 2017 deduction will be limited to $22,000, the amount of income earned at the
new location. This will leave a carry forward to 2018 of $3,395 ($25,395 - $22,000).
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SSS Solution Nine - 2
Generally, the spouse with the lower income must claim the deduction for child care
expenses. However, under certain circumstances, the spouse with the higher income can
claim the deduction.
One of these circumstances is when the lower income spouse is hospitalized. In this case, the
higher income spouse can claim the deduction for the period of hospitalization. Thus, for the
four weeks that Mr. Harris was hospitalized, Mrs. Harris can claim child care costs.
The relevant calculations for determining the deductible costs for each individual are as
follows:
Mrs. Harris Mr. Harris
Actual Costs And Limited Camp Costs $14,425 $14,425
Annual Expense Limit
[($5,000)(2) + ($8,000)(1) + ($11,000)(1)] $29,000 $29,000
2/3 Of Earned Income
[(2/3)($263,500)] $175,667
[(2/3)($4,200)] $2,800
Periodic Expense Limit [($125)(2)(4 weeks)
+ ($200)(1)(4 weeks) + ($275)(1)(4 weeks)] $2,900 N/A
The least of these amounts for Mrs. Harris is $2,900. You should note that there is no require-
ment that actual payments be allocated on the basis of the time that Mr. Harris was
hospitalized.
The lowest figure for Mr. Harris is $2,800, two-thirds of his earned income. As Mrs. Harris will
be deducting $2,900, Mr. Harris will not be able to deduct any amount of child care costs.
Note that the interest received is not included in Mr. Harris’ earned income.
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SSS Solution Nine - 3
Loretta Loretta's federal Tax Payable with no pension income splitting would be calculated
as follows:
Tax Before Credits [(15%)($2,800)] $ 420
Basic Personal Credit [(15%)($11,635)] ( 1,745)
Federal Tax Payable - Loretta Nil
Harry Harry's federal Tax Payable with no pension income splitting would be calculated as
follows:
Tax On First $91,831 $16,300
Tax On Next $41,169 ($133,000 - $91,831) At 26% 10,704
Total Before Credits $27,004
Credits:
Basic Personal ($11,635)
Spousal ($11,635 - $2,800) ( 8,835)
Age [$7,225 - (15%)($133,000 - $36,430) Nil
Pension ( 2,000)
Total ($22,470)
Rate 15% ( 3,371)
Federal Tax Payable - Harry $23,633
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SSS Solution Nine - 3
When pension income splitting is used, Loretta’s federal Tax Payable would be calculated as
follows:
Tax On First $45,916 $6,887
Tax On Next $2,884 ($48,800 - $45,916) At 20.5% 591
Tax Before Credits $7,478
Credits:
Basic Personal ($11,635)
Pension ( 2,000)
Total ($13,635)
Rate 15% ( 2,045)
Federal Tax Payable - Loretta $5,433
With pension income splitting , Henry's federal Tax Payable would be calculated as follows:
Comparison
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SSS Solution Nine - 4
From the point of view of Alex Bolton, his cost base for the shares will be limited to the actual
price paid of $375,000 [(5,000)($75)]. This means that, when Alex Bolton sells these shares,
the difference between his proceeds of disposition per share of $105 and the price per share
he paid of $75 would be taxed in his hands. In effect, any gain arising from a sales price of up
to $105 will be subject to double taxation.
With respect to the subsequent sale by Alex, the results for him would be as follows:
Proceeds Of Disposition (Actual) $525,000
Adjusted Cost Base (Actual) ( 375,000)
Capital Gain $150,000
Inclusion Rate 1/2
Taxable Capital Gain $ 75,000
From the point of view of Alex Bolton, ITA 69(1)(a) would limit his adjusted cost base to
$525,000, the fair market value of the shares at the time of purchase, despite the fact that John
had to record the actual proceeds of $625,000. With respect to the subsequent sale by Alex,
the results for him would be as follows:
Proceeds Of Disposition (Actual) $525,000
Adjusted Cost Base - ITA 69(1)(a) ( 525,000)
Capital Gain Nil
As was the situation in Case A, Case B involves double taxation. In this case it applies to the
extra $100,000 ($625,000 - $525,000) in proceeds of disposition that is recognized in John's
gain but not in Alex's adjusted cost base.
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SSS Solution Nine - 4
With respect to the subsequent sale by Alex, the results for him would be as follows:
Proceeds Of Disposition (Actual) $525,000
Adjusted Cost Base (Actual) ( 525,000)
Capital Gain Nil
D. Gift
In this Case, John Bolton will be deemed to have received proceeds equal to the fair market
value of $525,000 and the adjusted cost base to Alex Bolton will also be equal to the fair
market value. No double taxation will arise. The results will be the same as in Case C.
The result for John would be as follows:
Deemed Proceeds Of Disposition - ITA 69(1)(b) $525,000
Adjusted Cost Base [(5,000)($45)] ( 225,000)
Capital Gain $300,000
Inclusion Rate 1/2
Taxable Capital Gain $150,000
With respect to the subsequent sale by Alex, the results for him would be as follows:
Proceeds Of Disposition (Actual) $525,000
Adjusted Cost Base - ITA 69(1)(c) ( 525,000)
Capital Gain Nil
Summary
These results can be summarized as follows:
Taxable Capital Gain
John Alex Total
A. Sale For $75 (ACB = $375,000) $150,000 $75,000 $225,000
B. Sale For $125 (ACB = $525,000) 200,000 Nil 200,000
C. Sale For $105 (ACB = $525,000) 150,000 Nil 150,000
D. Gift (ACB = $525,000) 150,000 Nil 150,000
The real economic gain on the two sales is $300,000 ($525,000 - $225,000), a taxable
amount of $150,000. This is reflected in Cases C and D where John either sells the shares at
fair market value or gifts them to his brother Alex. The preceding table reflects the fact that
there was double taxation in Cases A and B, resulting in higher taxable capital gains.
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SSS Solution Nine - 5
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SSS Solution Nine - 6
UCC $170,000
Deduct Disposition - Lesser Of:
• Capital Cost = $250,000
• Deemed Proceeds = $325,000 ( 250,000)
Negative Closing UCC Balance = Recaptured CCA ($ 80,000)
A total of $173,500 ($56,000 + $37,500 + $80,000) would be added to Mr. Forsyth’s 2017
Net Income For Tax Purposes.
With respect to his daughter’s tax records, the land will have an adjusted cost base of
$212,000. In addition, the building will be a Class 1 asset with a capital cost of $325,000. In
calculating the 2017 CCA, two things should be noted:
• ITA 13(7)(e) does not apply to deemed dispositions resulting from the death of a taxpayer.
This provision normally limits the UCC for the acquiring taxpayer to the selling taxpayer's
capital cost, plus one-half of the difference between the proceeds of disposition and the
taxpayer's capital cost.
• Since the acquisition of the building is a non-arm’s length transaction and its previous use
was to produce income, it is exempt from the half-year rules.
Given these consideration, the 2017 CCA will be $13,000 [($325,000)(4%)], leaving a UCC of
$312,000 ($325,000 - $13,000).
Using this information, the 2018 tax effects associated with the sale of the building would be
calculated as follows:
Land Building
Proceeds Of Disposition $225,000 $375,000
Adjusted Cost Base/Capital Cost ( 212,000) ( 325,000)
Capital Gain $ 13,000 $ 50,000
Inclusion Rate 1/2 1/2
Taxable Capital Gain $ 6,500 $ 25,000
UCC $312,000
Deduct Disposition - Lesser Of:
• Capital Cost = $325,000
• Proceeds Of Disposition = $375,000 ( 325,000)
Negative Closing UCC Balance = Recaptured CCA ($ 13,000)
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SSS Solution Nine - 6
A total of $44,500 ($6,500 + $25,000 + $13,000) would be added to the 2018 Net Income
For Tax Purposes of Mr. Forsyth’s daughter.
Case B
Assuming that the transfer was to Mr. Forsyth’s spouse rather than to his daughter, his proceeds
of disposition would be equal to the tax cost of the land and building . As a consequence, there
would have been no tax effects to be included in Mr. Forsyth’s final return.
The land, because it is a non-depreciable asset, would be recorded by Christine at its original
adjusted cost base of $100,000. With respect to the building , for purposes of determining
capital gains and losses, Christine would retain Mr. Forsyth's original capital cost of $250,000.
However, for CCA and recapture purposes, Christine would use Mr. Forsyth's UCC of
$170,000.
During 2017, Christine will take CCA of $6,800 [(4%)($170,000)], leaving a January 1, 2018
UCC of $163,200.
Using these figures, the tax consequences from Christine's sale of the land and building would
be as follows:
Land Building
Proceeds Of Disposition $225,000 $375,000
Adjusted Cost Base/Capital Cost ( 100,000) ( 250,000)
Capital Gain $125,000 $125,000
Inclusion Rate 1/2 1/2
Taxable Capital Gain $ 62,500 $ 62,500
A total of $211,800 ($62,500 + $62,500 + $86,800) would be added to the 2018 Net Income
For Tax Purposes of Mr. Forsyth’s wife.
Mr. Forsyth and Eileen’s increase in Net Income For Tax Purposes total $205,000 ($173,500 +
$31,500), the same amount as the total increase for Mrs. Forsyth.
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SSS Solution Nine - 8
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SSS Solution Nine - 8
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SSS Solution Nine - 8
Any rental income on the property while it is held by his 14 year old daughter would be attrib-
uted back to Mr. Goodby until she reached 18 years of age. This would not be the case if the
gift were to his 25 year old son.
There would be no attribution of capital gains on a gift to either child. If the children subse-
quently sold the property for $550,000 ($510,000 + $40,000), there would be a taxable
capital gain of $20,000 [(1/2)($426,000 - $386,000)] that would be taxed in their hands. As
the value of the land remained at $124,000, there would be no capital gain or loss on the land.
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Chapter 10 Self Study Problems Volume 1 Page 239
Self Study Problem Ten - 1
Case B Mr. Block’s employer sponsors a defined benefit RPP and, during 2017,
contributes $2,900 on Mr. Block’s behalf. Mr. Block also contributes $2,900 to the
plan in 2017. The plan provides a benefit equal to 1.75 percent of pensionable earn-
ings for each year of service. Mr. Block’s pensionable earnings for 2017 are $45,000.
Calculate his 2017 PA.
Case C Miss Carr has worked for her current employer since 2015. In January,
2017, this employer institutes a defined benefit RPP, with benefits extended for all
years of service prior to the inception of the plan. The benefit formula calls for a retire-
ment benefit equal to 1.25 percent of pensionable earnings for each year of service.
In the current and both previous years, Miss Carr’s pensionable earnings were
$38,000.
Calculate her 2017 PSPA and PA.
Case D Ms. Dexter has worked for her current employer since 2015. She has been a
member of her employer’s defined benefit RPP during all of this period. In January,
2017, the employer agrees to retroactively increase the benefit formula from 1.6
percent of pensionable earnings for each year of service, to 1.8 percent of pension-
able earnings for each year of service. In the current and both previous years, Ms.
Dexter’s pensionable earnings were $59,000.
Calculate her 2017 PSPA and PA.
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Chapter 10 Self Study Problems Volume 1 Page 240
Self Study Problem Ten - 2
Required:
A. Determine Mark's maximum RRSP deduction for 2017.
B. Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would be
assessed to Mark for the year ending December 31, 2017.
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Chapter 10 Self Study Problems Volume 1 Page 241
Self Study Problem Ten - 3
Required: For 2017, determine Mr. Barnes’ maximum allowable deduction for contribu-
tions to a Registered Retirement Savings Plan under the following assumptions:
A. During 2016 and 2017, Mr. Barnes is not a member of a Registered Pension Plan or a
Deferred Profit Sharing Plan.
B. Mr. Barnes is a member of a Registered Pension Plan. His employer reports that his
Pension Adjustment is $4,200 for 2016 and $4,300 for 2017, all of which reflects contri-
butions made by his employer.
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Chapter 10 Self Study Problems Volume 1 Page 242
Self Study Problem Ten - 4
Required:
A. Calculate Mr. Beasley’s net employment income for 2016.
B. Determine Mr. Beasley’s maximum deductible RRSP contribution for 2017.
C. As Mr. Beasley’s personal financial consultant, what advice would you give him regarding
his TFSA and RRSP contribution and deduction for 2017?
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Chapter 10 Self Study Problems Volume 1 Page 243
Self Study Problem Ten - 5
Required:
A. Calculate Mr. Detwiller’s 2016 Net Income For Tax Purposes. In addition, indicate any
carry overs available to him at the end of the year.
B. For each of the following independent cases, calculate:
• the maximum RRSP contribution that Mr. Detwiller can make for 2017 without
incurring a penalty;
• Mr. Detwiller’s maximum RRSP deduction for 2017, assuming that he makes the
maximum contribution that you have calculated.
Case 1 During 2016, he is a member of a money purchase Registered Pension Plan
(RPP) in which he has contributed $1,500 and his employer has contributed $3,000.
He is also a member of a Deferred Profit Sharing Plan (DPSP) to which his employer
has contributed $1,000.
Case 2 During 2016, he is a member of a DPSP in which his employer contributed
$4,500 per employee. His employer does not sponsor a RPP.
Case 3 During 2016, he is not a member of a RPP or DPSP. Assume that in addition
to the preceding information, he also has net business income of $220,000.
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Self Study Problem Ten - 6
Other Information:
1. The corporation made a number of deductions from Mr. Sabatini’s salary. The amounts
were as follows:
Canada Pension Plan contributions $ 2,564
Employment Insurance premiums 836
Income taxes 39,000
Registered Pension Plan contributions 3,500
Contributions to a registered charity 600
Parking fees - company garage 240
Employee share of life insurance premium (See item #2) 1,500
Employee share of sickness and accident
insurance premium (See item #3) 550
2. Mr. Sabatini is covered by a group life insurance policy that pays $150,000 in the event of
his death. The total annual premium on this policy is $3,000, with one-half of this amount
paid by the employer.
3. Mr. Sabatini is covered by a group sickness and accident insurance plan that he joined on
January 1, 2017. The premium on this plan is $100 per month, one-half of which is paid
by Mr. Sabatini’s employer. The plan provides periodic benefits that compensate for lost
employment income. During 2017, Mr. Sabatini was hospitalized during all of November
and received a benefit from the sickness and accident insurance plan in the amount of
$4,500. Payment of the monthly premium was waived during the one month period of
disability.
4. Mr. Sabatini’s employer provides him with an automobile that was purchased in 2016 for
$68,000. During 2017 Mr. Sabatini drives this automobile 99,000 kilometers, 92,000 of
which are employment related. All operating costs, amounting to $16,200 for 2017, are
paid by the employer. During the period of his hospitalization, his employer required that
the vehicle be returned to the company garage. Mr. Sabatini pays the company $1,000 for
his personal use of the automobile during 2017.
5. As a result of his extensive employment related travel, Mr. Sabatini has accumulated over
300,000 points in a frequent flier program. All of Mr. Sabatini’s travel costs have been
charged to his personal credit card and his employer has reimbursed him for all of these
charges.
On December 30, 2017, he uses 150,000 of these points for two first class tickets to
Cancun. Mr. Sabatini is accompanied on this one week trip by his secretary and, while
there is some discussion of business matters, the trip is primarily for pleasure. At the same
time, Mr. Sabatini uses another 30,000 of the points to provide his wife with an airline
ticket to visit her mother in Leamington, Ontario. The normal cost of the Cancun tickets is
$11,000, while the normal cost of the Leamington ticket is $600.
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Chapter 10 Self Study Problems Volume 1 Page 245
Self Study Problem Ten - 6
6. In 2014, Mr. Sabatini received options to purchase 1,000 shares of his employer’s stock at
a price of $12.50 per share. At the time the options were granted, the shares were trading
at $10.00 per share. During December, 2017, Mr. Sabatini exercises these options. At
the time of exercise, the stock is trading at $23.50 per share.
7. Mr. Sabatini’s employer allows him to purchase merchandise at a discount of 30 percent
off the normal retail prices. During 2017, Mr. Sabatini acquires such merchandise at a
cost (after the applicable discount) of $6,790.
8. In addition to reimbursing him for invoiced travel costs, Mr. Sabatini’s employer pays a
$5,000 annual fee for his membership in a local golf and country club. During 2017, Mr.
Sabatini spends $6,800 entertaining clients at this club. None of these costs are reim-
bursed by Mr. Sabatini’s employer.
9. Mr. Sabatini’s employer contributes $2,400 to the company’s Registered Pension Plan on
his behalf and, in addition, contributes $2,000 in his name to the company’s Deferred
Profit Sharing Plan.
10. Mr. Sabatini has correctly calculated that his employment income added $116,000 to his
2016 Earned Income for RRSP purposes. This Earned Income figure has not taken into
consideration the following items:
2017 2016
Business Loss ($ 3,300) ($12,500)
Taxable Dividends (After Gross Up) 600 800
Interest Income 1,100 660
Rental Income 2,000 7,500
Taxable Capital Gains 7,900 3,800
Child Support Received
(For 8 Year Old Son) 6,000 6,000
11. Mr. Sabatini’s Unused RRSP Deduction Room carried forward from 2016 was nil and he
had no undeducted RRSP contributions. His employer reports that his Pension Adjust-
ment for 2016 was $6,800.
12. On May 18, 2017, Mr. Sabatini contributes $2,600 to his wife’s RRSP. His only contribu-
tion to his own RRSP in 2017 and 2018 was $10,000 in February, 2017. This contribution
was deducted in full on his 2016 tax return.
13. In July, 2018, Mr. Sabatini drowns in his swimming pool. The police found receipts for the
Cancun trip with his secretary floating beside him in the pool.
Required:
A. Determine Mr. Sabatini’s minimum net employment income for the year ending
December 31, 2017, and indicate the reasons that you have not included items in your
calculations. Ignore GST implications.
B. Calculate Mr. Sabatini’s RRSP Deduction Limit for 2017 and determine his RRSP deduc-
tion in the calculation of his Net Income For Tax Purposes for 2017.
C. Assume that Mr. Sabatini’s RRSP does not specify a beneficiary if he dies. Describe the tax
consequences of his death on his RRSP.
D. Assume Mr. Sabatini’s wife is the sole beneficiary of his RRSP. Describe the tax conse-
quences of his death on his RRSP.
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Chapter 10 Self Study Problems Volume 1 Page 246
Self Study Problem Ten - 7
Required:
A. Determine the maximum RRSP contribution that Mr. Colt can deduct in 2017.
B. What are the tax implications for Mr. Colt in 2017 if he makes his planned contributions
($50,000 payment to his RRSP and the remainder to a spousal RRSP)? As Mr. Colt’s finan-
cial consultant, what advice would you give him regarding his RRSP contributions and
deductions?
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Chapter 10 Self Study Problems Volume 1 Page 247
Self Study Problem Ten - 8
Required: Advise Mr. Jones with respect to alternative forms of compensation that could
reduce or defer taxes on the $300,000 that he is to receive from the Martin Manufacturing
Company.
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Chapter 10 Self Study Problems Volume 1 Page 248
Self Study Problem Ten - 9
Kerri is employed by a large public company. Employment related information for the years
2016 and 2017 is as follows:
2016 2017
Gross Salary $47,000 $53,000
Commissions 6,200 7,800
Canada Pension Plan Contributions 2,544 2,564
Employment Insurance Premiums 955 836
RPP Contributions (Note) 1,800 1,950
Note Kerri’s employer makes a matching contribution to the money purchase RPP in
each of the two years.
Other than the RPP contributions, Kerri’s employer provides no other benefits. In addition,
she is required to maintain an office in her home with no reimbursement provided. Her
employer provides the required T2200 form. Kerri’s home had cost $420,000 on January 1,
2016, with $120,000 of this amount being the estimated value of the land. For 2016 and
2017, the total costs of owning and operating this home are as follows:
2016 2017
Utilities And Maintenance $ 1,850 $ 2,040
Insurance 625 715
Property Taxes 4,200 4,400
Mortgage Interest 12,000 11,800
Kerri’s home office occupies 15 percent of the total floor space in the home.
In January, 2016, Kerri acquires a residential duplex that she uses as a rental property. The
cost of the property is $340,000, with $80,000 of this amount being the estimated value for
the land. For the two years 2016 and 2017 rents and expenses other than CCA are as follows:
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Chapter 10 Self Study Problems Volume 1 Page 249
Self Study Problem Ten - 9
2016 2017
Rents $ 8,400 $13,800
Expenses Other Than CCA 10,300 11,100
In January, 2016, Kerri acquired 5,000 shares of her employer’s stock at its fair market value of
$12.00 per share. During 2016, these shares paid eligible dividends of $0.75 per share.
During 2017, she receives eligible dividends of $0.60 per share. During December, 2017,
Kerri sells all of her shares at their fair market value of $14.75 per share.
Kerri has unused RRSP deduction room carried forward from 2016 of $6,200. In addition, her
plan contains $5,800 in undeducted contributions. Based on the undeducted contributions
in the plan, along with any additional contributions required to meet this goal, Kerri would
like to deduct an amount in 2017 that would reduce her unused RRSP deduction room to nil at
the end of the year.
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Chapter 10 Self Study Problems Volume 1 Page 250
Self Study Problem Ten - 10
Ahmed makes an annual donation to the Canadian National Institute For The Blind of $4,000.
He is not eligible for the first-time donor's super credit.
While he was still employed, he was granted options to acquire 5,000 shares of his employer’s
stock. The option price was $15 per share and, at the time the options were granted, this was
also the fair market value of his employer’s shares. All of these options were exercised in
February, 2017. At this time, the shares were trading at $21 per share. In November, 2017, all
of the shares are sold for $23 per share.
Ahmed had other investment income during 2017 as follows:
Interest From Canadian Sources $18,000
Eligible Dividends Received 2,200
Foreign Source Interest (Net Of 10 Percent Withholding)* 2,700
Total $22,900
*Assume that the foreign tax credit is equal to the amount withheld.
On January 1, 2017, Ahmed owns three residential rental properties. They are all Class 1
properties. Relevant information on these properties is as follows:
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Self Study Problem Ten - 10
On December 31, 2017, property A is sold for $960,000. The value of the land for this prop-
erty was $100,000 at the time of purchase and had increased to $340,000 at the time of sale.
The vendor pays $96,000 in cash, with Ahmed taking back a mortgage for the $864,000
balance. The mortgage requires annual payments of $86,400 on the principal, beginning in
2018.
When he turned 71 in 2016, Ahmed transferred his RRSP assets into a RRIF. On January 1,
2017, the fair market value of these assets is $1,250,000. As he has little need for current
income, Ahmed would like to minimize his withdrawals from the plan.
At the beginning of 2017, Ahmed opens an RRSP with his wife as the registrant. He has no
unused RRSP deduction room carried forward from 2016. He would like to make the
maximum deductible contribution to his wife’s RRSP during 2017. In calculating this amount,
assume that his 2016 earned income is equal to his 2017 earned income.
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Chapter 10 Supplementary Self Study (SSS) Problems Volume 1 Page 252
SSS Problem Ten - 1
Case A Barbra Stressand has worked for her current employer since 2014. In
January 2017, this employer implements a defined benefit RPP. The benefits of the
plan are extended to all years of service prior to the inception of the plan. The plan
provides a benefit equal to .75 percent of pensionable earnings for each year of
service. Barbra's pensionable earnings in prior years were as follows:
2014 $46,000
2015 49,000
2016 54,000
2017 55,000
Required: Calculate Barbra's 2017 PSPA and PA.
Case B Jane Fisher's employer sponsors both a defined contribution RPP and a
DPSP. Jane is a member of both plans. During 2017, on Jane's behalf, her employer
contributes $3,300 to the RPP and $1,500 to the DPSP. Jane contributes $2,400 to the
RPP.
Required: Calculate Jane's 2017 PA.
Case C Mark Lanvin begins working for LTC Ltd. at the beginning of 2015. LTC
sponsors a defined benefit RPP with benefits that do not become vested until after an
employee has been with the corporation for five years. LTC has reported the following
PAs for Mark:
2015 $4,500
2016 4,800
On January 1, 2017, Mark is offered a better position with a competing corporation
and resigns at LTC Ltd.
Required: Calculate Mark's PAR for 2017.
Case D Victor Fortune's employer sponsors a defined benefit RPP. During 2017,
Victor and his employer make matching contributions of $2,500 each. The plan
provides a benefit of 1.3 percent of pensionable earnings for each year of service.
Victor has 2017 pensionable earnings of $41,000.
Required: Calculate Victor's 2017 PA.
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Chapter 10 Supplementary Self Study (SSS) Problems Volume 1 Page 253
SSS Problem Ten - 1
Case E Martin Davis has worked for his current employer since 2015. He has been a
member of his employer's defined benefit RPP since his employment began. His
pensionable earnings were $62,000 in 2015 and $65,000 in 2016. Because of wors-
ening economic conditions in his employer's industry, the employees have agreed to
have the benefit formula reduced from 1.5 percent of pensionable earnings for each
year of service, to 1.3 percent of pensionable earnings for each year of service. The
change will be applied retroactively for all prior years of service.
Required: Calculate Martin's 2017 PSPA.
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Chapter 10 Supplementary Self Study (SSS) Problems Volume 1 Page 254
SSS Problem Ten - 2
Required: Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would
be assessed to Mary Jo for the year ending December 31, 2017.
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Chapter 10 Supplementary Self Study (SSS) Problems Volume 1 Page 255
SSS Problem Ten - 3
The royalty income listed above is 2 percent of the sales of the “Handy Shopper,” a gadget Ms.
Goodman invented three years ago. The business income listed above is earned from selling
leather goods.
Ms. Goodman had no Earned Income for RRSP purposes prior to 2014. While in 2014 and
2015, she had sufficient Earned Income to enable her to deduct the maximum allowable RRSP
contribution for 2015 and 2016, she made no RRSP contributions in either of these years.
Beginning in 2016, Ms. Goodman participates in ABP’s employee money purchase Registered
Pension Plan. ABP contributes twice the amount contributed by an employee to the plan. Her
Pension Adjustment for 2016 is $9,000.
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Chapter 10 Supplementary Self Study (SSS) Problems Volume 1 Page 256
SSS Problem Ten - 4
Required:
A. Calculate Ms. Akerfeldt’s 2016 Net Income For Tax Purposes and any carry overs avail-
able to her.
B. Calculate the maximum deductible contribution Ms. Akerfeldt can make to her RRSP for
the 2017 taxation year for the following independent Cases:
Case 1 During 2016, she is a member of a money purchase Registered Pension Plan
(RPP) in which she has contributed $2,000 and her employer has contributed $2,500.
Case 2 During 2016, she is a member of a Deferred Profit Sharing Plan (DPSP) in
which her employer contributed $3,500 per employee.
Case 3 During 2016, she is not a member of a RPP or DPSP. Assume that in addition
to the preceding information, she also has net business income of $165,000. She has
contributed $1,500 to her husband’s RRSP in August, 2017.
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Chapter 10 Supplementary Self Study (SSS) Problems Volume 1 Page 257
SSS Problem Ten - 5
Other Information:
1. Mrs. Sorenson is employed by a large publicly traded company, earning a gross salary of
$67,000 in 2017. In addition, she received commissions of $3,150. During 2017, her
employer withheld the following amounts from her salary.
Canada Pension Plan Contributions $2,564
Employment Insurance Premiums 836
Registered Pension Plan Contributions 2,750
Donations To United Way 600
Professional Dues 350
Contribution To Disability Insurance Plan 1,000
Rhonda’s employer makes a matching contribution of $2,750 to her RPP, as well as a
matching contribution of $1,000 to her disability insurance plan. The plan provides peri-
odic benefits that compensate for lost employment income. Mrs. Sorenson began
contributing to the disability insurance plan in 2016. Her contribution in that year was
$900.
2. Mrs. Sorenson’s employer provides her with a car that was purchased in 2016 for
$45,200. The car was used by Mrs. Sorenson throughout the year, except for a period of
one month during which she was hospitalized for a nervous disorder. During this one
month period, she was required to return the car to the company garage.
During 2017, the car was driven a total of 62,000 kilometers, of which 51,000 were
employment related. Her employer paid all of the operating costs which totaled $9,300
for 2017.
3. Her employer reimburses 100 percent of her airline tickets and meals, but only a portion
of her lodging costs. As a result, she has unreimbursed employment related travel costs.
For 2017, these totalled $4,200.
She is required to maintain an office in her home without reimbursement from her
employer. Her employer provides the required T2200 form. Based on the portion of her
house that is used for this office, the related costs are as follows:
Utilities And Maintenance $ 850
Insurance 725
Property Taxes 1,340
Mortgage Interest 960
4. During her one month hospitalization, Mrs. Sorenson received disability insurance bene-
fits of $4,800.
5. During 2017 Mrs. Sorenson earned interest on term deposits of $3,200. In addition, she
received eligible dividends of $1,500.
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SSS Problem Ten - 5
6. On May 1, 2017, Mrs. Sorenson sold a piece of land for $143,000, receiving a down
payment of $43,000 in cash. The remaining balance will be paid in 5 annual instalments
in the years 2018 through 2022. The adjusted cost base of the land was $87,000.
7. The family medical expenses were as follows:
Rhonda $ 1,200
Martin 2,750
Cissy 8,395
Total $12,345
8. Mrs. Sorenson is not eligible for the first -time donor's super credit.
9. In 2016, Mrs. Sorenson’s had Net Income For Tax Purposes of $57,525. This was made up
of net employment income of $55,000 (after the deduction of $2,400 of RPP contribu-
tions), a net business loss of $8,600, interest income of $2,000, grossed up dividends of
$3,525, and royalties on a song she wrote eight years ago of $5,600.
10. At the end of 2016, Mrs. Sorenson’s Unused RRSP Deduction Room was $7,400 and she
had no undeducted RRSP contributions. Her employer reported that she had a 2016
Pension Adjustment of $5,200.
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SSS Solution Ten - 1
Case B
The required 2017 PA would be calculated as follows:
Employer’s Contribution To RPP $3,300
Employer’s Contribution To DPSP 1,500
Jane’s Contribution To RPP 2,400
PA $7,200
Case C
The required PAR would be calculated as follows:
2015 PA $4,500
2016 PA 4,800
2017 PAR $9,300
Case D
The required 2017 PA would be calculated as follows:
[(1.3%)(9)($41,000)] = $4,797
Note that the contributions made during 2017 have no influence on the PA for a defined
benefit RPP.
Case E
The required PSPA would be calculated as follows:
2015 Amount [(1.5% - 1.3%)(9)($62,000)] $1,116
2016 Amount [(1.5% - 1.3%)(9)($65,000)] 1,170
2017 PSPA (Reduction In Benefits) $2,286
Note that, in this case, the PSPA involves a reduction in benefits. This means that it would be
added rather than deducted in the calculation of the RRSP Deduction Limit.
There would also be a 2017 PA. However, this cannot be calculated as the problem does not
provide the 2017 pensionable earnings.
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SSS Solution Ten - 2
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SSS Solution Ten - 3
*
Note that, in calculating Earned Income for RRSP purposes, no deduction is made
from net employment income for contributions made to an RPP.
A listing of the items that are not included in the calculation of Earned Income is as follows:
• Registered Pension Plan Contributions
• Interest Income
• Taxable Capital Gains
• Non-Eligible Dividends
Part B
The calculation of Ms. Goodman’s maximum deductible RRSP contribution for 2017 is as
follows:
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SSS Solution Ten - 4
Ms. Akerfeldt’s Net Income For Tax Purposes is $61,040 and she has a net capital loss carry
over of $2,000 ($12,300 - $10,300).
Part B - Case 1
Ms. Akerfeldt’s 2016 Earned Income would be calculated as follows:
Net Employment Income $71,000
Add Back RPP Contributions 2,000
Net Rental Loss ( 18,000)
Earned Income $55,000
Given this, her maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End Of 2016 $ 6,000
Annual Addition - Lesser Of:
• 2017 RRSP Dollar Limit = $26,010
• 18% of 2016 Earned Income Of $55,000 = $9,900 9,900
Less 2016 PA ($2,000 + $2,500) ( 4,500)
Maximum Deductible RRSP Contribution $11,400
Part B - Case 2
Ms. Akerfeldt’s 2016 Earned Income would be calculated as follows:
Net Employment Income $71,000
Net Rental Loss ( 18,000)
Earned Income $53,000
Given this, her maximum deductible RRSP contribution would be calculated as follows:
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SSS Solution Ten - 4
Part B - Case 3
Ms. Akerfeldt’s 2016 Earned Income would be calculated as follows:
Net Employment Income $ 71,000
Net Rental Loss ( 18,000)
Business Income 165,000
Earned Income $218,000
Given this, her maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End Of 2016 $ 6,000
Annual Addition - Lesser Of:
• 2017 RRSP Dollar Limit = $26,010
• 18% of 2016 Earned Income Of $218,000 = $39,240 26,010
Less 2016 PA Nil
2017 RRSP Deduction Limit $32,010
Less 2017 Contribution to Spousal RRSP ( 1,500)
Maximum Deductible RRSP Contribution $30,510
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SSS Solution Ten - 5
Given the preceding calculation, her maximum deductible RRSP contribution for 2017 is as
follows:
Unused Deduction Room - End Of 2016 $ 7,400
Annual Addition - Lesser Of:
• 2017 RRSP Dollar Limit = $26,010
• 18% Of 2016 Earned Income Of $54,400 = $9,792 9,792
Less 2016 PA ( 5,200)
Maximum Deductible RRSP Contribution $11,992
Part B
Net Employment Income
Mrs. Sorenson’s net employment income for the year would be calculated as follows:
Gross Salary $67,000
Commission Income 3,150
Registered Pension Plan Contributions ( 2,750)
Professional Dues ( 350)
Taxable Car Benefit (Note One) 8,715
Employment Expenses (Note Two) ( 5,050)
Disability Insurance Benefits (Note Three) 2,900
Net Employment Income $73,615
Note One The taxable benefit on the car would be calculated as follows:
Standby Charge [(2%)(11)($45,200)][11,000 ÷ 18,337] $5,965
Operating Cost Benefit - Lesser Of:
• [(11,000)($0.25)] = $2,750
• [(1/2)($5,965)] = $2,983 2,750
Total Benefit $8,715
As Mrs. Sorenson’s employment related driving is more than 50 percent of the total,
she is eligible for the reduced standby charge calculation. This also means that she is
eligible to use the alternative operating cost benefit calculation based on one-half the
standby charge. In this case, this approach does not produce the lower operating cost
benefit and is not used.
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SSS Solution Ten - 5
Note Two Mrs. Sorenson can deduct home office costs of $850 in utilities and main-
tenance under ITA 8(1)(i) which is available to all employees. As Mrs. Sorenson has
commission income, she has the choice of deducting certain of her expenses under
ITA 8(1)(f) or, alternatively under ITA 8(1)(h). As discussed in Chapter 3, she cannot
use both ITA 8(1)(f) and ITA 8(1)(h).
If she uses ITA 8(1)(h) and (i), she can deduct her non-reimbursed travel costs of
$4,200 for a total of $5,050 ($850 + $4,200). Alternatively, under ITA 8(1)(f) and(i),
she can deduct the following:
Home Office Costs - Insurance $ 725
Home Office Costs - Property Taxes 1,340
Non-Reimbursed Travel Costs 4,200
Total Under ITA 8(1)(f) $6,265
Limited To Commission Income of $3,150 $3,150
Home Office Costs - Utilities And Maintenance 850
Total Under ITA 8(1)(f) and (i) $4,000
Unfortunately, if ITA 8(1)(f) is used, the deduction under ITA 8(1)f) is limited to the
$3,150 of commission income. Clearly, Mrs. Sorenson would be better off using ITA
8(1)(h) and (i) and deducting a total of $5,050.
Note Three As her employer contributes to the disability insurance plan, the
$4,800 in benefits received must be included in income. However, this can be
reduced by the cumulative contributions that she has made to this plan. These total
$1,900 ($1,000 + $900), leaving a net income inclusion of $2,900 ($4,800 - $1,900).
Property Income
Mrs. Sorenson’s property income would be calculated as follows:
Interest Income $3,200
Eligible Dividends 1,500
Gross Up [(38%)($1,500)] 570
Total Property Income $5,270
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SSS Solution Ten - 5
Taxable Income
As Mrs. Sorenson has no deductions applicable to the determination of Taxable Income, her
Taxable Income is equal to her Net Income For Tax Purposes.
Tax Payable
The required calculations here are as follows:
Tax On First $45,916 $ 6,887
Tax On Next $29,397 ($75,313 - $45,916) At 20.5 Percent 6,026
Tax Before Credits $12,913
Tax Credits:
Basic Personal Amount ($11,635)
Spousal ($11,635 - $8,400) ( 3,235)
Employment Insurance ( 836)
Canada Pension Plan ( 2,564)
Canada Employment ( 1,178)
Transfer Of Cissy’s Tuition - Lesser Of:
• Absolute Limit Of $5,000
• Actual Tuition Of $7,800 ( 5,000)
Medical Expenses (Note Four) ( 9,891)
Total Credit Base ($34,339)
Rate 15% ( 5,151)
Charitable Donations (Note Five)
[15%)($200) + (29%)($600 - $200)] ( 146)
Dividend Tax Credit On Eligible Dividends [(6/11)($570)] ( 311)
Federal Tax Payable $ 7,305
Note Four The credit base for medical expenses would be calculated as follows:
Rhonda And Martin’s Expenses ($1,200 + $2,750) $3,950
Lesser Of:
• [(3%)($75,313)] = $2,259
• 2017 Threshold Amount = $2,268 ( 2,259)
Subtotal $1,691
Cissy’s Medical Expenses $8,395
Reduced By The Lesser Of:
• $2,268
• [(3%)($6,500)] = $195 ( 195) 8,200
Base For Credit $9,891
Note Five As none of her income is taxed at 33 percent, this rate will not be appli-
cable to the calculation of the charitable donations tax credit.
Canadian Tax Principles - Self Study And SSS Problems (2017 - 2018)