Cindy has the following income tax transactions for 2013:
? Cindy separated from her husband Ken, on May 1, 2013. They had
been married for 10 years, and they parted on good terms. Cindy
verbally agreed to pay $50,000 to Ken to allow him to buy
household furniture and make a down payment on a house. She
also agreed to pay a monthly support allowance of $600 per month
until Ken found a job. The $50,000 was paid in May 2013, and the
monthly support payments began on June 1, 2013, and continued
throughout the remainder of 2013.
? In November 2013, Cindy left Readers Ltd., where she had worked
since April 2000; she had not been a member of an RPP or a DPSP
with that employer. In December 2013, she took a new job with
Writers Ltd. She was a member of that company’s RPP at the end of
the 2013 taxation year. Following is a summary of the details on the
T4 slips that Cindy received for 2013:
Readers Ltd. Writers Ltd.
Salary (Box 14) $ 81,000.00 $ 5,000
CPP (Box 16) 2,356.20 —
EI (Box 18) 891.12 —
RPP (Box 20) — 100
Tax withheld (Box 22) 20,000.00 1,000
Pension adjustment (Box 52) — 400
? Cindy has a rental property in Winnipeg which she owned prior to
getting married. She has given you the following information:
Gross rental $ 14,400
Rental expenses (10,000)
Rental income $ 4,400
The UCC of the building was $150,000 on December 31, 2012.
Cindy considers that the net rental income should be nil for 2013,
since she can claim a CCA deduction of $4,400. The maximum
available is $6,000 ($150,000 × 4%) because the property is the
only asset included in class 1.
A fire completely destroyed the building on December 1, 2013. The
insurer paid Cindy $180,000 for the building on December 29, 2013,
and she then sold the land for $30,000 on the same date.
Cindy had acquired the property on August 15, 1999, at the
Land $ 20,000
Building $ 160,000
? Cindy loaned $2,000 in 2007 to Adam Ltd., an SBC. The rate of
interest on the loan was 5%. On October 12, 2013, she was advised
that Adam Ltd. had declared bankruptcy and that the entire loan
and interest would not be paid.
? Cindy set up a sideline business effective July 1. The proprietorship
provides local walking and hiking trips. The business year-end is
December 31, 2013. She has provided you with the following
information for 2013:
Cash-Flow Statement from Proprietorship
OUT AND ABOUT
July 1 to December 31
Cash receipts (Note a) $ 28,000
Advertising (Note b) $2,200
Charitable donations 380
Equipment rental 3,450
Liability insurance 2,860
Licences (Note c) 680
Salary paid to Cindy 14,750
Telephone—Long distance 610 (28,800)
Cash outflow ($ 800)
a. Cash receipts do not include $4,000 in payments received
from customers in January for all December trips and
outstanding accounts receivable.
b. Advertising includes $500 of meals and entertainment
expenses relating to promoting business with clients.
c. Licences expense includes $400 for golf memberships for
Cindy. She has met several potential new customers through
the club. The remaining amount was for business licensing.
Since Cindy has a sightseeing business, she has various
annual license fees that she pays to the city for access to city
d. Cindy has not claimed a donation tax credit in prior years.
? In September, Cindy won a new car through a minor hockey
association ticket raffle. The prize had an estimated fair market
value of $18,000.
? On December 1, 2013, Cindy moved to avoid a 90-kilometre drive
to her new workplace. Her new residence is 25 kilometres from the
new workplace. In moving, she incurred the following expenses,
which were not reimbursed by Writers Ltd.:
Legal expenses with respect to purchase of new residence $ 1,500
Cost of transporting household effects (Bumpem and Breakem
Hauling Ltd.) $ 3,000
Commission on sale of old residence $ 10,000
New furniture, carpets, and drapes $ 5,000
Sale price of old residence $ 200,000
Cost of acquisition of new residence $ 250,000
? Cindy sold a painting in April 2013 for $3,000. The painting was
acquired in 2000 for $1,000. She also sold 100 shares of a Canadian
public corporation on November 15, 2013, that were acquired in
POD $ 20,000
ACB $ 10,000
Brokerage commission $ 2,000
? She received an eligible dividend of $300 in 2013.
Cindy has $20,000 of unused RRSP deduction room carried forward
a. (30 marks)
Calculate Cindy's income for 2013 under section 3. Show all your
calculations. Explain the tax treatment of any items not included in
your section 3 calculations, and identify any deductions that Cindy
can carry forward to 2014.
b. (2 marks)
Manually compute Cindy's maximum deductible contributions to an
RRSP for 2014.
c. (10 marks)
Use Cantax to calculate and report Cindy's income-tax related
transactions for 2013. State the values found in the following lines
of the tax return:
i. Line 126
ii. T1-S1-2, line 425
iii. T1-S1-1, line 349
iv. T1-S3, line 199
v. T776#01- 2, line 9924
d. (4 marks)
Based on your answer in (a) regarding the deductibility of the
payments made to Ken, what suggestion could you make to Cindy
for 2013 and/or future taxation years if she consults you on January
1, 2014? Justify your answer by providing the appropriate
references to the ITA.
e. (4 marks)
Cindy received a Notice of Reassessment from the CRA dated
November 18, 2013, and mailed the same day, amending her 2011
income tax return. The CRA disallowed her deduction for a business
investment loss claimed in 2011. Cindy disagrees with the
reassessment notice and has detailed information regarding the
amount claimed. Advise Cindy on how to respond to this
Procedure for part (c)
1. Start Cantax and open the tax return file TX1(2A). The basic
personal information has been pre-entered. Save this tax return
under your own initials.
2. Enter the amounts calculated in part (a) in the appropriate
3. After entering all the data, display the tax summary. Cindy's net
income should be equal to the net income you calculated in part (a).
4. Save the tax return and print schedules T1-1 to T1-4, T1-S1, T1-S3,
T-1M#01, T776, T776#01-1, and T776#01-2. From the printouts,
determine the answers to part (c).
Question 2 (10 marks)
Mark Jacobs, a well-known Toronto artist, signed a contract with the
University of Toronto to beautify the campus. Mark spent all year
completing the beautification. During that time, he enhanced the campus
with his own artwork, bought pieces at local auctions, and commissioned
pieces by other artists.
The university restricted Mark’s choice of art to Canadian artists. The
university also controlled the colour schemes and the types of art selected
(for example, paintings, sculptures, or murals) for the various locations on
campus. However, within these requirements, Mark was permitted to
exercise artistic discretion over the actual pieces chosen. This gave him a
great degree of latitude over the beautification of the campus.
Mark could produce the art himself, purchase or commission another
artist's work, and focus on any theme he desired. He worked at his own
studio and used his own tools for his own productions. If the University
did not like the art he produced or bought, he was not reimbursed costs
and had to sell the art on the open market. The University gave him
access to an office to allow him to meet with other artists he was
considering for the project. A representative from the university was not
required to be present with Mark in his meetings with other artists.
During the year, Mark channelled all his energy into the university's
beautification and did not produce art for outside clients.
What is the proper tax treatment for Mark's income from this contract?
Explain your reasoning.
Question 3 (8 marks)
Answer the following questions, giving your justification in each case:
a. (3 marks)
Subsection 8(6.1) provides detailed criteria with respect to what is
an eligible tool of a tradesperson for purposes of the deduction in
subsection 8(1)(s). The criteria are set out in paragraphs (a) to (d).
Must all the criteria be met for the deduction to be allowed? Explain
b. (2 marks)
Section 62(3) defines "moving expenses" for the purposes of section
62(1). Is this an exhaustive list? Explain your reasoning.
c. (3 marks)
Section 10(1) indicates inventory shall be valued at the lower of
cost or fair market value, whichever is lower, or in a prescribed
manner. Where would you find information on the “prescribed
manner” that must be used for this section?
Question 4 (9 marks)
Mad about Wraps Inc., a company owned by Martha Mod, has been
operating two locations in British Columbia since 1994. Its fiscal period
ends December 31.
In 2014, the company bought four more locations and, in addition to
paying for other assets, paid for goodwill as follows:
Vancouver $ 90,000
Total $ 130,000
Mad About Wraps Inc. sold the two original locations and received the
following amounts for goodwill:
Location Selling price
Victoria $ 35,000
Total $ 45,000
The balance in the cumulative eligible capital account at the end of 2011
was $20,000 after the deduction allowed under paragraph 20(1)(b). There
were no additions or dispositions of ECP in 2012 or 2013.
The maximum deduction allowable under paragraph 20(1)(b) was claimed
State the tax implications for Mad About Wraps Inc. with respect to the
goodwill in the 2014 taxation year. Show all your calculations and round
all amounts to the nearest dollar.
Question 5 (23 marks)
Edith Cleaver earns income in excess of $200,000 each year. She is
married to Paul Smith and has two children, Michael, age 20, and Judy,
age 14. Edith has heard about income splitting and is thinking of
transferring shares of RW Ltd., a public corporation, to her husband and
children so that dividends may be paid to them in the future. She acquired
100 common shares of RW Ltd. in 2000 for $ 10,000. She wants to give
35 shares to her husband and 20 shares each to her two children. The
FMV of the 100 shares is currently $ 2,000,000.
Edith inherited a parcel of land from her father in 1987. She sold the land
in 2014 for $100,000. The value in 1987 was $20,000. The purchaser paid
$20,000 cash, with the remaining $80,000 plus interest due in 2016. Edith
has calculated her capital gain as $80,000.
Edith also owns a chalet she acquired in 2001 for $40,000. It was rented
until December 2011, after which time it was used by Edith and her family
for their pleasure. The FMV of the chalet was $65,000 in December 2011,
and in January 2014 it was sold for $109,000. Edith paid $3,500 to the
real estate broker who negotiated the sale. No CCA had ever been
claimed, and an election under subsection 45(3) was included in Edith’s
2011 income tax return. Edith and her husband also own a house that
they lived in since they were married in 1988. They paid $70,000 for their
house, which is now worth $300,000.
a. (15 marks)
Explain to Edith the tax consequences for herself, her husband, and
her children, of the gift of the shares to each member of her family.
State the immediate tax consequences and what the tax
consequences would be when dividends are paid on the shares, and
when the shares are eventually sold by Judy, Michael, and Paul.
Show all your calculations.
b. (4 marks)
Determine if Edith’s calculation of her capital gain is correct.
Indicate whether she has any other alternatives for reporting the
gain in 2014. Support your answer with appropriate
references to the ITA.
c. (4 marks)
Determine the tax consequences for Edith for 2014 for the
disposition of the chalet, and identify any elections she can make.
Cindy has the following income tax transactions for 2013: