Byrd & Chen's Canadian Tax Principles, 2022-2023, 1s edition. Volume 1, Volume 2 by Clarence Byrd, by QuentinAxel

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 1 Introduction to Federal Taxation in Canada 1.1 Online Exercises 1) The major source of federal revenues is the personal income tax. Indicate three other types of taxes that contribute to federal revenues. Answer: The other sources of federal revenues that are shown in Figure 1-1 of the text are: • Corporate income taxes. • Non-resident income taxes. • GST. • Customs and import duties. • Other excise taxes. • EI premiums. Type: ES Topic: Federal revenue sources

2) What is the meaning of "person" when the term is used in the ITA? Answer: In the ITA, the term "person" refers to an individual, a corporation, a trust or an estate. Type: ES Topic: Definition - "Person" ITA 248(1)

3) Briefly describe the procedures used in calculating provincial or territorial income tax for individuals in other than individuals residing in Quebec. Answer: Provincial or territorial income taxes for individuals are calculated by applying a provincial or territorial income tax rates to taxable income for federal income tax purposes. Provincial or territorial personal income tax credits are then applied to the resulting gross income tax. The provincial and territorial income tax brackets may differ from the federal income tax brackets. In addition, provincial and territorial personal tax credits may be different than the federal personal tax credits. Type: ES Topic: Income tax payable - federal income tax

4) The Canadian income tax system is often used to achieve various economic objectives. Give three examples that illustrate this point. Answer: There are many examples that could be cited. The text divides them into resource allocation (e.g., public health care), distribution effects (e.g., federal GST credit), stabilization effects (e.g., deficit reduction), and fiscal federalism (e.g., allocations to various levels of government). Type: ES Topic: Canadian income tax system - objectives

5) Provide an example of how taxation policy can be used to influence resource allocation. Answer: Examples provided in the text are as follows: • Tax revenues are used to provide public goods and services. • Excise taxes are used to discourage the consumption of alcohol and tobacco products. There are, of course, many other examples that could be cited. Type: ES Topic: Canadian income tax system - objectives

6) The government pays a Canada Child Benefit to the parents of children who are under 18 years of age. The payments are reduced by a percentage of income above a certain amount. What objectives are achieved by this benefit system? Answer: The Canada Child Benefit system is designed to assist low income families with children. The government is encouraging population growth. In addition the benefits are targeted to those most in need being low income families. Type: ES Topic: Canadian income tax system - objectives

7) Indicate three disadvantages of a tax system that uses progressive rates. Answer: There are a number of possibilities here. They include that progressive rates: • Increase the complexity of the system. • Are unfair to individuals with highly variable income streams. • Are unfair to single income family units. • Lead to pressure for various types of tax concessions. • Discourage high income individuals from making additional efforts. • Encourage tax evasion. Type: ES Topic: Canadian income tax system - objectives

8) A regressive tax is one that taxes high income individuals at lower effective rates. Explain why a sales tax levied at a flat rate of 8% can be regressive. Answer: While the sales tax rate is the same for all individuals without regard to their income level, lower income individuals normally spend a higher percentage of their total income. Since the sales tax is charged on the amounts spent, this means that the sales tax paid by lower income individuals represents a larger percentage of their total income. As a consequence, they are generally considered to be regressive in nature. Type: ES Topic: Canadian income tax system - regressive vs progressive rates

9) Distinguish between horizontal equity and vertical equity as these terms are used in describing tax systems. Answer: Horizontal equity is achieved when taxpayers in similar economic circumstances are subject to similar levels of tax. Vertical equity is achieved when taxpayers in different economic circumstances are subject to taxes in a different manner. Type: ES Topic: Canadian income tax system - objectives

10) What are some of the factors that have led to the entrenched use of tax expenditures as opposed to program spending? Answer: The reasons that are listed in the text are as follows: • It is less costly to administer tax expenditures than it is to administer government funding programs. • More decisions are left to the private sector so that funds may be allocated more efficiently. • Tax expenditures reduce the visibility of certain government actions. This is particularly beneficial if some social stigma is attached to the programs. For example, a child tax benefit system is more acceptable than increasing social assistance (welfare) payments. • Tax expenditures reduce the progressivity of the tax system. As many of the tax expenditures, such as tax shelters, are more available to higher income taxpayers, they serve to reduce effective tax rates in the higher rate brackets. Type: ES Topic: Canadian income tax system - objectives

11) While the Sections of the ITA are numbered 1 through 281, there are actually more than 281 Sections. Explain why this is the case. Answer: This situation reflects the fact that when a new Section is added, it has been more convenient to attach a decimal designation to the new Section, as opposed to renumbering all of the Sections that follow the new Section. As an example, over several years, the Department of Finance has added six new Sections after Section 12. They have been numbered Section 12.1 through Section 12.6. If they had used whole numbers for these new Sections, it would have been necessary to renumber all of the remaining Sections in the Act each time a new Section was added. Type: ES Topic: The ITA & income tax reference materials

12) What purposes are served by Canada's international tax treaties? Answer: The purposes of these treaties are as follows: • They impose measures on countries to avoid double taxation where a person is liable for income tax on the same income in both countries • They tare used to create an exchange of information for the purposes of combatting tax evasion. Type: ES Topic: International - income tax treaties

13) List four non-legislative sources of income tax information. Answer: The required four items can be selected from the following: • CRA Web Site • Interpretation Bulletins • Income Tax Folios • Information Circulars • Income Tax Technical News • CRA News Releases, Tax Tips, and Fact Sheets • CRA Guides • Advance Income Tax Rulings • Technical Interpretations Type: ES Topic: The ITA & income tax reference materials

14) What is the meaning of "taxation year" as the expression is used in the ITA? Answer: For individuals and trusts (except graduated rate estates), the taxation year is the calendar year of January 1 to December 31. In contrast, the taxation year for corporations are defined in terms of a fiscal period which generally relates to a business. A fiscal period can end on any date, with the only constraint being that it cannot exceed 53 weeks. Graduated rate estates are permitted to use a non-calendar taxation year. Type: ES Topic: Definition - "Taxation Year" ITA 249

15) Under what circumstances will a person who is not resident in Canada be liable for Canadian income tax? Answer: • The non-resident person earns employment income in Canada. • The non-resident person carries on a business in Canada. • The non-resident person has a gain on the disposal of taxable Canadian property. Type: ES Topic: Non-resident liability for income tax

16) What is the importance of residence in Canadian income taxation? Answer: As stated in the text, residence is the cornerstone of Canadian income taxation. If a person is considered a resident of Canada in a given year, that person will be subject to Canadian income tax for that year on all sources of income. Alternatively, if the person is a non-resident, Canadian Part I tax will only apply to Canadian employment income, Canadian business income, and gains on the disposition of Taxable Canadian Property. Type: ES Topic: Residency - general concepts

17) When an individual leaves Canada, the CRA may take the position that the individual has retained Canadian residence status. What are the three primary factors that the CRA considers in determining whether an individual has, in fact, ceased to be a resident of Canada? Answer: As stated in S5-F1-C1, the primary factors that will be considered by the CRA are as follows: • Whether the individual is continuing to maintain a dwelling in Canada. • Whether the spouse or common-law partner of the individual remains in Canada. • Whether the individual has dependants who remain in Canada. Type: ES Topic: Residential ties

18) List three factors that would be considered in the determination of whether or not an individual is a resident of Canada. Answer: The main factors here would be: • Does the individual have a dwelling in Canada? • Does the individual's spouse or common-law partner live in Canada? • Do the dependants of the individual live in Canada? Other factors that could be mentioned include: • Owning personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles). • Social ties with Canada (such as memberships in Canadian recreational and religious organizations). • Economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts). • Hospitalization and medical insurance coverage from a province or territory of Canada. • A driver's license from a province or territory of Canada. • A vehicle registered in a province or territory of Canada. • A seasonal dwelling place in Canada or a leased dwelling place. • Holding a Canadian passport. • Membership in Canadian unions or professional organizations. Type: ES Topic: Residential ties

19) If an individual leaves Canada for a temporary absence, this raises the question of whether the individual was a Canadian resident during the period of absence, particularly if some residential ties have been retained. What are the major factors that are considered in determining whether an individual continues to be a Canadian resident during a temporary absence? Answer: As noted in the text, S5-F1-C1 identifies the following factors: Intent - The issue is whether the individual intended to permanently sever residential ties with Canada. If, for example, the individual has a contract for employment, if and when the individual returns to Canada, this could be viewed as evidence that the individual did not intend to permanently depart. Another factor would be whether the individual complied with the rules related to permanent departures (i.e., as noted in Chapter 8, there is a deemed disposition of an individual's property at the time of departure from Canada, resulting in the need to pay income tax on certain gains). Frequency of Visits - If the individual continues to visit Canada on a regular and continuing basis, particularly if other secondary residential ties are present, this would suggest that the individual did not intend to permanently leave Canada. Residential Ties Outside of Canada - A further consideration is whether or not the individual establishes residential ties in another country. If someone leaves Canada and travels for an extensive period of time without settling in any one location, it will be considered as evidence that the individual has not permanently departed from Canada. Type: ES Topic: Residency - general concepts

20) One of your friends is leaving Canada and would like to know when he will no longer be considered a Canadian resident. Briefly explain the general rules related to terminating an individual's status as a Canadian resident. Answer: A Canadian resident normally becomes a non-resident on the latest of the following days: • on leaving Canada, • when a spouse and/or dependants leave Canada, and • on becoming a resident of another country. Type: ES Topic: Residency - general concepts

21) For the current year, Jane Doe, a resident of the U.S., spent 210 days in Canada. Since she was physically present in Canada for 183 days or more (e.g. sojourned in Canada) she is deemed to be a resident of Canada. In addition, Jack Fawn, a long-time resident of Manitoba, was considered a part year resident for the first 210 days, after which he permanently departed from Canada. Explain how these two individuals will be taxed in Canada. Answer: As a sojourner, Jane would, as a deemed resident, be liable for Canadian income tax on her world wide income for the entire year. As she would not be considered a resident of a province, she would be charged an additional federal income tax of 48% based on her federal income tax payable. In contrast, Jack would only be liable for Canadian income tax on his world wide income for the 210 day period prior to his departure from Canada. In addition, he would be liable for provincial income tax in Manitoba for the same 210 day period. Jack would be considered a non-resident of Canada for the remainder of the year. Type: ES Topic: Residency - general concepts

22) It is possible that an individual could be considered resident in more than one country. In such situations, "tie-breaker" rules are used to deem the individual to be resident in one of the two countries. These tie-breaker rules are designed to avoid the individual being subject to taxation in both countries. List and describe three of the tie-breaker rules common to Canada's income tax treaties. Answer: The tie-breakers rules are as follows: Permanent Home - If the individual has a permanent home available in only one country, the individual will be considered a resident of that country. A permanent home means a dwelling, rented or purchased, that is continuously available at all times. For this purpose, a home that would only be used for a temporary period would not be considered a permanent home. Centre of Vital Interests - If the individual has permanent homes in both countries, or in neither, then this test looks to the country in which the individual's personal and economic relations are greatest. Such relations are virtually identical to the ties that are examined when determining factual residence for individuals. Habitual Abode - If the first two tests do not yield a determination, then the country where the individual spends more time will be considered the country of residence. The number of days spent in each country is often used in applying this test. Citizenship - If the tie-breaker rules still fail to resolve the issue, then the individual will be considered a resident of the country where the individual is a citizen. Competent Authority - If none of the preceding tests resolve the question of residency then, as a last resort, the so-called "competent authority procedures" are used. Without describing them in detail, these procedures are aimed at opening a dialogue between the two countries for the purpose of resolving the conflict. Type: ES Topic: Residency - tax treaty tie-breaker rules for individuals

23) Is a corporation incorporated in Canada that carries on a business always considered to be resident in Canada or is the location where the business is carried on relevant? Explain your conclusion. Answer: The carrying on of a business by a corporation is generally irrelevant to the determination of whether the corporation is a resident of Canada. Corporate residency is determined on a factual or deemed basis and a corporation may also be deemed to be a non-resident of Canada if the corporate tiebreaker rule of a tax treaty concludes that the corporation is only a resident of the other country and not Canada. Corporations are factually resident where their Board of Directors regularly meets. Corporations are deemed to be resident in Canada if the corporation was in Canada after April 26, 1965. However, if the company is incorporated in Canada prior to April 27, 1965, it will only be considered resident in Canada in those situations where it either: • it carried on business in Canada at any time after that date; or • was factually resident in Canada at any time after that date. In general the corporate tie-breaker rule in Canada's income tax treaties generally provides that the corporation is resident in the country in which it was incorporated. Type: ES Topic: Residency - tax treaty tie-breaker rules for corporations

24) Limon Inc. was incorporated in the U.S. five years ago. However, all of the members of the Board of Directors meet in Montreal. In which country would Limon Inc. be taxed? Answer: Limon Inc. is a U.S. resident because it was incorporated in the U.S. It is however considered a factual resident of Canada based on where the Board of Directors meet. In such dual residency cases, the corporate tie-breaker rule of the Canada/U.S. tax treaty deem the corporation to be a resident of the country in which it was incorporated. That means that Limon Inc. would be considered a non-resident of Canada and only subject to Canadian income tax under Part I if it carried on a business in Canada or disposed of Taxable Canadian property, both of which are subject to other tax treaty provisions. Type: ES Topic: Residence of corporations

25) What are the components of net income? Answer: The components of net income are employment income or loss, business income or loss, property income or loss, net taxable capital gains (taxable capital gains minus allowable capital losses), other miscellaneous sources of income, subdivisions e deductions and allowable business investment losses. Type: ES Topic: Net income - ITA 3

26) ITA 3(b) reads that a taxpayer should "determine the amount, if any", by which taxable capital gains exceeds allowable capital losses.Does this wording mean that negative amounts are not possible? Answer: ITA 257 adds a rule that says to ignore negative numbers unless the context requires otherwise. The phrase "the amount, if any" is generally used throughout the ITA to indicate that only positive or nil amounts are acceptable. Type: ES Topic: Net income - ITA 3

27) What is the difference between tax avoidance and tax deferral? Answer: Tax avoidance is a form of tax planning in which a taxpayer, through means that are acceptable for income tax purposes, arranges their affairs to avoid the payment of income tax. Tax planning to achieve tax deferral involves either the delayed recognition of income, or the accelerated recognition of deductions. The ultimate payment of tax is delayed, as opposed to permanently avoided. Type: ES Topic: Administration - tax evasion vs tax avoidance

28) What is income splitting? Under what circumstances will it provide tax benefits to an individual? Answer: Income splitting involves efforts to share or split income of an individual with family members or other related persons. It will only benefit an individual who is in a high tax bracket in those circumstances where there are family members or other related persons who are in lower tax brackets. Type: ES Topic: Income tax planning - Income splitting

29) Contributions to a Registered Retirement Savings Plan (RRSP) can be deducted to reduce the income taxes of an individual in the year that they are made. However, these contributions will be subject to income tax when they are withdrawn from the plan. What type of tax planning is involved in this arrangement? Answer: The basic type of tax planning that is involved in RRSPs is tax deferral – a tax savings results from making contributions that will have to be paid back at a later point in time. There may also be an element of avoidance in that, after retirement, an individual may be in a lower tax bracket than he was during his working years. If this is the case, there will be an absolute reduction in taxes. Type: ES Topic: Income tax savings & deferral - general concepts

30) Your client, a government employee, would like to reduce their income tax. The client is trying to decide whether to contribute $5,000 to an RRSP this year. The client has an RRSP as does their spouse, a part time employee at a day care centre. Briefly describe the basic goals of tax planning. What advice would you give your client regarding his RRSP contribution? Explain your conclusion. Answer: The basic goals of tax planning can be summarized as follows: • Tax avoidance - To permanently avoid the payment of some amount of tax. • Tax deferral - To delay the recognition of certain types of income or accelerate the timing of certain deductions. • Income splitting - To have a family aggregate taxable income allocated as evenly as possible among family members. The client should contribute the $5,000 to a spousal RRSP. By contributing to a spousal RRSP income tax will be deferred. By contributing to a spousal RRSP income splitting is achieved and there may be possible tax avoidance if the spouse is taxed at a lower rate when the funds are eventually withdrawn. Type: ES Topic: Income tax savings & deferral - general concepts

31) A partnership is a taxable entity for income tax purposes. Answer: FALSE Explanation: A taxpayer must be a person. Partnerships are not persons. In general only individuals, corporations, trusts and estates are taxable entities for income tax purposes. Type: TF Topic: Definition - "Person" ITA 248(1)

32) A partnership is a taxable entity for GST purposes. Answer: TRUE Explanation: Partnerships engaged in commercial activity are specifically included as taxable entities for GST purposes. Type: TF Topic: GST/HST - liability for GST/HST

33) In general, provincial income taxes for individuals are based on a specified percentage of federal income tax payable. Answer: FALSE Explanation: In general, provincial income taxes are based on a specified percentage of federal taxable income. Type: TF Topic: Residency - provincial or territorial residence of individuals

34) The federal government does not collect personal or corporate income taxes for Ontario or Quebec. Answer: FALSE Explanation: The federal government collects personal and corporate income taxes for Ontario. Type: TF Topic: Income tax payable - federal income tax

35) A sales tax is a regressive tax even when it is applied at a single rate on all transactions. Answer: TRUE Explanation: Even if the rate is the same on all transactions, it will be a higher rate on the taxable income of lower income individuals because they spend a larger percentage of their income. Type: TF Topic: Canadian income tax system - regressive vs progressive rates

36) A major advantage of progressive tax rates is that their use encourages economic growth. Answer: FALSE Explanation: Progressive rates discourage both employment and investment, thereby limiting economic growth. Type: TF Topic: Canadian income tax system - regressive vs progressive rates

37) Tax expenditures are less costly to administer than direct funding programs. Answer: TRUE Explanation: Tax expenditures are less costly to administer than direct funding programs. Type: TF Topic: Canadian income tax system - objectives

38) Part I of the ITA is the largest and most important part. Answer: TRUE Explanation: Part I of the ITA is the largest and the most important part. Type: TF Topic: The ITA & income tax reference materials

39) The citation ITA 61(4)(b)(ii) would be read Paragraph 61, Subparagraph 4, Section b, Subsection ii. Answer: FALSE Explanation: The citation ITA 61(4)(b)(ii) would be read Section 61, Subsection 4, Paragraph b, Subparagraph ii. This is often shortened by referring to the last description such as subparagraph 61(4)(b)(ii). Type: TF Topic: The ITA & income tax reference materials

40) Any taxpayer can choose the calendar year as their taxation year. Answer: TRUE Explanation: While individuals and inter vivos and testamentary trusts (with the exception of Graduated Rate Estates (GRE)) must use a calendar taxation year, other taxpayers, corporations and GREs, can choose to use the calendar year as their taxation year. Type: TF Topic: Definition - "Taxation Year" ITA 249

41) If there is a conflict between an income tax treaty and the ITA, the ITA overrides the tax treaty. Answer: FALSE Explanation: The provisions of an income tax treaty override the ITA. Type: TF Topic: International - income tax treaties

42) An income tax is payable for each taxation year on the taxable income of every person resident in Canada at any time in the year. Answer: TRUE Explanation: An income tax is payable for each taxation year on the taxable income of every person resident in Canada at any time in the year. ITA 2(1) Type: TF Topic: Liability for income tax

43) Canadian citizens are required to file a Canadian income tax return, without regard to where they reside. Answer: FALSE Explanation: Canadian income taxes under Part I are assessed on residents of Canada. Type: TF Topic: Liability for income tax

44) When an individual is absent from Canada for some period of time, the length of their absence is an important factor in determining whether they continued to be a Canadian resident during the period of their absence. Answer: FALSE Explanation: S5-F1-C1 makes it clear that the length of the period of time during which the individual is absent from Canada is not a determining factor with respect to residency. Type: TF Topic: Residency - general concepts

45) If an individual moves to Canada and is here less than 183 days prior to the end of the year, that individual will be subject to Part I tax on their worldwide income for the entire year. Answer: FALSE Explanation: Such part year residents will only be taxed on their worldwide income for the portion of the year subsequent to their moving to Canada. Type: TF Topic: Residency - general concepts

46) The residency of a trust depends on the country in which the central management and control of the trust takes place, not where the beneficiaries reside. Answer: TRUE Type: TF Topic: Residence of a Trust

47) If an individual leaves Canada, the three most significant factors in determining whether the individual has ceased to be a resident are: • Whether he continues to own a dwelling in Canada. • Whether he is accompanied by his spouse or common-law partner. • Whether he maintains social ties in Canada. Answer: FALSE Explanation: Whether the individual continues to maintain social ties is not one of the three most significant factors. the three factors are (1) having a dwelling in Canada, (2) having a spouse or commonlaw partner in Canada and (3) having other dependants in Canada. Type: TF Topic: Residence of individuals

48) If an individual returns to Canada after an absence of less than two years the individual will be considered to have retained Canadian residency during his absence. Answer: FALSE Explanation: The length of the period of absence from Canada is not considered a factor in determining whether an individual has remained a resident. Type: TF Topic: Residency - general concepts

49) A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year. Answer: TRUE Explanation: A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year. In other words the individual is not resident for all 365 days of the year (366 for leap years). Type: TF Topic: Residency - general concepts

50) A sojourner is any individual who has been present in Canada for 183 consecutive days in one year. Answer: FALSE Explanation: The 183 days do not have to be consecutive. Type: TF Topic: Residency - general concepts

51) Canadian citizens are automatically subject to income tax on their worldwide income. Answer: FALSE Explanation: Canadian Citizens are only taxable on their world wide income if they are residents of Canada Type: TF Topic: Residency - general concepts

52) U.S. Citizens are never subject to Canadian income tax. Answer: FALSE Explanation: U.S. citizens are taxable in Canada if they are either (1) resident in Canada or (2) earn income in Canada. Type: TF Topic: Residency - general concepts

53) Partnerships are required to file an annual T4 income tax return. Answer: FALSE Explanation: Partnerships are not a taxable entity and therefore an annual income tax return is not required. However a partnership may be required to file an information return which is different than an income tax return. A T4 is an information slip provided to individuals earning employment income. It is not an income tax return. Type: TF Topic: Liability for income tax

54) Sole proprietorships are taxable entities that must file an annual income tax return. Answer: FALSE Explanation: The individual sole proprietor is the taxable entity that must include the profits or losses of a business carried on as a sole proprietorship in that individual's annual T1 income tax return. Type: TF Topic: Liability for income tax

55) Which of the following types of taxes is not currently in use by the federal government of Canada? A) Excise Taxes B) Custom Duties C) Head Tax D) Transfer Tax Answer: C Explanation: C) Head Tax Type: MC Topic: Canadian income tax system

56) Which of the following is NOT a taxable entity for Canadian income tax purposes? A) Darklyn Ltd., a Canadian resident corporation. B) Ms. Sarah Bright, a Canadian resident. C) Walters and Walters, a CPA partnership. D) The Martin family trust. Answer: C Explanation: C) Walters and Walters, a group of CPAs operating as a partnership. Type: MC Topic: Liability for income tax

57) Which of the following could be required to file a GST return? A) Chan's Clothing Store (a business carried on as a sole proprietorship) B) The Chan Foundation (a registered charity) C) Min Chan (an individual) D) All of the above could be required to file a GST return. Answer: D Explanation: D) All of the above could be required to file a GST return. Type: MC Topic: GST/HST - liability for GST/HST

58) Which of the following forms of taxation provides the largest component of federal government taxation revenues? A) Personal income tax B) Corporate income tax C) GST D) Employment insurance premiums Answer: A Explanation: A) Personal income tax Type: MC Topic: Canadian income tax system

59) With respect to provincial income taxes, other than Quebec, which of the following statements is NOT correct? A) Each province can apply different rates to as many brackets for individuals as it wishes. B) The federal government collects the provincial income tax for individuals for every province except Quebec. C) Each province can establish its own tax credits to apply against income tax payable for individuals. D) Each province can establish rules for determining the taxable income of individuals. Answer: D Explanation: D) Each province can establish rules for determining the Taxable Income of individuals. Type: MC Topic: Income tax payable - federal income tax

60) Which of the following groups of entities are all subject to income tax? A) Individuals, proprietorships and corporations B) Proprietorships, corporations and trusts C) Individuals, trusts and corporations D) Individuals, partnerships and corporations Answer: C Explanation: A) Proprietorships are not entities B) Same as A C) Individuals, trusts and corporations D) Partnerships are not taxpayers Type: MC Topic: Canadian income tax system

61) Which of the following statements with respect to Canadian tax policy is NOT correct? A) The economic burden of a particular tax may not fall on the same group that has the legal liability to pay the tax. B) Extremely high rates of tax will always encourage individuals to work harder so that they will have more after tax income. C) The inability to harmonize the GST in some provinces has increased the complexity of tax compliance. D) A progressive tax system is unfair to individuals with incomes that fluctuate significantly from year to year. Answer: B Explanation: B) Extremely high rates of tax will always encourage individuals to work harder so that they will have more after tax income. Type: MC Topic: Canadian income tax system - income tax policy concepts

62) Which of the following goals is NOT a current economic policy objective of the Canadian tax system? A) Ensure the continued provision of public goods. B) Redistribute income and wealth among taxpayers. C) Ensure fairness in the allocation of resources to different levels of government. D) Economic stabilization such as stimulating the economy or creating jobs. Answer: C Explanation: C) Ensure fairness in the allocation of resources to different levels of government. Type: MC Topic: Canadian income tax system - income tax policy concepts

63) Which of the following can be considered an advantage of an income tax system based on progressive rates? A) A progressive rate system is simpler to administer. B) A progressive rate system provides greater stability in the context of changing economic conditions. C) A progressive system discourages tax evasion. D) A progressive system encourages greater effort on the part of individuals. Answer: B Explanation: B) A progressive rate system provides greater stability in the context of changing economic conditions. Type: MC Topic: Canadian income tax system - regressive vs progressive rates

64) Which of the following statements accurately describes a regressive tax? A) A tax which results in higher effective tax rates for higher income taxpayers. B) A tax which results in lower effective tax rates for higher income taxpayers. C) A tax in which the same effective rate applies to all levels of income. D) A tax that is shifted to consumers through price increases on the goods purchased. Answer: B Explanation: B) A regressive tax is one which results in lower effective tax rates for higher income taxpayers. Type: MC Topic: Canadian income tax system - regressive vs progressive rates

65) Which of the following statements with respect to using tax expenditures rather than program spending is NOT correct? A) It is more costly to administer tax expenditures as opposed to program spending. B) Tax expenditures reduce the visibility of government actions. C) Tax expenditures leave fewer decisions in the hands of the private sector, thereby providing for more efficient allocation of resources. D) Tax expenditures reduce the impact of progressive rates on higher income taxpayers. Answer: A Explanation: A) It is more costly to administer tax expenditures as opposed to program spending. Type: MC Topic: Canadian income tax system - objectives

66) "Taxpayers who earn $100,000 in dividends should pay the same amount of tax as taxpayers who earn $100,000 in capital gains." This statement reflects which of the following qualitative characteristics of an effective tax system? A) Vertical equity. B) Neutrality. C) Flexibility. D) Horizontal equity. Answer: D Explanation: D) Horizontal equity. Type: MC Topic: Canadian income tax system - objectives

67) Which of the following statements with respect to tax reference materials is correct? A) Income Tax Folios are a legislative source of guidance. B) Income Tax Regulations are gradually being replaced by Income Tax Folios. C) Interpretation Bulletins are gradually being replaced by Information Circulars. D) The ITA is the most important source of information for dealing with matters related to the federal income tax. Answer: D Explanation: D) The Income Tax Act is the most important source of information for dealing with matters related to the federal income tax. Type: MC Topic: The ITA & income tax reference materials

68) With respect to the structure of the ITA, which of the following statements is correct? A) The major components of the ITA are called Divisions. B) The ITA has Parts numbered I through XVII, reflecting the fact that there are 17 Parts in the Act. C) All Parts of the ITA have Divisions. D) All Parts of the ITA contain at least one Section. Answer: D Explanation: D) All Parts of the ITA contain at least one Section. Type: MC Topic: The ITA & income tax reference materials

69) Of the following publications, indicate the one that is NOT a legislative source. A) Income Tax Act. B) Income Tax Folios. C) Income Tax Application Rules. D) International Tax Treaties. E) Income Tax Regulations. Answer: B Explanation: B) Income Tax Folios. Type: MC Topic: The ITA & income tax reference materials

70) Of the following publications, indicate the one that is NOT published by the CRA. A) Income Tax Folios. B) Information Circulars. C) Court decisions. D) Income Tax Technical News. Answer: C Explanation: C) Court decisions. Type: MC Topic: The ITA & income tax reference materials

71) Where would an individual find the formula for determining the prescribed rate? A) The Income Tax Act. B) The Income Tax Regulations. C) A CRA Income Tax Folio. D) A CRA Information Circular. Answer: B Explanation: B) The Income Tax Regulations. Type: MC Topic: The ITA & income tax reference materials

72) Which of the following statements is NOT correct? A) Most major income tax changes are introduced in the annual Federal Budget. B) Outstanding legislation that has not been passed may be affected by a Federal election. C) Proposed changes in tax law are usually introduced to parliament in the form of a Notice of Ways and Means Motion. D) When there is a conflict between the ITA and an international agreement, the terms of the ITA override the treaty. Answer: D Explanation: D) When there is a conflict between the ITA and an international agreement, the terms of the ITA override the treaty. Type: MC Topic: International - income tax treaties

73) Of the following statements related to liability for Canadian income tax, which statement is NOT correct? A) As used in the ITA, the term person refers to individuals, trusts, and corporations. B) Corporations must use the calendar year as their taxation year. C) Part I tax is assessed on residents of Canada. D) Part I tax is assessed on Canadian employment income earned by a non-resident. Answer: B Explanation: B) Corporations must use the calendar year as their taxation year. Type: MC Topic: Liability for income tax

74) An individual is liable for income tax in Canada if the individual: A) is a resident of Canada. B) is a citizen of Canada. C) has lived in Canada at any time during the year. D) All of the above are required. Answer: A Explanation: A) is a resident of Canada. Type: MC Topic: Liability for income tax

75) Which of the following persons is NOT liable for Part I income tax? A) Pheap Chom, an individual who has resided in Canada for the past 15 years. B) Chom Incorporated, a resident corporation. C) Phon Im, a resident of the United States who earns employment income in Canada. D) Bunly Im, a resident of the United States who earns investment income that is interest in Canada. Answer: D Explanation: D) Bunly Im, a resident of the United States who investment income that is interest in Canada. Type: MC Topic: Liability for income tax

76) Which of the following types of income earned by a non-resident is NOT subject to income tax under Part I of the ITA? A) Employment income earned in Canada B) Business income earned in Canada C) Rental income earned in Canada D) Income from the disposition of Canadian real estate Answer: C Explanation: C) Rental income earned in Canada Type: MC Topic: Liability for income tax

77) Which of the following is an essential factor in determining whether an individual has ceased to be a resident of Canada? A) The individual has closed his Canadian savings account. B) The individual has given up his membership in the Canadian club. C) The individual has become a resident of another country. D) The individual has given up their provincial or territorial driver's licence. Answer: C Explanation: C) The individual has become a resident of another country. Type: MC Topic: Residence of individuals

78) All of the following statements are true, except: A) Canadian residents must report their worldwide income for income tax purposes. B) If an individual is a resident of Canada for part of a calendar year, that individual only has to report worldwide income for that part of the year. C) An individual who immigrates to Canada during the year is a resident of Canada for income tax purposes for the full calendar year. D) An individual can be a resident of Canada for income tax purposes, even if the individual is not a Canadian citizen. Answer: C Explanation: C) An individual who immigrates to Canada during the year is a resident of Canada for tax purposes for the full calendar year. Type: MC Topic: Residence of individuals

79) Of the following individuals, who would be a resident or deemed resident of Canada for income tax purposes this year? • Alex is a U.S. citizen who commutes each day to Canada for employment purposes. • Bob is a U.S. citizen who lives in Canada during the week for employment purposes, but returns to the U.S. on weekends to the house he shares with his wife and children. • Charles is a Canadian citizen who lived in Toronto until March of last year, at which time he left for a four year aid mission in Africa under an agreement with the Canadian International Development Agency. • Richard is a Canadian citizen who goes to school in the U.S. for eight months of each year but returns to Canada to live with his parents each summer. A) Alex, Bob and Charles. B) Bob, Charles and Richard. C) Bob and Charles. D) Alex and Richard. Answer: B Explanation: B) Bob, Charles, and Richard. Type: MC Topic: Residence of individuals

80) With respect to the residency of an individual, which of the following statements is NOT correct? A) To be a resident for income tax purposes, an individual must be a Canadian citizen. B) If an individual permanently departs or enters Canada with the intention of permanently staying in Canada in the current year, the individual will be considered a part-year resident for income tax purposes. C) An individual is a Canadian resident for income tax purposes if their principal residential ties are in Canada. D) An individual is considered to be a Canadian resident for income tax purposes if the individual visits for 183 days or more in a calendar year. Answer: A Explanation: A) To be a resident for income tax purposes, an individual must be a Canadian citizen. Type: MC Topic: Residence of individuals

81) Which of the following factors would NOT be relevant under the Canada/U.S. tax treaty tie-breaker rules for determining the residence of an individual? A) The country in which the individual carries on a business. B) The country in which the individual is a citizen. C) The country in which the individual has a permanent home available to him. D) The country in which the individual has a habitual abode. Answer: A Explanation: A) The country in which the individual carries on a business. Type: MC Topic: Residence of individuals

82) Jamal, his wife and two teenage children are all Canadian citizens. For the last 2 years he and his family have been living in Mexico while he works for the Mexican subsidiary of a Canadian company. Jamal still owns his house in Canada but has purchased a home in Mexico. His wife and children visit Canada for 2 months in the summer and he spends 4 weeks a year in Canada. The rest of the time the house is empty as his wife visits family in Canada regularly. Jamal has no intention to return to Canada and loves living in Mexico. However, since his mother-in-law is very ill, it is possible that his wife will have to return to Canada for at least 6 months to nurse her mother. Which of the following statements is correct? A) Jamal is considered a part-time resident of Canada for the 4 weeks he spends in Canada. B) If Jamal's wife returns alone to Canada to care for her mother, Jamal is considered a part-time resident of Canada for the 6 months she is in Canada. C) Jamal is considered a non-resident of Canada. D) Since Jamal owns a house in Canada that is not rented out under a long-term lease he is considered a Canadian resident for income tax purposes. Answer: C Explanation: C) Jamal is considered a non-resident of Canada. Type: MC Topic: Residence of individuals

83) Of the following individuals, who is most likely to be considered a part-year resident of Canada for the current taxation year? A) Ravi is a citizen of India, where he was born and lived until moving to Canada on March 1 of the current year with his wife and child. He was transferred by his employer to its Canadian head office. B) Helga had lived and worked in Canada for 10 years. She was transferred by her employer to its flagship hotel in Switzerland on March 1 of the current year for a 1 year training assignment. Her husband remained in Canada to complete his MBA. C) Marc is a French citizen who lives in Paris. On March 1 of the current year he begins work as a translator in Ottawa. It is a 1 year assignment. D) Billy Bob is a U.S. Marshall on loan to the RCMP detachment in Nunavut. It is a 9 month assignment. Answer: A Explanation: A) Ravi is a citizen of India, where he was born and lived until moving to Canada on March 1 of the current year. He was transferred by his employer to its Canadian head office. Type: MC Topic: Residence of individuals

84) Dominique, a Canadian citizen, lives in Buffalo, NY, USA. Throughout the current year she commutes to Fort Erie, Ontario, Canada, where she is the bartender at the Cross Border Bar. She normally works 7 pm to 3 am Tuesday through Saturday. She never stays overnight in Canada. Dominique is: A) a deemed resident (sojourner). B) a non-resident. C) a full-time resident. D) a part-year resident. Answer: B Explanation: B) A non-resident Type: MC Topic: Residence of individuals

85) Which of the following corporations would NOT be considered a resident of Canada? Ignore treaty implications. A) Dram Inc. was incorporated in Alberta in 2006. While it carries on business in both the U.S. and Canada, its central management has always been located in New York. B) Craser Ltd. was incorporated in Ontario in 2011 where it carries on its only business. Its central management is located in Toronto. C) Alor Inc. was incorporated in British Columbia in 2005. The company carries on most of its business in Canada but its central management is situated in Seattle. D) Exeter Ltd. was incorporated in Alberta in 1957. However, it has never carried on business in Canada and its central management has always been situated in Montana. Answer: D Explanation: D) Exeter Ltd. was incorporated in Alberta in 1957. However, it has never carried on business in Canada and its central management has always been situated in Montana. Type: MC Topic: Residence of corporations

86) Of the persons described, which one would NOT be considered a Canadian resident? A) A person who lives in Leamington, Ontario and commutes to work each day in Detroit, Michigan. B) A corporation that was incorporated in North Dakota, but carries on all of its business in southern Manitoba. C) A member of the Canadian armed forces who has, for the last 3 years, been stationed in Germany. D) A corporation that was incorporated in Winnipeg, but carries on all of its business in North Dakota. Answer: B Explanation: B) A corporation that was incorporated in North Dakota but carries on all of its business in southern Manitoba. Type: MC Topic: Residence of individuals and corporations

87) In which of the following situations is the person likely to be considered a non-resident of Canada, in 2022, for income tax purposes? A) James Arder, a recently qualified CPA, based in Montreal, accepted a transfer to an office in Sydney, Australia for the period May 1, 2022 to August 31, 2022. James is not married and had lived at his parent's house in Montreal. B) Karen Cotin, a computer programmer, had been employed by ABC Systems Ltd. in Toronto. In 2021, she accepted a minimum two-year contract with CS Services Inc. in London, England. Her position with CS Services Inc. started October 1, 2021. Before moving to England, where she will join her fiance, Karen terminated the lease on her apartment in Toronto and sold her car. It is her intention to remain in England. C) N Limited was incorporated in Canada in 1998 and, until May 2022, its manufacturing plant was located in Mississauga, Ontario. In May 2022, it moved all of its operations, including the manufacturing plant, to North Carolina, U.S.A. D) B. Bath, a member of the Canadian Armed Forces, who was stationed in Lahr, Germany from September 1, 2020 to February 1, 2023. Answer: B Explanation: B) Karen Cotin, a computer programmer, had been employed by ABC Systems Ltd. in Toronto. In 2021, she accepted a minimum two-year contract with CS Services Inc. in London, England. Her position with CS Services Inc. started October 1, 2021. Before moving to England, where she will join her fiance, Karen terminated the lease on her apartment in Toronto and sold her car. It appears Karen has severed all ties with Canada. Type: MC Topic: Residence of individuals and corporations

88) Which of the following statements accurately describes the ITA view of income? A) Net income is determined by adding revenue based on recognition at the point of sale and deducting expenses which are determined based on generally accepted accounting principles. B) Net income is based on the source concept that matches revenue with expenses based on the type of activity. C) Net income is the amount paid to an employee after an employer deducts CPP, EI, income taxes and any other source deductions from employee pay. D) Net income is the total increase in a taxpayer's net worth or overall wealth for the year. Answer: B Explanation: B) Net income is based on the source concept that matches revenue with expenses based on the type of activity. Type: MC Topic: Alternative concepts of income

89) With respect to the determination of net income (ITA 3), which of the following statements is correct? A) Property losses are deducted from business income before the deduction of RRSP contributions. B) Allowable capital losses can be deducted to the extent of other positive sources of income. C) If not used during the current period, all subdivision e deductions can be carried forward to subsequent periods. D) If a business loss exceeds all other sources of income, net income will be equal to nil. Answer: D Explanation: D) If If a business loss exceeds all other sources of income, net income will be equal to nil. Type: MC Topic: Net income - ITA 3

90) With respect to the calculation of net income (ITA 3), which of the following statements is NOT correct? A) Subdivision e deductions are subtracted from the total of all positive sources of income. B) Allowable capital losses for the year can only be deducted to the extent of taxable capital gains for the year. C) Business losses can be netted against employment income in determining the positive amounts to be included under ITA 3(a) and 3(b). D) Property losses can only be deducted after the subtraction of Subdivision e deductions. Answer: C Explanation: C) Business losses can be netted against employment income in determining the positive amounts to be included under ITA 3(a) and 3(b). Type: MC Topic: Calculation of net income

91) Minjie Liu has the following sources of income and deductions: Employment income Interest income Taxable amount of dividend income Taxable capital gain Allowable capital loss Subdivision e deductions

$35,000 5,000 7,000 5,000 12,000 2,000

What is Minjie's net income? A) $47,000 B) $40,000 C) $45,000 D) $49,000 Answer: C Explanation: A) $47,000 (this answer does not deduct the subdivision e deductions of $2,000) B) $40,000 (this answer incorrectly deducts the full amount of allowable capital loss C) $45,000 D) $49,000 (this answer adds the subdivision e deductions instead of subtracting them). Type: MC Topic: Net income - ITA 3

92) Tanya Turek has the following sources of income and deductions: Gross Salary Employment income Business loss Taxable capital gain Allowable capital loss

$35,000 34,000 14,000 4,000 2,000

What is Tanya's net income? A) $23,000 B) $22,000 C) $36,000 D) $24,000 Answer: B Explanation: A) $ 23,000 (This answer incorrectly uses Gross salary) B) $ 22,000 ($34,000 + ($4,000 - $2,000) - $14,000) C) $36,000 (this answer does not deduct the business loss) D) $24,000 (this answer fails to deduct the allowable capital loss) Type: MC Topic: Net income - ITA 3

93) Fadel Ghanem has the following sources of income and deductions: Employment income Property income Business loss Taxable capital gain Allowable capital loss

34,000 6,000 54,000 4,000 2,000

What is Fadel's net income? A) $40,000 Income B) Nil C) $44,000 Income D) $12,000 Loss Answer: B Explanation: B) Nil, with a business loss that can be used in either the previous 3 years or in the next 20 future years of $12,000 (34,000 + 6,000 + 4,000 — 2,000 — 54,000) D) Net income means a positive amount or nil. Negatives or not recognized. Type: MC Topic: Net income - ITA 3

94) ITA 3(b) requires the taxpayer to "determine the amount, if any, by which taxable capital gains exceed allowable capital losses". The rule that is established by this phrase is: A) that allowable capital losses in excess of taxable capital gains during a year are never deductible from net income. B) that the current year allowable capital losses can only be deducted to the extent that there are taxable capital gains during the current year. C) that taxable capital gains are only included in income in a year when there are also allowable capital losses that can be used to reduce the effect on income. D) that unused allowable capital losses are deductible against any type of income in one of the past 3 years or in a future year. Answer: B Explanation: B) That the current year allowable capital losses can only be deducted to the extent that there are taxable capital gains during the current year. Type: MC Topic: Net income - ITA 3

95) Fred Hopkins has employment income of $45,000, a business loss of $14,000, capital gains of $20,000, capital losses of $12,000, and subdivision e deductions of $3,000. Fred's net income is: A) $36,000. B) $50,000. C) $39,000. D) $32,000. Answer: D Explanation: D) $32,000 [$45,000 + (1/2)($20,000 - $12,000) - $3,000 - $14,000] Type: MC Topic: Net income - ITA 3

96) Which one of the following items is a taxable income deduction? A) A deduction for spousal support payments made during the year. B) A deduction for the extra costs related to living in prescribed areas of the Canadian north (ITA 110.7). C) Current year allowable capital losses in excess of current year taxable capital gains. D) Current year business losses in excess of other positive sources of income. Answer: B Explanation: B) A deduction for the extra costs related to living in prescribed areas of the Canadian north. (ITA 110.7) Type: MC Topic: Taxable income deductions

97) Which of the following amounts is NOT a taxable income deduction? A) Losses of other years. B) The capital gains deduction. C) A stock option deduction. D) The excess of allowable capital losses over taxable capital gains for the year. Answer: D Explanation: D) The excess of allowable capital losses over taxable capital gains for the year. Type: MC Topic: Taxable income deductions

98) Which of the following items does not result in tax avoidance? A) Use of the capital gains deduction. B) Employer contributions to group disability plans. C) Employer contributions to private health service plans (PHSP). D) Accelerated depreciation (CCA). Answer: D Explanation: D) Accelerated depreciation (CCA). Type: MC Topic: Tax avoidance

99) Providing employees with private health service plan (PHSP) benefits involves what type of tax planning? A) Tax evasion. B) Tax deferral. C) Income splitting. D) Tax avoidance. Answer: D Explanation: D) Tax avoidance. Type: MC Topic: Tax planning

100) Making contributions to an RRSP always involves what type of tax planning? A) Tax avoidance and tax deferral. B) Tax deferral. C) Tax avoidance. D) Income splitting. Answer: B Explanation: A) Tax avoidance may occur depending on the circumstances but it will not always occur. B) Tax deferral. Type: MC Topic: Tax planning

101) Which of the following will always result in tax avoidance? A) Making contributions to a registered retirement savings plan (RRSP). B) Making contributions to an employer's registered pension plan (RPP). C) Claiming the capital gains deduction. D) Claiming maximum capital cost allowance (CCA) deductions. Answer: C Explanation: C) Claiming the capital gains deduction. Type: MC Topic: Tax planning

102) Which of the following entities could be required to file an income tax return? • Sally Forbes (an individual) • Forbes Boutique (a sole proprietorship) • Forbes and Delaney (a partnership) • The Forbes family trust (a trust) • Forbes Ltd. (a corporation) • The Forbes Foundation (an unincorporated charity) Answer: Sally Forbes, the Forbes family trust, and Forbes Ltd. could be required to file income tax returns. Forbes Boutique, Forbes and Delaney, and the Forbes Foundation are not taxable entities for income tax purposes. These latter entities may be required to file information returns with the CRA but not actual income tax returns. Type: ES Topic: Taxable entities for income tax purposes

103) Which of the following entities could be required to file a GST return? • Sally Forbes (an individual) • Forbes Boutique (a sole proprietorship) • Forbes and Delaney (a partnership) • The Forbes family trust (a trust) • Forbes Ltd. (a corporation) • The Forbes Foundation (an unincorporated charity) Answer: Under the ETA, all of the listed entities could be required to file a GST return. Where only individuals, corporations and trusts can be required to file an income tax return, the definition of a person (i.e., taxable entity) is much broader for GST purposes. As is explained in detail in Chapter 21, whether an entity is required to file a GST return is dependent on the level of commercial activity. Type: ES Topic: Taxable entities for GST/HST purposes

104) Joan Smith has taxable income of $37,500. For the current year her federal income tax rate is 15%, while the corresponding provincial rate is 8.2%. Determine Ms. Smith's combined federal and provincial income tax payable, before consideration of any available credits against income tax payable. Answer: Federal Tax Payable [(15%)($37,500)] $5,625 Provincial Tax Payable [(8.2%)($37,500)] 3,075 Total Tax Payable [(15% + 8.2%)($37,500)] $8,700 Type: ES Topic: Federal and provincial/territorial income taxes payable

105) Karla Ho has taxable income of $26,700. For the current year her federal income tax rate is 15% and the corresponding provincial rate is 10%. Determine Ms. Ho's combined federal and provincial income tax payable, before consideration of any available credits against income tax payable. Answer: Federal Tax Payable [(15%)($26,700)] $4,005 Provincial Tax Payable [(10%)($26,700)] 2,670 Total Tax Payable [(15% + 10%)($26,700)] $6,675 Type: ES Topic: Federal and provincial/territorial income taxes payable

106) Ms. Michelle Walker, a U.S. citizen, has Canadian employment income of $42,000 and U.S. employment income of $40,000 Canadian. She lives in Seattle, Washington and is a resident of the United States for the entire year. Ms. Walker does not believe that she is subject to taxation in Canada. Is she correct? Explain your conclusion ignoring the tax treaty. Answer: She is not correct. As a non-resident of Canada she would be subject to ITA 2(3) which imposes Canadian income tax on non-residents who earn employment income in Canada. As a non-resident Canada would have no right to tax her U.S. employment income. Type: ES Topic: Non-resident liability for income tax

107) Daniel Bourne is a U.S. citizen who lives in Fargo, North Dakota. For many years, he has had a cottage on Manitoba's Lake Winnipeg. In recent years, however, he has made little use of this property and, given this, he has sold the property. While there was a gain of $50,000 on the sale, Daniel assumes that he will not pay Canadian taxes on this amount because he is a U.S. citizen. Is he correct? Explain your conclusion ignoring the tax treaty. Answer: He is not correct. As a non-resident of Canada he would be subject to ITA 2(3) which imposes Canadian income tax on non-residents who dispose of Taxable Canadian Property. Type: ES Topic: Non-resident liability for income tax

108) At the end of the current year, Michael Resner departed from Canada when he accepted permanent employment in Mexico. He was accompanied by his common-law partner and their children, as well as their personal property that had not been sold. He has no intention of returning to Canada except to visit friends and family on occasion. He was unable to sell his residence at a satisfactory price and decided instead to rent it out for a period of two years. He retained his membership in the CPA (Chartered Professional Accountants) Alberta. After his departure, would he still be considered a Canadian resident for income tax purposes? Explain your conclusion. Answer: Based on the facts the intention to sever residency with Canada and establish residency in Mexico is supported by the facts. One would normally expect and individual to dispose of their principal residence if their is no intention to return however circumstances must first be considered in evaluating why the residence was not sold. Examples include situations where the market is in a downturn and expected to recover in years to come or when an individual decides that keeping a Canadian residency effectively provides an opportunity for a vacation property or the individual simply sees the residence as a viable investment. In this case the market appears to be at a low point which supports a delayed sale. In the interim rental income is being earned. The retention of his membership in the CPA Alberta would not be viewed as a relevant consideration given the facts. The facts support a conclusion that the individual severed Canadian residency on his departure from Canada. Type: ES Topic: Residential ties

109) Mary is a Canadian citizen who is employed by a corporation operating in Canada and the U.S. While she has worked for many years in the Canadian office of this organization, she agreed to transfer to the corporation's U.S. head office in New York City. Before leaving, she disposed of her residence and other personal property that she did not wish to move. She canceled her Saskatchewan driver's licence and health care card, and closed all of her Canadian banking and brokerage accounts. Because her boyfriend remained in Regina, she found herself flying back to Canada at least once a month. After two years, she concluded that between the high cost of living in New York City and the travel required to maintain the relationship with her boyfriend, she would return to Canada. Would Mary be considered a Canadian resident during the two years that she was absent from Canada? Explain your conclusion. Answer: Residency determinations begin with the intent of an individual which is then evaluated in terms of whether the intent matches ones actions. In this case the actions to dispose of the principal residence and personal property are supportive of an intent to sever residency with Canada. She would therefore be considered a non-resident of Canada on her departure and re-establishing Canadian residency once she decided to return to Canada and took action to re-establish the connection with Canada. Type: ES Topic: Residency - temporary absences

110) John Acheever is employed by Research In Limbo. He has worked for a number of years in their office in Kitchener, Ontario. However, he has become convinced that he would have greater advancement opportunities if he transferred to their office in New York City. He requests this transfer and moves in September, 2021. Before leaving he cancels his apartment lease, sells all of the personal property that he does not wish to move, and cancels his Ontario driver's licence. However, he retains his Canadian banking and brokerage accounts and, because of concerns about the cost of U.S. health care, he does not cancel his Ontario health care card (he changes the address to that of his parents in Waterloo, Ontario). He has also left his dog, Bart with his parents. After the move, he is shocked to realize how much he misses Bart. He finds himself flying back to Kitchener at least twice a month to spend the weekend caring for Bart. By February, 2023, after not being able to find a suitable dog-friendly apartment in New York City, John returns to his position in Kitchener. He has no plans to return to the U.S. Would John be considered a Canadian resident during the 18 months that he was absent from Canada? Explain your conclusion. Answer: Residency determinations begin with the intent of an individual which is then evaluated in terms of whether the intent matches ones actions. Based on the facts it would appear that John has severed Canadian residency. This is further supported by his actions including continuing to find accommodation in New York that would accept pets. Retaining Canadian bank accounts is not a significant tie and is often quite common until one has settled in another country. Cancelling one's driver's license and not cancelling healthcare coverage in the same province would alert the provincial government that there is a potential concern. The Ontario government allows individuals who spend little time in Canada to retain their healthcare coverage for up to a couple of years as long as the individual's primary place of residency is in Ontario. The fact that the individual may not legally be entitled to retain Ontarion healthcare coverage is not determinative as to the individual's residency status for income tax purposes. In summary the facts suggest that he became a non-resident of Canada when he departed for New York. Type: ES Topic: Residency - temporary absences

111) Melissa is a Canadian citizen who has been employed in Vancouver for the last five years. She has accepted new employment in the United States and, as of March 15 of the current year, flies to New Mexico to begin her responsibilities. She has been granted a green card to enable her to work in the U.S. Her husband remains behind with the children until July 1, after the end of their school year. On that date, they fly to New Mexico to join Melissa. Their residence is sold on August 1 of the current year, at which time a moving company picks up their furniture and other personal possessions. The moving company delivers these possessions to their new house in New Mexico on August 15. Explain Melissa residency status with Canada during the current year. Answer: Melissa became a non-resident of Canada in the current year. The question however would be at what point in time during the current year that she actually became a non-resident of Canada. The answer depends upon the facts together with the laws of the two countries. In Canada the CRA has a general policy that an individual severs Canadian residency at the latest of (1) the date the individual leaves Canada, (2) the date the individual establishes residency in the other country and (3) the date that members of the immediate family leave Canada (e.g. spouse, common-law partner and dependants). The period of Canadian residency would be the period January 1 through July 1, the date that her husband and children fly to the U.S. July 1 would be the latest of: the date that Melissa leaves Canada (March 15), the date that Melissa establishes U.S. residency (March 15), and the date that her husband and children depart Canada (July 1). Type: ES Topic: Part year residence

112) Barton Vader is a Canadian citizen who has always lived in London, Ontario. He has a spouse and two school-aged children. As of May 2021, he accepts a permanent employment in Akron, Ohio. On October 1, 2021, he moves to Akron to locate housing for his family. In order for his children to finish the school term, his family remains in London until January 1, 2022. When they move, John severs all residential ties with Canada other than the family home. The home is put up for sale in January, 2022. However, it remains unsold as of December 31, 2022. While Barton was scheduled to begin working in the U.S. in early 2022, he is unable to obtain the required residency documents until July 1, 2022. Explain Barton's Canadian residency status for 2021 and 2022. Answer: For residency purposes the CRA has a general policy designed to assist individuals in determining the actual date that the individual has become a non-resident of Canada. This administrative policy recognizes that the specific facts determine that date but that individuals can rely upon this policy if they so choose. The CRA policy is that an individual is considered to have ceased being a resident of Canada at the latest of three dates: 1. The date the individual leaves Canada. 2. The date the individual's family leaves Canada. 3. The date the individual establishes residency in another country. In Barton's case the latest of the dates would be July 1, 2022, the date on which he receives the required residency documents. Given this, Barton would be considered a Canadian resident for all of 2021. In addition, he would be a part year resident for the period January 1, 2022 through June 30, 2022. Note that thus date may cause issues where there is residency overlap with the U.S. Type: ES Topic: Part year residence

113) Mary Sothor is the Canadian ambassador to Tanzania. She was a resident of Canada immediately prior to her appointment as ambassador. Living with her in Tanzania's capital city are her husband and two children. Her husband was born in Canada and was a Canadian resident at the time of their marriage. He is exempt from Tanzanian taxation because he is the spouse of a foreign diplomat. Her 25 year old son was born in Canada and works for a Tanzanian company. His income exceeds $30,000 annually. Her 16 year old son was born in Kenya and is a full time student with no income of his own. Which of these individuals would be considered Canadian residents for income tax purposes? Explain your conclusions. Answer: Under ITA 250(1)(c)(i), Mrs. Sothor would be a deemed Canadian resident because of her position as a Canadian ambassador and the fact that she was a Canadian resident at the time she was appointed to this post. As her husband is exempt from Tanzanian taxation due to his relationship to a deemed resident, he is a deemed resident of Canada under ITA 250(1)(g). Of her two children, the younger son would be a deemed resident under ITA 250(1)(f) as he is a Canadian ambassador's dependent child. However, the older son would not be a deemed resident because his income exceeds the base for the BPA for 2022 of $14,398 and he would therefore not be considered a dependant. Type: ES Topic: Individual residency

114) Ms. Sharon Washton was born 26 years ago in Bahn, Germany. She is the daughter of a Canadian High Commissioner serving in that country. Her father still holds this position. However, Ms. Washton is now working in Prague, Czechoslovakia. The only income that she earns in the year is from her Prague marketing job and is subject to taxes in Czechoslovakia. She has never visited Canada. Determine the residency status of Sharon Washton. Answer: While Ms. Washton is the child of a Canadian High Commissioner, it appears that she is no longer a dependant of this individual. It would also appear that she has income in excess of the base for the BPA for 2022 of $14,398. As a consequence, she would not be considered a deemed resident under ITA 250(1). Type: ES Topic: Individual residency

115) Nixon Inc. was incorporated as an Ontario corporation in 2013. However, since 2016, all of the Company's business has been carried on outside of Canada. Determine the residency status of Nixon Inc. Answer: As the Company was incorporated in Canada after April 26, 1965, it would be deemed to be a Canadian resident under ITA 250(4). While the problem does not provide enough information to determine this, it is possible that the Company has dual residency with the country or countries where it carries on business. This could result in resorting to a tax treaty to resolve any dual residency issues. Note that the location of where a corporation carries on its business is not relevant to a residency determination. Type: ES Topic: Corporate residency

116) Wolfhowl Ltd. was incorporated in Banff, Alberta in 1961. The company has never carried on business in Canada. However, until 1971, all meetings of the Board of Directors were held in Banff. Since 1971, all board of directors meetings have been held in the U.S. in Wyoming. Determine the residency status of Wolfhowl Ltd. Answer: As Wolfhowl Ltd. was incorporated in Canada prior to April 27, 1965, it will only be considered to be a Canadian resident if it carried on business in Canada or was a factual resident of Canada subsequent to April 26, 1965. As the director's meetings were held in Canada until 1971, this would suggest that the "mind and management" of the Company was in Canada during this period and therefore that the company was a factual resident. As a result the company would be considered a deemed resident of Canada. However, as the mind and management of the corporation is in the United States, it would be considered a factual resident of the U.S. In such dual residency situations, the Canada/U.S. tax treaty tie breaker rules would consider the company to be a resident of the country of incorporation, which in this case would be Canada. Type: ES Topic: Corporate residency

117) Acton Enterprises was incorporated in Montana in 1964. Until 2016, all of the company's directors were residents of Bozeman, Montana, with all meetings held in that city. However, in 2016, all of the directors moved to Calgary, Alberta, with all subsequent meetings held in that city. Determine the residency status of Acton Enterprises for the taxation year ending December 31, 2022. Answer: While Acton Enterprises was not incorporated in Canada, it would appear that the "mind and management" of the Company is now situated in Canada and as a result the company would be considered a factual resident of Canada for its 2022 taxation year. However, as it was incorporated in the U.S., it would also be considered a resident of that country. In such dual residency situations, the tie breaker rules would consider the company to be a resident of the country in which it was incorporated. This would mean that Acton Enterprises would be deemed to be a non-resident of Canada for its 2022 taxation year. Type: ES Topic: Corporate residency

118) Ms. Sonia Nexus is a computer specialist with employment income of $66,000. During the current year she has: • a taxable capital gain on the sale of land of $13,500, • an allowable capital loss on the sale of shares of $24,000, • interest income of $10,250, • rental loss of $6,750, and • a loss from a business carried on as a sole proprietorship of $28,000. In addition, she makes deductible spousal support payments of $14,000 and makes a deductible contribution to her RRSP of $3,000. Determine her net income for the current year and indicate the amount and type of any loss carry overs that are available for the year. Show all of your calculations. Answer: Ms. Nexus' current year net income would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Loss Balance from ITA 3(a) and (b) ITA 3(c) Deductions: Spousal Support RRSP Contributions

$66,000 10,250 $13,500 (24,000)

$76,250

Nil $76,250 (14,000) (3,000)

ITA 3(c) Deductions under ITA 3(d): Rental Loss Business Loss Net Income

$59,250 (6,750) (28,000) $24,500

She has a current year net capital loss n of $10,500 ($24,000 - $13,500). Type: ES Topic: Net income - ITA 3

119) Harvey Nicastro has current year employment income of $45,000. In addition, he has the following additional sources of income, gains, and losses: • A loss from a business carried on as a sole proprietorship of $23,000. • Interest income of $4,500. • A taxable capital gain of $13,500. • An allowable capital loss of $18,200. • Deductible spousal support paid of $24,000. • A rental loss of $14,500. Determine Harvey's minimum current year net income and indicate the amount and type of any loss carry overs for the year. Show all of your calculations. Answer: Mr. Nicastro's current year net income would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Loss Balance from ITA 3(a) and (b) ITA 3(c) Deductions: Spousal Support ITA 3(c) Deductions under ITA 3(d): Business Loss Rental Loss Net Income

$45,000 4,500 $13,500 (18,200)

$49,500

Nil $49,500 (24,000) $25,500 (23,000) (14,500) Nil

At the end of this year, Mr. Nicastro would have a current year net capital loss of $4,700 ($13,500 $18,200). In addition, he would have a current year non-capital loss of $12,000 (($23,000 + $14,500) $25,500). Type: ES Topic: Net income - ITA 3

120) Mr. Jack Bronson makes a $5,000 contribution to his RRSP. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: This transaction involves tax deferral, in that the contribution will be deductible and the earnings on the contribution within the RRSP trust will accumulate on a tax free basis. However, all of these amounts will be taxable when they are withdrawn from the RRSP trust. There may also be tax avoidance. This will happen if Mr. Bronson is taxed at a lower rate when the funds become taxable. There could also have been income splitting had a contribution been made to a spousal or common-law partner RRSP where the spouse or common-law partner was in a lower tax bracket than the contributing spouse. Type: ES Topic: Tax planning

121) Ms. Sarah Bloom convinces her employer to provide her with a private drug plan instead of additional salary. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: This transaction involves tax avoidance in the sense that Ms. Bloom can receive the benefit of having the employer pay for the drug plan insurance premiums without the benefit being included in her employment income as a taxable benefit. In comparison the additional salary would have been taxable. Type: ES Topic: Tax planning

122) Mr. John Lenonovitz is an unemployed poet. As Mr. Lenonovitz has no sources of income, his spouse Natasha, a successful painter, has decided to make contributions to an RRSP on his behalf, rather than making contributions to her own plan. What type of tax planning is involved in this decision? Explain your conclusion. Answer: Natasha is involved in income splitting, tax deferral, and possibly tax avoidance. She is getting the deduction from net income immediately and her spouse will only be subject to income tax on amounts subsequently withdrawn from the RRSP. The tax deferral occurs as the contribution is currently deductible and the earnings on the contribution within the RRSP trust will accumulate on a tax free basis. However, all of these amounts will be taxable when they are withdrawn from the plan. Tax avoidance will occur if the income tax rate to John at the time of withdrawal is less than Natasha's income tax rate for the year in which she claimed an RRSP deduction. Type: ES Topic: Tax planning

123) Ms. Tricia Jones makes contributions to an RPP (Registered Pension Plan) sponsored by her employer. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: Employee contributions to an RPP are deductible in the year in which they are made. The contributions with the RPP trust are not subject to income tax until retirement benefits are received under the terms of the plan. This involves tax deferral and, if Ms. Jones is subject to income tax at a rate that is lower than the rate in effect when he made the contributions then there will also be tax avoidance. Type: ES Topic: Tax planning

124) Mrs. Janice Theil gives $50,000 in Canada Savings Bonds to her 27 year old, unemployed daughter. What type of tax planning is involved in this transaction? Explain your conclusion. Answer: This transaction involves income splitting. It would appear that her daughter is likely in a lower income tax bracket than Mrs. Theil. This means that the interest income on the Canada Savings Bonds will be subject to income tax at a lower rate than would have applied had the bonds not been gifted to the daughter. Type: ES Topic: Tax planning

125) Since it came into power in 2015, the Liberal government has made a number of changes in the Canadian tax system. A brief description of three of these changes follows. Reduction to tax Free Savings Account (TFSA) Contributions Limit — The TFSA provision allows nondeductible contributions to be made to a registered account where earnings accumulate on a tax free basis. Withdrawals from these accounts are not taxed. For 2016 and subsequent years, the maximum annual contribution has been reduced from $10,000 to $5,500. Small Business Tax Rate — For many years, the federal tax rate on active business income earned by CCPCs was 11%, 4 percentage points less than the rate applicable to most other corporate income. In 2015, the government announced that the rate would gradually be reduced to 9%. The rate was reduced to 10.5% for 2016 but the further planned reductions were cancelled. However, in 2017, the planned reductions were re -instated, with the rate going to 10% for 2018 and 9% for 2019. Early Child Educator School Supply Tax Credit — The government introduced a new tax credit equal to 15% of eligible expenditures for supplies (e.g., paper, glue, paint for art projects, etc.). The maximum base for the credit will be $1,000 of eligible supplies in each year. To qualify, the individual taxpayer must have a certificate or diploma in early childhood education. Required: Analyze each of the described changes using two of the qualitative characteristics 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 • flexibility • simplicity and ease of compliance • certainty • balance between sectors • international competitiveness

Answer: Note — The descriptions of these tax measures are significantly simplified. The objective of this problem is to present the basic ideas so they can be understood by students at this introductory level, while still providing a basis for discussion. It is obvious that there is no definitive solution to this problem. The analysis provided below is intended to be no more than suggestive of possible points that could be made. There are, of course, many alternative solutions. Reduction In Contributions to TFSAs Possible comments here would be as follows: Adequacy — The reduction in the 22% tax bracket to 20.5% and several new and expensive programs have increased the government's need for additional revenues. Reducing this limit on the amount of investment income that can be earned tax free will increase revenues. Balance Between Sectors — As this provision is only available to individuals, the ability to earn tax free investment income reduces taxes for this group of taxpayers. A reduction in the maximum contribution has the effect of increasing taxes for the group. This serves to increase the already heavy tax burden on this group of individual taxpayers. Small Business Tax Rate Possible comments here would be as follows: Certainty — The fact that the reductions were scheduled, cancelled, and then reinstated has reduced certainty Neutrality — As changes in the small business rate affect specific taxpayers, the reductions in this rate are not neutral. They favour the shareholders of the corporations that qualify for this rate. Early Child Educator School Supply Tax Credit Possible comments here would be as follows: Simplicity And Ease Of Compliance — The large number of existing tax credits and the fact that new ones are added nearly every year, has greatly increased the complexity of the Canadian tax system. Another addition will exacerbate this problem. Additional complexity is also created by issues such as defining eligible supplies and determining who qualifies for the credit. Neutrality — This credit results in a benefit related to the costs associated with being a particular type of employee. It is not neutral in that it does not provide similar benefits for the costs associated with other types of employment (e.g., construction workers cannot deduct the cost of protective clothing). Type: ES Topic: Qualitative characteristics

126) Mr. Desmond Morris has spent his entire working life with his current employer, the Alcorn Manufacturing Company. In his first years with the Company, he was located in Winnipeg, Manitoba as a production supervisor. More recently, he was transferred to the Company's Calgary based subsidiary, where he has served as a manufacturing vice president until the current year. Early in the current year, Mr. Morris was asked to move to the United States by April 1 to oversee the construction of a new manufacturing operation in Sarasota, Florida. It is expected that when the facility is completed, Mr. Morris will remain as the senior vice president in charge of all of the Florida operations. He does not have any intention of returning to live in Canada during the foreseeable future. On April 1, Mr. Morris left Canada. In preparation for his departure, he had taken care to sell his residence, dispose of most of his personal property, and resign from all memberships in social and professional clubs. However, because Mr. Morris and his wife had three school age dependent children, it was decided that they would remain in Canada until the end of the current school year. As a consequence, Mrs. Morris and the children did not leave Canada until June 30. Until their departure, they resided in a small furnished apartment, rented on a month to month basis. Required: For purposes of determining Canadian income taxes, determine when Mr. Morris ceased to be a Canadian resident and the portion of his annual income which would be subject to Canadian income tax. Explain your conclusions. Answer: Mr. Morris would fall under the part year resident rules and would only be liable for Canadian income taxes on worldwide income during the portion of the year prior to his ceasing to be a resident of Canada. By selling his house, disposing of other personal property, and resigning from various social and professional clubs, Mr. Morris's actions support an intention to establish that he had made a clean break from Canada as of April 1. However, S5-F1-C1 indicates that, in general, the CRA will view an individual as becoming a non-resident on the latest of three dates: • The date the individual leaves Canada. • The date the individual's spouse or common-law partner and dependants leave Canada. • The date the individual becomes a resident of another country. Because of the continued presence in Canada of the spouse and dependent children of Mr. Morris, he would be considered a resident of Canada until June 30, the latest of the relevant dates. In terms of income tax consequences, he would be subject to Canadian income taxes on his salary until March 31. He would then be subject to U.S. taxes on income earned in that country after March 31. However, he would also be liable for Canadian income taxes during the period April 1 through June 30. While he would be eligible for a tax credit for U.S. taxes paid on this income, the fact that Canadian taxes are generally higher than those in the U.S. would probably result in a liability for Canadian taxes during this period until his family departs from Canada. Note that the facts suggest that he became a nonresident of Canada on his departure April 1 which when properly supported would avoid some of these difficulties. Type: ES Topic: Residency after departure from Canada

127) Mr. Valone is a U.S. citizen. However, since obtaining permanent residence status in Canada in 2008, he has been employed on a full time basis in London, Ontario. His employer is a Canadian subsidiary of a multi-national corporation that operates in a number of different countries. The head office of the company is in the United States. Mr. Valone has been very successful in his position with the Canadian subsidiary. Based on this, he has been offered a promotion which involves a significant increase in salary. However, this promotion is conditional on his moving to the company's head office in Philadelphia no later than March 1, 2022. Given the sizable increase in remuneration, Mr. Valone finds this offer too good to pass up. As he is a U.S. citizen, he has no difficulty getting the appropriate documentation to establish his residency in the U.S. He relinquishes his Canadian driver's licence, as well as his provincial health care card. As required by his employer, he is at his desk in the new work location in the U.S. on March 1, 2022. Mr. Valone and his spouse have two children who are attending a private school in London Ontario. The current semester at this school lasts until June 15, 2022. In order to provide continuity in their education, Mrs. Valone decides that she and the children will remain in Canada until the current semester is finished. They depart on June 20, 2022. The real estate market in London has been somewhat slow of late. As a consequence, the Valone's house is not sold until October 5, 2022. Required: Determine when Mr. Valone ceased to be a resident of Canada and the portion of his annual income which would be subject to Canadian income taxes. Explain your conclusions.

Answer: Solution According to Textbook Mr. Valone would be considered a part year resident and would only be subject to Canadian income tax on worldwide income during the portion of the year prior to his ceasing to be a resident of Canada. S5-F1-C1 indicates that, in general, the CRA will view an individual as becoming a non-resident on the latest of three dates: • The date the individual leaves Canada. • The date the individual's spouse or common-law partner and dependants leave Canada. • The date the individual becomes a resident of another country. While Mr. Valone departed from Canada on March 1, 2022, he will be considered a Canadian resident until his family's departure on June 20, 2022 if he abides by the CRA administration policy. The fact that he did not sell his Canadian home until that date would provide additional support. His Canadian salary from January 1, 2022 to March 1, 2022 would be subject to Canadian income tax. In addition, his U.S. salary for the period March 1, 2022 through June 20, 2022 will be subject, first to U.S. income tax, and Canadian income tax. In calculating his Canadian income tax, he will receive a credit for the U.S. taxes which he has paid on this income. However, because Canadian tax rates at a given income level are usually higher than those which prevail in the U.S., it is likely that he will be required to pay some Canadian income taxes in addition to U.S. income tax. Note To Instructors The preceding solution reflects the content of the text with respect to departures from Canada and students should be evaluated on that basis. However, S5-FI-C1 qualifies the general departure rules as follows: Paragraph 1.22 - An exception to this will occur where the individual was resident in another country prior to entering Canada and is leaving to re-establish his or her residence in that country. In this case, the individual will generally become a non-resident on the date he or she leaves Canada, even if, for example, his or her spouse or common law partner remains temporarily behind in Canada to dispose of their dwelling place in Canada or so that their dependants may complete a school year already in progress. On the assumption that Mr. Valone was a resident of the U.S. prior to his working years in Canada, this exception would mean that he would cease to be a resident of Canada on March 1, 2021, the date that he departs from Canada. The textbook does not deal with the residency rules of countries other than Canada. Although this solution concludes that June 20 is the date residency is terminated in Canada, it is probable that the foreign jurisdiction (the U.S.) would consider Mr. Valone to be resident under their own rules effective March 1. In effect, the period between March 1 and June 20 would become a dual residency period. We would not expect students to come to this conclusion, but include this to illustrate the complexities of international issues in taxation. Type: ES Topic: Residency after departure from Canada

128) For each of the following persons, determine the residency status of the individuals, whether they will be subject to income tax in Canada and the income that would be subject to Canadian income tax in 2022. Case A — John is a citizen of the U.K. who has landed immigrant status in Canada. He has lived and been employed in Canada for over 15 years. In 2021, he won $1.5 million in a lottery. He has decided to use the winnings to spend two years touring Europe and Asia. His wife and children will remain at the family home in New Brunswick. He was not physically present in Canada during any part of 2022. Case B — In 2021, Jane's Canadian employer asked her to spend three years working in their Hong Kong office. Her employment contract requires her to return to Canada in 2024. Jane severs all of her residential ties with Canada and moves to Hong Kong in November, 2021. She is not physically present in Canada during any part of 2022. Case C — Laura is married to a member of the Canadian armed forces who is serving in Ghana. She is a citizen of Ghana and has never visited Canada. She is not subject to income tax in Ghana because of an exemption in the tax treaty between Canada and Ghana as a result of her spouse's employment with the Canadian government. Case D — Martha Mendoza is a U.S. citizen who lives in Buffalo, New York. In 2022 she is employed 5 days per week in Fort Erie, Ontario. Her 2022 salary is $52,000. In addition, she has $2,000 (Canadian) of interest on a savings account with a U.S. bank. Case E — Barry Long is a Canadian citizen who has lived and worked in Canada all of his life. He is offered a significant increase in salary if he accepts a permanent employment position in Spain. He accepts the offer and moves to Spain on March 1, 2022, While he immediately establishes residency in Spain, he is not joined by his wife and children until July 1, 2022. As they are unable to sell their Canadian home at an acceptable price, the property is rented under a long-term residential lease to an arm's length person.

Answer: Case A John's 2 year tour would be considered a temporary absence from Canada. Given the facts, it appears his intent is not to permanently sever residential ties with Canada. This position is evidenced by the fact his tour is for a limited time and he will not be establishing residency in another country. John remain a factual Canadian resident during his tour and would be subject to Canadian income tax on his worldwide income during 2022. Case B Because she has an employment contract that requires her to return to Canada in three years, she will be viewed as having retained Canadian residency. Although she has severed her ties with Canada, the requirement to return would show that she does not intend to permanently leave Canada. Jane will be subject to Canadian income tax on her worldwide income during 2022. Case C As she is exempt from taxation in Ghana because she is the spouse of a deemed Canadian resident, Laura would be a deemed resident of Canada for income tax purposes in 2022 [(ITA 250(1)(g)]. Laura would be subject to Canadian income tax on her worldwide income in 2022. Case D Commuting from the U.S. for employment purposes does not make an individual a deemed resident under the sojourner rules. Therefore, Martha would be considered a non-resident of Canada. She would be exempted by the Canada/U.S. tax treaty under ITA 2(3) if the amount of employment income was less than $10,000, or if she was physically present in Canada for less than 183 days. Her employment income was more than $10,000 and, because she was working 5 days a week, it appears that she was physically present in Canada for more than 183 days. Given these facts, she would not be exempted from Canadian taxation because of the Canada/U.S. tax treaty. Martha would be subject to Canadian income tax on her 2022 Canadian employment income. She would not be subject to Canadian income tax on her U.S. savings account interest since she is a non-resident of Canada. Case E Residency terminates at the latest of: • the date the individual leaves Canada; • the date the individual's family leaves Canada; and • the date that individual establishes residency elsewhere. As Barry's family did not leave Canada until July 1, 2022, Barry would be considered a Canadian resident until that date if he accepts to choose the CRA administrative policy. Provided he has no intention of returning to Canada, he would be subject to Canadian income tax on his worldwide income for the period January 1, 2022 through July 1, 2022. In addition, he would be subject to Canadian income tax on his 2022 rental income. The rental income will be subject to Canadian income tax under Part XIII (discussed in Chapter 20). Type: ES Topic: Residence of individuals - mini-cases

129) Indicate which of the corporations described in the following Cases would be considered factual or deemed residents of Canada or deemed non-residents for the current year. Explain the basis for your conclusion. Case A — Bonix Ltd. was incorporated in Canada in 1982. While the company carried on business in Canada for a number of years, its central management and control relocated to the United States in 2009. Case B — Dorad Inc. was incorporated in Ohio in 2004. For several years, all of its directors were residents of Canada, with board meetings being held in Windsor, Ontario. However, in 2009, all of the directors moved to Toledo, Ohio where all meetings are held. Case C — Upton Inc. was incorporated in Delaware in 2009. However, the head office of the corporation is in Halifax, Nova Scotia. All of the directors of the corporation are Canadian residents and all meetings of the board of directors are held in Halifax. Case D — Carlin Inc. was incorporated in Canada in 2006. However, its directors have always been residents of the United States, where Board Of Directors meetings are held. Answer: Canada/U.S. Tax Treaty Tie Breaker Rule In cases of dual residency for corporations, where a corporation could be considered a resident of both countries, the Canada/U.S. tax treaty resolves the situation by deeming the corporation to be resident in the country in which it was incorporated. Case A While Bonix is no longer carrying on business in Canada, it was incorporated in Canada and, as a result, it is deemed to be a resident of Canada. However, as the mind and management of the Company is currently situated in the United States, the Company would be a factual resident of the U.S. Using the tax treaty tie breaker rule, Bonix will be considered a resident of Canada only. Case B Dorad Inc. was not incorporated in Canada and its mind and management are not currently situated in Canada. As a result the company is neither a deemed or factual resident of Canada. Dorad would be considered a non-resident of Canada. Case C The central mind and management of Upton Inc. is situated in Canada and, as a result, the company is a factual resident of Canada. However, as Upton Inc. was incorporated in the U.S., it is also a resident of the U.S. Using the tax treaty tie breaker rule, Upton Inc. will be considered a resident of the U.S. and a deemed non-resident of Canada. Case D Carlin Inc. was incorporated in Canada which means Carlin is a deemed resident of Canada. However, because the central mind and management of the Company is in the U.S., it is a factual resident of the U.S. Using the tax treaty tie breaker rule, Carlin Inc. will be considered a resident of Canada only. Type: ES Topic: Residence of corporations - mini-cases

130) For each of the following individuals and corporations, determine their residency status. Your answer should explain whether the individual or corporation is a Canadian resident, what income would be subject to Canadian income tax and the basis for your conclusions. A. Molly London was born in Salmon Arm, British Columbia. On October 31, she quit her job, left Salmon Arm and moved all her belongings to San Diego, California. B. Daryl Bennett is a Canadian citizen living and working in Sault Ste. Marie, Michigan. He has a summer cottage in Sault Ste. Marie, Ontario, where he spent July and August. As his only sister lives in Sault Ste. Marie, Ontario, he spent a total of 27 days during the year staying with her in her home. C. Tweeks Inc. was incorporated in Vermont in 1981 by two U.S. citizens who were residents of Quebec. All of the directors are residents of Quebec and all meetings of the Board of Directors have been held in Montreal since incorporation. D. Bordot Industries Ltd. was incorporated in British Columbia on September 29, 1974. However, the directors of the corporation have always lived in Blaine,Washington. All of their meetings have been held at a large waterfront property just south of Blaine. Answer: A. Molly London would be considered a part year resident of Canada until October 31, the date of her departure and would be subject to Canadian income tax on her worldwide income for this period. Since she was not visiting Canada prior to her departure the sojourning rules would not have applied. B. Daryl Bennett is a factual resident of the U.S. and a non-resident of Canada. would not be considered a Canadian resident. He could have been subject to the deemed residency sojourner rule had he spent 183 days or more visiting Canada but that is not the case for the current year. As a result, none of his income would be subject to Canadian income tax. His Canadian citizenship would not affect his residency status. C. The company is a factual resident of Canada since the central mind and management are situated in Canada. The company is also a resident of the U.S. since it was incorporated in the U.S. As a result the company is a dual resident (resident of both Canada and the U.S.). Given this dual residency, the tax treaty tie-breaker rules resolve the issue by considering the company to be a resident of the U.S. only where the company was incorporated/ The company would therefore be a deemed non-resident of Canada. D. Bordot Industries would be deemed to be a resident of Canada because it was incorporated in Canada subsequent to April 26, 1965 [ITA 250(4)(a)]. However, because the central mind and management of the Company is in the U.S., the company would be a factual resident of the U.S. As a result the company is a dual resident. The tax treaty tie-breaker rules would resolve the situation by considering the Company a resident of Canada where it was incorporated. This would make Bardot Industries a resident of Canada, with its worldwide income taxed in Canada. It would be a non-resident of the U.S. Type: ES Topic: Residence of individuals & corporations - mini-cases

131) Pertinent facts are given for a different individual or corporation in each of the Parts of this problem. For each Part, indicate whether or not the individual or corporation would be considered a resident of Canada for income tax purposes during the current year. Briefly explain your conclusion. Part A — Dorothy is married to Jack, who is a member of the Canadian armed forces serving in Indonesia. Other than a brief visit to Jack's parents' home in Halifax, she has never been to Canada in her life. Because Jack is a member of the Canadian armed forces, neither he nor his wife is subject to taxation in Indonesia. Part B — Alice is a U.S. citizen living in Seattle,Washington. While she leaves many of her belongings at her parent's home in Seattle, she spends at least four days every week living with her boyfriend in Burnaby, British Columbia. They plan to be married at some future date. Part C — Last year, John transferred to the Cayman Islands office at the request of his Canadian employer for a three year period. His three year employment contract calls for him to return to work in Canada after its completion. On his departure from Canada, he severed all residential ties with Canada except for his medicare coverage. Part D — Millicent is a U.S. citizen who, until last year, had lived and worked in Canada as a landed immigrant for over 20 years. Last year, after winning $2 million in an Ontario lottery, she left Canada on a two year pleasure trip that will take her to virtually every country in the world. Her husband and children, all Canadian citizens, continue to live at the family home in Port Hope, Ontario. Part E — Berkly Management Inc. was incorporated in Alberta in 1964. Until 1990, its only director resided in Alberta. In that year, the director was replaced by an individual resident in Fresno, California. Part F — Lorris Ltd. was incorporated in Wisconsin in 1986. Until 1995, all of the directors of the corporation lived and met in Kenora, Ontario. Beginning in 1995, all of the directors have been residents of Green Bay, Wisconsin where all the meetings are currently held.

Answer: Part A As she is exempt from income tax in Indonesia because she is related to a deemed resident of Canada, Dorothy would be a deemed resident of Canada for income tax purposes during the current year under ITA 250(1)(g). Part B As she is present in Canada on a temporary basis for 183 days or more in the year she would be considered a sojourner. Under ITA 250(1)(a), this would make her a Canadian resident for income tax purposes for all of the current year subject to the tax treaty between Canada and the U.S. Part C Because he has an employment contract that requires him to return to Canada, he will be a Canadian resident for income tax purposes during the current year. Although he has severed his ties with Canada, the requirement to return would show that he does not intend to permanently leave Canada. Part D Millicent would be a factual resident of Canada for income tax purposes during the current year. An individual is not considered to have departed from Canada until the latest of the departure date, the date of departure for their spouse and children, and the date on which residence is established in a different country. As her family is staying in Canada and Millicent will not be establishing residency in another country, she will remain a Canadian factual resident during her trip. Part E ITA 250(4)(c) deems a corporation incorporated in Canada prior to April 27, 1965 to be resident in Canada if it either carried on business, or was factually resident in Canada, in any taxation year ending after April 26, 1965. Since those conditions were met the company would be deemed to be a resident of Canada. The company is also a factual resident of the U.S. since its central management and control is situated in the U.S. In this case the company is therefore a dual resident. The tie-breaker rule of the tax treaty deems the corporation to only be resident in the country in which it is incorporated. Given this, Berkley Management would be a resident of Canada. Part F The company was not incorporated in Canada and the central mind and management of the company is not in Canada. As a result the company the company would not be a deemed or factual resident of Canada/ Lorris Ltd. is a non-resident of Canada. Type: ES Topic: Residence of individuals & corporations - mini-cases

132) The following two Cases make different assumptions with respect to the amounts of income and deductions of Ms. Leslie Burke for the current taxation year: Case A — Ms. Burke had employment income of $17,000 and rental income of $8,500. She carries on a business as a sole proprietor and experienced a current year business loss of $12,300. As the result of dispositions of capital property, she realized taxable capital gains of $17,400 and allowable capital losses of $19,200. Her Subdivision e deductions for the year totalled $6,300. Fortunately for Ms. Burke, she won $1,000,000 in a lottery on March 3. Case B — Ms. Burke had employment income of $42,100, interest income of $8,200, and a loss from a business she carries on as a sole proprietor of $51,000. As the result of dispositions of capital property, she realized taxable capital gains of $22,400 and allowable capital losses of $19,200. Her Subdivision e deductions for the year amounted to $4,200. Required: For both Cases, calculate Ms. Burke's current year net income. Indicate the amount and type of any current year loss carry overs.

Answer: Case A The Case A solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance From ITA 3(a) And (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income for the current year

$17,000 8,500 $17,400 (19,200)

$25,500

Nil $25,500 (6,300) $19,200 (12,300) $ 6,900

In this Case, Ms. Burke has a current year net capital loss of $1,800 ($19,200 - $17,400). The lottery winnings are not considered a source of income. Case B The Case B solution would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance From ITA 3(a) And (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income for the current year

$42,100 8,200 $22,400 (19,200)

$50,300

3,200 $53,500 (4,200) $49,300 (51,000) Nil

In this Case, Ms. Burke's current year net income is nil. There would be a current year non-capital loss of $1,700 ($51,000 - $49,300). Type: ES Topic: Net income - ITA 3

133) The following two Cases make different assumptions with respect to the amounts of income and deductions that are available to Carl Suzak, a Canadian resident, for the current year. Case A — Carl had employment income of $126,100, as well as income from a business carried on as a sole proprietorship of $14,100. A rental property owned by Carl experienced a loss of $4,600. Dispositions of capital property during the current year had the following results: Capital Gains $56,400 Capital Losses 72,300 In compliance with the terms of his divorce agreement, Carl paid deductible spousal support of $7,200. In addition to the preceding items, Carl had a winning lottery ticket which resulted in his receiving a prize of $562,000. Case B — Carl had employment income of $89,000, interest income of $3,100, and rental income of $8,600. Carl also carried on a business as a sole proprietor. Unfortunately, during the current year, it experienced a loss of $187,400. Dispositions of capital property during the current year had the following results: Capital Gains $46,200 Capital Losses 26,300 Also during the current year, Carl made deductible contributions of $8,600 to his RRSP. Required: For each Case, calculate Carl's current year net income. Indicate the amount and type of any current year loss carry overs.

Answer: Case A The Case A solution would be calculated as follows: Income under ITA 3(a): Employment Income Business Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($56,400)] Allowable Capital Losses [(1/2)($72,300)] Balance from ITA 3(a) and (b) Spousal Support Payments ITA 3(c) Deduction under ITA 3(d): Rental Loss Net Income

$126,100 14,100

$140,200

$28,200 (36,150) $140,200

Nil (7,200) $133,000 (4,600) $128,400

In this Case, Carl has a current year net capital loss of $7,950 ($36,150 - $28,200). The lottery winnings would not be included in income because it is not a source of income. Case B The Case B solution would be calculated as follows: Income under ITA 3(a): Employment Income Interest Income Rental Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($46,200)] Allowable Capital Losses [(1/2)($26,300)] Balance from ITA 3(a) and (b) Deductible RRSP Contribution ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$89,000 3,100 8,600

$100,700

$23,100 (13,150)

9,950 $110,650 (8,600) $102,050 (187,400) Nil

In this Case, Carl has a current year non-capital loss of $85,350 ($187,400 - $102,050). Type: ES Topic: Net income - ITA 3

134) Karla Gomez is a Canadian resident who lives in Toronto. In the following two Cases, different assumptions are made with respect to the amounts and types of current year income and deductions. Case One — Karla had employment income of $62,350. Unfortunately, her flower shop business that she carries on as a sole proprietor suffered a business loss of $115,600. In contrast, she had a very good year in the stock market, realizing the following gains and losses: Capital Gains $97,650 Capital Losses 5,430 Also during the current year, Karla made deductible contributions of $4,560 to her RRSP. Case Two — Karla had employment income during the year of $45,600, business income of $27,310 and a rental loss of $4,600. As part of a divorce agreement from a previous year, Karla paid spousal support of $7,200 during the current year to her former common-law partner, Lucretia Smart. She realized the following results in the stock market during the year: Capital Gains $31,620 Capital Losses 41,650 While Karla does not gamble on a regular basis, she enjoys the ambiance of the local casino. Given this, two or three times a year, she spends an evening dining and gambling with friends there. In March of this year, she got very lucky, winning $46,000 by hitting a slot machine jackpot. Required: For each Case, calculate Karla's current year net income. Indicate the amount and type of any current year loss carry overs.

Answer: Case One The Case One solution would be calculated as follows: Income under ITA 3(a): Employment Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($97,650)] Allowable Capital Losses [(1/2)($5,430)] Balance from ITA 3(a) and (b) Subdivision e Deduction: Deductible RRSP Contribution ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$62,350

$48,825 (2,715)

46,110 $108,460 (4,560) $103,900 (115,600) Nil

In this Case, Karla has a current year non-capital loss of $11,700 ($115,600 - $103,900). Case Two The Case Two solution would be calculated as follows: Income under ITA 3(a): Employment Income Business Income Income under ITA 3(b): Taxable Capital Gains [(1/2)($31,620)] Allowable Capital Losses [(1/2)($41,650)] Balance from ITA 3(a) and (b) Subdivision e Deduction: Spousal Support Payments ITA 3(c) Deduction under ITA 3(d): Rental Loss Net Income

$45,600 27,310

$72,910

$15,810 (20,825)

Nil $72,910 (7,200) $65,710 (4,600) $61,110

In this Case, Karla has a current year net capital loss of $5,015 ($20,825 - $15,810). As Karla's gambling activity does not appear to be substantial enough to be considered a business, the $46,000 in winnings would not be considered a source of income. Type: ES Topic: Net income - ITA 3

135) The following four Cases make different assumptions with respect to the amounts of income and deductions of Kirsten for the current year:

Employment Income Business Income (Loss) Rental Income (Loss) Taxable Capital Gains Allowable Capital Losses Subdivision e Deductions

Case A $75,660 (15,990) 7,020 41,080 (16,120) (5,330)

Case B $107,380 (10,920) 15,860 20,280 (30,420) (7,020)

Case C $60,710 (80,990) 3,380 15,080 (13,910) (15,080)

Case D $43,420 (60,060) (23,790) 30,030 (32,110) (7,280)

Required: For each Case, calculate Kirsten's current year net income. Indicate the amount and type of any current year loss carry overs, or state that no carry overs are available.

Answer: Case A The Case A solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income Under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$75,660 7,020 $41,080 (16,120)

$ 82,680

24,960 $107,640 (5,330) $102,310 (15,990) $ 86,320

In this Case, Kirsten has no current year loss carry overs. Case B The Case B solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$107,380 15,860 $20,280 (30,420)

$123,240

Nil $123,240 (7,020) $116,220 (10,920) $105,300

In this Case, Kirsten has a current year net capital loss of $10,140 ($30,420 - $20,280).

Case C The Case C solution would be calculated as follows: Income under ITA 3(a): Employment Income Rental Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Net Income

$60,710 3,380 $15,080 (13,910)

$64,090

1,170 $65,260 (15,080) $50,180 (80,990) Nil

In this Case, Kirsten would have a current year non-capital loss of $30,810 ($80,990 - $50,180). Case D The Case D solution would be calculated as follows: Income under ITA 3(a): Employment Income Income under ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance from ITA 3(a) and (b) Subdivision e Deductions ITA 3(c) Deduction under ITA 3(d): Business Loss Rental Loss Net Income

$43,420 $30,030 (32,110)

Nil $43,420 (7,280) $36,140 (60,060) (23,790) Nil

Kirsten would have a current year non-capital loss of $47,710 ($60,060 + $23,790 - $36,140) and current year net capital loss of $2,080 ($32,110 - $30,030). Type: ES Topic: Net income - ITA 3

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 2 Procedures and Administration 2.1 Online Exercises 1) An individual can request that an employer reduce the amounts withheld for income taxes. What conditions must be met for this request to be granted? Provide an example of a situation where the request would be granted. Answer: For the CRA to grant this request, the reason for the reduction must be documented in a reasonable fashion and it must be recurring. Form T1213 would be required to be filed with the CRA. Common examples that lead to a request for a reduction include RRSP contributions, child care expenses and deductible spousal support payments. Type: ES Topic: Administration - reduction in withholdings

2) In some situations, an employee may request an increase in the amounts that are withheld for future income taxes. What circumstances might lead an employee to make such a request? Answer: While there are other possibilities, the ones that are mentioned in the text are: • Normal withholding is based on rates in a low tax rate province, but the individual resides in a high tax rate province (e.g., the individual works in Alberta, but lives in Saskatchewan). • An individual receives large amounts of taxable spousal support payments that are not subject to withholding. Type: ES Topic: Administration - increase in withholdings

3) Under what circumstances must an individual make income tax instalment payments during the current year? Answer: Individuals are required to make instalment payments if their net tax owing is greater than $3,000 ($1,800 in Quebec) in the current year and in either of the two preceding years. Type: ES Topic: Administration - individual tax instalments

4) If an individual is required to make quarterly instalment payments, how is the required amount of the instalments determined? Answer: An individual can choose from three different methods in determining their instalment payments: Method 1 - The instalments could be based on one-quarter of the estimated net tax owing for the current year. Method 2 - The instalments could be based on one-quarter of the net tax owing for the first preceding year. Method 3 - The first two instalments could be based on one-quarter of the net tax owing for the second previous year, with the third and fourth instalments based on one-half of the net tax owing for the first preceding year, less the sum of the first two instalments paid. Type: ES Topic: Administration - individual tax instalments

5) By making all instalments on the basis of the CRA's instalment reminder, the taxpayer is assured that no interest will be assessed for deficient instalments. However, this may not be the best alternative for making instalment payments. Explain why this is true. Answer: The CRA's instalment reminder generally results in total instalment payments equal to the net tax owing in the first preceding year. If the estimated net tax owing for the current year is less, lower instalments could be paid using the estimated current year net tax owing as the base. Type: ES Topic: Administration - individual tax instalments

6) One of your clients has received an instalment notice and has asked your advice as to whether instalments should be made. Provide the requested advice. Answer: If the client has debt on which he is paying non-deductible interest (e.g., interest on personal use credit cards), you should determine the applicable rates. If the client is paying interest at a rate in excess of the rate charged on deficient instalments (i.e., the prescribed rate plus 4%), the client might consider paying down the debt instead of making instalment payments. Alternatively, if the interest rate on the personal debt is lower, then an effort should be made to pay instalments. The excess penalty under ITA 163.1 would also have to be taken into consideration if the instalment payments are large. Type: ES Topic: Administration - individual tax instalments

7) How is interest on late instalments calculated? Answer: Interest on later instalments is calculated using the highest prescribed rate (the regular rate plus 4%) applied for the period from the date the instalment is due until the balance due date for the income tax payable for the year. Type: ES Topic: Administration - interest on late or deficient instalments

8) On April 30 of the current year, her filing due date, Nicole Houde finds that she has a significant tax balance owing. She will not be able to pay this until the beginning of July. She doesn't want to file her return until she has the funds available to pay the balance. What advice would you give Ms. Houde in this regard? Answer: She should file the return on the due date, regardless of whether she has the funds to pay the balance owing. Whether or not she files, she will have to pay interest on the balance owing. However, if she delays filing until early July, she will not only have to pay the non-deductible interest, she will also be subject to an immediate penalty of 5% of the balance owing, plus an additional 1% per complete month for a maximum of 12 months. Filing in July will result in a penalty of 7% for the period from April 30 to June 30. If, within the last three years, there has been another late filing of her return, the penalty will double to an immediate 10%, plus 2% for each complete month. The monthly penalty will be assessed for a maximum of 20 months. Type: ES Topic: Administration - penalties and interest for individuals

9) Under what circumstances must a corporation make income tax instalment payments during its current taxation year? Answer: Corporations are generally required to make either monthly or quarterly instalment payments throughout their taxation year. The only exception to this is when the estimated taxes payable for the current year, or the taxes payable in the first preceding year, are $3,000 or less. Type: ES Topic: Administration - corporate tax instalments

10) If a corporation that is not a small CCPC is required to make instalment payments on their income taxes, how are the required amounts determined? Answer: A corporation that is not a small CCPC can choose from three different methods in determining their instalment payments: Method 1 - The instalments can be based on one -twelfth of the estimated taxes payable for the current taxation year. Method 2 - The instalments can be based on one -twelfth of the taxes payable for the first preceding taxation year. Method 3 - The first two instalments can be based on one -twelfth of the taxes payable for the second preceding year. The remaining 10 instalments will then be based on the taxes payable for the first preceding year reduced by the amounts paid in the first two instalments, with the net amount divided by 10. Type: ES Topic: Administration - corporate tax instalments

11) If a corporation that is a small CCPC is required to make quarterly instalment payments. How are the required instalments determined? Answer: A corporation that is a small CCPC can choose from three different methods in determining their instalment payments. Method 1 - The instalments can be based on one -fourth of the estimated taxes payable for the current taxation year. Method 2 - The instalments can be based on one -fourth of the taxes payable for the first preceding taxation year. Method 3 - The first instalment can be based on one -fourth of the taxes payable for the second preceding taxation year. The remaining three instalments will then be based on the taxes payable for the first preceding taxation year reduced by the amount paid in the first instalment, with the net amount divided by 3. Type: ES Topic: Administration - corporate tax instalments

12) A corporation's balance due date is not the same as its filing due date. Explain how these dates differ. Answer: Corporate income tax returns must be filed within six months of the end of the corporation's taxation year. In contrast, the balance due date is either 2 months after the end of the corporation's taxation year (general rule) or 3 months after the end of the corporation's taxation year (qualifying CCPCs). As a consequence, payment is always required prior to the due date for filing the corporate income tax return. Type: ES Topic: Administration - corporate filing requirements

13) The normal reassessment period is 3 years for individuals and CCPCs and 4 years for other corporations. Indicate two situations where a reassessment can occur outside the normal reassessment period. Answer: There are a number of situations that could be cited. The ones listed in the text are as follows: • Reassessment can occur at any time if the taxpayer or person filing the return has made any misrepresentation that is attributable to neglect, carelessness or wilful default, or has committed any fraud in filing the return or in supplying information under the ITA. • Reassessment can occur at any time if the taxpayer has filed a waiver of the normal time limit. A taxpayer can revoke such a waiver at any time but it remains valid for six months from the date of revocation. • Reassessment can occur outside the normal reassessment period if a request has been made to reduce taxes, interest, or penalties. The ability to use this provision is limited to ten years measured from the end of the relevant taxation year. The ability to request a refund however is generally restricted to individuals and Graduated Rate Estates (GRE). • Reassessment can occur beyond the normal reassessment period when reassessment within the normal period affects a balance outside of this period. • Reassessment can occur outside the normal reassessment period in situations where the taxpayer is claiming certain specified deductions, such as a loss carry back for that year. Type: ES Topic: Administration - normal reassessment period

14) Cases can be heard by the Tax Court of Canada using either the general or the informal procedures. How do these two procedures differ? Answer: The general and informal procedures differ as follows: • Under the informal procedures, the total federal income tax and penalties for a specific year must be less than $25,000, or the loss in question for a specific year is less than $50,000. • Under the informal procedures, an individual can represent themselves, or be represented by someone other than a lawyer (e.g., an accountant). • Under the informal procedures, the taxpayer cannot be assessed court costs. • Under the informal procedures, if the taxpayer loses, there is no appeal to a higher court. • Informal procedures usually resolve a dispute much more quickly than the general procedures. Type: ES Topic: Administration - tax court of Canada procedures

15) Briefly describe the difference between tax evasion and tax avoidance. Answer: Tax evasion is described on the CRA web site as follows: Tax evasion occurs when an individual or business intentionally ignores Canada's tax laws. This includes falsifying records and claims, purposefully not reporting income, or inflating expenses. A less clear description of tax avoidance is as follows: results when actions are taken to minimize tax, while within the letter of the law, those actions contravene the object and spirit of the law. Tax avoidance would include all unacceptable and abusive tax planning whereas aggressive tax planning would be considered to "push the limits" of acceptable tax planning. Type: ES Topic: Administration - tax evasion vs tax avoidance

16) If an individual believes that the amount of income taxes withheld by an employer is greater than the amount that the individual will have to pay in a particular year, a request to the CRA can be made to authorize the employer to reduce the source deductions no matter the reason for the difference. Answer: FALSE Explanation: The deficiency must be recurring, not just for a particular year. Type: TF Topic: Administration - reduction in withholdings

17) Because the taxation year of an individual must be based on the calendar year, all individuals will have the same filing due date. Answer: FALSE Explanation: There are two filing due dates for individuals. April 30 or, for individuals, their spouses or common earning business income, June 15. In addition, deceased individuals may also have a different filing date. Type: TF Topic: Administration - individual due dates

18) If an individual dies after October in a particular taxation year, the legal representatives must file the income tax return for that year by the later of his normal filing due date and six months after the date of death. Answer: TRUE Type: TF Topic: Administration - individual due dates

19) If quarterly instalments must be paid by an individual, they can be calculated as one-quarter of the net tax owing for the first preceding year. Answer: TRUE Type: TF Topic: Administration - individual tax instalments

20) If an individual is required to make income tax instalment payments, it is acceptable to base each payment on one-quarter of the estimated income tax payable for the current year. Answer: FALSE Explanation: The acceptable approach is to use one-quarter of the net tax owing for the current year. Type: TF Topic: Administration - individual tax instalments

21) The interest rate applicable on refunds to individuals is 4 percentage points less than the interest rate applicable on amounts owing to the CRA. Answer: FALSE Explanation: The interest rate applicable on refunds to individuals is 2 percentage points less than the interest rate on amounts owing to the CRA. Type: TF Topic: Administration - interest on refunds and/or amounts owing (Individuals)

22) The penalty for an individual making insufficient instalment payments is 5% of the total unpaid tax at the filing date, plus 1% for each complete month to a specified maximum number of months. Answer: FALSE Explanation: There is no penalty for late payment of instalments. The 5% penalty is for late filing of the income tax return. Type: TF Topic: Administration - interest on late or deficient instalments

23) Without regard to whether an individual's filing due date is April 30 or June 15, any income tax balance owing must be paid by April 30. Answer: TRUE Type: TF Topic: Administration - individual due dates

24) All corporations must file their income tax returns no later than six months after the end of their taxation year, and pay any balance of income tax owing no later than three months after the end of their taxation year. Answer: FALSE Explanation: Corporations, other than some CCPCs, must pay the balance of tax owing no later than two months after the end of their taxation year. Type: TF Topic: Administration - corporate filing requirements

25) The notice of objection for a corporation must be filed within 90 days from the date of mailing of the notice of assessment. Answer: TRUE Type: TF Topic: Administration - notice of objection

26) Interest and penalties may be waived or reduced in extraordinary circumstances, such as those involving natural disasters or serious illness. Answer: TRUE Explanation: Taxpayer relief provisions Type: TF Topic: Administration - taxpayer relief provisions

27) Which of the following statements is NOT correct? A) If an individual has business income during the year, the due date for filing the income tax return is June 15 of the following calendar year. B) An income tax return may be required of an individual, without regard to their age. C) If an individual has no taxable income for the year, they never have to file an income tax return. D) If an individual sells a capital property during the year, they are required to file an income tax return, even if there is no gain or loss on the transaction. Answer: C Explanation: C) If an individual has no taxable income for the year, they do not have to file an income tax return. This is because they would presumably have no income tax payable but there are other reasons why an income tax return has to be filed. Type: MC Topic: Administration - individual filing requirements

28) Which of the following statements is correct? A) When an individual dies in a year, an income tax return must be filed for that year within 6 months of the date of death. B) Only residents of Canada are required to file Canadian income tax returns. C) An individual with business income during the year must pay any income tax balance owing by June 15 of the following year. D) An individual sole proprietor with a business loss for the year may not have to file an income tax return for the year. because there would be no income tax payable. Answer: D Explanation: D) An individual sole proprietor with a business loss for the year may not have to file an income tax return for the year. because there would be no income tax payable. Type: MC Topic: Administration - individual filing requirements

29) With respect to the filing of an individual income tax return, which of the following statements is correct? A) An individual is required to file an income tax return if their only source of income is business income, even if no tax is payable. B) An individual is required to file an income tax return if they have reached the age of 18 by the end of the year. C) If an individual has disposed of a capital property during the year, they are required to file an income tax return, even if no tax is payable. D) An individual is not required to file an income tax return if no tax is payable for the year. Answer: C Explanation: C) If an individual has disposed of a capital property during the year, they are required to file an income tax return, even if no tax is payable. Type: MC Topic: Administration - individual filing requirements

30) For the 2022 taxation year, John Bookman had a taxable capital gain of $45,000 and a business loss of $45,000, resulting in net and taxable income of nil. Which of the following statements is correct? A) John is not required to file an income tax return for 2022 . B) John must file an income tax return on or before June 15, 2023. C) John must file an income tax return on or before December 31, 2023. D) John must file an income tax return on or before April 30, 2023. Answer: B Explanation: B) John must file a tax return on or before June 15, 2023. Type: MC Topic: Administration - individual filing requirements

31) John Barron carries on a business as a sole proprietor and plans to file his 2022 income tax return on June 15, 2023. His balance-due day is: A) April 30, 2022. B) April 30, 2023. C) June 15, 2023. D) June 15, 2022. Answer: B Explanation: B) April 30, 2023. Type: MC Topic: Administration - individual filing requirements

32) Bunly Im carries on a business as a sole proprietor. Which of the following dates are correct for the date by which his income tax return for a year must be filed (1st item) and his due date for the payment of any income taxes owing (2nd item)? A) April 30, April 30. B) June 15, April 30. C) April 30, June 15. D) June 15, June 15. Answer: B Explanation: B) June 15, April 30. Type: MC Topic: Administration - individual filing requirements

33) Ms. Deveco's 2022 income tax return is due on April 30, 2023. While she is too busy to file her income tax return on that date, she remits a cheque to the government for $10,000, her estimated amount of income tax owing a few days prior to April 30, 2023. The CRA acknowledges receipt on her My Account before April 30, 2023. She has never filed a late return before. She prepares and files her income tax return on May 31, 2023. At this time, the return shows that her actual income tax owing was $9,800. Assuming that the interest rate applicable to late payment of taxes is one-half percent per month without daily compounding, how much will she owe in penalties and interest as a result of the late filing? A) $ 49. B) $490. C) $588. D) $637. E) Nil. Answer: E Explanation: E) Nil. The late filing penalty is applied to any unpaid amount as of the filing due date of April 30, 2023. Since Ms. Deveco has paid more than income tax balance by April 30, 2023, no penalties or interest would be charged even though her income tax return was late filed. Type: MC Topic: Administration - individual filing requirements

34) Mr. Finlay, a retired individual whose only source of income was pension income, dies on August 15, 2022. By what date must Mr. Finlay's final income tax return be filed? A) April 30, 2023. . B) February 28, 2023. C) February 15, 2023. D) December 31, 2022. E) None of the above. Answer: A Explanation: A) The final income tax return of individuals who die between January 1 and October 31 and who had not carried on business must be filed no later than April 30 of the following year. The 6month filing extension provided by ITA 150(1)(b) only applies where an individual dies between November 1 of the year and April 30 (or June 15 where a business was carried on) of the following year. Type: MC Topic: Administration - individual filing requirements

35) Ms. Ali, an individual who carried on a music education business as a sole proprietor, dies on November 15, 2022. What is the latest filing date for her 2021 income tax return? A) April 30, 2023. B) May 15, 2023. C) May 30, 2023. D) June 15, 2023. Answer: D Explanation: D) June 15, 2022. The later of June 15, 2023 and six months after the date of death. Type: MC Topic: Administration - individual filing requirements

36) Mr. Khan, who carried on a construction business as a sole proprietor, dies on April 1, 2022. What is the latest filing date for his final 2022 income tax return? A) April 30, 2023. B) June 15, 2023. C) October 1, 2023. D) December 31, 2023. Answer: B Explanation: B) June 15, 2023, his regular filing date for his 2022 income tax return. His 2022 income tax return filing is not affected by the six month extension because he did not die between November 1, 2022 and June 15, 2023. His 2021 income tax return however would have been eligible for the six month extension. Type: MC Topic: Administration - individual filing requirements

37) Ms. Loren dies on February 1, 2023. All of her income is from employment and she does not have a spouse or common-law partner. What is the latest date for filing her 2022 income tax return? A) April 30, 2023. B) June 15, 2023. C) August 1, 2023. D) June 30, 2023. Answer: C Explanation: C) August 1, 2023 which is the latest of April 30, 2023 and six months after the date of death. Type: MC Topic: Administration - individual filing requirements

38) Greta died on September 10, 2022. She has never carried on a business. By what date must her final income tax return be filed? A) April 30, 2023. B) April 30, 2024. C) March 10, 2023. D) June 15, 2023. Answer: A Explanation: A) April 30, 2023 Type: MC Topic: Administration - individual filing requirements

39) Which of the following individuals did NOT have to pay instalments in 2022? A) Jane Austen, who had business income of $50,000 in both 2020 and 2022 and a $1,000 business loss in 2021. B) Charlotte Bronte, who realized capital gains of $3,500 in 2021 and $4,000 in 2022. Her only other income during the years 2020 through 2022 was $5,000 in employment income. C) George Eliot, who had rental income of $50,000 in the years 2020 through 2022 and an allowable capital loss of $50,000 in 2021. D) Emily Bronte, who received spousal support payments of $20,000 per year in each of the years 2020 through 2022. Answer: B Explanation: B) Charlotte Bronte, who realized capital gains of $3,500 in 2021 and $4,000 in 2022. With her only other income during the years 2019 through 2022 being $5,000 in employment income, the net tax owing on the taxable one-half of the capital gains plus the employment income would be less than $3,000. A. is not correct. Although there is a requirement to pay instalments, the minimum instalment would be nil because the prior year's net tax owing was nil. Type: MC Topic: Administration - individual tax instalments

40) Ms. Marston has net tax owing for 2020 of $4,500, net tax owing for 2021 of $8,000, and estimated net tax owing for 2022 of $7,500. If she wishes to pay the minimum total amount of instalments for the 2021 taxation year, her first payment on March 15, 2022 will be for what amount? A) Nil. B) $1,125. C) $1,875. D) $2,000. Answer: C Explanation: C) $1,875 ($7,500 ÷ 4). Type: MC Topic: Administration - individual tax instalments

41) Jason Marks has to pay income tax instalments as a result of significant investment income. His net tax owing in 2020 was $13,600. In 2021, it was $15,000. His estimate for 2022 is $17,000. If he decides to pay his 2022 income tax instalments according to the first preceding year option, how much should he pay on September 15, 2022? A) $3,400. B) $3,750. C) $4,250. D) $6,500. Answer: B Explanation: B) $3,750 ($15,000 ÷ 4). Type: MC Topic: Administration - individual tax instalments

42) All of the following individuals will have to pay tax by instalments this year, except: A) Jane White, who received a one-time bonus of $60,000 last year and, because her employer had not deducted enough tax, found herself with net tax owing of $8,200. B) Karen Phillips, who has started to earn investment income, which resulted in net tax owing of $3,100 last year. Her investment income is expected to be even greater this year. C) Blake Fortin, who began a business as a sole proprietor two years ago. Blake had a very successful first year and, as result, he had net tax owing that year of $85,000. Business dropped in his second year, resulting in net tax owing of only $1,500. This year, business has picked up again and he expects to have net tax owing of $53,000. D) Terri Jones, who has had net taxable capital gains on real estate in excess of $40,000 in each of the last two years, and who expects to have similar gains this year. Answer: A Explanation: A) Jane White, who received a one-time bonus of $60,000 last year and, because her employer had not deducted enough tax, found herself with net tax owing of $8,200. Type: MC Topic: Administration - individual tax instalments

43) Larry Short had business income of $62,000 in 2022. Prior to 2022, he was employed full-time and his employer's withholdings more than covered his income tax liability for tall years such that he received an income tax refund. Larry estimates that, based on his business income, his net tax owing for 2022 will be $8,000. Which of the following statements is true? A) Larry must file his return for 2022 by April 30, 2023. B) Larry should pay instalments in 2022. C) Larry must pay his income tax for 2022 by June 15, 2023. D) If Larry has as much business income in 2023 as he had in 2022, he will have to pay instalments in 2023. Answer: D Explanation: D) If Larry has as much business income in 2023 as he had in 2022, he will have to pay instalments in 2023. Type: MC Topic: Administration - individual tax instalments

44) Individuals are required to pay instalments: A) when net tax owing is over $3,000 for any one of the past two years. B) when net tax owing is over $3,000 for the current year and both of the two prior years. C) when net tax owing is over $3,000 for the current year and one of the two prior years. D) when net tax owing is over $3,000 for the current year only. Answer: C Explanation: C) When net tax owing is over $3,000 for the current year and one of the two prior years. Type: MC Topic: Administration - individual tax instalments

45) One way to ensure that no interest will be assessed for late instalments is: A) to pay the amounts provided by the CRA in their instalment reminder on or before the required dates. B) to pay the lowest amount calculated using the three alternative calculations on or before the required dates. C) to pay the estimated tax owing for the current year on the first instalment due date. D) to pay the average of the three amounts calculated using the three alternative calculations on or before the required dates. Answer: A Explanation: A) To pay the amounts provided by the CRA in their instalment reminder on or before the required dates. B is wrong as the estimate for the current year may be too low. Type: MC Topic: Administration - interest on late or deficient instalments

46) Dora Chen has determined that her minimum tax instalments for 2022 are $8,000 per quarter. She also owes $30,000 on her credit card, which carries an interest rate of 20%. She has destroyed her credit card, so no more can be put on it. Dora is unable to pay both the entire instalment amounts and her credit card balance, but she does have $8,000 in cash each quarter for her debts. Which of the following would be the best choice for Dora from a financial planning perspective? A) Dora should pay off her credit card balance before making instalment payments. B) Dora must make all her instalment payments, even if it means she cannot pay anything off on her credit card this year. C) Dora should split her payments equally between the credit card balance and the instalment liability, in order to show the CRA that she is trying her best to meet her obligations to them. D) Dora should pay her first two instalments and then make payments on her credit card balance. Answer: A Explanation: A) Dora should pay off her credit card balance before making instalment payments. Type: MC Topic: Administration - interest on late or deficient instalments

47) Lang Lang Ltd., a CCPC eligible for the small business deduction, has a March 31 year end. Due to the death of the owner/manager, the tax return for the year ended March 31, 2021 was not filed until May 12, 2023. The unpaid tax on March 31, 2021 was $15,500. Lang Lang Ltd. has never filed an income tax return late before. What is the total late filing penalty that the corporation is required to pay? (Do not include any interest payable.) A) $1,705. B) $2,635. C) $1,860. D) $3,720. Answer: B Explanation: B) The penalty for a first offence is 5% + 1% per full month late to a maximum of 12 months. Since the return was more than 19 months late, the maximum penalty is 17% of $15,500 = $2,635. A = (11%)($15,500) = $1,705 C = (12%)($15,500) = $1,860 D = (24%($15,500) = $3,720 Type: MC Topic: Administration - late filing penalty

48) Which of the following scenarios will result in a penalty being charged by the CRA? A) A taxpayer pays less than the required amount of instalments. B) A taxpayer who is owed a refund files their tax return late. C) A taxpayer who has a balance owing files their tax return late, with the payment enclosed. D) A taxpayer who has a balance owing files their tax return on time, but does not include a payment. Answer: C Explanation: C) A taxpayer who has a balance owing files their tax return late, with the payment enclosed. Type: MC Topic: Administration - late filing penalty

49) Which of the following statements with respect to corporations is NOT correct? A) Corporate income tax returns must be filed within 6 months of the end of the taxation year. B) All corporations must file their income tax returns electronically. C) If the corporation is a CCPC, the due date for any balance owing is three months after the end of the taxation year. D) If a corporation has foreign operations, it can determine its Canadian tax liabilities on the basis of financial statements prepared in the corporation's functional currency. Answer: B Explanation: B) All corporations must file their income tax returns electronically. If their gross revenues are less than $1,000,000, they can file a paper return. Type: MC Topic: Administration - corporate filing requirements

50) For corporations, the filing deadline for income tax returns is: A) April 30. B) the taxation year end. C) three months after the taxation year end. D) three months after the taxation year end if the small business deduction is claimed, otherwise two months after the taxation year end. E) six months after the taxation year end. Answer: E Explanation: E) Six months after the taxation year end. Type: MC Topic: Administration - corporate filing requirements

51) PS Swim Inc. has a year end of November 30. It is a small CCPC. For its 2022 taxation year, its income tax return is due on: A) January 31, 2023. B) February 28, 2023. C) April 30, 2023. D) May 31, 2023. E) None of the above. Answer: D Explanation: D) The return would be due on May 31, 2023, six months after the taxation year end. Type: MC Topic: Administration - corporate filing requirements

52) For its 2022 taxation year, its first year of operation, PS Swim Inc. filed its income tax return three months late. The unpaid income tax at the due date for the return was $2,500. This amount was not paid until the income tax return was filed. What would its penalty be? A) Nil. B) $175. C) $125. D) $200. E) $500. Answer: D Explanation: D) The penalty would be 5% of the tax unpaid at the date the return was due to be filed, plus 1% per month for three months, a total of 8%. This amounts to $200 [(8%)($2,500)]. Type: MC Topic: Administration - late filing penalty

53) The balance due date for a corporation is: A) April 30 of the following year. B) the same as the filing deadline. C) three months after the end of the taxation year, or two months after the end of the taxation year if the corporation is a small CCPC. D) two months after the end of the taxation year, or three months after the end of the taxation year if the corporation is a small CCPC. Answer: D Explanation: D) Two months after the end of the taxation year, or three months after the end of the taxation year if the corporation is a small CCPC. Type: MC Topic: Administration - corporate filing requirements

54) A Canadian public company has income tax payable of $62,000 in 2020, $95,000 in 2021, and $75,000 in 2022. The company would like to minimize its 2022 instalments. What would its instalments be? A) One monthly payment of $5,167 per month, followed by eleven monthly payments of $8,167 per month. B) Twelve payments of $5,167 per month. C) Twelve payments of $6,250 per month. D) Two monthly payments of $5,167 per month, followed by ten monthly payments of $8,467 per month. Answer: C Explanation: C) Twelve payments of $6,250 per month. Type: MC Topic: Administration - corporate tax instalments

55) PP Ltd., a client of your firm, has a November 30 taxation year end and has requested you to advise them on what its monthly instalments for the 2022 taxation year will be. Its income tax payable for its November 30, 2020 and November 30, 2021 taxation years were $13,800 and $13,200, respectively. Its estimated income tax payable for the November 30, 2022 year are $14,400. PP Ltd. wants to pay the lowest amount possible, without incurring interest penalties. What would its instalments be? A) Twelve payments at $1,200 per month. B) Twelve payments at $1,100 per month. C) Twelve payments at $1,150 per month. D) Two monthly payments at $1,150 each, followed by ten monthly payments at $1,090 each. E) None of the above. Answer: B Explanation: B) Its preceding year's taxes payable of $13,200, divided by twelve months. Type: MC Topic: Administration - corporate tax instalments

56) A Canadian public corporation had federal income taxes payable in each of 2020 and 2021 exceeding $3,000. One correct option it has with respect to its 2022 instalments is to pay: A) equal instalments, on a quarterly basis, based on its 2021 federal income taxes payable. B) on a monthly basis, instalments equal to 1/12th of its estimated 2022 income taxes payable. C) one lump-sum payment, within three months of its 2022 year end. D) on a monthly basis, instalments equal to 1/12th of its 2020 federal income taxes payable. Answer: B Explanation: B) The only correct approach listed is to pay monthly instalments equal to 1/12th of the current year's estimated income tax liability. Type: MC Topic: Administration - corporate tax instalments

57) If a Canadian public corporation is experiencing a year-to-year decrease in income tax, the most advantageous calculation of instalments that would be allowed is: A) monthly, based on the estimated income tax for the current year. B) quarterly, based on the estimated income tax for the current year. C) monthly, based on the estimated income tax for the first preceding year. D) quarterly, based on the estimated income tax for the first preceding year. E) monthly, based on the estimated income tax for the second preceding year and the immediately preceding year. F) quarterly, based on the estimated income tax for the second preceding year and the immediately preceding year. Answer: A Explanation: A) Monthly, based on the estimated income tax for the current year. Type: MC Topic: Administration - corporate tax instalments

58) Which of the following is NOT one of the criteria for a CCPC to be considered a small CCPC eligible to pay instalments on a quarterly basis? A) Taxable income cannot exceed $500,000 for the corporation and its associated corporations for the current taxation year and the two previous years. B) The corporation has claimed the small business deduction in the current or previous year. C) The corporation has a perfect compliance record during the last 12 months. D) The corporation and its associated corporations do not have Taxable Capital Employed in Canada that exceeds $10 million for the current or previous year. Answer: A Explanation: A) Taxable income cannot exceed $500,000 for the corporation and its associated corporations for the current taxation year and the two previous years. Type: MC Topic: Administration - corporate tax instalments

59) Dora Burch files her 2022 income tax return on March 2, 2023. She receives an original notice of assessment dated June 3, 2023. However, on December 28, 2023, she receives a reassessment indicating that she owes a substantial amount of additional tax. She would like to object to this reassessment. What is the latest date for her to file a notice of objection? She does not carry on a business. (Ignore the effect of leap year if applicable.) A) March 2, 2024. B) April 30, 2024. C) March 28, 2024. D) December 28, 2024. Answer: B Explanation: B) April 30, 2024. The later of 90 days from the notice of reassessment dated December 28, 2023 or March 28, 2024 and one year from the filing due date for the 2022 taxation year. or April 30, 2024. Type: MC Topic: Administration - notice of objection

60) Which of the following statements is NOT correct? A) When the person filing the income tax return has made any misrepresentation due to neglect, carelessness or wilful default, the normal reassessment period can be extended beyond 3 years. B) A taxpayer can choose to file a waiver to extend the 3 year time limit. C) When a return has been reassessed once, no further reassessments are permitted. D) Reassessment can occur outside the normal reassessment period when reassessment within the normal period affects a balance outside of the normal period. Answer: C Explanation: C) When a return has been reassessed once, no further reassessments are permitted. Type: MC Topic: Administration - normal reassessment period

61) Which of the following is NOT one of the criteria that must be met before an adjustment to a previous year tax return is permitted? A) The CRA must be satisfied that the previous assessment was incorrect. B) The change is based on a successful appeal to the courts by another taxpayer. C) The taxpayer's return was filed within 3 years of the end of the year to which it relates. D) The reassessment must be made within the normal assessment period, or under certain permitted extensions to this period. Answer: B Explanation: B) The change is based on a successful appeal to the courts by another taxpayer. Type: MC Topic: Administration - assessments and appeals

62) Tom Arnold filed his 2022 income tax return on March 1, 2023. The CRA mailed the original notice of assessment to Tom dated May 15, 2023, and Tom received it on May 30, 2023. If Tom disagrees with the notice of assessment, what is the latest date he has to file a notice of objection? Tom does not carry on a business. A) 90 days from March 1, 2023. B) 90 days from April 30, 2023. C) 90 days from May 15, 2023. D) 90 days from May 30, 2023. E) None of the above. Answer: E Explanation: E) For individuals, the notice of objection must be filed before the later of: 90 days from the date of the notice of assessment or reassessment, and one year from the filing due date for the return under assessment or reassessment. The later date would have been April 30, 2023. Type: MC Topic: Administration - notice of objection

63) Minnie Belanger is retired. She filed her 2022 income tax return on March 5, 2023. She received a portion of the income tax refund claimed for 2022 and an original notice of assessment, dated April 19, 2023, which set out the difference between the amount claimed and the amount of the refund. As Minnie disagrees with the notice of assessment, she wishes to file a notice of objection. What is the latest date she has to file a notice of objection? Minnie does not carry on a business. A) March 5, 2024. B) April 19, 2024. C) April 30, 2024. D) July 18, 2023. E) June 15, 2024. Answer: C Explanation: C) Her notice of objection must be filed before the later of: 90 days from the date of the notice of assessment (July 18, 2023), and one year from the filing due date for the return (April 30, 2024). Type: MC Topic: Administration - notice of objection

64) For a public corporation, which of the following statements is correct with respect to filing a notice of objection? A) It must be filed no later than 180 days from the date on the original notice of assessment. B) It must be filed the later of 90 days after the date on the notice of assessment and one year from the filing date for the return under assessment. C) It must be filed the later of 180 days after the date on the notice of assessment and one year from the filing date for the return under assessment. D) It must be filed no later than 90 days after the date on the notice of assessment. Answer: D Explanation: D) It must be filed no later than 90 days after the date of the notice of assessment. Type: MC Topic: Administration - notice of objection

65) Marc Mayer filed his 2022 income tax return on March 1, 2023. Neither he nor his spouse has business income in any year. The CRA mailed an original notice of assessment to Marc dated May 5, 2023 and Marc received it on May 14, 2023. If Marc disagrees with the notice of assessment, he has until which one of the following dates to file a notice of objection? A) August 3, 2023. B) August 12, 2023. C) March 1, 2024. D) April 30, 2024. Answer: D Explanation: D) April 30, 2024. Type: MC Topic: Administration - notice of objection

66) An individual who resides in Saskatchewan has not filed her 2017, 2018 and 2019 income tax return because the individual was told that withholdings for source deductions were sufficient and that no tax would be owing for the three years. The individual has since learned that the withholdings for source deductions were excessive and that the individual is entitled to a refund for all three years. The individual files all three income tax returns on September 29, 2022. Refunds will be issued for the following years: A) 2017 & 2018 B) All three years C) 2019 D) None of the years Answer: C Explanation: C) ITA 164(1) provides that refunds will only be issued if a request for the refund is made by filing an income tax return no later than three years from the end of the taxation year. As a result the return for 2017 and 2018 would have had to have been filed by December 31, 2020 and 2021 respectively. The individual is however within the time limit of December 31, 2022 for the 2019 taxation year. Type: MC Topic: Administration - statute-barred refunds

67) An individual carries on a business as a sole proprietor. The individuals files his 2022 income tax return on June 2, 2023 which indicates he is entitled to a refund of $7,200. Assuming that he receives the full refund on July 12, 2023 interest will be included for what period of time? A) June 2, 2023 to July 12, 2023 B) April 30, 2023 to July 12, 2023 C) July 2, 2023 to July 12, 2023 D) No interest will be received Answer: C Explanation: C) July 2, 2023 to July 12, 2023. ITA 164(3) requires interest on refunds to begin at the later of (1) 30 days after the balance due day of April 30, 2023 and (2) 30 days after the income tax return has been filed which would be July 2, 2023. Type: MC Topic: Administration - interest on refunds and/or amounts owing (Individuals)

68) BarkCo is a CCPC with a December 31 taxation year end. The company expects a large refund when it files its income tax return for the 2022 taxation year. For what period of time will Interest on the refund begin to accrue if the company files its 2022 income tax return on (1) June 10, 2023? Answer: The company's filing due date is six months after its taxation year end which is June 30, 2023 for the 2022 taxation year. ITA 164(3) establishes the date on which refund interest begins as the later of (1) 120 days after the taxation year end which would be April 30, 2023 and (2) 30 days after the income tax return is filed but only if the return is filed after the filing due date of June 30, 2023. Since the income tax return was filed before the filing due date the limitation is April 30, 2023 only. Type: ES Topic: Administration - interest on refunds and/or amounts owing (Corporations)

69) BarkCo is a CCPC with a December 31 taxation year end. The company expects a large refund when it files its income tax return for the 2022 taxation year. For what period of time will Interest on the refund begin to accrue if the company files its 2022 income tax return on July 10, 2023? Answer: The company's filing due date is six months after its taxation year end which is June 30, 2023 for the 2022 taxation year. ITA 164(3) establishes the date on which refund interest begins as the later of (1) 120 days after the taxation year end which would be April 30, 2023 and (2) 30 days after the income tax return is filed but only if the return is filed after the filing due date of June 30, 2023. Since the income tax return was filed after the filing due date interest begins to accrue from August 9, 2023 which is 30 days after the return was actually filed. Type: ES Topic: Administration - interest on refunds and/or amounts owing (Corporations)

70) Mark Brown's 2022 net income includes business income. When is his 2022 income tax return due? By what date must any 2022 income tax owing be paid in order to avoid interest? Answer: While Mr. Brown's 2022 income tax return does not have to be filed until June 15, 2023, any amount owing must be paid by April 30, 2023 in order to avoid any interest charges. Type: ES Topic: Administration - individual due dates

71) Ms. Jeanine Farrel has 2022 net income which includes business income. When is her 2022 income tax return due? In addition, indicate when any income tax owing must be paid to avoid interest charges. Answer: While Ms. Farrel's 2022 income tax return does not have to be filed until June 15, 2023, she must pay any income tax owing by April 30, 2023 to avoid interest charges. Type: ES Topic: Administration - individual due dates

72) George Klause dies on March 1, 2023. All of his 2022 income is from the carrying on of a business. By what date must his representative file his 2022 income tax return? Explain your answer. Answer: Mr. Klause's 2022 income tax return must be filed by the later of six months after the date of his death and his normal filing date if he dies between November 1, 2022 and June 15, 2023. Since he died within this period the later date of six months that is September 1, 2023 applies rather than the regular filing due date which would have been June 15, 2023. Type: ES Topic: Administration - deceased individual taxpayer due date

73) Gloria Klump dies on December 1, 2022. Much of her 2022 income is from the carrying on of a business. By what date must her representatives file her 2022 income tax return? Explain your answer. Answer: Ms. Klump's 2022 income tax return must be filed by the later of six months after the date of her death and her normal filing date if she died between November 1, 2022 and her regular filing due date of June 15, 2023. Since she dies within that period of time her 2022 income tax return can be filed the later of the filing due date of June 15, 2023 and six months after her death which would be June 1, 2023. Given this, the later date is June 15, 2023. Type: ES Topic: Administration - deceased individual taxpayer due date

74) At the beginning of 2022, the following information relates to Sarah Elmsley: Year 2020 2021 2022 (Estimated)

Net Tax Owing $1,800 6,400 3,600

Indicate whether Ms. Elmsley is required to make instalment payments in 2022. Explain your conclusion and, if your answer is yes, indicate the minimum instalments that will be required and the instalment payment dates. Answer: As the net tax owing for the current year and one of the two preceding years exceeds $3,000, she is required to make instalment payments for 2022. The best alternative for instalment payments would be to use the current year estimate. This would result in required instalment payments of $900 ($3,600 ÷ 4) to be paid on March 15, June 15, September 15, and December 15 of 2022. Note, however, that if the estimated net tax owing is below actual net tax owing for 2022, instalment interest may be charged. Type: ES Topic: Administration - individual tax instalments

75) Horace Greesom filed his 2021 income tax return on time. At the beginning of 2022, the following information relates to Mr. Greesom:

Year 2020 2021 2022 (Estimated)

Taxes Payable $56,000 49,000 65,000

Amounts Withheld $45,000 46,200 45,000

What amounts will be shown on CRAs Instalment Reminder notices for 2022 and when will the amounts be due? Should he pay those amounts? Explain your conclusion. Answer: The net tax owing amounts can be calculated as follows: 2020 $11,000 ($56,000 - $45,000) 2021 $2,800 ($49,000 - $46,200) 2022 $20,000 ($65,000 - $45,000) As the net tax owing exceeds $3,000 in the current year and the second preceding year, instalments are required. The CRA Instalment Reminder will have March 15 and June 15 instalments of $2,750 each ($11,000 ÷ 4). There would be no further instalments required for 2022 as his net tax owing for 2021 is only $2,800 and he would already have paid $5,500 [(2)($2,750)]. The best alternative for instalment payments would be to use the prior year option. This would result in required instalment payments of $700 ($2,800 ÷ 4) to be paid on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments

76) At the beginning of 2022, the following information relates to Jerry Farrow:

Year 2020 2021 2022 (Estimated)

Taxes Payable $83,000 76,000 63,000

Amounts Withheld $78,000 77,200 59,000

Is Mr. Farrow required to make instalment payments during 2022? If he is required to make instalment payments, indicate the amounts that would be required under each of the three alternative methods of calculating instalments. Indicate which alternative would be preferable. Answer: The net tax owing amounts can be calculated as follows: 2020 $5,000 ($83,000 - $78,000) 2021 Nil ($76,000 - $77,000). Note Negative amount are not recognized. 2022 $4,000 ($63,000 - $59,000) As the net tax owing exceeds $3,000 in the current year and the second preceding year, instalments are required to be determined. The three alternatives for calculating instalment payments are as follows: • Based on the estimate for the current year, the instalments would be $1,000 ($4,000 ÷ 4). • Based on the estimate for the preceding year, the instalments would be nil. • Based on the second preceding year, the first two instalments would each be $1,250 ($5,000 ÷ 4). As the net tax owing for the previous year is nil, no further instalments would be required. The best alternative would be to base the payments on the previous year, resulting in instalments of nil. This is perfectly acceptable. Type: ES Topic: Administration - individual tax instalments

77) Despite the fact that her net tax owing has been between $7,000 and $8,000 in the two previous years, and is expected to be a similar amount during 2022, Marsha Fields has made no instalment payments for 2022. While her normal filing date would be April 30, 2023, she does not file her 2022 income tax return or pay the balance owing until August 24, 2023. Marsha has filed her income tax return on time in all previous years. What amounts of penalties and interest will be charged for the 2022 taxation year? Answer: Given the size of her net tax owing, ITA 163.1 will not apply and there will be no penalties for late instalments. However, a penalty of 8% of the income taxes owing will be charged for filing three complete months late (5%, plus 1% per month). Interest will be assessed on the deficient instalments, the balance owing on her filing due date, and the penalty assessed for late filing. It will be assessed at the prescribed base rate plus 4% for the period May 1 through August 24, 2023. Type: ES Topic: Administration - penalties and interest for individuals

78) As his taxable income in 2021 was nil, Mark Felton did not make any income tax instalment payments in 2022. In completing his income tax return for 2022, he finds that he has net tax owing of $22,500. While his normal filing date would be April 30, 2023, he does not file his return or pay the balance owing until September 12, 2023. What penalties and interest will be charged for the 2022 taxation year? Answer: A penalty of 9% of the income tax amount owing will be charged for filing four complete months late (5%, plus 1% per month). There will be no interest on late income tax instalments because, with the previous year's net tax owing of nil no instalments would have been required. This would also mean that the ITA 163.1 penalty would not apply. Interest at the prescribed base rate plus 4% will be charged on the amount owing on his filing due date and the penalty assessed for late filing for the period May 1 through September 12, 2023. If, in one of the three preceding taxation years he has also late filed, the penalty could be 18% (10 percent, plus % per month) if the individual has received a notice from the CRA demanding that the 2022 income tax return be filed. Type: ES Topic: Administration - penalties and interest for individuals

79) Lemar Ltd. has a December 31 year end. It is not a small CCPC. For 2020, its income taxes payable were $71,500, while for 2021, the amount was $93,600. For 2022, its estimated taxes payable are $114,700. What would be the minimum instalment payments for the 2022 taxation year and when would the instalments be due? How would your answer differ if Lemar Ltd. qualified as a small CCPC? Answer: Not Small CCPC — The first two instalments would be based on the second preceding year and would be $5,958.33 each ($71,500 ÷ 12). The remaining 10 instalments would be based on the preceding year, less the $11,916.66 paid in the first two instalments. The amount would be $8,168.33 [($93,600 - $11,916.66) ÷ 10]. The instalments would be due on the last day of each month in 2022 beginning January 31. Small CCPC — In this case, the first instalment would be based on the second preceding year and would be $17,875 ($71,500 ÷ 4). The remaining 3 instalments would be based on the preceding year, less the $17,875 paid for the first instalment. The amount would be $25,241.67 [($93,600 - $17,875) ÷ 3]. The instalments would be due on the last days of March, June, September, and December of 2022. Note that when the initial instalment(s) are based on the second preceding year, the total amount of instalments will be the same as when all of the instalments are based on the first preceding year. However, using the second preceding year is preferable in that it provides some deferral of taxes. Type: ES Topic: Administration - corporate tax instalments

80) Chemco Inc. has a December 31 year end and is not a small CCPC. For 2020, its income taxes payable were $146,300, while for 2021, the amount was $94,650. In 2022, its estimated income taxes payable are $52,300. What would be the minimum instalment payments for the 2022 taxation year and when would they be due? How would your answer differ if Chemco Inc. qualified as a small CCPC? Answer: Not Small CCPC — The minimum instalments would be based on the estimated income taxes payable for 2022. The amount would be $4,358.33 ($52,300 ÷ 12). The instalments would be due on the last day of each month in 2022 beginning January 31. Note that, if the estimate for 2022 is too low, interest will be charged on the deficiency. Small CCPC — In this case, all four instalments would be based on the estimated income taxes payable for 2022. The amount would be $13,075 ($52,300 ÷ 4). The instalments would be due on the last days of March, June, September, and December of 2022. Note that when the initial instalment(s) are based on the second preceding year, the total amount of instalments will generally be the same as when all of the instalments are based on the first preceding year. However, using the second preceding year is preferable in that it provides some deferral of taxes if the income taxes payable for each taxation year are increasing each year. Type: ES Topic: Administration - corporate tax instalments

81) Dustin Inc. has a September 30 year end and is not a small CCPC. Its income tax payable for the taxation year ending September 30, 2020 was $33,500. $93,400 for its September 30, 2021 taxation year and it is estimated that its income tax payable for the current year ending September 30, 2022 will be $56,200. What is the minimum income tax instalment payments for the current year ending September 30, 2022 and when would the payments be due? How would your answer differ if Dustin Inc. qualified as a small CCPC? Answer: Not Small CCPC — Minimum instalments would be based on the estimate for the current year. The monthly amount would be $4,683.33 ($56,200 ÷ 12). If the second previous year was used, the first two installments would be lower. However, as the remaining instalments would be based on the previous year's $93,400, the total would be significantly larger. The instalments would be due on the last day of each month during the period October, 2021 through September, 2022. Note that, if the estimate for 2022 is too low, interest will be charged on the deficiency. Small CCPC — Minimum instalments would be based on the estimate for the current year. The monthly amount would be $14,050 ($56,200 ÷ 4). The instalments would be due on the last day of December, 2021, March, 2022, June, 2022, and September, 2022. Type: ES Topic: Administration - corporate tax instalments

82) The taxation year end for Grange Inc. is March 31, 2022. It is a CCPC that claims the small business deduction and had taxable income for the year ending March 31, 2021 of $165,000. Indicate the date on which the corporate income tax return for the taxation year ending March 31, 2022 must be filed, as well as the date on which any final payment of income taxes is due. Answer: Grange Inc.'s income tax return is due six months after its year end, on September 30, 2022. As it is a CCPC that claims the small business deduction, and its taxable income for the preceding taxation year did not exceed $500,000, the final tax payment is due three months after the year end. This would be June 30, 2022. Type: ES Topic: Administration - corporate due dates

83) The taxation year end for Lawnco Inc. is January 31, 2022. Lawnco Inc. is a Canadian public company. Indicate the date on which the corporate tax return must be filed, as well as the date on which any final payment of income taxes is due. Answer: Lawnco Inc.'s income tax return is due six months after its year end, on July 31, 2022. As Lawnco is a public company that is not eligible for the small business deduction, the final tax payment is due two months after the year end, on March 31, 2022. Type: ES Topic: Administration - corporate due dates

84) The taxation year end for Breyson Ltd., a CCPC, is June 30, 2022. The company claims the small business deduction and had taxable income for the year ending June 30, 2021 of $132,000. Indicate the date on which the corporate income tax return for the taxation year ending June 30, 2022 must be filed, as well as the date on which any final payment of income tax is due. Answer: Breyson's tax return is due December 31, 2022, six months after its year end of June 30, 2022. As it is a CCPC that claims the small business deduction, and its taxable income for the preceding taxation year did not exceed $500,000, its final income tax payment is due three months after the year end on September 30, 2022. Type: ES Topic: Administration - corporate due dates

85) Nancy Forth filed her 2022 income tax return as was required on April 30, 2023. Her Notice of Assessment dated May 15, 2023 indicated that her return was accepted as filed. On July 12, 2024, she receives a Notice of Reassessment dated July 2, 2024 indicating that she owes additional income taxes, as well as interest on the unpaid amounts. What is the latest date for filing a notice of objection ? Explain your answer. Answer: A notice of objection must be filed by the later of: • 90 days after the date of July 2, 2024 on the Notice of Reassessment (September 30, 2024); or • one year after the due date for filing the return that is being reassessed (April 30, 2024). The later of these two dates is September 30, 2024. Type: ES Topic: Administration - notice of objection

86) Norman Foster filed his 2022 income tax return as was required on June 15, 2023. His Notice of Assessment dated August 28, 2023, indicated that his 2022 income tax return was accepted as filed. On March 15, 2024, he receives a Notice of Reassessment dated March 8, 2024 indicating that he owes additional income tax, as well as interest on the unpaid amounts. What is the latest date for filing a notice of objection for this reassessment? Explain your answer. Answer: A notice of objection must be filed by the later of: • 90 days after the March 8, 2024 date on the Notice of Reassessment (June 6, 2024); or • one year after the due date for filing the return that is reassessed (June 15, 2024). The later of these two dates is June 15, 2024. Type: ES Topic: Administration - notice of objection

87) In the three independent cases which follow, assume that Barry Levenor's income tax payable before withholdings for each of the three years is as follows: 2020 $14,256 2021 15,776 2022 (Estimated) 16,483 The amount Barry's employer withholds for the three independent cases is as follows: Case 1 - $11,800 in 2020, $14,150 in 2021, and $12,400 (estimated) in 2022. Case 2 - $14,920 in 2020, $11,400 in 2021, and $13,226 (estimated) in 2022. Case 3 - $11,220 in 2020, $13,275 in 2021, and $12,873 (estimated) in 2022. Required: A. For each of the three cases: • indicate whether instalments are required for the 2022 taxation year; • in those Cases where instalments are required, calculate the amount of the instalments that would be required under each of the three acceptable methods; and • in those cases where instalments are required, indicate which of the three acceptable methods would be the best alternative. B. For those Cases where instalments are required, indicate the dates on which the payments will be due. Answer: Part A - Case 1 Barry's net tax owing in each of the three years is as follows: 2020 = $2,456 ($14,256 - $11,800) 2021 = $1,626 ($15,776 - $14,150) 2022 = $4,083 ($16,483 - $12,400) Estimated While the net tax owning in the current year is expected to exceed $3,000, it did not exceed $3,000 in either of the two preceding years. The payment of instalments is not required.

Part A - Case 2 Barry's net tax owing in each of the three years is as follows: 2020 = Nil ($14,256 - $14,920) Note that a negative number are not recognized. 2021 = $4,376 ($15,776 - $11,400) 2022 = $3,257 ($16,483 - $13,226) Estimated As his net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the instalments are required. Instalments under the three acceptable alternatives would be as follows: Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $814.25 ($3,257 ÷ 4), for a total amount of $3,257. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $1,094 ($4,376 ÷ 4), for a total amount of $4,376. Alternative 3 - Using the net tax owing for the second previous year would result in the first two instalments being nil. The remaining two instalments would be $2,188 ($4,376 ÷ 2), a total of $4,376. The best choice would be Alternative 1. While the first two instalments are lower under Alternative 3, the total for the year under Alternative 3 is $1,119 ($4,376 - $3,257) higher. Part A - Case 3 Barry's net tax owing in each of the three years is as follows: 2020 = $3,036 ($14,256 - $11,220) 2021 = $2,501 ($15,776 - $13,275) 2022 = $3,610 ($16,483 - $12,873) Estimated As his net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2020, the payment of instalments is required. Instalments under the three acceptable alternatives would be as follows: Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $902.50 ($3,610 ÷ 4), for a total amount of $3,610. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $625.25 ($2,501 ÷ 4), for a total amount of $2,501. Alternative 3 - Using the net tax owing for the second previous year would result in the first two instalments being $759 ($3,036 ÷ 4) each, a total of $1,518. The remaining two instalments would be $491.5 [($2,501 - $1,518) ÷ 2], a total of $983. When combined with the first two instalments, the total for the year would be $2,501 ($1,518 + $983). The best choice would be Alternative 2. While the total for the year under Alternative 3 is the same, the first two instalments are lower under Alternative 2, allowing for a small amount of tax deferral. Part B In Case Two and Case Three, the required instalments would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

88) For 2020, Mr. Mason Boardman has combined federal and provincial income tax payable of $62,350. The employer withheld $61,600. For 2021, his combined federal and provincial income tax payable is $29,760. The employer withheld $13,740. In 2022, he anticipates having combined federal and provincial income tax payable of $52,370. Withholdings are expected to be $47,390. In January, 2022, you are asked to provide tax advice to Mr. Boardman. He has asked you whether it will be necessary for him to pay instalments in 2022 and, if so, what the minimum amount should be and the dates the amounts are due. Required: Provide the information requested by Mr. Boardman. Show all your calculations. Answer: Need For Instalments Instalments are required when an individual's "net tax owing" exceeds $3,000 in the current year and in either of the two preceding years. In somewhat simplified terms, "net tax owing" is defined as the combined federal and provincial income taxes payable, less amounts withheld. Mr. Boardman's net tax owing for each of the three years are as follows: 2020 = $750 ($62,350 - $61,600) 2021 = $16,020 ($29,760 - $13,740) 2022 = $4,980 ($52,370 - $47,390) Estimated As Mr. Boardman's net tax owing in 2022 (the current year) and his net tax owing in 2021 (one of the two preceding years) is greater than $3,000, he is required to determine instalment payments. Amounts If Mr. Boardman bases the first two quarterly payments on the 2020 net tax owing, they would only be $187.50 each ($750 ÷ 4). However, the payments for the last two quarters would be $7,822.50 each {[$16,020 - (2)($187.50)] ÷ 2}, resulting in total instalment payments of $16,020. A preferable alternative would be to base the payments on the estimated net tax owing for 2022. These payments would be $1,245 each ($4,980 ÷ 4), for a total of $4,980. Payment Dates The quarterly payments would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

89) For the three years ending December 31, 2020 through December 31, 2022, a corporation's combined federal and provincial income tax payable is as follows: 2020 = $153,640 2021 = $186,540 2022 = $172,340 (Estimated) Case One The taxpayer is a small CCPC. Case Two The taxpayer is a small CCPC. Assume that its combined federal and provincial income taxes payable for the year ending December 31, 2021 were $163,420, instead of the $186,540 given in the problem. Case Three The taxpayer is a publicly traded corporation. Case Four The taxpayer is a publicly traded corporation. Assume that its combined federal and provincial income taxes payable for the year ending December 31, 2021 were $163,420, instead of the $186,540 given in the problem. Required: For each of the preceding independent Cases, provide the following information: 1. Indicate whether instalments are required during 2021. Provide a brief explanation of your conclusion. 2. Calculate the amount of instalments that would be required under each of the acceptable methods available. 3. Indicate which of the available methods would best serve to minimize instalment payments. Answer: Case One 1. As the corporation's tax payable for both the current and the first preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $43,085 ($172,340 ÷ 4) based on the current year estimate. • Quarterly instalments of $46,635 ($186,540 ÷ 4) based on the first preceding year. • One instalment of $38,410 ($153,640 ÷ 4) based on the second preceding year, followed by three instalments of $49,376.67 [($186,540 - $38,410) ÷ 3], a total of $186,540. 3. The best alternative in terms of minimum instalments would be four instalments of $43,085, for total payments of $172,340. The instalments are due on March 31, June 30, September 30, and December 31 of 2022.

Case Two 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $43,085 ($172,340 ÷ 4) based on the current year estimate. • Quarterly instalments of $40,855 ($163,420 ÷ 4) based on the first preceding year. • One instalment of $38,410 ($153,640 ÷ 4) based on the second preceding year, followed by three instalments of $41,670 [($163,420 - $38,410) ÷ 3], a total of $163,420. 3. The best alternative would be one payment of $38,410, followed by three payments of $41,670. While the total instalments are the same $163,420 in both the second and third alternatives, the third alternative is preferable because the first payment is lower. This provides a small amount of tax deferral. The instalments are due on March 31, June 30, September 30, and December 31 of 2022. Case Three 1. As the corporation's income 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 instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $14,361.67 ($172,340 ÷ 12) based on the current year estimate. • Monthly instalments of $15,545 ($186,540 ÷ 12) based on the first preceding year. • Two monthly instalments of $12,803.33 ($153,640 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $16,093.33 {[($186,540 - (2)($12,803.33)] ÷ 10}, a total of $186,540.03. 3. The best alternative in terms of minimum instalments would be 12 instalments of $14,361.67, resulting in a total of $172,340 of instalment payments. The instalments would be due on the last day of each month, beginning January 31, 2022. Case Four 1. As the corporation's income 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 instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $14,361.67 ($172,340 ÷ 12) based on the current year estimate. • Monthly instalments of $13,618.33 ($163,420 ÷ 12) based on the first preceding year. • Two monthly instalments of $12,803.33 ($153,640 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $13,781.33 {[$163,420 - (2)($12,803.33)] ÷ 10}, a total of $163,420. 3. The best alternative would be two payments of $12,803.33, followed by ten payments of $13,781.33. While the total instalments are the same $163,420 in both the second and third alternatives, the third alternative is preferable because the first two payments are lower. This provides a small amount of tax deferral. The instalments would be due on the last day of each month, beginning January 31, 2022. Type: ES Topic: Administration - corporate tax instalments (comprehensive)

90) For the three years ending December 31, 2022, Galina Skurnick's combined federal and provincial taxes payable are as follows: 2020 $28,800 2021 23,040 2022 (Estimated) 21,600 Assume Ms. Skurnick's employer withholds combined federal and provincial income tax for each year as follows: Case One $19,200 in 2020, $16,000 in 2021, and $16,000 in 2022. Case Two $11,200 in 2020, $24,000 in 2021, and $14,400 in 2022. Case Three $27,500 in 2020, $16,200 in 2021, and $18,200 in 2022. Required: For each of the preceding independent Cases, calculate the minimum instalment payments that are required to be made towards the settlement of the income tax payable for the year ending December 31, 2022. Show all required calculations. If instalments must be paid, your answer should include the date that each instalment is due. Note that, in answering this question, you should state a conclusion as to whether instalments may be required even if the most favourable alternative results in nil instalments. Answer: While there are alternatives in all Cases, the following answers represent the "minimum" instalments, as required in the problem. Case One Ms. Skurnick's net tax owing in each of the three years is as follows: 2020 = $9,600 ($28,800 - $19,200) 2021 = $7,040 ($23,040 - $16,000) 2022 = $5,600 ($21,600 - $16,000) Estimated As her net tax owing is expected to exceed $3,000 in 2021 and was more than $3,000 in both 2020 and 2021, the payment of instalments is required. Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $1,400 ($5,600 ÷ 4) for a total of $5,600. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $1,760 ($7,040 ÷ 4), for a total amount of $7,040. Alternative 3 - Using the net tax owing for the second preceding year would result in a figure of $2,400 ($9,600 ÷ 4) for the first two instalments. The remaining two instalments would be $1,120 each {[$7,040 (2)($2,400)] ÷ 2]. This would result in total instalments of $7,040. The best choice would be Alternative 1 with total instalments of $5,600. They would be due on March 15, June 15, September 15, and December 15 of 2022.

Case Two Ms. Skurnick's net tax owing in each of the three years is as follows: 2020 = $17,600 ($28,800 - $11,200) 2021 = Nil ($23,040 - $24,000) 2022 = $7,200 ($21,600 - $14,400) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2020, the conditions for instalments have been met and instalments payments may be required. Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $1,800 ($7,200 ÷ 4) for a total of $7,200. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments nil. Alternative 3 - Using the net tax owing for the second preceding year would result in a figure of $4,400 ($17,600 ÷ 4) for the first two instalments. As the first two instalments total more than the nil balance for 2021, no further instalments are required. The best choice would be Alternative 2 with no required instalments. Case Three Ms. Skurnick's net tax owing in each of the three years is as follows: 2020 = $1,300 ($28,800 - $27,500) 2021 = $6,840 ($23,040 - $16,200) 2022 = $3,400 ($21,600 - $18,200) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the payment of instalments is required. Instalments under the three acceptable alternatives would be as follows: Alternative 1 - Using the estimated net tax owing for the current year would result in quarterly instalments of $850 ($3,400 ÷ 4) for a total of $3,400. Alternative 2 - Using the net tax owing for the first preceding year would result in quarterly instalments of $1,710 ($6,840 ÷ 4), for a total amount of $6,840. Alternative 3 - Using the net tax owing for the second preceding year would result in a figure of $325 ($1,300 ÷ 4) for the first two instalments. The remaining two instalments would be $3,095 each {[$6,840 (2)($325)] ÷ 2]. This would result in total instalments of $6,840. The best choice would be Alternative 1. While the first two instalments are lower under Alternative 3, the total for the year under Alternative 3 is $3,340 ($6,840 - $3,400) higher. They would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

91) For both income tax and accounting purposes Ledux Inc. has a January 31 taxation year end. Ledux is a publicly traded Canadian company. For the year ending January 31, 2020, Ledux Inc. had federal income tax payable of $193,420. During the following year ending January 31, 2021, the federal income tax payable was $215,567. While final figures are not available at this time, it is estimated that federal income tax payable for the year ending January 31, 2022 will be $203,345. Required: A. Calculate the instalment payments that are required for the year ending January 31, 2022 under each of the three alternative methods available. Indicate which of the alternatives would be preferable. B. If the Company did not make any instalment payments towards its 2022 income tax payable, and did not file its corporate income tax return or pay its income tax payable on time, indicate how the interest and penalty amounts would be determined (a detailed calculation is not required). Answer: Part A Under ITA 157(1), Ledux Inc. would have three alternatives with respect to the calculation of its instalment payments. The alternatives and the relevant calculations are as follows: Current Year Base — The instalment payments could be 1/12th of the estimated income tax payable for the current year. In this case the resulting instalments would be $16,945.42 per month ($203,345 ÷ 12). Preceding Year Base — The instalment payments could be 1/12th of the income tax payable in the first preceding year. The resulting instalments would be $17,963.92 ($215,567 ÷ 12). First and Second Preceding Years — The third alternative would be to base the first two instalments on 1/12th of the Tax Payable in the second preceding year and the remaining instalments on 1/10th of the income tax payable in the first preceding year, less the total amount paid in the first two instalments. In this case, the first two instalments would be $16,118.33 ($193,420 ÷ 12) each, a total of $32,236.66. The remaining 10 instalments would be $18,333.03 [($215,567 - $32,236.66) ÷ 10] each. The total instalments under this alternative would be $215,567. While the third approach would provide the lowest payments for the first two instalments, the payments would total $215,567. As this is larger than the $203,345 total when the instalments are based on the current year's estimated income tax payable, the current year alternative would be the best alternative.

Part B If the Company failed to make instalment payments towards its 2022 income tax payable, it would be liable for interest from the date each instalment should have been paid to the balance due date, March 31, 2022. Assuming the actual 2022 income tax payable is $203,345, it would be the least of the amounts described in ITA 157(1), and interest would be calculated based on the current year instalment alternative. The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular base rate plus 4%. 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% of the amount by which the interest owing on the late or deficient instalments exceeds the greater of $1,000 and 25% of the interest that would be owing if no instalments had been made. While detailed calculations are not required, we would note that this penalty would apply in this case. Interest on the entire balance of $203,345 of income tax payable would be charged beginning on the balance due date, March 31, 2022, two months after the end of the 2022 taxation year. The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular base rate plus 4%. There is also a penalty for late filing the income tax return. If the income tax return is not filed by the filing due date of July 31, 2022, the penalty amounts to 5% of the amount owing at the filing due date plus 1% per complete month of the unpaid income 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 income tax return is filed or the amount owing is paid. The late file penalty could be doubled to 10%, plus 2% per month for a maximum of 20 months for a second offence within a three year period if the CRA has sent a notice demanding that the income tax return be filed. Type: ES Topic: Administration - instalments, interest and penalties for corporations

92) For the three taxation years ending December 31, 2022, Gloria Sloan had combined federal and provincial income tax payable as follows: 2020 $23,600 2021 25,400 2022 (Estimated) 27,200 Using this information consider the following three independent cases. Case One Ms. Sloan's employer withholds $23,100 in 2020, $21,100 in 2021, and $23,300 in 2022. Case Two Ms. Sloan's employer withholds $24,100 in 2020, $18,600 in 2021, and $23,700 in 2022. Case Three Ms. Sloan's employer withholds $19,100 in 2020, $20,200 in 2021, and $24,300 in 2022. Required: A. For each of the three cases: • indicate whether instalments are required for the 2022 taxation year. Show all of the calculations required to make this decision; • in those cases where instalments are required, indicate the amount of the instalments that would be required under the approach used in the CRA's instalment reminder; and • in those cases where you have calculated the instalments required under the CRA's instalment reminder, indicate whether you believe there is a better alternative and calculate the required instalments under that alternative. B. For those Cases where instalments are required, indicate the dates on which the payments will be due. Answer: While there are alternatives in all Cases, the following answers represent the "minimum" instalments, as required in the problem. In all three Cases, the current year alternative is the best, but you should note that if the estimated net tax owing is lower than the actual net tax owing, she may be charged interest on the insufficient amounts of the instalments if the interest totals more than $25. Part A - Case One Ms. Sloan's net tax owing in each of the three years is as follows: 2020 = $500 ($23,600 - $23,100) 2021 = $4,300 ($25,400 - $21,100) 2022 = $3,900 ($27,200 - $23,300) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the conditions for instalments have been met. Under the CRA approach, the first two instalments would be $125 [($500 ÷ 4)] each, for a total of $250. The remaining two instalments would be $2,025 [($4,300 - $250) ÷ 2], for a total of $4,050. This would bring the total instalments for the year to $4,300 ($250 + $4,050). A better solution would be to base the instalments on the estimated 2022 results. Each instalment would be $975 ($3,900 ÷ 4). The resulting total of $3,900 would be less than the $4,300 total under the CRA reminder.

Part A - Case Two Ms. Sloan's net tax owing in each of the three years is as follows: 2020 = Nil ($23,600 - $24,100) 2021 = $6,800 ($25,400 - $18,600) 2022 = $3,500 ($27,200 - $23,700) Estimated As her net tax owing is expected to exceed $3,000 in 2022 and was more than $3,000 in 2021, the conditions for the payment of instalments has been met. Under the CRA approach, no payment would be required for the first two instalments. However, the remaining two instalments would be $3,400 each [($6,800 - Nil) ÷ 2], bringing the total for the year to $6,800. A better solution would be to base the instalments on the estimated 2022 results. Each instalment would be $875 ($3,500 ÷ 4). The resulting total of $3,500 would be less than the $6,800 total under the CRA approach. Part A - Case Three Ms. Sloan's net tax owing in each of the three years is as follows: 2020 = $4,500 ($23,600 - $19,100) 2021 = $5,200 ($25,400 - $20,200) 2022 = $2,900 ($27,200 - $24,300) Estimated As her net tax owing is not expected to exceed $3,000 in 2022, the conditions for the payment of instalments has not been met and no instalments are required. Part B In Case One and Case Two, the required instalments would be due on March 15, June 15, September 15, and December 15 of 2022. Type: ES Topic: Administration - individual tax instalments (Comprehensive)

93) For the taxation year ending December 31, 2020, a corporation's combined federal and provincial income tax payable is $57,600. The corresponding figure for 2021 is $67,900. For the year ending December 31, 2022, it is estimated that combined federal and provincial income tax payable will be $62,900. Case One The taxpayer is a publicly traded corporation. Case Two The taxpayer is a publicly traded corporation. Assume that its combined federal and provincial income tax payable for the year ending December 31, 2021 were $61,400, instead of the $67,900 given in the problem. Case Three The taxpayer is a small CCPC. Case Four The taxpayer is a small CCPC. Assume that its combined federal and provincial income tax payable for the year ending December 31, 2021 were $61,400, instead of the $67,900 given in the problem. Required: For each of the preceding independent Cases, provide the following information: 1. Indicate whether instalments are required during 2022. Provide a brief explanation of your conclusion. 2. Calculate the amount of instalments that would be required under each of the three acceptable alternative methods. 3. Indicate which of the available methods would best serve to minimize instalment payments during 2022. If instalments must be paid, indicate the dates on which they are due. Answer: Case One 1. As the corporation's income 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 instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $5,241.67 ($62,900 ÷ 12) based on the current year estimate. • Monthly instalments of $5,658.33 ($67,900 ÷ 12) based on the first preceding year. • Two monthly instalments of $4,800 ($57,600 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $5,830 {[($67,900 - (2)($4,800)] ÷ 10}, a total of $67,900. 3. The best alternative in terms of minimum instalments would be 12 instalments of $5,241.67, resulting in a total of $62,900 of instalment payments. The instalments would be due on the last day of each month, beginning in January 31, 2022.

Case Two 1. As the corporation's income 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 instalments are required. 2. The three acceptable alternatives would be as follows: • Monthly instalments of $5,241.67 ($62,900 ÷ 12) based on the current year estimate. • Monthly instalments of $5,116.67 ($61,400 ÷ 12) based on the first preceding year. • Two monthly instalments of $4,800 ($57,600 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $5,180 {[($61,400 - (2)($4,800)] ÷ 10}, a total of $61,400. 3. The best alternative would be two payments of $4,800, followed by ten payments of $5,180. While the total instalments are the same $61,400 in both the second and third alternatives, the third alternative is preferable because the first two payments are lower. This provides a small amount of tax deferral. The instalments would be due on the last day of each month, beginning in January 31, 2022. Case Three 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $15,725 ($62,900 ÷ 4) based on the current year estimate. • Quarterly instalments of $16,975 ($67,900 ÷ 4) based on the first preceding year. • One instalment of $14,400 ($57,600 ÷ 4) based on the second preceding year, followed by three instalments of $17,833.33 [($67,900 - $14,400) ÷ 3], a total of $67,900. 3. The best alternative in terms of minimum instalments would be four instalments of $15,725, for total payments of $62,900. The instalments are due on March 31, June 30, September 30, and December 31 of 2022. Case Four 1. As the corporation's income tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • Quarterly instalments of $15,725 ($62,900 ÷ 4) based on the current year estimate. • Quarterly instalments of $15,350 ($61,400 ÷ 4) based on the first preceding year. • One instalment of $14,400 ($57,600 ÷ 4) based on the second preceding year, followed by three instalments of $15,667.67 [($61,400 - $14,400) ÷ 3], a total of $61,400. 3. The best alternative would be one payment of $14,400, followed by three payments of $15,667.67. While the total instalments are the same $61,400 in both the second and third alternatives, the third alternative is preferable because the first payment is lower. This provides a small amount of tax deferral. The instalments are due on March 31, June 30, September 30, and December 31 of 2022. Type: ES Topic: Administration - corporate tax instalments (comprehensive)

94) Mr. James Simon has asked for your services with respect to dealing with a Notice of Reassessment requesting additional tax for the 2018 taxation year which he says he has just received. Your first interview takes place a week later, on April 25, 2022, and Mr. Simon informs you that he has had considerable difficulty with the CRA in past years and, on two occasions in the past five years, he has been required to pay penalties as well as interest. With respect to the current reassessment, he assures you that he has complied with the law and that there is a misunderstanding on the part of the assessor. After listening to him describe the situation, you decide it is likely that his analysis of the situation is correct. Required: Indicate what additional information should be obtained during the interview with Mr. Simon and what steps should be taken if you decide to accept him as a client. Answer: The following additional information would be relevant in considering Mr. Simon's situation: A. Determination of the date of the Notice of Reassessment. A notice of objection must be filed prior to the later of: • 90 days from the date of the Notice of Reassessment; and • one year from the due date for the return under reassessment. In this case, the later date is 90 days after the date of the Notice of Reassessment. B. Determination of the date of the Notice of Assessment for the 2018 taxation year. A three year time limit applies from the date of the Notice of Assessment. As the Notice of Assessment for 2018 could have been sent in early April, 2019, this reassessment could be within the three year limit. C. Determination of whether Mr. Simon has signed a waiver of the three year time limit or if he is guilty of fraud or misrepresentation attributable to neglect, carelessness or wilfil default. If the reassessment is not within the three year time limit, Mr. Simon would not usually be subject to reassessment. However, if Mr. Simon has signed a waiver of the three year time limit, or if fraud or misrepresentation is involved, he becomes subject to reassessment, regardless of the time period involved. If the preceding determinations indicate that the reassessment is valid and you decide to accept Mr. Simon as a client, the following steps should be taken: • You should have Mr. Simon authorize you to represent him in his affairs with the CRA and/or authorize you to access his file through the online Represent a Client service. • A notice of objection should be filed before the expiration of the 90 day time limit. • You should begin discussions of the matter with the relevant assessor at the CRA. Type: ES Topic: Administration - appeals (Comprehensive)

95) For each of the following independent cases, indicate whether you believe any penalty would be assessed under ITA 163.2 on any of the parties involved. Explain your conclusion. Case 1 In preparing a income tax return for one of his established clients, an accountant relies on the financial statements that another accountant has prepared for the client's business income. Nothing in these statements seemed unreasonable. On audit, the CRA finds that the business income financial statements prepared by the other accountant contained material misrepresentations. Case 2 An accountant is asked to prepare an income tax return for a new client. The accountant had no previous acquaintance with the individual. The client provides statements, showing business income of $45,000 and no other income. He indicates that, during the current year, he made a $32,000 contribution to a registered Canadian charity, but has lost the receipt and has requested a duplicate. As it is now April 29, in order to avoid a late filing penalty, the accountant e-files the tax return, claiming a tax credit for the contribution without seeing the receipt. Case 3 An accountant has been engaged by a new client to use client provided records to prepare an income statement and to use the information in this statement to prepare an income tax return. As part of this engagement, the accountant reviews both the expense and revenue information that has been provided to him by the new client. Revenues are $285,000 and expenses $201,000. The information used to arrive at these figures seems reasonable and, given this, the accountant files the required income tax return. When the client is audited, the CRA finds a large proportion of the expenses claimed cannot be substantiated by adequate documentation and may not have been incurred. Furthermore, it appears that the client has a substantial amount of unreported revenues. Case 4 An accountant who lives in an expensive neighbourhood notices that the house next door has just been sold. It was listed for $1 million. The accountant introduces himself to the new neighbour and they become friends. At tax time the friend hires the accountant to prepare his income tax return. The accountant is given a T4 with $25,000 in income reported. Thinking that the gross income is on the low side, the accountant asks if this is all the income and the individual answers yes. The accountant is still not satisfied with the answer as the income seems to be out of proportion with the living standard of the friend, so he then asks him if he has received money from any source other than his employment and the friend replies that he received a substantial inheritance from his mother last year. The accountant does not ask any further questions and prepares and files the income tax return. When the friend is audited it is discovered that he has over $200,000 in unreported income.

Case 5 Units in a new limited partnership tax shelter are being sold by a company. The company has established this limited partnership by acquiring a software application in the open market for $100,000. However, the prospectus prepared by the company states that the fair market value of the application is $5,000,000, a value that was supported by an independent appraiser. The tax shelter is registered with the CRA and is available as an investment opportunity in the current year. On audit, the CRA determines that the $100,000 that was paid for the software application is, in fact, its fair market value on the date of the transfer. In discussing the matter with the independent appraiser, the CRA finds that the appraisal was not prepared using normal valuation procedures. In addition, the appraiser based his work entirely on assumptions and facts that were provided by the company. The appraiser was paid $50,000 for the appraisal. Case 6 (Requires Basic GST/HST Knowledge) An accountant is asked to file an HST return for a client who has not kept records of the HST paid or payable on purchases for a business carried on as a sole proprietor. However, the client does have financial statements for her business which, after a brief review, the accountant concludes is reasonable. In his review, the accountant found that these statements contain large amounts for wages and interest expense, as well as a significant amount of purchases that are zero-rated. (HST is not paid on any of these types of expenditures). In preparing the HST return, the accountant applies a factor of 13/113 to all of the expenses shown in the income statement. This results in an overstatement of input tax credits reported on the HST return which significantly reduces the HST payable.

Answer: Case 1 While the use of the other accountant's business income statements resulted in the income tax return that was filed, the tax return preparer would be entitled to the good faith defense since he relied, in good faith, on information provided by another professional on behalf of the client. Therefore, he would not be subject to the preparer penalty. The third party penalties may be applied to the other accountant if he or she knew or would be expected to know, but for circumstances amounting to culpable conduct, that the financial statements contained false statements. Case 2 Since the tax return preparer e-filed the taxpayer's return without viewing the charitable donation receipt, the CRA would consider assessing the tax return preparer with the preparer penalty. Given that the size of the donation is so disproportionate to the taxpayer's apparent resources as to defy credibility, to proceed unquestioningly in this situation would show wilful blindness and thus an indifference as to whether the ITA is complied with. Case 3 In view of the business that the taxpayer is in, there was nothing in the income statement that would have made the accountant question the validity of the information provided to him. Therefore, he could rely on the good faith reliance exception and would not be subject to the preparer penalty. Case 4 The accountant would not be subject to the penalties for participating or acquiescing in the understatement of an income tax liability. The facts were highly suspect until the accountant asked pointed questions to clear up any doubt. The client response appeared plausible given the circumstances. Case 5 The prospectus prepared by the company contains a false statement (overstated fair market value of the software) that could be used for income tax purposes to reduce the income tax liability of investors. The company knew or would reasonably be expected to know, but for culpable conduct, that the fair market value of the software was false. The CRA would consider assessing the company and the appraiser with third party civil penalties. Case 6 The issue here is whether the accountant is expected to know that HST is not payable on wages, interest expense, and zero-rated purchases. It is clear that the accountant should have known that no HST could be claimed on these expenditures. Given this, in filing a claim that includes an HST refund the accountant made a false statement, either knowingly, or in circumstances amounting to culpable conduct. Consequently, the CRA would consider assessing the accountant with the third party civil penalty, specifically, the preparer penalty. Type: ES Topic: Administration - tax preparer's penalties

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 3 Income or Loss from an Office or Employment 3.1 Online Exercises 1) Explain how a bonus arrangement can be used to defer the taxes paid by an employee. Answer: The ability to use a bonus arrangement to defer tax on employment income is based on the fact that, while business income is accrual based, employment income is on a cash basis. This means that the business can deduct the bonus at the time a legal obligation to make the payment arises irrespective of the fact that the payment may be delayed. On the other hand the employee will only include the bonus in income when actually received. If the bonus is declared in one year and paid in the following year, this provides a one year deferral to the employee. Note, however, the bonus must be paid by the 179th day of the year end of the employer. If it is not paid by that date the employer will not be able to deduct the bonus until it is actually paid (ITA 78(4)). Type: ES Topic: Employment - bonus arrangements

2) List and briefly describe the major factors that will be considered in determining whether an individual is working as an employee or as an independent contractor. Answer: As noted in your text, the first step in making this distinction is to determine the intent of both parties. Both the worker and the payer must be clear as to whether there is a contract of service (employment relationship) or alternatively, a contract for services (business relationship). In many cases, the intent may be clear. However, the worker and payer must ensure that their intent is reflected in the actual terms and conditions of their relationship. In making this determination, the following factors will be considered by the CRA and the courts: Control — In an employer/employee relationship, the employer usually controls, directly or indirectly, the way the work is done and the work methods used. The employer assigns specific tasks that define the real framework within which the work is to be done. Ownership of Tools and Equipment — In an employment relationship, the employer usually supplies the equipment and tools required by the employee. In addition, the employer covers the following costs related to their use: repairs, insurance, transport, rental, and operations (e.g., fuel). In some trades, however, it is customary for employees to supply their own tools. This is generally the case for garage mechanics, painters, and carpenters. Similarly, employed computer scientists, architects, and surveyors sometimes supply their own software and instruments. Ability to Subcontract or Hire Assistants — If the individual must personally perform the services, this weighs in favour of an employment relationship. Alternatively, if the individual can hire assistants, with the payer having no control over the identity of the assistants, this fact will weigh in favour of a contractual business relationship self-employed. Financial Risk — In general, employees will not have any financial risks associated with their work. In contrast, in a business relationship the provider bears any risk and can incur losses. Responsibility for fixed monthly costs is another factor that weighs in favour of a business relationship. Responsibility for Investment and Management — The absence of capital investment in the business and no presence in management points to an employment relationship. This factor is generally viewed by the courts as looking to answer the question of Who's business is it?" Opportunity For Profit — In an employment relationship, the employer alone normally assumes the risk of loss. The employer also usually covers operating costs, which may include office expenses, employee wages and benefits, insurance premiums, and delivery and shipping costs. The employee does not assume any financial risk, and is entitled to their salary or wages regardless of the financial health of the business. Correspondingly, an employee will have little or no opportunity for profit. While there may be productivity bonuses for exceptional work, such amounts are not profits of the worker's own business. Type: ES Topic: Employee vs. self-employed

3) The income tax consequences of being classified as an employee rather than as an independent contractor can be significant. As a result, it is not uncommon to find controversy and, in some cases, litigation resulting from the need to make this distinction. Explain the importance, from the point of view of an employee, of the distinction between being classified as an employee versus being classified as an independent contractor. Answer: The importance of this distinction largely relates to the deductibility of expenses. The number and types of expenses which can be deducted against employment income are very limited. In contrast, if an individual is an independent contractor then they are carrying on their own business often as a sole proprietor where the amounts allowed as deductible expenses for income tax purposes are considerably much broader. In addition if the individual is considered to be an employee, then the employer will have to withhold income taxes, Canada Pension Plan contributions, and Employment Insurance premiums. This would not be the case if the individual is an independent contractor. An independent contractor is responsible for quarterly tax instalments, if necessary, and for both the employer's and employee's portions of CPP contributions. Such individuals may or may not have to make EI contributions, depending on whether they elect to participate in the EI program. There are also GST/HST implications where the provider of the services is an independent contractor GST/HST may have to be charged and remitted. This would not be the case where the individual is in an employment relationship. Type: ES Topic: Employee vs. self-employed

4) Briefly described the advantages to an employer of hiring independent contractors, as opposed to hiring employees. Answer: The major advantages include the following: • Using independent contractors eliminates the need for payments for CPP, EI, and payroll taxes (where applicable). • Independent contractors are not entitled to employee fringe benefits. • Employers are not committed to retaining independent contractors for the long-term as in the case with employees. • Employers are, in general, not legally responsible for the work of independent contractors. Type: ES Topic: Employee vs. self-employed

5) List two types of employee benefits that involve tax deferral and two types of benefits that involve tax avoidance. Answer: Examples involving tax deferral include employee contributions to RPPs and bonus arrangements that are paid within 180 days of the employer's year end. Examples involving tax avoidance include insurance premium payments for private health care, non-cash gifts under $500 and employer contributions to RPPs. Type: ES Topic: Employment - taxable benefits (general concepts)

6) London Wholesalers employs over 50 full time salespeople, all of whom are provided with a company car. While the cars are used primarily for business purposes, all of the sales staff drive them at least 20,000 kilometers per year for personal purposes. As controller of the Company you are aware that there are income tax rules that could result in a substantial taxable benefits as a result of the use of a company car. Indicate some of the ways in which the Company and the sales staff might legitimately reduce the amount of the taxable benefit associated with having the use of an employer provided car. Answer: While there may be other possibilities, the tax planning suggestions that were included in the text are as follows: Require Return of Car — During extended periods of time when an employee does not use an employer provided vehicle, the vehicle will be considered available for use unless the employer REQUIRES it to be returned to their premises. Given this, the employer should have a policy of requiring vehicles to be returned during periods of non-use by the employee. There should be justification for this policy such as for insurance purposes or where available cars are shared amongst employees. Record Keeping — In the absence of detailed records, an employee can be charged with the full standby charge and 100% personal use. To avoid this result, it is essential that records be kept of both employment related and personal kilometers driven. Apps exist to assist in the process. Leasing Vs. Buying — In many cases, a lower taxable benefit will result when the employer leases rather than purchasing a car. One adverse aspect of leasing arrangements should be noted. Lease payments are made up of a combination of both interest and principal payments on the car. As the taxable benefit is based on the total lease payment, the interest portion becomes, in effect, a part of the taxable benefit. Minimizing the Standby Charge — This can be accomplished in a variety of ways including longer lease terms, lower trade-in values for old vehicles in purchase situations, larger deposits on leases, and the use of higher residual values in leasing arrangements. Note that refundable deposits in excess of $1,000 on leases can reduce the deductible lease costs. Cars costing more than $30,000 — With the taxable benefit to the employee based on the full cost of the car and any portion of the cost in excess of $30,000 not being deductible to the employer as depreciation (e.g. CCA), it is difficult to imagine situations in which it would make economic sense for a profit oriented employer to provide any employee with a luxury car. As the taxable benefit to the employee is based on the actual cost of the car, while the deductible amount is limited to $30,000, a situation is created in which the employee is paying taxes on the portion of a benefit attributable to a cost that is nondeductible to the employer for income tax purposes. Employee Owned Automobile — The alternative to the employer provided automobile is to have the employer compensate the employee for using their own automobile. In many cases, this may be preferable to providing an automobile. For example, in those situations where employment related use is less than 50% providing an employee with an employer-provided vehicle will result in the maximum benefit which may exceed the cost of the personal use portion. These issues may be favourably resolved by providing employees with structured allowances for the use of their own vehicles. Type: ES Topic: Employment - automobile benefits (planning & general concepts)

7) Because of the formula used to calculate the taxable benefit when an employer owned vehicle is provided to an employee, the amount of the benefit can exceed the value of the vehicle. Explain this statement. Answer: The formula requires a benefit of 2% of the cost of the vehicle per month of use. This benefit continues, without regard to the length of time the car is used by the employee. At this rate, after 50 months, the taxable benefit is equal to the value of the vehicle [(2%)(50) = 100%]. If the vehicle is used for more than 50 months, the amount of the benefit will exceed 100% of the cost of the vehicle. Type: ES Topic: Employment - automobile benefits (planning & general concepts)

8) What is the difference between an allowance and a reimbursement? Answer: A reimbursement is an amount paid to an employee to compensate the employee for actual costs incurred on behalf of the employer in performing their employment duties. The amount paid will equal the costs incurred. In contrast, an allowance is a payment designed to cover, in a general way, the costs of some specified type of activity (e.g., a per diem allowance to cover food and lodging while traveling). Type: ES Topic: Employment - allowances and reimbursements

9) An employee may be paid a flat rate monthly amount for using their own automobile for employment purposes. Alternatively, employees may be paid a reasonable amount based on the actual number of kilometers driven for employment purposes. From the point of view of both the employer and the employee, explain the difference in the income tax treatment of these two alternatives. Answer: From the point of view of the employer, the full amount of any monthly allowance will be deductible as an employment related expense. With respect to the use of a kilometre based allowance, there are prescribed limits on what they employer may deduct. (These are discussed in Chapter 6.) From the point of view of the employee, the flat rate monthly allowance will have to be included in employment income for the year since the ITA deems any allowance not solely based on a per kilometre allowance to be unreasonable and therefore required to be included in income. Given this, the employee would then be in a position to deduct their actual costs of using their own vehicle (an appropriate percentage of interest, CCA, and operating costs). Alternatively, if an employee receives a per kilometer based allowance, the allowance is only required to be included in employment income if the allowance is not reasonable which is a question of fact. If the allowance is included in income then once again the employee would be in a position to be able to deduct a portion of their expenses related to their employment use. Type: ES Topic: Employment - allowances and reimbursements

10) Briefly explain the tax consequences resulting from being a member of an employer sponsored group disability insurance plan. Answer: Depending on the plan, the employer may pay all of the premiums, part of the premiums, or none of the premiums. As long as the plan provides periodic benefits that compensate for lost employment income, the premiums paid by the employer are not considered to be taxable benefits to the employee regardless of the amount paid by the employer. Employer paid premiums are fully deductible to the employer. Amounts paid by the employee are not deductible to the employee when paid by may be deductible when disability receipts are received (see the next paragraph). If the employer has made any contribution towards the plan premiums that does not create a taxable benefit, the full amount of any disability benefits received must be included in the income of the employee. This amount can be reduced to the extent of the cumulative amount of premiums paid by the employee prior to the receipt of the benefits, as well as those paid during the year the benefits are received. Type: ES Topic: Employment - disability insurance benefits

11) List the factors that will have to be considered in determining whether a particular low interest or interest free loan is an effective form of employee compensation. Answer: The factors that would have to be considered are as follows: • the employer's rate of return on alternative uses for the funds • the employer's tax rate • the employee's tax rate • the prescribed rate • the rate available to the employee on a similar arm's length loan Type: ES Topic: Employment - loans to employees

12) Briefly describe the calculation of the taxable benefit that is assessed on loans to employees that are not considered to be housing loans. Answer: The taxable benefit on non-housing loans is calculated using the prescribed rate that is applicable to each calendar quarter. The amount of the benefit is reduced by any interest paid on the loan by the employee during the year or within 30 days of the end of the year. Type: ES Topic: Employment - loans to employees

13) Under what circumstances is an individual entitled to a stock option deduction equal to one-half of the stock option benefit that would be required to be included in employment income as the result of exercising rights under a stock option plan or selling stock option shares? Answer: If the issuing corporation is a publicly traded Canadian company with gross revenues of $500 million or less, the deduction is only available when the option price is equal to or greater than the FMV of the shares at the time the options were issued. New rules, effective July 1, 2021 with respect to stock option issued as of that date, may restrict access to the stock option deduction for employees of large mature public corporations with gross revenues in excess of $500 million. Employees of such mature public companies are limited to the stock option deduction based upon a $200,000 annual vesting limit which depends on the FMV of the stock option shares at the time the option was granted and depending on when the options become exercisable. The employer may also designate the stock options as nonqualifying meaning that no stock option deduction could be claimed by a recipient employee of the stock option plan. The benefit of the designation treatment by the corporate employer is that the employer is permitted to claim the stock option benefit amount to the employee on non-qualifying stock option shares as a deduction. If the issuing corporation is a CCPC, the deduction is available if the shares are held for two years, without regard to whether the option price was above or below the fair market value of the shares at the time the options were issued. However, if the shares are not held for two years, the availability of the deduction is subject to the same condition that is applicable to non-CCPCs other than those affected by the new stock option deduction rules. That is, the option price must be equal to or greater than the fair market value of the shares at the time they were issued. The new stock option deduction rules are not intended to apply to CCPCs. Type: ES Topic: Employment - employee stock options

14) The number of deductions that can be made in computing employment income is fairly limited. Further, certain types of expenses must meet specified conditions in order to be eligible for deduction. Indicate the conditions that must be met in order for a salesperson to deduct expenses in computing employment income. In addition, Indicate the conditions that must be met in order for travel costs to be deducted in computing employment income. Answer: ITA 8(1)(f) indicates that four conditions must be met before the deduction of expenses for salespersons will be allowed. These are as follows: 1. The salesperson must be required by the employer to pay their own expenses. This must be supported by form T2200 signed by the employer. 2. The salesperson must be ordinarily required to carry out their employment duties away from the employer's place of business. 3. The salesperson must not receive an expense allowance that is not required to be included in employment income. 4. The salesperson must receive at least part of their remuneration in the form of commissions. ITA 8(1)(h) indicates that any employee can deduct travel expenses, with meals and entertainment subject to the 50% limit, provided three conditions are met. These are as follows: 1. The employee must be required by the employer to pay their own travel costs. This must be supported by Form T2200 signed by the employer. 2. The person must be ordinarily required to carry on their employment duties away from the employer's place of business. 3. The person must not receive an allowance for travel costs that is not required to be included in employment income. Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

15) Many employees maintain a work space in their home. Describe the kinds of home related expenses that can be deducted by an employee. Answer: All employees who qualify to deduct work space in the home costs can deduct an appropriate portion of: • Maintenance or operating costs such as water and electricity • Minor repairs In those cases where the employee has commission income, he can also deduct an appropriate portion of: • Property taxes • Insurance Note that, under no circumstances, can an employee deduct CCA on the home, or any portion of interest on a mortgage on the home. Type: ES Topic: Employment - home office expenses (ITA 8(13))

16) Employment income is the salary, wages, and other remuneration, including gratuities, that are receivable by an individual during the year. Answer: FALSE Explanation: Employment income is the salary, wages, and other remuneration, including gratuities, that are received by an individual during the year. Type: TF Topic: Employment income (comprehensive)

17) If properly constructed, bonus arrangements can result in tax deferral for employees. Answer: TRUE Type: TF Topic: Employment - bonus arrangements

18) One of the advantages of being an independent contractor (carrying on a business) rather than an employee is that you do not have to make CPP contributions. Answer: FALSE Explanation: Independent contractors have to make a double contribution to CPP. Type: TF Topic: Employee vs. self-employed

19) Employers generally prefer contracting out as it avoids the cost of CPP and EI contributions. Answer: TRUE Type: TF Topic: Employee vs. self-employed

20) Payments by employers of premiums on life insurance for employees are not taxable benefits. Answer: FALSE Explanation: Such payments are a taxable benefit for employees. Type: TF Topic: Employment - taxable benefits

21) When an employee pays all of the premiums for disability insurance coverage, the payments are not deductible and the benefits received are tax free. Answer: TRUE Type: TF Topic: Employment - disability insurance benefits

22) Payments of premiums by employers to private health care service (PHSP) plans are not taxable benefits and are therefore any benefits received under such plans are tax free. Answer: TRUE Type: TF Topic: Employment - taxable benefits

The questions below relate to the following facts: An employee is given a $10,000 interest free loan from an employer on January 1 to buy a car to be used for employment purposes. Due to a serious illness, the car is only used for nine months of the year. Assume that the prescribed rate is 2% for the entire year.

23) Her taxable benefit from the loan is $200 for the year. Answer: TRUE Explanation: Her taxable benefit from the loan is $200 for the year. Her use for only nine months is irrelevant. Type: TF Topic: Employment - loans to employees

24) She pays her employer $1,000 on September 30 to decrease the loan. Her taxable benefit from the loan is $180 for the year. Answer: FALSE Explanation: Her taxable benefit is $195 [(2%)(9/12)($10,000)] + [(2%)(3/12)($9,000)]. Type: TF Topic: Employment - loans to employees

25) In calculating her minimum standby charge, the imputed interest from the loan is part of her operating costs. Answer: FALSE Explanation: There would be no minimum standby charge as the company does not own the car. Type: TF Topic: Employment - loans to employees

26) A corporate director is subject to the employment income rules such that any fees received are included in employment income. Answer: TRUE Explanation: The employment income rules apply to employment and those individuals who hold an "office". An individual holding an office includes directors of corporations. In addition directors fees are included in employment income at ITA 6(1)(c). Type: TF Topic: Employment - director fees

27) An employee worked overtime at the end of December 2022 earning an additional $2,500. The employer processed the payment which was deposited to the employee's bank account on January 4, 2023. The overtime will be included in the employee's income for the 2022 taxation year. Answer: FALSE Explanation: Employees are required to include remuneration in their income for the calendar year in which it was received which was only in 2023. Type: TF Topic: Employment - received basis

28) An employee worked overtime at the end of December 2022 earning an additional $2,500. The employer processed the payment which was mailed out on December 30, 2022. The employee only received the mail on January 4, 2023. The overtime will be included in the employee's income for the 2022 taxation year. Answer: TRUE Explanation: While employees are required to include remuneration in their income for the calendar year in which it was received ITA 248(7) establishes a rule that deems an employee to have received the amounts based on the date the payment was mailed which is the 2022 calendar year. Type: TF Topic: Employment - received basis

29) Which of the following considerations is NOT relevant in the determination of whether an individual performing work is an employee or an independent contractor? A) Opportunity for profit. B) Hours per week spent at work site. C) Ability to subcontract to others. D) Ownership of tools. Answer: B Explanation: B) How much work is performed at a particular site. Type: MC Topic: Employee vs. self-employed

30) Veronica mows lawns during the summer. In 2022 she was paid directly by homeowners for her work, in some case on the basis of the completed job, in other cases at an hourly rate. Her friend Jonathon does the same work. However, he is paid at an hourly rate by a lawn maintenance company. Which of the following statements is correct? A) Veronica earns business income and Jonathon earns employment income. Veronica will be able to deduct more expenses than Jonathon. B) Veronica and Jonathon both earn employment income. C) Veronica earns business income and Jonathon earns employment income. Their deductible expenses will be the same. D) Veronica and Jonathon both earn business income. Answer: A Explanation: A) Veronica earns business income and Jonathon earns employment income. Veronica will be able to deduct more expenses than Jonathon. Type: MC Topic: Employee vs. self-employed

31) Which of the following groups of factors are used by the courts in order to determine a taxpayer's status as an employee or a self-employed contractor? A) Intent, control test, ownership of tools test, number of hours worked per week B) Intent, ability to subcontract test, the type of work being undertaken, ownership of tools test C) Intent, control test, ownership of tools test, opportunity for profit D) Intent, ability to subcontract test, the location of the work site, opportunity for profit Answer: C Explanation: B) The nature of the work performed can weigh in favour of a contractual business relationship but it is not a separately established test. C) intent, control test, ownership of tools test, opportunity for profit Type: MC Topic: Employee vs. self-employed

32) In 2022, Nellie Ward receives from her current employer: • A $400 gift certificate for online retailer Amazon. • A $600 reclining easy chair for outstanding customer service during the year. • A set of 4 coffee mugs with the employer's logo etched on the side. These mugs cost the employer $20. • An Easter basket of gourmet treats valued at $245. • A cash award of $300 in recognition of 10 years of service with the employer. What is the amount that will be included in Nellie's 2021 employment income with respect to these gifts? A) $800. B) $1,000. C) $1,300. D) $700. Answer: C Explanation: A) $800 ($400 + $600 - $500 + $300) B) $1,000 ($400 + $600) C) $1,300 ($400 + $600 + $300) D) $700 ($400 + $300) Type: MC Topic: Employment - taxable benefits

33) Indicate which of the following benefits provided by an employer is NOT considered part of employment income. A) Reimbursement of moving expenses as a result of an employer required move. B) Travel expenses of the employee's spouse where the spouse's presence was not required. C) Periodic payments from wage loss replacement plan designed to replace employment income. D) Premiums paid by an employer on life insurance policies. E) Individual premiums under provincial hospitalization plans. Answer: A Explanation: A) Reimbursement of moving expenses. Type: MC Topic: Employment - taxable benefits

34) Indicate which of the following benefits provided by an employer is considered part of employment income. A) Subsidized meals provided in employer facilities where the employees pays an amount equal to or greater than the employer's cost. B) Low rent housing in non-remote or non-special work sites. C) Premiums under private health services plans. D) Uniforms and special clothing required to protect employees from hazards. Answer: B Explanation: B) Low rent housing in non-remote or non-special work sites. Type: MC Topic: Employment - taxable benefits

35) Which of the following is NOT a taxable benefit? A) A cash Christmas gift to an employee from the employer. All the employees received a cash bonus of $150. B) Payment of the tuition for an employee completing a general interest degree on a part-time basis that has no benefits to the employer. C) A 20% discount on employer merchandise, available to all employees. The employer's mark-up is 50%. D) Low rent housing provided by the employer in non-remote or non-special work sites. Answer: C Explanation: C) A 20% discount on the employer's merchandise is not considered a taxable benefit unless the employee is permitted to purchase the item below the employer's cost. Type: MC Topic: Employment - taxable benefits

36) Which one of the following benefits received from an employer would NOT result in a taxable benefit or taxable allowance to the employee? A) A reasonable allowance of $0.45 per kilometer for driving on employer business. B) An interest free loan used to acquire shares of the employer. C) Employer paid life insurance premiums for $20,000 of employee coverage. D) Use of the employer's vehicle which is used 95% for employment purposes. Answer: A Explanation: A) The allowance is not taxable to the employee as long as it is reasonable. Type: MC Topic: Employment - taxable allowances and benefits

37) In which one of the following lists are ALL items relevant to the determination of employment income? A) Employee RPP contributions; signing bonus on accepting employment; use of an employer-owned automobile. B) Monthly automobile allowance; dental plan premiums paid for by the employer; promotional cost incurred in selling the employer's products. C) Subsidized meals at an employer's remote work site; life insurance paid by the employer; legal fees incurred to collect unpaid salary. D) Tips and gratuities; dental insurance premiums paid by the employer; exercise of options to purchase shares of the publicly traded employer. Answer: A Explanation: A) In B, dental plan premium payments are not a taxable benefit if the plan is a PHSP. In C, subsidized meals at an employer's remote work site do not create a taxable benefit. In D, dental insurance premiums is not a taxable benefit as long as the plan qualifies as a PHSP. Type: MC Topic: Employment - taxable allowances and benefits

38) An employee has been offered a choice of an increase in salary of $100,000 or a combination of salary and other benefits with a cost to the employer of $100,000. Assuming that the employee would purchase the listed benefits with their own funds if they were not provided in the benefits package, which of the following packages would be the most advantageous from an income tax perspective? A) A dental plan plus a leased automobile that would be used only for personal purposes by the employee. B) Life insurance plus a leased automobile that would be used only for personal purposes by the employee. C) Salary plus life insurance. D) Salary only. Answer: A Explanation: A) A dental plan plus a leased automobile that would be used only for personal travel by the employee. Dental premiums would not be taxable as long as the plan qualifies as a PHSP and the automobile benefit would only cost the employee the income tax on the addition to income. Type: MC Topic: Employment - taxable benefits

39) Which of the following is NOT a tax-free benefit for the employee when it is provided by an employer? A) Premiums for private health services plans (PHSP). B) A gift of a digital camera that cost $390 for an employee's wedding. No other gifts were received by the employee in the year. C) Employer reimbursement for the cost of tools required by the employee to perform their employment duties. D) Employer contributions to an RPP. Answer: C Explanation: C) Employer reimbursement for the cost of tools required to perform work. Type: MC Topic: Employment - taxable benefits

40) Which of the following is a taxable benefit? A) Payment of the tuition for an employee taking a course that will benefit the employer. B) A $350 VISA gift card given as a Christmas present to all employees. C) A 15% discount on the employer's merchandise, available to all employees. The discounted amount is above the employer's cost. D) Low priced meals in the company cafeteria where the prices are equal to the cost of the meals. Answer: B Explanation: B) The Christmas gift is a near-cash gift. Type: MC Topic: Employment - taxable benefits

41) With respect to employment related automobile costs and benefits, which of the following statements is correct? A) When an employee is provided with an automobile that is purchased by the employer for $50,000, the taxable benefit to the employee will be based on the Class 10.1 prescribed limit of $30,000. B) An employee who uses their own vehicle for employment purposes cannot deduct any financing costs related to the purchase of the car. C) An employee who is provided with a vehicle owned by the employer can deduct CCA to the extent that the vehicle is used for employment purposes. D) If an employee drives an employer provided vehicle for 20,004 kilometers or more for personal purposes during a year, there will be no reduction of the basic standby charge. Answer: D Explanation: C) Only the employer owner can claim CCA not the employee. D) If an employee drives an employer provided vehicle for 20,004 kilometers or more for personal purposes during a year, there will be no reduction of the basic standby charge. Type: MC Topic: Employment - automobile benefits (planning & general concepts)

The questions below are based on the following information: The cost of the automobile is $20,000 including HST. If the car is leased, the monthly lease payment is $500 including HST. The car is driven for a total of 26,000 km during 2022 and the operating costs for the year are $4,000.

42) Assume the car is purchased. It was used by an employee for the whole year. The employee drives it for personal purposes for a total of 9,000 kms. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,520. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: H Explanation: H) Standby charge = [(12)(2%)($20,000)(9,000/20,004)] = $2,160 Operating costs - Lesser of: • [(9,000)($0.29)] = $2,610 • [(1/2)($2,160)] = $1,080 Total of $2,160 and $1,080 = $3,240 Standby Charge Operating Costs Benefit H - right Total Benefit

$2,160 1,080 $3,240

E - wrong, no operating cost benefit = $2,160 M - wrong, no reduction = $4,800

Type: MC Topic: Employment - taxable benefits - employer owned automobile

43) Assume the car is leased. It is used by the employee for 11 months of the year. In the other month, he was required to return the automobile to his employer's premises in accordance with company policy. He drives it for personal purposes for a total of 6,000 km. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,455. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: C Explanation: C) Standby charge = [(2/3)(11)($500)(6,000/18,337)] = $1,200 Operating costs - Lesser of: • [(6,000)($0.29)] = $1,740 • [(1/2)($1,200)] = $600 Total of $1,200 and $600 = $1,800 Standby Charge Operating Costs Benefit C - right Total Benefit

$1,200 600 $1,800

B - wrong - 20,004 km as denominator in standby reduction = $1,650 D - wrong - 2 months usage = $1,964 Type: MC Topic: Employment - taxable benefits - employer leased automobile

44) Assume the car is purchased. It is used by the employee for 10 months of the year. In the other months, he was required to return the car to his employer's premises per company policy. He drives it for personal purposes for a total of 11,000 km. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,455. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: K Explanation: K) Standby charge = [(10)(2%)($20,000)(11,000/16,670)] = $2,639 Operating costs - Lesser of: • [(11,000)($0.29)] = $3,190 • [(1/2)($2,639]) = $1,320 Total of $2,639 and $1,320 = $3,959 Standby Charge Operating Costs Benefit K - right- Total Benefit

$2,639 1,320 $3,959

J - wrong - 20,004 km as denominator in standby reduction = $3,300 L - wrong - 12 months usage = $4,752 Type: MC Topic: Employment - taxable benefits - employer owned automobile

45) Assume the car is leased. It is used by the employee for 11 months of the year. In the other month, he was required to return the car to his employer's premises in accordance with company policy. He drives it for personal purposes for a total of 7,500 km and reimburses the employer $1,100 ($100 per month) for the use of the car. The minimum taxable benefit is: A) $1,150. B) $1,650. C) $1,800. D) $1,964. E) $2,160. F) $2,250. G) $2,455. H) $3,240. J) $3,300. K) $3,959. L) $4,752. M) $4,800. Answer: A Explanation: A) Standby charge = [(2/3)(11)($500)(7,500/18,337)] = $1,500 Operating costs - Lesser of: • [(7,500)($0.29)] = $2,175 • [(1/2)($1,500)] = $750 Total of $1,500 and $750, less $1,100 = $1,150 Standby Charge Operating Costs Benefit Repayment F - wrong - Ignore repayment = $2,250 G - wrong - 12 months usage = $2,455

$1,500 750 (1,100) $1,150 A - right - Total Benefit

Type: MC Topic: Employment - taxable benefits - employer leased automobile

46) Mr. Brown's employer provides him with an automobile for his personal use, and pays all operating costs for that vehicle. The vehicle, used by Mr. Brown throughout 2022, cost his employer $31,500, including GST of $1,500 (no provincial sales tax was charged on the vehicle purchase). Mr. Brown drove the vehicle 45,000 km during the year, of which 9,000 km were for personal purposes and 36,000 for employment purposes. His employer paid $7,750 in operating costs for the year. Mr. Brown paid nothing to his employer for the use of the vehicle. Which one of the following amounts represents the minimum taxable benefit that Mr. Brown must include in his employment income for the use of this vehicle in 2022? A) $2,268. B) $4,859. C) $5,102. D) $5,831. Answer: C Explanation: C) The minimum taxable benefit that Mr. Brown must include in his employment income for the use of this vehicle in 2022 is $3,401 [(2%)(12)($31,500)(9,000/20,004)], plus $1,701 [(1/2)($3,401)], a total of $5,102. Standby Charge (2%)(12)($31,500)(9,000/20,004) Operating Costs Benefit (1/2)(3401) C - Total Benefit

$3,401 1,701 $5,102

Errors A. 45,000 km as denominator in reduction formula = $2,268 B. Used $30,000 as cost of vehicle = $4,859 D. Used $3401 [(2%)(12)($31,500)(9,000/20,004)] + $ (0.27)(9,000) as operating cost benefit = $5,831 Type: MC Topic: Employment - taxable benefits - employer owned automobile

47) The following facts relate to an employer provided automobile. Original cost of automobile, including HST Replacement value of car at time of providing it to employee CCA claimed by employer Personal use kilometers driven by employee during the year Total kilometers driven by employee during the year Number of months automobile was used by employee

$40,000 $30,000 $ 3,000 2,000 km 30,000 km 12

Which one of the following amounts represents the employee's minimum standby charge in 2022? A) $720. B) $960. C) $640. D) $9,600. Answer: B Explanation: B) $960 [(2%)(12)($40,000)(2,000/20,004)]. A. $30,000 as cost of vehicle = $720 C. 30,000 as denominator = $640 D. No reduction = $9,600

Type: MC Topic: Employment - taxable benefits - employer owned automobile

48) Omar is employed by Sansauto Corp. and uses his own car for employment purposes. Which of the following may NOT be claimed as an employment expense? A) Gas (employment related portion) B) Auto insurance (employment related portion) C) Standby charge (employment related portion) D) Oil change (employment related portion) Answer: C Explanation: C) Standby charge (employment related portion). Standby charge only applies when an employee uses the employer's automobile for personal use. It is an employment income inclusion (not an expense). Type: MC Topic: Employment - employee provided vehicle

49) Which of the following employee reimbursements would result in an increase in employment income? A) Housing loss reimbursement of $20,000 B) Moving costs reimbursement of $20,000 for employer required move. C) Travel expense reimbursement of $20,000 for employer related travel. D) Employment related tuition reimbursement of $20,000 Answer: A Explanation: A) Housing loss reimbursement of $20,000. $2,500 of the housing loss reimbursement would be a taxable benefit [$20,000 — 15,000) × 50%] Type: MC Topic: Employment - allowances and reimbursements

50) With respect to the determination of employment income, which of the following statements is correct? A) If an allowance is included on an employee's T4, any expenses related to the allowance cannot be deducted for tax purposes. B) One-half of reimbursed meals are required to be included in employment income. C) Reasonable vehicle allowances are not included in income. D) All allowances are included in income, all reimbursements are not included in income. Answer: C Explanation: C) Reasonable vehicle allowances are not included in income. Type: MC Topic: Employment - allowances and reimbursements

51) With respect to loans to employees, which of the following statements is correct? A) If the rate on the loan is less than the market rate for similar types of debt, the employee will have a taxable benefit equal to the difference. B) If the proceeds from the loan are used to purchase investments the imputed interest benefit on the loan will be deductible in determining the employee's income from those investments. C) When the loan is to assist an employee with a home purchase, the taxable benefit must always be calculated using each quarterly value for the prescribed rate. D) The taxable benefit on an employee loan will not be altered by the amount of interest payments the employee makes to the employer. Answer: B Explanation: B) If the proceeds from the loan are used to purchase investments the imputed interest benefit on the loan will be deductible invested in income producing assets, the interest benefit on the loan will be deductible in determining the employee's income from those investments. Type: MC Topic: Employment - loans to employees

52) T. Adams commenced employment at Moana Sales Ltd. on February 1, 2022. He had lived in an apartment until May 2022, at which time he purchased a new house. Under the terms of his employment, he received a housing loan on May 1, 2022 of $80,000 at a rate of 2%. He pays the interest on the loan on a monthly basis. Assume the 2022 prescribed interest rates applicable to employee loans are as follows: First quarter Second quarter Third quarter Fourth quarter

5% 4% 3% 3%

What is T. Adams' taxable benefit on the above loan for 2022 using number of days? A) Nil. B) $267.40. C) $670.68. D) $1,073.97. E) $2,147.95. Answer: C Explanation: C) $670.68 {[$80,000][(61/365)(4% - 2%) + (184/365)(3% - 2%)]}. Type: MC Topic: Employment - loans to employees (home purchase loan)

53) Sam borrowed $50,000 from her employer at an annual rate of 1% interest last year for personal purposes. Assume that at the time the loan was made, the prescribed rate of interest was 3% and this rate has not changed. Sam is subject to a combined federal/provincial income tax rate of 30%. What is the after tax cost of the loan to Sam for the current year? A) $300 B) $500 C) $800 D) $1,500 Answer: C Explanation: C) $800 Tax cost of benefit of $300 [($50,000)(3% - 1%)(30%)] + interest paid of $500 [($50,000)(1%)] = $800 A. $300 ($1,000 × 30%) B. $500 ($50,000 × 1%) D. $1,500 ($500 + $1,000)

Type: MC Topic: Employment - loans to employees

54) Which of the following statements with respect to stock options is correct? A) If the stock option price for shares is less than the FMV at the date the option is granted then simply granting the options will automatically create a taxable benefit to the employee. B) If shares in a CCPC are acquired through the exercise of stock options, there will be a deduction equal to one-half of the employment income inclusion, provided the shares were held for at least two years. C) When options to acquire the shares of a Canadian public corporation are exercised, there are no immediate income tax consequences for the employee. D) When shares in a CCPC that have been acquired through the exercise of options are sold, any loss on the sale can be used to offset any stock option employment benefit that results from the exercise of the options. Answer: B Explanation: B) If shares in a Canadian controlled private corporation are acquired through the exercise of stock options, there will be a deduction equal to one-half of the employment income inclusion, provided the shares were held for at least two years. Type: MC Topic: Employment - employee stock options

55) Ms. Joan Hanson is an employee of a CCPC. In 2021, she is granted options to purchase 500 shares of her employer's common stock at a price of $22 per share. At this time, the FMV of the shares are estimated to be $20.50. In 2022, she exercises all of the options purchasing 500 shares. At this time, the estimated FMV of the shares are $31.50 per share. On December 1, 2022, she sells the shares for $38.75 per share. The net effect of the transactions on her 2022 taxable income would be: A) an increase of $1,812.50. B) an increase of $2,375.00. C) an increase of $4,187.50. D) an increase of $4,750.00. E) an increase of $6,562.50. Answer: C Explanation: C) An increase of $4,187.50. This would be calculated as follows: Employment Income [($31.50 - $22.00)(500)] $4,750.00 Deduction under ITA 110(1)(d) ( 2,375.00) Taxable Capital Gain [($38.75 - $31.50)(500)(1/2)] 1,812.50 Net increase in 2022 taxable income $4,187.50 Type: MC Topic: Employment - employee stock options

56) An employee of a public Canadian corporation is granted an option to purchase 1,000 of the employer's common shares at $20 per share in June, 2021. At this time, the FMV of the stares are $19 per share. In March, 2022, when the FMV is $26 per share, she exercises the option and immediately sells the shares. What is the net increase to her 2022 taxable income? A) $1,000. B) $3,000. C) $3,500. D) $6,000. Answer: B Explanation: B) The increase in taxable income is $3,000 [ITA 7(1) (1,000)($26 - $20) - ITA 110(1)(d) (1/2)(1,000)($26 - $20)]. Type: MC Topic: Employment - employee stock options

The questions below are based on the following information: Scott Bicycle Manufacturing Ltd. (SBM) is a CCPC. Brian Mills, one of SBM's employees, was granted stock options on January 15, 2019 for 10,000 shares at $3 per share. The FMV on January 15, 2019 was $4 per share. Brian exercised the stock options on September 30, 2019, when the FMV was $6 per share. In June, 2022, Brian purchased a new home and sold the shares for $7 each.

57) What is the effect of these facts on Brian's Taxable Income? A) An increase of $15,000 in 2019 B) An increase of $15,000 in 2022. C) An increase of $30,000 in 2019. D) An increase of $20,000 in 2022. E) None of the above. Answer: D Explanation: D) Employment Income [(10,000)($6 - $3)] $30,000 Deduction under ITA 110(1)(d.1) (15,000) Taxable capital gain [(10,000)($7 - $6)(1/2)] 5,000 Net increase in 2021 taxable income $20,000 Since the Company is a CCPC, the stock option benefit is only included in employment income when the stock option shares are disposed of. The stock option deduction is available as long as the shares were owned for at least two years even though the FMV of the shares was greater than the option price at the time of issue, Type: MC Topic: Employment - employee stock options

58) What is the adjusted cost base (ACB) to Brian of the SBM shares at the time of sale in June, 2022? A) $30,000. B) $45,000. C) $60,000. D) $70,000. E) None of the above. Answer: C Explanation: C) The ACB of the shares is $60,000 ($6 per share). This equals the $30,000 paid for the shares plus an ACB addition under ITA 53(1)(j) to take the employee stock option benefit of $30,000 into account. Type: MC Topic: Employment - employee stock options

The questions below are based on the following information: Mr. Morra commenced employment with Peoples Bank Ltd., a public corporation, on January 1, 2020. On December 31, 2020, he was granted options to purchase 500 shares of Peoples Bank Ltd. stock for $15 per share. The FMV of these shares on December 31, 2020 was $16 per share. Mr. Morra exercised all of the stock options on May 31, 2021, purchasing 500 shares for $15 per share when the FMV was $17 per share. On September 1, 2022, Mr. Morra sold the shares for $24 each. 59) What is the effect of the above transactions on Mr. Morra's 2021 taxable income? A) Nil. B) An increase of $250. C) An increase of $500. D) An increase of $1,000. Answer: D Explanation: D) An increase in employment income of $1,000 [($17 - $15)(500)]. No stock option deduction is available as the FMV of the shares was greater than the option price when the options were granted. Type: MC Topic: Employment - employee stock options

60) What is the effect of the above transactions on Mr. Morra's 2022 taxable income? A) Nil. B) An increase of $1,750. C) An increase of $2,750. D) An increase of $3,500. Answer: B Explanation: B) A taxable capital gain of $1,750 [($24 - $17)(500)(1/2)]. Type: MC Topic: Employment - employee stock options

The questions below are based on the following information: Parminder is an employee of a public Canadian corporation. On April 1, 2021 she was granted stock options to purchase 5,000 shares of her employer's common shares at a price of $75 per share. She exercised her options and purchased 5,000 shares on November 1, 2021. She sold all of her shares on February 1, 2022. The market price of her employer's common shares was $74 per share on April 1, 2021; $79 per share on November 1, 2021 and $85 per share on February 1, 2022. 61) The effect on her 2021 net and taxable income is: A) increase in net iand taxable income of $12,500. B) increase in net income of $25,000 and an increase in taxable income of $12,500. C) increase in nat and taxable income of $10,000. D) increase in net income of $20,000 and an increase in taxable income of $10,000. Answer: D Explanation: D) Increase in net income of $20,000 and an increase in taxable income of $10,000. The exercise of options results in an increase in employment income of $20,000 [5,000 shares × ($79 - $75)], less the stock option deduction of $10,000 ($20,000 × 50%). A & B. [ 5,000 shares × ($79 - $74) ] = $25,000 × 50% = $12,500 Type: MC Topic: Employment - employee stock options

62) The effect on her 2022 net and taxable income is: A) increase in net and taxable income of $15,000. B) increase in net income of $30,000 and an increase in taxable income of $15,000. C) increase in net and taxable income of $25,000. D) increase in net income of $50,000 and an increase in taxable income of $25,000. Answer: A Explanation: A) Increase in net and taxable income of $15,000. [ 5,000 shares × ($85 - $79) ] = $30,000 × 50% = $15,000 taxable capital gain C & D [ 5,000 shares × ($85 - $75) ] = $50,000 × 50% = $25,000 Type: MC Topic: Employment - employee stock options

63) Gail works for a Canadian public corporation. Three years ago she was granted an option to purchase 100 shares at $30 per share from her employer. The FMV on the day the option was granted was $33 per share. Gail exercised her option by purchasing 100 shares in the current year at a time the FMV was $42 per share. She has not yet sold the shares. What is the effect on Gail's current year net income? A) $1,200 increase B) $900 increase C) $600 increase D) No effect. Answer: A Explanation: A) 100 × ($42 - $30) = $1,200 increase B = 100 × ($42 - $33) = $900 C = 100 × ($42 - $30)(1/2) = $600

Type: MC Topic: Employment - employee stock options

64) Which of the following statements about expense deductions for employees is NOT correct? A) In order for an employee to deduct work space in the home costs it must be the place where that individual principally carries on their employment duties. B) If an employee uses their own automobile to carry out his employment duties, they can deduct a pro rata share of the interest paid on a loan to finance the automobile. C) In order to deduct travel costs, an employee must ordinarily be required to carry on their employment duties away from the employer's place of business. D) If an employed salesperson who earns commission income acquires a cell phone, he cannot claim CCA on the phone. Answer: A Explanation: A) In order for an employee to deduct work space in the home costs it must be the place where that individual principally carries on their employment duties. Type: MC Topic: Employment - employee expenses (General)

65) Roger is employed by an Internet based corporation as a technical support representative and is paid a salary of $40,000 per year. He is required to work from home and estimates that the work space use represents 200 square feet of his 1,000 square foot apartment exclusively for this purpose. Total expenses for 2022 were as follows: Apartment rent Tenant's insurance Apartment utilities Office Supplies

$18,000 500 850 100

Roger's maximum employment expense deduction for 2021 is: A) $3,890. B) $3,970. C) $3,870. D) $3,790. Answer: C Explanation: A) ($18,000 + 500 + 850 + 100) × 20% = $3,890 B) [($18,000 + 500 + 850) × 20%] + 100 = $3,970 C) $3,870 [($18,000 + $850) × 20%] + 100 = $3,870 D) ($18,000 + 850 + 100) × 20% = $3,790 Type: MC Topic: Employment - home office expenses (ITA 8(13))

66) Nancy is employed by a large corporation as a sales representative. She is paid a salary of $70,000 in 2022. She is required to have a home office and she estimates that her work related use at 375 square feet of her 1,500 square foot house. Total costs for 2022 were as follows: Mortgage payments (40% principal, 60% interest) Home owner's insurance Utilities Roof repair Property tax

$24,000 900 1,500 800 5,000

As Nancy's compensation does not include any commissions, she is unable to claim some of these expenses as an employment expense. If instead, her compensation of $70,000 was in the form of commissions, she would be able to claim extra employment expenses of: A) $1,675. B) $3,600. C) $5,075. D) $1,475. Answer: D Explanation: A) [($800 + 900 + 5,000) × 25%] = $1,675 B) ($24,000 × 60% × 25%) = $3,600 C) ($24,000 × 60% × 25%) + [($900 + 5,000) × 25%] = $5,075 D) $1,475 [($900 + 5,000) × 25%] Type: MC Topic: Employment - home office expenses (ITA 8(13))

67) John secured employment as a commissioned salesman in July, 2022. In 2022, he received a base salary of $60,000, and $5,000 of commissions. A further $6,000 of commissions earned in December 2022 was paid to him in January, 2023. John worked away from the office negotiating sales contracts, and he is required to pay his own vehicle and promotional expenses. His employer has signed a Form T2200 certifying that requirement, and certifying that no reimbursements are paid for any expenses John incurs to earn commissions. John incurred the following costs from July through December 2022: Meals and entertainment for potential customers Driving costs (90% of driving was for employment purposes): Fuel Insurance Repairs Leasing costs ($500 per month)

$14,000 4,000 750 2,250 3,000

What is the maximum deduction John may claim for employment expenses in 2022? A) $5,000. B) $9,000. C) $11,000. D) $16,000. Answer: B Explanation: B) If John claims under ITA 8(1)(f) as a commission salesperson, the total eligible expenses would be $16,000 (one-half of the client meals and entertainment of $14,000, plus 90% of the driving costs of $10,000). However, under this provision he would be limited to his $5,000 in commission income. The alternative that would maximize his deduction would be to use ITA 8(1)(h.1). While he could not deduct the client meals and entertainment costs under this provision, his deduction would not be limited to his commission income. This would allow a deduction of $9,000 (90% of the driving costs of $10,000). Type: MC Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

68) Which of the following criteria is NOT necessary in order for a salesperson to deduct home office costs? A) Must pay own expenses. B) Must carry on employment duties away from the employer's place of business. C) Must not receive an allowance that is not required to be included in income. D) Must receive all remuneration as commissions. Answer: D Explanation: D) Must receive all remuneration in commissions. Type: MC Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

69) Connely Ltd. has an August 31 year end. On August 31, 2022, the company declares a bonus of $250,000 payable to Ms. Sara Connely, the founder of the Company. The bonus is payable on April 1, 2023. Describe the income tax consequences of this bonus to both Connely Ltd. and Ms. Sara Connely. Answer: The bonus will be included in Ms. Connely's 2023 employment income when received. With respect to Connely Ltd., the bonus is not payable by the 179th day after its taxation year ending August 31, 2022. As a consequence, Connely Ltd. will not be able to deduct the bonus in the year ending August 31, 2022. It will only be deducted in the year ending August 31, 2023 when it is actually paid. Type: ES Topic: Employment - bonus arrangements

70) Brock Inc. has a taxation year that ends on September 30. On July 1, 2022 the company declared a bonus of $100,000 payable to Stan Gable. The bonus will be paid on February 1, 2023. Describe the income tax consequences of the declaration of the bonus and payment on both Stan Gable and Brock Inc. Answer: The bonus will be included in the 2023 employment income of Mr. Gable's based on the calendar year of receipt. The declaration of the bonus for its 2022 taxation year would normally entitle the employer to an expense for the bonus whether paid immediately or not. ITA 78(4) however requires that the employer can only deduct the bonus in the year incurred (2022) if the bonus is actually paid by the 179th day following its 2022 taxation year end. As it is paid by the 179th day the Company will be able to deduct the bonus in its 2022 taxation year ending September 30, 2022. Type: ES Topic: Employment - bonus arrangements

71) Mr. John Lamarche, as the result of an outstanding sales achievement within his organization, is awarded two airline tickets to Vancouver. His employer pays a travel agent $5,275, plus $264 in GST for the tickets. What is the amount of Mr. Lamarche's taxable benefit? Answer: Mr. Lamarche's taxable benefit would be $5,539, the $5,275 cost of the tickets, plus the additional $264 in GST. The benefit would not be reduced by $500 for the CRA concessions since the gift was based on performance and is considered equivalent to salary and other remuneration. Type: ES Topic: Employment - GST on taxable benefits

72) In 2022 Ms. Robin Nestor is provided with an automobile that is owned by her employer. The employer purchased the car in 2021 for $54,000, plus $7,020 in HST. During 2022, she drives the car a total of 72,000 kilometers, of which 67,000 kilometers were for employment purposes and 5,000 for personal use. The automobile was available to Ms. Nestor for 268 days during 2022. Calculate Ms. Nestor's minimum taxable automobile benefit. Answer: Rounded to the nearest whole number, 268 days results in 9 months of availability. Further, Ms. Nestor's employment use is over 50% and the monthly average personal use is well below 1,667, entitling her to a reduction in the full standby charge. Although she can use the alternative one -half of the standby charge calculation of the operating cost benefit, she would not do so as it results in a higher benefit. Given these factors, the taxable benefit would be calculated as follows: Standby Charge [(2%)(9)($54,000 + $7,020)(5,000/15,003*)] Operating Cost Benefit - Lesser of: • [($0.29)(5,000)] = $1,450 • [(1/2)($3,660)] = $1,830 Total Automobile Benefit

$3,660

1,450 $5,110

*[(9)(1,667)]

Type: ES Topic: Employment - taxable benefits - employer owned automobile

73) Mr. Robert Rhodes is provided with an automobile that is owned by his employer. The car was acquired by the employer in 2020 for $63,000, plus $3,150 in GST. In 2022, it was available to Mr. Rhodes for 8 months. The car was driven 53,000 kilometers in 2022, of which 22,000 were for employment purposes and 31,000 for personal use. Calculate Mr. Rhodes' minimum taxable automobile benefit. Answer: As Mr. Rhodes' employment related use is less than 50% of total kilometers driven the reduced standby charge is not available. In addition, he cannot use the alternative one -half of the standby charge calculation of the operating cost benefit. Given this, the taxable benefit would be calculated as follows: Standby Charge [(2%)(8)($63,000 + $3,150)] Operating Cost Benefit [($0.29)(31,000)] Total Automobile Benefit

$10,584 8,990 $19,574

Type: ES Topic: Employment - taxable benefits - employer owned automobile

74) In 2022, Mr. Sam Warren is provided with an automobile that is leased by his employer. The monthly lease payment is $791 per month which includes $91 in HST. During the year, the car was available to Mr. Warren for a total of 310 days. During this period, he drives the car a total of 40,000 kilometers, 22,000 of which are for employment purposes and 18,000 for personal use. Calculate Mr. Warren's minimum taxable automobile benefit. Answer: Rounded to the nearest whole number, 310 days results in 10 months of availability. As Mr. Warren's employment related use is more than 50%, he is eligible for a reduction in the full standby charge. The reduction however will not reduce the benefit since the average monthly personal use of 1,800 kilometers ($18,000/10) exceeds 1,667 monthly average required of the formula. He is also eligible for the alternative one-half of the standby charge calculation of the operating cost benefit. Given these factors, the taxable automobile benefit would be calculated as follows: Standby Charge [(2/3)($791)(10)(16,670*/16,670*)] Operating Cost Benefit - Lesser of: • [($0.29)(18,000)] = $5,220 • [(1/2)($5,273)] = $2,637 Total Benefit

$5,273

2,637 $7,910

*[(10)(1,667)] - the numerator cannot exceed the denominator

Type: ES Topic: Employment - taxable benefits - employer leased automobile

75) Ms. Sarah Wexler is provided with a car by her employer. It is leased by the employer for $728 per month, including $78 of HST. The lease payment also includes a payment of $50 per month to cover insuring the vehicle. In 2022, the car is available to Ms. Wexler for 10 months. She drives the car 76,000 kilometers of which 53,000 kilometers are for employment purposes and 23,000 for personal use. Calculate Ms. Wexler's minimum automobile benefit. Answer: As Ms. Wexler's employment use is more than 50 %, she is eligible for a reduction in the basic standby charge. However since her average monthly personal kilometer use exceeds the formula maximum of 1,667 kilometers she will not benefit from a reduction of the standby charge. She is also eligible for the alternative one -half of the standby charge calculation of the operating cost benefit. Given these factors, the taxable automobile benefit would be calculated as follows: Standby Charge [(2/3)($728 - $50)(10)(16,670*/16,670*)] Operating Cost Benefit - Lesser of: • [($0.29)(23,000)] = $6,670 • [(1/2)($4,520)] = $2,260 Total Automobile Benefit

$4,520

2,260 $6,780

*[(10)(1,667)] - the numerator cannot exceed the denominator

Type: ES Topic: Employment - taxable benefits - employer leased automobile

76) Mr. Rudy Jackson is required by his employer to use his own automobile in the course of carrying oon his employment duties. To compensate him for that use, he is paid an annual flat rate allowance of $350 per month or $4,200 for the year. In 2022, he drove his automobile a total of 26,720 kilometers, of which 8,150 were for employment purposes and 18,570 for personal use. His total automobile costs for the year, including lease costs, are $8,623. What amounts will Mr. Jackson include and deduct from his 2021 employment income related to the use of his automobile? Answer: As the car allowance is not based solely on kilometers the allowance is deemed to be unreasonable resulting in a requirement to include the allowance in employment income (ITA 6(1)(b)). He can also deduct the employment related portion of his actual automobile expenses since the allowance was required to be included in employment income. The expense would be $2,630 [($8,623)(8,150 ÷ 26,720)]. The net increase in employment income would be $1,570 ($4,200 - $2,630). Type: ES Topic: Employment - employee provided vehicle

77) Ms. Rhonda Jewel's employer provides her with a flat rate annual allowance of $6,500 to compensate her for the fact that she uses her own automobile for employment purposes. In 2022, she has total automobile related costs, including her monthly lease payments, of $12,472. In 2021 she drove 42,000 kilometers, of which 18,000 kilometers were for employment purposes and 24,000 for personal use. Indicate how the allowance and the use of her own automobile affect for 2022 employment income? Answer: As the $6,500 allowance is not based solely on kilometers driven the allowance is deemed to be unreasonable requiring that it be included in employment income. As the allowance is included in employment income, she can deduct a proportionate share of her automobile expenses. The deductible amount is $5,345 [($12,472)(18,000 ÷ 42,000)]. Her net effect on her employment income is an increase of $1,155 ($6,500 - $5,345). Type: ES Topic: Employment - employee provided vehicle

78) Ms. Jessica Tremblay is a member of a group disability plan sponsored by her employer. Contributions are made by both the employees and the employer. The plan provides periodic benefits that compensate for lost employment income. In 2021, Ms. Tremblay was required to pay $324 in premiums. In 2022, Ms. Tremblay received benefits under the plan of $6,940. Ms. Tremblay's contributions to the plan for 2022 totalled $250. In 2022, her employer's share of the annual premium was $2,175. What amount will Ms. Tremblay include in her 2022 employment income? Answer: As her employer contributes to the plan, and the contributions do not create a taxable benefit, the $6,940 in benefits received during the year will be included in her employment income when received. This will be reduced by the $574 ($324 + $250) in contributions that she made in 2021 and 2022, leaving a net inclusion of $6,366 ($6,940 - $574). Type: ES Topic: Employment - disability insurance benefits

79) John Tertiak's employer sponsors a group disability plan for its employees. The plan provides periodic benefits that compensate for lost employment income. The annual premium on this plan is $3,200, with this cost being shared equally by the employer and the employee. Because John became disabled in January, 2022, he did not make any contribution in that year. In the years prior to 2022, John had total contributions of $16,000. In 2022, because of his disability, John receives benefit under the plan totaling $24,000. What amount will John include in his 2022 employment income as a result of the disability receipts? Answer: Because his employer contributes to the group disability plan, and the employer contributions do not create a taxable benefit, the $24,000 in benefits that he receives in 2022 will be included in his employment income. However, this amount received will be reduced by the $16,000 of contributions that he made in previous years, leaving a net employment inclusion of $8,000 ($24,000 - $16,000). Type: ES Topic: Employment - disability insurance benefits

80) On January 1, 2022, Mr. Packard receives a $135,000 loan from his employer to assist him in purchasing a home. The loan requires annual interest at a rate of 3.1%, which he pays on December 31, 2022. Assume that the relevant prescribed rate is 5% during the first quarter of 2022, 6% during the second quarter, and 4%. What is the amount that Mr. Packard's is required to add to his 2022 employment income as a result of the employee loan? Answer: The ITA 80.4(1) benefit is calculated as follows: The Lesser of: • [($135,000)(5%)(1/4) + ($135,000)(6%)(1/4) + ($135,000)(4%)(2/4)] = $6,413 • [($135,000)(5%)] = $6,750 Less Interest Payment [($135,000)(3.1%)] Employment Benefit

$6,413 ( 4,185) $2,228

As this is a home purchase loan, the annual benefit cannot exceed the benefit that would result from applying the 5% rate that was in effect when the loan was made. Note that the 5% rate is not compared to the prescribed rate on a quarter-by- quarter basis, but on an annual basis. The lower figure of $6,413 would then be reduced by the $4,185 in interest paid. Type: ES Topic: Employment - loans to employees (home purchase loan)

81) On May 1, 2022, Ms. Ponti receives a $210,000 interest free loan from her employer in order to assist her in purchasing a new home. The loan must be repaid in annual instalments of $30,000 on December 31 in each of the years 2023 through 2029. Assume that the relevant prescribed rate is 4% during the first two quarters of 2022, but is reduced to 3% in the third quarter, and to 2% in the fourth quarter. What is the amount that is required to be included in Ms. Ponti's 2022 employment income as a result of the employee loan? Answer: The ITA 80.4(1) benefit is calculated as follows: The Lesser of: • [($210,000)(4%)(2/12) + ($210,000)(3%)(1/4) + ($210,000)(2%)(1/4)] = $4,025 • [($210,000)(4%)(8/12)] = $5,600 $4,025 Interest Payments Nil Employment Benefit

Type: ES Topic: Employment - loans to employees (home purchase loan)

$4,025

82) A senior executive asks her employer for a $240,000 interest free housing loan. At this time, the employer has investment opportunities involving a rate of return of 8.2% before income taxes. Assume the relevant prescribed rate for the period is 3%, while the going market rate for home mortgages is 5%. The employee is subject to a marginal income tax rate of 44%, while the employer pays corporate income taxes at a marginal rate of 28%. Should the employer grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion. Answer: In the absence of the interest free loan, the employee would borrow $240,000 at 5%, requiring an annual interest payment of $12,000. The after tax cash outflow associated with the employer providing sufficient additional salary to carry this loan would be calculated as follows: Required Salary [$12,000 ÷ (1 - 0.44)] Corporate income tax savings from deducting the salary [($21,429)(28%)] Employer's after tax cash flow - Additional Salary

$21,429 ( 6,000) $15,429

Alternatively, if the loan is provided, the employee will have a taxable benefit of $7,200 [(3%)($240,000)], resulting in taxes payable of $3,168 [(44%)($7,200)]. To make this situation comparable to the straight salary alternative, the employer will have to provide the employee with both the loan amount and sufficient additional salary to pay the income taxes on the imputed interest benefit. The amount of this additional salary would be $5,657 [$3,168 ÷ (1 - 0.44)]. The employer's after tax cash flow associated with providing the additional salary and the loan amount would be calculated as follows: Required Salary [$3,168 ÷ (1 - 0.44)] Corporate income tax savings from deducting the salary [($5,657)(28%)] After Tax Cost of Salary Employer's lost earnings [(8.2%)(1 - 0.28)($240,000)] Employer's after tax cash flow - Loan

$ 5,657 (1,584) $ 4,073 14,170 $18,243

Given these results, providing the additional salary appears to be the better alternative. Type: ES Topic: Employment - loan benefits (tax planning)

83) John Baxter is a highly valued employee of Stern Inc. His marginal income tax rate is 46% and he would like to acquire a vacation property. To assist with this purchase, he has asked the management of Stern for a $350,000 interest free loan. At this time the mortgage rate for vacation properties is 4.5% and the prescribed rate is 2%. Stern is subject to a marginal income tax rate of 26% and has alternative investment opportunities that earn 7% before income taxes. Should Stern Inc. grant the loan or, alternatively, provide sufficient salary to carry an equivalent loan from a commercial lender? Explain your conclusion. Answer: In the absence of the interest free loan, John would have to borrow $350,000 at 4.5 %, resulting in an annual interest cost of $15,750 [(4.5%)($350,000)]. In order to pay this after tax amount, John would need additional salary of $29,167 [($15,750 ÷ (1 - 0.46)]. The after tax cash outflow of providing this salary is calculated as follows: Additional salary [($15,750 ÷ (1 - 0.46)] Corporate income tax savings [($29,167)(26%)] Employer's after tax cash flow - Additional Salary

$29,167 (7,583) $21,584

If the loan is provided, John will have a taxable benefit of $7,000 [($350,000)(2%)], resulting in income tax of $3,220 [($7,000)(46%)]. In order to pay the additional income tax John will need additional salary of $5,963 [$3,220 ÷ (1 - 0.46)]. For Stern, the after tax cash outflows associated with this additional salary and the loan would be calculated as follows: Additional salary [$3,220 ÷ (1 - 0.46)] Corporate income tax savings [($5,963)(26%)] After tax cost of salary Employer's lost earnings [(7%)(1 - 0.26)($350,000)] Employer's after tax cash flow - Loan

$ 5,963 (1,550) $ 4,413 18,130 $22,543

Based on these results, the payment of additional salary appears to be the better alternative. Type: ES Topic: Employment - loan benefits (tax planning)

84) Ms. Mary Mason is employed by a large public company. In 2020, she was granted stock options to acquire 1,000 shares of her employer's common stock at a price of $23 per share. At the time the options were granted, the shares were trading at $20 per share. In May, 2022, when the shares are trading at $45 per share, she exercises her options and acquires 1,000 shares. What is the effect of the exercise of the options on Ms. Mason's 2022 employment income? Answer: The employment income inclusion is $22,000 [(1,000)($45 - $23)]. There would also be a taxable income stock option deduction under ITA 110(1)(d) equal to $11,000. Type: ES Topic: Employment - employee stock options

85) Ms. Mary Mason is employed by a CCPC. In 2020, she was granted options to acquire 1,000 shares of her employer's common shares at a price of $23 per share. At the time the options were granted, the shares had a FMV of $20 per share. In May, 2022, when the shares had a FMV of $45 per share, she exercises her options and acquires 1,000 shares. What is the effect of the exercise of the stock options on Ms. Mason's 2022 employment income? Answer: Stock options issued by a CCPC are not required to be included in employment income when the options are exercised but are instead deferred until such time as the shares are actually sold. As a result, the exercise of the stock options does not affect her 2022 employment income. Type: ES Topic: Employment - employee stock options

86) Mr. John Savage has been employed for many years by a Canadian public company. Several years ago, Mr. Savage was granted options to acquire 4,000 shares of his employer for $54 per share. At this time, the FMV of the shares was $50 per share. On July 15, 2021, Mr. Savage exercises all of these options. At this time, the FMV of the shares is $82 per share. In February, 2022, he sells all of the shares for $97 per share. Calculate the effect of these transactions that took place during 2021 and 2022 on Mr. Savage's net income and taxable income. Where relevant, identify the effects separately. Answer: The increase in 2021 net income and taxable income resulting from the exercise of the options would be calculated as follows: FMV at exercise [(4,000)($82)] Cost of shares [(4,000)($54)] Employment income = Increase in 2021 net income Stock option deduction ITA 110(1)(d) [(1/2)($112,000)] Increase in 2021 taxable income

$328,000 ( 216,000) $112,000 (56,000) $ 56,000

When the shares are sold in 2022, the results will be as follows:

POD [(4,000)($97)] ACB [(4,000)($82)] Capital Gain Inclusion Rate Taxable Capital Gain

$388,000 (328,000) $ 60,000 1/2 $ 30,000

This $30,000 taxable capital gain will be both the increase in 2022 net and taxable income. Type: ES Topic: Employment - employee stock options

87) Mr. John Savage has been employed for many years by a CCPC. Several years ago, Mr. Savage was granted options to acquire 4,000 shares of his employer for $54 per share. At that time, the FMV of the shares was $50 per share. On July 15, 2021, Mr. Savage exercises all of these options. At this time, the FMV of the shares is $82 per share. In February, 2022, he sells all of the shares for $97 per share. Calculate the effect of the transactions that took place during 2021 and 2022 on Mr. Savage's employment income, net income and taxable income. Where relevant, identify these effects separately. Answer: As Mr. Savage's employer is a CCPC, the exercise of the options has no effect on his Taxable Income in 2021. When the shares are sold in 2022, the total increase in net income and taxable income is calculated as follows: FMV at exercise [(4,000)($82)] Cost of Shares [(4,000)($54)] Employment income POD [(4,000)($97)] ACB [(4,000)($82)] Capital Gain Inclusion Rate Increase in net income Stock option deduction ITA 110(1)(d) [(1/2)($112,000)] Stock option deduction ITA 110(1)(d.1) Increase in taxable income

$328,000 (216,000) $112,000

$388,000 (328,000) $ 60,000 1/2

30,000 $142,000 (56,000) N/A $ 86,000

As the option price was greater than the FMV of the shares at the time of issue, he is allowed the deduction under ITA 110(1)(d). If this had not been the case, although Mr. Savage's employer is a CCPC, he would not have been able to make this deduction under ITA 110(1)(d.1) as he did not own the shares for at least two years. Type: ES Topic: Employment - employee stock options

88) Several years ago, Mr. Kerry Johnson's corporate employer granted him options to purchase 1,000 shares of the employer at a price of $13.25 per share. At that time, the shares were trading at $13.25 per share. The employer is a publicly traded company. In June of 2022, Mr. Johnson exercises the options. At this time, the shares are trading at $18.50 per share. Prior to the end of the year, Mr. Johnson sells the shares for $19.75 per share. Determine the effect of these transactions on Mr. Johnson's net and taxable income. Where relevant, identify these effects separately. Answer: The effect of these transactions would be calculated as follows: Employment income [(1,000)($18.50 - $13.25)] Taxable Capital Gain [(1/2)(1,000)($19.75 - $18.50)] Increase in net income Stock option deduction Under ITA 110(1)(d) [(1/2)($5,250)] Increase in taxable income Type: ES Topic: Employment - employee stock options

$5,250 625 $5,875 (2,625) $3,250

89) Joan Smithers has been employed by a Canadian public company for several years. In 2020, she was granted options to acquire 2,200 of her employer's shares at $10.50 per share. At that time, the shares were trading at $10.00 per share. In 2021, when the shares are trading at $15 per share, she exercises all of these options. In 2022 she sells 1,000 of the shares for $13 per share. Indicate the income tax consequences of each of the stock option events in 2020, 2021, and 2022 on Ms. Smithers' net and taxable income. Where relevant, identify these effects separately. Answer: The granting of the options in 2020 does not affect either net or taxable income. As a public company is involved, the exercise of the options in 2021 will have the following income tax consequences: FMV at exercise [(2,200)($15)] $33,000 Cost of Shares [(2,200)($10.50)] (23,100) Employment income (Increase in net income) $ 9,900 Stock option deduction Under ITA 110(1)(d) [(1/2)($9,900)] (4,950) Increase in taxable income $ 4,950 When the shares are sold in 2022, the income tax consequences are as follows: POD [(1,000)($13)] ACB [(1,000)($15)] Capital Loss Inclusion Rate Allowable Capital Loss

$13,000 (15,000) ($2,000) 1/2 ($1,000)

This loss can only be deducted in the determination of net income to the extent that Ms. Smithers has net taxable capital gains in 2022. Note to Instructor - Depending on what has been covered in your course, students may or may not be expected to comment on the ability to carry the capital loss back or forward as follows: If she has taxable capital gains in the previous 3 years or any year in the future, the loss could be carried back or carried forward and deducted in the determination of Taxable Income. It is important that the students realize that the allowable capital loss can not be offset against the employment income from the stock options in 2021. Type: ES Topic: Employment - employee stock options

90) Jerry Farrow is employed by a CCPC. In 2020, he was granted options to acquire 625 of his employer's shares at $92 per share. At that time, it was estimated that the FMV of the shares was $90. In 2021, when the estimated FMV of the shares is $95 per share, he exercises all of these options. In 2022, he sells 125 of the shares for $85 per share. Indicate the income tax consequences of the events in 2020, 2021, and 2022 on Mr. Farrow's employment income. net income and taxable income. Where relevant, identify these effects separately. Answer: The granting of the options in 2020 does not affect employment income, net income or taxable income. As a CCPC is involved, the exercise of the options does not affect employment income, net income or taxable income. However, the employment income inclusion for all 625 shares is measured in 2021 (see 2022 results). When 125 of the 625 shares are sold in 2022, the income tax consequences are as follows: Deferred Employment Income: FMV at exercise [(125)($95)] Cost of shares [(125)($92)] Employment Income (Increase in net income) Stock option deduction Under ITA 110(1)(d) [(1/2)($375)] Increase in taxable income

$11,875 ( 11,500) $375 (188) $187

There is also an allowable capital loss, calculated as follows: POD [(125)($85)] ACB [(125)($95)] Capital Loss Inclusion Rate Allowable Capital Loss

$10,625 (11,875) ($1,250) 1/2 ($625)

This loss can only be deducted in the determination of net income to the extent that Mr. Fallow has net taxable capital gains in 2022. Note to Instructor - Depending on what has been covered in your course, students may or may not be expected to comment on the ability to carry the capital loss back or forward as follows: If she has taxable capital gains in the previous 3 years or any year in the future, the loss could be carried back or carried forward and deducted in the determination of Taxable Income. It is important that the students realize that the allowable capital loss can not be offset against the employment income from the stock options in 2021. Type: ES Topic: Employment - employee stock options

91) Mrs. Joan Conway is a commission salesperson. During the current year, her gross salary was $46,700. In addition, she earned $9,200 in commissions. Her employment related costs during the year were advertising costs of $6,150, client entertainment costs of $8,850, and travel costs of $9,325. She is required to pay her own expenses and does not receive any allowance from her employer. What is Mrs. Conway's maximum employment expense for the current year? Show your calculations. Answer: Her potential deduction is $19,900 [$6,150 + (1/2)($8,850) + $9,325]. However, this total exceeds her commission income and cannot be deducted under ITA 8(1)(f). If she claims a deduction under ITA 8(1)(h) there is generally no limit to the amount that can be claimed. The problem here is that she cannot deduct the advertising or entertainment costs under this Paragraph. Further, she cannot claim a deduction under ITA 8(1)(h) if she claims a deduction under ITA 8(1)(f). As the travel costs that are deductible under ITA 8(1)(h) exceed the ITA 8(1)(f) ceiling of $9,200 in commission income, her maximum deduction is the $9,325 in travel costs under ITA 8(1)(h). Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

92) Barton Ho is a commission salesperson. During the current year, in addition to his salary of $92,500, he earns and receives $14,700 in commissions. His costs for advertising were $12,200 and, in addition, he spent $6,400 on client entertainment. Because of the extensive travel required for his employment, his travel costs totaled $16,100. He is required to pay his own expenses and does not receive any allowance from his employer. What is Mr. Ho's maximum employment expense for the current year? Show your calculations. Answer: Mr. Ho's total potential deductions are $31,500 [$12,200 + (1/2)($6,400) + $16,100]. However, this total exceeds his commission income and cannot be deducted under ITA 8(1)(f). While he cannot deduct the advertising or entertainment under ITA 8(1)(h), the travel costs can be deducted without limit. As these costs exceed Mr. Ho's commission income, his maximum deduction is the $16,100 in travel costs that can be deducted under ITA 8(1)(h). Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

93) Doug Evans works for a company that sells video equipment. His records for the current year contain the following information: Salary Received Commissions Received Total Employment Income

$61,250 6,250 $67,500

Advertising and Promotion Traveling expenses CCA on Van* Interest on Van financing* Total Employment Expenses

$ 1,250 7,500 1,875 625 $11,250

*The van is used exclusively for employment purposes. Mr. Evans meets the conditions for deducting employment expenses. Given the preceding information, determine Mr. Evans' minimum employment income for the current year. Explain your conclusions. Answer: As Doug Evans receives a portion of his income in the form of commissions, all of the $11,250 in listed expenses are potentially deductible under ITA 8(1)(f) (advertising and travel) and 8(1)(j) (CCA and interest on van). However, if he makes the deduction under ITA 8(1)(f), his expenses other than CCA and interest on the car, are limited to $6,250, the amount of his commission income. As a result, he can deduct $8,750 ($6,250 + $1,875 + $625). Alternatively, he can deduct all of the expenses except the advertising and promotion costs under ITA 8(1)(h), (h.1) and (j). As these deductions are not limited by commissions or total employment income, he will be able to deduct a total of $10,000 ($7,500 + $1,875 + $625). Note that, if he claims a deduction under ITA 8(1)(h) and ITA 8(1)(h.1), he cannot claim a deduction under ITA 8(1)(f). Therefore, his maximum deduction is $10,000 and his minimum employment income is $57,500 ($67,500 - $10,000). Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

94) Deborah Ekert is employed as a salesperson and receives some of her compensation in the form of commissions. During the current year, her salary totaled $85,000 and her commissions totaled $8,400. Her employment related expenses during this period were as follows: CCA On Car* Interest on Car Loan* Traveling expenses Promotion and Advertising Client Entertainment [(1/2)(Actual Costs Of $5,200)] Total Available Expenses

$ 2,850 1,075 10,300 5,600 2,600 $22,425

*The car is used exclusively for employment purposes. Ms. Ekert meets the conditions for deducting employment expenses. Given the preceding information, determine Ms. Ekart's minimum employment income for the current year. Explain your conclusions. Answer: As Ms. Ekart receives some of her employment income in the form of commissions, all of the $22,425 in listed expenses is potentially deductible under ITA 8(1)(f) (travel, promotion, and entertainment) and 8(1)(j) (CCA and interest on car). However, under ITA 8(1)(f), all of the expenses other than the CCA and interest on the car are limited to her commission income of $8,400. This would result in a maximum deduction under ITA 8(1)(f) and 8(1)(j) of $12,325 ($8,400 + $2,850 + $1,075). Alternatively, under ITA 8(1)(h) and ITA 8(1)(h.1), she can deduct the traveling expenses, of $10,300 but not the promotion, advertising and entertainment. However, when the traveling expenses are added to the car costs that are deductible under ITA 8(1)(j), her total deduction would be $14,225 ($10,300 + $2,850 + $1,075). Using this would produce a minimum employment income calculated as follows: Salary Commissions Deductible Expenses ($10,300 + $2,850 + $1,075) Employment income

$85,000 8,400 (14,225) $79,175

Type: ES Topic: Employment - employee salesperson expenses (ITA 8(1)(f))

95) Each of the following independent Cases involves a Canadian public company paying a bonus to a key executive named Christine Lane. Case A — The company's year end is August 31. The bonus is declared on August 31, 2022 and paid on December 31, 2022. Case B — The company's year end is July 31. The bonus is declared on March 2, 2022 and paid on January 1, 2023. Case C — The company's year end is December 31. The bonus is declared on December 1, 2022 and paid on July 1, 2023. Case D — The company's year end is September 30. The bonus is declared on October 31, 2022 and paid October 31, 2026. Required: For each of these Cases, indicate the taxation year in which the Company can deduct the bonus, as well as the taxation year in which Ms. Lane will include it in her employment income. Answer: Case A The company will deduct the bonus in the year ending August 31, 2022 since the bonus is paid by the 179th day following August 31, 2022. Christine will include it in income in the calendar year ending December 31, 2022 since it was received in that year. Case B In this case, the bonus is paid by the 179th day measured from July 31, 2022 therefore the bonus is deductible to the company for its 2022 taxation year ending July 31. However, Christine will include the bonus in the calendar year in which it was received which is 2023. Case C In this case, the bonus is not paid by the 179th day of June 28, 2023 and as a result the company is only entitled to an expense in the taxation year in which the bonus is actually paid which is its 2023 taxation year ending December 31. Christine will include the bonus in income in the year in which it is received which is also 2023. Case D As the bonus is not paid within three years of the end of the year in which the services were rendered, the bonus is considered a salary deferral arrangement. The company will deduct the bonus in its 2023 taxation year ending September 30, 2023. However, as it was earned in 2022, Christine will have to include the bonus in her employment income for 2022. Type: ES Topic: Employment - bonus arrangements

96) Jerry Field was hired by Larson Wholesalers at the end of 2021 to fill an executive position in the company. He is scheduled to begin work on January 2, 2022. Larson Wholesalers plans to transfer him to their Hong Kong office after two years. As part of his compensation package, Jerry has considered having the Company provide him with a car for his personal use. He does not require the vehicle for his employment duties and, as a consequence, it will be used for personal use only. Jerry anticipates that he will drive the car about 80,000 kilometers in each of 2022 and 2023. He is considering two different cars and has collected the following information on them: Lexus ES $45,000 $0.30 $20,000

Purchase Price Estimated Operating Costs per Kilometer Estimated Trade In at the end of 2 Years

Lexus LS $100,000 $0.40 $40,000

The Company has agreed to provide an additional $100,000 in compensation and they offer Jerry the following alternatives. Option 1 — They will purchase either car and allow Jerry to use it for the calendar years 2022 and 2023. If Jerry prefers the Lexus ES, the Company will provide a signing bonus of $55,000, the difference in the cost of the two cars. The bonus will be paid when the car is delivered on January 2, 2022. Option 2 — They will provide Jerry with an $100,000 signing bonus. This bonus will be paid on January 2, 2022. He will use the funds to purchase one of the cars personally. If the Company buys either car, Jerry will pay his own operating costs and the Company will take possession of the car after the 2 years. Jerry's combined federal/provincial marginal income tax rate is expected to be 48% in both 2022 and 2023. Assume that the prescribed operating cost benefit will be $0.27 per kilometer for both 2022 and 2023. Required: Advise Jerry as to which option he should choose if decides that he wants: A. the Lexus ES. B. the Lexus LS. In both parts of this question your advice should be based on non-discounted cash outflows. Ignore GST and HST considerations in your solution.

Answer: Part A - Jerry Chooses The Lexus ES If Jerry chooses the Lexus ES and selects Option 1, the employment benefit will be calculated as follows: Standby Charge [(2%)(12)($45,000)] Operating Cost Benefit (Jerry pays his own costs) Total Taxable Benefit Number of Years Total Taxable employment benefit - Option 1

$10,800 Nil $10,800 2 $21,600

Given this, the after tax cash flow associated with Option 1 would be calculated as follows: Signing Bonus Income Tax Consequences: Signing Bonus Taxable Benefit Increase in Taxable Income Jerry' Marginal Income Tax Rate Net Cash Inflow (Outflow)

$55,000 ($55,000) (21,600) ($76,600) 48%

(36,768) $18,232

Alternatively, the after tax cash flow associated with Option 2 would be as follows: Signing Bonus Purchase Price of the car Tax Consequences: Signing Bonus Jerry' Marginal Tax Rate Trade in proceeds Net Cash Inflow (Outflow)

$100,000 (45,000) ($100,000) 48%

(48,000) 20,000 $27,000

With respect to the Lexus ES alternative, selecting Option 2, is the better alternative. Note that, as Jerry pays his own operating expenses in both Option 1 and Option 2, this factor can be ignored in our calculations.

Part B - Jerry Chooses the Lexus LS If Jerry chooses the Lexus LS and selects Option 1, the taxable benefit will be calculated as follows: Standby Charge [(2%)(12)($100,000)] Operating Cost Benefit (Jerry Pays His Own Costs) Total Taxable Benefit Number of years Total Taxable Employment Benefit - Option 1

$24,000 Nil $24,000 2 $48,000

Given this, the after tax cash flow associated with Option 1 would be calculated as follows: Signing Bonus Income Tax Consequences: Taxable Benefit Signing Bonus Increase in Taxable Income Jerry' Marginal Income Tax Rate Net Cash Inflow (Outflow)

Nil ($48,000) Nil (48,000) 48%

($23,040) ($23,040)

Alternatively, the after tax cash flow associated with Option 2 would be as follows: Signing Bonus Purchase Price of the car Tax Consequences: Signing Bonus Jerry' Marginal Income Tax Rate Trade In Proceeds Net Cash Inflow (Outflow)

$100,000 (100,000) ($100,000) 48%

(48,000) 40,000 $ 8,000

Once again, operating costs are ignored in that Jerry pays his own operating costs in both Option 1 and Option 2. As was the case with the Lexus ES, Option 2 is the preferred alternative. The economic basis for this result is the fact that in Option 2, Jerry benefits from the trade in value of the car, while in Option 1, this benefit goes to the Company. Although the requirements of the problem ask that only the cash flows be considered, we would note that the alternative of purchasing the car carries more uncertainty. Both the resale value and the actual operating costs are estimates. If there was a large variation from the estimate for either or both of these amounts, it could substantially affect the total cash outflow of the purchase alternative. Type: ES Topic: Employment - employer owned vs. employee owned vehicle

97) Ms. Sharon Herzog is employed with a large, publicly traded company. Her employment duties require her to travel and the employer provides her with an automobile. Sharon is allowed to use the automobile for personal use. However, there are some periods during the year when she does not need the car for employment purposes and during these periods she is required to return the car to her employer's premises where it can be used by other employees. The car that she will use was purchased by her employer in 2020 for $45,200, including $5,200 in HST. During the years 2020 and 2021, the company claimed maximum CCA. In 2022, Sharon drove the car a total of 37,000 kilometers. The company pays all of her operating costs which, in 2022 totaled $11,340. Required: Indicate the minimum automobile benefit in each of the following independent Cases: Case 1 — The car is available for 9 months of the year. Personal use during the year totals 6,000 kilometers with 31,000 kilometers for employment purposes. Case 2 — The car is available for 11 months of the year. Personal use during the year totals 28,000 kilometers with 9,000 kilometers for employment purposes. Case 3 — The car is available for 7 months of the year. Employment use during the year totals 18,600 kilometers and personal use 18,400 kilometers.

Answer: Case 1 In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($45,200)(9)(6,000/15,003*)] Operating Cost Benefit - Lesser of: • [(6,000)($0.29)] = $1,740 • [(1/2)($3,254)] = $1,627 Total Automobile Benefit *[(9)(1,667)]

$3,254

1,627 $4,881

As Sharon's usage is more than 50% employment related, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit, but it is not advantageous for her to do so. Case 2 In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($45,200)(11)] Operating Cost Benefit [(28,000)($0.29)] Total Automobile Benefit

$ 9,944 8,120 $18,064

As Sharon's employment use was less than 50%, there is no reduction in the basic standby charge. This also means that Sharon cannot elect to use the alterative calculation of the operating costs benefit as onehalf of the standby charge. Case 3 In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($45,200)(7)(11,669/11,669*)] Operating Cost Benefit - Lesser of: • [(18,400)($0.29)] = $5,336 • [(1/2)($6,328)] = $3,164 Total Automobile Benefit *[(7)(1,667)] - the numerator cannot exceed the denominator

$6,328

3,164 $9,492

As Sharon's usage is more than 50% employment use, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit. Type: ES Topic: Employment - taxable automobile benefits employer owned vehicle (Multiple Cases)

98) Klaxton Inc. provides an automobile to Ms. Roxanne Smith for her to use in carrying out her employment duties. Ms. Smith is given full possession of the car and is allowed to use it for personal purposes. However, when she is not using it for employment or personal use, it must be returned to Klaxton's premises so that it can be used by other employees. The automobile was purchased in 2020 for $42,000 and, during the years 2020, 2021, and 2022, the Company claimed maximum CCA. In 2022, Ms. Smith drove the car 48,000 kilometers, with the Company paying for all of the operating costs. These costs totaled $9,850 during the year. Required: Ignore all GST/PST & HST implications. Indicate the minimum automobile benefit in each of the following Cases: Case A — The car was available for 11 months of the year. Personal use during the year totals 4,000 kilometers and employment use 44,000 kilometers. Case B — The car was available for 10 months of the year. Personal use during the year totals 23,000 kilometers with 25,000 kilometers of employment use. Case C — The car was available for 8 months of the year. Employment use during the year totals 4,000 kilometers with 44,000 kilometers of personal use.

Answer: Case A In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($42,000)(11)(4,000/18,337*)] Operating Cost Benefit - Lesser of: • [(4,000)($0.29)] = $1,160 • [(1/2)($2,016)] = $1,008 Total Automobile Benefit *[(11)(1,667)]

$2,016

1,008 $3,024

As Ms. Smith's employment use is more than 50%, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit. Case B In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($42,000)(10)(16,670*/16,670*)] Operating Cost Benefit - Lesser of: • [(23,000)($0.29)] = $6,670 • [(1/2)($8,400)] = $4,200 Total Automobile Benefit *[(10)(1,667)]

$ 8,400

4,200 $12,600

As Ms. Smith's employment use is more than 50% she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit. Case C In this Case, the automobile benefit would be calculated as follows: Standby Charge [(2%)($42,000)(8)] Operating Cost Benefit [(44,000)($0.29)] Total Automobile Benefit

$ 6,720 12,760 $19,480

As Ms. Smith's employment usage was less than 50%, there is no available reduction in the basic standby charge. This also means that Ms. Smith cannot elect to use the alterative calculation of the operating costs benefit as one-half of the standby charge. Type: ES Topic: Employment - taxable automobile benefits employer owned vehicle (Multiple Cases)

99) Fred Ethridge is a valued employee of a large Canadian company. He is in the process of negotiating a new compensation package for the coming year. As he is looking to purchase a new residence, one of the alternatives that is being considered is an interest free loan that would be used to purchase this property. Fred needs $350,000 to comfortably finance this purchase. As he has an excellent credit rating, a commercial bank is prepared to extend the $350,000 on a 5 year, closed mortgage at a rate of 4.75%. The company has indicated that they will extend a $350,000, 5 year, interest free loan in lieu of a raise. The Company's accounting department will calculate the after tax cost of providing the loan and his employer will offer Fred the alternative of additional salary that has the same after tax cost to the Company. The Company is subject to income tax at a combined federal/provincial rate of 29%. When funds are available, the Company has alternative investment opportunities that earn a pre-tax rate of 10%. Because of Fred's current high salary, any additional compensation will be taxed at a combined federal/provincial income tax rate of 49%. Assume that the prescribed interest rate on loans for the current year is 2%. Required: A. Determine the income tax consequences to Fred and the cost to the Company, in terms of lost after-tax earnings, of providing Fred with a $350,000 interest free loan for the first year of the loan. B. Determine the amount of additional salary that could be provided to Fred for the same after tax cost to the Company that you calculated in Part A. C. Which alternative would you recommend that Fred accept? Explain your conclusion.

Answer: Part A The first year income tax consequences for Fred would be that he would be assessed a taxable benefit on the loan of $7,000 [(2%)($350,000)] for the current year. This would result in an increase in his income tax of $3,430 [(49%)($7,000)]. The cost of the loan to the company for the first year would be calculated as follows: Lost Earnings on Funds Loaned [(10%)($350,000)] Corporate Taxes on Imputed Earnings (at 29%) Net Cost to Company - Loan

$35,000 (10,150) $24,850

This will result in Fred having the use of $350,000 at a tax cost to himself of $3,430 and an annual cost of $24,850 to the Company. Part B If instead of giving Fred the $350,000, the Company pays him the potentially lost annual earnings of $35,000, the after tax cost to the Company will be the same, as shown in the following calculation: Additional Salary Savings in Corporate Taxes (at 29%) Net Cost to Company - Additional Salary

$35,000 (10,150) $24,850

Part C Fred can borrow on a loan at a rate of interest of 4.75%. This means that the annual interest payments on $350,000 would amount to $16,625 [(4.75%)($350,000)]. If he receives the additional salary, his after tax income would be as follows: Additional Salary Income Tax (at 49%) Net Increase in Cash

$35,000 (17,150) $17,850

Fred should accept the additional salary of $35,000 per year as it results in an annual cash inflow of $1,225 ($35,000 - $17,150 - $16,625) after paying the income tax and the mortgage interest. This compares to a cash outflow of $3,430 if the company lends the money to Fred. Type: ES Topic: Employment - loan benefits (tax planning)

100) Albert Lee is an employee of a large Canadian company. As he has performed exceptionally well in recent years and has become sought after by competitors, the Company is planning to increase his compensation in an effort to retain him. Mr. Lee has developed a growing interest in investing in options and, in order to finance this activity, he is looking to borrow $500,000. His bank has indicated that they would be prepared to loan this amount to him at a rate of 6%. This is attractive in that he anticipates that his activity in the options market will generate a pre-tax return of at least 15%. Given this situation,Mr. Lee has indicated to his employer that, instead of additional remuneration in the form of salary, he would be prepared to accept a $500,000 interest free loan for 3 years. He would fully invest this in options. The Company is subject to income tax at a combined federal/provincial income tax rate of 27%. When funds are available, the Company has alternative investment opportunities that earn a pre-tax rate of 9%. Any additional compensation for Mr. Lee will be taxed at a combined federal/provincial income tax rate of 46%. Assume that the prescribed interest rate for employee loans for the current year is 2%. Required: A. Determine the income tax consequences to Mr. Lee and the cost to the Company, in terms of lost aftertax earnings, of providing Mr. Lee with a $500,000 interest free loan for the first year of the loan. B. Determine the amount of additional salary that could be provided to Mr. Lee for the same after tax cost to the Company that you calculated in Part A. C. Which alternative would you recommend that Mr. Lee accept? Explain your conclusion.

Answer: Part A Mr. Lee would include an interest benefit on the loan of $10,000 [(2%)($500,000)] for the current year. However, under ITA 80.5, this would be deemed interest paid where the funds are used for investment purposes. This means that the interest benefit will be added to employment income and he would be entitled to an interest expense when calculating his investment income or loss. The cost of the loan to the company for the first year would be calculated as follows: Lost Earnings on Funds Loaned [(9%)($500,000)] Corporate Income Tax on Imputed Earnings (at 27%) Net Cost to Company - Loan

$45,000 (12,150) $32,850

This will result in Mr. Lee having the use of $500,000 at no tax cost to himself and an annual cost of $32,850 to the Company. Part B If instead of giving Mr. Lee the $500,000, the Company pays him the potentially lost annual earnings of $45,000, the after tax cost to the Company will be the same, as shown in the following calculation: Additional Salary Savings Ii Corporate Taxes (at 27%) Net Cost to Company - Additional Salary

$45,000 (12,150) $32,850

Part C Mr. Lee can borrow on a loan at a rate of interest of 6%. This means that the annual interest payments on $500,000 would amount to $30,000 and would be deductible in determining his investment income or loss. If he receives the additional salary, his after tax income would be as follows: Additional Salary Deductible Interest on Investment Loan Increase in net income Income Tax (at 46%) Net Increase in Cash

$45,000 (30,000) $15,000 (6,900) $ 8,100

Mr. Lee should accept the additional salary of $45,000 per year as it results in an annual cash increase of $8,100. Type: ES Topic: Employment - loan benefits (tax planning)

101) Opting Inc. has a very generous stock option plan that allows all of their long term employees to participate. Sandra has worked for the Company for over 10 years and has participated in this plan on a regular basis. With regards to the last options granted to her, the following information is relevant: • On January 1, 2020, Sandra was granted options to acquire 275 of the Company's shares at a price of $15.00 per share. • At a later point in time, when Sandra exercises these options, the Company's shares have a FMV of $17.50 per share. • On December 1, 2022, all of the shares acquired with the options are sold. Required: Indicate the income tax consequences to Sandra of the transactions that took place during 2020, 2021, and 2022 under each of the following independent Cases. Your answer should include the effect on employment income, net income and taxable income. Where relevant, identify these effects separately. Case A — Opting is a CCPC. At the time the options were granted, the FMV of the Company's shares was $16.00 per share. The options are exercised on February 28, 2020. When the shares are sold, the proceeds of disposition are $20.25 per share. Case B — Opting is a Canadian public company. At the time the options were granted, the Company's shares were trading at $16.00 per share. The options are exercised on February 28, 2020. When the shares are sold, the proceeds of disposition are $16.00 per share. Case C — Opting is a Canadian public company. At the time the options were granted, the Company's shares were trading at $14.00 per share. The options are exercised on July 1, 2021. When the shares are sold, the proceeds of disposition are $19.75 per share. Case D — Opting is a CCPC. At the time the options were granted, the Company's shares had a FMV of $14.00 per share. The options are exercised on July 1, 2021. When the shares are sold, the proceeds of disposition are $21.50 per share.

Answer: Case A The required information under the assumption that Opting Inc. is a CCPC is as follows: • Year of granting and year of exercise - No income tax consequences. • Year of sale - As the option price was less than the FMV of the shares at the time the options were granted, no stock option deduction is available under ITA 110(1)(d). However, Sandra owned the shares for more than two years and, as a consequence, she can claim a stock option deduction under ITA 110(1)(d.1). The income tax consequences would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income Taxable Capital Gain [(275)($20.25 - $17.50)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) Stock Option Deduction ITA 110(1)(d.1) [(1/2)($687.50)] Increase in Taxable Income

$4,812.50 (4,125.00) $ 687.50 378.13 $1,065.63 Nil (343.75) $ 721.88

Case B The required information under the assumption that Opting Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - As the option price was less than the FMV of the shares at the time the options were granted, the ITA 110(1)(d) stock option deduction is not available. As Opting is a public company, no stock option deduction is available under ITA 110(1)(d.1). The income tax consequences would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) Increase In net income and taxable income

$4,812.50 (4,125.00) $ 687.50 Nil $ 687.50

• Year of sale - There would an allowable capital loss calculated as follows: POD [(275)($16.00)] ACB [(275)($17.50)] Capital Loss Inclusion Rate Allowable Capital Loss

$4,400.00 (4,812.50) ($ 412.50) 1/2 ($ 206.25)

The effect on both net income and taxable income would be nil. Note to Instructor: Depending on what has been covered in your course, students may or may not be expected to comment on the ability to carry the capital loss back or forward as follows: If she has taxable capital gains in the previous 3 years or any year in the future, the loss could be carried back or carried forward and deducted in the determination of taxable income. It is important that students realize that the capital loss cannot be used to offset employment income from stock option benefits.

Case C The required information under the assumption that Opting Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - The results for this year would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($687.50)] Increase in Taxable Income

$4,812.50 (4,125.00) $ 687.50 (343.75) $ 343.75

As the option price was greater than the FMV of the shares at the time the options were granted, the ITA 110(1)(d) stock option deduction is available. • Year of sale - There would a taxable capital gain calculated as follows: POD [(275)($19.75)] ACB [(275)($17.50)] Capital Gain Inclusion Rate Taxable Capital Gain

$5,431.25 (4,812.50) $ 618.75 1/2 $ 309.38

This would be both the increase in Net Income and the increase in Taxable Income for the year. Case D The required information under the assumption that Opting Inc. is a CCPC is as follows: • Year of granting - No income tax consequences. • Year of exercise - No income tax consequences. • Year of sale - The tax effects would be as follows: FMV of acquired Shares [($17.50)(275)] Cost of acquired Shares [($15.00)(275)] Employment Income Taxable Capital Gain [(275)($21.50 - $17.50)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($687.50)] Increase in Taxable Income

$4,812.50 (4,125.00) $ 687.50 550.00 $1,237.50 (343.75) $ 893.75

As the option price was greater than the FMV of the shares at the time the options were granted, the ITA 110(1)(d) stock option deduction is available. Type: ES Topic: Employment - employee stock options (multiple cases)

102) During January, 2020, Lastech Inc. issued options to their employee, Ms. Marianne Black. The options allowed Ms. Black to acquire 1,500 of the Company's common shares at an option price of $23 per share. At the point in time when the options were exercised, the FMV of the shares was $25 per share. All of the shares that are acquired through the options are sold on December 31, 2022 at a price of $28 per share. Required: Indicate the income tax consequences on Ms. Black of the transactions that took place during 2020, 2021, and 2022 under each of the following independent Cases. Your answer should include the effect on both net income and taxable income. Where relevant, identify these effects separately. Case A — Lastech Inc. is a Canadian public company. At the time the options were granted, the shares were trading at $22 per share. The options were exercised on July 1, 2021. Case B — Lastech Inc. is a Canadian public company. At the time the options were granted, the shares were trading at $24 per share. The options were exercised on July 1, 2021. Case C — Lastech Inc. is a CCPC. At the time the options were granted, the Company's shares had a FMV of $23 per share. The options were exercised on July 1, 2021. Case D — Lastech Inc. is a CCPC. At the time the options were granted, the Company's shares had a FMV of $24 per share. The options were exercised on July 1, 2020.

Answer: Case A The required information under the assumption that Lastech Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - The results for this year would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($3,000)] Increase in Taxable Income

$37,500 (34,500) $3,000 (1,500) $1,500

As the option price was greater than the FMV of the shares at the time the options were issued, the ITA 110(1)(d) stock option deduction is available. • Year of sale - The income tax consequences would be as follows: POD [(1,500)($28)] ACB [(1,500)($25)] Capital Gain Inclusion Rate Taxable Capital Gain

$42,000 (37,500) $ 4,500 1/2 $ 2,250

This $2,250 would be both the increase in Net Income and the increase in Taxable Income for the 2022 year. Case B The required information under the assumption that Lastech Inc. is a Canadian public company is as follows: • Year of granting - No income tax consequences. • Year of exercise - As the option price was less than the FMV of the shares at the time the options were issued, the ITA 110(1)(d) stock option deduction is not available. The income tax consequences would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income and Increase in Net Income Stock Option Deduction ITA 110(1)(d) Increase in Net Income and Taxable Income

$37,500 (34,500) $ 3,000 Nil $ 3,000

• Year of sale - The income tax consequences would be as follows: POD [(1,500)($28)] ACB [(1,500)($25)] Capital Gain Inclusion Rate Taxable Capital Gain

$42,000 (37,500) $ 4,500 1/2 $ 2,250

This $2,250 would be both the increase in Net Income and the increase in Taxable Income for the 2021 year. Case C The required information under the assumption that Lastech Inc. is a CCPC is as follows: • Year of granting - No income tax consequences. • Year of exercise - No income tax consequences. • Year of sale - The income tax consequences would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income Taxable Capital Gain [(1,500)($28 - $25)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) [(1/2)($3,000)] Increase in Taxable Income

$37,500 (34,500) $ 3,000 2,250 $ 5,250 (1,500) $ 3,750

Case D The required information under the assumption that Lastech Inc. is a CCPC is as follows: • Year of granting and exercise - No income tax consequences. • Year of sale - As the option price was less than the FMV of the shares at the time the options were granted, no stock option deduction is available under ITA 110(1)(d). However, Ms. Black owned the shares for more than two years and, as a consequence, she can claim a stock option deduction under ITA 110(1)(d.1). The income tax consequences would be as follows: FMV of acquired Shares [($25)(1,500)] Cost of acquired Shares [($23)(1,500)] Employment Income Taxable Capital Gain [(1,500)($28 - $25)(1/2)] Increase in Net Income Stock Option Deduction ITA 110(1)(d) Stock Option Deduction ITA 110(1)(d.1) [(1/2)($3,000)] Increase in Taxable Income

Type: ES Topic: Employment - employee stock options (multiple cases)

$37,500 (34,500) $ 3,000 2,250 $5,250 Nil (1,500) $3,750

103) Alicia Arden has established herself as a very effective sales representative for products related to health care services. While she has worked independently for a number of years, she has received two very attractive offers of employment. Both of these offers would require that she begin work on January 2, 2022 Offer One This offer would provide her with a fixed salary of $225,000 per year with no commissions on her sales. The employer would provide an allowance of $30,000 per year to cover hotel, meals, and airline costs. The employer believes that the CRA will consider this allowance to be reasonable in the circumstances. With respect to advertising and promotion expenses, no allowance or reimbursement would be provided. This employer would provide her with an automobile which would be leased at a cost of $850 per month, including a $75 per month payment for insurance. The employer will pay all of the operating costs of the automobile. This employer would provide her with a $200,000 interest free loan that she will use to purchase investments. The loan will have to be repaid after five years. Offer Two This offer would provide her with a fixed salary of $175,000 per year, plus a commission on all of her sales. Ms. Arden estimates that for 2022, commissions will total $85,000. The employer would reimburse her hotel, meal, and airline costs. With respect to advertising and promotion expenses, no allowance or reimbursement would be provided. The employer will not provide her with an automobile but will provide her with an allowance for using her own automobile of $1,500 per month. Ms. Arden estimates that for 2022 the total costs associated with driving her own automobile will be as follows: Operating Costs CCA Financing Costs Total

$10,600 4,500 1,800 $16,900

Other Information The following information is applicable to either of the alternative offers. 1. She estimates that her employment related expenses during 2022 would be as follows: Travel Costs (Hotel and Airline Costs) Travel Costs (Meals) Advertising and Promotion

$18,000 8,500 23,000

2. Whether it is the employer's automobile or her own automobile, she would use the car throughout 2022. She expects to drive this vehicle a total of 53,000 kilometers during 2022, with 37,000 of these kilometers for employment purposes and 16,000 kilometers for personal use. 3. Both offers include a group disability insurance plan for which the company will pay all of the premiums. The plan provides periodic benefits that compensate for lost employment income. This will cost the employer $4,500 per year.

4. Both offers include a $1,000,000 face value life insurance policy. All of the premiums, which will total $3,800 per year, will be paid by the employer. 5. Assume that the prescribed interest rate on employee loans is 2% throughout 2022. Required: A. Based on the estimates made by Ms. Arden, calculate Ms. Arden's minimum 2022 employment income for each of the two offers. Ignore PST and GST/HST considerations. B. Discuss the factors that Ms. Arden should consider in deciding between the two alternatives. Answer: Part A The calculations for employment income would be as follows:

Salary Commissions Hotel, Meal, and Airline Allowance (Note One) Hotel, Meal, and Airline Reimbursement (Note Two) Automobile Benefit (Note Three) Automobile Allowance [(12)($1,500)] Automobile Costs [(37,000/53,000)($16,900)] Loan Benefit [(2%)($200,000)] Disability Insurance Benefit (Note Four) Life Insurance Benefits (Note Four) Advertising Expense (Note Five) Employment Income

Offer One $225,000 Nil Nil N/A 7,439 N/A N/A 4,000 Nil 3,800 Nil $240,239

Offer Two $175,000 85,000 N/A N/A N/A 18,000 (11,798) N/A Nil 3,800 (23,000) $247,002

Note One — The $30,000 per year allowance is considered reasonable and, as a consequence, it does not have to be included in employment income. Note Two — Reimbursements have no effect on employment income. They are neither deducted nor included in the determination of employment income. Note Three — The taxable benefit associated with the automobile provided under Offer One would be calculated as follows: Standby Charge [(2/3)($850 - $75)(12)(16,000 ÷ 20,004*)] Operating Cost Benefit - Lesser of: • [(16,000)($0.29)] = $4,640 • [(1/2)($4,959)] = $2,480 Total Automobile Benefit * [(12)(1,667)]

$4,959

2,480 $7,439

Note Four — The payment of disability insurance premiums by an employer does not create a taxable benefit for employees if the plan provides periodic benefits that compensate for lost employment income. However, the payment of life insurance premiums does create a taxable benefit.

Note Five — As Ms. Arden does not receive any commissions under Offer One, she cannot deduct her advertising costs. She can deduct the full amount under Offer Two as the $23,000 total is less than her commissions of $85,000. Part B The actual amount of annual cash to be received from the employer under the two offers would be calculated as follows: Offer One $225,000 Nil 30,000 N/A N/A $255,000

Salary Commissions - Estimated Hotel, Meal, and Airline Allowance Reimbursements Automobile Allowance Total Cash

Offer Two $175,000 85,000 N/A 26,500 18,000 $304,500

The fact that Offer Two has significantly higher cash flows and a higher employment income suggests that Offer Two is preferable. A major factor in this result is that the absence of commissions in Offer One results in the $23,000 in advertising and promotion expenses not being deductible. This could easily be fixed at no cost to the employer by having an appropriate amount of the $30,000 allowance treated as a reimbursement of advertising and promotion expenses. This would leave the unreimbursed hotel, meal, and airline costs which could be deducted by Ms. Arden without a requirement to have commission income. In addition, other factors that have not been considered in this simple analysis include: • Offer One includes the provision of an automobile while Offer Two does not. This means that, under Offer One, Ms. Arden could get rid of her personal automobile, resulting in a significant annual savings. • Offer Two requires using estimates of costs for her personal automobile. There is uncertainty with respect to the amount of these costs. They could be higher or lower than estimated. • Offer One includes a $30,000 travel allowance that would not require receipts. Offer Two will reimburse all travel costs which would require all receipts. The additional paperwork would make Offer Two less attractive. However, Offer Two would be more attractive if her actual travel costs total more than $30,000. If they total less, than Offer One would allow her to keep the difference. • Offer One includes an interest free loan that will be invested. The fact that these funds will be invested means that there will be an interest expense available to offset any investment income. In addition, Ms. Arden’s cash flows are likely to be improved by some amount of return on the investment of the $200,000 in loan proceeds. • Offer Two contains an estimate of commissions. Unlike the fixed salary provided in Offer One, there is uncertainty with respect to the amount of these commissions. They could be higher or lower than estimated. There could also be uncertainty related to the timing of the payment of the commissions. Given these latter considerations, it is difficult to come to a firm conclusion on the two offers. If the invested funds earn a substantial return, she may be better off with Offer One. Correspondingly, it is difficult to quantify the cash flows associated with not owning a personal automobile. In addition, there could be a disadvantage with Offer Two if commission income did not reach the predicted level of $85,000. Type: ES Topic: Employment - evaluating alternative employment offers (comprehensive)

104) On January 2, 2022, Ms. Shirley Kantor moves from London, Ontario, to Thunder Bay, Ontario, in order to begin employment with Northern Enterprises Ltd. (NEL). Her salary for the year was $142,000. NEL withheld the following amounts from her earnings: Federal and Provincial Income Tax Registered Pension Plan (RPP) Contributions (NEL Makes a matching contribution) EI Premiums CPP Contributions United Way Donations Professional Association Dues

$32,500 3,200 953 3,500 450 1,250

Other Information: 1. Shirley's moving expenses total $6,800. NEL reimbursed Shirley for 100% of these costs. 2. For the year ending December 31, 2022, Shirley was awarded a bonus of $32,000. Of this total, $25,000 was paid during 2022, with the remainder of $7,000 paid in January, 2023. 3. NEL provided Shirley with a car to be used for employment purposes and paid the operating costs for the year that totalled $8,100. The cost of the car was $39,550, including HST of $4,550. The car was available to Shirley throughout 2022. She drove a total of 63,000 kilometers. This included 8,000 kilometers of personal use and 55,000 for employment purposes. 4. In negotiating her new position with NEL, Shirley had asked for a $50,000 interest free loan as one of her benefits. NEL's human resources department indicated that the CEO would not approve any employee loans. However, they agreed to advance $50,000 of her 2023 salary as of November 1, 2022. 5. In her employment related travels, Shirley has accumulated over 100,000 Aeroplan points. In 2022, she and her partner Diane used 50,000 of these points for a weekend flight to New York City. If she had purchased them, the tickets would have cost a total of $940. The accumulation of the points is not considered an alternative means of remuneration. 6. NEL provided Shirley with the following additional benefits: Allowance for acquiring clothing Squash Club membership (No Employment Related Use) Financial Advisor Fees

$4,800 2,800 1,200

7. Shirley's previous employer was a CCPC. In 2021, she was granted options to buy 500 of the company's shares at $20 per share. This option price was higher than the estimated FMV of the company's shares at the time the options were granted. On January 2, 2022, Shirley exercised these options. At this time the FMV of the shares was $28 per share. Shirley immediately sells the shares for $28 per share. 8. Shirley was required by her employer to acquire a laptop computer to be used for employment purposes. At the beginning of 2022, she purchased a computer at a cost of $1,356, including HST of $256. In 2022, her expenditures for computer related supplies totalled $150. Required: Determine Shirley's 2022 employment income.

Answer: Ms. Shirley Kantor's 2022 employment income would be calculated as follows: Salary Federal and Provincial Income Tax RPP Contributions EI Premiums CPP Contributions United Way Donations Professional Dues Bonus - Item 2 Car Benefit - Item 3 Salary Advance - Item 4 Allowance for Acquiring Clothing - Item 6 Squash Club Membership - Item 6 Financial Advisor Fees - Item 6 Stock Option Benefit - Item 7 Computer Related Supplies - Item 8 2022 Employment Income

$142,000 Nil (3,200) N/A N/A N/A (1,250) 25,000 5,694 50,000 4,800 2,800 1,200 4,000 (150) $230,894

Item 1 — The reimbursement of moving expenses is not a taxable benefit. However, as the costs were reimbursed, Shirley cannot claim a moving expense deduction. Item 2 — As employment income is determined on a cash basis, only the portion of the bonus that was received in 2022 will be included in employment income. Item 3 — The taxable benefit on the car would be calculated as follows: Standby Charge [(2%)($39,550)(12)(8,000/20,004*)] Operating Cost Benefit - Lesser of: [($0.29)(8,000)] = $2,320 [(1/2)($3,796)] = $1,898 Total Automobile Benefit *[(12)(1,667)]

$3,796

1,898 $5,694

Item 4 — Even though the $50,000 advance is earned in 2023, it is paid in 2022 and, because employment income is on a cash basis, it must be included in income in the year received. Item 5 — The use of Aeroplan points earned on employment related travel does not create a taxable benefit. Item 6 — While employer provided specialized clothing is not a taxable benefit, regular clothing would not fit this description, resulting in the inclusion of this allowance in employment income. As the squash club membership is not used at all for employment related purposes, it would be considered a taxable benefit. While mental or physical health counseling is not considered a taxable benefit, this is not the case with financial counseling. Item 7 — While there is no employment income resulting from the exercise of the CCPC stock options, the benefit is required to be included in employment income when the stock option shares are sold. The result is an increase in employment income of $4,000 [(500)($28 - $20)]. A stock option deduction of $2,000 [(1/2)($4,000)] would be available but this does not affect employment income. Item 8 — While Shirley cannot deduct CCA on the computer, she can deduct the cost of the supplies. Type: ES Topic: Employment income (comprehensive)

105) Ms. Martha Gobel is a linguist, specializing in Asian languages. As the daughter of a Canadian diplomat, she has become familiar with the many customs and practices found throughout Asia. In 2021, a headhunting firm in B.C. connected her with Golden Mountain Experiences (GME), a public company, which had begun operations in Whistler, B.C. GME had need of a representative to promote their Canadian services to Asian tour operators and executives. When her mother was diagnosed with a terminal illness, Martha moved into her house in Ottawa to help care for her. Her mother died in early 2020, leaving Martha her considerable estate, including her house. When GME offered her a position in November, 2021 with a start date of January 1, 2022, she immediately accepted. The final income tax return of her mother stated the FMV of her house was $525,000 on March 3, 2021. When Martha put the house on the market on November 15, 2021, the listing price was only $450,000 because of a nearby landfill. At the urging of the listing agent she accepted an offer for $390,000 in April, 2022, resulting in a $135,000 loss on the property. Other Information: Other information relevant to 2022 is as follows: 1. GME owned a suite hotel and offered her the use of a unit there at a rate of $2,000 per month. The regular monthly rate for the unit was $5,000 per month. She moved in on January 1, 2022. Through contacts, she finds a large townhouse in Whistler that she purchases on May 15, 2022 for $1,600,000. After doing extensive renovations, she moves out of the hotel and into her townhouse on July 1, 2022. 2. As an incentive to accept the position, GME agreed to compensate her for one-half of any loss on the sale of her Ottawa home. The $67,500 [(1/2)($135,000)] payment was made on May 30, 2022. 3. In order to help Martha with the purchase of her new townhouse, GME provided her with a $100,000 interest free housing loan. The funds are provided to Martha on May 1, 2022. Assume that the prescribed interest rate for employee loans for all of 2022 is 2%. 4. In 2022, Martha earned a salary of $175,000. This included several large bonuses due to her exceptional sales ability. The Company withheld the following amounts from her salary: Income Taxes CPP EI RPP Contributions Payment for personal use of automobile

$53,000 3,500 953 2,500 1,200

5. GME contributed $2,500 on Martha’s behalf to the Company’s RPP. 6. GME provides group medical coverage to all of its employees. The PHSP premiums paid by GME on Martha’s behalf cost $1,115 for the year. 7. During the year, Martha received two non-cash gifts from GME, a season ski pass worth $1,000 and a Christmas gift certificate redeemable at many restaurants in Whistler Village for $100.

8. Her favourite uncle visited her and went skiing with a day pass that Martha provided. He died after falling and hitting his head on a boulder while skiing out of bounds. GME provided Martha with grief counseling services worth $665. 9. Up until her uncle's death, Martha purchased many day passes at Whistler for friends and families using GME's 15% corporate discount. A statement from GME stated that Martha had saved a total of $1,050 using the discount in 2022. 10. Martha was granted options to buy 100 of the company's shares at $100 per share when she joined the staff of GME. At that time, the shares were trading at $94 per share. On May 10, 2022, the shares are trading at $123 per share. She acquires 50 shares for cash of $5,000 on that date. She still owns the shares on December 31, 2022. 11. GME provided Martha with a membership in the exclusive Blackcomb Ski Club And Spa. The cost of the annual membership was $5,000. Martha took her clients there for meals and drinks. GME paid all the charges on her account as they were related to potential clients of GME. In 2022, this amounted to $22,200. 12. GME provides Martha with a luxury vehicle that she uses to drive her clients on tours and to and from the airport. It was purchased in late 2021 for $120,000, including GST and PST. The vehicle was used by Martha throughout 2022. During the year, she drove the vehicle a total of 102,000 kilometers, of which 90,000 were for employment purposes and 12,000 for personal use. GME pays all operating and maintenance costs, a total of $23,000 during the year. GME withheld $1,200 from her December salary to pay for her personal use of the vehicle for 2022. 13. Martha’s demanding job requires her to meet with clients at all hours of the day and night because many of them are on international flights. GME will provide her with a signed form T2200 stating that she is required to pay for certain employment expenses without reimbursement and use a portion of her home for employment purposes. Martha has renovated in order to have a separate area in her townhouse to be used exclusively to entertain her clients, in addition to signing the contracts. She has no receipts for the renovations she did. She was unable to find a contractor who would invoice and accept cheques. Since she needed the work finished quickly, Martha reluctantly paid cash. She used this work space between July 1 and December 31, 2022. This work space occupied 600 square feet of the 2,222 square feet available in her townhouse. Work space related expenditures are as follows: Monthly Maintenance Fee (For 6 Months) Hydro (For 6 Months) Property Insurance (6 Months) Property Tax (6 months) Big screen TV used solely for the entertainment of clients (promotional videos, ski races, etc.) Office Furniture Furniture for client's entertainment area

$5,400 450 575 2,600 2,600 5,600 12,400

14. Martha received an allowance of $400 per month for 6 months to cover the costs of maintaining a workspace in her home. Required: Determine Martha’s net employment income for 2022. Answer: Martha Gobel's net employment income would be calculated as follows: Item 1 - Lodging Benefit (Note 1) Item 2 - Housing Loss Reimbursement (Note 2) Item 3 - Imputed Interest On Housing Loan (Note 3) Item 4 - Salary Received (Note 4) Item 4 - RPP Contributions Item 5 - Employer's RPP Contribution (Note 5) Item 6 - Group Medical Coverage (Note 6) Item 7 - Excess Gift From Employer (Note 7) Item 8 - Grief Counseling (Note 8) Item 9 - Employer Discount (Note 9) Item 10 - Stock Option Benefit (Note 10) Item 11 - Club Dues (Note 11) Item 12 - Automobile Benefit (Note 12) Item 13 - Workspace in Home Costs (Note 13) Item 14 - Workspace in Home Allowance (Note 14) 2022 Employment Income

$ 18,000 26,250 1,333 175,000 (2,500) Nil Nil 600 Nil Nil 1,150 Nil 19,557 (1,580) 2,400 $240,210

Note 1 — If an employer provides an employee with subsidized lodging, the benefit is the FMV reduced by any amounts paid by the employee. In Martha's case, the benefit is $18,000 [($5,000 - $2,000)(6)]. Note 2 — Employer-reimbursed housing losses fall into two categories – regular housing losses and eligible housing losses. Eligible housing losses occur when there is an eligible relocation which generally means a relocation or move the expenses of which would qualify for a moving expense deduction had they been paid by the employee. In this case the move is an eligible relocation meaning that the reimbursement qualifies as an eligible housing loss. The employer reimbursed $67,500. The taxable portion of the loss reimbursement is $26,250 [(1/2)($67,500 - $15,000)]. The remaining tax free amount of $41,250 can be calculated as ($67,500 - $26,250) or [$15,000 + (1/2)($67,500 - $15,000)]. Note 3 — The imputed interest on this loan could be calculated as $1,342 [($100,000)(2%)(245 ÷ 365)]. An acceptable alternative calculation would be $1,333 [($100,000)(2%)(8 ÷ 12)]. Since it is lower, we will use the alternative calculation. Note 4 — While the withholdings generate a tax credit against income tax payable, CPP and EI payments are not deductible. In addition, income tax payments are not deductible. The CPP tax credit would be $3,039 and there would be an expense of $461 which reduces net income but is not an employment expense. Note 5 — An employer's contributions to an employee's RPP is not a taxable benefit. Note 6 — Employer's contributions to group health services plans are not a taxable benefit for the employee.

Note 7 — Non-cash gifts of up to $500 can be received by an employee on a tax free basis. Amounts in excess of $500 are taxable. The excess $600 ($1,100 - $500) will be included in Martha’s employment income. Note 8 — Under ITA 6(1)(1)(iv), mental health counselling services are excluded from employment income. Grief counselling would be included in this category of services. Note 9 — Employee discounts do not generally result in taxable benefits. Note 10 — At time of exercise, Martha will have an employee benefit of $1,150 [($123 - $100)(50 Shares)]. As the option price exceeded the FMV when the options were granted Martha will be able to claim a stock option deduction of $575 [(1/2)($1,150)] in the determination of taxable income, but this deduction will not affect employment income. Note 11 — While club dues cannot be deducted by an employer, they do not create a taxable benefit for an employee, provided the membership is primarily of benefit to the employer. Since GME paid the charges on her account, they would be no income tax consequences for her. Note 12 — The automobile benefit would be calculated as follows: Standby Charge [(2%)(12)($120,000)(12,000 ÷ 20,004*)] Operating Cost Benefit - Lesser Of: • [($0.29)(12,000)] = $3,480 • [(1/2)($17,277) = $8,639 Total Benefit Reimbursement To Employer Total Automobile Benefit *[(12)(1,667)]

$17,277

3,480 $20,757 (1,200) $19,557

Note 13 — Based on floor space, the workspace in the home office occupies 27% of the apartment (600 ÷ 2,222). The work space in the home expenses that may be claimed for the period July 1 to December 31 are the following: Monthly Maintenance Fee (For 6 Months) Hydro (For 6 Months) Total Eligible Expenses Home Office Use Deductible Expense

$5,400 450 $5,850 27% $1,580

As employees cannot take CCA on furniture or electronics (the TV), there is no deduction for the cost of these capital expenditures. Employees cannot deduct the cost of property insurance or property tax on a home office. Note 14 — Allowances received are included in employment income unless the allowance is specifically excluded by ITA 6(1)(b). There is no exclusion for this allowance. The amount is $2,400 [(6)($400)]. Type: ES Topic: Employment income (comprehensive)

106) Ms. Matilda Bracken is a Certified Financial Planner (CFP) with many years of successful experience. In 2020, she decided that she was not adequately appreciated in her current position with a large financial institution in Windsor, Ontario. Given this, she resigned on November 1, 2021. After several months of investigation, she accepted employment with Retirement Planners Ltd. (RPL), a CCPC located in London, Ontario. She commenced working for RPL on May 1, 2022. She owned a home in Windsor which she had acquired several years ago for $375,000. Because of the depressed real estate market in this area, she was eventually forced to sell the property for $275,000 in October, 2021, resulting in a $100,000 loss on this property. Because of the uncertainty surrounding the sale of her Windsor property, she moved into an apartment when she arrived in London on May 1, 2022. The apartment was rented on a monthly basis until November 30, 2022. After she accepts an offer to purchase her Windsor house, she finds a home in London that she purchases on November 1, 2022 for $420,000. She moves into this new home on December 1, 2022. Other Information: Other information relevant to 2022 is as follows: 1. Because of her strong professional reputation, RPL paid her a signing bonus of $12,000. The signing bonus was paid on June 1, 2022. 2. During the period May 1, 2022 through December 31, 2022, Matilda earned salary of $124,000. Of these earnings, $120,125 was paid in 2022 with the remainder of $3,875 paid in 2023. The Company withheld the following amounts from her salary: Income Taxes CPP EI RPP Contributions Payment For Personal use of automobile

$18,650 3,500 953 3,700 880

3. RPL contributed $3,500 on Matilda's behalf to the Company's RPP. 4. RPL provides group medical coverage to all of its employees. The PHSP premiums paid by RPL on Matilda's behalf cost $562 for the year. 5. On December 12, 2022, a bonus of $10,600 was accrued for Matilda. Matilda received $5,300 of this bonus on December 29, 2022, with the remainder being paid on January 17, 2023. 6. During the year, Matilda received two non-cash gifts, a birthday gift worth $350 and a Christmas gift worth $300. 7. Because of the need to invest some of her additional income, RPL provided Matilda with financial counseling services. The value of these services was $1,200. 8. In order to assist her move, RPL agreed to compensate her for one-half of the $100,000 loss on the sale of her Windsor home. The $50,000 payment was made on December 1, 2022.

9. In order to help Matilda with financing her new London residence, RPL provided her with a $220,000 interest free housing loan. The funds are provided to Matilda on November 1, 2022. Assume that the prescribed interest rate on employee loans for all of 2022 is 2%. 10. RPL has a stock option plan for its employees. Under this plan, employees are permitted to acquire a limited number of option shares at 10% below their FMV on December 1 of each year. The company hires valuators to determine the FMV at each of those dates. Matilda acquires 200 shares on December 1, 2022 for cash of $7,200. On December 15, she sells 100 of these shares for $4,100. 11. Matilda paid $1,600 in CFP dues in 2020. RPL’s policy is to reimburse 50% of such professional dues. RPL reimbursed her $800 in December, 2022. 12. RPL provides its professional employees with a membership in the London Curling Club. They believe this is a useful venue for entertaining clients of the Company. The cost of this annual membership was $1,300. 13. RPL provides Matilda with a vehicle that was purchased in 2022 for $45,200, including HST. The vehicle was available to Matilda for all months during the period May 1, 2022 through December 31, 2022. During this period, she drove the vehicle a total of 52,000 kilometers, of which 40,000 were for employment purposes and 12,000 for personal use. RPL pays all operating and maintenance costs, a total of $8,900 for the same period that Matilda used the car. RPL withheld $110 per month from her salary to pay for her personal use of the vehicle. 14. Matilda’s new job requires her to meet with clients outside of regular office hours throughout the week. RPL will sign form T2200 stating that she is required to pay for certain employment expenses without reimbursement and use a portion of her home for employment purposes. Matilda has set aside a separate room in her apartment to be used exclusively to meet with clients. She used this office space between May 1 and November 30, 2022. This home office occupied 150 square feet of the 1,250 square feet available in her apartment. The home office in the residence she moved into on December 1, 2021 will not be available for use until 2023. RPL has agreed to let Matilda use head office space as needed during December 2022. Home office related costs are as follows: Monthly Rent Office Furniture Computer Purchase Stationery and Office Supplies Purchased Monthly Phone Line Charge (for 7 Months) Employment Related Long Distance Calls (for 7 Months) Electricity Charge (For 7 Months) Paint for Apartment Property Insurance (7 Months)

$2,200 3,400 896 147 210 110 350 165 175

15. Matilda received an allowance of $325 per month for 7 months to cover the costs of maintaining a workspace in her home.

Required: Determine Matilda’s 2022 employment income. Answer: Matilda Bracken's net employment income would be calculated as follows: Item 1 - Signing Bonus (Note 1) Item 2 - Salary Received (Note 2) Item 2 - RPP Contributions Item 3 - Employer's RPP Contribution (Note 3) Item 4 - Group Medical Coverage (Note 4) Item 5 - Bonus Received (Note 5) Item 6 - Excess Gift (Note 6) Item 7 - Financial Counseling (Note 7) Item 8 - Housing Loss Reimbursement (Note 8) Item 9 - Imputed Interest on Housing Loan (Note 9) Item 10 - Stock Option Benefit (Note 10) Item 11 - CFP Dues (Note 11) Item 12 - Club Dues (Note 12) Item 13 - Automobile Benefit (Note 13) Item 14 - Stationery and Supplies (Note 14) Item 14 - Long Distance Calls (Note 14) Item 14 - Workspace in the Home Costs (Note 14) Item 15 - Home Office Allowance (Note 15) Employment Income

$ 12,000 120,125 (3,700) Nil Nil 5,300 150 1,200 17,500 735 400 ( 800) Nil 8,881 (147) (110) (1,910) 2,275 $161,899

Note 1 — Amounts received prior to, during or after employment are required to be included in employment income when received. Note 2 — Salary and other forms of remuneration such as bonuses are included in income when received regardless of when earned. While the withholdings generate a credit against income tax payable, $461 of CPP contributions are eligible for a deduction in determining net income that does not affect employment income. The remaining CPP and all of the EI premiums are eligible for an income tax credit that affects income tax payable. Note 3 — An employer's contributions to an employee's RPP is not a taxable benefit. Note 4 — Employer's contributions to group private health services plan is not a taxable benefit for the employee. Note 5 — Only the amount of the bonus that was received during 2021 will be included in Matilda's 2022 employment income. Note 6 — Non-cash gifts of up to $500 can be received by an employee on a tax free basis. Amounts in excess of $500 are required to be included in employment income. The excess $150 ($650 - $500). Note 7 — The provision by an employer of financial counseling services is considered to be a taxable benefit.

Note 8 — Employer-reimbursed housing losses fall into two categories – regular housing losses and eligible housing losses. Eligible housing losses occur when there is an eligible relocation which generally means a relocation or move the expenses of which would qualify for a moving expense deduction had they been paid by the employee. In this case the move is an eligible relocation meaning that the reimbursement qualifies as an eligible housing loss. The employer reimbursed $50,000 [(50%)($100,000)]. The taxable portion of the loss reimbursement is $17,500 [(1/2)($50,000 - $15,000)]. The remaining tax free amount of $32,500 can be calculated as ($50,000 - $17,500) or [$15,000 + (1/2)($50,000 - $15,000)]. Note 9 — The imputed interest on this loan would be $735 [($220,000)(2%)(61 ÷ 365)]. An acceptable alternative calculation would be $733 [($220,000)(2%)(2 ÷ 12)]. Note 10 — Despite the fact that the option price was 10% below FMV, the granting of the stock options does not create a benefit. However, when she exercises the option by purchasing shares, there is a benefit as follows: FMV at Exercise Date ($7,200 ÷ 90%) Option Price Stock option benefit (200 Shares)

$8,000 (7,200) $ 800

Per Share Benefit ($800 ÷ 200)

$4 Per Share

Since RPL is a CCPC, this benefit can be deferred until the shares are sold. As 100 shares are sold in 2022, $400 [(100)($4 benefit per share)] of this benefit will be included in Ms. Bracken's 2022 employment income. In addition to this benefit, there is also a taxable capital gain of $50 {[1/2][$4,100 - (1/2)($8,000)]}. However, such gains are not employment income. Note 11 — Professional dues are generally deductible to the extent they have not been reimbursed Note 12 — While club dues cannot be deducted by an employer, they do not create a taxable benefit for an employee, provided the membership is primarily a benefit to the employer. Note 13 — The automobile benefit would be calculated as follows: Standby Charge [(2%)(8)($45,200)(12,000 ÷ 13,336*)] Operating Cost Benefit - Lesser of: • [($0.29)(12,000)] = $3,480 • [(1/2)($6,507) = $3,254 Total Benefit Reimbursement To Employer [(8)($110)] Total Automobile Benefit *[(8)(1,667)]

$6,507

3,254 $9,761 (880) $8,881

Note 14 — Based on floor space, the home office occupies 12% of the apartment (150 ÷ 1,250). The work space in the home expenses that may be claimed for the period June 1 to November 30 are the following: Rent Paid [(7)($2,200)] Electricity Paid Paint Total Eligible Expenses Home Office Use Deductible Expense

$15,400 350 165 $15,915 12% $ 1,910

The stationary and supplies, as well as the business related long distance calls are deductible. As employees cannot take CCA on office furniture or computers, there is no deduction for the cost of these capital expenditures. Unless a phone is used only for employee related purposes, the monthly cost for its use is not deductible. Finally, employees cannot deduct the cost of property insurance on a home office. Note 15 — Allowances received are included in employment income unless the allowance is specifically excluded by ITA 6(1)(b). There is no exclusion for this allowance. The amount is $2,275 [(7)($325)]. Type: ES Topic: Employment income (comprehensive)

107) Olin Packett has been employed for over 10 years by a large Canadian public corporation. He works in their Victoria office. For the 2022 year, his gross salary is $75,000. While he does not receive commissions, he was awarded a bonus of $15,000 in 2022 based on his sales performance. One-half of the bonus is paid in December, 2022, and the other half paid in February, 2023. In 2022, Olin's employer withheld the following amounts from his gross wages: Federal Income Tax EI Premiums CPP Contributions RPP Contributions Donations to the United Way Union Dues Payments for personal use of company car Premiums for Group Life Insurance Policy

$14,350 953 3,500 3,100 750 275 1,500 200

Other Information 1. Olin is provided with a car that the company leases at a rate of $723 per month, including both GST and PST. The company pays for all of the operating costs of the car and these amounted to $4,200 during 2022. Olin drove the car a total of 33,000 kilometers during 2022, 27,500 kilometers of which were carefully documented for employment purposes and 5,500 for personal use. The car was available to him for 10 months of the year. 2. Olin was granted options to acquire 500 shares of his employer's common stock at a price of $31.00 per share 2 years ago. On the date the options were granted, the shares were trading at $29.50 per share. These options were exercised by Olin on February 16, 2022, when the shares were trading at $34.75 per share. Olin does not plan to sell the shares for at least 2 years. 3. In order to assist Olin in acquiring a new residence in Victoria, his employer granted him a three year, interest free loan of $175,000. The loan was granted and received on July 1, 2022 and, at this point in time, the interest rate on open five year mortgages was 4.5%. Assume the relevant prescribed interest rate on employee loans was 2% on this date. Olin purchases a house for $327,000 on October 2, 2022. 4. On his birthday, Olin received several gifts including a hoverboard and drone. In his enthusiasm for his new toys, he flew the drone over his neighbour's swimming pool while maneuvering the hoverboard on the sidewalk in front of the two homes to watch it. The result was a concussion, a broken leg, a shattered wrist and a drowned drone. He was unable to work for a period of two months. As his employer provides disability insurance coverage, he received benefits during this period totaling $8,500. All of the premiums for this insurance plan are paid for by the employer and totaled $560 for 2022. The plan provides periodic benefits that compensate for lost employment income.

5. Other disbursements made by Olin include the following: Tuition Fee for Operations Management Course Tuition Fee for Medieval History Course Fees Paid to Employer recommended Financial Planner

$1,300 950 450

Olin's employer reimbursed for the tuition fees for both the operations management course and the medieval history course, as well as the fees paid to the financial planner. 6. Olin's employer made a payment to the group life insurance policy on his behalf. The premiums for 2022 totalled $200. Required: Calculate Olin's 2022 employment income. Answer: Mr. Packett's employment income would be calculated as follows: Gross Salary Additions: Bonus (Amount received) Personal Benefit on Car (Note 1) Stock Option Benefit [($34.75 - $31.00)(500)] (Note 2) Home Purchase Loan Benefit (Note 3) Disability Insurance Receipts (Note 4) Tuition Fee for Medieval History Course (Note 5) Fees paid to Financial Planner (Note 6) Premiums on Life Insurance (Note 7) Deductions: RPP Contributions Union Dues 2022 Employment Income

$75,000 $7,500 885 1,875 1,750 8,500 950 450 200

($3,100) (275)

22,110 $97,110

(3,375) $93,735

Note 1 — The employee benefit on the company car would be as follows: Standby Charge [(2/3)(10)($723)(5,500/16,670)*] Operating Cost Benefit - Lesser of: • [(5,500)($0.29)] = $1,595 • [(1/2)($1,590)] = $795 Less: Payments Withheld By Employer Total Automobile Benefit *[(10)(1,667)]

$1,590

795 (1,500) $ 885

Note 2 — Although Olin would qualify for the stock option deduction under ITA 110(1)(d), it would not affect the calculation of employment income. Note 3 — The taxable benefit associated with the home purchase loan would be calculated as follows: [($175,000)(2% - Nil)(6/12)] = $1,750

Note 4 — As all of the premiums were paid by the employer and were not considered to be a taxable benefit, benefits received under this coverage must be included in employment income. Note 5 — As it is reasonable to assume that the operations management course would primarily benefit his employer the amount reimbursed would not be considered an employee benefit. However, a course in medieval history does not appear to be business related and, as a consequence, there would be a taxable benefit for the tuition paid by the employer. Note 6 — While fees paid for some types of counseling do not create a taxable benefit, counseling related to an employee's finances is not on the list. As a result, the reimbursement of the fees is a taxable benefit. Note 7 — The cost of providing life insurance to employees is a taxable benefit as specified in ITA 6(4). Although premiums paid by Olin have no tax effect as they are not deductible, the employer's payment on his behalf is added to employment income. Type: ES Topic: Employment income (comprehensive)

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 4 Taxable Income and Tax Payable for Individuals 4.1 Online Exercises 1) Tax legislation requires that amounts received under the workers' compensation program be included in the determination of net income, despite the fact that these same amounts will be deducted in the determination of taxable income. If the intent was not to subject these amounts to income tax, why didn't the legislation simply exclude these amounts from net income in the first place? Answer: The reason for this is that "net income" is used as a measure to determine access to a number of financial incentives provided through the ITA. As a result it is important that the net income amount represent all of the income of a taxpayer (specifically individuals who benefit from the largest amount of incentives) regardless of whether there is an intention to subject the amounts to income tax. For example, the amount of the age tax credit is reduced by an individual's net income in excess of a specified amount ($39,826 for 2022). Type: ES Topic: Net income - ITA 3

2) Explain briefly the general rules for determining the province or territory in which an individual will be subject to provincial or territorial income tax. From the point of view of tax planning, is the province or territory in which an individual is subject to income tax an important issue? Answer: An individual's income for the entire taxation (calendar) year, other than business income, is subject to tax in the province or territory in which the individual resides on December 31 of that year. Given that provincial and territorial income tax rates and personal tax credits vary considerably the province or territory in which an individual is subject to income tax is an important consideration. The distinction can influence where an individuals decides to live particularly where one's employment is situated close to a provincial or territorial border. Type: ES Topic: Residency - provincial or territorial residence of individuals

3) Briefly explain the difference between an income tax deduction and an income tax credit. Answer: A "tax deduction" is generally an amount subtracted in the determination of net income. The reduction also causes an equal reduction in taxable income reducing income tax payable by the amount of the deduction, multiplied by the relevant income tax rate. For example an individual with salary of $40,000 who decides to make an RRSP contribution of $1,000 will have net income and taxable income of $39,000. The federal income tax savings would be 15% of $1,000 or $150. In contrast, an "income tax credit" provides a direct reduction in the amount of income tax payable. For example the BPA for 2022 is $14,398 which when multiplied by the tax credit percentage of 15%.results in a reduction in federal income tax of $2,159.70. Type: ES Topic: Tax credits vs tax deductions

4) Describe the relationships that are eligible for the Canada caregiver amount of $7,525 for 2022. Answer: The $7,525 Canada caregiver credit is available for infirm dependants who are spouses or common-law partners, or parents, grandparents, brothers, sisters, aunts, uncles, nieces, nephews, and children of the claimant or of their spouse or common-law partner as long as the dependants are over 17 years of age at any time in the year. Type: ES Topic: Tax credits - Canada caregiver

5) ITA 118(1)(a) provides an income tax credit for an individual's and their "spouse or common-law partner". Briefly describe the meaning of a spouse or common-law partner for the purposes of claiming this income tax credit. Answer: An individual's spouse is a person to whom that individual is legally married. A common-law partner is an individual who is not a spouse and who cohabits in a conjugal relationship with the taxpayer and (a) has so cohabited with the taxpayer for a continuous period of at least one year, or (b) is a parent of a child of whom the taxpayer is a parent. Spouses and common-law partners may be either the same sex or of the opposite sex. Type: ES Topic: Definition - "Spouse" and/or "Common-law partner"

6) Under what circumstances can an individual taxpayer deduct the ITA 118(1)(b) credit for an eligible dependant? Answer: In order to claim this deduction, the individual must be a person who is unmarried, does not have a common-law partner, or is separated. The claim must be for an individual who is living with the dependant in a self-contained domestic establishment (e.g. a home). Further, the dependant has to be under 18 at any time during the year, the taxpayer's parent or grandparent, or mentally or physically infirm. The dependant must be related by blood, marriage, common-law partnership or adoption, and must be wholly dependent on the individual for support. Note that, except in the case of the taxpayer's child, the dependant must be a resident of Canada. Type: ES Topic: Tax credits - eligible dependant (ITA 118(1)(b))

7) An unmarried father is supporting a dependent child of 16 who is mentally infirm, but who does not qualify for the disability tax credit. What personal tax credits, if any, could be claimed with respect to that child? Answer: Such a taxpayer could claim the eligible dependant credit, including the extra caregiver amount for an infirm eligible dependant. The BPA for 2022 would be $14,398 plus the caregiver amount of $2,350. Type: ES Topic: Tax credits - determining available credits

8) The Canada caregiver provisions treat infirm children over 17 differently than infirm children under 18. Describe the difference. Answer: Infirm children over 17 are eligible for the Canada caregiver credit based on an amount of $7,525. The amount of this base is reduced by the child's net income in excess of $17,670. With respect to an infirm child under 18, the base for the credit is $2,350. This base is not reduced by the infirm child's net income. Type: ES Topic: Tax credits - Canada caregiver

9) When a taxpayer claims the spousal credit for an infirm spouse ($14,398 or less + $2,350 for 2022), an additional amount of the Canada caregiver amount may be available. Under what circumstances is this additional amount available and, when it is available, how is it calculated? Answer: The base for the spousal credit and the Canada caregiver credit are different because they apply different threshholds. As a result the Canada caregiver credit can produce a tax credit that exceeds the spousal credit depending on the spouse or common-law partner's net income, When this occurs the tax system is designed to ensure that the larger credit apply. To achieve this result an additional credit is allowed for the difference. If, for example the spousal credit was $6,000 and the Canada caregiver credit would have been $7,525 then the available credit will be the spousal credit of $6,000 plus an additional credit of $1,525 which together matches the higher Canada caregiver credit. The additional amount will apply when the spouse or common-law partner's net income is between $9,224 and $25,194. Type: ES Topic: Tax credits - Canada caregiver tax credit - additional amount (ITA 118(1)(e))

10) For individuals 65 or over, several types of income qualify for the pension income tax credit. Indicate three types of pension income that would qualify and one type that would not qualify. Answer: The three qualifying types could be selected from the following: • periodic payments from a Registered Pension Plan (RPP); • an annuity payment out of a Registered Retirement Savings Plan (RRSP); • a payment out of a Registered Retirement Income Fund (RRIF); • an annuity payment from a Deferred Profit Sharing Plan (DPSP); and • the interest component of other annuities. A non-qualifying type could be selected from the following: • payments under the Old Age Security Act or Canada Pension Plan; • payments under certain provincial pension plans; • payments under salary deferral arrangements; • payments under retirement compensation arrangements; • payments under an employee benefit plan; and • death benefits. Type: ES Topic: Tax credits - pension credit (ITA 118(3))

11) Most tax credits involve applying the minimum tax rate (currently 15%) to a specified amount which is generally indexed each year. In contrast, the charitable donations credit uses the rates of 15%, 29% and 33%. What is the reason for this different treatment? Answer: The tax policy justification is to encourage high income taxpayers to contribute to registered charities. Type: ES Topic: Tax credits - charitable donations credit (ITA 118.1)

12) An individual may choose not to claim all of the donations made in that year. Explain why this may be a good idea. Answer: Donations are eligible for a five year carry forward. There is the possibility that the amount claimed in the year of contribution could result in a tax credit that exceeds an individual's income tax payable in that year. Excess donations cannot result in a refund therefore the extra amount claimed would be wasted. It is therefore more appropriate to utilize the donation tax credit to reduce income tax to the extent possible and apply any remaining amounts in subsequent years. Type: ES Topic: Tax credits - charitable donations credit (ITA 118.1)

13) A medical expense tax credit, based on the total medical expenses for a family, can be claimed by either spouse. Does it make any difference which spouse makes the claim? Answer: In general, the medical expense credit should be claimed by the lower income spouse. This is because the amount of medical expenses must be reduced by the lesser of $2,479 (for 2022) and 3% of the individual's net income. This threshold amount will be lower for the lower income spouse so the medical expense credit claim will be larger. Exceptions to this general rule are: • If both spouses have net income of $82,633 or more then the lower amount for both will be equal to the $2,479 threshold since 3% of $82,633 equals $2,479. • If the lower income spouse does not have sufficient income tax payable to use the medical expense tax credit, it should be claimed by the higher income spouse. Type: ES Topic: Tax credits - medical expense (ITA 118.2)

14) Under what circumstances can the disability tax credit be transferred to a supporting person? Answer: It can be transferred provided the supporting person can claim the disabled person as a: • a dependant under the eligible dependant provision [ITA 118(1)(b)]; • a dependant for purposes of the caregiver tax credit [ITA 118(1)(c.1)]; or • a mentally or physically infirm dependant over 17 [ITA 118(1)(d)]. In addition, it can be claimed if the supporting person: • could have claimed the eligible dependant credit, if neither the supporting person nor the disabled dependant were married; or • could have claimed the disabled dependant over 17, or the caregiver credit, if the dependant had been 18 years of age or older and had no income. Type: ES Topic: Tax credits - disability credit (ITA 118.3)

15) Indicate the types of tuition fees that are eligible for the tuition fees tax credit. Answer: The following types of fees are eligible for this credit: • Tuition fees of at least $100 paid to a university, college, or other institution for post-secondary courses situated in Canada. • Tuition fees paid to an institution certified by the Minister of Employment and Social Development for a course that developed or improved skills in an occupation (the individual must be 16 or older). • Tuition fees paid to a university outside Canada for full-time attendance. To qualify the course must have a minimum duration of 3 weeks. • For individuals who live near the U.S. border and commute, tuition fees paid to a U.S. college or university for part-time or full-time studies. Type: ES Topic: Tax credits - tuition credit (ITA 118.5)

16) Certain tax credits can be transferred to a spouse or common-law partner. Indicate which credits are eligible for this treatment. Include only credits that can be transferred, not credits that can be claimed by either spouse or common-law partner such as the medical expense or donations tax credit. Answer: The credits that can be transferred to a spouse or common-law partner are the: • age credit, • disability credit, • pension income credit, and • tuition credit. Type: ES Topic: Tax credits - transfer to a spouse or common-law partner (ITA 118.8)

17) Some tax credits are referred to as "refundable". What does this mean? Answer: Non-refundable tax credits can only be used to reduce income tax payable. If non-refundable credits exceed the income tax payable they difference cannot be refunded. Alternatively, if a tax credit is refundable, the government will refund the amount that exceeds the income tax payable. Refundable credits do not rely upon an individual having income.therefore and individual with no income will have no income tax payable but will be entitled to a refund of any refundable tax credits. Type: ES Topic: Tax credits - refundable credits

18) Worker's compensation payments received are not included in an individual's net income. Answer: FALSE Explanation: They are included in net income but deducted in the determination of taxable income. Type: TF Topic: Taxable income deductions (ITA 110(1)(f))

19) Provincial income taxes are calculated as a percent of federal income tax. Answer: FALSE Explanation: Provincial income taxes are calculated as a percent of taxable income. Type: TF Topic: Income tax payable - provincial income tax

20) All federal tax credits are calculated by multiplying the lowest federal income tax bracket rate of 15% by an indexed amount. Answer: FALSE Explanation: Not all tax credits are indexed not are all based solely on 15%. Type: TF Topic: Tax credits - spousal credit (ITA 118(1)(a))

21) An individual can claim the eligible dependant credit for a child even if the child is not resident in Canada. Answer: TRUE Explanation: While the credit is usually only available for a resident related dependant, an exception is made for the child of an individual. Type: TF Topic: Tax credits - eligible dependant (ITA 118(1)(b))

22) An individual cannot claim the pension income credit if their only income is from the Canada Pension Plan (CPP). Answer: TRUE Explanation: ITA 118(8) specifically excludes CPP payments from eligibility for this credit. Type: TF Topic: Tax credits - pension credit (ITA 118(3))

23) If both spouses have medical expenses, it will usually be to their advantage for one of the spouses to claim the credit on the basis of their combined medical expenses. Answer: TRUE Explanation: This will avoid double counting the 3% of income limit. Type: TF Topic: Tax credits - medical expense (ITA 118.2)

24) There is no limit on the amount of the tuition credit that can be transferred to a spouse. Answer: FALSE Explanation: The combined transfer is limited to $5,000 multiplied by the appropriate percentage of 15%. Type: TF Topic: Tax credits - transfer of tuition credit (ITA 118.8)

25) Sharon Jarvis contributed $500 to the Federal Liberal Party. She is eligible for a federal political contributions tax credit of $500. Answer: FALSE Explanation: She is eligible for a federal political contributions tax credit of $350 [(3/4)($400) + (1/2)($100)]. Type: TF Topic: Tax credits - political contributions (ITA 127(3))

26) Federal political contributions are deductible in computing taxable income, but cannot create a loss. Answer: FALSE Explanation: Federal political contributions create a non-refundable tax credit that reduces federal income tax payable. Type: TF Topic: Tax credits - political contributions (ITA 127(3))

27) The refundable medical expense supplement is available to any individual who is 18 years of age or older. Answer: FALSE Explanation: In addition to the age requirement, there is a minimum income requirement. Type: TF Topic: Tax credits - refundable medical expense supplement (ITA 122.51)

28) The clawback of OAS payments will not affect an individual's net income. Answer: FALSE Explanation: The OAS clawback is achieved through two measures. The first provides a deduction from net income and the second an addition to income tax payable. Type: TF Topic: Net income deductions - OAS clawback (ITA 60(w)

29) Which of the following items is NOT a taxable income deduction for an individual? A) Worker's compensation payments received as a result of injury. B) A current year business loss. C) A deduction for residing in a prescribed northern zone. D) A net capital loss. Answer: B Explanation: B) A current year business loss. Type: MC Topic: Taxable income deductions

30) During the year, Ted Knight received worker's compensation payments totaling $10,000 as a result of an injury he suffered at work. His only other source of income for the year was employment income of $25,000. Which one of the following represents Ted's net and taxable income for the year? A) Net Income $25,000, Taxable Income $25,000. B) Net Income $30,000, Taxable Income $30,000. C) Net Income $35,000, Taxable Income $25,000. D) Net Income $35,000, Taxable Income $35,000. Answer: C Explanation: C) Net Income $35,000, Taxable Income $25,000. Type: MC Topic: Taxable income deductions (ITA 110(1)(f))

31) Which of the following statements with respect to the calculation of an individual's income tax payable is correct? A) Provincial income tax payable is calculated by applying progressive rates to federal income tax payable. B) Income that is not subject to provincial income tax is subject to an additional tax at the federal level. C) The provincial tax rate is based on the province in which the individual spends the most number of days in the taxation year. D) The applicable rate varies both with the amount of Tax Payable and the type of income being taxed. Answer: B Explanation: B) Income that is not subject to provincial income tax is subject to an additional tax at the federal level. The additional tax is 48% of the federal income tax (ITA 120(1)). Type: MC Topic: Income tax payable - provincial income tax

32) Which of the following statements is correct? A) Net income minus federal tax credits equals taxable income B) Taxable income minus federal tax credits equals total federal income tax C) Total federal income tax minus federal tax credits equals federal income tax payable D) Net income minus federal tax credits equals federal tax payable Answer: C Explanation: C) Total federal income tax minus federal tax credits equals federal income tax payable Type: MC Topic: Income tax payable - federal income tax

33) Which of the following statements with respect to an individual's income tax payable is NOT correct? A) Provincial income tax payable is calculated by applying the appropriate rate to taxable income. B) The relevant provincial income tax rate is based on the province in which the individual resides on December 31 of the year. C) Only federal income taxes apply with respect to individuals who are residents of Canada but who are not a resident in any province or territory. D) All provinces and territories use the same income tax brackets. Answer: D Explanation: D) All provinces and territories use the same income tax brackets. Type: MC Topic: Income tax payable - provincial income tax

34) With respect to claiming income tax credits for one's child, which of the following statements is NOT correct? A) To claim the eligible dependant credit for a child, the child must be under the age of 18 at some time during the year. B) The Canada caregiver credit for a child under 18 cannot be claimed if the parent is claiming the eligible dependant credit for that child. C) An individual cannot claim the eligible dependant credit if they are living with, supporting, or being supported by a spouse. D) To claim the eligible dependant credit for a child, the child does not have to be a resident of Canada, provided they are living with the taxpayer. Answer: A Explanation: A) To claim the eligible dependant credit for a child, the child must be under the age of 18 at some time during the year. If the child is mentally or physically infirm, they do not have to be under 18. Type: MC Topic: Tax credits - eligible dependant (ITA 118(1)(b))

35) In 2022, Bart Bixley has net income and taxable income of $230,000. During the year, Bart makes a cash gift to a registered charity of $75,000. What is his maximum charitable donations tax credit for 2022? A) $21,722 B) $24,714 C) $22,053 D) $24,742 Answer: C Explanation: A) $21,722 [(29%)($75,000 - $200) + (15%)($200)] B) $24,714 [(33%)($75,000 - $200) + (15%)($200)] C) The required amount would be calculated as follows: 15% of $200 33% of the lesser of: • $74,800 ($75,000 - $200) • $8,292 ($230,000 - $221,708) = [(33%)($8,292)] 29 % of $66,508 [$75,000 - ($8,292 + $200)] Total Donation Credit

$ 30

2,736 19,287 $22,053

D) $24,742 [(33%)($75,000 - $200) + (29%)($200)]

Type: MC Topic: Tax credits - charitable donations credit (ITA 118.1)

36) Which of the following contains a list of federal income tax credits that reduce the income tax liability of an individual? A) Canada caregiver, employment credit, medical expenses, disability B) Medical expenses, standby charge, charitable donations, age C) Tuition, adoption expenses, work space in home, pension D) Age, home accessibility, Canada pension plan, moving expenses Answer: A Explanation: A) Canada caregiver, employment credit, medical expenses, disability Type: MC Topic: Tax credits - spousal credit (ITA 118(1)(a))

37) Which of the following tax credit bases is NOT subject to full indexation? A) Amount for an eligible dependant. B) Age amount. C) Disability amount. D) Pension income amount. Answer: D Explanation: D) Pension income amount. Type: MC Topic: Tax credits - spousal credit (ITA 118(1)(a))

38) Of the following statements about tax credits, which one is correct? A) They are deducted from net income and as a result are not subject to income tax. B) They reduce income tax by the same amount regardless of a taxpayer's marginal income tax rate. C) They are deducted from taxable income and as a result are not subject to income tax. D) Their impact is greater for taxpayers with a marginal tax rate in excess of 15%. Answer: B Explanation: B) They reduce tax by the same amount regardless of a taxpayer's marginal income tax rate. Type: MC Topic: Tax credits - spousal credit (ITA 118(1)(a))

39) Of the following statements about the spousal tax credit, which one is correct? A) The claimant must be legally married to the relevant individual. B) It can be claimed by either spouse depending upon the net income of.each individual. C) If the individuals are married during the year, the base for the credit must be only reduced by the spouse's net income from the date of the marriage. D) In the year of separation or divorce, an individual can claim both spousal support payments and the spousal tax credit. Answer: B Explanation: B) It can be claimed by either spouse depending upon the net income of each individual. Type: MC Topic: Tax credits - spousal credit (ITA 118(1)(a))

40) Jean Marchand is a single parent with a child. Which of the following conditions is NOT required for Jean to claim the ITA 118(1)(b) credit for an eligible dependant? A) Jean must maintain a self-contained domestic establishment. B) The child must be under 18 years of age, or mentally or physically infirm. C) The child must be a resident of Canada. D) The child must be wholly dependent for support on Jean. Answer: C Explanation: C) The child must be a resident of Canada. Type: MC Topic: Tax credits - eligible dependant (ITA 118(1)(b))

41) Jake Baxter donated $100,000 in cash to a Canadian registered charity. His net income and taxable income for the year is $120,000. Calculate Jake's maximum federal donation tax credit. A) $13,500. B) $15,000. C) $26,072. D) $28,972. Answer: C Explanation: C) A person may claim 75% of their net income in charitable donations for a single year ($90,000 in this case). As none of his taxable income is subject to the 33% tax rate then the 29% income tax rate will apply to donations in excess of $200. The donation credit is 15% of the first $200, plus 29% of the excess, for a total of $26,072. Type: MC Topic: Tax credits - charitable donations credit (ITA 118.1)

42) Of the following statements about medical expenses, which one is correct? A) An individual can only claim their own medical expenses. B) The claim must be made in the calendar year the expense was incurred. C) Only expenses in excess of a specified amount are eligible for a tax credit. D) The amount of the tax credit is always dependent on an individual's marginal income tax rate. Answer: C Explanation: C) Only expenses in excess of a specified amount are eligible for a tax credit. Type: MC Topic: Tax credits - medical expense (ITA 118.2)

43) For an individual who is over 65 years of age, which of the following types of pension income does NOT qualify for the ITA 118(3) pension income tax credit? A) Payments from the CPP. B) OAS payments. C) Payments under certain provincial pension plan. D) All of the above. Answer: D Explanation: D) All of the above. Type: MC Topic: Tax credits - pension credit (ITA 118(3))

44) Which of the following tax credits CANNOT be transferred to a spouse? A) The age credit. B) The disability credit. C) The EI and CPP credits. D) The pension income credit. Answer: C Explanation: C) The EI and CPP credits. Type: MC Topic: Tax credits - transfer to a spouse or common-law partner (ITA 118.8)

45) With respect to the federal political contributions tax credit, which of the following statements is correct? A) Contributions made to any registered political party are eligible for the credit. B) Contributions made to a candidate at the time of a federal general election are eligible. C) The credit is equal to 29% of the eligible contributions made. D) There is no upper limit to the amount of the credit that can be claimed, as long as the contributions are made within the legal limits governing campaign contributions. Answer: B Explanation: B) Contributions made to a candidate at the time of a federal general election are eligible. Type: MC Topic: Tax credits - political contributions (ITA 127(3))

46) Shamus provides support for the following dependants: • His 42 year old spouse who has a physical infirmity. • His 63 year old father who has a mental infirmity. • His 67 year old mother who is in good health. • His 12 year old son who has a physical infirmity. He can claim the Canada caregiver credit (based on $7,525 for 2022) for: A) his spouse and father only. B) all of the listed dependants. C) his mother only. D) his spouse, his father, and his mother. Answer: A Explanation: A) His father only. Type: MC Topic: Tax credits - Canada caregiver

47) Which of the following relatives may NOT be used to claim the eligible dependant tax credit? A) Healthy grandfather age 65. B) Healthy daughter age 9. C) Mentally infirm spouse age 65. D) Mentally infirm brother age 19. Answer: C Explanation: C) Mentally infirm spouse age 65. Type: MC Topic: Tax credits - eligible dependant (ITA 118(1)(b))

48) Which of the following relatives may NOT be used to claim the Canada caregiver tax credit ($7,525 for 2022)? A) A physically infirm 62 year old aunt. B) A mentally infirm 21 year old child. C) A healthy 67 year old grandfather. D) A physically infirm 35 year old sister. Answer: C Explanation: C) A healthy 67 year old grandfather. Type: MC Topic: Tax credits - spousal credit (ITA 118(1)(a))

49) In 2022 Fred had the following amounts deducted from his pay: CPP EI Union Dues United Way Donation

$3,500 953 1,500 2,000

All of the above amounts are eligible for federal tax credits except: A) CPP. B) EI. C) Union Dues. D) United Way Donation. Answer: C Explanation: C) Union Dues Type: MC Topic: Tax credits - determining available credits

50) Joe, who is single, supports his 80 year old blind mother who has no income and lives in a nursing home. Which of the following federal tax credits can he claim for his mother? A) Disability tax credit only. B) Disability tax credit and Canada caregiver tax credit only. C) Disability tax credit and eligible dependant tax credit only. D) Canada caregiver credit only. Answer: B Explanation: B) Disability tax credit and Canada caregiver tax credit only. Type: MC Topic: Tax credits - determining available credits

51) Hilda is a 67 year old widow. She lives in an apartment with her old 12 year old granddaughter, Sue. Sue does not suffer from any infirmity. Both of Sue's parents are on a two year expedition to remote areas of the Yukon. They provide all financial support for Sue and speak with her weekly via satellite. Which of the following federal tax credits can Hilda claim regarding Sue? A) Eligible dependant tax credit. B) Canada caregiver tax credit for child under 18. C) Canada caregiver tax credit for child 18 or over. D) No tax credits available. Answer: D Explanation: D) No tax credits available. The grandmother is not supporting the child. Type: MC Topic: Tax credits - determining available credits

52) Jennifer is single with no dependants. During the year she had the following amounts deducted from her salary: CPP EI Federal Income Tax

$3,500 953 15,000

Based on this information, Jennifer's total federal tax credits for 2022 will be: A) $668. B) $861. C) $2,952. D) $2,828. Answer: C Explanation: A) $668 = (CPP + EI) × 15% B) $861: $3,500 + $953 + Canada Employment $1,287 × 15% C) ($14,398 + $3,039 + $953 + $1,287) × 15% = $2,952 Note that only $3,039 of the CPP amount is eligible for a tax credit. The remaining $461 is eligible for a deduction against net income (ITA 60(e.1)). D) $2,828 = ($14,398 + CPP $3,500 + EI $953) × 15% Type: MC Topic: Tax credits - determining available credits

53) Mildred has $300 budgeted for donations. It will go either to the SPCA (a registered charity) or the Green Party (a registered federal political party). None of her taxable income is subject to the 33% income tax rate. If she gives the money to the Green Party, her tax credit will be: A) the same amount that she would get from donating to the SPCA. B) $180 more than she would get from donating to the SPCA. C) $138 more than she would get from donating to the SPCA. D) $166 more than she would get from donating to the SPCA. Answer: D Explanation: A) same amount B) $180 more: $225 - ($300 × 15%) C) $138 more: $225 - ($300 × 29%) D) $166 [($300 × 3/4) — [($200 × 15%) + ($100 × 29%)] Type: MC Topic: Tax credits - determining available credits

54) Adam carries on a business as a sole proprietor. He might be eligible for all of the following federal tax credits except: A) CPP tax credit. B) EI tax credit. C) Canada employment tax credit. D) Canada Workers Benefit tax credit. Answer: C Explanation: C) Canada Employment tax credit (must have employment income) Type: MC Topic: Tax credits - determining available credits

55) Oscar is 73 years old. His 2022 net income from his RRIF and other investments is $120,000. He lives with his common-law partner, Felix who is 63 years old. Felix's only income for 2022 was investment income of $6,000. Oscar can claim all of the following federal tax credits except: A) BPA. B) age tax credit. C) pension tax credit. D) spousal tax credit. Answer: B Explanation: B) Age tax credit (net income is above the 2022 threshold of $92,479 when all of the credit would be eliminated) Type: MC Topic: Tax credits - determining available credits

56) With regards to the transfer of the tuition credit and interest on student loans, which of the following statements is NOT correct? A) If the student is married, the tuition credit can be transferred to either the spouse, parent.or grandparent. B) Any tuition amounts that are not transferred to another person can be carried forward and claimed by the student. C) Credits related to tuition paid to a university outside of Canada cannot be transferred to another person. D) Credits related to interest paid on a student loan cannot be transferred to another person. Answer: C Explanation: C) Credits related to tuition paid to a university outside of Canada cannot be transferred to another person. Type: MC Topic: Tax credits - determining available credits

57) In 2022, Canadian resident Mark Forbes has calculated his taxable income to be $53,175. Calculate his 2022 federal income tax payable before the consideration of any tax credits. Answer: The required income tax payable would be calculated as follows: Federal Tax Payable: On First $50,197 On Next $2,978 ($53,175 - $50,197) at 20.5% Federal Income Tax Payable before Credits

Type: ES Topic: Income tax payable - federal income tax before tax credits

$7,530 610 $8,140

58) Canadian resident Zack Bronson has 2022 taxable income of $102,485. Calculate his 2022 federal income tax payable before the consideration of any tax credits. Answer: The required income tax payable would be calculated as follows: Federal Income Tax Payable: On First $100,392 On Next $2,093 ($102,485 - $100,392) at 26% Federal Income Tax Payable Before Credits

Type: ES Topic: Income tax payable - federal income tax before tax credits

$17,820 544 $18,364

59) Mr. Don Deloran has 2022 net income of $26,100. His spouse is dependent on him because of a physical infirmity. The infirmity is not sufficient to qualify for the disability tax credit. She has 2022 net income of $5,800. Mr. Deloran has no tax credits other than the basic personal credits for his spouse and himself. Determine Mr. Deloran's federal tax credits for 2022. Answer: The required amount would be calculated as follows: BPA Spousal Including Infirm Amount ($14,398 + $2,350 - $5,800) Credit Base Rate Total Credits

$ 14,398 10,948 $25,346 15% $ 3,802

Type: ES Topic: Tax credits - determining available credits

60) Nadel Lyon has 2022 net income of $32,400. His common-law partner has net income of $8,420. Nadel has no tax credits other than the basic personal credits for his common-law partner and himself. Determine Nadel's federal tax credits for 2022. Answer: The required amount would be calculated as follows: BPA Spousal ($14,398 - $8,420) Credit Base Rate Total Credits

$ 14,398 5,978 $20,376 15% $ 3,056

Type: ES Topic: Tax credits - determining available credits

61) Gerrard Bensen lives with his wife and their two children. His wife's income is less than the basic personal tax credit amount. Two years ago, his mother who is 72 years old and extremely healthy, moved in with him. Her net income for 2022 is $18,400. Determine the amount of Gerrard's Canada caregiver tax credit, if any, for 2022. Answer: As his mother is not suffer from a mental or physically infirmity, Gerrard would not be entitled to the Canada caregiver credit. Type: ES Topic: Tax credits - Canada caregiver

62) Elaine Markham lives with her husband and 11 year old daughter. Her husband's income is less than the BPA. Her 81 year old mother also lives with the family. While her mother has 2022 investment income of $10,000, she has a physical infirmity that makes her dependent on Elaine. Determine the amount of Elaine's Canada caregiver tax credit, if any, for 2022. Answer: As she has a physical infirmity, Elaine's mother would qualify for the Canada caregiver credit. The amount would be $1,129 [(15%)($7,525)]. Type: ES Topic: Tax credits - Canada caregiver

63) Margo Riche is married to John Riche. John has a mental infirmity. They have a 22 year old daughter who has a physical infirmity. Neither infirmity is severe enough to qualify for the disability tax credit. John has 2022 net income of $6,600. Their daughter has no 2022 net income. Determine the amount of any 2022 tax credits that Margo will have with respect to her spouse and daughter. Answer: Margo will be entitled to the spousal tax credit, including the additional amount for an infirm spouse. In addition, she can claim the Canada caregiver credit for her 22 year old infirm daughter. The total credits would be calculated as follows: Spousal Including Infirm Amount ($14,398 + $2,350 - $6,600) Canada Caregiver ($7,525 - Nil) Total Base Rate Margo's Tax Credits for Spouse and Daughter

$10,148 7,525 $17,673 15% $ 2,651

Type: ES Topic: Tax credits - determining available credits

64) Farah Delorme is married to Frank Delorme. Frank has a mental infirmity. They have a 26 year old son who is dependant because of a physical infirmity. Neither infirmity is severe enough to qualify for the disability tax credit. Frank has 2022 net income of $4,600. Their son has no 2022 net income. Determine the amount of any 2022 tax credits that Farah will have with respect to her spouse and son. Answer: Farah will be entitled to the spousal tax credit, including the additional amount for an infirm spouse. In addition, she can claim the Canada caregiver credit for her 26 year old infirm son. The total credits would be calculated as follows: Spousal Including Infirm Amount ($14,398 + $2,350 - $4,600) Canada Caregiver ($7,525 - Nil) Total Base Rate Farah's Tax Credits for Spouse and Son

$ 12,148 7,525 $19,673 15% $ 2,951

Type: ES Topic: Tax credits - determining available credits

65) Sheila Cox is a single mother who takes care of her 14 year old daughter, Susan. Susan has a physical infirmity. The infirmity is not severe enough to qualify for the disability tax credit. Susan has 2022 net income of $3,400. Determine the amount of any 2022 tax credits that Sheila will have with respect to her daughter. Answer: Sheila would claim the Canada caregiver amount for a child under ITA 118(1)(b.1). She would also claim the eligible dependant credit for Susan. Because she claims the Canada caregiver amount for a child, she cannot claim the additional amount for an infirm eligible dependant. Her total credits would be as follows: [(15%)($2,350) + (15%)($14,398 + Nil - $3,400)] = $2,002 Type: ES Topic: Tax credits - determining available credits

66) Gloria Mason is a single mother who takes care of her 10 year old son, Mark. Mark has a physical infirmity. The infirmity is not severe enough to qualify for the disability tax credit. MarK has no net income. Determine the amount of any 2022 tax credits that Gloria will have with respect to her son. Answer: Gloria would claim the Canada caregiver amount for a child under ITA 118(1)(b.1). She would also claim the eligible dependant credit for Mark. Because she claims the Canada caregiver amount for a child, she cannot claim the additional amount for an infirm eligible dependant. Her total credits would be as follows: [(15%)($2,350) + (15%)($14,398 + Nil)] = $2,512 Type: ES Topic: Tax credits - determining available credits

67) Toshiro Mifune is single and lives with his 62 year old mother, Anna Mifune. Anna has a physical infirmity which makes her dependent on Toshiro. It is not, however, severe enough to qualify for the disability tax credit. Anna has 2022 net income of $18,300. Determine the amount of the 2022 tax credits that Toshiro will have with respect to his mother. Answer: The base for Toshiro's eligible dependant credit for his infirm mother is nil ($14,398 + $2,350 $18,300), resulting in an eligible dependant tax credit of nil. The calculation of the Canada caregiver amount would result in a base of $6,895 [$7,525 - ($18,300 - $17,670)]. As the eligible dependant tax credit was nil, the additional amount is $6,895 ($6,895 - Nil), resulting in a credit of $1,034 [(15%)($6,895)]. Type: ES Topic: Tax credits - determining available credits

68) Mr. John Foret is 42 years old and divorced from his wife. His net income consists entirely of rental income. He has retained the family home and both of the children of the marriage live with him. His daughter is 23 years old and has a physical infirmity that makes her wholly dependent on him for support. However, she does not qualify for the disability tax credit. His son is 14 years old and in good health. His daughter has no net income in 2022,while his son has net income of $2,100. Determine Mr. Foret's maximum federal tax credits for 2022. Answer: The daughter and son both qualify for the eligible dependant credit and the daughter qualifies for the Canada caregiver tax credit. If John claims the eligible dependant credit for the daughter, the Canada caregiver credit cannot be claimed. Given this, the eligible dependant credit should be claimed for the son. The fact that this claim can only be made for one dependant means that the daughter is no longer eligible for this credit. Based on this approach, John's 2022 tax credits are as follows: BPA Eligible Dependant - Son ($14,398 - $2,100) Canada Caregiver - Daughter Credit Base Rate Total Tax Credits

$14,398 12,298 7,525 $34,221 15% $ 5,133

Type: ES Topic: Tax credits - determining available credits

69) Ingrid Tower is a 45 year old widow. Her net income consists entirely of rental income. She maintains a home for herself and her two children. Her 19 year old son has a physical infirmity that makes him wholly dependent on Ingrid for support. However, he does not qualify for the disability tax credit. He has no net income. Her daughter is 13 year sold, is in good health, and has 2022 net income is $1,230. Determine Ms. Tower's maximum federal tax credits for 2022. Answer: The son and daughter both qualify for the eligible dependant credit and the son qualifies for the Canada caregiver tax credit. If Ingrid claims the eligible dependant credit for the son, the Canada caregiver credit cannot be claimed for him. Given this, the eligible dependant credit should be claimed for the daughter. Based on this approach, Ingrid's 2022 tax credits are as follows: BPA Eligible Dependant - Daughter ($14,398 - $1,230) Canada Caregiver - Son Credit Base Rate Total Tax Credits

$14,398 13,168 7,525 $35,091 15% $ 5,264

Type: ES Topic: Tax credits - determining available credits

70) Ms. Marlene Burns is 69 years old and has 2022 net income of $46,642. Determine Ms. Burns' age credit for 2022. Answer: Ms. Burns' age credit would be $1,031 {[15%][$7,898 - (15%)($46,642 - $39,826)]}. Type: ES Topic: Tax credits - age credit (ITA 118(2))

71) Harry Rose is 71 years of age and has 2022 net income of $62,485. Determine Harry's age credit for 2022. Answer: Mr. Rose's age credit would be $675 {[15%][$7,898 - (15%)($62,485 - $39,826)]}. Type: ES Topic: Tax credits - age credit (ITA 118(2))

72) Claude Lafleur and his spouse have adopted an infant French orphan. The adoption process began on January 2, 2022 when they applied to an adoption agency licensed by the provincial government. Later that month they traveled to France to discuss the adoption. The cost of this trip was $3,850. Their provincial government opens the adoption file on March 15, 2022, and the adoption order is issued on September 29, 2022. In October, the couple returns to France to pick up their newly adopted daughter. The happy family returns to Canada on October 20, 2022. The cost of this trip is $6,280. Additional expenses paid during the first week of October, 2022 were $1,759 paid to the French orphanage and $5,600 paid to a Canadian adoption agency. Legal fees incurred during the adoption period were $3,250. After arrival in Canada, an additional $3,200 in medical expenses were incurred for the child prior to the end of 2022. Mr. Lafleur's employer has a policy of providing reimbursement for up to $4,500 in adoption expenses eligible for the adoption expenses tax credit. This amount is received in October, 2022 and will be considered a taxable benefit to Mr. Lafleur. What is the maximum adoption expenses tax credit that can be claimed by the couple? Show your calculations. Answer: The adoption expenses tax credit would be calculated as follows: Cost of first trip to France Cost of second trip to France French Orphanage Fee Canadian Adoption Agency Fee Legal Fees Medical Costs (Qualify for the Medical Expense Credit) Total Eligible Expenses

$ 3,850 6,280 1,759 5,600 3,250 Nil $20,739

Since the $4,500 employer reimbursement is a taxable benefit and included in employment income, it does not reduce the total eligible adoption expenses. The adoption period begins at the time that an application is made for registration with an adoption agency licensed by a provincial government. This means that all of the expenses listed in the preceding table would be eligible expenses made during the adoption period. However, for 2022, there is an overall limit of $17,131. Given this, the maximum credit that can be claimed is $2,570 [(15%)($17,131)]. Type: ES Topic: Tax credits - adoption expenses credit (ITA 118.01)

73) Mauricio Saidi is a single parent. He and his 10 year old son, who was born with a severe disability live in the house he owns. His son qualifies for the disability tax credit. In 2022, Mauricio spends $8,600 putting in a more accessible wheel-in shower in the child's bathroom and $2,500 for a mechanical lift on his truck for his son's wheelchair. What is the maximum amount that Mauricio can claim in 2022 as a home accessibility tax credit? Answer: The addition to the truck is not a qualifying expenditure. The base for the home accessibility tax credit is the lesser of: • The actual qualifying home accessibility costs. • $10,000. The lesser of these two figures is the actual costs of $8,600, resulting in a tax credit of $1,290 [(15%)($8,600)]. Type: ES Topic: Tax credits - home accessibility credit (ITA 118.041)

74) Leon Fiero has 2022 net and taxable of $70,400. Each week, without fail, he plays a nation-wide lottery. While over the years he has not had any winnings of consequence, his fortunes have changed and, in 2022, he wins over $320,000. As he had hoped to do for many years, he donates $120,000 of these winnings to the Canadian Cancer Society in 2022. He chooses to claim $15,000 of the donations in 2022. In 2023, his net and taxable income remains the same at $70,400 and he makes no further donations. Determine Mr. Fiero's charitable donations tax credit for 2022, as well as the maximum amount of the donation that he can use in 2023. Until what year can he claim any unused portions of his 2022 donation? Answer: The credit base for 2022 would be limited to $52,800 [(75%)($70,400)]. However, he chooses to claim only $15,000, leaving a carry forward of $105,000 ($120,000 - $15,000). Note that, because Leon's Taxable Income is below the $221,708 threshold at which the 33% rate applies, the 33% rate is not relevant in the following calculation. The resulting credit would be: $200 at 15% $14,800 ($15,000 - $200) at 29% Total Donation Credit for 2022

$ 30 4,292 $4,322

As his income for 2023 is unchanged from 2022, the limit would be the same $52,800 [(75%)($70,400)]. In general, charitable donations can be carried forward for up to 5 years. As a result, the final year to claim any unused portion of his 2022 donation would be 2027. Type: ES Topic: Tax credits - charitable donations credit (ITA 118.1)

75) Leon Fiero has 2022 net income and taxable income of $70,400. Each week, without fail, he plays a nation-wide lottery. While over the years he has not had any winnings of consequence, his fortunes changed in 2021, when he won over $320,000. As he had hoped to do for many years, he donated $120,000 of these winnings to the Canadian Cancer Society in 2021 but chose to claim only $15,000 of these donations in 2021 for income tax purposes. Determine Mr. Fiero's maximum charitable donations tax credit for 2022. Until what year can he claim any unused portions of his 2021 donation? Answer: The credit base for 2022 would be limited to $52,800 [(75%)($70,400)]. Note that, because Leon's taxable income is below the $221,708 threshold at which the 33% rate applies, this rate is not relevant in the following calculation. The resulting credit would be: $200 at 15% $52,600 ($52,800 - $200) at 29% Maximum 2022 Donation Credit

$ 30 15,254 $15,284

In general, charitable donations can be carried forward for up to 5 years. As a result, the final year to claim any unused portion of his 2021 donation would be 2026. Type: ES Topic: Tax credits - charitable donations credit (ITA 118.1)

76) Jack Banino has net and taxable Income of $83,000 in both 2022 and 2023. Because of a recent run of good luck in Las Vegas, he is able to make a 2022 donation of $120,000 to a registered Canadian charity. He plans to use $30,000 of the donation as the base for a charitable donations tax credit in 2022. He plans to carry the balance of $90,000 forward to subsequent years. Determine Jack's charitable donations tax credit for 2022. In addition, determine the maximum amount of the donation that he can use in 2023. Until what year can he claim any unused portions of his 2022 donation? Answer: The credit base for 2022 would be limited to $62,250 [(75%)($83,000)]. However, he chooses to claim only $30,000. Note that, because Jack's taxable income is below the $221,708 threshold at which the 33 % rate applies, this rate is not relevant in the following calculation. The resulting credit would be: $200 at 15% $29,800 ($30,000 - $200) at 29% Total 2022 Donation Credit

$ 30 8,642 $8,672

As his income for 2023 is unchanged from 2022, the limit would be the same $62,250 [(75%)($83,000)]. In general, charitable donations can be carried forward for up to 5 years. As a result, the final year to claim any unused portion of his 2022 donation would be 2027. Type: ES Topic: Tax credits - charitable donations credit (ITA 118.1)

77) Mr. Samuel Silverstein has a spouse and a 19 year old dependent son. Mr. Silverstein's 2022 net income is $125,000. For 2022, Mr. Silverstein's spouse has no net income and his son has net income of $8,675. During 2022, Mr. Silverstein and his spouse have medical expenses of $2,042. His son has medical expenses of $7,780 which Mr. Silverstein paid. Determine Mr. Silverstein's medical expense credit for 2022. Answer: The required calculation is as follows: Amount B Expenses for Samuel and Spouse Amount C Lesser of: • [(3%)($125,000)] = $3,750 • 2022 Threshold Amount = $2,479 Subtotal Amount D Son's Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($8,675)] = $260 Allowable Amount of Medical Expenses Amount A The Appropriate Rate 2022 Medical Expense Tax Credit

$2,042

( 2,479) Nil $7,780

( 260)

Type: ES Topic: Tax credits - medical expense (ITA 118.2)

7,520 $7,520 15% $1,128

78) Saul Lawson has a spouse, a 20 year old dependent son, and a 12 year old daughter. His 2022 net income is $70,000. Medical expenses for Saul, his spouse, and his 12 year old daughter total $4,500. He also pays medical expenses for his son of $6,200. His spouse has net income of $10,000 and his son has net income of $9,200. Determine Sauls' medical expense tax credit for 2022. Answer: The required calculation is as follows: Amount B Expenses for Saul, spouse and daughter Amount C Lesser of: • [(3%)($70,000)] = $2,100 • 2022 Threshold Amount = $2,479 Subtotal Amount D Son's Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($9,200)] = $276 Allowable amount of Medical Expenses Amount A The Appropriate Rate 2022 Medical Expense Tax Credit

$4,500

( 2,100) $2,400 $6,200

( 276)

Type: ES Topic: Tax credits - medical expense (ITA 118.2)

5,924 $8,324 15% $1,249

79) Lorraine tamer lives with her husband and 20 year old paraplegic daughter, Marie, who qualifies for the disability tax credit. In 2022, Lorraine paid medical expenses of $9,850 for Marie, none of which involved attendant care expenses. Marie has no net income. Lorraine's net and taxable income for 2022 was $108,600. Determine the total amount of tax credits in respect to Marie that will be available to Lorraine. Answer: As Marie has no net income, her disability credit can be transferred to Lorraine. As Marie is over 17, the disability child supplement is not available. In addition to the disability credit, Lorraine will be able to claim the Canada caregiver credit, as well as a credit for all of Marie's medical expenses. The total credits related to Marie would be as follows: Transfer of Marie's Disability amount Canada Caregiver Marie's Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)(Nil)] Total Credit Base Rate Total 2022 Tax Credits with respect to Marie

$9,850

Nil

Type: ES Topic: Tax credits - determining available credits

$ 8,870 7,525

9,850 $26,245 15% $ 3,937

80) Larry Osborne has a wife and a 16 year disabled daughter, Suzanne, who qualifies for the disability tax credit. Larry's net income is $186,000 and he and his wife have medical expenses of $3,560. In 2022, Larry paid medical expenses for Suzanne of $12,400, none of which involved payments for attendant care. Suzanne has a 2022 net income of $5,650. Determine the total amount of tax credits in respect of Suzanne that will be available to Larry. Answer: Given that Suzanne's income is less than the base for the basic personal tax credit, the disability tax credit can be transferred to her father. In addition, because she is under 18, she is eligible for the disability supplement. As none of her medical expenses were for attendant care, the full amount of the supplement is available. He will also be able to claim the Canada caregiver credit for a child under 18. As Larry and his wife have medical expenses that exceed the income threshold, and Suzanne's income is not a factor since she is under 18, he can claim all of Suzanne's medical expenses. The total credits related to Suzanne would be calculated as follows: Transfer of Suzanne's Disability Disability Supplement Canada Caregiver for a child under 18 Suzanne's Medical Expenses [($12,400) - (3%)($5,650)] Total Credit Base Rate Total 2022 Tax Credits with respect to Suzanne

$ 8,870 5,174 2,350 12,230 $28,624 15% $ 4,294

Type: ES Topic: Tax credits - determining available credits

81) In 2022, Frank Balmer attends university for 5 months. His total tuition for the year, including all ancillary fees, is $4,100, of which he prepaid $1,400 in 2021. The amount paid in 2022 includes $415 in fees that are only charged to students in his biology program. Interest paid for the year on his student loan was $417. Determine the total amount of education related tax credits that would be available for Mr. Balmer for 2022 assuming that he claims a refund of $750 for the Canada Training Credit. Answer: Mr. Balmer's education related tax credits would be calculated as follows: Tuition Amount: Total ($4,100 - $750 Canada Training) Ineligible Ancillary Fees ($415 - $250) Interest on Student Loan Total Credit Base Rate Total 2022 available Tax Credits

$3,350 ( 165)

Type: ES Topic: Tax credits - education related credits

$3,185 417 $3,602 15% $540

82) During the first 6 months of 2022, Grace Bucknell attends university on a full time basis. For the last 6 months of the year, her studies continue, but only on a part time basis. The tuition fees for the year total $10,400, including $350 of special fees that are only charged to students in her program. As she has taken out a student loan to pay for these studies, she has 2022 interest payments on this loan of $623. Determine the total amount of education related tax credits that would be available for Grace for 2022 assuming that she claims a Canada Training Credit refund of $750. Answer: Ms. Bucknell's education related tax credits would be calculated as follows: Tuition Amount: Total ($10,400 - $750 Canada Training) Ineligible Ancillary Fees ($350 - $250) Interest on Student Loan Total Credit Base Rate Total Available 2022 Tax Credits

$9,650 ( 100)

$9,550 623 $10,173 15% $ 1,526

Type: ES Topic: Tax credits - education related credits

83) At the beginning of 2022, Karl Schmidt has a carry forward of a tuition tax credit from 2021 of $525 [(15%)($3,500)]. In 2022, he is in full time attendance at a Canadian university. His tuition fees total $5,650 for the year. His taxable income for 2022 is $34,650. Other than his tuition credit, his only current tax credit is his BPA. Determine Karl's total tuition tax credit and any available carry forward. Assume that his Canada Training amount is $750 which he has never claimed. Answer: The available tuition credit for the year could be calculated as follows: Tuition Amount ($5,650 - $750 Canada Training) Rate Tuition Credit for the current year Carry Forward Tuition Credit Total Available Tuition Credits

$4,900 15% $ 735 525 $1,260

The alternative calculation approach that is used in the tax return would be as follows: Tuition Amount for the current year (Same as above) Carry Forward Amount Total Available Tuition Amounts Rate Total Available Tuition Credit

$4,900 3,500 $8,400 15% $1,260

Karl's income tax payable before deducting the tuition credit would be $3,038 [(15%)($34,650 - $14,398)]. This is more than sufficient to absorb the available tuition credit and, as a consequence, there would be no carry forward. Type: ES Topic: Tax credits - education related credits

84) Betty Masters has 2022 taxable income of $15,123. She attends university in London, England during 2022, paying a total amount for tuition of $26,800 (Canadian dollars). Her only tax credit, other than the tuition credit, is her BPA. Determine Betty's tuition credit and indicate how much of this total could be transferred to a supporting parent and how much would be carried forward. Assume that she will claim the $750 Canada Training Credit for the first time in 2022. Answer: The tuition credit for the year would be calculated as follows: Tuition Amount ($26,800 - $750) Rate Available Tuition Credit (Maximum Transfer = $750)

$26,050 15% $ 3,908

Income Tax Act Approach — The $750 maximum transfer of the tuition credit must be reduced by Betty's income tax payable of $109 [(15%)($15,123 - $14,398)]. This will leave a maximum transfer of $641 ($750 $109) and a carry forward credit of $3,158 ($3,908 - $109 -$ 641). Tax Return Approach — The $5,000 maximum transfer of the tuition amount must be reduced by $725 ($15,123 - $14,398), the excess of Betty's Taxable Income over her BPA. This results in a maximum transfer of $4,275 ($5,000 - $725) and would leave a carry forward of $21,050 ($26,050 - $725 - $4,275). This would give the same $3,158 [(15%)($21,050)] credit as under the alternative calculation. Type: ES Topic: Tax credits - transfer of tuition credit (ITA 118.8)

85) Carl Bond is a student at the University of Michigan in the U.S. on a full time basis in 2022. Carl is thirty-two years of age and qualifies for the Canada Training credit. His tuition fees total $31,400 (Canadian dollars). In 2022, he has taxable income of $16,000. Other than his tuition credit, his only tax credit is the BPA. Determine Carl's tuition credit and indicate how much of this total could be transferred to a supporting parent and how much would be carried forward. Assume that he will claim the $750 Canada Training Credit limit in 2022 for the first time. Answer: The available tuition credit for the year would be calculated as follows: Tuition Amount ($31,400 - $750 Canada Training) Rate Available Tuition Credit (Maximum Transfer = $750)

$30,650 15% $ 4,598

Income Tax Act — Approach The $750 maximum transfer of the tuition credit must be reduced by Carl's income tax payable of $240 [(15%)($16,000 - $14,398)]. This will leave a maximum transfer of $510 ($750 $240) and a carry forward credit of $3,848 ($4,598 - $240 -$510). Tax Return Approach — The $5,000 maximum transfer of tuition amount must be reduced by $1,602 ($16,000 - $14,398), the excess of Carl's taxable income over his BPA. This results in a maximum transfer of $3,398 ($5,000 - $1,602) and would leave a carry forward of $25,650 ($30,650 - $1,602 - $3,398). This would give the same $3,848 [(15%)($25,650)] credit as under the alternative calculation. Type: ES Topic: Tax credits - transfer of tuition credit (ITA 118.8)

86) Mrs. Rhonda Lee is 65 years old and has net income of $53,500. Of this total, $30,600 was from a life annuity that she purchased with funds in her RRSP. Her spouse is 68 years old and has no net income as he is ineligible for OAS, and is attending university on a full time basis. His tuition fees for the year were $3,450 and he was in attendance for 3 months of 2022. Determine Mrs. Lee's maximum tax credits for 2022. Ignore the possibility of splitting her pension income with her spouse. Answer: The Canada Training credit would not apply since the spouse is over 65 years of age. Her tax credits would be calculated as follows: BPA Spousal Amount Age [$7,898 - (15%)($53,500 - $39,826)] Pension Income Spousal Age Transfer Spousal Tuition Amount - Lesser of: • $5,000 • $3,450 Credit Base Rate Total Tax Credits

$14,398 14,398 5,847 2,000 7,898

Type: ES Topic: Tax credits - determining available credits (comprehensive)

3,450 $47,991 15% $ 7,199

87) John Trask is 67 years old and his spouse is 66 years old. He has net income of $63,200, largely from various pension funds. His spouse has no net income as she is not eligible for OAS payments. In 2022, his spouse attended university on a full time basis. Her tuition fees for the attendance were $8,200 and, in addition, she spent $800 on textbooks. Determine John's maximum tax credits for 2022. Ignore the possibility of splitting his pension income with his spouse. Answer: The Canada Training credit would not apply since the spouse is over 65 years of age. John's tax credits would be calculated as follows: BPA Spousal Amount Age [$7,898 - (15%)($63,200 - $39,826)] Pension Income Spousal Age Transfer Spousal Tuition Amount - Lesser of: • $5,000 • $8,200 Credit Base Rate Total Tax Credits

$14,398 14,398 4,392 2,000 7,898

Type: ES Topic: Tax credits - determining available credits (comprehensive)

5,000 $48,086 15% $ 7,213

88) Mr. Allen Dion contributes $826 to the Canadian Political Alliance, a registered federal political party. Determine the amount of his federal political contributions tax credit. Answer: Mr. Dion's $500 credit would be calculated as follows: First Next Remaining Maximum Tax Credit

Contributions $400 350 76 $826

Credit Rate 3/4 1/2 1/3

Type: ES Topic: Tax credits - political contributions (ITA 127(3))

Tax Credit $300 175 25 $500

89) In 2022, Mr. Chris Mackey has net and taxable income of $28,248. Mr. Mackey and his common-law partner, Emily, have total medical expenses of $10,325. Emily has no net income. Determine Mr. Mackey's minimum 2022 federal income tax payable. Answer: The regular medical expense credit would be calculated as follows: Medical Expenses Lesser of: • [(3%)($28,248)] = $847 • 2022 Threshold Amount = $2,479 Allowable Amount of Medical Expenses Rate Total Medical Expense Tax Credits

$10,325

( 847) $ 9,478 15% $ 1,422

The refundable supplement would be calculated as follows: Lesser of: • $1,316 (2022 Maximum) • [(25/15)($1,422)] = $2,370 Reduction [(5%)($28,248 - $29,129)] Refundable Medical Expense Supplement

$1,316 Nil $1,316

Mr. Mackey's total federal income tax payable (Refund) would be calculated as follows: Income tax payable before credits [(15%)($28,248)] Non-Refundable Credits: BPA Common-Law Partner Allowable Medical Expenses Total Rate Tax before Refundable Supplement Refundable Supplement Income tax Refund

$4,237 $14,398 14,398 9,478 $38,274 15%

( 5,741) Nil* ( 1,316) ($1,316)

* Income tax payable before the refundable supplement can only be reduced to nil, the net result cannot be negative for this subtotal. Type: ES Topic: Tax credits - determining available credits (comprehensive)

90) For 2022, Mr. Oliver Clemens has employment income of $70,200, receives EI payments of $9,460, and receives $7,700 in OAS. No amount was withheld from the OAS payments because he had very low income in the previous two years due to large business losses. Determine Mr. Clemens' 2022 net income. Answer: Mr. Clemens' income before deducting either the EI or OAS repayment would be calculated as follows: Employment Income EI Benefits OAS Benefits Income before Deductions

$70,200 9,460 7,700 $87,360

Dealing first with the EI repayment, Mr. Clemens would have to repay the lesser of: • $2,838 [(30%)($9,460)] • $3,596 [(30%)($87,360 - $75,375)] Using this deduction, the clawback of the OAS payments would be the lesser of: • $7,700 • $414 [(15%)($87,360 - $2,838 - $81,761)] As a result, Oliver's 2022 net income would be as follows: Income before deductions ITA 60(v.1) Deduction (EI) ITA 60(w) Deduction (OAS) 2022 Net Income

$87,360 ( 2,838) ( 414) $84,108

Type: ES Topic: Net income deductions - EI and OAS clawbacks

91) Agnes is 66 years old. In 2022, she received OAS payments of $7,700, CPP payments of $10,000 and investment income of $65,000. No federal income tax was withheld at source. Her total federal tax credits for 2022 (including charitable donations) are $2,500. Taking the OAS clawback into consideration, what is her federal income tax balance owing? Answer: Before the deduction of any OAS repayment, Agnes had income as follows: OAS CPP Investment Income Income before Deduction

$ 7,700 10,000 65,000 $82,700

The OAS clawback would be the lesser of: • $7,700 • $141 [(15%)($82,700 - $81,761)] This results in net and taxable income of $82,559 ($82,700 - $141). Federal income tax payable would be calculated as follows: Tax on first $50,197 Tax on remaining $32,362 ($82,559 - $50,197) at 20.5% Tax Before Credits Tax Credits (Given) Tax Payable Before Clawback Plus: OAS Clawback Total Federal income tax owing Type: ES Topic: Income tax payable - with OAS clawback

$ 7,530 6,634 $14,164 ( 2,500) $11,664 141 $11,805

92) In each of the following independent Cases, determine the maximum amount of 2022 personal tax credits, including transfers from a spouse or dependant, that can be applied against federal income tax payable. Ignore, where relevant, the possibility of pension income splitting. A calculation of federal income tax payable is NOT required, only the applicable income tax credits. 1. Sarah Partridge is 72 years old and has net income of $61,300. This total is made up of OAS payments and pension income from her former employer. Her husband is 58 years old and has net income of $4,725. 2. Martin Brody was divorced from his wife several years ago. He has custody of their four children, ages 7, 9, 12, and 15. His net income consists of spousal support payments totaling $54,000 per year. The children are all in good health. The oldest child has net income of $11,200 during the year. 3. Marion Lassiter has net income of $132,450, all of which is rental income. Her husband has net income of $1,600. 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 of $8,460. During the current year, Ms. Lassiter pays the following medical expenses: Marion Her Spouse 14 Year Old Child 16 Year Old Child 19 Year Old Child Total

$ 4,240 3,450 1,860 2,450 6,720 $18,720

4. Janice Archer has net income of $92,100, none of which is employment income or income from carrying on a business. Her spouse has net income of $7,240. Their daughter is 15 years old, lives with them, and has net income of $2,150. Their son is 22 years old and, because of a physical infirmity, continues to live at home. He has no net income. His disability is not severe enough to qualify for the disability tax credit. 5. Joan Baxter has net income of $85,000, all of which is employment income. Her employer withholds maximum CPP contributions and EI premiums. She is married to John Brown whose net income is $4,230. They have three children aged 7, 9, and 11. All of the children are in good health and none of them have net income.

Answer: The amount of the personal income tax credits would be as follows: 1. Ms. Partridge will qualify for the following tax credits: BPA Spousal ($14,398 - $4,725) Age [$7,898 - (15%)($61,300 - $39,826)] Pension Income Total Credit Base Rate Total Federal income tax credits

$14,398 9,673 4,677 2,000 $30,748 15% $ 4,612

Note that, because her net income is below the 2022 $81,761 income threshold, there will be no clawback of any of Ms. Partridge's OAS. 2. Mr. Brody will qualify for the following credits: BPA Eligible Dependant (See Note) Total Credit Base Rate Total Federal income tax credits

$14,398 14,398 $28,796 15% $ 4,319

Note — The eligible dependant credit can be taken for any child. However, it should not be claimed for the 15 year old as the amount of the credit would be reduced by the child's net income. 3. Ms. Lassiter will qualify for the following tax credits: BPA Spousal ($13,808 - $1,600) Medical Expenses (See Note) Total Credit Base Rate Total Federal income tax credits

$14,398 12,798 15,987 $43,183 15% $ 6,477

Note — The claim for medical expenses is determined as follows: Expenses for Marion, her Spouse, and Children under 18 years of age ($4,240 + $3,450 + $1,860 + $2,450) $12,000 Reduced by the lesser of: • [(3%)($132,450)] = $3,974 • 2022 Threshold Amount = $2,479 ( 2,479) 19 Year Old's Medical Expenses $6,720 Reduced by the lesser of: • [(3%)($8,460)] = $254 • $2,479 ( 254) 6,466 Allowable Medical Expenses $15,987

4. Ms. Archer will qualify for the following credits: BPA Spousal ($14,398 - $7,240) Canada Caregiver - 22 year old son Total Credit Base Rate Total Federal income tax credits

$14,398 7,158 7,525 $29,081 15% $ 4,362

5. Ms. Baxter will qualify for the following credits: BPA Spousal ($14,398 - $4,230) EI (Maximum) CPP (Maximum) Canada Employment Total Credit Base Rate Total Federal income tax credits

Type: ES Topic: Tax credits - determining available credits (multiple mini-cases)

$14,398 10,168 953 3,039 1,287 $29,845 15% $ 4,477

93) There are seven independent cases which follow. Each case involves various assumptions as to the amount and type of income earned by John Moss in 2022, as well as to other information that is relevant to the determination of his 2022 Federal income tax payable. John's net income and taxable income are the same in all cases. In those cases where we have assumed that the income was from employment, assume that the employer withheld the maximum EI premium and CPP contribution. Also assume that the CPP deduction of $461 has been taken into consideration in the determination of both net income and taxable income. Case 1 — John is 58 years old and has employment income of $87,600. His common-law partner is 48 years old and has net income of $8,260. They have an adopted child who is 19 years old and lives at home. John and his partner have medical expenses of $4,600. Medical expenses for the son total $10,300. The son has net income of $4,300. Case 2 —John is 46 years old and has net income of $160,000 all of which is employment income. His wife Mary is 41 years old and has net income of $6,100. They have a 20 year old son who lives at home. He is dependent because of a physical infirmity, but it is not severe enough to qualify him for the disability tax credit. However, he is able to attend university on a full time basis for 8 months during 2022. John pays his tuition fees of $9,400, as well as $720 for the textbooks that he requires in his program. The son has net income of $8,350. The son agrees to transfer the maximum education credits possible to John. Case 3 —John and his wife Beverly are both 67 years of age. Beverly qualifies for the disability tax credit. The components of net income for both John and Beverly are as follows: John $ 1,300 11,400 7,700 36,200 $56,600

Interest CPP Benefits OAS Benefits Income from RPP Net Income

Beverly $ 720 Nil 7,700 840 $9,260

Case 4 —John is 45 years old and has net income of $97,100 all of which is from employment. His wife Marcia is 37 years old and has net income of $8,600. They have no children. However, they provide in home care for Marcia's father who is 61 years old, dependent because of a physical infirmity, and has no income of his own. His infirmity is not severe enough to qualify for the disability tax credit. Also living with them is John's 67 year old father and 63 year old mother. They are both in good physical and mental health. John's father has net income of $23,200 and his mother has net income of $11,700. Case 5 —John is 31 years old, has net income of $83,000 all of which is from employment, and makes contributions of $3,000 to registered charities. He is not married or living common-law and has no dependants. Case 6 —John is 58 years old and has net income of $114,000 all of which is rental income. He is divorced and has been awarded custody of his 21 year old disabled son. The son qualifies for the disability tax credit and has net income of $8,430.

Case 7 —John is 43 years old and has net income of $97,300 all of which is rental income His wife died last year and he is a single parent of two children. Mack is 16 and is physically infirm, but does not qualify for the disability tax credit. He has net income of $8,400 from part time work as a student counselor. His daughter Serena, has no income and is 10 years old and is in good health. Required: In each Case, calculate the minimum Federal income tax payable for 2022 for John Moss. Indicate any carry forwards available to him and his dependants and the carry forward provisions. Ignore any amounts John might have had withheld for Federal income taxes paid, any instalments that may have been paid and the possibility of pension income splitting. Answer: Case 1 The solution for this Case is as follows: Tax on first $50,197 Tax on next $37,403 ($87,600 - $50,197) at 20.5% Federal Tax before Credits

$ 7,530 7,668 $15,198

BPA Spousal ($14,398 - $8,260) EI CPP Canada Employment Medical Expenses (See Note) Credit Base Rate Federal Income Tax Payable

($14,398) ( 6,138) ( 953) ( 3,039) ( 1,287) ( 12,292) ($38,107) 15%

( 5,716) $9,482

Note — The base for the medical expense tax credit would be calculated as follows: John and his Common-law partner Reduced by the lesser of: • [(3%)($87,600)] = $2,628 • 2022 Threshold Amount = $2,479 Son's Medical Expenses Reduced by the lesser of: • [(3%)($4,300)] = $129 • $2,479 Total Credit Base

$ 4,600

$10,300

( 129)

( 2,479)

10,171 $12,292

Case 2 The solution for this Case can be completed as follows: Tax on first $155,625 Tax on next $4,375 ($160,000 - $155,625) at 29% Federal Tax before Credits BPA Spousal ($14,287* - $6,100) Canada Caregiver For Son EI CPP Canada Employment Tuition Transfer from son (Note) Credit Base Rate Federal Income Tax Payable

($14,287) ( 8,187) ( 7,525) ( 953) ( 3,039) ( 1,287) ( 5,000) ($40,278) 15%

$32,181 1,269 $33,450

( 6,042) $27,408

$14,398 - [($1,679][($160,000 - $155,625) ÷ $66,083] = $14,287 Note — As the son's income is completely eliminated by his BPA of $14,398, he cannot use his tuition tax credit. This means the transfer is the lesser of the absolute limit of $5,000 and the actual tuition of $9,400. This will leave the son with an indefinite carry forward for subsequent taxation years of $4,400 ($9,400 $5,000). Case 3 The solution for this Case is as follows: Tax on first $50,197 Tax on next $6,403 ($56,600 - $50,197) at 20.5% Federal Tax before Credits BPA Spousal Including Infirm Amount ($14,398 + $2,350 - $9,260) Additional Canada Caregiver Amount (Note) Age [$7,898 - (15%)($56,600 - $39,826)] Pension Spouse’s Age Spouse’s Disability Spouse’s Pension (Limited to RPP) Credit Base Rate Federal Income Tax Payable

$7,530 1,313 $8,843 ($14,398) ( 7,488) ( 37) ( 5,382) ( 2,000) ( 7,898) ( 8,870) ( 840) ($46,913) 15%

( 7,037) $1,806

Note — As the income adjusted spousal amount is less than the Canada caregiver amount, there is an additional amount of $37 ($7,525 - $7,488).

Case 4 The solution for this Case can be completed as follows: Tax on first $50,197 Tax on next $46,903 ($97,100 - $50,197) at 20.5% Federal Tax before Credits BPA Spousal ($14,398 - $8,600) Canada Caregiver - Marcia's Father (Note) EI CPP Canada Employment Credit Base Rate Federal Income Tax Payable

($14,398) ( 5,798) ( 7,525) ( 953) ( 3,039) ( 1,287) $33,000 15%

$7,530 9,615 $17,145

( 4,950) $12,195

Note — Marcia's father, because he is infirm, is eligible for the Canada caregiver amount. John's father and mother are not eligible as neither parent is mentally or physically infirm. Case 5 The solution for this Case would be as follows: Tax on first $50,197 Tax on next $32,803 ($83,000 - $50,197) at 20.5% Federal Tax before Credits

$7,530 6.725 $14,255

BPA EI CPP Canada Employment Credit Base Rate Charitable Donations [(15%)($200) + (29%)($3,000 - $200)] Federal Income Tax Payable

($14,398) ( 953) ( 3,039) ( 1,287) ($19,677) 15%

( 2,952) ( 842) $10,461

As none of his taxable income is taxed at 33%, only the 29% rate will apply to donations in excess of $200,

Case 6 The solution for this Case can be completed as follows: Tax on first $100,392 Tax on next $13,608 ($114,000 - $100,392) at 26% Federal Tax before Credits BPA Eligible Dependant Including Infirm Amount ($14,398 + $2,350 - $8,430) Additional Canada Caregiver Amount (Note) Transfer of Son's Disability Credit Base Rate Federal Income Tax Payable

($14,398) ( 8,318) Nil ( 8,870) ($31,586) 15%

$17,820 3,538 $21,358

( 4,738) $16,620

Note — As the eligible dependant amount of $8,318 is greater than the maximum Canada caregiver amount of $7,525 there is no additional caregiver amount. Case 7 The solution for this Case is as follows: Tax on first $50,197 Tax on next $47,103 ($97,300 - $50,197) at 20.5% Federal Tax before Credits BPA Eligible Dependant - Serena Canada Caregiver Amount for a child under 18 Credit Base Rate Federal Income Tax Payable

($14,398) ( 14,398) ( 2,350) ($31,146) 15%

Type: ES Topic: Tax credits - determining available credits (multiple mini-cases)

$7,530 9,656 $17,186

( 4,672) $12,514

94) In each of the following independent Cases, determine the maximum amount of 2022 personal tax credits, including transfers from a spouse or dependant, that care available to the individual taxpayer. A calculation of income tax payable is NOT required, only the applicable income tax credits. 1. Mr. Hanson has net income of $40,000, all of which is investment income. He is single and provides support for his mother. His mother is a widow who resides in England, and has income of $700 per year. 2. Mr. Johnson has net income of $250,000, all of which is employment income. His employer has withheld and remitted the required EI and CPP amounts. Mr. Johnson was married on December 1, 2022. His wife, an accounting student, had salary of $27,500 for the period from January 1 to November 30, 2022 and $2,500 for the month of December, 2022. 3. Mr. Massey has net income of $60,000, all of which is rental income. He lives with his common-law wife and her two children from a previous marriage. The two children are 8 and 10 years of age, are in good health and have no net income for the year. His wife has net income of $1,500. 4. Mr. Jones is married and has net income of $70,000, none of which is employment income or income from carrying on a business. His 19 year old dependent son attends university. His wife has net income of $1,200, and his son has net income of $2,900. His son does not wish to transfer any of his tuition credit to his father. 5. Ms. Morrison is divorced and maintains a residence far from her former spouse. She has custody of the two children from the marriage. They are aged 7 and 10 and in good health. Her net income is $50,000, all of which is spousal support payments. Neither child had any net income for the year. 6. Mr. Bagley is 68 years old and has net income of $27,100, which is comprised of OAS benefits and pension income paid out of his Registered Retirement Income Fund (RRIF). His wife is 52 years old and is blind. She has no net income. Ignore the possibility that Mr. Bagley would split his pension income with his wife.

Answer: The amount of the personal tax credits would be as follows: 1. Mr. Hanson will qualify for the following credit: BPA Total Credit Base Rate Total Tax Credits

$14,398 $14,398 15% $ 2,160

The mother would be required to be resident in Canada to qualify her as an eligible dependant. 2. Mr. Johnson will qualify for the following credit: BPA Spousal EI (Maximum) CPP (Maximum) Canada Employment Total Credit Base Rate Total Tax Credits

$14,398 Nil 953 3,039 1,287 $19,677 15% $ 2,952

His wife's income will have to be considered for the entire year and not just from the date of the marriage. Since her net income of $30,000 exceeds the potentially available spousal credit of $14,398 the credit is not available in this year. 3. Mr. Massey will qualify for the following credits: BPA Spousal ($14,398 - $1,500) Total Credit Base Rate Total Tax Credits

$14,398 12,898 $27,296 15% $ 4,094

4. Mr. Jones will qualify for the following credits: BPA Spousal ($14,398 - $1,200) Total Credit Base Rate Total Tax Credits

$14,398 13,198 $27,596 15% $ 4,139

There is no personal tax credit available for his son.

5. Ms. Morrison will qualify for the following credits: BPA Eligible Dependant (See Note) Total Credit Base Rate Total Tax Credits

$14,398 14,398 $28,796 15% $ 4,319

Note — The eligible dependant credit can be claimed for either child. 6. Mr. Bagley will qualify for the following credits: BPA Spousal Including Infirm Amount ($14,398 + $2,350) Age Pension Spouse's Disability Total Credit Base Rate Total Tax Credits

$14,398 16,748 7,898 2,000 8,870 $49,914 15% $ 7,487

As Mr. Bagley's net income is less than the 2022 income threshold of $39,826 there will be no reduction in his age credit. In a similar fashion there will be no clawback of his OAS since the threshold for 2022 is $81,761. Type: ES Topic: Tax credits - determining available credits (multiple mini-cases)

95) Mr. Wallace Burns is a very successful executive with a Canadian public company. In 2022, he had net and taxable income of $96,000, all of which was employment income. The following five independent Cases make assumptions with respect to Wallace's marital status and number of dependants, as well as provides other information that is relevant to the determination of his 2022 Federal income tax payable. In all cases, his employer withholds the required EI premiums and CPP contributions. Assume that part of the CPP contribution of $461 has been properly considered in the determination of net and taxable income. Case A — Wallace is married to Sharon Burns. Sharon has net income of $6,750. Their 20 year old son Kenneth attends university on a full time basis during 11 months of the year. Wallace pays all of his son's costs including $9,850 for tuition and $1,350 for textbooks. Through part time jobs, Kenneth has net income of $4,620. Kenneth has agreed to transfer the maximum tuition amount to his father. Case B — While Wallace has never been married, he obtained custody of his 8 year daughter Sheila, when her mother, his high school girl friend, was killed in a car accident. Although he graduated several years ago, Wallace still has a Canada Student Loan outstanding of $35,000. During the year, interest paid on this loan totalled $1,750 and he paid down $5,000 of the principal. Case C — Wallace is married to Sharon Burns. Sharon has net income of $4,580. Wallace's 82 year old father, Wilbur and Sharon's 63 year old mother, Samantha live with Wallace and Sharon. Wilbur had net income of $18,450, while Samantha had net income of $8,750. Both Wilbur and Samantha are in good health. Case D — Wallace is married to Sharon Burns. Sharon has net income of $5,785. Wallace and Sharon have two children who are both in good health, Sonia is 10 years old and Zack is 8 years old. Neither child has any net income. The family's eligible medical expenses were as follows: Wallace Sharon Sonia Zack Total

$ 800 1,200 4,600 3,700 $10,300

Case E — Wallace has never been married and has no dependants. He is being treated by a psychologist for post traumatic stress disorder, but it is not severe enough to obtain a doctor's certificate for the disability tax credit. During the year he won $100,000 in the provincial lottery. He donates the entire amount to Planned Parenthood, a registered Canadian charity. For 2022, he claims only $45,000 of the total donation. Wallace also makes contributions to a federal political party in the amount of $1,200. Required: In each Case, calculate Wallace's minimum 2022 Federal income tax payable. Indicate any carry forwards available to him and his dependants and the carry forward provisions. Ignore any tax amounts that Wallace might have had withheld or that might have been paid by instalments.

Answer: The federal income tax before Credits is the same in all five of the cases in this problem. It is calculated as follows: Tax on first $50,197 Tax on next $45,803 ($96,000 - $50,197) at 20.5% Income Tax Before Credits

$ 7,530 9,390 $16,920

Case A The solution to this Case can be completed as follows: Income Tax before Credits BPA Spousal ($14,398 - $6,750) EI CPP Canada Employment Tuition transfer from son (Note) Credit Base Rate Federal Income Tax Payable

($14,398) ( 7,648) ( 953) ( 3,039) ( 1,287) ( 5,000) ($32,325) 15%

$16,920

( 4,849) $12,071

Note: The transfer from the son is as follows: Tuition Fees Maximum Transfer Indefinite carry forward (For son only)

$ 9,850 ( 5,000) $ 4,850

Kenneth's income tax payable would be completely eliminated by his BPA of $14,398. He can transfer a maximum of $5,000 of his tuition amount to his father. The remaining $4,850 can be carried forward indefinitely, but must be used by Kenneth. Case B The solution to this Case can be completed as follows: Income Tax before Credits BPA Eligible Dependant EI CPP Canada Employment Interest On Student Loan Credit Base Rate Federal Income Tax Payable

($14,398) ( 14,398) ( 953) ( 3,039) ( 1,287) ( 1,750) ($35,825) 15%

$16,920

( 5,374) $11,546

Case C The solution to this Case can be completed as follows: Income Tax before Credits BPA Spousal ($14,398 - $4,580) EI CPP Canada Employment Canada Caregiver (Note) Credit Base Rate Federal Income Tax Payable

($14,398) ( 9,818) ( 953) ( 3,039) ( 1,287) Nil ($29,495) 15%

$16,920

( 4,424) $12,496

Note: As neither parent is mentally or physically infirm, they are not eligible for the Canada caregiver credit. Case D The solution to this Case can be completed as follows: Income Tax before Credits BPA Spousal ($14,398 - $5,785) EI CPP Canada Employment Medical Expenses Reduced by the lesser of: • [(3%)($96,000)] = $2,880 • 2022 Threshold = $2,479 Credit Base Rate Federal Income Tax Payable

($14,398) ( 8,613) ( 953) ( 3,039) ( 1,287)

$16,920

($10,300)

2,479

( 7,821) ($36,111) 15%

( 5,417) $11,503

Case E The solution to this Case can be completed as follows: Income Tax before Credits BPA EI CPP Canada Employment Credit Base Rate Political Contributions Tax Credit [(3/4)($400) + (1/2)($350) + (1/3)($450)] Charitable Donations [(15%)($200) + (29%)($45,000 - $200)] Federal Income Tax Payable

($14,398) ( 953) ( 3,039) ( 1,287) ($19,677) 15%

$16,920

( 2,952) ( 625) ( 13,022) $ 321

Since none of his taxable income is subject to a tax rate of 33% any donations claimed in excess of $200 are subject to the 29% rate. Unused charitable donations can be carried forward for up to 5 years. The remaining $55,000 of unclaimed donations of $55,000 ($100,000 - $45,000) can be carried forward for 5 years to 2027. The annual donation limitation of 75% of net income would have given Wallace a maximum claim of $72,000 [(75%)($96,000)]. Regardless of whether Wallace might be considered mentally infirm or not, the Canada caregiver credit is not available as it can only be claimed for a dependant. Type: ES Topic: Tax credits - determining available credits (multiple mini-cases)

96) For the past 5 years, Mr. Brooks has been employed as a financial analyst by a large Canadian public firm located in Winnipeg. In 2022, his basic gross salary amounts to $63,000. In addition, he was awarded an $11,000 bonus based on the performance of his division. Of the total bonus, $6,500 was paid in 2022 and the remainder is to be paid on January 15, 2023 In 2022, Mr. Brooks' employer withheld the following amounts from his gross wages: Federal Income Tax EI Premiums CPP Contributions RPP Contributions Donations to a registered charity Union dues Payments for personal use of company car

$3,000 953 3,500 2,800 480 240 1,000

Other Information: 1. Due to an airplane accident while flying back from Thunder Bay on business, Mr. Brooks was seriously injured and confined to a hospital for two full months of 2022. As his employer provides complete group disability insurance coverage, he received a total of $4,200 in payments during this period. All of the premiums for this insurance plan are paid by the employer. The plan provides periodic benefits that compensate for loss of employment income. 2. Mr. Brooks is provided with a car that the company leases at a rate of $678 per month, including both GST and PST. The company pays for all of the operating costs of the car and these amounted to $3,500 for 2022. Mr. Brooks drove the car a total of 35,000 kilometers in 2022, 30,000 kilometers of which were carefully documented as use for employment purposes and 5,000 for personal use. While he was in the hospital (see Item 1), his employer required that the car be returned to company premises. 3. On January 15, 2021, Mr. Brooks received options to buy 200 shares of his employer's common shares at a price of $23 per share. At this time, the shares were trading at $20 per share. Mr. Brooks exercised these options on July 6, 2022, when the shares were trading at $28 per share. He does not plan to sell the shares for at least a year. 4. In order to assist Mr. Brooks in acquiring a home in Winnipeg, his employer granted him a five year, interest free loan of $125,000. The loan was granted on October 1, 2022 and, at this point in time, the interest rate on open five year mortgages was 5%. Assume the prescribed interest on employee loans was 2% on this date and remained unchanged during the year. Mr. Brooks purchases a house for $435,000 on October 2, 2022. He has not owned a home during any of the preceding four years.

5. Other disbursements made by Mr. Brooks include the following: Advanced financial accounting course tuition fees Music history course tuition fees (University of Manitoba one week intensive course) Fees paid to financial planner Payment of premiums on life insurance

$1,200 600 300 642

Mr. Brooks' employer reimbursed him for the tuition fees for the accounting course, but not the music course. The reimbursement was not included as a taxable benefit on his T4. 6. Mr. Brooks is a widower. His wife was killed in a car accident 2 years ago that injured his 8 year old son, Harold, so badly that he qualifies for the disability tax credit. Harold has no net income for the year. 7. Mr. Brooks' mother, Grace, lives with Mr. Brooks and cares for Harold. Grace is 67 years old and her net income is $7,500. Grace refused to take any payments for caring for Harold as she received a large inheritance in the previous year. As a result, Mr. Brooks did not pay any child care or attendant costs for Harold. 8. Mr. Brooks paid the following eligible medical costs: For Himself For Harold For Grace Total

$ 9,300 2,450 1,265 $13,015

Required: Calculate, Mr. Brooks' 2022 employment income, net income, taxable income and federal income tax payable or refund.

Answer: Mr. Brooks' minimum employment income, net income, taxable income and federal income tax payable or refund for 2022 would be calculated as follows: Gross Salary Additions: Bonus (Amount received only) Disability Insurance Receipts (Note 1) Automobile Benefit (Note 2) Stock Option Benefit [($28 - $23)(200)] Housing Loan Benefit [($125,000)(2% - Nil)(3/12)] Deductions: RPP Contributions Union Dues 2022 Employment Income

$63,000 $6,500 4,200 1,034 1,000 625 ( 2,800) ( 240) $73,319

Note 1 - As all of the premiums were paid by the employer and were not considered to be a taxable benefit, benefits received under this coverage must be included in employment income. Note 2 - The personal benefit on the company car, taking into consideration the two months he was in the hospital and unable to make use of the car, would be as follows: Standby Charge [(2/3)(10)($678)(5,000/16,670)*] Operating Cost Benefit - Lesser of: • [(5,000)($0.29)] = $1,450 • [(1/2)($1,356)] = $678 Less: Payments to the employer Taxable Benefit *[(10)(1,667)]

$1,356

678 ( 1,000) $1,034

Taxable Income Mr. Brooks' Taxable Income would be calculated as follows: Employment Income Deductible CPP ($3,500 - $3,039) Net Income Stock Option Deduction [(1/2)($1,000)] Taxable Income

$73,319 ( 461) 72,858 ( 500) $72,358

Federal Income Tax Payable Mr. Brooks' federal income tax payable or refund would be calculated as follows: Tax on first $50,197 Tax on next $22,161 ($72,358 - $50,197) at 20.5% Federal Income Tax before Credits BPA Eligible Dependant Including Infirm Amount ($14,398 + $2,350) (Note 4) Transfer of Harold's Disability Harold's Disability Supplement Canada Caregiver - Mother (Note 5) EI Premiums CPP Contributions Canada Employment Medical Expenses (Note 6) Tuition Fee - Unreimbursed Music Course (Note 7) First Time Home Buyer's Credit Base Rate Charitable Donations (Note 8) [(15%)($200) + (29%)($480 - $200)] Net Federal Tax Federal Income Tax Withheld Federal Income Tax Refund

($14,398) ( 16,748) ( 8,870) ( 5,174) Nil ( 953) ( 3,039) ( 1,287) ( 10,599) ( 600) ( 5,000) ($66,668) 15%

$ 7,530 4,543 $12,073

(10,000) ( 111) $ 1,962 ( 3,000) ($1,038)

Note 4 - The eligible dependant credit can be claimed for Harold, including the extra amount for an infirm dependant. Note 5 - As she is not mentally or physically infirm, the Canada caregiver credit cannot be claimed for Mr. Brooks' mother. No claim can be made for the eligible dependant credit for his mother, since the facts indicate that she inherited a significant amount meaning she would not be wholly dependant upon Mr. Brooks. The fact that she also appears to have taken on caring for the infirm child also supports the fact that she is not dependent upon anyone at this time. Note 6 - Allowable medical expenses are as follows: Mr. Brooks' and minor child (Harold) Medical Expenses ($9,300 + $2,450) Reduced by the lesser of: • [(3%)($73,029)] = $2,191 • 2022 Threshold Amount = $2,479 Grace's Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($7,500)] = $225 Allowable Medical Expenses

$11,750

$1,265

( 225)

( 2,191)

1,040 $10,599

Note 7 - As the accounting course tuition fees were reimbursed by his employer and not included in his employment income, there is no tuition credit for that course. Note 8 - As none of his taxable income is subject to the 33% income tax rate all donations in excess of $200 are eligible for a credit at a rate of 29%. Type: ES Topic: Tax credits - employment income, tax payable (comprehensive)

97) Marvin Combs is 43 years old and is employed by a Canadian public company. His annual salary is $112,468, none of which is commissions. Because of his outstanding work during 2022, he has been awarded a $20,000 bonus. The bonus will be paid in 2026 and 2027 at the rate of $10,000 each year to help ensure he stays with the Company. As Marvin expects to remain at the Company for the rest of his working life, he accepts the delayed payment. In 2022, his employer withheld EI premiums of $953 and CPP contributions of $3,500. The employer also withheld professional association dues of $3,400 and contributions to a registered charity of $2,500. Also withheld were RPP contributions of $6,800. On his behalf, the employer also made a contribution to the pension plan of $4,600. Marvin's spouse, Leslie Combs, 46 years old and is legally blind. Her net income is $8,460. The Combs have three children. Information on these children is as follows: Sharon is 17 years old, in good health, and has net income from part time employment of $7,625. Suzanne is 19 years old and suffers from a physical infirmity that prevent her from working on a full time basis. She lives with Marvin and Leslie and has net income from part time employment of $7,250. Samantha is 23 years old and attends university on a full time basis for 11 months of the year. Marvin pays the tuition fees of $10,300, along with textbook costs of $1,100. She lives with Marvin and Leslie and is in good health. She has net income of $12,800 all of which is from investments. The investments were purchased with income saved from part-time employment during her high school years. Other Information: 1. Marvin is provided with an automobile by his employer. The automobile is used largely for employment purposes. Total kilometers driven in 2022 was 62,000 kilometers, with 58,000 for employment purposes and 4,000 for personal use. The automobile is leased by the employer for $456 per month which includes $43 for insurance. The automobile is available to Marvin for 10 months in 2022. 2. In 2019, Marvin was granted stock options to purchase 300 shares of his employer's common shares at a price of $72 per share. At the time the options were granted, the FMV of the shares were $70 per share. In January, 2022, when the shares are trading at $85 per share, Marvin exercises all of the options. He still owns the shares at December 31, 2022. 3. During 2022, Marvin receives several gifts from his employer: • As a reward for winning the company's Employee of the Month Award, he receives an expense paid weekend in a local hotel. The regular price for this package was $1,200. • As is the case for all of the company's employees, Marvin received a $600 gift certificate for merchandise at a local department store. • At Christmas, the company provides each employee with a basket of gourmet food. The value of this basket is $450. 4. In 2022, Marvin spent $8,400 on meals and entertainment with clients of his employer. His employer reimbursed all but $1,000 of these costs.

5. In 2022, Marvin and Leslie decide to purchase their first family home (they have rented for the last 15 years). After considerable searching, they identify the perfect property one block from their rented apartment and purchase it for $462,000. Consistent with company policy he requests and receives an interest free loan of $200,000 to assist with this purchase. The loan was received on April 1, 2022. Assume that the prescribed interest rate on employee loans is 2% throughout all of 2022. 6. In 2022, both Sharon and Samantha had surgery. Marvin paid $2,800 for emergency services after Sharon's nose suffered serious trauma during a martial arts class. He also paid $13,500 for cosmetic surgery for Samantha.These amounts are included in the following medical expenses of the family, all of which were paid by Marvin: Marvin And Leslie Sharon Suzanne Samantha

$ 2,200 3,100 12,300 16,000

Required: A. Determine Marvin’s minimum employment income and net income for 2022. B. Determine Marvin’s minimum taxable income for 2022. C. Based on your answer in Part B, determine Marvin’s federal income tax payable for 2022.

Answer: Part A - Employment income and net income Marvin's minimum employment and net income would be calculated as follows: Salary Additions: Bonus (Amounts Received after 2025 - Salary Deferral Arrangement) Automobile Benefit (Note 1) Stock Options (Note 2) Gifts (Note 3) Client Meals and Entertainment (Note 4) Interest Free Loan Benefit (Note 5) Deductions: RPP Contributions Professional Association Dues 2022 Employment Income

$112,468

20,000 991 3,900 1,800 Nil 3,000 ( 6,800) ( 3,400) $131,959

Note 1 - The automobile benefit would be calculated as follows: Standby Charge [(2/3)(10)($456 - $43)(4,000 ÷ 16,670*)] Operating Cost Benefit - Lesser Of: • [(1/2)($661)] = $330 • [($0.29)(4,000)] = $1,160 Total Automobile Benefit *[(10)(1,667)]

$661

330 $991

As Marvin's employment related use was more than 50%, the reduced standby charge is available. In addition, he can use the alternative calculation of the operating cost benefit. Note 2 - The stock option benefit would be calculated as follows: [(300)($85 - $72)] = $3,900 Note 3 - The $1,200 employee of the month award is performance based and therefore would not be eligible for CRA administrative concessions. In addition the $600 gift certificate is also not eligible for the CRA concessions since it is a near cash gift. The Christmas basket is under the $500 concession limit and would therefore not be considered a taxable benefit. The total taxable benefit would be $1,800 ($1,200 + $600). Note 4 - Marvin's meal and entertainment costs exceed his employer's reimbursement by the $1,000 that were not reimbursed. However, as he has no commission income, he cannot deduct these out-of-pocket costs. In addition since the meals are entertainment were incurred on behalf of the employer no part of the amounts paid by the employer would be considered a taxable benefit. Note 5 - The taxable benefit on the loan is calculated as follows: [(2%)($200,000)(9/12)] = $3,000

Part B - Taxable Income Marvin's taxable income would be calculated as follows: Employment Income Deductible CPP ($3,500 - $3,039) Net Income Stock Option Deduction [(1/2)($3,900)] Taxable Income

$131,959 ( 461) $131,498 ( 1,950) $129,548

Part C - Federal Income Tax Payable Based on the taxable income calculated in Part B,Marvin's Federal income tax payable would be calculated as follows: Tax on first $100,392 Tax on next $29,156 ($129,548 - $100,392) at 26% Federal Tax before Credits BPA ($14,398) Spousal Including Infirm Amount ($14,398 + $2,350 - $8,460) Canada Caregiver - Suzanne Transfer of Leslie's Disability Transfer of Samantha's Tuition (Note 6) First-Time Home Buyers' EI Premiums CPP Contributions Canada Employment Medical Expenses (Note 7) Credit Base Rate Charitable Donations (Note 8) [(15%)($200) + (29%)($2,500 - $200)] Marvin's 2022 Federal Income Tax Payable

$17,820 7,581 $25,401

( 8,288) ( 7,525) ( 8,870) ( 5,000) ( 5,000) ( 953) ( 3,039) ( 1,287) ( 17,019) ($71,379) 15%

( 10,707) ( 697) $13,997

Note 6 - As Samantha's net income is less than the BPA of $14,398, she cannot claim any tuition credit. Given this and the fact that her total tuition exceeds the maximum transfer of $5,000, the transfer amount will be limited to $5,000.

Note 7 - Samantha's cosmetic surgery would not be an eligible medical expense. The base for Marvin's medical expense credit can be calculated as follows: Marvin, Leslie, And Sharon ($2,200 + $3,100) Reduced by the lesser of: • [(3%)($131,498)] = $3,945 • 2022 Threshold Amount = $2,479

$ 5,300

( 2,479)

Suzanne's Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($7,250)] = $218

$12,300

( 218)

Samantha's Allowable Medical Expenses ($16,000 - $13,500) Reduced by the lesser pf: • $2,479 • [(3%)($12,800)] = $384 Allowable Medical Expenses

12,082

$2,500

( 384)

2,116 $17,019

Note 8 - As none of his taxable income is subject to the 33% income tax rate all donations in excess of $200 are eligible for a credit at a rate of 29%. Type: ES Topic: Tax credits - employment income, tax payable (comprehensive)

98) Martin Dorne is 53 years old and employed by a large public construction company. His annual salary is $98,500, none of which is commissions. The company was very successful in 2022 and Martin has been provided with a $15,000 bonus. that will be paid in equal amounts ($3,000) over the five year period period 2022 through 2026. Martin's employer withheld maximum EI premiums and CPP contributions, along with $18,000 in federal income taxes. Other amounts withheld by his employer are as follows: RPP Contributions Union Dues

$4,300 450

Martin's common-law partner is Brian Lassiter. Brian is 48 years old and is legally blind. Brian has net income of $9,400 in 2021 all of which is from investments. Martin and Brian adopted three orphaned brothers 8 years ago. Information on these brothers is as follows: David is 15 years old, in good health, and has net income from part time employment of $10,500. Devon is 20 years old and suffers from a physical infirmity that prevent him from working on a full time basis. He lives with Martin and Brian and has net income from part time employment of $5,150. Derek is 22 years old and attends university on a full time basis for 8 months of the year. Martin pays his tuition fees of $14,300, along with textbook costs of $1,200. He lives with Martin and Brian and is in good health. He has net income of $14,000 all of which is from a business he carries on as a sole proprietor. Assume he pays no CPP contributions on this income. Other Information: 1. In 2022, Martin spent $12,300 on meals and entertainment with clients of his employer. His employer only reimbursed $7,300 of these costs. 2. In 2022, Martin makes his regular annual contribution of $2,000 to a registered charity, 3. The family's 2022 medical expenses, all of which were paid by Martin, were as follows: Martin and Brian David Devon Derek

$ 2,200 1,700 10,600 4,500

4. Martin received options to purchase 500 shares of his employer at a price of $45 per share 2 years ago. At the time the options were granted, the market price of the shares was $50 per share. In July, 2022, when the shares are trading at $70 per share, Martin exercises all of the options. He continues to own the shares on December 31, 2022. 5. As interest rates continue to be very favourable, Martin and Brian purchase a home near the rented residence that they have lived in for the last 15 years. The cost of the new home is $480,000 and, to assist with the purchase, Martin's employer provides a $280,000 interest free loan. The loan was received on July 1, 2022 and will have to be repaid by July 1, 2026. Assume the prescribed interest rate on employee loans is 1% throughout all of 2022.

6. Martin is provided with an automobile by his employer. The automobile was purchased at a cost of $45,200, including HST at 13%. In 2022, the automobile is driven 48,000 kilometers, of which 37,000 were for employment purposes and 11,000 for personal use. The automobile is available to Martin for 11 months during 2022. 7. In 2022, Martin receives several gifts from his employer: • As is the case for all of the company's employees,Martin receives a $250 gift certificate that can be used for merchandise at a local department store. • In recognition of his 10 years of service, Martin receives an engraved wrist watch. The retail value of this watch is $800. • At Christmas, all of the company's employees receive a gift box of vintage wines. The retail value of these wines is $400. Required: A. Determine Martin's 2022 employment income and net income. B. Determine Martin's 2022 taxable income. C. Based on your answer in Part B, determine Martin's 2022 Federal income tax payable or refund.

Answer: Part A Martin's 2022 employment income would be calculated as follows: Salary Additions: Bonus (2022 Receipt) Bonus (Amounts after 2025 - Salary Deferral) Client Meals and Entertainment (Note 1) Stock Options (Note 2) Interest Free Loan Benefit (Note 3) Automobile Benefit (Note 4) Gifts (Note 5) Deductions: RPP Contributions Union Dues 2022 Employment Income

$ 98,500 3,000 3,000 Nil 12,500 1,400 8,948 550 ( 4,300) ( 450) $123,148

Note 1 - Martin's meal and entertainment expenses exceed his employer's reimbursement by $5,000 ($12,300 - $7,300). However, as he has no commission income, he cannot deduct these out-of-pocket costs. In addition since the expenses were incurred on behalf of his employer no part of the amounts reimbursed create a taxable benefit. Note 2 - The stock option benefit would be calculated as follows: [(500)($70 - $45)] = $12,500 Note that, because the option price was less than the FMV of the shares at the time the options were granted, there is no stock option deduction allowed. Note 3 - The taxable benefit on the loan is calculated as follows: [(1%)($280,000)(6/12)] = $1,400 Note 4 - The automobile benefit would be calculated as follows: Standby Charge [(2%)(11)($45,200)(11,000 ÷ 18,337*)] Operating Cost Benefit - Lesser of: • [(1/2)($5,965)] = $2,983 • [($0.29)(11,000)] = $3,190 Total Automobile Benefit *[(11)(1,667)]

$5,965

2,983 $8,948

As Martin's employment related use was more than 50%, the reduced standby charge is available. In addition, he could use the alternative calculation of the operating cost benefit. Note 5 - The gift certificate for $250 is not eligible for the CRA concessions therefore it is a taxable because it is a near-cash gift. The first $500 of the long-service award will not be a taxable benefit. However, the excess of $300 ($800 - $500) will be a taxable benefit. As the value of the Christmas gift basket is under $500, it will not create a taxable benefit. The total taxable benefit for gifts is $550 ($250 + $300).

Part B Martin’s net and taxable income would be calculated as follows: Employment Income Deductible CPP ($3,500 - $3,039) 2022 Net and Taxable Income

$123,148 ( 461) $122,687

Part C Martin’s Federal income tax payable would be calculated as follows: Tax on first $100,392 Tax on next $22,295 ($122,687 - $100,392) at 26% Federal Tax before Credits BPA ($14,398) Spousal Including Infirm Amount ($14,398 + $2,350 - $9,400) ( 7,348) Canada Caregiver - Additional Amount (Note 6) ( 177) Canada Caregiver - Devon ( 7,525) Transfer of Brian’s Disability ( 8,870) Transfer of Derek’s Tuition (Note 7) ( 5,000) First Time Home Buyers (Maximum) ( 5,000) EI Premiums ( 953) CPP Contributions ( 3,039) Canada Employment ( 1,287) Medical Expenses (Note 8) ( 15,946) Credit Base ($69,543) Rate 15% Charitable Donations [(15%)($200) + (29%)($2,000 - $200)] (Note 9) Federal Income Tax Payable Federal Income Tax Withheld Federal Income Tax Refund

$17,820 5,797 $23,617

( 10,431) ( 552) $12,634 ( 18,000) ($ 5,366)

Note 6 - The base for the spousal credit of $7,348 is less than the Canada caregiver base of $7,525. As his spouse's net income is less than the income threshold for the Canada caregiver credit of $17,670, he would qualify for the full amount of the Canada caregiver credit. Given this, there is an additional amount of $177 ($7,525 - $7,348) added to the credit base. Note 7 - Derek will have to reduce his own federal income tax payable to nil before transferring any tuition amount. Since his BPA of $14,398 exceeds his net income of $14,000 he will not need any of his tuition credits to reduce his income tax payable. This means that he can transfer the maximum amount of $5,000. He will have a carry forward of $9,300 ($14,300 - $5,000). The reason for the assumption of no CPP contributions is that business income is not covered until Chapter 6. Derek's self-employed income would be reduced by half of the CPP paid and his tax payable would be reduced by the other half.

Note 8 - The base for Martin's medical expense credit can be calculated as follows: Martin, Brian, And David ($2,200 + $1,700) Reduced by the lesser of: • [(3%)($122,687)] = $3,681 • 2022 Threshold Amount = $2,479 Devon’s Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($5,150)] = $155 Derek’s Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($14,000)] = $420 Allowable Medical Costs

$ 3,900

$10,600

( 2,479)

( 155) $4,500

10,445

( 420)

4,080 $15,946

Note 9 - As none of his taxable income is subject to the 33% income tax rate all donations in excess of $200 are eligible for a credit at a rate of 29%. Type: ES Topic: Tax credits - employment income, tax payable (comprehensive)

99) Phil Cousteau is an accountant. Phil is 47 years old and is married to Claire who is 45 years old and blind. She has 2022 net income of $9,000, all of which is interest on investments she inherited from her mother. Phil and Claire have two children, a 15 year old daughter, Haley, and a 19 year old son, Manny. Both Haley and Manny live at home. Haley had 2022 net income of $800 from baby-sitting. Manny has a physical infirmity that is not severe enough to qualify for the disability tax credit. Manny has 2022 net income of $15,000 attributable to interest income on investments inherited from his grandmother. Phil's brother, Cameron, who is in good health, lives in the basement of Phil's Toronto home. Cameron is 50 years old and has net income of $3,000 all of which is from EI benefits. Phil also supports his 85 year old father, Jay, who is physically infirm and lives in a retirement home. Jay's 2022 net income is $9,000 which consists of OAS, investment income and payments from a RPP of $1,000. Phil works for ModFam Company and was paid a salary of $70,000 in 2022. He also earned a bonus of $5,000 in 2022, with one-fifth of the bonus to be paid each year from 2022 to 2026. In 2022 he received a briefcase worth $800 as an award for being the "employee of the year" and a Christmas basket from the company worth $600. All of the Company's employees received a similar basket. ModFam transferred Phil from their Toronto office to their Vancouver office in 2022. On April 1, 2022 Phil moved his family out of the house they had rented in Toronto for the last 10 years and into a brand new house in Vancouver that cost $800,000. Although Jay was to stay at the retirement home in Toronto, Cameron moved with the family to Vancouver. Phil was reimbursed by his employer for all of his moving costs. As a consequence, he has no deductible moving expenses. To help finance the new house, ModFam Company lent Phil $500,000 on April 1 at 1% interest. Phil would have paid 5% interest on a similar loan from the bank. ModFam provides Phil with a company car. While he was at the Toronto office, he had a Toyota Highlander that the company leased for $875 per month ($50 of which was for insurance). The company paid $1,600 for the Highlander's other operating costs from January 1, 2022 to March 31, 2022. During that period, Phil drove the car 9,000 kilometers of which 6,000 kilometers were for employment purposes and 3,000 for personal use. On April 1, 2022 the Vancouver office gave Phil the keys to a Toyota Camry Hybrid that was purchased for $31,300. The company paid $4,500 for the Camry's operating costs from April 1, 2022 to December 31, 2022. During that period, Phil drove the car 24,000 kilometers of which 10,000 kilometers were for employment purposes and 14,000 for personal use.

In 2022, the following payroll amounts were withheld by the employer : Federal Income Tax CPP EI Group Life Insurance Premiums RPP contributions Donations to a registered charity

$8,500 3,500 953 600 1,200 1,500

The company matched the life insurance and RPP amounts. In 2022, Phil paid the following eligible medical expenses: Himself Claire Haley Manny Cameron Jay

$ 650 1,940 860 1,250 480 990

Phil also paid $900 for his 2022 professional association dues. Claire made a $500 donation to their church during 2022. Assume that the prescribed interest rates for 2022 on employee loans were 2% for the first and fourth quarter and 3% second and third quarter. Required: For the 2022 taxation year, calculate Mr. Cousteau's: 1. Employment income and Net Income, 2. Taxable Income, 3. Federal Income Tax Payable or Refund. In determining these amounts, ignore GST/HST & PST considerations.

Answer: Part 1 - Employment Income The required amounts would be calculated as follows: Salary Additions Bonus ($5,000 ÷ 5) Salary Deferral Benefit (Bonus Past 2025) Performance Award (Briefcase) Christmas Basket ($600 - $500) Loan Benefit (Note 1) Automobile Benefit (Note 2) Employer Paid Premium on Life Insurance Deductions RPP Contributions Professional Dues 2022 Employment Income

$70,000 1,000 1,000 800 100 6,250 11,179 600 ( 1,200) ( 900) $88,829

Note 1 - The loan benefit would be calculated as follows: Taxable Benefit under ITA 80.4(1)(a) - Lesser of: • [(3%)(2/4)($500,000) + (2%)(1/4)($500,000)] = • [(3%)(3/4)($500,000)] = $11,250 Reduction For Payments Under ITA 80.4(1)(c) [(1%)($500,000)(3/4)] Total ITA 80.4(1) Interest Benefit

$10,000 ( 3,750) $ 6,250

Mr. Couteau can continue to use the rate in effect at the time the loan was made to calculate the taxable benefit for up to 5 years. However, since the rate has decreased, it is more advantageous for him to use the current rate instead. Note 2 - On the Vancouver automobile employment use was less than 50%. This means the reduced standby charge and the alternative operating cost benefit calculation are not available. The automobile benefit would be calculated as follows: Toronto Standby Charge [(2/3)($875 - $50)(3)(3,000/5,001*)] Toronto Operating Cost Benefit - Lesser of: • [($0.29)(3,000)] = $870 • [(1/2)($990)] = $495 Vancouver Standby Charge [(2%)($31,300)(9)] Vancouver Operating Cost Benefit [($0.29)(14,000)] Total Automobile Benefit *[(3)(1,667)]

$ 990

495 5,634 4,060 $11,179

Other Notes: • A bonus that is payable more than 3 years after the end of the year in which an employee provides services is a salary deferral arrangement and must be included in income in the year in which the employment services were provided. • Performance awards are not eligible for the CRA concessions and are therefore taxable benefits. • The exempt portion of non-cash gifts is limited to $500 as a result of the CRA concessions. • While employer payments for life insurance premiums are a taxable benefit, employer contributions to RPPs are not a benefit. Part 2 - Net and Taxable Income Mr. Cousteau’s Net and Taxable Income amounts are calculated as follows: Employment Income $88,829 Deductible CPP ($3,500 - $3,039) ( 461) 2022 Net and Taxable Income $88,368 Part 3 - Federal Income Tax Payable or Refund Mr. Cousteau’s Federal income tax payable or refund would be calculated as follows: Tax on first $50,197 Tax on next $38,171 ($88,368 - $50,197) at 20.5% Federal Tax before Credits BPA Spousal Including Infirm Amount ($14,398 + $2,350 - $9,000) Additional Caregiver Amount (Note 3) Disability Transfer from Spouse Canada Caregiver (Note 4) Manny And Jay [(2)($7,525)] First-Time Home Buyers' CPP EI Canada Employment Medical Expenses (Note 5)

($14,398)

$ 7,530 7,825 $15,355

( 7,748) Nil ( 8,870) ( 15,050) ( 5,000) ( 3,039) ( 953) ( 1,287) ( 2,881) ($59,226) 15%

Rate Charitable Donations (Note 6) [(15%)($200) + (29%)($1,500 + $500 - $200)] Federal Income Tax Payable before Withholding Federal Income Tax Withheld Federal Income Tax Refund

( 8,884) ( 552) $ 5,919 ( 8,500) ($ 2,581)

Note 3 - Since the spousal amount of $7,748 is not less than the Canada caregiver amount of $7,525, there is no additional amount. Note 4 - Both Manny and Jay qualify for the Canada caregiver credit because they are infirm. As neither has income in excess of the Canada caregiver income threshold of $17,256, the full Canada caregiver amount is available for each.

Note 5 - The base for the medical expense tax credit can be calculated as follows: Phil, Claire, and Haley ($650 + $1,940 + $860) Reduced by the lesser of: • [(3%)($88,368)] = $2,651 • 2022 Threshold Amount = $2,479 Manny Reduced by the lesser of: • [(3%)($15,000)] = $450 • $2,479 Cameron Reduced by the lesser of: • [(3%)($3,000)] = $90 • $2,479 Jay Reduced by the lesser of: • [(3%)($9,000)] = $270 • $2,479 Total

$3,450

$1,250

( 2,479)

( 450) $480

800

( 90) $990

390

( 270)

720 $2,881

Note 6 - As none of his taxable income is subject to the 33% income tax rate all donations in excess of $200 are eligible for a credit at a rate of 29%. Type: ES Topic: Tax credits - employment income, tax payable (comprehensive)

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 5 Capital Cost Allowance Note to Instructors: The solutions to the Chapter 5 Test Bank questions only contemplate federal income tax and GST/HST legislation that had become law as of December 31, 2021. 5.1 Online Exercises 1) The calculation of amortization expense under accounting rules such as ASPE or IFRS and the determination of CCA to be claimed for income tax purposes can be viewed as somewhat similar.However, there are some differences that arise in how the amounts are determined. Describe the similarities and differences between the procedures used to calculate amortization expense for accounting purposes and those procedures used to establish the amount of CCA to be claimed for income tax. Answer: The basic similarity between amortization and CCA is that both are directed towards allocating the cost of a depreciable property over periods of time. Amortization requires that this allocation period be based upon the useful life of the property. In contrast, CCA procedures often use periods that are longer or shorter than the actual life of the property. For example, CCA allocates the cost of some Class 12 property to just one year, even though the properties last considerably longer. Alternatively, the period of write-off for a property subject to declining balance methods (e.g., Class 8) have an unlimited write off period. The objectives of amortization and CCA are different in that amortization matches amortization expense with the related revenues in order to present fairly the results of operations of a business. In contrast, the tax policy behind CCA is simply to recognize a portion of cost as an annual expense for the purposes of reducing income tax payable. As far as methods are concerned, CCA is generally limited to the use of straight line or declining balance methods with the added complications required to apply the AccII, the available for use rules, the short fiscal period rules, new rules for zero emission vehicles and new rules for complete expensing for CCPCs to name some of the more common secondary rules that must be considered in determining annual CCA. In contrast, amortization calculations can use a much wider range of methods and, in addition, the accountant has discretion as to the choice of methods for particular types of depreciable property. A final difference is in the application of the methods chosen. The CCA rules determine the maximum amount that will be allowed as a deduction for each class. However there is no requirement to actually claim that maximum amount. This can provide flexibility such as where a business wishes to minimize a loss by claiming little or no CCA in a particular taxation year. In contrast, accounting amortization must determine the amount to be deducted on a consistent basis from year to year, without being influenced by the level of income being experienced by the enterprise. In other words in accounting annual amortization must be claimed each year irrespective of the performance of the business. Type: ES Topic: CCA and depreciable property (income tax vs accounting)

2) For accounting purposes, the cost of an asset is generally equal to its acquisition cost. This cost would include the basic invoice cost, delivery and installation costs, and other expenditures required to make the asset available for use by the business. Indicate some of the reasons why the capital cost of a property for income tax purposes may differ from the cost for accounting purposes. Answer: The capital cost of a property for income tax purposes would, in many cases, contain all of the same component costs used for accounting purposes. However, there may be differences and some of them are caused by the factors described below: Automobiles Costing more than $34,000 or $59,000 in 2022 — For income tax purposes, the deductible cost of passenger automobiles is limited to $34,000 or $59,000 in 2022 in the case of zero-emission passenger vehicles, exclusive of GST/HST & PST. Previously the prescribed amounts were $30,000 and $55,000. For accounting purposes, there is no similar restriction. Government Assistance — Under the provisions of ITA 13(7.1), government assistance (e.g. loans, grants, credits etc) to assist in the purchase of depreciable property must reduce the capital cost for CCA purposes. Under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, such assistance can either be deducted in a manner similar to the income tax rules or treated as a deferred charge. Property Acquired in Non-Arm's Length Transactions — When a depreciable property is purchased in a non-arm's length transaction, the ITA requires the use of FMV without regard to the actual price established between the buyer and seller. For accounting purposes, the actual price established between the buyer and seller would be used and, if that amount was different than the FMV, a significant difference between the accounting and tax values could arise. Type: ES Topic: CCA and depreciable property (income tax vs accounting)

3) Each depreciable property is allocated to a single prescribed Class that contains all of the property of that Class. However, in certain situations depreciable property may be required to be placed in a separate prescribed class on a mandatory or elective basis resulting in multiple classes of the same class number. What are some examples of this type of situation? Answer: The examples that are listed in the text are as follows: • Separate businesses must have separate Classes for each business. • Each rental property with a cost of $50,000 or more must be allocated to a separate class. • Each passenger vehicle with a cost in excess of $34,000 in 2022 must be allocated to a separate class. • Each zero-emission passenger vehicle with a cost in excess of $59,000 in 2022 must be allocated to a separate class. if an election is filed to exclude the property from Class 54 (ITR 1103(2j) • Eligible non-residential buildings that have been elected upon. • Qualifying depreciable property subject to technological obsolescence that is elected upon. Type: ES Topic: CCA separate classes

4) Briefly explain why it is important to take care in allocating depreciable property to the appropriate CCA class. Answer: Mistakes in classification can have a dramatic impact upon income or loss depending on the different CCA rates applicable to the correct class versus the class chosen in error. For example, if a $100,000 depreciable property is placed in Class 1 (4%/6%/10% declining balance CCA) when it should have been placed in Class 10 (30% declining balance CCA), the maximum CCA claim would be $4,000 as opposed to the $30,000 that would have been available had the correct class been chosen. Alternatively, an understatement of income tax owing would arise if a Class 10 depreciable property were mistakenly added to Class 1. Type: ES Topic: CCA misclassification error

5) Each non-zero-emission passenger vehicle with a cost in excess of $30,000 must be placed in a separate Class 10.1. Passenger vehicles with a cost of $30,000 or less are placed in Class 10. Briefly describe the differences between the rules applicable to Class 10.1, and those applicable to Class 10. Answer: The differences are as follows: • The addition to Class 10.1 requires a passenger vehicle with a cost in excess of $34,000 beginning in 2022. There is no dollar limit on depreciable property added to Class 10 • In the year of disposition, one-half of the normal CCA that could have been claimed had the property not been disposed of can be claimed with respect to Class 10.1. CCA can only be claimed on Class 10 in the normal manner. If there are no properties remaining in the class at the end of the year then no CCA can be claimed. • In the year of disposition, no recapture or terminal loss is allowed with respect to Class 10.1. Recapture or terminal losses apply with respect to Class 10. Type: ES Topic: CCA Class 10.1

6) Patents with a limited life are normally included in Class 44 where they are subject to declining balance CCA calculations at a 25% rate. However, a taxpayer can elect not to include the limited life patent in Class 44 in which case Class 14 would then apply. Class 14 applies a straight-line approach determining annual CCA based on the remaining legal life of the patent. Under what circumstances would this election be desirable? Answer: The election could be useful if the patent is acquired near the end of its legal life. For example, if only three years remained, the annual CCA claim would equal one-third of the cost, resulting in larger CCA claims than would be the case using Class 44's 25% declining balance rate. Type: ES Topic: CCA patents

7) Prior to November 21, 2018 the half year rule applied to most depreciable property acquired but as of November 20, 2018 until December 31, 2027 most depreciable property will be eligible for the AccII. What will be the effect of this change on the maximum CCA that can be claimed for the current 2022 taxation year? Answer: Under the half-year rule, one-half of net additions for the year were deducted from the base for calculating CCA for that year. Under the AccII, one-half of the net additions are added to the base for calculating CCA for the year. This has the effect of tripling the amount of CCA that can be claimed with respect to most depreciable property purchased in 2022. This change however does not affect the total CCA that can be claimed with respect to each depreciable property. The AccII simply allows a larger proportion of the cost of depreciable property to be claimed in the year of purchase (assuming that the property has passed the available for use rules). Type: ES Topic: CCA AccII rules

8) If a taxpayer has decided, in a particular taxation year, to deduct less than the maximum available CCA, a decision will be required to select the appropriate class from which CCA will be claimed. What is the general tax planning basis for making this decision? Explain your conclusion. Answer: In years in which a taxpayer deducts less than maximum CCA, the CCA that is deducted should usually be taken from the class or classes with the lowest CCA rates. The reason for this is that taking the deduction from a low rate class will leave a larger balance(s) in high rate classes. As a consequence, the application of these higher rates will result in a larger maximum CCA deduction in future years. Type: ES Topic: CCA tax planning

9) When a depreciable property is sold, there may be no immediate income tax consequences. Identify the circumstances necessary to achieve this result. Answer: As listed in the text, the conditions are as follows: • The POD is less than the ACB (i.e., capital cost) of the property. This avoids any capital gain. • There are additional properties in the class and the UCC balance on the last day of the taxation year is positive. This avoids any potential terminal loss. • The UCC balance is not negative on the last day of the taxation year. This avoids the possibility of recapture. Type: ES Topic: CCA calculations

10) When there is a disposition of depreciable property, there may be recapture, a terminal loss or no income tax implications. What conditions are required to result in (1) recapture and (2) a terminal loss. Answer: (1) Recapture occurs when the UCC balance on the last day of the taxation year is negative. Recapture is not dependent upon their being property in the class at that time and, (2) A terminal loss requires two conditions - the first is that the UCC balance on the last day of the taxation year is positive and the second that there are no properties remaining in that class on the last day of the taxation year. Type: ES Topic: CCA - recapture and/or terminal loss

11) When there is a disposition of depreciable property, there may be recapture or a terminal loss. How are recapture and terminal losses treated for income tax purposes. including their affect upon UCC of the class to which they relate? Answer: Recapture and terminal loss arise in connection with a source of income that is either a business or property (e.g. rental buildings). Recapture is added to either property or business income and terminal loss is deducted from either property or business income. In both cases the UCC balance of the particular class is reset to nil on the first day of the following taxation year. Type: ES Topic: CCA - recapture and/or terminal loss

12) When a depreciable property is sold, the income tax consequences are usually quite different than the consequences for accounting purposes. Describe the differences between accounting and income tax when depreciable property is sold. Answer: For accounting purposes the carrying value of a particular asset is compared to the sale proceeds. If the sale proceeds exceed the carrying value, an accounting gain is recorded. Alternatively, if the sale proceeds are less than the carrying value, an accounting loss is recognized. These accounting gains and losses are included in the accounting income for the year. The income tax consequences can be much more complex. In general, the disposition of depreciable property results in a reduction to the CCA class of an amount equal to the lesser of the capital cost and the POD. If the POD do not exceed the capital cost, if the property is not the last property in the class, and if the deduction of the POD or capital cost does not create a negative balance in the class, the only income tax consequence will be a reduced UCC balance that will result in a lower CCA claim for the year. However, there are several other possible outcomes that can be described as follows: POD exceed Capital Cost(i.e., ACB) — If the POD exceed the capital cost of the property, the excess will be a capital gain, one-half of which will be a taxable capital gain. Last property in the class — If the property disposed of is the last property in the class and on the last day of the taxation year the UCC balance is positive there will be a terminal loss equal to that positive UCC balance. The terminal loss represents a deduction in the year from either business or property income. Negative UCC balance in the class — If the reduction to the UCC caused by a disposition of depreciable property results in a negative UCC balance that still exists on the last day of the taxation year that negative amount represents a recapture which is added to either business or property income for the year of the disposition. Both recapture and terminal loss resets the UCC balance to nil on the first day of the next taxation year. Type: ES Topic: CCA and depreciable property (income tax vs accounting)

13) When a taxpayer acquires depreciable property such as a photocopier, the property can either be classified as Class 8 property along with all other Class 8 properties or an election can be filed to include the property in a separate Class 8. What is the advantage of electing to include a photocopier to a separate Class 8? Answer: If an election is filed to include a photocopier in a separate Class 8, it will be subject to CCA at a 20% rate, even if its expected life is very short (e.g., two or three years). The benefit of an election is that if the property is disposed of for an amount less than its UCC the remaining positive UCC balance can be deducted as a terminal loss in the year of disposition. Alternatively, if an election is not made an amount that would have been a terminal loss will likely result in a reduction in the UCC balance only. The result would be a smaller CCA claim rather than a large terminal loss. Type: ES Topic: CCA separate classes

14) Describe the type of properties or expenditures that are included in Class 14.1 and give two examples. Answer: Class 14.1 was established to include capital expenditures that are largely intangible property and other types of property that do not fit within other classes of depreciable property. Examples of Class 14.1 property include: • goodwill; • Licenses, patents, trademarks and franchises with unlimited lives; • purchased customer lists, • expenses of incorporation over $3,000. • the cost of certain government rights; Type: SA Topic: CCA Class 14.1

15) Describe the tax treatment of purchased goodwill. Answer: ITA 13(34)(a) deems each business to own goodwill and since there is no cost of that goodwill (e.g. internally generated goodwill) the cost would be nil. The rules of the ITA make the following adjustments with respect to goodwill: Additions • Amounts paid for goodwill on the purchase of a business. • Capital expenditures that are not identifiable with a specific property. Deductions • Amounts received for goodwill disposed of on the sale of a business. Type: ES Topic: CCA Class 14.1

16) CCA is analogous to the accounting term amortization that allocates the cost of depreciable property to current and future taxation years. Answer: TRUE Explanation: CCA is analogous to the accounting term amortization that allocates the cost of depreciable property to current and future taxation years. Type: TF Topic: CCA and depreciable property (income tax vs accounting)

17) The capital cost of depreciable property is reduced by government assistance received or receivable where it is provided to defray the costs of depreciable property. Answer: TRUE Explanation: The capital cost of depreciable property is reduced by government assistance received or receivable where it is provided to defray the costs of depreciable property. Type: TF Topic: Government assistance

18) CCA for each class can be calculated using the declining balance method or the straight line method, as long as it is the same method used to calculate amortization for financial statements purposes. Answer: FALSE Explanation: The method for calculating CCA for each class is specified in the Income Tax Regulations and the accounting treatment has no bearing on income tax considerations. Type: TF Topic: CCA and depreciable property (income tax vs accounting)

19) A corporation with a June 30 taxation year end begins carrying in business on January 1, 2022. The company purchases Class 8 property for $50,000 on March 1, 2022. The maximum CCA for its taxation year ending June 30, 2022 is $15,000. Answer: FALSE Explanation: The maximum CCA for its taxation year ending June 30, 2022 is $7,438 [($50,000)(20%)(1.5)(181/365)]. Type: TF Topic: CCA calculations

20) If a limited life patent is acquired near the end of its legal life, it will usually be a good idea to elect to include the patent in Class 14. Answer: TRUE Explanation: Patents, whether limited or unlimited life, automatically are classified as Class 44 which applies a 25% declining balance CCA. Unlimited life patents can also qualify as Class 14.1 property which only applies a 5% CCA rate. Alternatively, an election can be made to choose Class 14 if the patent has a limited life. Class 14 amortizes the cost of a limited life patent over its remaining life therefore if the patent is near the end of its life, the CCA claims could exceed what would be allowed under Class 44. Type: TF Topic: CCA patents

21) The separate class election for photocopiers should be used only if the property is expected to be used for long periods of time. Answer: FALSE Explanation: The election should be used when the photocopiers are retired after relatively short periods as it provides for recognition of the terminal losses which would arise in such situations. Type: TF Topic: CCA separate classes

22) Recapture of CCA occurs when there is a negative balance in a class on the last day of the taxation year. Answer: TRUE Explanation: Recapture of CCA occurs when there is a negative balance in the class on the last day of the taxation year. Type: TF Topic: CCA - recapture and/or terminal loss

23) Only one-half of a terminal loss can be deducted in the determination of a taxpayer's net income. Answer: FALSE Explanation: Taxpayers can deduct 100% of terminal losses in the determination of their business or property income which affects net income. Type: TF Topic: CCA - recapture and/or terminal loss

24) The cost of each rental property owned by a taxpayer must be allocated to a separate CCA Class. Answer: FALSE Explanation: In general only rental properties with a cost of $50,000 or more must be included in a separate class. Type: TF Topic: CCA separate classes

25) As part of the purchase of a business in 2022, goodwill is purchased for $60,000. There are no other properties in Class 14.1. The maximum CCA that can be claimed in 2022 is $3,000. Answer: FALSE Explanation: The maximum CCA that can be claimed is $4,500 [(150%)($60,000)(5%)]. Type: TF Topic: CCA Class 14.1

26) Of the following pairs of terms, which pair represents terms that are equivalent for accounting and for income tax? A) Capital Cost and Carrying Value. B) Amortization and Capital Cost Allowance. C) Undepreciated Capital Cost and Acquisition Cost. D) Capital Cost and Amortization. Answer: B Type: MC Topic: CCA and depreciable property (income tax vs accounting)

27) A business expects net income before deducting CCA of $15,000. It would like to reduce this amount to nil after claiming CCA. It can take the required $15,000 in CCA from four different CCA classes, all of which would allow a CCA claim of more than $15,000. If the business wishes to maximize future CCA, the $15,000 should be claimed from: A) Class 44. B) Class 10. C) Class 53. D) Class 8. Answer: D Explanation: A) 25% CCA rate B) 30% CCA rate C) 50% CCA rate D) 20% CCA rate Standard tax planning suggests claiming from the lowest rate class in these circumstances. Type: MC Topic: CCA tax planning

28) A taxpayer acquires a rental property several years ago for $562,000, with $112,000 of this amount being the estimated value of the land and the remaining $450,000 attributable to the building. At the beginning of the current year the UCC for the property is $374,561. During the current year, the property is sold for $843,000, with $262,000 of this amount for the land and $581,000 for the building. Which of the following statements is correct? A) There will be recapture of $75,439 and a capital gain of $131,000. B) There will be recapture of $75,439 and a capital gain of $281,000. C) There will be recapture of $187,439. D) There will be a taxable capital gain of $281,000. Answer: B Explanation: B) The recapture is correct and there will be a capital gain of $131,000 on the building and $150,000 on the land for a total capital gain of $281,000. Type: MC Topic: CCA calculations

29) Which of the following statements with respect to terminal losses is NOT correct? A) If property remains in a class on the last day of a taxation year, there is no terminal loss. B) Terminal losses are fully deductible in the determination of either business or property income. C) Terminal losses reset the UCC on the first day of the next taxation year to nil. D) A terminal loss occurs when there are no property remaining in the class on the last day of the taxation year and there is a negative UCC balance on that same date. Answer: D Explanation: D) The UCC balance would have to be positive on the last day of the taxation year. Type: MC Topic: CCA - recapture and/or terminal loss

Use the following information to answer the questions below. The Nelson Company has a taxation year end of December 31. On January 1 of the current year, the UCC of Class 8 was $80,000. The Nelson Company has a policy of always deducting maximum CCA. Each of the following questions deals with transactions during the current year which involved Class 8 property. Choose the best answer for each question. 30) An additional class 8 property was purchased for $20,000 on April 1, 2022. Maximum CCA for Class 8 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $91,000 Q) $98,000 Answer: F Explanation: F) $22,000 [20%][$80,000 + (150%)($20,000)] Type: MC Topic: CCA calculations

31) A class 8 property with a capital cost of $15,000 was sold for $4,000 on June 30, 2022. Minimum UCC on January 1, 2023 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $91,000 Q) $98,000 Answer: L Explanation: L) $60,800 [$80,000 - $4,000 - (20%)($80,000 - $4,000)]. Type: MC Topic: CCA calculations

32) A class 8 property with a capital cost of $15,000 was sold for $26,000 on September 1, 2022. Maximum CCA for Class 8 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $91,000 Q) $98,000 Answer: E Explanation: E) $13,000 [(20%)($80,000 - $15,000)]. Type: MC Topic: CCA calculations

33) A class 8 property with a capital cost of $15,000 was sold for $26,000 on September 1, 2022. Minimum UCC on January 1, 2023 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $91,000 Q) $98,000 Answer: K Explanation: K) $52,000 [$80,000 - $15,000 - (20%)($80,000 - $15,000)]. Type: MC Topic: CCA calculations

34) A class 8 property with a capital cost of $100,000 was sold on June 30, 2022 for $90,000. Also during the year, a class 8 property was purchased for $60,000. Maximum CCA for Class 8 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $91,000 Q) $98,000 Answer: B Explanation: B) $10,000 [(20%)($80,000 - $90,000 + $60,000)]. Type: MC Topic: CCA calculations

35) The last property in the class, with a capital cost of $85,000, was sold on July 15, 2022 for $90,000. This would give rise to: A) $5,000 Recapture B) $10,000 Recapture C) $5,000 Terminal Loss D) $10,000 Terminal Loss E) $5,000 Allowable Capital Loss F) $10,000 Allowable Capital Loss G) $5,000 Taxable Capital Gain H) $10,000 Taxable Capital Gain Answer: A Explanation: A) Recapture of $5,000. ($80,000 — 85,000). There would also be a $5,000 capital gain which is not among the choices meaning that only "A" is correct. Type: MC Topic: CCA calculations

36) The last class 8 property, with a capital cost of $85,000, was sold on August 1, 2022 for $70,000. This would result in: A) $5,000 Recapture B) $10,000 Recapture C) $5,000 Terminal Loss D) $10,000 Terminal Loss E) $5,000 Allowable Capital Loss F) $10,000 Allowable Capital Loss G) $5,000 Taxable Capital Gain H) $10,000 Taxable Capital Gain Answer: D Explanation: D) $10,000 terminal loss. ($80,000 — 70,000). There can never be a capital loss on depreciable property. Type: MC Topic: CCA calculations

37) A class 8 property with a capital cost of $40,000 was sold for $50,000 on September 1, 2022. This would give rise to: A) $5,000 Recapture B) $10,000 Recapture C) $5,000 Terminal Loss D) $10,000 Terminal Loss E) $5,000 Allowable Capital Loss F) $10,000 Allowable Capital Loss G) $5,000 Taxable Capital Gain H) $10,000 Taxable Capital Gain Answer: G Explanation: G) $5,000 taxable capital gain. (POD $50,000 — ACB 40,000) × 50% Type: MC Topic: CCA calculations

38) A class 8 property with a capital cost of $70,000 was sold on October 1, 2022 for $90,000. A class 8 property was also purchased on November 1, 2022 for $100,000. Maximum CCA for Class 8 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $91,000 Q) $98,000 Answer: G Explanation: G) $25,000 [20%][$80,000 - $70,000 + $100,000 + (1.5)($100,000 - $70,000)]. Type: MC Topic: CCA calculations

39) A class 8 property with a capital cost of $70,000 was sold on May 1, 2022 for $90,000 and a class 8 property was purchased on May 15, 2022 for $100,000. Minimum UCC on January 1, 2023 is: A) $4,000 B) $10,000 C) $10,800 D) $32,000 E) $13,000 F) $22,000 G) $25,000 H) $20,000 J) $43,200 K) $52,000 L) $60,800 M) $67,000 N) $72,000 O) $76,000 P) $85,000 Q) $98,000 Answer: P Explanation: P) $85,000 ($80,000 - $70,000 + $100,000 - $25,000 CCA).CCA base = $80,000 + (1.5)($100,000 - $70,000) = $125,000 @ 20% CCA = $25,000. Type: MC Topic: CCA calculations

40) The capital cost of a depreciable property includes a number of capital cost components. Indicate which cost components would NOT be considered part of the capital cost. A) Legal fees incurred to acquire the property. B) Custom duties paid. C) Fire and theft insurance on the property. D) Non-refundable provincial sales taxes. Answer: C Explanation: C) All of the capital cost components would be included in the capital cost except C, fire and theft insurance paid for coverage of the property. Such amounts would be considered a current expense and not a capital expenditure to be added to the capital cost. Type: MC Topic: CCA capital cost

41) A corporate taxpayer has $5,000 of taxable income in 2022. The management anticipates significant income in 2023. The maximum CCA claim for 2022 in Class 8 is $5,000 and an additional $5,000 for Class 12. To minimize the subsequent year's income taxes, the business should: A) claim maximum CCA on Class 8 only. B) claim maximum CCA on Class 12 only. C) claim maximum CCA on Class 8 and Class 12. D) claim no CCA for the year. E) claim $2,500 CCA on Class 8 and $2,500 CCA on Class 12. Answer: C Explanation: C) To minimize the subsequent year's taxes, the business should claim maximum combined CCA of $5,000 each on Class 8 and Class 12. This will result in a 2022 non-capital loss of $5,000 that can be applied to the 2023 taxation year. Type: MC Topic: CCA calculations

42) During the current year, Denos Corporation incurred costs of $45,000 for leasehold improvements to its newly rented building. The lease was signed in the current year for an initial term of three years plus four successive options to renew the lease, each for an additional one year term. Which one of the following amounts represents the maximum CCA claim in the current year? A) $13,500. B) $ 8,438. C) $27,000. D) $16,876. Answer: A Explanation: A) The maximum is limited to the lesser of cost divided by the initial lease term plus one renewal ($45,000 ÷ 4), and cost divided by five years ($45,000 ÷ 5). The resulting $9,000 is subject to the AccII provisions, giving a maximum deduction of $13,500 [(150%)($9,000)]. Type: MC Topic: CCA Class 13

43) On December 1 of the current year, Plen Limited purchased a franchise for $70,000. The franchise has a limited life of 15 years. Which one of the following amounts represents the maximum amount of CCA Plen Limited can claim for its current taxation year ending on December 31? A) $ 396. B) $ 594. C) $4,667. D) $7,000. Answer: B Explanation: B) $594, the franchise is Class 14 [(150%)($70,000 ÷ 15)(31/365)]. Type: MC Topic: CCA Class 14

44) In the current taxation year, a corporation acquired a rental property from its sole shareholder. The building was sold for its FMV of $425,000, but was not allocated to a separate Class 1. The shareholder originally paid $450,000 for the building two years ago. The property was a Class 1 (4%) property to the shareholder. The shareholder has earned rental income on the property since its acquisition. The UCC of the building at the time of the sale was $420,000. Which one of the following amounts represents the maximum CCA that the corporation may claim for this building in the current taxation year? A) $7,200. B) $8,500. C) $16,320. D) $17,000. Answer: D Explanation: D) $425,000 × 4% = $17,000. The AccII provisions do not apply to an acquisition from a nonarm's length person where that person had previously claimed CCA on the property. In addition the halfyear rule will also not apply since the transaction occurred between non-arm's length persons and the vendor owned the property for more than one year. As a result neither the half year or AccII will apply to the corporate purchaser. Type: MC Topic: CCA calculations

45) ABC Registered, a sole proprietorship, began carrying on a business on September 1, 2022. A calendar based fiscal period ending December 31 was chosen. On October 1, 2022 the proprietorship purchased furniture and fixtures for $40,000. The maximum CCA on the furniture and fixtures for the year ending December 31, 2022 will be: A) $ 2,673.97. B) $ 4,010.96. C) $12,000.00. D) $ 8,000.00. Answer: B Explanation: B) The equipment falls under Class 8, with CCA of 20%. Taking into account the AccII provisions and the short fiscal period, the CCA is $4,010.96 [(150%)($40,000)(20%)(122/365)]. Type: MC Topic: CCA calculations

46) Robert bought a rental property ten years ago for $320,000, with $80,000 of the purchase price allocated to the land and $240,000 attributable to the building. Over the ten years of ownership, he claimed CCA such that his UCC at the beginning of the current year for the building was $196,000. Robert sold the property this year for $520,000, with $180,000 of the sale price allocated to the land and $340,000 for the building. Which of the following statements is correct? A) Robert has recapture of $44,000. B) Robert has recapture of $124,000. C) Robert has recapture of $144,000. D) Robert has a capital gain of $100,000. Answer: A Explanation: A) Robert has recapture of $44,000 [($240,000 - $196,000]. The capital gain on the sale of the land was $100,000 ($180,000 - $80,000) and a capital gain on the building of $100,000 ($340,000 - $240,000) which totals $200,000. D) $100,000 would be the taxable capital gain not the capital gain. Type: MC Topic: CCA calculations

47) Sherry owned a rental property. She originally acquired the property for $260,000 with $200,000 of the cost attributed to the building and $60,000 for the land. Over the years, Sherry has claimed CCA of $32,000, such that her UCC at the beginning of the year was $168,000. The rental property is the only property in the class. This year, she sold the property for $214,000, with $160,000 of the sale price attributed to the building and $54,000 for the land. Which of the following statements is correct? A) Sherry has a terminal loss of $8,000. B) Sherry has a capital loss of $36,000. C) Sherry has an allowable capital loss of $4,000. D) Sherry has recapture of $32,000. Answer: A Explanation: A) Sherry has a terminal loss of $8,000 ($168,000 - $160,000). Type: MC Topic: CCA - recapture and/or terminal loss

48) Dresses R Us moved into their new rented premises on January 1, 2021. The term of the lease is 10 years without any renewal options. $8,000 of leasehold improvements were completed in January 2021 with further leasehold improvements of $4,500 completed in January 2022. The maximum amount of CCA for 2022 is: A) $1,475. B) $1,550. C) $1,250. D) $1,300. Answer: B Explanation: A) ($8,000/10) + ($4,500/10 × 150%) = $1,475 B) $1,550 ($8,000/10) + ($4,500/9 × 150%) = $1,550 C) ($8,000/10) + ($4,500/10) = $1,250 D) ($8,000/10) + ($4,500/9) = $1,300 Type: MC Topic: CCA calculations

49) Curt's Consulting Company purchased a laptop computer on February 15, 2022 for $2,000. The laptop was destroyed in a fire on April 30, 2022 and Curt's Consulting received $500 with respect to the loss from the insurance company. It was the only property in the class as all computer equipment has been leased for the last two years. The effect on 2022 business income for the taxation year ending December 31, 2022 is: A) $550 decrease. B) $412.50 decrease. C) $2,000 decrease. D) $1,500 decrease. Answer: D Explanation: A) $2,000 × 50% × 55% = $550 B) $1,500 × 50% × 55% = $412.50 C) insurance proceeds not deducted from UCC D) $1,500 decrease. This represents a terminal loss equal to the positive UCC balance of $1,500 on the last day of the taxation year ($2,000 purchase - $500 POD equal to the insurance compensation). Type: MC Topic: CCA calculations

50) On September 1, 2022 Carla's Company purchased a new computer for $1,600 and desktop publishing software for $400. The maximum CCA claim for 2022 is: A) $1,650. B) $1520. C) $3,000. D) $1,800. Answer: B Explanation: A) ($1,600 +400) × 55% × 150% = $1,650 B) $1,520 ($1,600 × 55% × 150%) + ($400 × 100% × 50%) = $1,520. The computer is Class 50 and the software Class 12. See paragraph 5-84 C) ($1,600 +400) × 100% × 150% = $3,000 D) ($1,600 × 100%) + ($400 × 100% × 50%) = $1,800 Type: MC Topic: CCA calculations

51) In 2022 Desiderata Design Corp. purchased a new BMW for $42,000. The car is used exclusively for business use. The maximum CCA that can be claimed for 2022 is: A) $15,300. B) $18,900. C) $9,000. D) $12,600. Answer: A Explanation: A) $15,300 ($34,000 maximum × 30% × 150%) = $15,300 B) ($42,000 × 30% × 150%) = $18,900 C) ($30,000 maximum × 30%) = $9,000 D) ($42,000 × 30%) = $12,600 Type: MC Topic: CCA Class 10.1

52) In 2022 Desiderata Design Corp., purchased a new zero-emission automobile. The list price of the vehicle was $42,000 but was reduced to $37,000 after the dealer applied a $5,000 federal incentive. The vehicle will be used exclusively in the company business. The maximum CCA that can be claimed for 2022 is: A) $11,100 B) $12,600 C) $37,000 D) $16,650 Answer: C Explanation: A) $37,000 x 30% B) $42,000 x 30% C) [($37,000 x 2 1/3) + $37,000][30%] D) [($37,000 x 1.5 AccII)(30%)] Type: MC Topic: CCA Class 54

53) In 2022 Desiderata Design Corp., purchased a new zero-emission automobile for $70,000 in 2022. The vehicle will be used exclusively in the company business. The maximum CCA that can be claimed for 2022 is: A) $21,000 B) $17,700 C) $26,550 D) $59,000 Answer: D Explanation: A) $70,000 x 30% B) $59,000 x 30% C) [($59,000 x 1.5 AccII)(30%)] D) [($59,000 x 2 1/3) + $59,000][30%] Type: MC Topic: CCA Class 54

54) Several years ago, Solea Company purchased a Mercedes Benz that is used exclusively for business use. The car is in Class 10.1. On January 1, 2022 the UCC balance is $17,850. On August 1, 2022 the car was sold for $17,000. The company uses a calendar-based taxation year ending December 31. What are the 2022 income tax consequences of the sale of the Class 10.1 vehicle? A) terminal loss of $850. B) recapture of $850. C) CCA deduction of $2,678. D) CCA deduction of $2,245. Answer: C Explanation: A) Terminal loss of $850 ($17,850 - $17,000) B) Recapture of $850 C) CCA deduction of $2,678 ($17,850 × 30% × 50%). CCA of half of the normal CCA is allowed in the year of disposition. No recapture or terminal loss is allowed. D) CCA deduction of $2,245 ($17,850 × 30% × 153/365) Type: MC Topic: CCA Class 10.1

55) In October of 2019 Solea Company purchased a zero-emission automobile. The list price of the vehicle was $42,000 but was reduced to $37,000 after the dealer applied a $5,000 federal incentive. The vehicle will be used exclusively in the company business. The Company uses a calendar-based taxation year ending December 31. On January 1, 2022 the Class 54 UCC balance was $1,000 because the Company did not always claim maximum CCA. On August 1, 2022 the vehicle is sold for $17,000. There are no other properties in the class at December 31, 2022. What are the income tax consequences of the sale of the vehicle? A) Terminal Loss of $16,000 B) Recapture of $16,000 C) CCA of $150 and no recapture D) Capital Gain of $16,000 Answer: B Explanation: A) $17,000 - $1,000 B) $1,000 - $17,000 C) [($1,000 x 50%)(30%)] Equivalent to the half year CCA in the year of disposition as Class 10.1 D) [(POD $17,000 — UCC $1,000] Type: MC Topic: CCA Class 54

56) In October of 2019 Solea Company purchased a zero-emission automobile for $70,000. The vehicle will be used exclusively in the company business. The Company uses a calendar-based taxation year ending December 31. On January 1, 2022 the Class 54 UCC balance was Nil as the Company always claims maximum CCA. On August 1, 2022 the vehicle is sold for $17,000. There are no other properties in the class at December 31, 2022. What are the income tax consequences of the sale of the vehicle? A) Recapture of $12,357 B) Recapture of $16,000 C) No income tax consequences D) Capital Gain of $17,000 Answer: A Explanation: A) [$1,000 — ($17,000)($55,000 ÷ $70,000)] See paragraph 5-136 B) $1,000 - $17,000 D) [(POD $17,000 — UCC $Nil] Type: MC Topic: CCA Class 54

57) On January 1, 2022 Jorge purchased two newly constructed rental buildings for $850,000 each. Of the total cost of $850,000 for each building, $100,000 represents the value of the land on which the building is situated and the remaining $750,000 was attributable to each building. One building contains four suites and is rented to students. The other building is rented to a florist business. Each of the buildings is in a separate Class 1. Rental income (before CCA) for 2022 is $30,000. Ignore the rental property restrictions on CCA. The maximum CCA deduction for 2022 is: A) $90,000. B) $112,500. C) $135,000. D) $60,000. Answer: B Explanation: A) ($750,000 + 750,000) × 4% × 150% = $90,000 B) $112,500 ($750,000 × 4% × 150%) + ($750,000 × 6% × 150%) C) ($750,000 + 750,000) × 6% × 150% = $135,000 D) ($750,000 + 750,000) × 4% = $60,000 Type: MC Topic: CCA calculations

58) CCC Construction Company purchased three new tools during 2022 as follows: January 1 March 15 April 30

$600 $350 $470

The maximum CCA that can be claimed in 2022 is: A) $ 426. B) $ 590. C) $2,130. D) $1,000. Answer: D Explanation: A) ($1,420 × 20% × 150%) = $426 B) ($600 × 20% × 150%) + ($350 + 470) × 100% × 50% = $590 C) ($1,420 × 100% × 150%) = $2,130 D) Class 8 ( $600 × 20% × 150%) + Class 12 ( $350 + 470) × 100% = $1,000. Tools costing less than $500 are included in Class 12 and tools costing $500 or more are included in Class 8. The AccII does not apply to Class 12. In addition the old half year rule does also not apply to tools included in Class 12. Type: MC Topic: CCA calculations

59) Amazine Inc. purchased Class 8 furniture for $4,000 in 2020. In 2022, this furniture was sold for $1,000. Class 8 UCC was $10,300 at the beginning of 2022 and no Class 8 property was purchased during the year. What is the UCC of this class at the end of 2022? A) $1,860 B) $7,440 C) $9,300 D) $8,240 Answer: C Explanation: A) 9,300 × 20% = $1,860 B) 9,300 × 80% = $7,440 C) $10,300 - 1,000 = $9,300. CCA is not deducted until the start of the following year. but additions and dispositions immediately impact the UCC. D) 10,300 × 80% = $8,240 Type: MC Topic: CCA calculations

60) Which of the following statements regarding recapture is correct? A) Recapture occurs when there is a negative UCC balance in a class at the end of the taxation year, whether or not there are properties remaining in the class. B) Recapture is deductible in the calculation of business or property income. C) Recapture occurs when there is a positive UCC balance in a class and there are no properties remaining in the class on the last day of the taxation year. D) Recapture occurs when there is a positive UCC balance in a class at the end of the taxation year, even if there are properties remaining in the class. Answer: A Explanation: A) Recapture occurs when there is a negative UCC balance in a class at the end of the taxation year, whether or not there are properties remaining in the class. Type: MC Topic: CCA - recapture and/or terminal loss

61) Which of the following properties are NOT eligible for CCA in the current year? A) A delivery truck is purchased in December of the current year. The purchase price is not paid until January of the following year. B) An employee owns and uses a truck for employment purposes during December. The employee's December earnings are not paid until January of the following year. C) A delivery truck is leased during the year on a 3 year lease. D) A delivery truck is purchased during the year on a 3 year financing term. Answer: C Explanation: C) A delivery truck is leased during the year on a 3 year lease. CCA can only be claimed by the owner of the truck which would be the lessor. Type: MC Topic: CCA eligibility

62) On September 1, 2022, Lerner Ltd, purchased a franchise for $75,000. The franchise has a limited life of 10 years. Lerner Ltd. has a September 30 taxation year end. The maximum CCA that can be claimed for the year ending September 30, 2022 is: A) $ 925. B) $11,250. C) $ 3,750. D) $ 7,500. Answer: A Explanation: A) [(150%)($75,000/10)] = $11,250 CCA annually. Pro-rate for the number if days owned in the taxation year: 30/365 × $7,500 = $925. This is not the application of the ITR 1100(3) short fiscal period rule but is how Class 14 CCA is determined. Type: MC Topic: CCA Class 14

63) Wolfe Ltd. has a December 31 taxation year end. It purchased a Class 10.1 automobile four years ago for $38,000 for use in its business. On January 1, 2022, the UCC for this Class 10.1 was $12,900. In 2022, it was sold for $10,000. What is the effect on its business income for 2022? A) No effect. B) Terminal loss of $2,900. C) Capital loss of $2,900. D) CCA claim of $1,935. Answer: D Explanation: D) [($12,900)(30%)(1/2)] = $1,935 In the year of disposition half of the normal CCA can be claimed as if the vehicle had not been sold. No recapture or terminal loss is allowed. Type: MC Topic: CCA Class 10.1

64) Wolfe Ltd. has a December 31 taxation year end. The company purchased a Class 54 automobile in June of 2019. The list price of the vehicle was $43,000 but was reduced to $38,000 after the dealer applied a $5,000 federal incentive. The vehicle will be used exclusively in the company business. On January 1, 2022 the Class 54 UCC balance was $3,000 because the Company did not always claim maximum CCA. The vehicle was sold in 2022 for $10,000. There are no properties remaining in the Class at December 31, 2022. What is the effect on the 2022 business income of the company? A) Terminal Loss of $7,000 B) Recapture of $7,000 C) CCA of $450 D) Capital Loss of $28,000 Answer: B Explanation: A) $10,000 - $3,000 B) $3,000 - $10,000 C) [($3,000 x 50%)(30%)] Equivalent to the half year CCA in the year of disposition as Class 10.1 D) [(POD $10,000 — ACB (capital cost $38,000] Type: MC Topic: CCA Class 54

65) Wolfe Ltd. has a December 31 taxation year end. The company purchased a Class 54 automobile in June of 2019 for $93,000. The vehicle will be used exclusively in the company business. On January 1, 2022 the Class 54 UCC balance was $3,000 because the Company did not always claim maximum CCA. The vehicle was sold in 2022 for $27,500. There are no properties remaining in Class 54 at December 31, 2022. What is the effect on the 2022 business income of the company? A) Recapture of $24,500 B) CCA of $450 C) Recapture of $13,263 D) Capital Loss of $27,500 Answer: C Explanation: A) $3,000 - $27,500 B) [($3,000 x 50%)(30%)] Equivalent to the half year CCA in the year of disposition as Class 10.1 C) [$3,000 — ($27,500)($55,000 ÷ $93,000)] D) [(POD $27,500 — ACB (capital cost $55,000] Type: MC Topic: CCA Class 54

66) Nestor Nerd paid $4,000 on April 1, 2022 to purchase various computer applications software for a business he carries on as a sole proprietorship. The business has a December 31 fiscal period and has been in existence for 3 years. What is the maximum CCA claim that can be made with respect to the software for the 2022 fiscal period? A) $1,100 B) $1,500 C) $2,000 D) $4,000 Answer: C Explanation: A) (55%)(1/2)($4,000) = $1,100 B) ($4,000)(100%)(1/2)(9/12) = $1,500 C) [($4,000)(100%)(1/2)] = $2,000 Applications software is included in Class 12 and, as a result, the AccII does not apply. Furthermore the old half year rule continues to apply. D) ($4,000)(100%) = $4,000 Type: MC Topic: CCA calculations

67) On January 1, 2022, Don Buchanan purchases a business that he will carry on as a sole proprietor. The purchase price includes $60,000 for goodwill. The business has a fiscal period that ends on December 31 and, for 2022, Don claims the maximum CCA. On January 1, 2023, the business is sold in an arm's length transaction with $82,000 paid for the goodwill. The affect of the sale of the goodwill is to increase net income for 2022 by: A) $11,000. B) $13,500. C) $15,500. D) $14,000. Answer: C Explanation: A) [(1/2)($82,000 - $60,000)] = $11,000 B) [(1/2)($82,000 - $57,000)] = $13,500 C) [(150%)(5%)($60,000)] = $4,500; [($60,000 - $4,500) - $60,000] = ($4,500 Recapture) [Taxable Capital Gain (1/2)($82,000 - $60,000) + $4,500 Recapture] = $15,500. D) [1/2)($82,000 - $60,000) + $3,000] = $14,000 Type: MC Topic: Goodwill

68) Which of the following statements with respect to Class 14.1 is NOT correct? A) If a disposition creates a negative balance in the UCC of the Class at the end of the taxation year, 100% of the negative amount must be included in income. B) Appraisal costs incurred for valuing intangible property in contemplation of a purchase would be added to the capital cost of the property. C) The maximum CCA for the year is calculated as 7% of the UCC of the class on the last day of the taxation year. D) If a business ceases to exist and there is a positive UCC balance in the Class, it can be deducted as a terminal loss in calculating business income. Answer: C Explanation: C) The maximum CCA for the year is calculated as 7% of the UCC of the class on the last day of the taxation year. The CCA rate is only 5%. Type: MC Topic: CCA Class 14.1

69) Fred commenced carrying on a franchise business as a sole proprietor on November 1, 2022. He paid $50,000 for the franchise rights and can use them for an unlimited number of years. The restaurant's fiscal period is December 31. Maximum CCA was claimed in 2022. The Class 14.1 UCC balance on January 1, 2023 is: A) $47,500. B) $49,582. C) $46,250. D) $49,373. Answer: D Explanation: A) $50,000 - [(5%)($50,000)] = $47,500 B) $50,000 - [(5%)($50,000)(61/365)] = $49,582 C) $50,000 - [(150%)(5%)($50,000)] = $46,250 D) $50,000 - [(150%)(61/365)(5%)($50,000)] = $49,373 Type: MC Topic: CCA Class 14.1

70) Indicate which of the following items would not be added to Class 14.1. A) Cost of fines and penalties. B) Cost of government rights with an unlimited life. C) Appraisal costs associated with the purchase of intangible property. D) Cost of amending the articles of incorporation of an existing company. E) Cost of customer lists. Answer: A Explanation: A) All of the items would be added to Class 14.1 except A, the cost of fines and penalties. The ITR description of Class 14.1 ((b)(iv)) specifically excludes expenditures that are denied deductibility by the ITA. Fines and penalties are subject to a general deductibility restriction in ITA 67.6 which is discussed in Chapter 6. Type: MC Topic: CCA eligibility

71) For each of the following depreciable property, indicate the appropriate CCA Class. • Cash registers • Boats, canoes, and other vessels • Airplane runways • Automobile (i.e., passenger vehicle) with a cost of $85,000 • Storage tanks for oil • Residential rental property acquired in 2017 for $450,000 (Value of land is $100,000) • Manufacturing and processing equipment acquired in 2022 Answer: The correct classes for each of the depreciable properties would be as follows: Depreciable Property Cash registers Boats, canoes, and other vessels Airplane runways Passenger vehicle with a cost of $85,000* Power operated movable equipment Storage tanks for oil Rental building* Manufacturing and processing equipment

Class 8 7 17 10.1 or 54 38 6 1 53

*The rental building and the Class 10.1 properties are required to be included in a separate class. There is no separate class however for Class 54 which represents zero-emission passenger vehicles (ZEPV). Type: ES Topic: CCA identifying the class

72) In 2022, your company acquired depreciable property for $437,000 to be used in its business. The accountant misclassified the property including it in Class 1 at the end of the year (it was not included in a separate Class 1). Early in 2023, the misclassification was discovered and you learned that the property should have been included in Class 8. What was the impact of this error on your 2022 business income? Assume that the company always claims maximum CCA. Answer: The impact can be calculated as follows: Correct CCA [($437,000)(150%)(20%)] CCA Claimed [($437,000)(150%)(4%)] Understated CCA

$131,100 ( 26,220) $104,880

Type: ES Topic: CCA misclassification error

73) In 2022, the Lardly Company spent $675,000 to acquire a government license with an unlimited life. The Company's accountant misclassified the cost as Class 8. This error was discovered in early 2023. What was the impact of this error on the Company's 2022 business income? Assume that the company always claims maximum CCA Answer: The government license should have been classified as Class 14.1. The resulting overstatement can be calculated as follows: Correct maximum CCA [(5%)(150%)($675,000)] CCA claimed [(20%)(150%)($675,000)] Overstated CCA

$ 50,625 ( 202,500) ($151,875)

Type: ES Topic: CCA misclassification error

74) Bifor Ltd., with a taxation year that ends on December 31 and has a Class 8 UCC balance on January 1, 2023 of $475,000. In 2022, the company purchases a Class 8 property for $150,000 that is eligible for the AccII. The Company also disposes of a Class 8 property for $72,000 which is below the property's capital cost. Determine the maximum Class 8 CCA that Bifor can claim for 2022 including the UCC balance as of January 1, 2023. Answer: The maximum CCA for 2022 and the January 1, 2023 UCC balance are calculated as follows: January 1, 2022 UCC Add: Acquisitions in the year year Deduct: Dispositions in the year Add: AccII Adjustment [(50%)($78,000)] CCA Base (December 31, 2022 UCC) 2022 CCA [(20%)($592,000)] AccII Adjustment Reversal January 1, 2023 UCC

$475,000 $150,000 ( 72,000)

Type: ES Topic: CCA on property eligible for the AccII

78,000 39,000 $592,000 ( 118,400) ( 39,000) $434,600

75) Sunpeel Ltd., with a taxation year that ends on December 31, has a Class 10 UCC balance on January 1, 2022 of $900,000. In 2022, the company purchases 10 automobiles at a cost of $25,000 each, for a total addition of $250,000. The Company also sells 8 automobiles for total proceeds of $120,000. In no case did the sale price exceed the capital cost of any automobile sold. Determine the maximum Class 10 CCA that Sunpeel can claim for 2022, as well as the January 1, 2023 UCC balance. Answer: The maximum CCA for 2022 and the January 1, 2023 UCC balance are calculated as follows: January 1, 2022 UCC Add: Acquisitions in the year Deduct: Dispositions in the year Add: AccII Adjustment [(50%)($130,000)] CCA Base (December 31, 2022 UCC) 2022 CCA [(30%)($1,095,000)] AccII Adjustment Reversal January 1, 2023 UCC

$ 900,000 $250,000 ( 120,000)

130,000 65,000 $1,095,000 ( 328,500) ( 65,000) $ 701,500

Type: ES Topic: CCA on property eligible for the AccII

76) Roden Ltd. has a December 31 year end. The Company leases its office space under a lease that was signed on January 1, 2018. The lease term is 5 years, with an option to renew at an increased rent for an additional 2 years. In 2018, the Company spent $74,000 renovating the premises. In 2022, changing needs required the Company to spend another $16,000 renovating the space. Determine the maximum amount of Class 13 CCA that the Company can claim in 2022 and 2023. Answer: The required CCA calculations for 2023 would be as follows: On 2018 Improvements ($74,000 ÷ 7) $10,571 On 2022 Improvements [(150%)($16,000 ÷ 5)]* 4,800 2021 CCA $15,371 * The CCA would be the lesser of $16,000 divided by the remaining years plus one renewal option of three years (e.g. $16,000/3 = $5,333 before the AccII) and one-fifth of the capital expenditure of $3,200 (before the AccII). The lesser amount is $3,200. The required CCA calculations for 2023 would be as follows: On 2018 Improvements ($74,000 ÷ 7) On 2022 Improvements ($16,000 ÷ 5) 2023 CCA

$10,571 3,200 $13,771

Type: ES Topic: CCA Class 13

77) Boker Inc. has a December 31 taxation year end. On March 1, 2022, Boker pays $375,000 to acquire a franchise agreement. The life of the franchise is 5 years. Determine the maximum CCA for 2022 and the UCC balance as of January 1, 2023. Answer: The required calculations are as follows: Acquisition Amount CCA for 2022 [(150%)($375,000 ÷ 5)(306/365)] January 1, 2023 UCC

$375,000 ( 94,315) $280,685

Type: ES Topic: CCA Class 14

78) On January 1, 2022, Cundo Inc. has a Class 53 UCC balance of $750,000. In 2022, additional Class 53 property is purchased for $150,000. There were no dispositions in the year. Determine the maximum Class 53 CCA for 2022, as well as the UCC balance as of January 1, 2023. Answer: The required calculations are as follows: January 1, 2022 UCC $ 750,000 Acquisitions in the year 150,000 AccII Adjustment [(100%)($150,000)] 150,000 CCA Base $1,050,000 2022 CCA [(50%)($1,050,000)] ( 525,000) AccII Adjustment Reversal ( 150,000) January 1, 2023 UCC $375,000 Note: The normal AccII adjustment is 50% but is increased to 100% for Class 53 property. Type: ES Topic: CCA Class 53

79) Fielding Inc. is incorporated on August 1, 2022. On September 15, 2022, the Company acquires Class 10 property for $150,000. The Company has a December 31 taxation year end and no other Class 10 property are acquired or disposed of in 2022. Determine the maximum CCA for the 2022 taxation year. Answer: The maximum 2022 CCA is $28,295 [(30%)(150%)($150,000)(153/365)]. Type: ES Topic: CCA calculations

80) Murray's Antiques is a business carried on as a sole proprietorship which commenced May 1, 2022. On June 1, 2022, Class 8 property is purchased for $92,400. The business will have a December 31 fiscal period. No other depreciable properties were acquired prior to December 31, 2022. Determine the maximum CCA that may be claimed for the fiscal period ending December 31, 2022. Answer: The maximum CCA for the year is $18,607 [(20%)(150%)($92,400)(245/365)]. Type: ES Topic: CCA calculations

81) Pointer Ltd. has determined that, for the current year, it will have taxable income before claiming maximum CCA of $40,000. It is the policy of the Company to limit CCA to an amount that would reduce taxable income to nil. At the end of the year the UCC balances of all of the company's depreciable property are as follows: Class 1 (Buildings acquired in 2005) Class 8 Class 10 Class 10.1

$475,000 95,000 102,000 26,000

There have been no additions to or dispositions from any of the classes during the year. From which class(es) should CCA be claimed to reduce taxable income to nil? Explain your conclusion. Answer: Following the general rule that, when less than the maximum CCA is to be claimed the amounts should be claimed from the Class(es) with the lowest CCA rates, the required calculations would be as follows: Required total Maximum CCA - Class 1 [(4%)($475,000)] Maximum CCA - Class 8 [(20%)($95,000)] Remaining amount

$40,000 ($19,000) ( 19,000)

( 38,000) $ 2,000

As they are both 30% declining balance classes, the remaining $2,000 could be claimed from either Class 10 or Class 10.1. It would be advisable to use Class 10.1, as recapture is not possible for this class. In addition, if the Class 10.1 vehicle is going to be disposed of in the near future, it could be better tax planning to take the maximum CCA for Class 10.1 of $7,800 [(30%)($26,000)] and reduce the Class 8 CCA to $13,200 ($40,000 - $7,800 - $19,000). Since there is no recapture for Class 10.1, this could increase future deductions of the other classes. Whether this would be advantageous would depend on the anticipated POD. Type: ES Topic: CCA tax planning

82) Sharma Inc. has determined that, for the current year, it will have taxable income before the consideration of CCA of $14,000. At the end of the year the company has the following classes of depreciable property: Class 1 (Buildings acquired in 2006) Class 8 Class 10

$213,000 16,000 42,000

There have been no additions to or dispositions from any of these classes during the year. It is the policy of the Company to limit CCA claims to an amount that would reduce taxable income to nil. Given this policy, which class(es) should CCA be claimed to reduce taxable income to nil? Explain your conclusion. Answer: Following the general rule that, when less than the maximum CCA is to be claimed, the amounts deducted should be taken from the Class(es) with the lowest CCA rates, the required calculations would be as follows: Required Total Maximum CCA - Class 1 [(4%)($213,000)] Maximum CCA - Class 8 [(20%)($16,000)] Remaining amount

($8,520) ( 3,200)

$14,000 ( 11,720) $ 2,280

The remaining $2,280 would be claimed from Class 10. Type: ES Topic: CCA tax planning

83) Barber Ltd. has a Class 10 UCC balance of $423,000. During the current year, a Class 10 property with a capital cost of $42,000 is sold for $51,000. There are no other dispositions during the year and there are multiple properties remaining in Class 10. What are the income tax consequences of the disposition? Answer: The UCC of the class will be reduced by $42,000 reducing the maximum Class 10 CCA claim for the year and there will also be a taxable capital gain of $4,500 [(1/2)(POD $51,000 - ACB $42,000)]. Type: ES Topic: Capital gains on depreciable property

84) At the beginning of 2022, Marquee Inc. has two properties in Class 10. that are used in its business The UCC balance in this class is $7,423. The capital cost of each of the two properties is $7,500. On June 30, 2022, one of the properties is sold for $7,950. There are no other additions or dispositions to Class 10 for the taxation year ending December 31, 2022. What are the income tax consequences of the Class 10 property disposition for 2022? In addition, calculate the UCC balance as of January 1, 2023. Answer: The required information would be calculated as follows: UCC January 1, 2022 Deduct: Dispositions during the year - Lesser of: • Capital Cost = $7,500 • POD = $7,950 Negative UCC Balance Recapture January 1, 2023 UCC balance

$7,423

( 7,500) ($ 77) 77 Nil

The effect would be an addition to business income of $77 in recapture. There will also be a taxable capital gain of $225 [(1/2)($7,950 - $7,500)]. Type: ES Topic: CCA - recapture and/or terminal loss

85) On January 1, 2022, Bard Ltd. has a Class 8 UCC balance of $32,400. The Class 8 property are used in the company's business. The only transaction involving Class 8 property in 2022 was a disposition on July 12 of a group of Class 8 property that had a combined capital cost $62,300. The combined POD was $41,800. None of the properties were sold for an amount in excess if their capital cost. The Company's taxation year ends on December 31. What are the income tax consequences of the disposition of the Class 8 properties for the 2022 taxation year? In addition, determine the Class 8 UCC balance as of January 1, 2023. Answer: The income tax consequences would be as follows: UCC January 1, 2022 Deduct: Dispositions in the year - Lesser of: • Capital Cost = $62,300 • POD = $41,800 Negative UCC Balance Recapture January 1, 2023 UCC

$32,400

( 41,800) ($ 9,400) 9,400 Nil

There would be an addition to the 2022 business income of $9,400 in recapture. Type: ES Topic: CCA - recapture and/or terminal loss

86) At the beginning of 2022, Quest Inc. has two properties in Class 10 that are used in its business. The capital cost of each is $72,000 and the Class 10 UCC balance was $56,472. On June 30, 2022, both of the properties are sold for combined total of $41,500. What are the 2022 income tax consequences of the sale of the two Class 10 properties? In addition, determine the Class 10 UCC balance at January 1, 2023. Answer: The income tax consequences would be as follows: UCC January 1, 2022 Deduct: Dispositions in the year - Lesser of: • Capital Cost = $144,000 • POD = $41,500 UCC December 31, 2022 Terminal Loss January 1, 2023 UCC

$56,472

( 41,500) $14,972 ( 14,972) Nil

As there is a positive balance in the class at the end of the year and no remaining property there is a terminal loss of $14,972. This loss is deducted in the calculation of 2022 business income. The terminal loss rules prevent any CCA claim for the same year therefore no CCA can be claimed for 2022 (ITA 20(16)(d)). Finally there are no capital losses allowed on depreciable property with the result that the only income tax consequence is a terminal loss deduction for 2022 of $14,972. Type: ES Topic: CCA - recapture and/or terminal loss

87) Farine Ltd. has a December 31 taxation year end. On January 1, 2022, the Company had multiple Class 10 properties. The January 1, 2022 UCC balance is $83,400. The combined capital cost of all existing Class 10 property is $110,000. The following Class 10 transactions occurred in 2022: • On May 1, 2022, all of the original Class 10 properties are sold for $92,400. • On June 1, 2022, additional Class 10 property is acquired for $105,000. • On December 1, 2022, all of the new properties acquired in June are sold for $65,000. On December 31, 2022, there are no properties remaining in Class 10. What are the income tax consequences of these transactions in 2022? In addition, determine the Class 10 UCC balance at January 1, 2023. Answer: The income tax consequences would be as follows: UCC January 1, 2022 Deduct: May 1 Disposition - Lesser of: • Capital Cost = $110,000 • POD = $92,400 June 1 Acquisitions Deduct: December 1 Disposition - Lesser of: • Capital Cost = $105,000 • POD = $65,000 UCC balance December 31, 2022 Terminal Loss January 1, 2023 UCC

$ 83,400

( 92,400) 105,000

( 65,000) $31,000 ( 31,000) Nil

As there is a positive UCC balance in the class on the last day of the taxation and no remaining property, there will be a terminal loss of $31,000. The terminal loss rules prevent any CCA claim for the same year therefore no CCA can be claimed for 2022 (ITA 20(16)(d)). Finally there are no capital losses allowed on depreciable property with the result that the only income tax consequence is a terminal loss deduction for 2022 of $31,000. Type: ES Topic: CCA - recapture and/or terminal loss

88) Sherd Inc. disposes of Class 8 property with a capital cost of $183,000 and a carrying value of $92,500 for accounting purposes for $246,000. There are other properties in Class 8 subsequent to the disposition. In addition the UCC of the class prior to the disposition was $1,648,000. Describe briefly the accounting treatment and income tax consequences of the disposition. Answer: The accounting results would be calculated as follows: Sale Price $246,000 Carrying Value ( 92,500) Accounting Gain $153,500 If the accounting gain was included in accounting income it would have to be removed (i.e. deducted) when reconciling accounting income to net income for income tax purposes. For income tax purposes, there would be a taxable capital gain calculated as follows: POD Less: ACB (e.g.Capital Cost) Capital Gain Inclusion Rate Taxable Capital Gain

$246,000 ( 183,000) $ 63,000 1/2 $ 31,500

The capital cost of $183,000 would be subtracted from the UCC, leaving a balance of $1,465,000 ($1,648,000 - $183,000). While the disposition would reduce the maximum CCA for the current and subsequent years, there would be no recapture or terminal loss. Type: ES Topic: Depreciable property dispositions - income tax vs. accounting

89) In early 2022, Dortan Ltd. acquires two businesses that together constitute one business. The cost of the first business includes goodwill of $243,000, while the cost of the second business includes goodwill of $317,000. Dortan Ltd. had no Class 14.1 balance as of January 1, 2022, and there were no other Class 14.1 transactions during the year. The company uses a December 31 taxation year end. In December, 2023, Dortan decides to downside its business and sells part of its business in two separate transactions to different persons. The first transaction results in a partial sale of goodwill for $187,000 and the second transaction results in a partial sale of goodwill for $307,000. Dortan always claims maximum CCA. Determine the UCC balance at January 1, 2023 and determine the income tax consequences of the dispositions? Answer: CCA on Class 14.1 for 2022 would be calculated as follows: January 1, 2022 UCC 2021 Additions ($243,000 + $317,000) AccII Adjustment [(50%)($560,000)] CCA Base 2022 CCA [(5%)($840,000)] AccII Adjustment Reversal January 1, 2023 UCC Deduct: Dispositions in the year - Lesser of: Capital Cost = $560,000 (See Note) POD = ($187,000 + $307,000) = $487,000 UCC subsequent to the sales

Nil $560,000 280,000 $840,000 ( 42,000) ( 280,000) $518,000

( 487,000) $ 31,000

Note - The capital cost of the single goodwill property is $560,000, the total of the purchased goodwill. The cost of the remaining single goodwill property after the sale is reduced to $73,000 ($560,000 $487,000) ITA 13(34)(c)(ii). There would be no immediate income tax consequences resulting from the dispositions other than a reduced CCA base upon which to claim CCA in the current and subsequent taxation years. Type: ES Topic: Goodwill - dispositions

90) Multilink Inc. has a December 31 taxation year end. In January, 2022, Multilink Inc. acquires five photocopiers at a cost of $5,500 each. In December, 2022, two of these photocopiers are upgraded for newer models. The new photocopiers cost $6,000 each, and the Company receives a trade-in allowance for each old photocopier of $2,000. Determine the 2022 income tax consequences as a result of these transactions on the assumption that (1) no election is made to put any of the photocopiers in a separate class and (2) elections are made to place all photocopiers in separate classes? Answer: Photocopiers would be included in Class 8, a 20% declining balance class. The following table compares the CCA if no election is made with the results if the separate class election is made.

January 2022 purchases at $5,500 each Dispositions at $2,000 each Terminal Loss December 2022 acquisitions at $6,000 AccII Adjustment CCA Base Class 8 CCA Rate CCA for 2022

No Election 5 Copiers $27,500 ( 4,000)

With Election 2 Copiers $11,000 ( 4,000) $ 7,000

12,000 17,750 $53,250 20% $10,650

$12,000 6,000 $18,000 20% $ 3,600

With Election 3 Copiers $16,500 N/A

8,250 $24,750 20% $ 4,950

If no election is made, there will be a deduction for CCA of $10,650. Alternatively, if each photocopier is allocated to a separate class, there will be a deduction for CCA of $8,550 ($3,600 + $4,950) plus a deduction for a terminal loss of $7,000. resulting in total deductions of $15,550 which exceeds the noelection treatment by $4,900 ($3,600 + $4,950 + $7,000 - $10,650). Type: ES Topic: CCA - separate class election

91) Garick Ltd. has a December 31 year end. In February 2022, the Company acquires three photocopiers at a cost of $23,000 each. Because of their extremely heavy usage, they must be replaced in November, 2022. They are replaced with three new photocopiers at a cost of $21,500 each. The Company received a trade in allowance of $2,500 for each of the replacement photocopiers. Determine the income tax consequences for 2022 if (1) no election is made to put each photocopier in a separate class and (2) if the separate class election is made. Answer: Photocopiers would be Class 8 property depreciable at a rate of 20% on a declining balance basis. The following table compares the CCA if no election is made with the results if the separate class election is made.

First Purchase [(3)($23,000)] November dispositions [(3)($2,500)] Terminal Loss

No Election With Election $ 69,000 $69,000 ( 7,500) ( 7,500) $61,500

November Purchase [(3)($21,500)] AccII Adjustment CCA Base Class 8 CCA Rate CCA for 2022

64,500 63,000 $189,000 20% $ 37,800

$64,500 32,250 $96,750 20% $19,350

If no election is made, there will be a deduction for CCA of $37,800. Alternatively, if each photocopier is allocated to a separate class, there will be a deduction for CCA of $19,350 plus a deduction for a terminal loss of $61,500 resulting in total deductions of $80,850 which exceeds the non-election treatment by $43,050 ($19,350 + $61,500 - 37,800). Type: ES Topic: CCA - separate class election

92) Fromor is a Canadian public company with a taxation year that ends on December 31. It is the policy of Fromor Ltd. to claim maximum CCA for all Classes. On January 1, 2022, Fromor had a nil balance in Class 14.1. Two independent cases follow involving purchases and sales of goodwill. In each case assume that Fromor has no other Class 14.1 transactions in 2022 or 2023 Case One - In 2022, Fromor purchases two businesses that are integrated into the company's one business. Goodwill purchases amount to $127,000. for the first business purchase and an additional $186,000 for the second business purchase. In 2023, Fromor sells off part of its business and, as a consequence, receives a payment for goodwill of $142,000. Case Two - In 2022, Fromor purchases a business which is integrated into its one business. The cost of this business includes a payment for goodwill of $64,000. In addition in 2022 Fromor purchases an unlimited life franchise for $98,000. In 2022, Fromor sells a portion of its business which includes a sale of goodwill for $85,000. Required: Determine the income tax consequences for 2022 and 2023 in each of the two cases. Your answer should include the January 1, 2024 Class 14.1 UCC balance. Answer: Case One For the year ending December 31, 2022, the maximum CCA, as well as the UCC balance for January 1, 2023 for Fromor's Class 14.1 would be as calculated as follows: January 1, 2022 UCC Balance 2022 Additions ($127,000 + $186,000) AccII Adjustment [(50%)($313,000)] CCA Base 2022 CCA [(5%)($469,500)] AccII Adjustment Reversal January 1, 2023 UCC

Nil $313,000 156,500 $469,500 ( 23,475) ( 156,500) $289,525

The results for 2023 would be calculated as follows: January 1, 2023 UCC Disposition - Lesser of: Capital Cost = $313,000 POD = $142,000 CCA Base 2023 CCA [(5%)($147,525)] January 1, 2024 UCC

$289,525

( 142,000) $147,525 ( 7,376) $140,149

There would be no immediate income tax consequences resulting from the sale of goodwill, other than a reduction in the UCC. The cost of the single goodwill property is reduced to $171,000 ($313,000 $142,000). ITA 13(34)

Case Two For the 2022 taxation year, the maximum CCA, as well as the UCC balance for January 1, 2023 for Class 14.1 would be as calculated as follows: January 1, 2022 UCC 2022 Additions ($64,000 + $98,000) AccII Adjustment [(50%)($162,000)] CCA Base 2022 CCA [(5%)($243,000)] AccII Adjustment Reversal January 1, 2023 UCC

Nil $162,000 81,000 $243,000 ( 12,150) ( 81,000) $149,850

The results for 2023 would be as follows: January 1, 2023 UCC Disposition - Lesser of: Capital Cost of Goodwill = $64,000 POD = $85,000 CCA Base 2023 CCA [(5%)($85,850)] January 1, 2024 UCC

$149,850

( 64,000) $ 85,850 ( 4,293) $ 81,557

While Fromor would still have a goodwill property its capital cost would be nil. POD Less ACB (i.e., capital cost) of Goodwill Capital Gain Inclusion Rate Taxable Capital Gain

$85,000 ( 64,000) $21,000 1/2 $10,500

There would be maximum CCA of $4,293 and a taxable capital gain of $10,500 resulting in a net increase of $6,207 for 2023. Type: ES Topic: Goodwill - purchase and sale

93) Shawarma Palace Ltd. was incorporated on January 1, 2020 to carry on a luxury restaurant business. The Company has a December 31 taxation year end and claims the maximum CCA each year. On February 15, 2020, the Company purchased a new building for use in its business at a cost of $750,000. Of this total, $500,000 is allocated to the building and $250,000 to the land. The building is used exclusively (100%) for non-residential purposes of which 25% is categorized as manufacturing and processing (the preparation of food and drinks). An election was filed to include the building in a separate Class 1. On March 1, 2020 furnishings for the building are acquired for $225,000. and 10 delivery vehicles are purchased for $27,000 each for a total of $270,000. In 2021, the Company traded in 4 of the delivery vehicles for more fuel efficient vehicles. The replacement vehicles cost $29,000 each. The company receives a trade-in allowance of $21,000 for each of the vehicles traded in. The Company also purchased a zero-emission luxury automobile for the exclusive use of the Company's CEO at a cost of $89,000. The CEO is not a shareholder no are any members of the CEO's family. At the end of the 2022 taxation year, mounting losses force the Company to discontinue its business. The depreciable properties are sold in 2022 as follows: • The building is sold for its original cost of $750,000, with $250,000 of this amount being attributed to the land. • The furniture is sold for $150,000. • The 6 remaining vehicles that were purchased in 2020 are sold for a total of $72,000. The 4 vehicles that were purchased in 2020 are sold for a total of $100,000. • The luxury automobile is sold for $45,000. Required: Determine the maximum CCA that can be claimed in each of the years 2020 through 2022. In your calculations, include and identify the January 1, 2021, January 1, 2022, and January 1, 2023 UCC balances for each class. In addition, determine the income tax consequences resulting from the 2021 and 2022 dispositions. Ignore GST/HST & PST considerations.

Answer: The maximum CCA for 2020, 2021, and 2022, would be calculated as in the following schedules: 2020 Opening UCC Additions Class 1 Class 10 [(10)($27,000)] Class 8 AccII adjustment CCA Base Maximum CCA Class 1 [(6%)($750,000)]* Class 10 [(30%)($405,000)] Class 8 [(20%)($337,500)] AccII Reversal January 1, 2021 UCC

Class 1 Nil $500,000

250,000 $750,000 ( 45,000)

(250,000) $455,000

Class 10 Nil

Class 8 Nil

$270,000 135,000 $405,000

(121,500) (135,000) $148,500

$225,000 112,500 $337,500

( 67,500) (112,500) $157,500

*As the Class 1 building is being used 100% for non-residential purposes, but less than 90% for M&P and is elected to be included in a separate Class 1, it would qualify for the 6% CCA rate. The total maximum CCA for 2020 would be $234,000 ($45,000 + $121,500 + $67,500). 2021 Beginning UCC Additions Class 1 Class 10 [(4)($29,000)] Class 8 Class 54* Class 10 Disposition - Lesser of: Capital Cost = $108,000 [(4)($27,000)] POD = $84,000 [(4)($21,000)] AccII Adjustment* CCA Base Maximum CCA Class 1 [(6%)($455,000)] Class 10 [(30%)($196,500)] Class 8 [(20%)($157,500)] Class 54 [(30%)($183,333)] AccII Adjustment Reversal January 1, 2022 UCC

Class 1 $455,000

Class 10 $148,500

Class 8 $157,500

Class 54 Nil

Nil 116,000

Nil Nil $455,000 ( 27,300)

$427,700

( 84,000) 16,000 $196,500

( 58,950)

( 16,000) $121,550

Nil

Nil Nil $157,500

( 31,500) Nil $126,000

$55,000

128,333 $183,333

( 55,000) (128,333) $ Nil

*The CCA base for the zero-emission luxury car is limited to $55,000. The AccII adjustment for Class 54 is 2 1/3 of $55,000 or $128,333. The total maximum CCA for 2021 would be $172,750 ($27,300 + $58,950 + 31,500 + $55,000).

2022 Beginning UCC Additions Disposition Class 1 - Lesser of: Capital Cost = $500,000 POD = $500,000 Class 10 - Lesser of: Capital Cost = $278,000 {[(6)($27,000)] + [(4)($29,000)]} POD = $172,000 Class 54 - Lesser of: Capital Cost = $55,000 POD = $27,809* Class 8 - Lesser of: Capital Cost = $225,000 POD = $150,000 Balance with no remaining property Recapture January 1, 2023 UCC

Class 1 $427,700 Nil

Class 10 $121,550 Nil

Class 8 $126,000 Nil

Class 54 Nil Nil

( 500,000)

( 172,000)

( 27,809)

( $72,300) 72,300 Nil

( $50,450) 50,450 Nil

( 150,000) ($ 24,000) 24,000 Nil

( 27,809) 27,809 Nil

*The POD are modified for zero-emission passenger vehicles (ZPEV) and are deemed to be equal to $27,809 [($45,000)($55,000 ÷ $89,000)] ITA 13(7)(i). There would be no CCA for 2022 in any of the classes. There would be recapture in all four Classes totalling of $174,559 ($72,300 + $50,450 + $24,000 + $27,809). Type: ES Topic: CCA calculations multiple years

94) Votex Inc. has a taxation year end of December 31. On January 1, 2022, the following information with respect to classes of depreciable property used in the company business is made available: Class 1 - The building in Class 1 were purchased in January, 2011 for $734,000, with $84,000 attributable to the land and $650,000 to the building. The UCC balance on January 1, 2022 is $562,154. Class 8 - The equipment in Class 8 was purchased in January, 2016 for $78,500. The UCC balance on January 1, 2022 is $23,520. Class 10 - The vehicles in Class 10 were purchased in June, 2019 for $82,000. The UCC balance on January 1, 2022 is $34,153. The following transactions occurred in the 2022 taxation year: Sale of Equipment - As the result of an extensive analysis, it is decided that it would be better to sell the existing equipment and to replace it with leased equipment. The old equipment is sold for $32,500. Sale of Building - A similar decision is made with respect to the building. The property is sold for $825,000 and replaced with a leased property. Of the $825,000 sales price, $100,000 is for the land on which the building is situated and $725,000 for the building. The lease term is for 4 years with no options for renewal. A total of $81,000 is spent on leasehold improvements to make the buildings more suitable for the business. Sale of Vehicles - The Class 10 vehicles were sold during the current year and replaced with leased vehicles. The sale proceeds totaled $27,500 with no vehicle being sold for more than its capital cost. Sale of Goodwill - In order to further streamline its business, Votex Inc. sells off a portion of its business to another company. No depreciable property was disposed of in this transaction other than the sale of goodwill for $225,000. Required: Calculate the maximum CCA that can be claimed for the 2022 taxation year for each class. In addition, calculate the January 1, 2023 UCC balances and indicate any other income tax consequences that occur as a result of the transactions described above. Answer: Sale of Equipment The income tax tax consequences as a result of the sale of equipment are as follows: Opening UCC Dispositions - Lesser of: • Capital Cost = $78,500 • POD = $32,500 Negative Ending Balance Recapture January 1, 2023 UCC Balance

$23,520

( 32,500) ($ 8,980) 8,980 Nil

There would be no Class 8 CCA for 2022 as there is no property owned and no positive UCC balance. The sale of the equipment would result in an increase in income of $8,980.

Sale of the Building The income tax consequences of the sale of the buildings can be analyzed as follows: Opening UCC Dispositions - Lesser of: • Capital Cost = $650,000 • POD = $725,000 Negative Ending Balance Recapture January 1, 2023 UCC Balance

$562,154

( 650,000) ($ 87,846) 87,846 Nil

The sale of the land and buildings would result in taxable capital gains that would be calculated as follows: Land Building POD $100,000 $725,000 ACB (e.g. Capital Cost for the building) ( 84,000) ( 650,000) Capital Gain $ 16,000 $ 75,000 Inclusion Rate 1/2 1/2 Taxable Capital Gain $ 8,000 $ 37,500 There would be no Class 1 CCA for this year. The sale of the property (land and building) would increase the company's 2022 income by $133,346 ($87,846 + $8,000 + $37,500). Sale of Vehicles The income tax consequences of the sale of the vehicles can be analyzed as follows: Opening UCC Balance Dispositions - Lesser of: • Capital Cost = $82,000 • POD = $27,500 Ending Balance with no remaining property Terminal Loss January 1, 2023 UCC Balance

$34,153

( 27,500) $ 6,653 ( 6,653) Nil

The terminal loss must be deducted in the 2022 taxation year. As a consequence, there will be no Class 10 CCA for the year. Leasehold Improvements The leasehold improvements must be included in Class 13 and are subject to straight line write-off over the life of the lease. However, the minimum life that may be used is 5 years, resulting in a 2022 CCA maximum claim of $24,300 [(1.5)($81,000 ÷ 5)] and a January 1, 2023 Class 13 UCC of $56,700.

Sale of Goodwill - Class 14.1 The income tax consequences of the sale of goodwill can be calculated as follows: Opening UCC Balance Disposition - Lesser of: • Capital Cost = Nil • POD = $225,000 December 31, 2022 and January 1, 2023 UCC Balance

Nil

Nil Nil

There would be a taxable capital gain resulting from the sale of goodwill. It would be calculated as follows: POD Less: ACB (e.g. Capital Cost) Capital Gain Inclusion Rate Taxable Capital Gain

$225,000 Nil $225,000 1/2 $112,500

Summary of CCA and UCC Results (Not Required) The maximum CCA for the 2022 taxation year and the January 1, 2023 UCC balances can be summarized as follows: Maximum CCA UCC Class 1 Nil Nil Class 13 $24,300 $56,700 Class 8 Nil Nil Class 10 Nil Nil Class 14.1 Nil Nil In addition, the following income tax consequences resulted from the transactions described above: Class 8 Recapture Class 1 Recapture Taxable Capital Gain on the Land Taxable Capital Gain on the Building Class 10 Terminal Loss Taxable Capital Gain on sale of Goodwill Total Increase in 2022 net income

Type: ES Topic: CCA - multiple disposition of depreciable property

8,980 $ 87,846 8,000 37,500 ( 6,653) 112,500 $248,173

95) Ken's Kouriers is a business carried on as a sole proprietorship which provides courier services within the city of Halifax. It has a taxation year that ends on December 31 and plans to claim the maximum CCA each year. Ken's Kouriers commenced business on May 1, 2020 by acquiring a new building for $326,000 with $53,000 for the land and $273,000 attributable to the building. The building will be used 100% of the time for business purposes other than manufacturing, an election has been made to include the building in a separate Class 1 to take advantage of the higher CCA rate. Furnishings for the building are purchased on June 1, 2020 for $85,000. In addition on June 1, 2020, the business purchases 12 delivery vehicles to be used by its couriers. The cost of these vehicles is $23,000 each for a total of $276,000. In 2021, the business trades in 5 of its old delivery vehicles for more fuel efficient vehicles. The replacement vehicles cost $27,000 each. The company receives a trade-in allowance of $16,000 for each old delivery vehicle. Also during 2021, the Company purchases a luxury zero-emission automobile to be used by Ken, the sole proprietor. The cost of the automobile is $103,000. In 2022, Ken and five of his drivers are charged with smuggling counterfeit goods. Ken's Kouriers is closed down the business ceases to exist on December 31, 2022. Before closing, Ken sells all of the business property for the following amounts: • The building is sold for $342,000, with $53,000 of this amount for the land and $289,000 for the building. • The remaining 7 delivery vehicles that were purchased in 2020 are sold for a total of $73,000. The 5 delivery vehicles that were purchased in 2021 are sold for a total of $62,500. The amount received for each delivery vehicle was less than its capital cost. • The furniture is sold for $12,300. • The luxury automobile is sold for $63,800. Required: Determine the maximum CCA that can be claimed in each of 2020, 2021 and 2022. In your calculations, include and identify the UCC balances for January 1 of 2021, 2022 and 2023. In addition, indicate any other income tax consequences resulting from the dispositions in 2021 and 2022. Ignore GST/HST & PST considerations.

Answer: The maximum CCA for the 3 years are shown in the table below: 2020 Opening Balance Additions Class 1 Class 10 [(12)($23,000)] Class 8 AccII Adjustment CCA Base Maximum 2020 CCA Class 1 [(6%)($409,500)(245 ÷ 365)]* Class 10 [(30%)($414,000)(245 ÷ 365)] Class 8 [(20%)($127,500)(245 ÷ 365)] AccII Reversal January 1, 2021 UCC

Class 1 Nil $273,000

136,500 $409,500

Class 10 Nil

$276,000 138,000 $414,000

Class 8 Nil

$85,000 42,500 $127,500

(16,492) ( 83,367) (136,500) $256,508

(138,000) $192,633

(17,116) (42,500) $67,884

*As the Class 1 building is being used 100% for non-residential purposes that is not manufacturing, and an election is made to include the building in a separate Class 1 the CCA is increased by two percentage points from 4% to 6%. The total maximum CCA for 2020 would be $116,975 ($16,492 + $83,367 +$ 17,116). 2021 Beginning UCC Additions Class 1 Class 10 [(5)($27,000)] Class 8 Class 54* Class 10 Disposition - Lesser of: Capital Cost = $115,000 POD = $80,000 AccII Adjustment CCA Base Maximum 2021 CCA Class 1 [(6%)($256,508)] Class 10 [(30%)($275,133)] Class 8 [(20%)($67,884)] Class 54 [(30%)($183,333)] * AccII Adjustment Reversal January 1, 2022 UCC

Class 1 $256,508 Nil

Nil Nil $256,508 ( 15,390)

$241,118

Class 10 $192,633

135,000

( 80,000) 27,500 $275,133

( 82,540)

( 27,500) $165,093

Class 8 $67,884

Nil

Nil Nil $67,884

( 13,577) Nil $54,307

Class 54 Nil

$55,000

128,333 $183,333

( 55,000) ( 128,333) $ Nil

*The CCA base for a Class 54 zero-emission vehicle that is a ZEPV is limited to $55,000. The AccII adjustment is equal to 2 1/3 of $55,000 or $128,333. This adjustment ensures that the first year maximum CCA claim equals 100% of $55,000. The total maximum CCA for 2021 would be $166,507 ($15,390 + $82,540 + $13,577 + $55,000).

2022 Beginning UCC Additions Dispositions - Lesser of: $289,000 Vs. $273,000 $296,000 Vs. $135,500 $55,000 Vs. $34,068* $85,000 Vs. $12,300 Balance With No Remaining Assets Recapture Terminal Losses January 1, 2023 UCC

Class 1 $241,118 Nil ( 273,000)

( $31,882) 31,882 Nil

Class 10 $165,093 Nil

Class 8 $54,307 Nil

( 135,500)

Class 54 Nil Nil

( 34,068)

$ 29,593

( 12,300) $42,007

( 29,593) Nil

( 42,007) Nil

( 34,068) 34,068 Nil

*The POD are modified for zero-emission passenger vehicles (ZPEV) and are deemed to be equal to $34,068 [($63,800)($55,000 ÷ $103,000)] ITA 13(7)(i). With respect to the Class 10.1 automobile, one-half of the normal CCA can be claimed in the year of disposition. Since the final year is not a short fiscal period, this amount would be $2,475 [(1/2)(30%)($16,500)]. No CCA can be claimed on any class. There would be recapture of $65,950 ($31,882 + $34,068) for Class 1 and 54 and terminal losses of $29,593 for Class 10 and $42,007 for Class 8. There would also be a taxable capital gain on the building of $8,000 [(1/2)(POD $289,000 - ACBV $273,000)]. Type: ES Topic: CCA calculations multiple years

96) The following information relates to the Fortin Ltd.'s depreciable properties. Fortin's taxation year end is December 31. Class 1 - In 2022, a new office building was purchased for $623,000. Of this total, the value of the land is $145,000 and $478,000 is attributable to the building. The building will be used 100% for business purposes none of which involve manufacturing. An election was filed to include the building in a separate Class. 1. Class 3 - The January 1, 2022 UCC was $798,000. In 2022, one of the warehouses in this class burned to the ground. It had a capital cost of $150,000. Insurance proceeds were $185,000. Class 8 - The January 1, 2022 UCC was $346,000. In 2022, the Company purchased additional acquired Class 8 property of $105,000. In addition Class 8 property with a capital cost of $83,000 was sold for $75,000. Class 10 - The January 1, 2022 UCC was $150,000. In 2022, 3 delivery vans were purchased for $25,000 each. In addition, a delivery van with a capital cost of $42,000 was sold for $18,000. Class 10.1 - The January 1, 2022 UCC was $17,850. The only property in this Class was the CEO's $350,000 Bentley. At the instructions of the Company's directors, who felt this automobile was excessively extravagant, it was sold for $275,000 in 2022. The CEO is not a shareholder of the Company nor are any of their family members. Class 13 - The January 1, 2022 UCC was $37,500, reflecting leasehold improvements of $50,000 that were made in 2020, the year in which the lease began. The leasehold improvements were made on a property leased as office space for company business. The initial lease term was for 8 years, with an option to renew for a period of 2 years. Additional improvements, costing $40,000, were made in 2022. Class 50 - The January 1, 2022 UCC was $23,000. In 2022, there were additions to this Class with a capital cost of $18,000. Class 53 - The January 1, 2022 UCC was $63,000. The total capital cost of the properties was $84,000. The Company found that its manufacturing operations were not profitable and all of the manufacturing properties were sold in 2022 for $51,000. None of the properties were sold for amounts in excess of their capital cost. Fortin Aluminum always claims maximum CCA on each Class of depreciable property. Required: Calculate the maximum CCA that can be claimed by Fortin for each class of property for its 2022 taxation year and determine the UCC for each class as of January 1, 2023. In addition, determine any other income tax consequences with respect to these depreciable properties. Ignore GST/HST & PST considerations.

Answer: Note To Instructor - Although the replacement property rules (covered in Chapter 8) might be considered relevant as a building was burned down and a new building was purchased, we have specified that a warehouse was disposed of, and an office building was purchased, to purposefully avoid this issue. Class 1 As it is a new building, is going to be used 100% for business purposes, and an election has been filed to include the building in a separate Class, it is eligible for an additional two percentage points resulting in a CCA rate of 6%. 2022 CCA and UCC at January 1, 2023 is determined as follows: January 1, 2022 UCC Additions AccII Adjustment [(50%)($478,000)] CCA Base 2022 CCA [(6%)($717,000)] AccII Adjustment Reversal January 1, 2023 UCC

Nil $478,000 239,000 $717,000 ( 43,020) ( 239,000) $434,980

Class 3 The 2022 CCA and January 1, 2023 UCC are determined as follows: January 1, 2022 UCC Dispositions - Lesser of: Capital Cost = $150,000 POD = $185,000 CCA Base 2022 CCA [(5%)($648,000)] January 1, 2023 UCC

$798,000

( 150,000) $648,000 ( 32,400) $615,600

There would also be a taxable capital gain of $17,500 [(1/2)(POD $185,000 - ACB $150,000)]. Class 8 The 2022 CCA and January 1, 2023 UCC is determined as follows: January 1, 2022 UCC Additions Dispositions - Lesser of: • Capital Cost = $83,000 • POD = $75,000 AccII Adjustment [(50%)($30,000)] CCA Base 2022 CCA [(20%)($391,000)] AccII Adjustment Reversal January 1, 2023 UCC Balance

$105,000

( 75,000)

$346,000

30,000 15,000 $391,000 ( 78,200) ( 15,000) $297,800

Class 10 - Vehicles The 2022 CCA and January 1, 2023 UCC are determined as follows: January 1, 2022 UCC Additions [(3)($25,000)] Disposition of Truck - Lesser of: • Capital Cost = $42,000 • POD = $18,000 AccII Adjustment [(50%)($57,000)] CCA Base 2022 CCA [(30%)($235,500)] AccII Adjustment Reversal January 1, 2023 UCC Balance

$75,000

( 18,000)

$150,000

57,000 28,500 $235,500 ( 70,650) ( 28,500) $136,350

Class 10.1 Both recapture and terminal losses are not recognized in Class 10.1, however, in the year of disposition, one-half of the normal CCA can be claimed. As a result 2022 CCA is $2,678 [(1/2)(30%)($17,850)]. The January 1, 2023 UCC balance would be nil. Class 13 The 2020 leasehold improvements are depreciated on a straight line basis over 10 years, the original term of the lease (8 years), plus the first renewal of two years. The 2022 CCA and January 1, 2023 UCC are determined as follows: January 1, 2022 UCC Additions CCA Base 2022 CCA: • 2020 Improvements ($50,000 ÷ 10) • 2022 Improvements Including AccII Adjustment [(150%)($40,000 ÷ 8)] January 1, 2023 UCC Balance

$37,500 40,000 $77,500 ($5,000) ( 7,500)

( 12,500) $65,000

Class 50 The 2022 CCA and January 1, 2023 UCC are determined as follows: January 1, 2022 UCC Additions AccII Adjustment [(50%)($18,000)] CCA Base 2022 CCA [(55%)($50,000)] AccII Adjustment Reversal January 1, 2023 UCC

$23,000 18,000 9,000 $50,000 ( 27,500) ( 9,000) $13,500

Class 53 The 2022 CCA and January 1, 2023 UCC are calculated as follows: January 1, 2022 UCC Disposition - Lesser of: • Capital Cost = $84,000 • POD = $51,000 Ending Balance (No remaining properties) 2022 Terminal Loss January 1, 2023 UCC Balance

$63,000

( 51,000) $12,000 ( 12,000) Nil

After all of the Class 53 property has been sold there is still a $12,000 UCC balance. This results in a 2022 terminal loss that will be deducted in full from the business income of Fortin Ltd. The terminal loss will cause the UCC balance to reset to nil. Other Income Tax Consequences In addition to CCA, there are additional income tax consequences: Taxable Capital Gain on Class 3 Building Terminal Loss on Class 53 Property Total net increase

$17,500 ( 12,000) $ 5,500

Summary of the results (Not Required) The maximum CCA for 2022 and the January 1, 2023 UCC balances are summarized as follows:

Class 1 Class 3 Class 8 Class 10 Class 10.1 Class 13 Class 50 Class 53

Type: ES Topic: CCA calculations - comprehensive

Maximum CCA $43,020 32,400 78,200 70,650 2,678 12,500 27,500 Nil

UCC $434,980 615,600 297,800 136,350 Nil 65,000 13,500 Nil

97) For its taxation year ending December 31, 2022, Martin's Enterprises Ltd. has determined that its 2022 net and taxable income would be $53,000 before any deduction for CCA. On January 1, 2022, the Company has the following UCC balances: Class 1 (Building acquired in 2005) Class 8 Class 10 Class 10.1 (Porsche - Cost $110,000) Class 10.1 (Cadillac - Cost $45,000)

$876,000 220,000 95,000 16,500 16,500

In 2022, the Company purchased Class 10 property for $122,000 and sold Class 10 property that cost $118,000 for $87,000. None of the Class 10 properties were sold for amounts in excess of their capital cost. There were Class 10 property remaining on December 31, 2022. There were no purchases or sales of property in Class 1, 8 or 10.1 in 2022. The Company plans to sell the Porsche in January, 2023 and estimates a sale price of $75,000. During the preceding three taxation years of 2019, 2020 and 2021, the Company's total taxable income was only $39,000. Required: A. Calculate the maximum 2022 CCA that can be claimed by the Company. Your answer should include the maximum CCA for each class. B. As Martin's Enterprises' income tax advisor, indicate how much CCA you would advise the Company to claim for 2022, and the specific classes from which it should be claimed. Provide a brief explanation of the reasons for your recommendation. In determining your solution, ignore the possibility that 2022 loss carry forwards can be carried forward to subsequent taxation years.

Answer: Part A 2022 CCA is calculated as follows:

Opening UCC and CCA Base CCA Rate Maximum 2022 CCA

Class 1 $876,000 4% $ 35,040

Class 8 $220,000 20% $ 44,000

Class 10.1 Opening UCC and CCA Base CCA Rate Maximum 2022 CCA (Class 10.1 = $15,300)

Porsche $16,500 30% $ 4,950

Cadillac $16,500 30% $ 4,950

Opening UCC - Class 10 Additions Dispositions - Lesser of: • Cost = $118,000 • POD = $87,000 AccII Adjustment [(50%)($35,000)] CCA Base CCA Rate Maximum 2022 CCA

$122,000

( 87,000)

$95,000

35,000 17,500 $147,500 30% $ 44,250

This gives a maximum amount for CCA of $133,190 ($35,040 + $44,000 + $4,950 + $4,950 + $44,250) for the 2022 taxation year. Part B Since the Company only has net and taxable income before CCA of $53,000, the business may wish to deduct less than the maximum CCA. However, there is no question that the business will wish to deduct the $53,000 that is required to reduce 2022 taxable income to nil. Further, it would be advisable to deduct an additional $39,000 for a total of $92,000 ($53,000 + $39,000). This would create a 2022 non-capital loss of $39,000 ($53,000 - $92,000), which could then be carried back to claim refunds of income taxes paid in the three preceding years. If we ignore the possibility of loss carry forwards, no additional CCA would be claimed in 2022. Assuming the 2022 CCA claim is limited to $92,000, it would normally be claimed in the class or classes with the lowest CCA rates. This would leave the unused amounts in classes with higher rates which, in turn, would maximize the amount that could be claimed in subsequent profitable years. This means that the maximum amounts would be claimed from Class 1 and Class 8, for a total of $79,040. Given this, an additional deduction of $12,960 ($92,000 - $79,040) would be required. As they are both 30% declining balance classes, this amount could be claimed from either of Class 10 or Class 10.1. Since the Porsche will be sold for an estimated $75,000, the maximum of $4,950 should be claimed from the Class 10.1 for the Porsche as there would be no recapture for this class since it is Class 10.1. The remaining amount of $8,010 could be claimed from Class 10 or a combination of the other Class 10.1 property and Class 10

The total deduction can be summarized as follows: Class 1 (Maximum Available) Class 8 (Maximum Available) Class 10.1 - Porsche Other Class 10.1 & Class 10 Total 2022 CCA

$35,040 44,000 4,950 8,010 $92,000

This $92,000 CCA deduction would reduce 2022 taxable income to nil. In addition, it would create a 2022 non-capital loss of $39,000 that could be carried back to the three preceding taxation years, 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 be claimed from as any additional CCA taken on Class 1 in 2022 would have to be added to income as recapture in the taxation year in which the building would be sold. Type: ES Topic: CCA tax planning

98) For its taxation year ending December 31, 2022, Axel Ltd. has estimated that its net and taxable income, before any deductions for CCA, will be $42,000. The company will only claim sufficient CCA to reduce taxable income to nil. On January 1, 2022 the Company has the following UCC balances: Class 1 (Two buildings no separate class) Class 13* Class 10

$462,000 94,500 139,000

*This balance reflects leasehold improvements made in January of 2020 at a total cost of $126,000. The original term of the lease was 4 years. However, there are two available renewal options, each allowing the Company to renew for a period of two years. In 2022, Class 10 property was purchased for $76,000 and Class 10 property with a capital cost of $68,000 was sold for $58,000. There remain Class 10 property at December 31, 2022. There were no purchases or sales or property in either Class 1 or Class 8 in 2022. However, the Company has received an unsolicited offer to purchase one of its buildings which it is considering. Required: A. Calculate the maximum 2022 CCA for each class. B. As Axel's income tax advisor, indicate the maximum CCA for each class, how much CCA should actually be claimed and the specific classes from which it should be claimed. Provide a brief explanation of the reason for your recommendation. In providing this advice, ignore any loss carryovers that can be carried either back or forward.

Answer: Part A Since there are two buildings in Class 1, the CCA rate is 4% (Note that the ability to claim either the 6% or 10% rate is dependent upon the buildings being elected to be included in a separate Class 1). The maximum 2022 CCA would be determined as follows: Class 1 $462,000 4% $ 18,480

Opening UCC and CCA Base CCA Rate Maximum 2022 CCA

Class 13 $94,500 See Note $21,000

Note - CCA on Class 13 would be calculated by dividing the leasehold expenditure cost by the number of years remaining in the initial lease plus the first renewal period. The result is CCA of $21,000 [$126,000 ÷ (4 + 2)] per year. Class 10 $139,000

Opening Balance Additions Lesser of POD and Capital Cost AccII Adjustment [(50%)($18,000)] CCA Base CCA Rate Maximum 2022 CCA

$76,000 ( 58,000)

18,000 9,000 $166,000 30% $ 49,800

This results in maximum CCA for 2022 of $89,280 for the 2022 taxation year ($18,480 + $21,000 + $49,800). Part B Since the Company only expects net and taxable income before the consideration of CCA of $42,000 and the problem states that loss carry overs should not be considered, maximum CCA would not be claimed since it would result in a loss carryover (e.g. a non-capital loss). Only $42,000 in CCA should be claimed in order to reduce taxable income to nil. With respect to the classes from which the claim should be made the general rule is that CCA claims should be made from the classes with the lowest CCA rates. By leaving the classes with higher rates for future years. Taking this approach, the recommended CCA claims would be as follows: Class 1 (Maximum Available) Class 13 (Maximum Available) Class 10 ($42,000 - $18,840 - $21,000) Total recommended 2022 CCA

$18,480 21,000 2,520 $42,000

This amount of CCA would reduce 2022 net and taxable income to nil. Note that the effective Class 13 rate is 16.7% since costs are amortized over 6 years.

Note that if Axel plans to accept the offer to sell the building and the purchase price is more than the Class 1 opening UCC, this could affect the choice of classes to choose from since any additional CCA claimed from Class 1 would be added to income as recapture in the taxation year in which the building is sold. Type: ES Topic: CCA tax planning

99) The following information relates to Andorn Ltd. for its 2022 taxation year ending December 31: 1. The Company has the following UCC balances on January 1, 2022: Class 1 (A single building purchased in 2009) Class 8 Class 10 Class 13

$478,695 243,000 126,000 127,500

2. In 2022, the building was sold for $650,000 with $125,000 paid for the land and $500,000 for the building. The capital cost of the building was $545,000 and the cost and ACB of the land $80,000. The building was subsequently replaced in 2022 with a new building at a cost of $620,000 for the building and $125,000 for the land. The old building was used 100% for business office space and an election had been made to include the building in a separate Class 1. The new replacement building is also used 100% for business office space and is elected to be included in a separate Class 1. 3. In 2022, the Company purchased office furnishings for $74,000. Older furnishings with a capital cost of $56,000 were traded in for the new furnishings. The Company received a trade in allowance of $17,000. 4. In 2022 the Company also purchased a Tesla (zero-emission) to be used by the president of the Company. The cost of the automobile was $93,000. The president drives it 23,000 kilometers during the year, of which 5,750 kilometers are for employment purposes. Any automobile benefit would be a taxable employee benefit. 5. Andorn conducts some of its business out of a building which it leases. The lease was signed in early 2020 and had an initial lease term of 7 years. There is also one renewal option for 3 years. Andorn spent $150,000 on leasehold improvements in 2020. 6. The Company purchased a limited life franchise for $62,000 August 1, 2018. At the time of purchase the remaining legal life was exactly 8 years. 7. Company policy is to claim the maximum annual CCA. Required: Calculate the 2022 maximum CCA for each class of property. In addition, identify any other income tax consequences that may have resulted from dispositions of depreciable property in 2022. Ignore the effect of the replacement property rules with respect to the building as these rules are only discussed beginning in Chapter 8.

Answer: Class 1 The calculations related to the old building that was replaced are as follows: Opening UCC Balance Disposition - Lesser of: POD = $525,000 Capital Cost = $545,000 Negative Ending Balance = Recapture

$478,695

( 525,000) ($ 46,305)

There is also a taxable capital gain from the sale of the land of $22,500 [50%)(POD $125,000 - ACB $80,000)]. Since the replacement building is new, used 100% for non-residential purposes and elected to be in a separate Class 1, it qualifies for the enhanced CCA rate of 6% for business other than manufacturing. The maximum CCA on the new building would be as follows: Opening UCC Balance Additions AccII Adjustment [(50%)($620,000)] CCA Base Rate 2022 Maximum CCA

Nil $620,000 310,000 $930,000 6% $ 55,800

Class 8 2022 maximum CCA would be calculated as follows: Opening Class 8 Balance Additions Disposals: Lesser of: Capital Cost = $56,000 POD = $17,000 AccII Adjustment [(50%)($74,000 - $17,000)] CCA Base Rate 2022 Maximum CCA

$243,000 74,000

( 17,000) 28,500 $328,500 20% $ 65,700

Class 10 2022 maximum CCA would be calculated as follows: Opening UCC Balance and CCA Base Rate 2022 Maximum CCA

$126,000 30% $ 37,800

Class 54 The Tesla qualifies as a zero-emission passenger vehicle (ZEPV) since its cost exceeds $59,000. The Tesla would be included in Class 54 which is not a separate class as it is for Class 10.1. The kilometers driven for personal purposes would affect the taxable employment benefit but would not impact what the Company could claim as CCA. Opening UCC Balance Additions AccII Adjustment [(2 1/3)($59,000)] CCA Base Rate 2022 Maximum CCA

Nil $59,000 137,667 $196,667 30% $59,000

Class 13 Class 13 is a straight-line class which amortizes leasehold expenditures over the number of years remaining in the initial leases term plus the first renewal option. In this case, the term of the lease and one renewal totals 10 years. The maximum CCA for 2022 would be $15,000 ($150,000 ÷ 10). Class 14 The limited life franchise would be a Class 14 property which applies a straight line basis over the remaining legal life. Although this franchise was purchased on August 1, 2018 this would only impact the year of purchase and the last year of its life. The 2022 maximum CCA would be for complete year and would equal $7,750 ($62,000 ÷ 8). Summary (Required) The total maximum CCA for 2022 is summarized as follows: Class 1 Class 8 Class 10 Class 54 Class 13 Class 14 Total 2022 CCA

$ 55,800 65,700 37,800 59,000 15,000 7,750 $241,050

Other Income Tax Consequences In addition to CCA, there would also be a taxable capital gain on the land of $22,500 and recapture with respect to the old Class 1 building of $46,305. Type: ES Topic: CCA calculations - comprehensive

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 6 Income or Loss from a Business 6.1 Online Exercises 1) What are the four major types of income that make up net income? Answer: The major types of income that make up net income are: • Income from an office or employment • Income from a business • Income from property • Capital Gains. Type: ES Topic: Net income - ITA 3

2) A taxpayer can acquire property for (1) use in a business, (2) for resale by a business, or (3) as investments. For each of these three situations indicate (1) How each of the properties would be categorized for purposes of the ITA, and (2) the nature of the income from each property if the properties were sold. Answer: Property used in a business is generally categorized as capital property which is further broken down into depreciable and non-depreciable capital property. Non-depreciable capital property generally refers to land and investments such as shares of corporations. The sale of non-depreciable capital property results in capital gains or capital losses. The sale of depreciable property results in recapture, terminal losses and capital gains but not capital losses. Property purchased for investment purposes is generally categorized as non-depreciable capital property that would result in capital gains or capital losses on their sale. The income from investments however is generally considered income from property but may be considered business income depending upon the strength of the connection between the investments and the underlying business. Property purchased for resale is generally categorized as inventory the sale of which either increases or decreases business income depending on the results of the sale. Type: ES Topic: Types of property

3) The sale of inventories is treated differently than the sale of non-depreciable capital property. Briefly describe the different treatments of these two types of properties. Answer: The sale of inventory increases or decreases business income and may create a business loss, whereas the sale of non-depreciable capital property results in a capital gain or capital loss. All of the income or loss from the sale of inventory affects income where as only one-half of capital gains or capital losses affect income. In addition capital losses are generally restricted and can only be deducted to the extent there are capital gains. Type: ES Topic: Types of property

4) There are many similarities and differences as to the treatment of business income for accounting and income tax purposes. Identify at least four of the notable differences in treatment. Answer: There are many differences with some of the more notable listed below: • between CCA and amortization expense, • warranty costs, • pension costs, • business meals and entertainment, • capital gains, • automobile costs, and • scientific research and experimental development (SRED) costs. At a more conceptual level, there are also differences in the treatment of unreasonable expenditures and expenditures that occur as a result of non-arms' length transactions. Type: ES Topic: Reconciliations (accounting to income tax)

5) What is a reserve? Explain briefly the reserve system that is used in the ITA with respect to income from a business. Answer: A reserve is an income tax mechanism that generally adjusts certain amounts that are initially required to be included in income from a business. The reserves allow a reduction of business income for amounts that have been received in advance, amounts for certain sales that are payable over a number of years and the adjustment of accounts receivables where there is doubt as to the collectibility. The effect is to adjust the business income or loss to better match the realities of what is income that will be ultimately realized. The claiming of reserves is generally optional. A reserve claimed in one year must be added back to income in the second year and another reserve determined based on the circumstances in that year. Type: ES Topic: Reserves for businesses

6) List three reserves that can be claimed with respect to a business. Answer: Although there are other reserves, the three main reserves are: • reserve for doubtful debts; • reserve for certain goods and services; and • reserve for unpaid amounts. Type: ES Topic: Reserves for businesses

7) Compare the general process used to determine doubtful debts for accounting purposes with the process for income tax purposes. Answer: Accountants may simply employ a flat rate percentage to outstanding receivables at year end based on past history and experience. For income tax purposes a reserve can only be claimed with respect to identifiable receivables that, based on the facts, are likely to be uncollectible. The process requires first identifying the receivables that are doubtful of collection and then determining which specific receivables among those identified will likely not be collected. Type: ES Topic: Reserves for businesses

8) The ability to claim a reserve for receivables (e.g. unpaid amounts) produces results that are similar to those that would arise if only cash sales were required to be included in business income. However, the ability to claim this type of reserve is restricted. Describe the restrictions. Answer: As described in the text, the restrictions are as follows: • ITA 20(1)(n) provides that no reserve can be claimed unless some part of the sale proceeds are not due until at least two years after the date of the sale (this two year requirement does not apply to sales of real property inventory). • ITA 20(8) specifies that no reserve can be claimed in a year if the sale took place more than 36 months before the end of that year. The result is that the reserve is only available for three years. There are additional restrictions that are designed to deny a reserve where the purchaser is a person closely connected to the seller such as a corporation controlled by the seller, or a partnership in which the seller has a majority interest. Type: ES Topic: Reserve for unpaid amounts ITA 20(1)(n)

9) ITA 18 lists a number of general limitations that affect what can be claimed as a deduction with respect to a business. Identify four of these limitations. Answer: General limitations include: • Must be incurred for the purpose of earning business income. • No capital expenditures can be deducted unless authorized by the ITA. • No personal living expenditures. • No expenses for recreational facilities or club dues. • No political contributions. • No reserves unless authorized by the ITA. • No interest or property taxes on vacant land. • No safety deposit box fees. • No prepaid expenses • No lease cancellation payments unless authorized by the ITA. Type: ES Topic: General limitations ITA 18

10) Describe the income tax treatment that applies to interest and property taxes on land. Answer: If the land is being used to earn business income or the primary reason for acquiring the land was to earn income from the land, interest expenses and property taxes associated with its ownership of that land are fully deductible. For example, the land on which a factory is situated is used as part of the income earning process of a business and, as a consequence, the interest and property taxes would be fully deductible. If, however, the land does not meet one of the tests for full unrestricted deductibility, interest and property taxes can only be deducted to the extent of any profit earned with respect to that land. For example, if the vacant land is only being used for a parking lot, the interest and property taxes could be deducted to the extent of the profits from the parking. To the extent that interest and property taxes cannot be deducted, they can be added to the adjusted cost base (ACB) of the land. A special rule applies to real estate companies whose principal business is leasing, rental or sale, or the development of land. They are permitted to deduct a base level amount, defined as interest at the prescribed rate on a $1 million principal amount. This base amount must be shared amongst companies with a certain connection (e.g. associated corporations which are discussed in Chapter 12). Type: ES Topic: Land - interest and property taxes

11) Both employees and individuals carrying on a business as a sole proprietor can claim expenses for a home office. Is the income tax treatment the same? If not describe the differences. Answer: All employees can deduct a pro rata share of maintenance and utilities where they are permitted by the employer and the facts to require a home office. Employees who receive a portion of their income in the form of sales commissions can claim a broader range of expenses such as property taxes and home insurance. A sole proprietor can claim a broadest range of expenses which are not restricted by the employment income rules. Additional expenses would include mortgage interest and CCA. Type: ES Topic: Employment - home office expenses (ITA 8(13))

12) Describe the restrictions imposed on the ability of a business to claim expenses for advertising in foreign media. Answer: The general rule is that expenditures made in foreign print or foreign broadcast media where the advertising message is directed primarily at the Canadian market cannot be claimed. This restriction does not apply where such foreign media expenditures are focused on non-Canadian markets. There is an exception to this general rule for foreign periodicals only. Canadian businesses can deduct 100% of advertising costs in foreign publications, without regard to whether it is directed at the Canadian market, provided 80% or more of its non-advertising content is original editorial content. If the periodical cannot meet the 80% threshold then only 50% of these foreign advertising costs are deductible. Type: ES Topic: Foreign advertising expenses ITA 19

13) ITA 67 provides a general restriction on the ability to claim a deduction for unreasonable expenses unless the outlay or expense is reasonable in the circumstances. Provide an example of an outlay or expense that would not be considered reasonable in the circumstances. Answer: Examples include excessive payments to non-arm's length persons such as family members that is disproportionate to the services they have provided. Other examples include unreasonable expenses such as excessive transportation costs not consistent with general business practices such as the use of a private jet for short distance travel. Type: ES Topic: Unreasonable expenses ITA 67

14) List and briefly describe three of the exceptions to the rule that only 50% of the cost of meals and entertainment can be deducted. Answer: The text describes the following exceptions, any three of which would satisfy the requirements of this question: • Long-haul truck drivers can deduct 80% of these costs. • The costs incurred by hotels and restaurants in providing meals and entertainment to their customers are fully deductible. • Meals and entertainment expenses relating to a fund raising event for a registered charity are fully deductible. • Where the taxpayer is compensated by someone else for the cost of food, beverages, or entertainment, the amounts will be fully deductible. • When amounts are paid for meals or entertainment for employees and, either the payments create a taxable benefit for the employee, or the amounts do not create a taxable benefit because they are being provided at a remote work location, the amounts are fully deductible to the employer. • When amounts are incurred by an employer for food, beverages, or entertainment that is generally available to all employees, the amounts are fully deductible. (Maximum of six such special events per year.) • Meals included in the price of airline, bus, and rail tickets are viewed by the government as immaterial. The food component of the ticket price is deemed to be nil. The result is that there is no need to estimate the meal component of the ticket and therefore no limitation. Type: ES Topic: Meals and entertainment expenses ITA 67.1

15) There are two limitations that affect an employer for expenditures and costs incurred with respect to the ownership of automobiles and one that affects an employer when an automobile is leased. Describe these three limitations. Answer: The three limitations are as follows: (1) The capital cost of a passenger vehicle to the employer is restricted to $30,000 for non-zero emission passenger vehicles and $55,000 for zero-emission passenger vehicles (ZEPV); (2) Interest expenses incurred for either type of passenger vehicles is restricted to a daily maximum of $10 and (3) Leasing expenses are also subject to the same restriction whether the passenger vehicles are Class 10.1 or ZEPVs in Class 54. Type: ES Topic: Automobile ownership restrictions (employer)

16) Describe the alternative methods of inventory valuation that can be used for income tax purposes. Answer: In general inventories can be valued using either (1) FMV or (2) the lower of cost and FMV. Type: ES Topic: Inventory valuation ITA 10

17) Compare the accounting treatment for estimated warranty costs with the income tax treatment. Answer: For accounting purposes, estimated warranty costs are expensed annually. In general, ITA 18(1)(e) prohibits a warranty expense. Furthermore ITA 20(1) does not generally allow a reserve meaning that warranty costs can only be deducted for income tax purposes when an actual expense is incurred. ITA 20(1)(m.1) is an exception to this general treatment for a very restrictive situation. Type: ES Topic: Warranty expenses ITA 18(1)(e)

18) When a taxpayer raises capital by issuing debt obligations, these obligation may be issued at a discount from their principal amount due at maturity. For accounting purposes, this discount is amortized to income as an addition to interest expense. How are these discounts treated for income tax purposes? Answer: For income tax purposes, discounts on issued debt obligations are not amortized or otherwise added to interest expenses as they are with accounting. This means that deductible interest is based only on cash amounts of interest actually paid. The income tax treatment for the actual discount looks to the maturity date of the debt obligations. If the debt obligations are issued for not less than 97% of their maturity amount and, if the effective yield is not more than 4/3 of the coupon rate, the full amount of the discount can be deducted in the taxation year the debt obligations mature as a business expense. If these conditions are not met, then only 50% of the discount paid on maturity is treated as a business expense in the year that the maturity amount is paid. Type: ES Topic: Discount on debt obligations - ITA 20(1)(f)

19) The ability to deduct losses from farming is dependent upon a number of factors. The ITA categorizes farming into three categories. Describe these categories and indicate whether the farm losses are deductible or not and if deductible whether there are any restrictions on deductibility. Answer: Hobby Farmers - These are individuals who farm on a part-time basis primarily for personal purposes without an expectation of a profit. The level of activity is not sufficient to create a business therefore none of the losses can be claimed. Full Time Farmers - These are taxpayers in which farming is generally their principal activity or where the level of the activity is unquestionably a business that is not secondary to any other source of income. The full amount of the farming losses can be deducted against all other sources of income. This category does not preclude the taxpayer having one or more other sources of income, provided these sources are subordinate to farming in terms of the level of activity. Part-Time Farmers - As described in ITA 31, these are farmers whose chief source of income is neither farming nor a combination of farming and some other source of income that is a subordinate source of income. The farming activity would have to be meet the tests for the establishment of a business. Farming losses under this category are restricted by the rules of ITA 31. The first $2,500 of an annual farm loss plus one-half of the next $30,000 (overall maximum of $17,500) can be claimed against all sources of income but the remaining part of the farm loss is restricted and can only be claimed in previous or subsequent years to the extent of farm income from the same farming business in those years. Type: ES Topic: Farm losses

20) When a business is sold the business owner ceases to carry on the business. The sale of the business involves the sale of all of its remaining property. Since accounts receivable is a non-depreciable capital property the sale of the receivables would result in either a capital gain or capital loss. The purchaser and seller however can elect to treat the sale of the receivables in a different manner by filing an election under ITA 22. What are the income tax consequences of the election to both the purchaser and seller? Answer: The sale of the receivables would represent a a capital transaction. This means that any gains and losses from the sale of receivables will, in the absence of any special rules of the ITA, be treated as capital gains and capital losses. In general the sale of receivables typically results in a sale for an amount less than the amounts actually receivable. In this situation the loss would be treated as a capital loss only one-half of which would be deductible on a restricted basis to the extent of capital gains. With respect to the purchaser of the receivables no amount could be claimed for any doubtful debt reserves or as bad debts since the rules of the ITA only grant that privilege to the original business owner. These results can be avoided with an election under ITA 22. The election allows the seller to recognize any loss on the sale of the receivables as a fully deductible business expense rather than a restricted capital loss. The election also allows the purchaser to claim any doubtful debt reserve or bad debts with respect to the purchased receivables. The one downside to the purchaser is that any deductible loss on the receivables to the seller is reciprocated to the purchaser who must include that same amount as business income in the year of the purchase of the receivables. Type: ES Topic: Accounts receivable election ITA 22

21) The income tax rules for determining business income are identical to those used for determining property income. Answer: FALSE Explanation: There are a number of differences between the business income and property income rules. Type: TF Topic: Business vs. property income

22) The deduction of CCA cannot be used to create or increase a business loss. Answer: FALSE Explanation: The deduction of CCA cannot be used to create a rental property income loss. It can be used however to create a business loss. Type: TF Topic: Business losses

23) Differences between business income for income tax purposes and business income for accounting purposes can result in reconciliation adjustments that can be either permanent or temporary. Answer: TRUE Type: TF Topic: Reconciliations (accounting to income tax)

24) When a business incurs expenses that are unreasonable in the circumstances, the unreasonable portion of the expense cannot be deducted in the calculation of either accounting income or business income for income tax purposes. Answer: FALSE Explanation: While they cannot be deducted for income tax purposes, the unreasonable portion of an expense can be deducted for accounting purposes. Type: TF Topic: Reconciliations (accounting to income tax)

25) If a reserve is deducted for accounting purposes, it can also be deducted for income tax purposes. Answer: FALSE Explanation: A reserve can only be deducted for income tax purposes if it is specifically allowed by the ITA. ITA 18(1)(e). Type: TF Topic: Reserves for businesses

26) The amounts that can be expensed with respect to bad debts on accounts receivable will generally be the same for both income tax and accounting purposes. Answer: TRUE Explanation: While the procedures are somewhat different, the results are generally the same. Type: TF Topic: Reserve for bad debts

27) A self-employed individual (e.g. a sole proprietors) cannot claim CCA on a home office in the principal residence of the individual unless it is used exclusively for the purpose of earning income. Answer: FALSE Explanation: If the home office is the individual's principal place of business, it does not have to be used exclusively for income earning purposes. Type: TF Topic: Employment - home office expenses (ITA 8(13))

28) Landscaping costs can be deducted in the determination of business income, even if the costs include capital expenditures that would normally be disallowed because of ITA 18(1)(b). Answer: TRUE Explanation: The opening words of ITA 20(1) overrides the limitation of ITA 18(1)(b). Type: TF Topic: Landscaping expenses ITA 20(1)(aa)

29) For the hobby farmer, farming losses can be deducted against any source of income up to $2,500, plus one-half of the next $30,000 in each year. Answer: FALSE Explanation: A hobby farmer does not carry on a business there no losses are deductible. The limitation mentioned applies to farmers who are subject to ITA 31 for restricted farm losses. Type: TF Topic: Farm losses

30) For income tax purposes, inventories can be valued at FMV, which can mean replacement cost or net realizable value. Answer: TRUE Explanation: Inventories can be valued at FMV, which can mean replacement cost or net realizable value. Type: TF Topic: Inventory valuation ITA 10

31) When a business ceases to exist and property that was included in inventories is subsequently sold any gain or loss realized on the sale will be treated as a capital gain or capital loss unless an election is made by the seller. Answer: FALSE Explanation: The gain will be treated as if the business was still carried on. No election is required for this result. ITA 23. Type: TF Topic: Ceasing to carry on business (inventory) ITA 23

32) When almost all of the property used in a business including accounts receivables is sold any loss realized on the sale of the receivables will be treated as a capital loss unless a joint election is jointly filed by the purchaser and seller. Answer: TRUE Type: TF Topic: Accounts receivable election ITA 22

33) In 2022, depreciable property with a capital cost of $100,000 and a UCC balance of $79,400 at the end of the taxation year, is sold for $103,000. The carrying value for accounting purposes was $83,400. What are the income tax consequences of the sale? A) Recapture of $23,600. B) A capital gain of $1,500. C) A capital gain of $3,000 and recapture of $20,600. D) A capital gain of $23,600. Answer: C Explanation: C) A capital gain of $3,000 and recapture of $20,600. Type: MC Topic: Types of income

34) Which of the following would be considered to be business income rather than property income or capital gains? A) Gains from the sale of capital property that were used in a business B) Gains from the sale of capital property used to earn property income C) Gains from the sale of inventory D) Both A and C Answer: C Explanation: C) Gains from the sale of inventory Type: MC Topic: Types of income

35) Fung Wo purchased vacant land on a remote island off the coast of British Columbia on January 1, 2019 for $50,000. She intended to re-sell it for a profit the next year but due to an oil spill, property values dropped. She was finally able to sell the vacant land for $45,000 on December 31, 2022. In the meantime, she paid property taxes of $500 each year. What are the income tax consequences of the sale in 2022? A) an allowable capital loss of $2,500. B) an allowable capital loss of $3,500. C) a business loss of $5,000. D) a business loss of $7,000. Answer: D Explanation: A) Allowable Capital Loss of $2,500 ($45,000 —$50,000) × 50% = $2,500 B) Allowable Capital Loss of $3,500[($45,000 - ($2,000 + $50,000)] × 50% = $3,500 C) Business Loss of $5,000 ($45,000 —$50,000) × 100% = $5,000 D) Business Loss of $7,000 [($45,000 - ($2,000 + $50,000)] × 100% = $7,000. Property taxes on the land would be subject to ITA 18(2) and added to the cost of the land. The sale of the land would be considered an adventure of concern in the nature of trade and treated as a business. with the land treated as inventory Type: MC Topic: Types of income

36) Jerry has collected baseball cards as a hobby for most of his life. During the current year, he acquired twenty-five specially selected cards at a total cost of $29,550. He sold the cards shortly thereafter for $55,900. What are the income tax consequences of the sale of the cards? A) Jerry has a taxable capital gain of $26,350. B) Jerry has a taxable capital gain of $13,175. C) Jerry has business income of $26,350. D) Because the collection was a hobby, the gain does not have to be included in income. Answer: C Explanation: C) Jerry has business income of $26,350. D) The cards Jerry acquired were not part of his collection given that they were acquired for the purpose of a quick resale. At a minimum this would be an adventure or concern in the nature of trade which is treated as a business. Type: MC Topic: Types of income

37) Marvin purchased a large piece of land 5 years ago when a highway bypass was rumoured to have an exit being built nearby. He had planned to subdivide the land into building lots within 5 years, but has done no work on the land yet. He has rented the land each summer over the Labour Day weekend for $500. A local non-profit organization holds a huge neighbourhood garage sale on that weekend. A recent heart attack has convinced Marvin to slow down. As a result, he has advertised the land for sale online and an interested buyer is offering to purchase it at a price that would result in a large gain. What would be the character if the gain? A) property income. B) business income. C) a capital gain. D) a taxable capital gain. Answer: B Explanation: B) business income. It appears that a business has been created as Marvin has devoted time, attention and labour towards an activity with the intent of a profit. Given this finding the rental income earned would be incidental to the business and would be considered business income and not property income. Type: MC Topic: Types of income

38) Which of the following statements is NOT correct with respect to business income? A) An income tax based business reserve that is claimed in the current taxation year, must be added back to income in the following taxation year. B) Bad debts that are deducted in a previous taxation year and recovered in a subsequent taxation year must be added to business income in that subsequent year. C) Amounts received in advance for goods to be delivered or services to be provided in a subsequent taxation year must be included in business income when received. D) As long as some part of any sale proceeds for goods sold or services rendered is not collectible until a subsequent taxation year, a reserve for uncollected amounts can be claimed. Answer: D Explanation: D) While there are circumstances where this may be the case (ITA 20(1)(n)) there is no general rule that would allow reserves to be claimed in any situation involving uncollected amounts. Type: MC Topic: Reserves for businesses

39) A business may may receive advances for goods or services to be delivered or services to be provided in a subsequent taxation year. How are these advances treated for income tax purposes? A) included in income when the goods or services are delivered or the services provided B) included in income within 180 days of the end of the taxation year. C) allocated to income over the period between the time the cash is received and the time the goods and services are delivered or services are provided. D) included in income in the taxation year in which the advance is received. Answer: D Explanation: D) Required to be included in income in the taxation year in which the advance is received. An optional reserve is permitted to offset the inclusion. Type: MC Topic: Advances ITA 12(1)(a)

40) In 2021, Marg's Antiques claimed a reserve for doubtful debts of $12,000. In 2022, she had actual bad debt write-offs of $12,500 and recoveries of previously written off bad debts of $1,500. At the end of 2022, she claimed a reserve for doubtful debts of $14,000. Marg's 2022 net deduction for doubtful and bad debts would be: A) $12,500. B) $11,000. C) $13,000. D) $14,000. Answer: C Explanation: C) C. $13,000 ($12,000 (ITA 12(1)(d)) - $12,500 (ITA 20(1)(p)) + $1,500 -(ITA 12(1)(i)) $14,000 (ITA 20(1)(l))) Type: MC Topic: Reserves for businesses

41) Ed's Appliances Ltd (Ed's) sold a furnace to a customer in October, 2022 for $10,000. The mark-up on the $5,000 cost of the furnace was 100%. The customer paid 20% of the purchase price on delivery, with the remainder of the purchase price due in March 2023. What is the maximum reserve Ed's can claim for the taxation year ending November 30, 2022? A) $2,000. B) $4,000. C) $6,000. D) $8,000. E) None of the above. Answer: E Explanation: E) None of the above. No reserve is allowable under ITA 20(1)(n) as the entire proceeds are due within two years of the sale. Type: MC Topic: Reserve for unpaid amounts ITA 20(1)(n)

42) Myrle Cocco owns an automobile that she uses both in a business she carries on as a sole proprietor and for personal use. The cost of the automobile was $28,000 and, on January 1, 2022, the UCC was $11,662. The automobile is the only property in the class. During the year she drives the car a total of 42,000 kilometers of which 38,000 were for business purposes and 4,000 kilometers for personal use. Car insurance for the year was $950 and other operating costs were $6,500. What is the maximum amount she can claim in 2022 for the automobile? A) $9,906. B) $10,239. C) $17,292. D) $10,949. Answer: B Explanation: A) $9,906 [(30%)($11,662) + $950 + $6,500][38,000 ÷ 42,000] B) $$10,239 [(30%)($11,662) + (38,000 ÷ 42,000)($950 + $6,500)]. C) $17,292 [(38,000 ÷ 42,000)($11,662 + $950 + $6,500)] D) $10,949 [(30%)($11,662) + $950 + $6,500] Type: MC Topic: Automobile expenses (business)

43) Which of the following items can NOT be claimed as a business deduction? A) Premiums on a life insurance policy on a business owner's life that is a requirement of a bank that has extended a business loan. B) The cost of advertising on a U.S. television station that is directed to attracting customers in Florida. C) Reasonable fees paid to the business owner's spouse for maintaining the books and records of the business. D) Parking fines incurred by delivery vehicles making deliveries in congested areas. Answer: D Explanation: D) Parking fines incurred by delivery vehicles making deliveries in congested areas. These costs would be specifically disallowed by ITA 67.6. Type: MC Topic: Limitations on deductions

44) X Co. can deduct life insurance premiums paid providing: A) the life insurance policy is required as security on a loan from a financial institution. B) the interest payable on the loan for which the life insurance is required is deductible by X Co. for income tax purposes. C) the premium paid is for insurance on the president of X Co. D) Both A and B. E) All of A, B, and C. Answer: D Explanation: D) Both A and B. Type: MC Topic: Life insurance premiums ITA 20(1)(e.2)

45) Maxine is the sole proprietor of a home based business. She paid $25,000 to her editorial assistant, $8,000 to her son as her computer technician, and $32,000 she withdrew from the business as salary. Had she not employed her son she estimates that the cost of equivalent work would have been $11,000. How much can she deduct as a business expense with respect to these three amounts? A) Nil. B) $25,000. C) $33,000. D) $65,000. Answer: C Explanation: C) $33,000 ($25,000 + $8,000). A sole proprietor cannot employ themselves therefor the withdrawal is not salary. Type: MC Topic: Business expenses (general)

46) Jon Bogen carries on a consulting business as a sole proprietor out of a dedicated space in his home. It is his principal place of business. Which of the following home office expenses can he deduct? A) Jon can only deduct a pro rata share of operating costs and utilities. B) Jon can only deduct a pro rata share of operating costs, utilities, and property taxes. C) Jon can only deduct a pro rata share of operating costs, utilities, property taxes, and mortgage interest. D) Jon can deduct a pro rata share of operating costs, utilities, property taxes, mortgage interest and CCA. Answer: D Explanation: D) Jon can deduct a pro rata share of operating costs, utilities, property taxes, mortgage interest and CCA. Type: MC Topic: Business - home office expenses (ITA 18(12)

47) Omar owns and manages a business he carries on as a sole proprietor. In 2022, an automobile which he leases was driven 10,000 kilometers for business purposes and 12,000 kilometers for personal use. The total automobile related expenses for 2022 were as follows: Lease payments Insurance Other Operating Expenses

$7,200 1,000 1,300

For income tax consequences are: A) business deduction of $4,318 and a taxable benefit of $0. B) business deduction of $5,182 and a taxable benefit of $0. C) business deduction of $9,500 and taxable benefit of $8,280. D) business deduction of $9,500 and taxable benefit of $7,700. Answer: A Explanation: A) Business deduction of $4,318 [($7,200 + $1,000 + $1,300) × 10,000/22,000]; and a taxable benefit of $0 Note: D would be the correct answer if the business was incorporated and owned the car. The business deduction would belong to the corporation. Standby charge = $4,800 [(2/3)($7,200)]. Operating cost benefit would be $3,480 [12,000 @ $.29]. B) Deduction of $5,182 [($7,200 + 1,000 +1,300) × 12,000/22,000]; benefit of $0 C) Deduction of $9,500; benefit of $8,280(standby $4,800 + ops. cost $3,480) D) Deduction of $9,500; benefit of $7,700 (standby $4,800 + ops. cost $2,900) Type: MC Topic: Automobile expenses (business)

48) Jean Brochet uses an automobile in a business he carries on as a sole proprietor. The automobile cost $53,000 in 2021 and is not a ero-emission vehicle, with maximum CCA claimed in that year. Assume that the automobile was eligible for the AccII. The purchase was financed with a bank loan of $37,000. In 2022, the interest on this loan totaled $4,440. The automobile is used exclusively for business purposes, with the 2022 operating expenses totaling $7,500. What is the maximum automobile deduction that can be claimed for 2022? A) $16,100. B) $16,890. C) $24,665. D) $19,875. Answer: A Explanation: A) $16,100 [($16,500)(30%) + (365)($10) + $7,500] Type: MC Topic: Automobile expenses (business)

49) Which of the following expenses would be denied as a deduction under the Income Tax Act? A) A speeding ticket received by a truck delivering goods. B) The costs of disability related building modifications. C) Work space in a home costs for an individual carrying on a home-based business. D) A reserve for doubtful accounts receivables. Answer: A Explanation: A) A speeding ticket received by a truck delivering goods for resale. ITA 67.6 Type: MC Topic: Business expenses (general)

50) Antonio Capellini is an accountant providing tax and accounting services as a sole proprietor. He meets all of his clients in his office in the basement of his home. 800 square feet is considered to be attributable to his home office plus common areas. The house is 3,000 square feet of livable space. Antonio incurred the following expenses in the current year: Business liability insurance House insurance House utilities House repairs and maintenance Mortgage interest Property tax Office supplies

$ 400 880 2,600 3,000 5,700 1,600 760

What is the maximum expense that can be claimed with respect to the amounts listed above? A) $1,160 B) $2,888 C) $3,675 D) $4,835 Answer: D Explanation: A) 400 + 760 = $1,160 B) ($880 + $2,600 + $3,000)(26-2/3%) + 1,160 = $2,888 D) House insurance $ 880 House utilities 2,600 House repairs and maintenance 3,000 Mortgage interest 5,700 Property tax 1,600 Total $13,780 Percentage (800 ÷ 3,000) 26-2/3% Deductible portion $3,675 Business liability insurance 400 Office supplies 760 Total $4,835 Type: MC Topic: Business - home office expenses (ITA 18(12)

51) Kyle purchased a large lot on a lake in anticipation of building his home there within 3 years. In the current year, Kyle paid $650 in property taxes and $2,500 of interest on the demand loan he obtained to purchase the lot. January to March he rented out the lot to a local snowmobile club for $1,500. The amount charged is chosen to allow Kyle to recover some of his costs. Which of the following statements is correct? A) .Kyle can deduct the $650 of property taxes paid and $850 of the interest paid B) Kyle can deduct the $650 of property taxes paid, but none of the interest paid. C) Kyle cannot deduct any of the property taxes or interest paid for the vacant lot. D) Kyle can deduct all of the property taxes and interest paid. Answer: C Explanation: C) The limitation that restricts claiming interest and property faxes (ITA 18(2)) is premised on the ability to otherwise deduct those amounts which requires there to be a source of income. The land was acquired for personal purposes only and the subsequent fees charged were only enough to cover costs. In other words there is no source of income meaning that ITA 18(2) cannot apply. None of the interest and property taxes can be added to the cost of the land as a result. Type: MC Topic: Land - interest and property taxes

52) Tomas began carrying on a home-based business as a sole proprietor on January 1, 2022. In 2022, he received $40,000 cash for services rendered and paid $33,000 in business expenses. On December 31, 2022 there was an outstanding accounts receivable for amounts owed by a customers. of $1,200 There was also an account payable of $2,300 as an amount owing to a supplier. In addition to any business expenses, Tomas can also deduct one-third of his house expenses since he utilizes the ground floor of his rented 3-storey home. Total house costs for 2022 were: rent of $19,200; home insurance of $800 and utilities of $2,100. What is Tomas' maximum 2022 home office expense? A) $5,900. B) $7,000. C) $7,100. D) $7,367. Answer: A Explanation: A) $40,000 — 33,000 +1,200 — 2,300 = $5,900 net income before home expenses (can't create a loss) B) ($40,000 — 33,000) = $7,000 cash basis net income before home expenses C) ($19,200 + 2,100) × 1/3 = $7,100 D) ($19,200 + 800 + 2,100) × 1/3 = $7,367 Type: MC Topic: Business - home office expenses (ITA 18(12)

53) Busy Company incurred the following meal expenses in 2022: Meals with Clients: Cost of clients' and employees' meals $10,000 Gratuities (tips) 1,500 Company Christmas Party Management Dinner Meetings Picnic (Management only) Meal allowances paid to employees during eligible business travel (100 days @ $51 per day) Total

$11,500 4,100 1,800 1,200 5,100 $23,700

The total deductible meal expense is: A) $11,100. B) $11,850. C) $13,300. D) $13,900. Answer: D Explanation: A) ($23,700 — 1,500) × 50% = $11,100 B) $23,700 × 50% = $11,850 C) [ ($11,500 + 1,800 + 5,100) × 50% ] + (4,100 × 100%) = $13,300 D) [($23,700 - $4,100) × 50% ] + (4,100 × 100%) = $13,900 Type: MC Topic: Meals and entertainment expenses ITA 67.1

54) 888 Company leased a passenger vehicle throughout 2022 for $950 per month, $75 of which was for insurance. The lease was entered into at the beginning of 2022. There was no down payment or refundable deposit. The manufacturer's suggested list price for the car is $48,000. Other costs incurred for the vehicle in 2022 were $1,600 for gas and $420 for repairs. What is the maximum amount that can be claimed for these expenses in 2022? A) $10,770. B) $12,670. C) $11,670. D) $13,420. Answer: B Explanation: A) $8,750 + $1,600 + $420 = $10,770 B) $8,750 + ($75 × 12) + $1600 + $420 = $12,670 Lease payments — least of: a) Actual lease payments ($950 -75) × 12 = $10,500 b) Basic formula ($900 × 365/30) = $10,950 c) Anti Avoidance formula [$10,500 × $34,000/(.85 × 48,000)] = $8,750 C) $8,750 + ($75 × 12) + $1,600 + $420 = $11,670 D) $10,500 + ($75 × 12) + $1,600 + $420 = $13,420 Type: MC Topic: Automobile expenses (business)

55) With respect to In terms of the ability to claim a business expense which of the following statements is CORRECT? A) A corporation can deduct the expenses of issuing new common shares in the year in which the shares are issued. B) Any premium on the sale of new debt obligations by a corporation is amortized over the life of the obligations. C) Cost of good sold can be determined using inventory valuation methods based on either replacement cost or net realizable value. D) Landscaping costs are deductible in the year that the expenditures are accrued. Answer: C Explanation: C) Cost of goods sold can be determined using inventory valuation methods based on either replacement cost or net realizable value. Type: MC Topic: Business expenses (general)

56) For which of the following inventory valuation approaches CANNOT be used for income tax purposes to track inventory cost? A) Last-In, First-Out. B) First-In, First-Out. C) Specific Identification. D) Average Cost. Answer: A Explanation: A) Last-In, First-Out. Type: MC Topic: Inventory valuation ITA 10

57) Which of the following items is NOT deductible in calculating business income for the current taxation year? A) An $11,000 legal fee paid for services rendered in conjunction with a new issue of the company's common stock. B) A $125,000 management bonus paid 125 days after the end of the corporation's current taxation year. C) An amount of $25,000 paid for planting large maple trees in various locations around a building of the business. D) An unfunded accrued pension expense of the employer. Answer: A Explanation: A) The expense would be capital and therefore denied by ITA 18(1)(b). ITA 20(1)(e) however allows an expense but generally over a five year period and as a result the whole amount of $11,000 would not be deductible. B) The management expense is allowed if reasonable and if paid within 180 days of the taxation year end. C) Planting trees are capital expenditures and therefore disallowed by ITA 18(1)(b). ITA 20(1)(aa) however allows landscaping costs if the conditions of ITA 20(1)(aa) are met. D) A pension contribution is generally considered a capital expenditure which would be denied by ITA 18(1)(b). ITA 20(1)(qq) however allows a deduction but only of the pension amount is actually paid. Type: MC Topic: Business expenses (general)

58) Which of the following business expenses is deductible? A) $25 late filing penalty charged by CRA. B) $50 speeding ticket incurred while delivering goods to a customer. C) $15 late payment interest charged by utility company. D) $20 late payment interest charged by CRA. Answer: C Explanation: A) ITA 18(1)(t) prevents an expense for amounts charged under the ITA including interest and penalties. B) ITA 67.6 C) $15 late payment interest charged by utility company D) ITA 18(1)(t) prevents an expense for amounts charged under the ITA including interest and penalties. Type: MC Topic: Business expenses (general)

59) Which of the following is a deductible business expense for a sole proprietorship? A) Donation made to the United Way. B) Contribution made to the Federal Green Party. C) Estimated cost of providing warranty services in future taxation years. D) Reasonable salary paid to a relative. Answer: D Explanation: A) Donations are considered eligible for tax credits for individuals and a taxable income deduction for corporations. There is no business expense allowed. B) Same as "A" except political contributions are only eligible for tax credits for both sole proprietors and corporations. C) Estimated warranties are not allowed as a result of ITA 18(1)(e). D) Reasonable salary paid to a relative Type: MC Topic: Business expenses (general)

60) Old Time Company purchased a used Class 10 truck many years ago for $8,000. The truck has now become a collectors' item and was sold on August 1, 2022 for $10,000. The carrying value for accounting purposes on that date was $500. The UCC of the class was $11,525. There are other Class 10 property in the class on the last day of the taxation year. Accounting net income before tax for the year ended December 31, 2022 was $24,000. Accounting amortization was equal to the CCA claimed for income tax purposes. Net income for 2022 is: A) $15,000. B) $15,500. C) $25,000. D) $26,000. Answer: B Explanation: A) $24,000 — 10,000 + (2,000 × 50%) = $15,000 B) $24,000 - accounting gain (10,000—500) + taxable capital gain (2,000 × 50%) = $15,500 C) $24,000 + (2,000 × 50%) = $25,000 D) $24,000 + (2,000 × 100%) = $26,000 Type: MC Topic: Reconciliations (accounting to income tax)

61) Maria carries on the business of an accounting practice as a sole proprietor in Victoria, B.C. In 2022 she paid $1,650 to attend the following conventions: • $400 for a 2 day convention on "Tax issues for the owner/manager" held at Vancouver, B.C. • $500 for a 3 day convention on "Attracting new clients" held at Kelowna, B.C. • $750 for a 5 day convention on "IFRS implementation" held at Whistler, B.C. The fees included all meals served during the convention. Maria's total deductible convention expense for tax purposes is: A) $1,650. B) $1,250. C) $1,050. D) $825. Answer: C Explanation: A) ($500 + 750 + 400) = $1,650 B) ($500 + 750) = $1,250 C) ($500 + 750) — [( 3 + 5) × ($50 × 50%) = $1,050 limit is 2 conventions, $50/day deemed meals × 50%. The interaction with the 50% meal restriction means that a choice must be made among the three conferences. The first conference results in a deduction of $350; the second a deduction of $425 and the third a deduction of $625 therefore conferences two and three are selected as resulting in the larger deductions. D) ($500 + 750 + 400) × 50% = $825 Type: MC Topic: Convention expenses ITA 20(10)

62) Widget Production Ltd. has a taxation year end of June 30. In February 2020, the Company borrowed $750,000 to fund an expansion. The Company paid $21,000 to obtain this financing. In January 2021, the Company repaid $250,000 of the principal and in June 2022, it repaid the remaining $500,000. The repayment was not financed from other borrowings. Describe the income tax treatment of the $21,000 in financing costs? A) $4,200 is deducted n each of the 2020 to 2024 taxation years. B) $4,200 is deducted in 2020 and 2021, and the remaining $12,600 in 2022. C) $4,200 is deducted in 2020, $8,400 in 2021, and $8,400 in 2022. D) $7,000 is deducted in 2021 and $14,000 in 2022. Answer: B Explanation: B) Financing costs may be deducted on a straight-line basis over a five-year period (ITA 20(1)(e)). However, if the debt is repaid in full without any new debt being incurred, the undeducted balance of financing costs may be deducted in the year the borrowings are repaid. Type: MC Topic: Financing expenses ITA 20(1)(e)

63) Quality Homes Ltd. (Quality) has a December 31 taxation year end. The controller has calculated the Company's 2022 net income as $50,000. However, in arriving at this amount, the controller deducted $30,000 of salary to an employee who is the sole shareholder of the Company and $5,000 of salary to an arm's length employee. Both of these amounts were paid on June 30, 2023. Which one of the following represents Quality's 2022 net income? A) $50,000. B) $55,000. C) $80,000. D) $85,000. Answer: D Explanation: D) $85,000 ($50,000 + $30,000 + $5,000). The salaries cannot be deducted because they are not paid by the 179th day which would be June 28, 2023. Type: MC Topic: Unpaid remuneration ITA 78(4)

64) Mary carries on business as a sole proprietor that generated $100,000 in net accounting income. Included in this amount are: • $7,000 of amortization expense; • $4,000 for bad debt expense; • $112,000 cost of goods sold; and • $12,000 meals and entertainment with clients. Mary's maximum CCA has been calculated at $10,000 for the year. What is Mary's business income for income tax purposes? A) $113,000 B) $109,000 C) $107,000 D) $103,000 Answer: D Explanation: A) $100,000 + $7,000 + $6,000 = $113,000 B) $100,000 + $7,000 + $12,000 - $10,000 = $109,000 C) $100,000 + $7,000 + $6,000 + $4,000 - $10,000 = $107,000 D) $100,000 + $7,000 (ITA 18(1)(b) amortization) + $6,000 (ITA 67.1 50% of meals and entertainment) $10,000 (ITA 20(1)(a) CCA) = $103,000 Type: MC Topic: Reconciliations (accounting to income tax)

65) Jon Avery commences carrying on business as a sole proprietor on December 1, 2022. Which of the following statements is correct with respect to the fiscal period of Jon's business? A) Jon must select December 31 as his fiscal period. B) Jon must select November 30 as his fiscal period. C) Jon can choose any date for his fiscal period. However, if Jon chooses a non-calendar fiscal period he will have to adjust his income by an amount referred to as "additional business income". D) Jon can choose any date for his fiscal period. However, if Jon chooses a non-calendar fiscal period he will have to include business income for his first two fiscal periods in his net income for 2023. Answer: C Explanation: C) Jon can choose any date for his fiscal period. However, if Jon chooses a non-calendar fiscal period he will have to adjust his income by an amount referred to as "additional business income". Type: MC Topic: Fiscal period

66) In 2022, a corporation sells its business in an arm's length transaction for proceeds equal to FMV. At the time of the sale the business has accounts receivable of $123,000. The corporate vendor of the business and the purchaser agree that the realizable value of the receivables is $118,500. In 2021, the vendor had deducted a reserve for doubtful debts of $6,800. Which of the following statements is correct? A) If no joint election is filed under ITA 22, the vendor will have an addition to business income of $2,300. B) If no joint election is filed under ITA 22, the vendor will have an addition to business income of $6,800 and an allowable capital loss of $2,250. C) If a joint election is filed under ITA 22, the vendor will have a business deduction of $2,300. D) If a joint election is filed under ITA 22, the vendor will have a business deduction of $4,500. Answer: B Explanation: A) $6,800 - $4,500 loss on the sale of receivables B) $4,550 [$6,800 - (1/2)($23,000 - $118,500)] Type: MC Topic: Accounts receivable election ITA 22

67) Which of the following statements regarding farming income is correct? A) A full time school teacher has income from farming on a part-time basis. The farming income must be determined on a cash basis. B) A full time school teacher recognized a $9,500 loss this year from farming on a part-time basis. The maximum deduction allowed this year from the farm loss is $6,000. C) A full time school teacher recognized a $9,500 loss this year from farming on a part-time basis. The maximum deduction allowed this year from the farm loss is $2,500. D) A full time school teacher has income from farming on a part-time basis. No losses are deductible until a year in which there is farming income. Answer: B Explanation: B) $2,500 + [(1/2)($9,500 - $2,500)] = $6,000 Type: MC Topic: Farm losses

68) Martin Elwood has purchased the rights to a number of songs written by the Ringtones. He estimates that these songs will produce annual royalties of $100,000 for at least 5 years. He does not have plans to acquire additional song rights. Explain whether the royalties he receives would be treated as business income or property income. In addition, indicate how any gain or loss on a disposition of the rights would be treated for income tax purposes. Answer: In general is business is defined as time, attention and labour devoted to an activity that is potentially capable of generating a profit. A business is generally contrasted with investments that generate income from property where there is little effort involved and income is generated by awaiting investment returns. The limited facts suggest that the purchased of rights, which constitutes "property" for income tax purposes is an investment resulting in income from property. Had the rights been purchased and immediately sold an argument could be made that the purchase was part of an adventure or concern in the nature of trade although this is not supported by the limited facts. The conclusion is that the activity is property income and that the rights would be considered non-depreciable capital property. which would result in a capital gain or a capital loss on disposition. Type: ES Topic: Types of income

69) William Lemay acquired a six unit apartment building for $315,000 with the intention of operating it as a rental property. Three weeks after the purchase, he received an unexpected offer to purchase the building for $387,000. He accepts the offer. Should the $72,000 be treated as a capital gain or as business income? Justify your conclusion. Answer: Based on the facts the rental property would be considered a source of property income and not inventory connected to a business that is an adventure or concern in the nature of trade. As a result a sale would be treated as a capital gain and not business income. Type: ES Topic: Types of income

70) Several years ago, John Martin purchased a number of internet domain names at a cost of $1,000 each, hoping at some point that he could sell them at a later date for a gain. Until this year, none of the names have been sold although efforts were made by John to sell them. During this year, two of the names were sold for $25,000 each. Should the resulting gains be treated as capital gains or as business income? Justify your conclusion. Answer: An activity constitutes a business if time, attention and labour is devoted to an activity that is potentially capable of making a profit. The limited facts suggest that the activity is supportive of a business. In that case the property (e.g. the domain names) would be considered inventory. At a minimum the activity could also be considered an adventure or concern in the nature of trade withe the same result - a business and inventory. Any gains on the sale of the names would be considered business income. Type: ES Topic: Types of income

71) At the end of its 2021 fiscal period, Barton's Books, a sole proprietorship, has ending accounts receivable of $87,500. Of this amount, it is estimated that $3,400 are doubtful of collection. A reserve for income tax purposes is claimed for this amount. In 2022, $3,600 of accounts receivable are written off. as bad debts At the end of its 2022 fiscal period, accounts receivable total $103,200, with $4,100 of this amount considered doubtful of collection. What are the income tax consequences with respect to the accounts receivables for the 2022 fiscal period? Answer: The accounts receivables events will result in a decrease in the business income for the 2022 fiscal period: Add: 2021 reserve ITA 12(1)(d) Deduct: 2022 Bad debt Write-Offs ITA 20(1)(p) 2022 Doubtful debt reserve ITA 20(1)(l) 2022 Net effect on business income

$3,400 ($3,600) ( 4,100)

Type: ES Topic: Bad debts and reserve for doubtful debts

( 7,700) ($4,300)

72) During its 2022 fiscal period, Leslie's Boutique, a sole proprietorship, wrote off $13,000 in bad debts. At the end of its 2022 fiscal period the accounts receivable balance was $256,400. Based on past experience, it is expected that 4% of these accounts will prove uncollectible. A detailed analysis of 2022 receivables applying the approach acceptable to the CRA results in a doubtful debt reserve of $8,780. In its 2021 fiscal period, Leslie's Boutique had claimed a reserve for doubtful debts of $12,300. By what amount will the business income of Leslie's Boutique for the 2022 fiscal period be increased or decreased as a result of these accounts receivables transactions? Answer: Business income for the 2022 fiscal period will decrease by $10,956 calculated as follows: Add: 2021 reserve ITA 12(1)(d) Deduct: 2022 Bad debt Write-Offs ITA 20(1)(p) 2022 Doubtful debt reserve ITA 20(1)(l)

$12,300 ($13,000) (8,780) ( 21,780) ($ 9,480)

2022 Net effect on business income

Type: ES Topic: Bad debts and reserve for doubtful debts

73) Frank's Auto Body, a sole proprietorship, keeps its accounting books and records on a cash basis. During its 2022 fiscal period, its first year of operation, the business has cash sales of $71,200. At the end of the fiscal period, an additional $22,450 of revenues are receivable. Of the amounts received, $7,100 was for services that will only be delivered in the 2023 fiscal period. Frank estimates that $650 of the 2022 receivables are doubtful of collection. What is the business income for the 2022 fiscal period? Answer: The amount to be included in business income for the 2022 fiscal period would be calculated as follows: Cash Sales Sales on account Reserve for future services ITA 20(1)(m) Reserve for Doubtful Debts ITA 20(1)(l) Business income for 2022

Type: ES Topic: Reserve for doubtful debts and unearned advances

$71,200 22,450 ( 7,100) ( 650) $85,900

74) Bob's Hats is a business carried on as a sole proprietorship. During its 2022 fiscal period, its first year of operations, the business has cash sales of $123,000. It also has sales on account of $46,000, of which $22,000 remains outstanding at the end of the 2022 fiscal period. It is estimated that $4,000 of the accounts receivable will be doubtful of collection. Of the cash received, $9,500 represents advances is for merchandise that will only be delivered in the 2023 fiscal period. What is the business income for the 2022 fiscal period? Answer: The amount to be included in business income for the 2022 fiscal period would be calculated as follows: Cash Sales Sales on account Reserve for future services ITA 20(1)(m) Reserve for Doubtful Debts ITA 20(1)(l) Business income for 2022

Type: ES Topic: Reserve for doubtful debts and unearned advances

$123,000 46,000 ( 9,500) ( 4,000) $155,500

75) During the month of February, 2022, Jacob's Jewels sells a brooch for $428,000. The cost to the business of the brooch was $212,000, resulting in a gross profit of $216,000. The $428,000 sales price is to be paid in four equal annual instalments on December 31 in each of the 2023 through 2026 fiscal periods. Jacob's Jewels has a December 31 fiscal period year end. What are the income tax consequences for each of the 2022 to 2026 fiscal periods on the business income. Answer: Since a part of the sale proceeds are only due more than 2 years, after the date of the sale a reserve can be claimed under ITA 20(1)(n). The maximum reserve, based on the gross profit of $216,000, would be as follows: Income Nil $ 54,000 54,000 108,000 Nil $216,000

2022 Reserve = [(100%)($216,000)] = $216,000 2023 Reserve = [(75%)($216,000)] = $162,000 2024 Reserve = [(50%)($216,000)] = $108,000 2025 Reserve = Nil (>36 Months from date of sale) 2026 Reserve = Nil (All Proceeds Received) Totals

Proceeds Rec'd Nil $107,000 107,000 107,000 107,000 $428,000

As December 31, 2025 is more than 36 months after the sale was made, no reserve can be claimed for the 2025 or 2026 fiscal period. Note that the technically correct calculation of income involves adding back the previous year's reserve and deducting the new reserve. For example, the calculation for 2024 involves adding back the 2023 reserve of $162,000 and deducting the new 2024 reserve of $108,000. Type: ES Topic: Reserve for unpaid amounts ITA 20(1)(n)

76) In January, 2022, Marty's Fine Pens, a business carried on as a sole proprietorship, sells a limited edition fountain pen for $125,000. The cost of the pen is $63,000. There is a down payment of $50,000 in 2022, followed by 3 annual payments of $25,000 in the 2023, 2024, and 2025 fiscal periods. Indicate the amount of the reserve that can be claimed in each of the 2022 to 2025 fiscal periods. Answer: Since a part of the sale proceeds are not due until more than 2 years after the date of the sale, a reserve can be claimed under ITA 20(1)(n). Based on the gross profit of $62,000 ($125,000 - $63,000), the maximum reserve for each of the four fiscal periods, as well as the amounts required to be included in business income is as follows: Income $24,800 12,400 12,400 12,400 $62,000

2022 Reserve = [(60%)($62,000)] = $37,200 2023 Reserve = [(40%)($62,000)] = $24,800 2024 Reserve = [(20%)($62,000)] = $12,400 2025 Reserve = Nil (All Proceeds Received) Totals

Proceeds Rec'd $ 50,000 25,000 25,000 25,000 $125,000

The 3 year time limit is not relevant in this case since all of the sale proceeds are received before the fourth year end. Note that the technically correct calculation of income involves adding back the previous year's reserve and deducting the new reserve. For example, the calculation for 2024 involves adding back the 2023 reserve of $24,800 and deducting the new and last available reserve for 2024 of $12,400. Type: ES Topic: Reserve for unpaid amounts ITA 20(1)(n)

77) During the current year, Janice Teason has the following expenses: Utility costs for home Maintenance and repairs for home Property taxes for home House Insurance Interest on Mortgage Home telephone: Monthly Charge Personal Long Distance Charges Employment/Business Related Long Distance Charges Home Internet Fees

$3,200 3,800 6,400 1,800 6,200 480 275 780 675

Ms. Teason estimates that she uses 30% of her home, including a component for common areas, and 40% of her home phone and home internet service for employment/business related purposes. Maximum CCA on 100% of the home would be $15,000. Determine the maximum deduction that could be claimed with respect to the amounts shown above assuming: A. She is an employee with $80,000 in income (no commissions). B. She is an employee with $80,000 in employment income that is all commissions. C. She carries on a business as a sole proprietor (e.g. self-employed )and earns $80,000 in business income. Answer: The following home office expenses would be deductible in each of the three scenarios:

Utilities Maintenance and Repairs Property Taxes House Insurance Interest on Mortgage House CCA Subtotal Percentage Subtotal Monthly Phone [(40%)($480)] Employment/Business Related Long Distance Charges (100%) Internet Service Fees [(40%)($675)] Maximum Deduction

Type: ES Topic: Home office expenses - comprehensive

Part A $3,200 3,800 Nil Nil Nil Nil $7,000 30% $2,100 Nil

Part B $ 3,200 3,800 6,400 1,800 Nil Nil $15,200 30% $ 4,560 Nil

Part C $ 3,200 3,800 6,400 1,800 6,200 15,000 $36,400 30% $10,920 192

780 Nil $2,880

780 Nil $ 5,340

780 270 $12,262

78) During the current year, Jonathan Beasley has the following expenses: Utility expenses for Home Maintenance and Repairs for Home Property Taxes for Home House Insurance Interest on Mortgage Home Telephone Monthly Charge Separate Line Monthly Charge Employment/Business related Long Distance Charges Home Internet Fees

$2,500 3,100 5,400 1,300 4,600 600 480 560 720

Mr. Beasley estimates that he uses 18% of his home, including a component for common areas, and 30% of his home internet service for employment/business related purposes. Maximum CCA on 100% of the home would be $12,000. Determine the maximum deduction that could be claimed assuming: A. The individual is an employee with $72,000 in income (no commissions). B. The individual is an employee with $72,000 in commission income. C. The individual carries on a business as a sole proprietor (e.g. self-employed )and earns $72,000 in business income. Answer: The following home office expenses could be claimed in each of the three scenarios:

Utilities Maintenance and Repairs Property Taxes House Insurance Interest on Mortgage House CCA Subtotal Percentage Subtotal Home Telephone (See Note) Phone Line to Home Office (100%) Employment/Business Related Long Distance Charges (100%) Internet Fees [(30%)($720)] Maximum Deduction

Part A $2,500 3,100 Nil Nil Nil Nil $5,600 18% $1,008 Nil 480

Part B $ 2,500 3,100 5,400 1,300 Nil Nil $12,300 18% $ 2,214 Nil 480

Part C $ 2,500 3,100 5,400 1,300 4,600 12,000 $28,900 18% $5,202 Nil 480

560 Nil $2,048

560 Nil $ 3,254

560 216 $6,458

Note With a separate phone line to the home work space the cost of which is fully deductible, it can be assumed that the home phone is not used for employment/business purposes. Type: ES Topic: Home office expenses - comprehensive

79) Mr. Alex Roddle acquires a non-zero-emission automobile to be used 100% of the time in a business that is carried on as a sole proprietorship. This business began several years ago. The purchase occurs on October 1, 2022 at a cost of $83,000. He finances $70,000 of the car purchase through his bank at an annual rate of 9%. Interest charges for the period October 1, 2022 through December 31, 2022 amount to $1,575. What amounts can Mr. Roddle claim as a deduction for the fiscal period ending December 31, 2022? Ignore GST/HST and PST considerations. Answer: The base amount for the CCA calculation is limited to the Class 10.1 maximum of $34,000 for new or used vehicles purchased on or after January 1, 2022. The AccII provisions would also apply in this case. As a result, the maximum amounts that can be deducted are as follows: CCA [(30%)(150%)($34,000)] Interest Costs - Lesser of: • Amount Paid = $1,575 • [($10)(92 Days)] = $920 Total Deduction for 2022

$15,300

920 $16,220

Type: ES Topic: Automobile expenses (business)

80) For a number of years, Ms. Alexandria Bouclair has carried on a business as a sole proprietor. Because of business travel needs, on September 1, 2022, a non-zero-emission automobile that is to be used exclusively for business purposes is purchased for $63,000, of which $50,000 is financed by the dealer. Interest charges for the period September 1, 2022 to December 31, 2022 are $2,000. What amounts can Ms. Bouclair claim as a deduction from her 2022 business with respect to the automobile? Ignore GST and PST considerations. Answer: The base amount for the CCA calculation is limited to the Class 10.1 maximum of $34,000 for new or used vehicles purchased on or after January 1, 2022. The AccII provisions would also apply in this case. As a result, the maximum amounts that can be deducted are as follows: CCA [(30%)(150%)($34,000)] Interest Costs - Lesser of • Amount Paid = $2,000 • [($10)(122 Days)] = $1,220 Total Deduction for 2022

$15,300

1,220 $16,520

Type: ES Topic: Automobile expenses (business)

81) On November 1, 2022, Ms. Sherry Boland leases a zero-emission automobile to be used 100% of the time in a business she carries on as a sole proprietor with a December 31 fiscal period. The lease cost is $862 per month, and a total of $1,724 was paid for the year. The manufacturer's suggested list price for the automobile is $53,000. Ms. Boland makes no down payment and there are no refundable deposits. Determine the maximum amount that can be deducted with respect to the lease payments for 2022. Ignore GST/HST and PST considerations. Answer: The amount she can deduct is limited to $1,301, the least of: • $1,724 [($862)(2)]; • $1,830 [($900)(61/30)]; and • $1,301 {[$1,724][$34,000 ÷ (85%)($53,000)]}. Type: ES Topic: Automobile leasing costs ITA 67.3

82) On August 1, 2022, Mr. Jimmy Bond leases a zero-emission automobile that will be used 100% in a business he carries on as a sole proprietor with a December 31 fiscal period. The monthly lease payment is $797, with a total of $3,985 being paid during 2022. The manufacturer's list price for the vehicle is $61,000. Mr. Bond makes no down payment and there are no refundable deposit made. Determine the maximum amount that can be deducted with respect to the leases payments for 2022. Ignore GST/HST and PST considerations. Answer: The amount he can deduct is limited to $2,613, the least of: • $3,985 [($797)(5)]; • $4,590 [($900)(153/30)]; and • $2,613 {[$3,985][$34,000 ÷ (85%)($61,000)]} Type: ES Topic: Automobile leasing costs ITA 67.3

83) Sharp Ltd. signs an 8 year lease of a property with an economic life of 9 years. The lease payments are $32,500 per year. Compare the income tax treatment of the lease with its treatment under accounting principles such as ASPE or IFRS. Answer: For income tax purposes, the lease would be treated as an operating lease, with the deduction being based only on the required lease payments. Under ASPE/IFRS, the lease would be treated as a purchase and sale and capitalized. This is because during the lease term the lease transfers "substantially all of the benefits and risks of ownership related to the leased property from the lessor to the lessee". This means that the accounting rules would deduct amortization on the capitalized property and interest costs on any related financing. Type: ES Topic: Leases - income tax vs. ASPE/IFRS

84) Morton Ltd sells inventory which is a single product which it buys from various manufacturers. It has a December 31 taxation year end. In 2022, its first year of operations, purchases of inventory were as follows: Date February 1 May 23 August 18 October 28

Quantity 7,500 5,000 6,800 5,300

Price $23.00 28.00 21.00 25.00

On December 31, 2022, 7,800 of these items are still on hand. Their replacement cost on this date is $24.00 and they are being sold for $31.00. It is estimated that selling costs average 20% of the sales price. It is not possible to identify the individual inventory items being sold. Calculate all the values that could be used for the 7,800 remaining units of inventory, identifying the method you used for each value. Answer: The following calculations will be used in this solution. FMV (Using Replacement Cost) [($24.00)(7,800)] FMV (Using Net Realizable Value) [(80%)($31.00)(7,800)] FIFO Cost [(5,300)($25.00) + (7,800 - 5,300)($21.00)] Average Cost [($23.89*)(7,800)]

$187,200 $193,440 $185,000 $186,342

*Average per unit cost of $23.89 ($587,400 ÷ 24,600) calculated as follows: Price $23.00 $28.00 $21.00 $25.00 Totals

Units 7,500 5,000 6,800 5,300 24,600

Total $172,500 140,000 142,800 132,500 $587,800

For income tax purposes, the inventory value can be determined by any of the following methods. • FMV (Using Replacement Cost) = $187,200 • FMV (Using Net Realizable Value) = $193,440 • Lower of $185,000 Cost (FIFO) or $187,200 Market (Replacement Cost) = $185,000 • Lower of $185,000 Cost (FIFO) or $193,440 Market (Net Realizable Value) = $185,000 • Lower of $186,342 Cost (Average Cost) or $187,200 Market (Replacement Cost) = $186,342 • Lower Of $186,342 Cost (Average Cost) or $193,440 Market (Net Realizable Value) = $186,342 Type: ES Topic: Inventory valuation ITA 10

85) Ms. Melinda Gabor begins carrying on a business as a sole proprietor May 1, 2022. After careful consideration, she decides on a fiscal period that ends on September 30. During the period May 1, 2022 to September 30, 2022, there is $23,500 of business income. Determine the amount of business income that will be required to be included in her 2022 net income? Answer: Ms. Gabor's additional business income for 2022 will be $14,131 [($23,500)(92 Days ÷ 153 Days)]. The 92 days is for the period October 1 through December 31, 2022. The 153 days is for the number of days in the fiscal period May 1 through September 30, 2022. She will be required to include business income of $37,631 ($23,500 + $14,131) for her 2022 taxation year. Type: ES Topic: Additional business income ITA 34.1

86) Mr. Brian Brock is selling a business he carried on as a sole proprietor. The sale includes accounts receivables with a face value of $87,560. It has been agreed that the FMV of the receivables is equal to the net realizable value of $82,150. In 2021, Mr. Brock claimed a doubtful debt reserve of $4,800. Determine the income tax consequences of the sale of the receivables to Mr. Brock on the assumption that an election was jointly filed under ITA 22. Answer: The income tax consequences would be the addition of the 2021 doubtful debt reserve of $4,800 and a reduction of $5,410 for the loss on the sale of the receivables. The net effect would be a decrease in business income of $610 [$4,800 - ($87,560 - $82,150)]. Type: ES Topic: Accounts receivable election ITA 22

87) Ms. Brooke Besson is selling a business she carried on as a sole proprietor. The sale includes accounts receivables with a face value of $68,500. It has been agreed that the FMV of the receivables is equal to the net realizable value of $65,300. In 2021, Ms. Besson claimed a doubtful debt reserve of $4,200. Determine the income tax consequences of the sale of the receivables in 2022 to Ms. Besson assuming that: • No election was made under ITA 22; and • an election was jointly filed under ITA 22. Answer: In the absence of an election under ITA 22, Ms. Besson will have to include the $4,200 doubtful debt reserve claimed in 2021 in her business income for 2022. In addition the loss on the sale of the receivables would be an allowable capital loss of $1,600 [(1/2)($68,500 - $65,300)]. If an election is jointly filed under ITA 22 she will still have to include the $4,200 doubtful debt reserve claimed in 2021 in her business income for 2022. However, in this case, the inclusion will be offset by a deduction of $3,200 ($68,500 - $65,300) with respect to the loss on the receivables. In this case the net addition to current year business income will be $1,000 ($4,200 - $3,200). Type: ES Topic: Accounts receivable election ITA 22

88) Coretta Kirkman carries on a business as a sole proprietor that sells security related products to both retail customers and to building contractors. The business began on January 1, 2022. The fiscal period of the business will be December 31. The following information relates to the 2022 fiscal period: • Cash sales of delivered merchandise total $375,000. • Account sales of delivered merchandise total $130,000. • As of December 31, uncollected Accounts Receivable balances total $55,000. Coretta expects $6,000 of the accounts to be doubtful of collection. • Cash advances of $36,000 are received for merchandise to be delivered in 2023. • In 2022, a comprehensive security system is installed in a 462 unit condominium development. The gross profit on this sale was $12,500. Because of the size of the contract, Coretta agrees to accept payment in three annual instalments as follows: 2022 2023 2024 Total Contract Price

$23,000 32,000 18,000 $73,000

The following information relates to the 2023 fiscal period: • A total of $5,800 of accounts receivable were written off as bad debts in the year. • All of the merchandise on which 2022 cash advances were received was delivered. • The $32,000 instalment on the condominium project was received. • Sales of delivered merchandise and services totaled $520,000, with $150,000 of this amount being on account. As of December 31, $52,000 of the account sales had not been collected. Coretta anticipates that $7,500 of these outstanding accounts receivable will be doubtful of collection. • Cash advances of $29,000 are received for merchandise to be delivered in early 2024. Required: What are the income tax consequences on Coretta Kirkman's business income for the 2022 and 2023 fiscal periods? Include the full details of your calculations for each year, not just the net result for each year. Ignore GST/HST & PST considerations.

Answer: The results for the 2 years would be as follows: 2022 $375,000

Cash Sales Cash Sales ($520,000 - $150,000)

2023 $370,000

Sales on Account Reserve for Doubtful Debts: Add Prior Year Reserve Deduct Current Year Reserve Deduct bad debts

130,000

150,000

Nil ( 6,000) Nil

6,000 ( 7,500) ( 5,800)

Cash Advances Reserve for undelivered merchandise: Add Prior Year Reserve Deduct Current Year Reserve

36,000

29,000

Nil ( 36,000)

36,000 ( 29,000)

12,500

Nil

8,562

Gross Profit on Condominium Project Reserve for unpaid amounts: Add Prior Year Reserve Deduct Current Year Reserve* {[$12,500][($73,000 - $23,000) $73,000]} {[$12,500][($73,000 - $55,000) $73,000]} Net effect on business income

( 8,562) $502,938

( 3,082) $554,180

*As some of the proceeds on the sale of unused materials are not due until 2 years after the date of the sale, a reserve for unpaid amounts can be claimed. The 3 year time limit is not relevant as the full balance is paid off prior to the end of that period. Type: ES Topic: Reserves for businesses

89) In order to supplement his income working in a Calgary bookstore, Mr. Victor Larson has decided to start a home based business that will specialize in selling used textbooks to university and college students. The business will be run out of space that he has set aside in his home. This space represents 18% of the livable space including a component for common areas. The home was purchased on January 1, 2022 at a total cost of $426,000. It is estimated that $150,000 of this amount can be attributed to the land ands the remaining $276,000 attributable to the building. For the fiscal period ending December 31, 2022, Mr. Larson has the following home office expenses: Utilities (Heat, Light, and Water) Mortgage Interest House Insurance Property Taxes Repairs and Maintenance Total Home office expenses

$ 3,200 10,100 500 4,300 2,600 $20,700

The business commences January 31, 2022. On that date, Mr. Larson acquires the following properties for the new business: Office Furniture and Storage Racks Computer Applications Software

$18,500 1,430 570

In addition, he has a separate telephone line installed for dealing exclusively with the mail order business. The telephone charge includes charges for a toll-free number and a long distance package. During the fiscal period January 31, 2022 to December 31, 2022, his mail order sales total $182,000. Costs associated with these sales are as follows: Cost of goods sold Unsold Merchandise (Lower of Cost and FMV) Packaging Materials Shipping expenses Miscellaneous Office Supplies Telephone (Total charge for the fiscal period) Printing of posters and brochures distributed

$98,000 23,500 2,400 4,600 560 1,100 420

Required: A. Can Mr. Larson claim work space in the home expenses? Briefly explain your conclusion. B. Compute the minimum business income or loss for the 2022 fiscal period. C. Briefly describe any issues that should be discussed with Mr. Larson concerning the work space in his home and business expenses and costs.

Answer: Part A Under ITA 18(12), the following conditions must be satisfied in order for expenses related to a work space in a self-contained domestic establishment to be deductible: • the work space is either the individual's principal place of business; or • the work space is used exclusively for the purpose of earning income from business and is used on a regular and continuous basis for meeting clients, customers, or patients of the individual in respect of the business. With respect to Mr. Larson's mail order business, the allocated space in his home would appear to be his principal place of business. This means that he would be able to claim work space in home expenses in determining his business income. Part B The calculation of the minimum business income for the 2022 fiscal period would be determined as follows: Sales Expenses other than home work space costs: Cost of goods sold Packaging Materials Shipping Costs Miscellaneous office supplies Telephone Printing of Posters and Brochures CCA (Note 1) Income before Home Work Space Expenses Less: Home Work Space Expenses (Note 2) 2022 Business Income

$182,000 ($98,000) ( 2,400) ( 4,600) ( 560) ( 1,100) ( 420) ( 6,439)

( 113,519) $ 68,481 ( 4,332) $ 64,149

Note 1 - Maximum CCA amounts on property acquired for the business (not including CCA on the home) for the short fiscal period would be calculated as follows (alternative calculations shown in the two columns):

100% $5,550 1,180 285 $7,015 335/365 $6,439

Class 8 [($18,500)(150%)(20%)] Class 50 [($1,430)(150%)(55%)] Class 12 [($570)(1/2)(100%)] Total Short Fiscal Period Factor Maximum CCA

Short Fiscal Period (335/365) $5,094 1,083 262

$6,439

Note 2 - The work space in home expenses would be calculated as follows: Utilities (Heat, Light, and Water) Mortgage Interest House Insurance Property Taxes Repairs and Maintenance Total Class 1 CCA [($276,000)(150%)(4%)]* Total expenses for the Home Percentage of Floor Space Subtotal Short Fiscal Period Deductible Home Work Space Expenses

$ 3,200 10,100 500 4,300 2,600 $20,700 16,560 $37,260 18% $ 6,707 335/365 $ 6,156

*As Mr. Larson owned the home prior to using it for income producing purposes and CCA was never claimed on the home by anyone previously, the home is eligible for the AccII. This analysis reflect changes toe the AccII regulations that retractively became law in June 2021. See also Figure 5-2 which features a flowchart on the AccII analysis. Part C There are two issues that should be discussed with Mr. Larson. • As this problem asks for "minimum" business income, CCA must be claimed on Mr. Larson's home. The problem with this is that, if CCA is claimed, it could jeopardize the principal residence exemption, resulting in the payment of income taxes on a portion of the taxable capital gain that might arise on any future sale of the property, assuming real estate prices are increasing. This is discussed in more detail in Chapter 8. • Although it is not relevant for this year, Mr. Larson should be aware that the deduction of work space in home costs cannot be used to create a loss in the future. However, any amount not deductible because it is greater than the business income can be deducted in any subsequent year provided there is sufficient income from the same business in that year. This provides for an unlimited carry forward of unused work space in home costs (see IT-514, Work Space in Home Expenses). Type: ES Topic: Work space in home costs and CCA

90) Maxine's Cleaning Services is a Canadian controlled private corporation (CCPC) with a December 31 taxation year end. Maxine Brott is the sole shareholder of the corporation and actively participates in the business as an employee. Because of the extensive travel required in supervising her employees, the Company provides Ms. Brott with a car. During the first 6 months of 2022, the provided car was a Honda Accord that had been purchased in 2020 for $29,000. During this 6 month period, she drove the car a total of 23,000 kilometers, of which 15,000 were for employment purposes and 8,000 for personal use. The Class 10 UCC balance at the beginning of 2022 was $15,950. On July 1, 2022, the Honda Accord was sold for $25,000. It was replaced with a BMW 7 Series sedan at a cost of $105,000. During the period July 1, 2022 to December 31, 2022, she drove the vehicle a total of 37,000 kilometers, of which 18,000 were for employment purposes and 19,000 for personal use. In 2022, the Company paid for all operating costs of both vehicles, a total of $12,300. Other than the Honda Accord and the BMW sedan, the Company did not own any other vehicles in 2022. During the period January 1, 2022 to December 31, 2022, an automobile was always available to Ms. Brott. Required: Determine the following: A. The income tax consequences to Maxine's Cleaning Services that result from owning and selling the Honda Accord and owning the BMW sedan in 2022. B. The minimum amount of the taxable benefit that Maxine will have to include in her 2022 employment income. Ignore GST/HST and PST considerations in both parts of this question.

Answer: Part A The income tax consequences resulting from the sale of the Honda can be calculated as follows: January 1, 2022 UCC Disposition - Lesser of: Capital Cost = $29,000 POD = $25,000 Negative Ending Balance Recapture UCC - January 1, 2023

$15,950

( 25,000) ($ 9,050) 9,050 Nil

The $9,050 of recapture would be included in the company's business income for 2022. No CCA would be deducted for Class 10 since there is not a positive UCC balance at December 31, 2022. Note that, because the BMW was purchased on or after January 1, 2022 and cost more than $34,000, it would be categorized as a separate Class 10.1 property. This means that its purchase would not eliminate the recapture in Class 10. The maximum 2022 CCA deduction on the BMW would be calculated as follows: Capital Cost (Limited to $34,000) AccII Adjustment [(50%)($34,000)] CCA Base Rate Maximum CCA

$34,000 17,000 $51,000 30% $ 15,300

The net effect on income due to the two automobiles would be as follows: Recapture CCA Operating Costs (Fully Deductible) Decrease in 2022 business income

$ 9,050 ( 15,300) ( 12,300) ($18,550)

Part B Because the Honda was used primarily (more than 50%) for employment purposes, it is eligible for the reduced standby charge and the alternative operating cost benefit calculation. This is not the case with the BMW sedan. The minimum total benefit on the two automobiles would be calculated as follows: Standby Charge: Honda [(2%)($29,000)(6)(8,000 ÷ 10,002*)] BMW - No Reduction [(2%)($105,000)(6)] Total Standby Charge Operating Cost Benefit for Honda - Lesser of: • [($2,783)(1/2)] = $1,392 • [(8,000)($0.29)] = $2,320 Operating Cost Benefit for BMW [(19,000)($0.29)] 2022 Minimum Total Automobile Benefit *[(6)(1,667)]

$ 2,783 12,600 $15,383

$1,392 5,510

6,902 $22,285

Type: ES Topic: Deductible automobile costs and taxable benefit

91) Jerry Reid will become an employee of Margo Ltd. as of January 1, 2022. His employment contract is for a period of three years and his annual salary will be in excess of $250,000. Given this, his combined federal/provincial income income tax rate on additional income will be 51%. His employment duties are such that he will require an automobile. It is anticipated that he will drive the automobile a total of 55,000 kilometers in each year of his three year employment contract, with 40,000 of this for employment purposes and 15,000 for personal use. The automobile will be a Lexus ES that will cost $48,000. At the end of the employment contract, its estimated FMV will be $20,000. Margo Ltd. has offered him the following two alternatives with respect to the Lexus. The Company is indifferent as to which alternative he chooses. 1. The Company will provide the automobile to Jerry and will pay all of the operating costs, including those related to Jerry's personal use of the vehicle. The automobile will be available to Jerry for 12 months in each year. 2. If Jerry provides his own Lexus and pays all of its operating costs, the Company will provide an annual flat rate allowance of $18,000 to cover the costs of using the automobile for employment purposes. Actual operating costs are expected to be $0.24 per kilometer throughout this period. If Jerry chooses the second alternative, he will finance the purchase with funds borrowed from his margin account at a rate of 5%. He will repay the funds at the rate of $16,000 per year, payable on December 31, 2022, 2023, and 2024. He will sell the automobile at the end of the 3 year employment contract. Assume that the prescribed rate for the operating cost benefit is $0.29 per kilometer in all of the years 2022 to 2024. 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. Answer: Analysis The choice between the two alternatives will be based on the comparative cash flows of the two alternatives. The relevant calculations are provided in the sections which follow. Employer Provides Automobile If Jerry elects to have the employer provide the Lexus, he will have a taxable benefit in each year. Since his employment related kilometers are greater than 50%, he is eligible for the reduced standby charge and the alternative operating cost benefit calculation. The after tax consequence of this choice would be as follows: Standby Charge (Reduced) [(2%)(12)($48,000)(15,000 20,004)] Operating Cost Benefit - Lesser of: • [(1/2)($8,638)] = $4,319 • [($0.29)(15,000)] = $4,350 Total Automobile Benefit Marginal Tax Rate Annual Increase in income tax

$8,638

4,319 $12,957 51% $ 6,608

Jerry Buys the Automobile The pre-tax cash inflows (outflows) associated with this alternative are as follows: 2022 $48,000 ( 48,000) 18,000 ( 16,000) N/A ( 13,200)

Margin Loan Proceeds Lexus Purchase Allowance Received Loan Repayment Proceeds from Sale of Car Operating Costs [($0.24)(55,000)] Financing Cost [(5%)($48,000)] [(5%)($32,000)] [(5%)($16,000)] Pre-Tax Cash Inflows (Outflows)

2023 N/A N/A $18,000 ( 16,000) N/A ( 13,200)

2024 N/A N/A $18,000 ( 16,000) 20,000 ( 13,200)

( 2,400) ( 1,600) ($13,600)

($12,800)

( 800) $ 8,000

The income tax savings (costs) associated with this alternative are as follows:

Operating Costs [($0.29)(55,000)] Financing Costs (Less than $10/Day) CCA (See Note) [(150%)(30%)($34,000)] [(30%)($34,000 - $15,300)] [(1/2)(30%)($18,700 - $5,610)] Total Automobile Costs Employment Usage (40,000 55,000) Deductible Amount Allowance Inclusion in Taxable Income Marginal Tax Rate Increase (Decrease)in Income Tax

2022 ($15,850) ( 2,400) ( 15,300)

($33,550) 72.7% ($24,391) 18,000 ($ 6,391) 51% ($ 3,259)

2023 ($15,950) ( 1,600)

( 5,610) ($23,160) 72.7% ($16,837) 18,000 $ 1,163 51% $ 593

2024 ($15,950) ( 800)

( 1,964) ($18,714) 72.7% ($13,605) 18,000 $ 4,395 51% $ 2,241

Note - As a Class 10.1 vehicle is involved and the purchase was made on or after January 1, 2022, the CCA base is limited to $34,000 The AccII provisions are applicable. When the vehicle is sold, no recapture or terminal loss can be recognized on Class 10.1. However, one-half of the regular CCA can be claimed in the year of disposal. The net after tax cash outflow would be calculated as follows:

Pre-Tax Cash Inflow (Outflow) Income Tax Inflow (Outflow) Net Cash Inflow (Outflow)

2022 ($13,600) ( 3,259) ($16,859)

2023 ($12,800) 593 ($12,207)

2024 $8,000 ( 2,241) $5,759

Best Alternative A comparison of the two alternatives is as follows: Net Cash Inflows (Outflows) Employer Provided Employee Purchase

2022 ($ 6,608) ( 16,859)

2023 ($ 6,608) ( 12,207)

2024 ($6,608) 5,759

Total ($19,824) ( 23,307)

There is only a difference of $3,483 in the outflows of the two alternatives with the employer provided vehicle being slightly more advantageous. Other Considerations There are a number of other considerations that could affect the choice of the best alternative, such as if the actual number of kilometers driven, or personal kilometers driven was different than estimated, or if the resale value of the Lexus was not actually $20,000. Type: ES Topic: Employment - employer owned vs. employee owned vehicle

92) Alphonse Bona carries on a business as a sole proprietor in which a single product is sold to retail customers. During his first year of business, his purchases are as follows: Date January 20 March 12 June 15 October 8 December 9 Totals

Quantity 10,300 11,400 12,600 10,200 8,600 53,100

Price $2.50 $2.75 $3.15 $3.27 $2.85

Total Cost $ 25,750 31,350 39,690 33,354 24,510 $154,654

On December 31, the fiscal period of the business, there are 19,400 inventory units on hand. It is estimated that these units have a replacement cost of $2.90 per unit and a net realizable value of $3.18 per unit. Required: Calculate the various closing inventory values that could be used to determine business income. Your answer should indicate the valuation method being used, as well as the resulting value.

Answer: Market Determination - Two Possible Values For income tax purposes, the business can measure market using either replacement cost or net realizable value. These values would be as follows: Replacement Cost [($2.90)(19,400)]

$56,260

Net Realizable Value [($3.18)(19,400)]

$61,692

Cost Determination - Two Possible Values 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: 8,600 Units at $2.85 10,200 Units at $3.27 600 Units at $3.15 19,400 Units at FIFO Cost

$24,510 33,354 1,890 $59,754

Based on average cost, the ending inventory value would be calculated as follows: Number of Units Average Cost [($154,654 ÷ 53,100)] 19,400 Units at Average Cost

19,400 $2.91 $56,454

Lower of Cost and Market - Four Possible Values For income tax purposes, the possible values here would be: Lower of Replacement Cost and FIFO Cost Lower of Replacement Cost and Average Cost Lower of Net Realizable Value and FIFO Cost Lower of Net Realizable Value and Average Cost

$56,260 56,260 59,754 56,454

For accounting purposes, only the last two values would be acceptable. Type: ES Topic: Inventory valuation ITA 10

93) The Vernon Manufacturing Company, a Canadian controlled private corporation (CCPC), has just ended its first taxation year. During that year, a number of outlays were made for which the Company is uncertain as to the appropriate income tax treatment. You have been asked to advise them in this matter and, to that end, you have been provided with the list of outlays and expenditures that follows: 1. A part of the Company's raw materials had to be imported from Brazil. In order to obtain local financing for these inventories, the Company paid a $1,200 fee to a Brazilian financial consultant for assistance in locating the required financing. 2. Donations totalling $12,000 were made to various registered Canadian charities. 3. The Company paid $2,500 to the owner of a tract of land in return for an option to purchase the land for $950,000 for a period of 2 years. The land is adjacent to the Company's main factory and management believes it may be required for future expansion of the Company's manufacturing facilities. 4. Direct costs of $7,500, related to incorporating the Company, were incurred during the year. 5. An amount of $10,000 was paid for a franchise giving the Company the right to manufacture a Brazilian consumer product for a period of ten years. 6. Because of its rapid growth, the Company was forced to move into a building that they had originally leased to another company. In order to cancel the lease, it paid $8,000 to the tenant. In addition, $9,500 was spent to landscape around the building and another $13,000 was spent to construct a parking lot for employees. Required: Indicate which of the preceding expenditures that the Vernon Manufacturing Company will be able to deduct in the calculation of business income for the current year, and the income tax treatment of the non-deductible expenditures. Explain your conclusions. Answer: 1. Costs of obtaining financing with respect to current operations are generally deductible under ITA 9 and consequently the payment to the Brazilian consultant would be deductible. In general financing costs that are disallowed by ITA 18(1)(b) would be deducted over a five year period as a result of ITA 20(1)(e). Since the costs relate to current ongoing operations these costs would not be denied by ITA 18(1)(b) as capital expenditures and therefore ITA 20(1)(e) would not apply. 2. Donations to registered Canadian charities are taxable income deductions and not business expenses. 3. The cost of the option on the land is a capital expenditure that is non-depreciable capital property and cannot be deducted in the calculation of business income (ITA 18(1)(b)). 4. Costs of incorporation are considered capital expenditures that would be initially denied by ITA 18(1)(b). ITA 20(1)(b) however allows the first $3,000 of costs incurred in the incorporation of a corporation to be deducted. The remaining $4,500 ($7,500 - $3,000) will be added to Class 14.1. As these costs are not related to a specific property, they will become part of the capital cost of goodwill. 5. The cost of the franchise is a capital expenditure that is a right that is depreciable capital property. The cost will be added to Class 14 and allowed a CCA deduction under ITA 20(1)(a)which applies a straightline method method over its 10 year life. 6. The landscaping costs are fully deductible when paid (ITA 20(1)(aa)). With respect to the cost of cancelling the lease, these amounts can only be deducted on a pro rata basis over the remaining term of the lease (ITA 20(1)(z)). The cost of the parking lot is a capital expenditure that will be added to Class 17 and written off at a rate of 8% on a declining balance basis. Type: ES Topic: Business expenses (general)

94) Morgon Inc. carries on a business and uses a taxation year ending December 31. The sole shareholder of the Company is Helen Morgon. For the current taxation year, Ms. Morgon's daughter, Summer, who maintains the books and records of the Company, has calculated 2022 net income of $193,200. In determining net income Summer begins with accounting income applying ASPE. Other Information: 1. During the year, Morgon Inc. spent $12,700 for landscaping the grounds around its office. In accordance with ASPE, this amount was treated as a capital expenditure. As the work was done late in the year, no amortization was claimed for the current year. 2. The following items were included in the expenses claimed for accounting purposes: Amortization expense Golf club membership fees for Helen and Summer Cost of sponsoring local soccer teams Advertising on a foreign television station (Directed at Canadian market) Advertising circulars (Only one-quarter distributed) Business meals and entertainment Charitable donations Loss from theft Interest paid on building mortgage Interest paid on late income tax instalments Appraisal costs on land to be sold Damages received resulting from breach of contract

$69,300 15,000 7,200 9,600 12,400 22,000 31,900 16,200 24,200 1,400 4,200 3,800

3. Included in the accounting expenses were $14,000 in fees paid to Summer's 16 year old son for creating and maintaining the web site of Morgon Inc. In determining the fee, Helen found that it would cost at least $25,000 to obtain the equivalent services from an outside consultant. 4. Maximum CCA has been determined to be $94,200 for the current taxation year. 5. Had the contract in which damages were paid been completed, it would have increased business income. Required: Calculate Morgan Inc.s' 2022 business income. Explain the reason for excluding any of the amounts.

Answer: The 2022 business income of Morgon Inc. would be calculated as follows: Accounting Income Additions: Amortization Expense Golf club membership fees for Helen and Summer (Note 1) Cost of Foreign Advertising (Note 2) Unused Advertising Circulars [(3/4)($12,400)] (Note 3) Business Meals and Entertainment Non-Deductible 50% Charitable Donations (Note 4) Interest paid on late Income Tax Instalments (Note 5) Appraisal Costs on Land to be Sold (Note 6) Deductions: Landscaping Costs CCA 2022 Business income

$193,200 $69,300 15,000 9,600 9,300 11,000 31,900 1,400 4,200

($12,700) ( 94,200)

151,700 $344,900

( 106,900) $238,000

Note 1 - Golf club membership fees cannot be deducted for income tax purposes (ITA 18(1)(l)). Note 2 - In general, when a Canadian business advertises in foreign print or broadcast media that is directed at the Canadian market the advertising expenses are not deductible. ITA 19.01 exempts certain foreign periodicals from this rule. However, the rule is still applicable to foreign broadcast media. Note 3 - Items such as advertising circulars are required to be treated as inventory (ITA 10(4) and 10(5)). This means that the expense for the period would be limited to the amount distributed of $3,100 (1/4) ($12,400)]. The outstanding circulars are not allowed to be deducted until they are actually distributed in a subsequent taxation year. Note 4 - Donations to charities are a taxable income deduction to a corporation and cannot be claimed as a business expense. Note 5 - Interest paid on late income tax instalments is not deductible. ITA 18(1)(t). Note 6 - The appraisal costs on land to be sold are capital expenditures (ITA 18(1)(b)) and are generally either added to the cost of the land or represent costs and outlays of the disposition. In either case they cannot be claimed as a business expense.

Other Items Further explanation related to the items not included in the preceding calculation of business income are as follows: Soccer Sponsorship — As a rule the costs would normally be a deductible promotion or advertising expense however the expenses could also be a donation or a personal expense in which case the amounts would not be a deductible business expense. Loss from Theft — Losses of this type, unless they result from the activity of senior officers or shareholders, are considered to be deductible as a normal cost of doing business. ITA 9 Mortgage Interest — The interest would be deductible as the building is a capital property used in the business. ITA 20(1)(c). Damages — As the damages relate to a transaction that produces business income, they are considered business income. Fees paid to Grandson — Since the fees paid by the Company to Ms. Morgon's grandson are reasonable when compared to those charged by a non-arm's length party, they are deductible. Type: ES Topic: Reconciliations (accounting to income tax)

95) For the taxation year ending December 31, 2022, the income statement of Markham Ltd., prepared in accordance with ASPE, is as follows: Revenues Expenses: Cost of Goods Sold Selling and Administrative Costs Amortization Expense Other Expenses Income before Income Tax Expense Income Tax Expense: Current Future 2022 Net Accounting Income

$973,000 ($272,000) ( 132,000) ( 156,000) ( 137,000)

($ 97,000) ( 32,000)

( 697,000) $276,000

( 129,000) $147,000

Other Information: 1. The Company spent $6,000 during the year on landscaping for its new building. For accounting purposes this was treated as an asset. The Company will not amortize this balance as it believes the work has an unlimited life. 2. Selling and Administrative Costs include $15,000 in business meals and entertainment. 3. Selling and Administrative Costs include membership fees for several employees in a local golf and country club. These fees total $3,400. 4. Other Expenses include donations to registered charities of $3,700. 5. Other Expenses includes bond discount amortization of $2,500. 6. In 2022, Markham Ltd. purchased a competing business at a price that included goodwill of $70,000. For accounting purposes, there has been no impairment or write-down of the goodwill since its purchase. 7. As the Company expects to issue more shares in 2023, it made a number of amendments to its articles of incorporation in 2022. Legal costs, included in Other Expenses, totalled $6,000. 8. On January 1, 2022, the Company has UCC balances for the following classes of depreciable property: Class 1 Class 8 Class 10 Class 13

$400,000 575,000 45,000 68,000

The Class 1 balance relates to a single building acquired in 2002 at a cost of $550,000. It is estimated that the value of the land at this time was $50,000 and the building $500,000. On February 1, 2022, the building is sold for $612,000. It is estimated that the value of the land is unchanged at $50,000 and that the value of the building was $562,000. For accounting purposes, the carrying value of the property was $507,000, $457,000 for the building and $50,000 for the land. The resulting gain on the building is included in the accounting revenues.

The old building is replaced on February 15, 2022 with a new building acquired at a cost of $683,000 of which $60,000 is for the land and $623,000 for the building. The Company chose not to put the new building into a separate Class 1 so it does not qualify for the 6% CCA rate. No elections are made with respect to the replacement of the building. There are no dispositions of any Class 8 property in 2022 however there were purchases of Class 8 property of $126,000. As the Company has decided to lease all of its vehicles in the future, all of the Class 10 properties are sold during the year. The capital cost of the properties sold was $93,000 and the sale proceeds were $37,000. The carrying value for accounting purposes was $52,000 and the resulting accounting loss of $15,000 ($37,000 - $52,000) was included in Other Expenses. The Class 13 balance relates to a single lease that commenced on January 1, 2020. The lease has an initial term of seven years, with two successive options to renew for three years each. Expenditures on this leasehold were $50,000 in 2020 and $27,000 in 2021. There were no further expenditures in 2022. The write-off of these expenditures for accounting purposes is included in Amortization Expense. 9. Other Expenses includes interest on late income tax instalments of $500 and on late municipal tax payments of $275. 10. Markham Ltd. claims maximum CCA in each year. Required: Determine Markham Ltd.'s 2022 net income. In addition, calculate the January 1, 2023 UCC for each CCA class.

Answer: The calculation of Markham Ltd.'s 2022 net income would be as follows: Accounting Net Income Additions: Amortization Expense (Income Statement) Income Tax Expense (Income Statement) Item 2 - Non-Deductible Meals and Entertainment (50% of $15,000) Item 3 - Golf Club Membership Fees Item 4 - Contributions to Registered Charities Item 5 - Bond Discount Amortization Item 7 - Articles of Incorporation Amendment Costs Item 8 - Taxable Capital Gain on building sale [(1/2)($562,000 - $500,000)] Item 8 - Gain on Land ($50,000 - $50,000) Item 8 - Accounting Loss on Class 10 property Item 9 - Interest on late Income Tax Instalments Subtotal Deductions: Item 1 - Landscaping Costs Item 8 - Accounting Gain on Building Sale ($562,000 - $457,000) (Land ACB = $50,000) CCA (Note One) Item 8 - Terminal Loss (Note One) 2022 Net Income

$147,000 156,000 129,000 7,500 3,400 3,700 2,500 6,000 31,000 Nil 15,000 500 $501,600 ( 6,000) ( 105,000) ( 189,880) ( 8,000) $192,720

Note One - Maximum CCA and other related inclusions and deductions can be calculated as follows:

January 1, 2022 UCC Addition Disposition - Lesser of: • POD = $562,000 • Capital Cost = $500,000 AccII Adjustment [(50%)($123,000)] CCA Base 2022 CCA at 4% AccII Adjustment Reversal January 1, 2023 UCC

January 1, 2022 UCC Additions AccII Adjustment [(50%)($126,000)] CCA Base 2022 CCA at 20% AccII Adjustment Reversal January 1, 2023 UCC

Class 1 $623,000

( 500,000)

Class 8

$400,000

123,000 61,500 $584,500 ( 23,380) ( 61,500) $499,620

$575,000 126,000 63,000 $764,000 ( 152,800) ( 63,000) $548,200

Class 10 January 1, 2022 UCC Disposition - Lesser of: • POD = $37,000 • Capital Cost = $93,000 Positive Balance with no remaining property = Terminal Loss 2022 Terminal Loss January 1, 2023 UCC Class 13 January 1, 2022 UCC 2022 CCA: 2020 Expenditures ($50,000 ÷ 10 Years) 2021 Expenditures ($27,000 ÷ 9 Years) January 1, 2023 UCC

$45,000

( 37,000) $ 8,000 ( 8,000) Nil

$68,000 ( 5,000) ( 3,000) $60,000

Class 14.1 The required calculations for 2022 are as follows: 2022 Additions ($70,000 + $6,000) AccII Adjustment [(50%)($76,000)] CCA Base 2022 CCA at 5% AccII Adjustment Reversal January 1, 2023 UCC

$76,000 38,000 $114,000 ( 5,700) ( 38,000) $ 70,300

Summary of CCA Results (Not Required) The maximum 2022 CCA and January 1, 2023 UCC balances can be summarized as follows: Class Class 1 Class 8 Class 10 (Terminal Loss = $8,000) Class 13 Class 14.1 Total

Maximum CCA $ 23,380 152,800 Nil 8,000 5,700 $189,880

UCC $ 499,620 548,200 Nil 60,000 70,300

Other Notes • While there is a specific prohibition against the deduction of interest and penalties charged under the ITA (ITA 18(1)(t)), there are no restrictions on interest and penalties charged outside of the ITA (and ETA). As a result the interest due to late municipal taxes, is deductible. • As the old building is not a rental property, the new building can be added to the same Class 1 that contained the old building. If this were not the case, this transaction would have resulted in recapture of CCA on the disposition of the old building. Type: ES Topic: Business income reconciliation with CCA - corporation

96) Carol Basque is an experienced lawyer who carries on a business of a professional practice as a sole proprietor. She carries on the business out of a new building which she purchased several years ago for $725,000 with $175,000 paid for the land and $550,000 for the building. The building is used exclusively for business purposes, and an election was filed to include it in a separate Class 1. The UCC on January 1, 2022 is $447,831. As her practice specializes in cases where lack of anger management has caused legal difficulties, she has had to replace her office furniture several times. The latest was during 2022, when the divorcing owners of a martial arts club could not come to a peaceful resolution on an equitable split in family assets. A registered charity, Ex-Cons R Us, hauled her destroyed furniture away to be used for training purposes and as spare parts in their furniture repair shop. No insurance or other amounts were received with respect to the damage. The old furniture had a capital cost of $53,000 and the new furniture was purchased for $78,000. The Class 8 UCC at January 1, 2022 was $38,160. In January, 2020, Carol acquired a $92,000 Lexus that she uses largely for business purposes. She has concluded that, given the nature of her clientele, this car appears too luxurious. Based on this view, she trades it in on the purchase of a $28,000 Toyota. The January 1, 2022 UCC for the Lexus is $17,850. Neither of the vehicles are zero-emission vehicles. Because the Lexus had been badly damaged by an exiting client who lost his case, the trade-in allowance that she receives is only $22,000. In 2022, the Toyota is driven 41,000 kilometers with 38,000 driven for business purposes and only 3,000 for personal use. The vehicle operating costs for the year were $6,150. Assume that the operating expenses for the Lexus were correctly calculated and included in the accounting expenses. Other 2022 purchases include the following: New Computer Applications Software Client List from retiring lawyer

$ 1,250 1,475 32,000

Other 2022 business expenses, determined on an accrual basis, include the following: Building current expenses Payments to Assistants (Note*) Miscellaneous Office Expenses Meals with Clients (not billed to clients)

$27,300 46,100 13,600 15,500

*Note — The payments include $25,000 paid to her 17 year old daughter. She works part time during the school year and full time during the summer doing online research for Carol's practice. The fees paid to the daughter are considered reasonable (ITA 67). In 2022, business revenues were $297,800. Required: Calculate the 2022 business income. In preparing your solution, ignore GST/HST and PST considerations and any CPP implications.

Answer: Carol's minimum 2022 business income can be calculated as follows: Carol Basque Statement of Business Income For Fiscla Period Ending December 31, 2022 Total Revenue Vehicle Operating Costs [($6,150)(38,000 ÷ 41,000)] Building Operating Expenses Payments to Assistants (Payment to Daughter is reasonable) Miscellaneous Office expenses Business Meals [(50%)($15,500)] CCA (Note) 2022 Business Income

$297,800 ($ 5,700) ( 27,300) ( 46,100) ( 13,600) ( 7,750) ( 76,427)

( 176,877) $120,923

Note - The total CCA deductible would be as follows: Class 1 [(6%)($447,831)] Class 8 (Calculation Follows) Class 50 [(150%)(55%)($1,250)] Class 12 [(1/2)(100%)($1,475)] Class 10 [(150%)(30%)($28,000)(38,000 ÷ 41,000)] Class 10.1 (Calculation Follows) Class 14.1 [(150%)(5%)($32,000)] Total CCA for 2022

$26,870 31,032 1,031 738 11,678 2,678 2,400 $76,427

Class 1 - As the building is used 100%for non-residential purposes, it is eligible for the enhanced rate of 6%. Class 8 - The required calculations are as follows: Opening UCC Additions Disposal - Lesser of: • POD = Nil • Cost = $53,000 AccII Adjustment [(50%)($78,000)] CCA Base Rate Class 8 CCA

$78,000

Nil

$ 38,160

78,000 39,000 $155,160 20% $ 31,032

The proceeds of disposition were nil as the property was worthless given the extent to which it was damaged.

Class 10.1 - As the Lexus cost over $30,000, it was allocated to a separate Class 10.1. While neither terminal losses nor recapture of CCA can be recognized on the disposition of the Lexus, Carol will be allowed to take one-half year's CCA. This amount would be $2,678 [(1/2)(30%)($17,850)]. Type: ES Topic: Business income reconciliation with CCA - sole proprietorship

97) Darby Inc. has just completed its 2022 taxation year ending December 31. Using ASPE, the accountant has determined that, the Company has experienced a business loss of $113,000 before income taxes and amortization expense. The accountant provides the following information that was used in the determination of the accounting loss: 1. The Company was forced to pay damages of $12,300 for failure to perform a service contract. The amount was paid when the client threatened to bring action for breach of contract. The $12,300 was expensed in the current year. 2. The Company's property tax expense of $19,500 includes an amount of $1,100 that was paid to a regional municipality in which the Company maintains a fishing lodge for its employees. 3. The Company's expenses include donations to registered charities of $13,700. 4. The Company's expenses include costs of new landscaping at their administration building in the amount of $9,800 all of which was paid in the year. 5. The Company deducted a loss of $10,100 resulting from a theft by one of its clerical employees. 6. Effective December 31, 2022, as the result of a change in its distribution system, the Company was forced to cancel a tenant's lease that would have been in force until January 1, 2029. During the 2022 taxation year, the Company agreed to pay, and deducted, damages in the amount of $17,000. On December 31, 2022, $5,000 of this amount had not been paid. 7. The current salary expense included a bonus payable to the Company's president in the amount of $14,500. It will be paid on February 1, 2023. 8. The insurance expense included the premium on a whole life policy on the life of the president's wife in the amount of $9,500. This was not a group life policy and the Company is the beneficiary of the policy. 9. As the Company changed property and casualty insurers during the year, all of its assets had to be appraised. The cost of this appraisal was $4,150, with the entire amount being expensed in the year. 10. The Company's wage expense included $51,000 in management bonuses (other than that of the president described in item 7) that will not be paid until May 1, 2022. In addition, $34,000 in bonuses, which were deducted for both tax and accounting purposes in 2021, were paid in March, 2022. 11. Bad debt write-offs amounted to $11,000. 12. Renovation costs in the amount of $153,000 were charged to expense during the year. This amount resulted from the need to completely renovate one of the Company's offices and involved the installation of plumbing and air conditioning systems, as well as rewiring and installation of new concrete foundations. 13. The president and his wife attended a convention that resulted in $5,200 in travel expenses for the Company. Of this amount, $1,900 related to the fact that the president's wife chose to accompany him on this trip when her attendance was not required. 14. The Company's interest expense included bond discount amortization in the amount of $950. 15. The Company's legal expenses for the year amount to $10,500 and were related to the following transactions: Defense of breach of contract (see item 1) $2,450 Cost of amending articles of incorporation 3,600 Defense costs related to income tax reassessment 4,450 16. The Company's expenses included a total amount of $12,500 for business meals and entertainment. 17. The Company's calculations for CCA have not yet been completed for the 2022 taxation year. Required: Compute the Company's 2022 net income before the consideration of CCA. Indicate why you have not included any of the preceding items in your calculations.

Answer: The required calculations would be as follows: Accounting Income (Loss) Before Income Taxes and Amortization Expense Additions: Item 2 - Property Taxes on Fishing Lodge Item 3 - Charitable Donations (Note 1) Item 6 - Lease Cancellation Payment (Note 2) Item 8 - Insurance Premium (Note 3) Item 12 - Renovation Costs (Note 4) Item 13 - Wife's Convention Expenses Item 14 - Bond Discount Amortization Item 15 - Legal expenses ($3,600 + $4,450) (Note 5) Item 16 - Non-Deductible Portion of Meals and Entertainment [(50%)($12,500)] 2022 Business Income (Before CCA)

($113,000) 1,100 13,700 17,000 9,500 153,000 1,900 950 8,050 6,250 $ 98,450

Note 1 - Donations to registered charities create a taxable income deduction for a corporation and not a business expense. Note 2 - ITA 20(1)(z) requires that lease cancellation payments be amortized over the term of the lease remaining immediately before cancellation. The amount to be deducted is a pro rata calculation based on the number of days remaining subsequent to the cancellation. As the cancellation occurred on December 31, 2022, none of the amount would be deductible during the current year. The $17,000 would be deducted over the 7 years that would have remained of the lease term, at the rate of $2,429 per year ($17,000 ÷ 7). The fact that $5,000 of the amount had not been paid as of December 31, 2021 is not relevant. Note 3 - Life insurance premiums where the employer is the beneficiary are not considered to be incurred for the purpose of earning income and are therefore not deductible except where they are required by a creditor in relation to financing. Note 4 - These amounts serve to extend the life of the relevant property and are therefore capital expenditures. When they are added to the relevant UCC balances, they would result in increased CCA. However, the problem indicates that you do not have to consider CCA amounts. Note 5 - The payment to amend the articles of incorporation are capital expenditures that would added to Class 14.1. While the Company would be able to deduct CCA for this Class, you have been instructed to ignore such deductions in this problem. Legal expenses to defend against the breach of contract are deductible business expenses and costs to defend an income tax assessment are deductible under ITA 60(o) as other expenses and not deductible business expenses.

Other Items Further explanation related to the items not included in the preceding calculation of 2022 net income are as follows: Item 1 - Since the damages relate to an income earning transaction the payment of damages is considered a current year business expense. Item 2 - Costs related to a fishing lodge are not permitted (ITA 18(1)(l)) Item 4 - Landscaping costs are fully deductible under ITA 20(1)(aa). Item 5 - Losses of this type, unless they result from the activity of senior officers or shareholders, are considered to be deductible as a normal cost of doing business. Item 7 - The bonus to the president would be deductible in 2022 since it is paid by the 179th day measured from December 31, 2022. Item 9 - Such appraisal costs are considered to be deductible as a normal cost of doing business. Item 10 - The $51,000 in management bonuses would be deductible in 2022. The 2021 bonuses would require no adjustment since the amounts would have been deductible in 2021. Item 11 - The bad debts would be fully deductible. Item 13 - The $3,300 in costs associated with the president attending the convention would be deductible. ITA 20(10). Type: ES Topic: Reconciliations (accounting to income tax)

98) Porsha Tortora is the sole proprietor of Tortora's Tarts, a business that she has been carrying on successfully for a number of years. She has recently decided to sell the business to Martin Bunn, an arm's length individual. Mr. Bunn will continue to carry on the business and will use a December 31 fiscal period. He will carry on the business as a sole proprietor. The sale is finalized on June 3, 2022. Information related to the accounts receivable of the business at that date of the sale is as follows: • Accounts Receivable • Estimated Realizable Value • Doubtful debt reserve claimed in 2021

$346,000 $328,000 $24,000

Between June 3, 2022 and December 31, 2022, $333,000 of the accounts receivable are collected, with the remaining $13,000 being written off as bad debts. Both Ms. Tortora and Mr. Bunn have heard of an election under ITA 22 that may have some influence on the income tax treatment of the sale of the accounts receivable. They would like to have your advice on this matter. They will both have significant taxable capital gains in 2022. Required: A. Determine the income tax consequences of the accounts receivable sale to both Ms. Tortora and Mr. Bunn, and the subsequent 2022 collections and write-offs, assuming: • that no joint election is filed under ITA 22. • that a joint election is filed under ITA 22. B. Indicate, from the point of view of each individual, whether the election would be beneficial. Would your conclusion for each individual differ if the amount collected by the purchaser had been $321,000, rather than the $333,000?

Answer: Part A - No Election If the ITA 22 election is not made, the 2022 income tax consequences for Ms. Tortora would be as follows: Add: 2021 Doubtful Debt Reserve Deduct Capital Loss: POD ACB Capital Loss Non-Deductible One-Half 2022 Income Effect - Ms. Tortora (No Election)

$24,000 $328,000 ( 346,000) ($ 18,000) 9,000

( 9,000) $15,000

Note that the $9,000 allowable capital loss can only be deducted to the extent of Ms. Tortora's taxable capital gains. In the absence of such taxable capital gains, the income inclusion would have been $24,000. If the ITA 22 election is not made, the income tax consequences to Mr. Bunn would be as follows: POD (Amount Collected) ACB Capital Gain Non-Taxable One-Half 2022 Income Effect - Mr. Bunn (No Election)

$333,000 ( 328,000) $ 5,000 ( 2,500) $ 2,500

Part A - Election The CRA requires that the election be filed in the income tax return of the individuals for the year of the purchase and sale of the accounts receivables. This means that the individuals have until the filing due date of the 2022 taxation year of June 15, 2023 to decide. If the ITA 22 election is made, the income tax consequences for Ms. Tortora would be as follows: Add: 2021 Doubtful Debt Reserve Deduct: Loss on the sale ($346,000 - $328,000) 2022 Income Effect - Ms. Tortora (With Election)

$24,000 ( 18,000) $ 6,000

If the ITA 22 election is made, the income tax consequences to Mr. Bunn would be as follows: Add: Face Value - Price Paid ($346,000 - $328,000) Deduct: Actual Write-Offs ($346,000 - $333,000) 2022 Income Effect - Mr. Bunn (With Election)

$18,000 ( 13,000) $ 5,000

Part B - Proceeds at $328,000 For Ms. Tortora, the ITA 22 election is clearly desirable, converting a $15,000 income inclusion into a $6,000 inclusion. The conclusion is that the election is beneficial to the seller when the receivables are sold at a loss. The collection of an additional amount by the purchaser would not have changed this outcome to the seller. For Mr. Bunn, the actual collections are $5,000 ($333,000 - $328,000) more than the price he paid for the Accounts Receivable. This means that making the election would result in this gain being treated as fully taxable business income, rather than a capital gain, only one-half of which would be included in income.

With the election, his income inclusion would be $2,500 higher which is an undesirable outcome. In conclusion a purchaser of receivables generally prefers not to use the election when the sales are sold by the seller at a loss. The election results in a benefit to one person and a disadvantage to the other. In practice this difference can be mitigated by adjusting the price of the receivables. There may however be other income tax consequences to manipulating the sales price to achieve mutual advantages (ITA 69). Part B - Proceeds of $321,000 A change in the proceeds would have no effect on the results for Ms. Tortora. She would still have a $15,000 income inclusion without the election and a $6,000 inclusion in income with the election. However, the situation would change for Mr. Bunn. If the ITA 22 election is not made, the income tax consequences to Mr. Bunn would be as follows: POD (Amount Collected) ACB Capital Loss Non-Deductible One-Half 2022 Income Effect - Mr. Bunn (No Election)

$321,000 ( 328,000) ($ 7,000) 3,500 ($ 3,500)

If the ITA 22 election is made, the income tax consequences to Mr. Bunn would be as follows: Add: Face Value - Price Paid ($346,000 - $328,000) Deduct: Actual Write-Offs ($346,000 - $321,000) 2022 Income Effect - Mr. Bunn (With Election)

$18,000 ( 25,000) ($ 7,000)

In this case, the election would be desirable as the loss would be treated as a fully deductible loss, rather than a capital loss, only one-half of which would be deductible. Type: ES Topic: Accounts receivable election ITA 22

99) Family Information Jamine Ramiz is 46 years old. She is married to Raul Ramiz. Raul is 41 years old and has 2022 net income of $5,650. The couple have two children: Diego — Their son, Diego, is 15 years old and has 2022 net income of $6,420. Isabella — Their daughter, Isabella is 20 years old and has 2022 net income of nil. She attends university on a full time basis for 8 months of the year. Jamine pays for all of Isabella's education costs, including $10,200 for tuition and $2,200 for textbooks and supplies. She has agreed to transfer the maximum tuition credit to her mother. The family's 2022 medical expenses, all paid for by Jamine, are as follows: Jamine Raul* Diego Isabella Total

$ 3,200 7,800 2,450 7,235 $20,685

*$4,800 was for hair transplants and the remaining $3,000 was for plastic surgery on his nose as a result of a collision with a tree while bike riding. In 2022, Jamine makes donations of $2,150 to a registered charity. In addition, she makes donations to registered federal political parties in the amount of $450. Employment Income Jamine is employed by Dominion Steel, a large public company, in their human resources department. In 2022, her basic salary is $143,000. In addition, she earned $18,500 in commissions. For the year, her employer withheld the following amounts from her income: CPP Contributions EI Premiums RPP Contributions* Union Dues Payments for Personal Use of a Company Car

$3,500 953 4,200 625 1,800

*In 2022, her employer makes a matching contribution to her RPP of $4,200. Dominion Steel provides Jamine with a car that was purchased in 2020 for $40,000. In the Company's records, this Class 10.1 passenger vehicle has a January 1, 2022 UCC balance of $17,850. In 2022, the car was available to Jamine for 10 months, of the year during which she drove it a total of 42,000 kilometers. Of this total, 15,000 kilometers were for personal use and 27,000 for employment purposes. The Company pays all of the operating costs, a total of $7,560 for the year. Several years ago, Jamine was granted options to purchase 2,000 shares of her employer's stock. The option price was $25 per share and, at the time the options were granted, the stock was trading at $27 per share. In March, of 2022, she exercises all of the options. At this time, the shares are trading at $32 per share and, immediately after exercising the options, she sells 1,000 of the shares at $32 per share. She is still holding the other 1,000 shares at the end of the year when they are trading at $20 per share. In recognition of her 10 years of service with the Company, Dominion Steel gives Jamine a $600 watch. In addition, all of the Company's employees were given a $300 gift certificate for online purchases at Amazon for Christmas. Jamine is provided with a flat rate travel allowance of $600 per month to cover hotel and meal costs during employment related travel. Her actual travel costs for 2022 were as follows: Hotels Meals

$4,200 2,900

It is the policy of Dominion Steel to reimburse tuition paid by employees when taking college or university courses. In 2022, Jamine received $3,400 in reimbursements for two courses: • $2,800 was for a two week course in negotiating skills which was encouraged by her employer • $600 was for a weekend course in music appreciation Business Income On January 1, 2022, Jamine began to carry on a management consulting business that assists people with

making sales contacts. Information related to this business is as follows: Office Space — Jamine rents space on the ground floor of the mixed use building in which she lives. She does not use of the employer provided vehicle in her business. The rental agreement with the building's management company has a term of 3 years and there are no options for renewal. The office rent is $750 per month and, in order for the space to suit her needs, she makes improvements at a cost of $18,000. Revenues — In 2022, Jamine issued invoices for her services totaling $63,450. In addition, she has unbilled work in progress of $5,055. This amount is what is expected to become receivable with respect to the work that has been completed. Capital Expenditures — In 2022, Jamine acquired office furniture and fixtures at a cost of $16,300. In addition, she purchased a computer for $1,230 and application software for $723. Business Expenses — In 2022, the following expenses were incurred: Part Time employees Office Supplies Web Hosting Fee (A simple web page for informational purposes only) Cell Phone Plan (for business use only) Meals and entertainment with clients (not billed to clients)

$6,340 623 240 462 4,340

Required: Calculate Jamine’s 2022 net income, taxable income and her minimum federal income tax payable or refund. Ignore GST/HST and PST considerations and estimates of any amounts that were withheld for income taxes by her employer. Answer: Employment Income The 2022 employment income would be calculated as follows: Salary Additions Commissions Automobile Benefit (Note 1) Stock Option Benefit [(2,000)($32 - $25)] Gifts (Note 2) Travel Allowance (Note 3) Music Course Tuition Benefit (Note 4) Deductions RPP Contributions Union Dues 2022 Employment Income

$143,000 18,500 9,000 14,000 400 Nil 600 ( 4,200) ( 625) $180,675

Note 1 - The automobile benefit would be calculated as follows: Standby Charge [(2%)($40,000)(10)(15,000 ÷ 16,667)] Operating Cost Benefit - Lesser of: • [($0.29)(15,000)] = $4,350 • ($7,200 ÷ 2) = $3,600 Total Benefit Before Repayment Repayment Taxable Automobile Benefit

$ 7,200

3,600 $10,800 ( 1,800) $ 9,000

Note 2 - The gift certificate of $300 would be considered a near cash gift and would have to be included in employment income. In addition, the $100 excess of the value of the watch over $500 would also have to be included. This gives a total inclusion of $400. Note 3 - As the travel allowance (12 @ $600 = $7,200) appears to be reasonable given her actual costs ($4,200 + $2,900 = $7,100) it does not have to be included in Jamine's income. Given her allowance is greater than her actual costs, this would be advisable. As a result, she cannot deduct the actual travel expenses incurred. Note that the determination of whether an allowance is reasonable is a question of fact. When actual costs approximate the allowance this is a suggestion that the allowance may be reasonable but that fact alone is not determinative. Note 4 - Tuition for the negotiating skills course would appear to be employment related and, as a consequence, the reimbursement for it would not be included in Jamine's employment income. Taxable Capital Gain As the shares were sold immediately after being acquired with options, their ACB of $32 per share would be equal to the $32 sale proceeds. As a result there would be no gain or loss on the sale. Business Income The 2022 business income would be calculated as follows: Amounts Billed Unbilled Work in Progress (Note 5) Total Inclusions Deductions: Office Rent (12 Months at $750) CCA (Note 6) Part Time Office Help Office Supplies Web Hosting Fee Cell Phone Charges Meals and Entertainment [(1/2)($4,340)] 2022 Business Income

$63,450 5,055 $68,505 ($ 9,000) ( 11,667) ( 6,340) ( 623) ( 240) ( 462) ( 2,170)

( 30,502) $38,003

Note 5 - Unbilled WIP would generally be considered to have the quality of income and would be required to be included income. In addition the ITA requires (ITA 10(4)(a)) that individuals value WIP at an amount equal to the amount that would become receivable with respect to that work. The effect would be to increase income by that same $5,055 amount. Note 6 - Maximum CCA would be calculated as follows: Class 13 [(150%)($18,000 ÷ 5*)] Class 8 [(150%)(20%)($16,300)] Class 50 [(150%)(55%)($1,230)] Class 12 [(1/2)(100%)($723)] Total CCA

$ 5,400 4,890 1,015 362 $11,667

*With respect to the Class 13 amount, this is a straight line Class eligible for the AccII provisions. While the term of the lease is only 3 years, the deductible amount is the lesser of 150% of: • the capital cost divided by the term of the lease plus the first renewal option, and • one-fifth of the capital cost. In this case, the deduction is limited to 150% of one-fifth of the capital cost. 2022 Net Income and Taxable Income Jamine has 2022 Net and Taxable Income as follows: Employment Income Business Income Deductible CPP ($3,500 - $3,039) (Note 7) 2022 Net Income Stock Option Deduction (Note 8) 2022 Taxable Income

$180,675 38,003 ( 461) $218,217 Nil $218,217

Note 7 - Individuals who carry on a business as a sole proprietor are potentially responsible for CPP contributions with respect to their business profits which would create a business deduction under ITA 60(e) and an income tax credit. However if the individual is also employed in the year and making the maximum CPP contributions of $3,500 then no additional CPP contributions are required with respect to the business profits. Part 5 of Schedule 8 of the federal income tax return addresses this situation. Note 8 - When the options were granted, the option price of $25 was below the market price of $27. Given this, the ITA 110(1)(d) deduction is not available. As Dominion Steel is a publicly traded company, the ITA 110(1)(d.1) deduction that applies to options granted by CCPCs cannot be used. 2022 Federal Income Tax Payable (Refund) The required calculations are as follows: Tax on first $155,625 Tax on next $62,592 ($218,217 - $155,625) at 29% Income Tax Before Credits Tax Credits: BPA (Note 9) Spouse ($12,808 - $5,650) EI Premiums CPP Contributions Canada Employment Jamine's Tuition Credit (Note 10) Transfer of Isabella's Tuition - Lesser of: • Maximum Limit of $5,000 • Actual Tuition of $10,200 Medical Expenses (Note 11) Total Credit Base Rate Charitable Donations (Note 12) Political Contributions [(3/4)($400) - (1/2)($50)] 2022 Federal Income Tax Payable

$32,181 18,152 $50,333 ($12,808) ( 7,158) ( 953) ( 3,039) ( 1,287) ( 600)

( 5,000) ( 13,406) ($44,251) 15%

( 6,638) ( 670) ( 325) $42,700

Note 9 - Since the net income is between $155,625 and $221,708 the BPA is prorated as follows: $14,398 - [$1,679][($218,217 - $155,625) ÷ $66,083] = $12,808 Note 10 - As Jamine included the reimbursement of the music course in her employment income as a taxable benefit, she can claim the tuition fee credit. Note 11 - The amount of medical expenses that can be included is calculated as follows: Medical Expenses For: Jamine Raul ($7,800 - $4,800) Diego Lesser of: • [(3%)($218,217)] = $6,547 • 2022 Threshold Amount = $2,479 Balance Before Dependants 18 and Over Isabella’s Medical Expenses Reduced by the Lesser of: • $2,479 • [(3%)(Nil)] = Nil Total Medical Expense Claim

$3,200 3,000 2,450

$7,235

Nil

$ 8,650

( 2,479) $ 6,171

7,235 $13,406

Note 12 - The charitable donations tax credit would be calculated as follows: 15% of $200 33% of the Lesser of: $2,150 - $200 = $1,950 $218,217 - $221,708 =$Nil 29% of $73 [$2,150 - ($200 + $1,877)] Total Credit

$ 30

619 21 $670

Type: ES Topic: Comprehensive case covering chapters 1 to 6

100) Joan Galley is a salesperson for Goodship Lollipop Ltd., a Canadian public corporation. The company produces various sweets such as candy and chocolate bars. It has been a stressful time for Joan these last 18 months. In the summer of 2021, her spouse passed away. Joan has two children: Ryan who is 13 and Julie who turned 18 on April 30, 2022. Joan's 2022 employment contract states that she will be paid an annual base salary of $50,000 plus a commission of 1.5% of her annual cash sales. Her 2021 sales totaled $3,200,000, with $200,000 of this total collected by the company in 2022. Her 2022 sales amounted to $2,800,000, but the company had yet to collect $300,000 of these by December 31, 2022. In 2022, her employer paid Joan her base salary plus her commission income. A review of her last pay stub for 2022 reveals the following was withheld from her salary for the year: Contributions to the Company RPP $3,000 CPP Contributions 3,500 EI Premiums 953 Premiums for the Company's Dental and Health Plan* 1,500 Federal Income Tax Withheld 15,000 * The plan is funded 50/50 by the employees and the employer and is a Private Health Services Plan (PHSP). Joan is covered by the company's group term life insurance. Her coverage is equal to her annual base salary. The company pays a premium of $5 for every $1,000 of coverage to the Sweet Life Insurance Company. In January of 2022, Joan detected a packaging problem with a particular line of candies before these were to be shipped. Her keen eye saved the company an estimated $360,000 in product recalls. This helped her win the employee of the year reward of an iPad2 which cost the company $900. In September of 2021, her employer transferred her from Montreal to Toronto. She thought the change would be beneficial after the death of her spouse a few months earlier. Her employer paid for all her moving expenses. Unfortunately, due to the quick sale of her Montreal home, she incurred a $30,000 loss on its sale. Goodship Lollipop agreed to reimburse her $20,000 of the $30,000 loss, but only in January of 2022. The $20,000 was actually received on January 14, 2022. In April of 2021, Joan's employer granted her the right to purchase up to 5,000 shares of the company for $17 per share under the employee stock option plan. At the time the option was granted, the shares were trading for $15. On February 1, 2022, when the shares were trading at $20 per share, she exercised her option on 3,000 shares. She sold 2,000 shares at $22 per share with a settlement date of December 30, 2022. In order to purchase the 3,000 shares, Joan negotiated an interest free loan from her employer for the purchase price. The loan was received on February 1, 2022. Joan repaid the loan in full on December 31, 2022.

Throughout 2022 her employer provided her with an automobile, which it leases for $450 per month. The automobile was also available for her personal use. During the year, Joan drove a total of 35,000 kilometers, 8,000 of which were personal and 27,000 of which were for employment purposes. Except for $2,200 of car insurance, Goodship Lollipop did not pay for any of her automobile operating expenses as these were Joan's responsibility. Joan is responsible for her salesperson expenses (including the automobile operating expenses). During the year she incurred the following: Total Automobile Expenses (Excluding Insurance) Meals and Entertainment with clients (not billed to clients) Hotels

$5,400 2,600 1,500

Joan is a member of the Confectioners’ Association of Canada, a professional association. Her annual membership dues are $1,400. Joan meets all of the conditions of ITA 8(1)(f) (deductible salesperson expenses). Joan has a sideline business which she carries on as a sole proprietor. The business is called The Cup Cake Diva. She started her business venture a few years ago and has continued it in Toronto. Joan prepares and sells cupcakes and other pastries from her home. Most of her sales are made for social events which are typically held on weekends. Joan provides you with the following information for 2022 with respect to her business: Sales Revenues Supplies (Flour, Sugar, Boxes, Etc.) Purchased Purchase of New Commercial Oven (For Business use only) Purchase of new automobile for cash (Not zero-emission) Automobile operating expenses

$40,000 12,000 2,200 39,000 3,000

With respect to the supplies, she had an opening inventory of $1,600. On December 31, 2022 the inventory of supplies was $900. Early in January, 2022, Joan sold her old automobile for $12,000. It had cost $35,000. Both the old and the new automobiles were used exclusively for her business. Any personal use is limited to the employer provided automobile. Her daughter Julie helps in the business. She is making the deliveries to practice her driving and shows real aptitude for dealing with clients. Joan has not offered her any monetary compensation as Julie is just happy to be driving a new car at this point in time.

Joan uses 20% of the livable space in her home (including a component for common areas) for the business. Her 2022 household expenses include the following: Utilities Property Taxes Maintenance Dedicated Phone Line for the business Home Insurance Mortgage Interest The UCC balances at January 1, 2022 are as follows: Class 8 Class 10.1

$5,400 3,800 1,600 800 1,900 12,300 $3,100 9,000

Joan does not claim CCA on her home as she realizes that if she did, this would result in future recapture and capital gain implications. Her son Ryan is in high school and has no income of his own. Her daughter Julie, not knowing which university program she would like to attend was enrolled parttime (4 months) at a local college. Joan agreed to pay her tuition of $1,600 as long as Julie agrees to transfer any related credit to her (Joan). Julie’s 2022 net income is $7,200. During the year, Joan paid $5,000 for orthodontic work (braces) for Ryan. She was reimbursed 50% of the amount through the company’s dental and health plan. In 2022, Joan made $1,600 of donations to registered charities. Assume the prescribed interest rate for loan benefits during all four quarters of 2022 is 1%. Required: A. Determine Ms. Galley’s minimum: 1. 2022 Net Income, 2. 2022 Taxable Income, 3. 2022 Federal Income Tax Liability or Refund. In determining these amounts, ignore GST/HST & PST considerations. B. Do you have any income tax planning advice for Joan Galley? Discuss.

Answer: Part A(1) - 2022 Net Income 2022 Employment Income 2022 Employment Income would be calculated as follows: Base Salary Commission Income [(1.5%)($2,800,000 + $200,000 - $300,000)] Group Term Life Insurance Premium [($5)($50,000 ÷ $1,000)] Award ($900 — $500) Eligible Housing Loss [(1/2)($20,000 — $15,000)] Stock Option Benefit [(3,000)($20 — $17)] Interest Benefit on Employee Loan [(1%)(3,000)($17)(334/365)] Standby Charge [(2/3)($450)(12)(8,000 ÷ 20,004)] Operating Cost Benefit (See Part B) - Lesser of: • [(8,000)($0.29)] = $2,320 • [(1/2)($1,440)] = $720 RPP Contributions Salesperson Expenses (Note 1) Professional Membership Dues 2022 Employment Income

$50,000 40,500 250 400 2,500 9,000 467 1,440

720 ( 3,000) ( 6,966) ( 1,400) $93,911

Note 1 - Salesperson expenses would be calculated as follows: Automobile expenses [($5,400)(27,000 ÷ 35,000)] Meals and entertainment [(50%)($2,600)] Hotels Total Expenses (Less than Commissions)

$4,166 1,300 1,500 $6,966

2022 Business Income 2022 Business Income would be calculated as follows: Revenues Supplies Used ($1,600 + $12,000 - $900) Business Telephone Work Space in the Home Expenses (Note 2) Automobile Operating Expenses (100%) CCA (Note 3) 2022 Business Income

$40,000 ( 12,700) ( 800) ( 5,000) ( 3,000) ( 17,930) $ 570

Note 2 - Work space in the home expenses would be calculated as follows: Utilities Property Taxes Maintenance Insurance Mortgage Interest Total House Expenses Business Use of Residence 2022 Work Space in yhe Home Expenses

$ 5,400 3,800 1,600 1,900 12,300 $25,000 20% $ 5,000

Note 3 - The CCA would be calculated as follows: Class 8 Opening UCC Additions AccII Adjustment [(50%)($2,200)] Balance Rate Class 10.1- Old Car [($9,000)(30%)(1/2)] (Note 4) Class 10.1- New Car in Separate Class [($34,000)(30%)(150%)] Total 2022 CCA

$ 3,100 2,200 1,100 $ 6,400 20%

$ 1,280

$ 1,350 15,300

16,650 $17,930

Note 4 - The recapture rules do not apply to Class 10.1. Also with respect to Class 10.1, in the year of disposition, the individual is entitled to claim one-half of the normal CCA. Taxable Capital Gains The taxable capital gain on the sale of the option shares would be calculated as follows: POD [($22)(2,000)] ACB [($20)(2,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$44,000 ( 40,000) $ 4,000 1/2 $ 2,000

Minimum 2022 Net Income Minimum 2022 Net Income would be calculated as follows: Employment Income Business Income Taxable Capital Gain Loss from Property (Note 5) Deducible CPP ($3,500 - $3,039) (Note 6) 2022 Net Income

$93,911 570 2,000 ( 467) ( 461) $95,553

Note 5 - As the loan was used for investment purposes, the employment income interest benefit of $467, which is deemed to be interest paid by virtue of ITA 80.5, would be deductible by virtue of ITA 20(1)(c). Note 6 - Individuals who carry on a business as a sole proprietor are potentially responsible for CPP contributions with respect to their business profits which would create a business deduction under ITA 60(e) and an income tax credit. However if the individual is also employed in the year and making the maximum CPP contributions of $3,500 then no additional CPP contributions are required with respect to the business profits. Part 5 of Schedule 8 of the federal income tax return addresses this situation. Part A(2) - 2022 Taxable Income Minimum Taxable Income would be calculated as follows: 2022 Net Income Stock Option Deduction [(1/2)(($9,000)] 2022 Taxable Income

$95,553 ( 4,500) $91,053

Part A(3) - 2022 Federal Income Tax Payable (Refund) Minimum 2022 Federal Income Tax Payable or Refund would be calculated as follows: Tax on first $50,197 Tax on next $40,856 [(20.5%)($91,053 - $50,197)] Tax Before Credits Tax Credits: BPA Eligible Dependant (Ryan) CPP Contributions EI Premiums Canada Employment Transfer of Tuition - Lesser of: • Maximum Limit of $5,000 • Actual Tuition of $1,600 Medical Expenses (Note 7) Subtotal Rate Charitable Donations (Note 8) [(15%)($200) + (29%)($1,600 — $200)] 2022 Federal Income Tax Payable Federal Taxes Deducted At Source 2022 Federal Income Tax Refund

$ 7,530 8,375 $15,905 ($14,398) ( 14,398) ( 3,039) ( 953) ( 1,287)

( 1,600) ( 1,521) ($37,196) 15%

( 5,579) ( 436) $ 9,890 ( 15,000) ($ 5,110)

Note 7 - The base for the medical expense credit is calculated as follows: Premiums Paid on Dental and Health Plan Ryan’s Orthodontic Work Employer Reimbursement (50%) Total Eligible Expenses Reduced by the Lesser of: • [(3%)($95,553)] = $2,867 • 2022 Threshold Amount = $2,479 2022 Base for Medical Expenses

$1,500 $5,000 ( 2,500)

2,500 $4,000

( 2,479) $1,521

Note 8 - As none of her income is taxed at 33%, this rate will not be applicable to the calculation of the charitable donations tax credit. Part B - Tax Planning Advice The following points are relevant: Car Insurance - As her employer pays the insurance cost portion of her operating expenses, the usual operating cost benefit is applicable, despite the fact that Joan pays all the other operating costs. If alternatively, this was treated as a taxable allowance, the $720 operating cost benefit would be eliminated. The net effect of this change would be as follows: Elimination of Operating Cost Benefit Taxable Allowance Received Deduction of Insurance Costs [($2,200)($27,000 ÷ $35,000)] Decrease in Employment Income

($ 720) 2,200 ( 1,697) ($ 217)

Compensation for Daughter - Joan should pay Julie a reasonable salary for her services to the business. Since Julie’s net income is currently reported as $7,200, a salary payment of up to $8,485 ($14,398 + $1,287 - $7,200) would not attract any federal income tax as her BPA of $14,398 and Canada employment credit amount of $1,287 would offset the income tax. Although Julie would have a tuition tax credit to offset more income, this would mean the credit could not be transferred to Joan. The payment of salary would be deductible to Joan, but would attract some employer EI premiums as well as some CPP premiums for Joan and Julie. Type: ES Topic: Comprehensive case covering chapters 1 to 6

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 7 Income or Loss from Property 7.1 Online Exercises 1) Indicate two differences between the income tax treatment of business income and property income. Answer: The required two differences can be selected from the following differences which were described in the text: • When some types of property income are being earned, the deduction of CCA cannot be used to create or increase a property loss. • When property income is being earned by individuals, there is no requirement for a pro rata CCA reduction to reflect a short fiscal period since a fiscal period is a concept that applies to a business source and not a property source. • Property income is subject to the income attribution rules (see Chapter 9) whereas business income in general is not. • Certain expenses specifically allowed in ITA 20(1) are only deductible against business income, but not property income (e.g. ITA 20(1)(aa) for landscaping expenditures). Type: ES Topic: Business vs. property income

2) One conceptual approach to determining whether interest should be deductible is to limit deductibility to situations in which non-exempt income is earned. List two situations in which interest would not be deductible under this conceptual approach. Answer: • Interest relates to the purchase of personal property(e.g., a loan to purchase a sail boat). • Interest relates to the purchase of tax sheltered investments such as RRSPs. • Interest relates to the purchase of property that can only generate capital gains or capital losses. • Interest relates to the purchase of property that will not generate income for many years (e.g., ITA 18(2) or 18(3.1)). Type: ES Topic: Interest deductibility - ITA 20(1)(c)

3) When an investor receives a payment from a corporation, what characteristics determine whether the amount received is interest or a dividend? Answer: Interest requires meeting three criteria: • The payment must accrue on a continuous basis. • It must be calculated with reference to a principal sum. • It must be compensation for the use of that principal sum. Dividend payments are also compensation for the use of a principal sum and, in some cases (preferred shares), they are calculated with reference to a specific amount. Given this, the most reliable distinguishing feature is that dividends do not accrue on a continuous basis. They arise only when they are declared by the Board of Directors of a company. Type: ES Topic: Interest vs dividends - conceptual

4) Briefly describe the "disappearing source" rules. Answer: The disappearing source rules are founded and based upon the source concept that only recognizes expenses as long as a source of income exists. If investments are purchased with financing and the financing remains in part after the investment has been sold perhaps because the value of the investments had declined then technically any interest expenses on the remaining debt would not be allowed since the source of income (the investments) has disappeared. ITA 20.1 was added to allow a person to continue claiming interest expenses after the source has disappeared. The legislation does this by deeming the source to exist for purposes of determining the interest expense deduction. Type: ES Topic: Interest deductibility - disappearing source ITA 20.1

5) Accounting principles (ASPE and IFRS) requires that any premium that is received on the issuance of debt securities be amortized as an adjustment of interest expense over the life of the debt. Explain briefly the income tax treatment of a premium received on the issuance of debt obligations. Answer: If the issuer of the debt is in the business of lending money and the issuance of the debt is part of that business, the premium will be included in income when the debt is issued. For most other situations, the premium will be treated as a tax free capital receipt (e.g. not income), with no further income tax consequences. Type: ES Topic: Premiums on debt obligations

6) Briefly explain the income tax treatment of corporate bonds that are issued at a discount. Answer: Over the life of the bond interest is expensed based on the amount required to be repaid at maturity. Technically the company would, at maturity, be required to pay a larger amount than was received. The result would be a loss but since a bond payable is not property the loss could not be recognized without rules in the ITA to the contrary. ITA 20(1)(f) sets out those rules that either (1) allow the full amount of the discount to be claimed as a business expense or (2) allow only one half of the discount to be claimed as a business expense. The discount is only fully deductible if the bonds are issued for not less than 97% of their maturity value and have an effective yield that does not exceed 4/3 of the stated yield. Type: ES Topic: Discount on debt obligations - ITA 20(1)(f)

7) The income tax rules for interest income are different for individuals than they are for corporations. Briefly describe the differences. Answer: Corporations are required to recognize interest income on a full accrual basis, including all amounts receivable at the end of a taxation year. In contrast, individuals can use either cash or accrual. However individuals are subject to a modified accrual method under ITA 12(4) that requires interest be recognized on each anniversary date of an investment contract (e.g. debt obligations). Type: ES Topic: Interest income

8) When publicly traded debt obligations are purchased between interest payment dates, the purchaser pays for any accrued interest to the date of acquisition. Describe the income tax consequences of the accrued interest and ultimate receipt of interest to both the purchaser and seller. Answer: The seller must include the accrued interest in income for the year of the sale. The purchaser must include all of the income received and can also deduct the interest amount accrued. In this way the effect is that accrued interest to the date of the sale is included in the income of the seller and the interest accruing from the date of the sale is included in the income of the purchaser. Type: ES Topic: Accrued interest on sale of debt obligations - ITA 20(14)

9) Each rental property that is owned by an individual that has a cost in excess of $50,000 is added to a separate Class. What is the purpose of this separate class treatment? Answer: The goal here is to ensure that the individual is not able to avoid recapture when a rental property is sold. Rental properties often have a FMV that exceeds the UCC. If each rental property is in a separate class, the proceeds of disposition are subtracted from the UCC resulting in a negative balance that is recapture that is then included in income. If the property was not in a a separate class, this result could be avoided by simply acquiring another rental property in the same taxation year and adding its cost to the class. As recapture only arises if there is a negative balance at the end of the period, there would be no recapture if this addition creates a positive balance in the class. Type: ES Topic: Rental property

10) Briefly explain the concept of integration. Answer: The concept of integration is the idea that an individual should pay the same amount of income tax on income without regard to whether it is earned personally or earned by a corporation in which the individual owns all of the shares. with the after corporate tax income distributed to the individual shareholder as a dividend. Where a corporation is used to earn the income the combination of the corporate income tax and individual income tax on a dividend distribution will equal the income tax that the individual would have paid without the use of a corporation. In brief the cash after paying income taxes under both alternatives would be the same. Type: ES Topic: Integration

11) Briefly describe the federal gross up and dividend tax credit mechanism for (1) eligible dividends and (2) non-eligible dividends. Answer: In 2022 eligible dividends are grossed-up by 38% meaning that the amount added to income as a taxable dividend is 138% of the dividends received. Non-eligible dividends are grossed up by 15% meaning that 115% of the non-eligible dividend received is considered a taxable dividend and added to income. Both eligible and non-eligible dividends entitle the individual recipient to a federal dividend tax credit which is applied to reduce federal income tax payable. The federal dividend tax credit for eligible dividends is 6/11 of the amount of the gross up of 38% and is 9/13 of the amount of the gross up.of 15% for non-eligible dividends. Type: ES Topic: Integration

12) How is the ACB of units in a mutual trust fund determined? Answer: The ACB of mutual fund trust units at the time they are acquired is equal to their cost. During the ownership of the units there are two types of ACB adjustments: • The ACB will be reduced by any return of capital (ROC) distributed to investor (unit holders). • In those cases where the investor has chosen to reinvest distributions, the ACB will be increased by the amount reinvested. As new units will be issued, this addition, when combined with the new number of units, will result in a revised average cost of the units. The reinvestment of income still requires the investor to include the income distributions in income. The effect is equivalent to an investor receiving the income distribution and then using that same distribution to purchase additional mutual trust fund units. These two ACB adjustments occur at the time the ROC and reinvestments are made. Type: ES Topic: Mutual trust fund - ACB

13) Mutual funds can be structured as either corporations or trusts. How will the choice of structure affect the income distributions from the fund? Answer: If the mutual fund is structured as a corporation (a Mutual Fund corporation), its after-tax distributions will generally be considered as capital or taxable (eligible or non-eligible) dividends. The corporation may also return capital to shareholders which is considered a distribution of one's investment cost and therefore not required to be included in income but will reduce the ACB of the shares. If the mutual fund is structured as a trust, its pre-tax distributions will consist of the same types of income that were earned by the trust (eligible dividends, non-eligible dividends, capital gains, and foreign interest and foreign dividend income). In other words the nature and character of the income is retained in the hands of the mutual fund unit holders. Some part of the distributions may also be a return of capital which would also reduce the ACB of the trust units. Type: ES Topic: Mutual funds - trusts vs corporations

14) What is a stock dividend and what is the income tax treatment of stock dividends including determining their ACB? Answer: A stock dividend occurs when a corporation declares a dividend payable by a pro rata distribution of its shares. The recipient of a stock dividend is deemed to have received a dividend based on the increase in the paid up capital of the corporation as a result of the stock dividend. The stock dividend can be treated as a capital dividend or taxable dividend depending upon the circumstances. Where the dividend is an eligible or non-eligible dividend the dividend gross-up and dividend tax credits will apply. Shares issued as a stock dividend are deemed to have a cost and therefore ACB equal to the dividend amount required to be included in income without consideration of the gross-up. Type: ES Topic: Stock dividends

15) Why are capital dividends received tax free by residents of Canada? Answer: The capital dividend rules ensure that certain tax free amounts received by a resident corporation retain their tax free character when distributed to shareholders as dividends. For example only one-half of capital gains are required to be included in income with the remaining one-half being tax free. The capital dividend account or CDA was created to track this tax free component allowing a corporation to decide to distribute the tax free portion of the capital gain as a capital dividend on an elective basis. Type: ES Topic: Capital dividends - ITA 83(2)

16) Describe the income tax treatment of foreign investment (e.g. non-business ) income to individuals when foreign income tax has been withheld. Answer: The foreign investment income is required to be included in income. Any foreign income tax withheld is eligible for a combination of a property income deduction and a foreign tax credit. The foreign tax credit, which reduces federal income tax payable, is limited to a maximum of 15% with any excess eligible for a property income deduction under ITA 20(11). Type: ES Topic: Foreign income tax - ITA 20(11)

17) Corporations must use the full accrual approach to recognize interest income. Answer: TRUE Explanation: Corporations must use the full accrual approach. Type: TF Topic: Interest income

18) For income tax purposes, premiums on debt obligations are amortized by the issuer as an adjustment of interest expense. Answer: FALSE Explanation: Premiums are either treated as income to money lenders and as a tax free capital receipt to other issuers. Type: TF Topic: Premiums on debt obligations

19) In determining whether interest expense is deductible, the direct use to which the borrowed money is put is an important consideration. Answer: TRUE Explanation: The case law is clear that it is the direct use of the borrowed money that is relevant and not the indirect use. Type: TF Topic: Interest deductibility - ITA 20(1)(c)

20) Interest on debt incurred to purchase shares of a corporation is only deductible if the corporation has a history of paying regular dividends. Answer: FALSE Explanation: A share is a source of income and therefore as long as there is a potential for the payment of dividends then interest expenses related to financing the shares would be deductible irrespective of whether dividends are actually paid. Folio S3-F6-C1 however indicates that if there is a legal restriction in certain classes of shares that prevents the payment of dividends then interest would not be deductible since there would be no possibility of earning investment income. Type: TF Topic: Interest deductibility - ITA 20(1)(c)

21) An individual purchased a warehouse as an investment property two years ago. During the current year, the individual earned rents of $8,000 and paid the following expenses; interest of $6,000, property taxes of $2,000, heat, light and power of $500, and maintenance of $300. The UCC of this Class 1 property was $60,000 on January 1 of the current year. The individual cannot claim a rental loss in the current year. Answer: FALSE Explanation: A rental loss of $800 can be claimed. The rental loss however cannot be increased with CCA. Type: TF Topic: Rental property

22) The federal dividend tax credit for eligible dividends can be expressed as 6/11 of the gross up, 20.7273% of dividends actually received, or 15.0198% of grossed up dividends. Answer: TRUE Explanation: All of these variations will produce the correct result although 6/11 is the method adopted by the ITA. Type: TF Topic: Dividend tax credit

23) When a unitholder of a mutual trust fund receives a distribution that is in part a return of capital, the amount of the return of capital must be added to the ACB of the trust units. Answer: FALSE Explanation: The return of capital reduces the ACB of the units. Type: TF Topic: Mutual trust fund distributions

24) Mutual funds can be structured as either corporations or trusts. Answer: TRUE Explanation: While mutual funds are usually structured as trusts, they can also be structured as corporations. Type: TF Topic: Mutual funds - trusts vs corporations

25) For income tax purposes, the amount of a stock dividend is treated in exactly the same manner as cash dividends. Answer: TRUE Explanation: The amount determined as the stock dividend equal to the increase in the PUC of the shares issued is treated the same as any other dividend. Type: TF Topic: Stock dividends

26) When foreign income taxes are withheld on foreign investment income of a Canadian resident individual, only the actual net amount received is required to be included in income. Answer: FALSE Explanation: The full amount of the foreign investment income must be included in income of the Canadian resident individual. The amount withheld will first be treated as a foreign tax credit up to 15% of the foreign investment income with a foreign tax deduction for any foreign income taxes in excess of 15%. Type: TF Topic: Foreign income tax - ITA 20(11)

27) On July 1, 2021, Janett Koenen purchased 1,000 shares of Techhab Inc. for $10 per share. The purchase was financed with a $10,000 bank loan, requiring annual interest payments of 5%. The shares were sold on December 1, 2021 for $6 per share, with the proceeds immediately invested in 500 Flexhub Ltd. shares at $12 per share. In 2022, the Flexhub shares pay eligible dividends of $0.50 per share. The original $10,000 bank loan was not repaid in 2022 and remains outstanding on December 31, 2022. Her 2022 income or loss from property will be: A) Property Income of $45. B) Property Loss of $155. C) Property Income of $345. D) Property Loss of $50. Answer: B Explanation: A) Property Income of $45 [(500)($0.50)(1.38) - ($6,000)(5%)] B) Property Loss of $155 [(500)($0.50)(138%) - ($10,000)(5%)] Since all of the $6,000 proceeds were used to purchase other sources of income the interest expense is fully deductible. C) Property Income of $345 [(500)($0.50)(1.38)] D) Property Loss of $50 [(500)($0.50) - ($6,000)(5%)] Type: MC Topic: Income or loss from property

28) Which of the following statements related to interest deductibility is correct? A) Interest paid on a mortgage secured by a principal residence is never deductible. B) If a business borrows to provide interest free loans to its employees, the interest on the borrowing will not be deductible. C) If an individual borrows $100,000 to purchase investments and the investments are later sold for $60,000, interest on the $100,000 will continue to be fully deductible provided the $60,000 is used to purchase other investments. D) If an individual borrows in order to buy common shares, the interest on the borrowing will only be deductible if the shares have a long-term history of paying dividends. Answer: C Explanation: C) If an individual borrows $100,000 to invest in securities and the securities are later sold for $60,000, interest on the $100,000 will continue to be fully deductible provided the $60,000 is immediately invested in other securities. Type: MC Topic: Interest deductibility - ITA 20(1)(c)

29) On January 1, 2022 Bernard borrowed $5,000 by signing a 1-year note payable at 6% interest. He used the money to purchase 2,000 common shares of Import Ltd., a Canadian public corporation for $2.50 per share. In 2022 Import Ltd. paid eligible dividends of $0.35 per share. On January 1, 2023 Bernard repaid the $5,000 he borrowed plus $300 in interest. Bernard's 2022 income from property will be: A) $400. B) $666. C) $700. D) $966. Answer: B Explanation: B) Property Income of $666 ($966* — 300). *Dividend Income (2,000 × $0.35) = $700 × 138% = $966. The accrued interest to the end of 2022 is deductible in 2022. Type: MC Topic: Income or loss from property

30) Louis received a "hot tip" from a friend about Fine Mine Ltd. He borrowed $10,000 from a bank April 1, 2022 and used the funds to purchase 1,000 common shares in the company for $10 each. Louis sold the shares June 30, 2022 for $15 a share and repaid the loan which included $148 of interest. As a result of these transactions Louis's 2022 net income would increase by: A) $4,852. B) $2,426. C) $2,500. D) $2,352. Answer: A Explanation: A) $4.852 ($5,000 — 148) The "hot tip" suggests that the transaction was an adventure or concern in the nature of trade with the shares being treated as inventory instead of capital property. [Calculated as: $10,000 × 6% × 90/365 = $147.95 B) ($5,000 — 148) × 50% = $2,426 C) $5,000 × 50% = $2,500 D) $2,352. [(50%)(1,000)($15 — $10) - $148*] *Interest Expense = $10,148 — 10,000 = $148 Type: MC Topic: Business income vs. capital gains

31) On July 1, 2022 Esther borrowed $8,000 from the bank and purchased 400 shares in No Hope Ltd. for $20 per share. Esther felt that this was a safe investment because she read online in a blog that No Hope would be paying dividends of $1.50 per share during the last half of 2022. Unfortunately, this didn't happen and she only received eligible dividends totalling $100 during 2022. On December 31 she paid the bank loan interest of $240. Esther's 2022 income or loss from property will be: A) Property Income of $100. B) Property Income of $138. C) Property Income of $0. D) Property Loss of $102. Answer: D Explanation: D) Property Loss of $102. ($100 × 138%) = $138 — $240 interest Type: MC Topic: Income or loss from property

32) Which of the following statements is NOT correct? A) Income from rental properties can be either business income or property income. B) When property income is earned, the income attribution rules may apply. C) Interest paid on a mortgage on a principal residence can be deductible. D) Interest paid on funds borrowed to make interest-free loans to employees is not deductible. Answer: D Explanation: D) Interest paid on funds borrowed to make interest-free loans to employees is not deductible. Considered a deductible remuneration expense to the employer. Type: MC Topic: Interest deductibility - ITA 20(1)(c)

The questions below are based on the following information: An individual loaned $20,000 for one year to his mother-in-law on October 1, 2020. Interest at 6% per year was payable on September 30, 2021, but was not paid until February 1, 2022. There are several ways in which the interest can be allocated to the years involved. For the situations described in the following questions, indicate which method (A, B, C, or D) corresponds to an interest allocation that would be acceptable. If it is not a permitted method, indicate the answer E. 33) Income for 2020 is $300, 2021 income is $900, and 2022 income is nil. A) Accrual Method B) Cash Method C) Compound Interest Method D) Receivable Method E) Not Allowed Method Answer: A Explanation: A) The accrual method. Type: MC Topic: Interest income

34) Income for 2020 is nil, 2021 income is $1,200, and 2022 income is nil. A) Accrual Method B) Cash Method C) Compound Interest Method D) Receivable Method E) Not Allowed Method Answer: D Explanation: D) The receivable method. Type: MC Topic: Interest income

35) Income for 2020 is nil, 2021 income is $900, and 2022 income is $300. A) Accrual Method B) Cash Method C) Compound Interest Method D) Receivable Method E) Not Allowed Method Answer: E Explanation: E) Not allowed method ($1,200 interest would have to be accrued by the September 30, 2021 anniversary of the loan). Type: MC Topic: Interest income

36) Income for 2020 is nil, 2021 income is nil, and 2022 income is $1,200. A) Accrual Method B) Cash Method C) Compound Interest Method D) Receivable Method E) Not Allowed Method Answer: E Explanation: E) Not allowed method (interest would have to be accrued on the September 30, 2021 anniversary of the loan). Type: MC Topic: Interest income

37) A corporation issues debt with a maturity value of $1,000,000 for proceeds of $900,000. The debt matures in 10 years and pays annual interest at a rate of 10%. Which of the following statements is correct? A) The corporation will be able to deduct interest of $110,000 in each of the years 1 through 10. B) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a fully deductible loss of $100,000 in year 10. C) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a business deduction in year 10 of $50,000. D) The corporation will be able to deduct interest of $90,000 in each of the years 1 through 10. Answer: C Explanation: C) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a business deduction in year 10 of $50,000. Type: MC Topic: Discount on debt obligations - ITA 20(1)(f)

38) A corporation issues debt with a maturity value of $1,000,000 for proceeds of $1,100,000. The debt matures in 10 years and pays annual interest at a rate of 10%. The issuer is not a money lender. Which of the following statements is correct? A) The corporation will be able to deduct interest of $90,000 in each of the years 1 through 10. B) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a fully taxable gain of $100,000 in year 10. C) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a capital gain in year 10 of $100,000, only one-half of which will be taxable. D) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and there will be no income tax consequences at maturity with respect to the premium. Answer: D Explanation: D) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and there will be no income tax consequences at maturity with respect to the premium. Type: MC Topic: Premiums on debt obligations

39) Jorge purchased a newly issued $20,000 corporate bond for $19,500 on November 1, 2022. The maturity date of the bond is October 31, 2027 and the annual interest rate is 5%, paid on October 31 of each year. How much interest income should Jorge include in his income for 2022 and 2023 if he wants to minimize the interest recognized for income tax purposes? A) $0 in 2022 and $975 in 2023. B) $0 in 2022 and $1,000 in 2023. C) $167 in 2022 and $833 in 2023. D) $167 in 2022 and $1,000 in 2023. Answer: B Explanation: A) $0 in 2022 and $975 in 2023 ($19,500 × 5% = $975) B) $0 in 2022 and $1,000 in 2023 ($20,000 × 5% = $1,000). C) $167 in 2022 and $833 in 2023 $1,000 interest × 61/365 = $167, $1,000 — 167 = $833 D) $167 in 2022 and $1,000 in 2023 $1,000 interest × 61/365 = $167, $1,000 for the year. Type: MC Topic: Interest income

40) Which of the following is NOT a characteristic of interest? A) It must represent compensation for use of a principal amount. B) It must accrue continuously over time. C) It must be paid on a regular, periodic basis. D) It must be calculated with reference to a principal amount. Answer: C Explanation: C) It must be paid on a regular, periodic basis. Type: MC Topic: Interest - meaning of

41) On July 1, 2022, Jon Laxtor acquires a newly issued investment contract with a maturity value of $100,000. It matures on June 30, 2027, with interest accruing at 8% per year. Interest is paid for the first one and one-half years on December 31, 2023. The remaining interest will be paid at maturity. With respect to the minimum amount of interest that Jon must include in his income, which of the following statements is correct? A) Jon will have to include $4,000 in 2022 and $8,000 in 2023. B) Jon will have to include nil in 2022 and $8,000 in 2023. C) Jon will have to include nil in 2022 and nil in 2023. D) Jon will have to include nil in 2022 and $12,000 in 2023. Answer: D Explanation: D) Jon will have to recognize nil in 2022 and $12,000 in 2023. $8,000 would be included as a result of the contract anniversary date which first falls in 2023 plus the remaining $4,000 of interest actually received at the end of 2023. Type: MC Topic: Interest income

42) Which of the following statements concerning the income tax treatment of interest income is NOT correct? A) Individuals must account for interest using the cash basis. B) Corporations must accrue interest on a daily basis. C) Accrued interest from the date of the last interest payment date is adjusted to ensure it is not part of the ACB of the debt obligation. D) If there is accrued interest on a debt obligation, the seller includes the accrued interest in income and the purchaser deducts a corresponding amount from the interest received on the debt obligations. Answer: A Explanation: A) Individuals must account for interest using the cash basis. Type: MC Topic: Accrued interest on sale of debt obligations - ITA 20(14)

43) With regard to debt obligations, which of the following statements is correct? A) Provided the issuer is not in the business of lending money, issuing debt obligations at a premium will normally reduce the after-tax cost of financing for the issuer. B) Provided the issuer is not in the business of lending money, issuing debt obligations at a premium will normally increase the after-tax cost of financing for the issuer. C) Issuing debt obligations at a discount results in the borrowing corporation receiving funds above the stated maturity price. D) Issuing debt obligations at a premium results in the borrowing corporation receiving funds below the stated maturity price. Answer: A Explanation: A) Provided the issuer is not in the business of lending money, issuing debt obligations at a premium will normally reduce the after-tax cost of financing for the issuer. Type: MC Topic: Premiums on debt obligations

44) Which of the following statements with respect to rental properties is NOT correct? A) Every rental property with a cost of $50,000 or more must be in a separate Class. B) The short fiscal period rules do not apply to the calculation of CCA on a rental property owned by an individual that is not part of a business. C) The deduction of CCA cannot be used to create or increase a rental loss. D) If a new rental property is acquired, put into a separate CCA class, and is used more than 90% for nonresidential purposes, it is automatically eligible for an enhanced CCA rate of 10%. Answer: D Explanation: D) If a new rental property is acquired, put into a separate CCA class, and is used more than 90% for non-residential purposes, it is eligible for an enhanced CCA rate of 10%. The 10% rate would only apply if the 90% or more test related to manufacturing and processing. Type: MC Topic: Rental property

45) Saul has two residential rental properties (Property A and Property B) that are mortgaged. Both properties are in a separate Class 1 with a CCA rate of 4%. At the beginning of the year, Property A has a UCC of $500,000 and Property B has a UCC of $1,100,000. Before consideration of CCA, Rental income from Property A is $43,000, and Property B has a rental loss of $27,000. What is the maximum amount of CCA Saul will be able to claim for the year? A) Nil. B) $16,000. C) $20,000. D) $44,000. Answer: B Explanation: B) $16,000 ($43,000 - $27,000). Type: MC Topic: Rental income

46) When determining property income for a rental property owned by an individual, which of the following should never be considered in the calculations? A) AccII provisions. B) Short fiscal period rule. C) Recapture. D) Terminal loss. Answer: B Explanation: B) Short fiscal period rule (only required when the rental property activity is a business). Type: MC Topic: Rental income

47) Rosa owns a duplex and rents both units to tenants. Which one of the following expenditures is not a current expense for income tax purposes? A) Cost of a new refrigerator. B) Cost of repairing the front stairs. C) Cost of painting the interior of unit #2. D) Interest paid on the mortgage on the duplex. Answer: A Explanation: A) Cost of a new refrigerator is a capital expenditure and only part of its cost can be claimed annually as CCA. B) Deductible current expense. C) Deductible current expense. D) Interest paid on a mortgage related to capital property (the duplex) is also a capital expenditure but it is expressly allowed as a deduction by ITA 20(1)(c). Type: MC Topic: Current vs capital expenditures

48) Fergus owns a rental property. Instead of hiring contractors he does all of the property maintenance and repairs himself, keeping careful records. Which one of the following amounts is not a deductible expense for income tax purposes? A) $700 for shrubs and flowers. B) $250 for bookkeeping services. C) $400 for lumber, paint and hardware. D) $1,000 for his labour (50 hours @ minimum wage of $20 per hour). Answer: D Explanation: D) $1,000 for his labour (50 hours @ minimum wage of $20 per hour). An individual cannot employ themselves therefore there is no genuine legal expense. Type: MC Topic: Deductible expenses

49) Aziz purchased a residential rental property on April 15, 2022. He paid $300,000 for the building. During the year he has rental property expenses of $540. He rented the property on May 1, 2022 to an individual on a long term rental basis at $2,500 per month. What is Aziz's 2022 rental income? A) $1,460. B) $7,918. C) $7,378. D) $19,460. Answer: A Explanation: A) $1,460 ($20,000 — CCA $18,000 — $540) Calculations: Rental revenue: [($2,500)(8) = $20,000 CCA: [(1.5)($300,000(4%)] = $18,000 B) $20,000 — (18,000 × 245/365) — 0 = $7,918 days is May 1 — Dec 31 (days rented) C) $20,000 — (18,000 × 245/365) — 540 = $7,378 D) $20,000 — 540 = $19,460 Type: MC Topic: Rental income

50) Shahrukh owns a residential rental building which he purchased for $200,000 in 2022. In that year, his rental income before CCA was $5,000. In 2023, his rental income before CCA was $8,000. Sharukh always minimizes his income tax by claiming the maximum available deductions. Which of the following statements is correct? A) Shahrukh has a rental loss of $3,000 in 2022. B) Shahrukh has rental income of $480 in 2023. C) Shahrukh has rental income of nil in 2023. D) Shahrukh has rental loss of $7,000 in 2022. Answer: B Explanation: B) 2022: [(1.5)($200,000)(4%)] = $12,000, UCC = $200,000 - $12,000 = $188,000 2022: $188,000 × 4% = $7,520, Rental income = $8,000 - $7,520 = $480 Type: MC Topic: Rental income

51) Which of the following statements with respect to dividends is NOT correct? A) Capital dividends can be received by individuals without income tax consequences. B) All taxable dividends paid by Canadian controlled private corporations are non-eligible dividends. C) Stock dividends are subject to the same gross up and tax credit procedures as regular cash dividends. D) Dividend tax credits are based on a fraction/percentage of the gross up on dividends received. Answer: B Explanation: B) All taxable dividends paid by Canadian controlled private corporations are non-eligible dividends. Type: MC Topic: Dividend income

52) In 2022 Thelma Evatt receives eligible dividends of $23,000. She has no other income in the year. What would be the amount of her federal income tax payable or refund on these dividends? A) $4,761 B) $3,450 C) Nil D) A $6.00 Refund Answer: C Explanation: A) [($23,000)(1.38)(15%) = $4,761 B) [($23,000)(15%)] = $3,450 C) Nil [(138%)($23,000)(15%) - (38%)($23,000)(6/11)] D) [(1.38)($23,000(15%) - (38%)($23,000)(6/11)] A $6 Refund Type: MC Topic: Dividend income

53) The federal dividend tax credit cannot be claimed by individuals if the dividends are: A) Eligible dividends paid in cash. B) Non-eligible dividends paid in cash. C) Eligible or non-eligible dividends paid as Stock dividends. D) Capital dividends. Answer: D Explanation: D) Capital Dividends. (Only eligible or non-eligible dividends are eligible for a dividend tax credit when received by individuals.) Type: MC Topic: Dividend tax credit

54) Which of the following statements is correct? A) The federal dividend tax credit is equal to 38% of eligible dividends received. B) The federal dividend tax credit is equal to 6/11 of the gross up on eligible dividends received. C) The federal dividend tax credit is equal to 15% of the non-eligible dividends received. D) The federal dividend tax credit is equal to 6/11 of the gross up on non-eligible dividends received. Answer: B Explanation: B) The federal dividend tax credit is equal to 6/11 of the gross up on eligible dividends received. Type: MC Topic: Dividend tax credit

55) Which of the following statements is correct? A) Property Income = Dividends received plus the gross-up minus the dividend tax credit. B) Property Income = Dividends received minus the gross-up minus the dividend tax credit. C) Federal Income Tax Payable = Federal income tax on grossed-up dividends minus the dividend tax credit. D) Federal Income Tax Payable = The gross up on dividends received minus the dividend tax credit. Answer: C Explanation: C) Federal Income Tax Payable = Federal tax on grossed-up dividends minus the dividend tax credit. Type: MC Topic: Dividend income

56) In 2022 Erin received eligible dividends of $800, non-eligible dividends of $600 and foreign dividends of $1,000 before 10% foreign income tax was withheld. Her 2022 property income is: A) $2,648. B) $2,694. C) $2,748. D) $2,794. Answer: D Explanation: A) [ ($800 × 115%) + ($600 × 138%) + $900 = $2,648 B) [ ($800 × 138%) + ($600 × 115%) + $900 ] = $2,694 C) [ ($800 × 115%) + ($600 × 138%) + ($1,000) ] = $2,748 D) $2,794 [($800)(138%) + ($600)(115%) + ($1,000)] Type: MC Topic: Dividend income

57) In 2022 Rolf received eligible dividends of $900 and non-eligible dividends of $600. His 2022 federal dividend tax credit is: A) $231 B) $249 C) $286 D) You can't calculate the dividend tax credit if you don't know his effective tax rate. Answer: B Explanation: A) [ ($900 × 15% × 6/11) + ($600 × 38% × 9/13] = $231 B) [ ($900)(38%)(6/11) + ($600)(15%)(9/13)] = $249 C) [ ($900 × 38% × 9/13) + ($600 × 15% × 6/11)] = $286 Type: MC Topic: Dividend tax credit

58) Sherry's marginal federal income tax rate is 29%. She lives in a province where her provincial marginal income tax rate is 17.5% and the provincial dividend tax credit is 31% of the dividend gross up. If Sherry receives an eligible dividend of $16,000 from a Canadian public corporation in 2022, how much income tax will she pay on that dividend? A) $6,150. B) $2,827. C) $5,066. D) $8,382. Answer: C Explanation: A) $6,150 [(115%)($16,000)(29% + 17.5%)] - [(15%)($16,000)(9/13+ 31%)] B) $2,827 [(38%)($16,000)(29% + 17.5%)] C) $5,066. Taxes on the grossed up eligible dividends [(138%)($16,000)(29% + 17.5%)] $10,267 Dividend tax credit [(38%)($16,000)(6/11 + 31%)] (5,201) Federal and Provincial Income Tax $ 5,066 D) $8,382 [(138%)($16,000)(29% + 17.5%)] - [(38%)($16,000)(31%)] Type: MC Topic: Dividends - income tax payable for individuals

59) Martin owns 2% of the outstanding shares of a Canadian public corporation. The corporation declared a an eligible stock dividend in 2022. The PUC of the class of shares upon which the stock dividend is paid is increased by $800,000. The receipt of the stock dividend will increase Martin's income by: A) $ 8,000. B) $16,000. C) $18,400. D) $22,080. Answer: D Explanation: A) $ 8,000 as if stock option (1/2) B) $16,000 - no gross up C) $18,400 [(115%)($800,000)(2%)] D) $22,080 [(2%)($800,000)(138%)]. Type: MC Topic: Stock dividends

60) Maria owns 500 units in a mutual trust fund that invests exclusively in bonds issued by Canadian public corporations. In 2022 the mutual trust fund received bond interest and paid income distributions of that bond interest of $1.12 per unit. Maria reinvested all of her distributions. What is the effect on Maria's 2022 net income? A) Increase of $280. B) Increase of $560. C) Increase of $773. D) $0 because the distributions were reinvested. Answer: B Explanation: A) Increase of $280 ($560 × 50%) B) Increase of $560 [(500)($1.12)] C) Increase of $773 ($560 × 138%) D) $0 because the distributions were reinvested Type: MC Topic: Mutual trust fund distributions

61) Yang owns 800 units in a mutual trust fund that invests exclusively in the shares of Canadian public corporations. In 2022, the trust fund paid a distribution of $1.50 per unit. One-half of the distribution was eligible dividend income and the remaining half was capital gains. What is the effect of the mutual fund distribution on Yang's net income? A) $600. B) $1,128. C) $1,200. D) $1,428. Answer: B Explanation: A) $600 ($1,200 × 50%) B) $1,128 [($1,200)(50%)(138%) + ( $1,200)(50%)(50%)] C) $1,200 (800 × $1.50) D) $1,428 [($1,200 × 50% × 138%) + ( $1,200 × 50%)] Type: MC Topic: Mutual trust fund distributions

62) On January 1, 2022, John Traverse acquires 12,000 units of a mutual trust fund at a cost of $720,000. In 2022, the trust fund makes a distribution of $5.00 per unit. Of this total $1.50 is a return of capital while the remaining $3.50 as interest income. John reinvests the total distribution units at a cost of $55 per unit. What is the ACB of John's units on December 31, 2022? A) $58.21 per unit. B) $53.62 per unit. C) $59.58 per unit. D) $60.00 per unit. Answer: A Explanation: A) $58.21 [($720,000 + $60,000 - $18,000) ÷ (12,000 + 1,090.91)] $60,000 reinvested at $55 per unit results in 1,090.91 units. Type: MC Topic: Mutual trust fund - ACB

63) During the current year, Pearlene Monroig, a resident of Canada, earns business income in the U.K. of €10,000 from which the British income taxes of €2,000 are withheld. Assume that the relevant exchange rate was €1.00 = $1.70 for the year. Which of the following statements is correct? A) Pearlene will have foreign business income of $13,600 and a foreign tax credit of $3,400. B) Pearlene will have foreign business income of $17,000 and no foreign tax credit. C) Pearlene will have foreign business income of $16,150 and a foreign tax credit of $2,550. D) Pearlene will have foreign business income of $17,000 and a foreign tax credit of $3,400. Answer: D Explanation: A) [(€8,000)($1.70)] = $13,600; [(€2,000)($1.70)] = $3,400 B) [(€10,000)($1.70)] = $17,000 C) [(€10,000 - €500)($1.70)] = $16,150; [(€1,500)($1.70)] = $2,550 D) Pearlene will have foreign business income of $17,000 and a foreign tax credit of $3,400. [(€10,000)($1.70)] = $17,000; [(€2,000)($1.70)] = $3,400 Type: MC Topic: Foreign source income

64) Julio has a savings account in a foreign country. The account earned $5,000 interest in 2022 but he only received $4,500 since $500 for foreign income taxes were withheld by the bank. All amounts are stated in Canadian dollars. What are the income tax consequences to Julio for 2022? A) An increase in income of $4,500 and a foreign tax credit of $0. B) An increase in income of $5,000 and a foreign tax credit of $500. C) An increase in income of $5,000 and a foreign tax credit of $75. D) Nothing since the interest was earned outside of Canada. Answer: B Explanation: B) An increase in income of $5,000 and a foreign tax credit of $500 Type: MC Topic: Foreign source income

65) Bernadette, a resident of Canada, owns 1,000 shares of a German public corporation. The corporation paid dividends of $1.50 per share in 2022 but Bernadette only received $1,275 since 15% foreign income tax was withheld in Germany. All amounts are stated in Canadian dollars. Bernadette's 2022 income from this investment is: A) $1,275. B) $1,500. C) $1,760. D) $2,070. Answer: B Explanation: A) $1,275 ITA 20(11) allows a deduction for any foreign income tax on the dividend that is in excess of 15%. Since this is not the case there would be no deduction. B) $1,500 ($1,275 ÷ 85%) or 1,000 @ $1.50 C) $1,760 ($1,275 + 38% gross-up) D) $2,070 ($1,500 + 38% gross-up) Type: MC Topic: Foreign source income

66) Ravinder's marginal federal income tax rate is 29%. He has foreign investments that results in $50,000 (Canadian) of interest income. The government of the foreign country withholds $10,000 of this amount, with the after-tax amount of $40,000 paid to Ravinder in 2022. Ravinder's 2022 federal income tax payable will increase by: (Note: assume that Ravinder would be entitled to a full foreign tax credit) A) $ 4,500. B) $ 6,275. C) $11,600. D) $14,500. Answer: B Explanation: B) $6,275 [(29%)($50,000 - $2,500) - $7,500]. The foreign tax credit is limited to $7,500, 15% of the foreign "non-business" income. The remaining $2,500 of can be claimed as a deduction against the foreign income (ITA 20(11)). Type: MC Topic: Foreign source income

67) Which of the following will provide the lowest amount of after-tax income for an individual in the top federal income tax bracket of 33%? A) $100 of interest income from Canadian bonds B) $100 of capital gains from Canadian stocks C) $100 of non-eligible dividends from Canadian corporations D) $100 of eligible dividends from Canadian corporations Answer: A Explanation: A) $100 of interest income from Canadian bonds. Interest is fully taxable whereas capital gains are only one-half taxable and both eligible and non-eligible dividends are taxed favourably because of the dividend tax credit. Type: MC Topic: Canadian source income - individuals

68) On January 1, 2022, Latkin Inc. issues bonds with a maturity amount of $1,250,000 and a maturity date of December 31, 2027. The bonds pay interest on December 31 of each year at an annual coupon rate of 2%. They are sold for proceeds of $1,150,000 for an effective yield of 3.5%. What are the income tax consequences related to this bond issue for Latkin Inc. in each of the years 2022 through 2027? How would the income tax consequences differ from the accounting treatment under ASPE or IFRS? Latkin Inc. uses the straight-line method to amortize the discount on the bonds for accounting purposes. Answer: Income Tax Consequences - The income tax consequences would be as follows: Annual Deduction - 2022 to 2027 [($1,250,000)(2%)]

$25,000

Maturity Amount Proceeds received on the issuance 2027 Loss Inclusion Rate ITA 20(1)(f) Allowable deduction (See Note)

$1,250,000 ( 1,150,000) $ 100,000 1/2 $ 50,000

NOTE - As the bonds were sold for less than 97% of their maturity amount and, in addition, the effective rate of 3.5% which is more than four-thirds of the coupon rate [(2%)(4/3) = 2.7%], only one-half of the $100,000 loss, or $50,000 would be deductible as a business deduction. The total deduction for the 6 year period would be $200,000 [($25,000)(6) interest expense + $50,000 bond discount]. Accounting Consequences - The accounting consequences would be as follows: Annual Interest [($1,250,000)(2%)] Discount Amortization ($100,000 ÷ 6) Annual Interest Expense - 2022 to 2027

$25,000 16,667 $41,667

Payment of the maturity amount in 2027 would have no accounting income consequences. Note that the total accounting deduction for the 6 year period would be $250,000 [(6)($41,667)], $50,000 more than could be deducted for income tax purposes. In the annual reconciliation of accounting income to income for tax purposes adjustments would have to be made to account for these differences. Type: ES Topic: Discount on debt obligations - ITA 20(1)(f)

69) On January 1, 2022, Leno Ltd. issues bonds for $770,000. The bonds have a maturity amount of $800,000 and mature on December 31, 2024. The coupon rate on the bonds is 3%, with the interest paid annually in December of each year. What are the income tax consequences related to this bond issue for Leno Ltd. in each of the years 2022 through 2024? How would the income tax consequences differ from the accounting treatment under ASPE or IFRS? Leno Ltd. uses the straight-line method to amortize the discount on the bonds for accounting purposes. Answer: Income Tax Consequences - The income tax consequences would be as follows: Annual Deduction - 2022 to 2024 [($800,000)(3%)]

$24,000

Maturity Amount Proceeds received on the issuance 2024 Loss Inclusion Rate Allowable Amount (See Note)

$800,000 ( 770,000) $ 30,000 1/2 $ 15,000

NOTE - As the bonds are sold for less than 97% of their maturity value, only one-half of this loss would be deductible as a business deduction. The yield test cannot be applied as the problem does not give the effective yield on the bonds. The total deduction for the 3 year period would be $87,000 [(3)($24,000) + $15,000]. Accounting Consequences - The accounting consequences would be as follows: Annual Interest [($800,000)(3%)] Discount Amortization ($30,000 ÷ 3) Annual Interest Expense - 2022 to 2024

$24,000 10,000 $34,000

Payment of the maturity amount in 2024 would have no accounting income consequences. The total deduction for the 3 year period would be $102,000 [(3)($34,000)], $15,000 more than could be deducted for income tax purposes. In the annual reconciliation of accounting income to income for tax purposes adjustments would have to be made to account for these differences. Type: ES Topic: Discount on debt obligations - ITA 20(1)(f)

70) On January 1 of the current year, Dryer Inc. issues 8 year bonds payable with a maturity amount of $1,500,000. The bonds have a coupon rate of 14%, pay interest on January 1 of each year, and are sold for $1,750,000. The Company has a December 31 year end. Determine the current year income tax consequences under each of the following assumptions: • Dryer is in the business of lending money. • Dryer is not in the business of lending money. Answer: The income tax consequences under each of the two assumptions would be as follows: Money Lender - In this case, the premium would be treated as business income in the year of receipt. The annual interest deduction for the year would be $210,000 [(14%)($1,500,000)]. Not a Money Lender - In this case, the premium would have no income tax consequences on the receipt of the premium and no income tax consequences when the bonds mature. The receipt of the premium is treated as a capital receipt of $250,000 which is not required to be included in income. Type: ES Topic: Premiums on debt obligations

71) On January 1, 2022, Desay Inc. issues 5 year bonds payable with a maturity amount of $900,000. They have a coupon rate of 12%, pay interest on January 1 of each year, and are sold for $1,200,000. The Company has a December 31 taxation year end. Determine the current year income tax consequences under each of the following assumptions: • Desay is in the business of lending money. • Desay is not in the business of lending money. Answer: The tax consequences under each of the two assumptions would be as follows: Money Lender - In this case, the premium of $300,000 would be treated as business income in the year of receipt. The annual interest expense for the year would be $108,000 [(12%)($900,000)]. Not a Money Lender - In this case, the premium would have no income tax consequences on the receipt of the premium and no income tax consequences when the bonds mature. The receipt of the premium is treated as a capital receipt of $250,000 which is not required to be included in income. The annual interest expense for the year would be $108,000 [(12%)($900,000)]. Type: ES Topic: Premiums on debt obligations

72) On June 1, 2022, Mr. Michael Leiner acquires a newly issued debt obligation with a maturity amount of $80,000. It matures on May 31, 2028 and pays interest at an annual rate of 7%. Payment for the first three and one-quarter years of interest is due on August 31, 2025, with interest for the remaining two and three-quarters years payable on the maturity date. What amount of interest will Mr. Leiner have to include in his income for each of the 2022 through 2028 taxation years? Answer: The total interest income over the six year period would be $33,600 [($80,000)(7%)(6 years)]. The interest income would be included in the following years: Year 2022 2023 2024 2025 2026 2027 2028 Total

Interest Paid Nil Nil Nil $18,200 Nil Nil 15,400 $33,600

Interest Reported Nil $ 5,600 5,600 7,000 4,200 5,600 5,600 $33,600

2022 - As no anniversary date occurred and no interest was received in 2022, no interest will be required to be included in income. 2023 - The first anniversary date occurs on May 31 and this requires the recognition of $5,600 [(7%)($80,000)] of interest income. 2024 - The second anniversary date of May 31 occurs and this requires the recognition of an additional $5,600 of interest income. 2025 - The third anniversary date requires the recognition of $5,600 and, in addition, an $18,200 [(7%)($80,000)(3.25 years)] interest payment is received. As $16,800 [(3)($5,600)] of this amount has been included in income on the three anniversary dates, only $1,400 of this amount will is added to income. This gives a total for the year 2025 of $7,000 ($5,600 + $1,400). 2026 - The anniversary date will require recognition of $5,600. However, only $4,200 of this amount will be included in income for the year since as $1,400 of the annual interest of $5,600 was included in income in 2025. 2027 - $5,600 will be recognized on the anniversary date. 2028 - A payment of $15,400 [(2.75)($5,600)] will be received. As $9,800 ($4,200 + $5,600) of the amount received has already been recorded in income in the two previous anniversary dates, the total for 2028 will be $5,600 ($15,400 - $9,800). Type: ES Topic: Interest income - annual accrual rules

73) Ms. Marilyn Lox invests in a newly issued debt obligation on April 1, 2022. It has a maturity amount of $50,000, matures on March 31, 2026, and pays interest at an annual rate of 5%. The terms of the debt obligation call for payment of interest for the first two and one-half years on September 30, 2024. The remaining interest is paid at the maturity date. What amount of interest will Ms. Lox have to include in her income for the taxation years 2022 to 2026? Answer: The total interest to be recorded on the instrument for the four year period will be $10,000 [($50,000)(5%)(4 years)]. It will be allocated as follows: Year 2022 2023 2024 2025 2026 Total

Interest Paid Nil Nil $ 6,250 Nil 3,750 $10,000

Interest Reported Nil $ 2,500 3,750 1,250 2,500 $10,000

2022 - As there is no anniversary date and no interest was received, no interest will have to be included in Ms. Lox's income for 2022. 2023 - The first anniversary date occurs on March 31 of this year and requires the recognition of $2,500 [(5%)($50,000)] of interest. 2024 - The second anniversary date occurs on March 31 of this year and requires the recognition of $2,500 [(5%)($50,000)] of interest. In addition, on September 30 of this year, an interest payment of $6,250 [(5%)($50,000)(2.5)] is received. As $5,000 of this amount has been recognized on previous anniversary dates, only an additional $1,250 ($6,250 - $5,000) must be included in income because of the payment. This gives a total of $3,750 ($2,500 + $1,250) to be included in Ms. Lox's income for 2024. 2025 - The third anniversary date occurs on March 31 of this year and requires recognition of an additional $2,500 [(5%)($50,000)]. However, $1,250 of this amount was included in 2024, leaving only $1,250 to be included in income for 2025. 2026 - The fourth anniversary date occurs on March 31 of this year and requires recognition of an additional $2,500 [(5%)($50,000)] of interest. In addition, a payment of $3,750 [(5%)($50,000)(1.5)] is received. As $1,250 of this amount has been included in 2025 and the remaining $2,500 must be recognized because of the fourth anniversary date, this payment does not require the recognition of any additional amounts of interest income. Type: ES Topic: Interest income - annual accrual rules

74) On May 1, 2022, Mrs. Anna White purchases bonds with a maturity amount of $40,000 at par. These bonds pay semi-annual interest of $2,000 on June 30 and December 31 of each year. She purchases the bonds for $41,326, which includes $1,326 of interest accrued to the purchase date. She holds the bonds for the remainder of the year, receiving both the June 30 and December 31 interest payments. What amount of interest must be included in her income for 2022? Answer: Mrs. White will have to include the full $4,000 received in the year. However, under ITA 20(14) she is eligible for a deduction of $1,326 [($2,000)(120/181)], reflecting the interest that was accrued on the bonds at the time of the purchase. She will be required to include $2,674 ($4,000 - $1,326) in her income for 2022. The $1,326 that is not included in her income is included in the income of the seller. Type: ES Topic: Accrued interest on sale of debt obligations - ITA 20(14)

75) Lexor Inc. has bonds outstanding with a maturity date of December 31, 2030. The bonds pay semiannual interest at an annual rate of 5%. Payments of $2,500 are made on June 30 and December 31 of each year. The bonds are currently trading at their maturity amount. On April 1, 2022, Arnold Wexler purchases some of these bonds. He pays $101,243, which includes accrued interest of $1,243, for bonds with a maturity amount of $100,000. He holds the bonds for the remainder of the year, receiving both the June 30 and December 31 interest payments. What amount of interest will be required to be included in his income for 2022? Answer: In 2022, Mr. Wexler will receive interest of $5,000 [(5%)($100,000)]. However, under ITA 20(14) he can deduct the $1,243 [($2,500)(90/181)] of interest that was accrued when the bonds were acquired on April 1, 2022. He will include $3,757 ($5,000 - $1,243) as interest income for 2022. The $1,243 that is not included in her income is included in the income of the seller. Type: ES Topic: Accrued interest on sale of debt obligations - ITA 20(14)

76) Alex Bodvin acquires a residential rental property on June 1, 2022 at a cost of $423,000. Of this total, $132,000 is attributable to the land and $291,000 to the building. He immediately spends $42,000 to make major improvements to the property. Rents for the year total $32,000, while rental expenses other than CCA total $27,500. This is the only rental property owned by Mr. Bodvin. Determine the maximum CCA that can be claimed for 2022. In addition, determine Mr. Bodvin's minimum rental income for the year. Answer: Rental income for Mr. Bodvin will be calculated as follows: Rents Rental Expenses other than CCA Rental Income before CCA CCA (See Note) Rental Income

$32,000 ( 27,500) $ 4,500 ( 4,500) Nil

Note - Maximum CCA would be $19,980 [(150%)(4%)($291,000 + $42,000)]. However, the maximum CCA that can be claimed is limited to the rental income before CCA of $4,500. Type: ES Topic: Rental income

77) Alice Baxter acquires a residential property on May 1, 2022. The cost of the property is $385,000, with $95,000 attributable to the land and $290,000 to the building. She spends $3,500 to paint the interior and exterior of the building. In 2022, rents total $29,000 and expenses other than CCA and the cost of painting total $20,100. Determine the maximum CCA that can be claimed for 2022. In addition, determine Ms. Baxter's rental income for 2022. Answer: Rental income will be calculated as follows: Rents Rental Expenses other than CCA and painting Painting Rental Income before CCA CCA (See Note) Rental Income

$29,000 ( 20,100) ( 3,500) $ 5,400 ( 5,400) Nil

Note - Maximum CCA would be $17,400 [(150%)(4%)($290,000). However, the maximum CCA that can be deducted is limited to the rental income before CCA of $5,400. Type: ES Topic: Rental income

78) In 2022, Mr. Franz Schlitz receives $23,500 in eligible dividends from Canadian public corporations. His income is such that this additional amount will be subject to federal income tax of 29% plus 14% for provincial income tax. On eligible dividends, the province provides a dividend tax credit equal to 25% of the gross up. Determine the total federal and provincial income tax that will be payable on these dividends and the after tax retention. Answer: Eligible Dividends Received $23,500 Gross Up (38%) 8,930 Taxable Dividends $32,430 Combined Federal/Provincial income tax (29% + 14%) 43% Income Tax before Credit $13,945 Dividend Tax Credit [(6/11 + 25%)($8,930)] ( 7,103) Income Tax Payable $ 6,842 The after tax retention is $16,658 ($23,500 - $6,842). Type: ES Topic: Eligible dividend income

79) Mr. Martin Pabst owns publicly traded shares which, in 2022, paid eligible dividends of $10,200. His taxable income for 2022 exceeds $300,000 and he lives in a province where the maximum individual income tax rate is 16%. The provincial dividend tax credit on eligible dividends is equal to 29% of the gross up. Determine the total federal and provincial income tax that will be payable on these dividends and his after tax retention. Answer: Eligible Dividends Received $10,200 Gross Up (38%) 3,876 Taxable Dividends $14,076 Combined Federal/Provincial Income Tax (33% + 16%) 49% Tax before Credit $ 6,897 Dividend Tax Credit [(6/11 + 29%)($3,876)] ( 3,238) Income Tax Payable $ 3,659 The after tax retention is $6,541 ($10,200 - $3,659). Type: ES Topic: Eligible dividend income

80) In 2022, Ms. Marion Blatz receives $5,600 in non-eligible dividends from taxable Canadian corporations. Her income is such that this additional amount will be subject to a federal income tax rate of 26% and a provincial income tax rate of 10%. The province provides a dividend tax credit equal to 38% of the gross up. Determine the total federal and provincial income tax that will be payable on these dividends and the after tax retention. Answer: Federal and provincial income tax payable on these dividends would be calculated as follows: Non-Eligible Dividends Received Gross Up (15%) Taxable Dividends Combined Federal/Provincial Income Tax (26% + 10%) Tax before Credit Dividend Tax Credit [(9/13 + 38%)($840)] Income Tax Payable

$5,600 840 $6,440 36% $2,318 ( 901) $1,417

The after tax retention is $4,183 ($5,600 - $1,417). Type: ES Topic: Non-eligible dividend income

81) In 2022, Ms. Andrea Molsen receives non-eligible dividends of $14,200. Her income is such that this additional amount will be subject to a federal income tax taxed of 26% and a 7% provincial income tax rate. The provincial dividend tax credit on non-eligible dividends is equal to 25% of the dividend grossup. Determine the total federal and provincial income tax that will be payable on these dividends and the after tax retention. Answer: Federal and provincial income tax payable on these dividends would be calculated as follows: Non-Eligible Dividends Received Gross Up (15%) Taxable Dividends Combined Federal/Provincial Income Tax (26% + 7%) Tax Before Credit Dividend Tax Credit [(9/13 + 25%)($2,130)] Income Tax Payable

$14,200 2,130 $16,330 33% $ 5,389 ( 2,007) $ 3,382

The after tax retention is $10,818 ($14,200 - $3,382). Type: ES Topic: Non-eligible dividend income

82) On January 1, 2022, Jeanine Dorset purchases 1,700 units of the Blackwell Mutual Trust Fund at $37 per unit, a total cost of $62,900. In 2022, the trust distributes $2.75 per unit, $0.85 of which is a return of capital and $1.90 of which is interest income. Jeanine has asked the trust to reinvest all distributions. The $2.75 per unit distribution was reinvested at a cost of $32 per additional unit. What are the income tax consequences to Jeanine with respect to the 2022 distribution and its reinvestment? What is the ACB per unit subsequent to the reinvestment? Answer: Jeanine will include interest of $3,230 [(1,700)($1.90)] in her income for 2022. The ACB per unit is calculated as follows: Original Investment - Purchase Cost Reinvestment of Distribution [(1,700)($2.75)] Return Of Capital [(1,700)($0.85)] Total ACB

$62,900 4,675 ( 1,445) $66,130

Original Investment - Number of Units Reinvestment of Distribution ($4,675 ÷ $32) Number of Units

1,700 146 1,846

The ACB per unit is therefore $35.82 ($66,130 ÷ 1,846) per unit. Type: ES Topic: Mutual trust fund - ACB

83) On June 1, 2022 Jerry Driggs purchases 2,500 units of the Belle Mutual Trust Fund at $12 per unit. In September, 2022, the trust makes a distribution of $1.50 per unit, of which $1.00 represents a return of capital and $0.50 is interest income. Mr. Driggs decides to reinvest the entire distribution at a cost of $12.50 per additional unit. What are the income tax consequences to Mr. Driggs with respect to the 2022 distribution and subsequent reinvestment? What is the ACB per unit subsequent to the reinvestment? Answer: Jerry will include $1,250 [(2,500)($0.50)] in income for 2022. The ACB calculations are as follows: Original Investment - Purchase Cost Reinvestment of Distribution [(2,500)($1.50)] Return of Capital [(2,500)($1.00)] Total ACB

$30,000 3,750 ( 2,500) $31,250

Original Investment - Number of Units Reinvestment of Distribution ($3,750 ÷ $12.50) Total number of Units

2,500 300 2,800

This will result in an average cost of $11.16 ($31,250 ÷ 2,800) per unit. Type: ES Topic: Mutual trust fund - ACB

84) John Bordy owns 2,200 units of the DRC Growth Fund, a mutual trust fund. These units were purchased at a cost of $8.15 per unit, for a total of $17,930. The ACB for these units has not changed since their purchase. On December 12 of the current year, the Fund has an interest income distribution of $0.27 per unit, resulting in an addition of $594 to John's account. All of this distribution is reinvested at a purchase price per unit of $10.40. What is the ACB per unit subsequent to the reinvestment? Answer: Given the purchase price per unit is $10.40, the reinvestment will result in Mr. Bordy receiving 57.12 ($594 ÷ $10.40) additional units. This will leave him with 2,257.12 units with a total ACB of $18,524 ($17,930 + $594). His ACB per unit subsequent to the reinvestment is $8.21 ($18,524 ÷ 2,257.12). Type: ES Topic: Mutual trust fund - ACB

85) Arial Horton owns 3,400 units of the Canadian Growth Fund, a mutual trust fund. The total cost of the 3,400 units was $17,000. The ACB of these units has not changed since they were purchased. In June of the current year, the fund has an interest income distribution of $0.45 per unit. All of this distribution is reinvested at a unit price of $5.10. What is the ACB per unit subsequent to the reinvestment? Answer: The amount of the distribution would be $1,530 [(3,400)($0.45)]. Reinvestment of this amount at $5.10 per unit would result in Ariel receiving 300 additional units. Given this, the ACB per unit would be $5.01 [($17,000 + $1,530) ÷ (3,400 + 300)]. Type: ES Topic: Mutual trust fund - ACB

86) Melific Ltd. has 4,500,000 common shares outstanding. Jerry Fry acquired 5% of these shares at a cost of $19 each. During the current year, the Company declares a 6% stock dividend which it designates as eligible. At this time the shares are trading at $21 per share. The stock dividend results in an increase in the paid up capital (PUC) of $21 per stock dividend share. What are the income tax consequences to Jerry Fry of the receipt of the stock dividend? Your answer should include the ACB per share to Jerry subsequent to the receipt of the stock dividend. Answer: The required calculations would be as follows: Original number of shares owned [(5%)(4,500,000)] Stock Dividend Percentage Number of stock dividend shares Per share increase in PUC Eligible Stock Dividend Received Gross Up 38% Taxable Eligible Dividend

225,000 6% 13,500 $ 21 $283,500 107,730 $391,230

There would be a federal dividend tax credit of $58,762 [(6/11)($107,730)]. The $283,500 stock dividend would be considered the cost of each stock dividend share. The ACB per share would be calculated as follows: [($4,275,000 + $283,500) ÷ (225,000 + 13,500)] = $19.11 Type: ES Topic: Stock dividends

87) Jupiter Inc. has 1,800,000 common shares outstanding. Harry Keller acquired 8% of these shares at a cost of $11 each. During the current year, the Company declares an 8% stock dividend which it designates as eligible. At this time the shares are trading at $12 per share. The Company increases paid up capital (PUC) by $12 per share. What are the income tax consequences to Harry Keller of the receipt of the stock dividend? Your answer should include the ACB per share subsequent to the receipt of the stock dividend. Answer: The required calculations would be as follows: Original shares owned [(8%)(1,800,000)] Stock Dividend Percentage Number of stock dividend shares Per Share increase in PUC Stock Dividend Received Gross Up 38% Taxable Eligible Dividend

144,000 8% 11,520 $ 12 $138,240 52,531 $190,771

There would be a federal dividend tax credit of $28,653 [(6/11)($52,531)]. The $138,240 stock dividend would be added to the $1,584,000 [($11)(144,000)] original cost of the shares. The ACB per share would be calculated as follows: [($1,584,000 + $138,240) ÷ (144,000 + 11,520)] = $11.07 Type: ES Topic: Stock dividends

88) Isaac Lemming owns foreign sources of income that earns $27,000 in income in the current year. As the foreign jurisdiction withholds 22% in income tax, he only receives $21,060. He has other income in the year such that this foreign source income will be subject to a federal income tax rate of 33%. How much will his income increase as a result of the foreign source income and how much additional federal income tax will he be required to pay, assuming that: A. the foreign source income is non-business income. B. the foreign source income is business income. For each part A and B assume that the full amount of any foreign tax deduction or credit is based upon the foreign income tax withheld. Answer: Part A - If the foreign source income is non-business income such as interest income, the foreign tax credit is limited to 15% of the foreign non-business income. Given this, the required calculations would be as follows: Amount Received Withholdings [(22%)($27,000)] Foreign Non-Business Income Deduction [(22% - 15%)($27,000)] Increase in nat and taxable income Federal Income Tax Federal Income Tax before Credit Foreign Tax Credit [(15%)($27,000)] Federal Income Tax Payable

$21,060 5,940 $27,000 ( 1,890) $25,110 33% $ 8,286 ( 4,050) $ 4,236

Part B - If the foreign source income is business income, the full amount of the withholdings can be used as a foreign tax credit. Given this, the required calculations are as follows: Amount Received Withholdings [(22%)($27,000)] Increase in net and taxable income Federal Income Tax Federal Income Tax before Credit Foreign Tax Credit (Amount Withheld) Federal Income Tax Payable

$21,060 5,940 $27,000 33% $ 8,910 ( 5,940) $ 2,970

Type: ES Topic: Foreign source income

89) Isabelle Lemming owns foreign sources of income that results in $34,000 of income in the current year. Because of income tax withholdings of 20% by the foreign jurisdiction, she only receives $27,200 of this amount. These earnings are in addition to over $250,000 in employment income. Determine the amount by which this foreign income would increase Isabelle's taxable income and federal income tax payable, assuming that: A. the foreign source income is non-business income. B. the foreign source income is business income. For each part A and B assume that the full amount of any foreign tax deduction or credit is based upon the foreign income tax withheld. Answer: Part A - If the foreign source income is non-business income, the foreign tax credit is limited to 15% of the foreign non-business income. Given this, the required calculations would be as follows: Amount Received Withholdings [(20%)($34,000)] Foreign source income Deduction [(20% - 15%)($34,000)] Increase in taxable income Federal income tax Federal Income Tax Payable before Credit Foreign Tax Credit [(15%)($34,000)] Federal Income Tax Payable

$27,200 6,800 $34,000 ( 1,700) $32,300 33% $ 10,659 ( 5,100) $ 5,559

Part B - If the foreign source income is business income, the full amount of the foreign income taxes withheld can be used as a foreign tax credit. The required calculations are as follows: Amount Received Withholdings [(20%)($34,000)] Increase in taxable income Federal Income Tax Federal Income Tax Payable before Credit Foreign Tax Credit (Amount Withheld) Federal Income Tax Payable

$27,200 6,800 $34,000 33% $ 11,220 ( 6,800) $ 4,420

Type: ES Topic: Foreign source income

90) Each of the following independent Cases involves the payment of interest and the determination of whether the interest will be deductible. Case A - Thomas Sanjuan finances the purchase of an income producing property. The cost of the property is $435,000 and Thomas finances 100% of the purchase. The investment proves successful, with the property being sold for $610,000. He uses the sale proceeds to purchase two properties with costs of $495,000 and $115,000 respectively. Is the interest expense on the original loan still deductible and if yes how does this occur? Case B - Tamara Sherrell has a trading account which holds shares she she owns. in various companies The shares are currently worth $1,500,000. She would like to purchase a new Bentley for $325,000. Her bank will finance her purchase with a $325,000 loan at 8.3%. However, as her shares are in a margin account, she can use her margin balance to borrow the $325,000 at a rate of 3.25%. She chooses the latter approach. During the year, she pays interest on this loan of $10,500. Also during the year, the securities in her trading account pay total dividends of $75,000. Can she deduct the $10,500 of interest against the dividend income generated by the securities in her trading account? Explain your conclusion. Case C - Manuel Pettie takes out a mortgage on his home for $500,000 and immediately transfers the entire amount to his brokerage account to invest in publicly traded shares. Relying solely on company names that come to him in his dreams, he makes some very bad investment choices. As a result, one year later, the value of the shares have declined to only $240,000. Feeling very discouraged, he sells all of the shares and uses the sale proceeds to reduce the loan balance. He will not have the resources to pay off the remaining $260,000 until he receives $500,000 from his trust fund in two years. Is the interest on the mortgage deductible before he sells the shares? If so, does this change after he sells the shares? Explain your conclusion. Case D - Bo Godina borrows $220,000 in order to purchase an income producing property for that same amount. The results from this investment are not promising and, as a result, he sells the investment for $150,000. He uses these funds to buy two properties. The first property costs $35,000, while the second costs $115,000. How will the $220,000 in borrowing be traced to the two properties?

Answer: Case A The loan on the original property relates to that property or that source of income. Once the property is sold the connection between the loan and the property is severed. Technically no further interest could be deducted as a result. However the courts and the CRA have provided that the interest remains deductible as long as the funds borrowed can be traced to another source of income. In this situation, since the sale proceeds are traceable to other sources of income the interest remains deductible. The CRA provides flexibility in come situations to effectively connect the initial borrowed funds to a particular source of income where two or more sources of income have replaced the initial source. Since in this case the sale proceeds exceed the loan balance the loan can be connected to the new properties on a discretionary basis. The individual could allocate all of the loan balance to the $495,000 property, with none going to the $115,000 property. Similarly, $115,000 could be connected to the $115,000 property, leaving $320,000 for the $495,000 property. There are, many other possible variations that are acceptable to the CRA. Case B While the dividend paying shares serve as collateral for her car loan, the direct use of the loan is to purchase the Bentley which is personal property. As this is not an income earning property, she cannot deduct the $10,500 in interest. Case C Although interest to purchase a principal residence is not generally deductible, the direct use of the funds from the mortgage was to purchase income producing property. As a result, the interest is deductible. Under ITA 20.1 (disappearing source provision), the $260,000 balance remaining after the sale of the shares will be deemed to continue to be used to produce income. Therefore, the interest can continue to be deducted after the sale of the shares until the loan balance is paid off. Case D The loan on the original property relates to that property or that source of income. Once the property is sold the connection between the loan and the property is severed. Technically no further interest could be deducted as a result. However the courts and the CRA provide that the initial interest can continue to be deducted as long as the original borrowed funds can be traced to income earning property. Since the sale proceeds were all reinvested in income earning properties the necessary connection has been maintained ensuring that interest on the original borrowed funds remains deductible. The CRA provides some flexibility where the sale proceeds are used to purchase two or more income earning properties. In this situation since the individual amount of both replacement properties is less than the amount borrowed, a pro-rata allocation of the borrowed money. must be used. In this case, the result would be connecting $51,333 [($35,000 ÷ $150,000)($220,000)] of the existing loan balance to the first property, and connecting $168,667 [($115,000 ÷ $150,000)($220,000)] to the second property. Type: ES Topic: Interest deductibility - ITA 20(1)(c)

91) In 2022, Ms. Jessica Roberts owns four residential rental properties. Information on these properties is as follows:

CCA Class Capital Cost of Building January 1, 2022 UCC

124 Glengarry Avenue 3 $827,000 $563,086

4251 Oak Street 1 $456,000 $411,845

1322 Curry Avenue 1 $246,000 $213,018

436 Rankin Avenue 1 $947,000 Nil

Rents and rental expenses, not including CCA, for the 2022 taxation year are as follows:

Rents Property Taxes Interest Charges Other Expenses (Not including CCA) Rental Income (Loss) Before CCA

124 Glengarry Avenue $50,400 ( 12,400) ( 24,000)

4251 Oak Street $37,200 ( 6,840) ( 10,200)

1322 Curry Avenue $12,800 ( 9,690) ( 4,200)

436 Rankin Avenue $63,600 ( 14,205) ( 41,300)

( 5,400)

( 8,400)

( 1,100)

( 3,600)

$ 8,600

$11,760

($ 2,190)

$ 4,495

Other Information: 1. In 2022, Ms. Roberts spent $63,000 on improvements to the property at 124 Glengarry Avenue. While none of the changes were required, the tenant insisted on the changes before he was prepared to renew his lease. These improvements will also enhance the value of this property. 2. The building at 4251 Oak Street was sold in 2022 for $523,000. At this time, the value of the land on which the building was situated was equal to its ACB. 3. The building at 1322 Curry Avenue was sold in 2022 for $185,000. At this time, the value of the land on which the building was situated was equal to its ACB. Ms. Roberts had furnished this property several years ago at a cost of $23,000. The Class 8 UCC at January 1, 2022 was $3,598. Given the condition of the furnishings, they were simply given to the former tenants who agreed to take them when they moved out. 4. The building at 436 Rankin Avenue was purchased in 2022 for $1,147,000, including an estimated value for the land of $200,000 and $947,000 for the building. Required: Calculate Ms. Robert's minimum 2022 rental income. You should provide a separate CCA calculation for each property and specify how much CCA should be claimed for each building. Include in your solution any income tax consequences associated with the sale of the two buildings and the disposition of the furniture.

Answer: Rental Income For the four properties, CCA and other information related to disposals, would be calculated as follows: 124 Glengarry Avenue $563,086 63,000

436 Rankin Avenue Nil $ 947,000

4251 Oak Street $411,845

1322 Curry Avenue $213,018

January 1, 2022 UCC Additions AccII Adjustments:(Note) [(50%) of $63,000 & $947,000] 31,500 473,500 CCA Base $657,586 $1,420,500 Rate 5% 4% Maximum CCA for 2021 $ 32,879 $ 56,820 Note: The capital improvements qualify for the AccII because the capital expenditure is treated as a separate property acquisition and no CCA would have previously been claimed by anyone with respect to this separate property. This result is consistent with retroactive changes made to the AccII that became law in June of 2021.

January 1, 2022 UCC Dispositions - Lesser of: $456,000 Cost and $523,000 POD $246,000 Cost and $185,000 POD Subtotal Recapture (Note 1) Terminal Loss (Note 2) CCA Base

( 456,000) ($ 44,155) 44,155 Nil

( 185,000) $ 28,018 ( 28,018) Nil

Note 1 - As each rental property with a cost of $50,000 or more must be allocated to a separate CCA Class, the negative balance for the 4251 Oak Street property must be included in income as recapture. Note 2 - As no property remains in the separate class for 1322 Curry Avenue, the positive balance that remains at December 31, 2022 can be claimed as a terminal loss. The terminal loss for Class 8 would be calculated as follows: January 1, 2022 UCC Disposition - Lesser of: • Cost = $23,000 • POD = Nil Balance with no remaining property in the class Terminal Loss on Class 8 property UCC January 1, 2023

$3,598

Nil $3,598 ( 3,598) Nil

The calculation of rental income would be as follows: Income (Loss) before CCA 124 Glengarry Avenue 4251 Oak Street 1322 Curry Avenue 436 Rankin Avenue Recapture Terminal Loss on Class 1 Terminal Loss on Class 8 Income Before CCA CCA (Note 3) 2022 Rental Income

$ 8,600 11,760 ( 2,190) 4,495 44,155 ( 28,018) ( 3,598) $35,204 ( 35,204) Nil

Note 3 - Maximum available CCA is $89,699 ($32,879 + $56,820). However, as CCA cannot be used to create or increase a rental loss, the CCA deduction is limited to $35,204, the rental income before CCA. With respect to the question of the Class from which this amount will be deducted, when CCA is not maximized, the general rule is to deduct the amount taken from the Class with the lowest CCA rate. This means the entire $35,204 should be claimed from the Class 1 property. If Ms. Roberts had any plans to sell 436 Rankin in the near future, it might be more beneficial to consider claiming the maximum CCA on the 124 Glengarry Avenue building instead. Taxable Capital Gain While the rental income is nil, there would be a taxable capital gain of $33,500 [(1/2)($523,000 - $456,000)] on the disposition of the 4251 Oak Street building. Note that the ITA doe snot permit capital losses on the sale of depreciable property therefore there is no capital loss on the sale of the building at 1322 Curry Avenue. The difference between its capital cost of $246,000 and the POD of $185,000 has been claimed through CCA and the terminal loss that arose when it was sold. Type: ES Topic: Rental income including CCA

92) Mr. Beau Truett has always believed that real estate was a better investment than equity securities. While real estate has a downside in its lack of liquidity, it has three major advantages: • Current income taxes can be minimized or avoided by claiming CCA. In fact, if properties are heavily financed, the interest expenses can result in losses that can be used to reduce income tax on other income. • Over long periods of time, gains can be substantial. Further, as these gains are, in general, capital gains, only one-half will be taxable. • Income tax on any appreciation in value is only subject to income tax when a property is sold. Based on these views, Beau has, for many years, actively invested in rental properties. At the beginning of 2022, he owns four rental properties. Relevant information on these properties for the 2022 taxation year is as follows: 13 Jane - The cost of this property was $825,000, of which $650,000 was allocated to the building and $175,000 for the land. It is in a separate Class 1 with a January 1, 2022 UCC of $531,044. In 2022, the rental income, before the deduction of CCA, was calculated as follows: Rents Property Taxes Mortgage Interest Other Expenses (Other than CCA) Rental Income (Before CCA)

$42,000 ($ 7,000) ( 16,250) ( 8,600)

( 31,850) $10,150

146 Bronsen - This property has been owned for many years and had an original cost of $48,000. This was divided into $36,000 for the building and $12,000 for the land. It is included in a single Class 3, along with 27 Front (see next property). The UCC balance in this Class on January 1, 2022 is $21,000. The property was sold in 2022 for $146,000, with $110,000 for the building and $36,000 for the land. Prior to its sale, rental income was determined as follows: Rents Property Taxes Mortgage Interest Other Expenses (Other than CCA) Rental Income (Before CCA)

($1,500) ( 1,400) ( 1,100)

$13,500

( 4,000) $ 9,500

27 Front - This property had an original cost of $58,000 with $42,000 attributable to the building and $16,000 to the land. It is included in the Class 3 balance with 146 Bronsen. In 2022, the property had rental income, before the deduction of CCA, calculated as follows: Rents Property Taxes Mortgage Interest Other Expenses (Other than CCA) Rental Income (Before CCA)

($ 1,800) ( 2,600) ( 2,100)

$16,700

( 6,500) $10,200

4826 Jarvus - This property had an original cost of $750,000 with $600,000 attributable to the building and $150,000 to the land. It is included in a separate Class 1 with a January 1, 2022 UCC balance of $479,439. In 2022, the rental income, before the deduction of CCA, was calculated as follows:

Rents Property Taxes Mortgage Interest Other Expenses (Other than CCA) Rental Loss (Before CCA)

($ 6,200) ( 15,250) ( 7,400)

$ 8,400

( 28,850) ($20,450)

Unlike the other properties, this property was rented fully furnished. However, when this unit became empty early in 2022, Beau had considerable difficulty finding a new tenant. Finally, in October 2022, he decided to replace the aging furnishings and appliances and repaint the property. With the improvement in appearance, he was able to rent the property in late November 2022. The old furnishings and appliances, all Class 8 property, were purchased at a cost of $46,000. The January 1, 2022 UCC balance was $21,197. In 2022, all of the Class 8 properties were replaced at a cost of $51,000. A generous trade-in allowance of $5,000 was provided. Beau has received an unsolicited offer for 4826 Jarvus that would result in a substantial capital gain. Although he has not made up his mind, he thinks he could use the funds to purchase real estate that would provide him with a better return. Required: Determine the income tax consequences for the 2022 taxation year of the operation of these rental properties, the sale of 146 Bronsen, and replacement of the furnishings in 4826 Jarvus. Your answer should include Beau's 2022 rental income and the January 1, 2023 UCC balances for the rental properties. Assume that the rental activity would be considered a rental business.

Answer: Class 3 Recapture As the buildings (not including the land) at 146 Bronsen and 27 Front each cost less than $50,000, they could be grouped into a single CCA Class 3 since the two properties are part of a rental business. If the activity was not considered a rental business then each property would be in a separate class based upon each source of income. When 146 Bronsen is sold, the results would be as follows: Class 3 Balance - January 1, 2022 Disposition - Lesser of: • Capital Cost = $36,000 • POD = $110,000 Negative UCC Balance = Recapture of CCA

$21,000

( 36,000) ($15,000)

This would leave a balance of nil in Class 3, resulting in no CCA being available on this Class in 2022. Rental Income Before CCA The rental income before CCA can be calculated as follows: Rental Income before CCA 13 Jane 146 Bronsen 27 Front 4826 Jarvus Rental Income before CCA and Recapture Recapture of Class 3 CCA - 146 Bronsen Rental Income before CCA

$10,150 9,500 10,200 ( 20,450) $ 9,400 15,000 $24,400

CCA Deduction Maximum CCA on the furniture would be calculated as follows: Class 8 Balance - January 1, 2022 Disposition - Lesser of: • Cost = $46,000 • POD = $5,000 Additions AccII Adjustment [(50%)($46,000)] CCA Base Rate Maximum 2022 Class 8 CCA (4826 Jarvus)

$21,197

($ 5,000) 51,000

46,000 23,000 $90,197 20% $18,039

Maximum available CCA on the three remaining buildings would be calculated as follows: 13 Jane [(4%)($531,044)] 4826 Jarvus [(4%)($479,439)] 27 Front (UCC of Class 3 is Nil) Maximum 2022 CCA

$21,242 19,178 Nil $40,420

The deduction of CCA cannot be used to create or increase a rental loss and, as a consequence, the actual deduction would be limited in this situation to $24,400, the amount of rental income on the four properties before CCA. Since this is less than the maximum CCA available of $58,459 ($18,039 + $40,420), a decision must be made as to whether the $24,400 should be claimed from Class 8 and/or Class 1. The general rule is that CCA should be claimed first on property with the lower CCA rate in order to leave larger potential deductions in the future. This would suggest taking the limited amount of $24,400 from Class 1 where the CCA rate is only 4%. There are two Class 1 properties, 13 Jane and 4826 Jarvus, each in a separate class. The maximum CCA on 13 Jane is $21,242, leaving a need for an additional $3,158 ($24,400 - $21,242) to reduce rental income to nil. As 4826 Jarvus may be sold, any CCA claimed on this property will be recaptured in the year of disposition. Given this, it would be preferable to claim the additional CCA amount from Class 8 as there will be no recapture on the disposition of the properties in this class. Rental Income and UCC Balances The calculation of rental income would be as follows: Rental Income before CCA Maximum CCA (Class 8 $3,158 + Class 1 $21,242) 2022 Rental Income

$24,400 ( 24,400) Nil

The January 1, 2023 UCC balances would be calculated as follows:

December 31, 2022 UCC Additions AccII Adjustment CCA Base 2022 CCA ($24,400 - $21,242) AccII Adjustment Reversal January 1, 2023 UCC

Class 8 $21,197 46,000 23,000 $90,197 ( 3,158) ( 23,000) $64,039

December 31, 2022 UCC 2022 CCA (Maximum) January 1, 2023 UCC

Class 1 13 Jane $531,044 ( 21,242) $509,802

Class 1 4826 Jarvus $479,439 Nil $479,439

The Class 3 January 1, 2023 UCC balance would be nil after the recapture in the Class.

Taxable Capital Gains While Rental Income is nil, there would be taxable capital gains resulting from the sale of 146 Bronsen as follows:

POD ACB (equal to Capital Cost) Capital Gain Inclusion Rate Taxable Capital Gain

Type: ES Topic: Rental income including CCA

Land $36,000 ( 12,000) $24,000 1/2 $12,000

Building $110,000 ( 36,000) $ 74,000 1/2 $ 37,000

93) Mr. Taylor bought a large triplex on February 1, 2021 for a total cost of $345,000. Of this amount, it is estimated that $255,000 is attributable to the building and $90,000 to the land. The three rental units in the triplex are identical in size and features and, for purposes of allocation to a CCA class, the property is considered to be a single unit. At a bankruptcy sale in February, 2021, Mr. Taylor purchased furniture and appliances for one of the units at a total cost of $12,800. Early in February, 2021, all three units were rented. In 2021, Mr. Taylor's triplex generated rents of $36,000 and incurred expenses, other than CCA, of $10,900. In May, 2022, the tenants in the furnished unit moved out and purchased all the furniture and appliances from Mr. Taylor for $7,840. In 2022, Mr. Taylor's triplex generated rents of $28,400 and incurred expenses, other than CCA, of $18,180. Mr. Taylor claims the maximum CCA allowable in both the 2021 and 2022 taxation years. Required: Calculate the rental income for each of 2021 and 2022. Also, determine the UCC balances on January 1, 2023. Include in your solution any income tax consequences associated with the sale of the furniture and appliances. Answer: 2021 The maximum CCA for 2021 would be calculated as follows: Class 1 $255,000 127,500 $382,500

Addition AccII Adjustment CCA Base Maximum CCA for 2021: [(4%)($382,500)] [(20%)($19,200)] AccII Adjustment Reversal January 1, 2022 UCC

( 15,300) ( 127,500) $239,700

Class 8 $12,800 6,400 $19,200

( 3,840) ( 6,400) $8,960

Rental Income for 2021 would be calculated as follows: Rental Revenue Expenses other than CCA Income Before CCA Class 1 CCA Class 8 CCA 2021 Rental Income

$36,000 ( 10,900) $25,100 ( 15,300) ( 3,840) $ 5,960

Note that when an individual uses property to earn income from property (e.g., rental income), the full calendar year is the taxation year of the individual. This means that the short fiscal period rules do not apply to Mr. Taylor as they are restricted to businesses.

2022 The terminal loss for Class 8 would be calculated as follows: January 1, 2022 UCC Disposition - Lesser of: • Cost = $12,800 • POD = $7,840 Balance Terminal Loss January 1, 2023 UCC - Class 8

$8,960

( 7,840) $ 1,120 ( 1,120) Nil

The terminal loss will be deducted from the Class 8 UCC leaving a January 1, 2023 balance of nil. The maximum CCA for 2022 would be $9,588 [(4%)($239,700)]. However, as the deduction of CCA cannot be used to create or increase a loss, the actual amount deducted would be limited to $9,100, as shown in the calculation of rental income for 2022: Rental Revenue Expenses other than CCA and Terminal Loss Terminal Loss Class 8 Income Before CCA CCA (Limited to income before CCA) 2022 Rental Income

$28,400 ( 18,180) ( 1,120) $ 9,100 ( 9,100) Nil

The January 1, 2023 UCC of the Class 1 building would be calculated as follows: January 1, 2022 UCC 2021 CCA January 1, 2023 UCC - Class 1

$239,700 ( 9,100) $230,600

Type: ES Topic: Rental income including CCA

94) Betty, Barbra, and Becky Larson are sisters who live in the same city. Due to disparate life choices, they have experienced varying degrees of financial success. Because of this, any additional income will be subject to different income tax rates as follows:

Federal Marginal Income Tax Rate Provincial Marginal Income Tax Rate

Betty 15% 8%

Barbra 20.5% 12%

Becky 33% 20%

In 2021, the three sisters jointly purchased lottery tickets and agreed to an equal sharing of any winnings. One of the tickets turned out to be a winner, and they shared a $60,000 prize. They each intend to invest their $20,000 in January of 2022 and are considering the following alternative investments: Corporate Bonds - Corporate bonds that provide a 5% coupon rate. These bonds can be purchased at their maturity amount. The bonds mature in 20 years. Preferred Shares - Preferred shares are available at a price of $25 per share. These shares pay a noncumulative eligible dividend of $1.50 per share. The income from these investments would not move any of the three sisters to a higher federal or provincial income tax bracket. The provincial dividend tax credit on eligible dividends is equal to 27% of the dividend gross up. Each sister has sufficient income to use all of her available personal tax credits. Required: Advise each of the Larson sisters 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 sisters, assuming that they invested their lottery winnings of $20,000 each in: A. The corporate bonds. B. The preferred shares. Answer: Part A The combined income tax rates for the three sisters are 23% (15% + 8%), 32.5% (20.5% + 12%), and 53% (33% + 20%). Given these rates, the after tax returns on the bonds would be calculated as follows:

Interest [(5%)($20,000)] Federal/Provincial income tax at 23%, 32.5%, and 53% After Tax Return — Interest

Betty (23%) $1,000

Barbra (32.5%) $1,000

Becky (53%) $1,000

( 230) $ 770

( 325) $ 675

( 530) $ 470

Part B The after tax returns resulting from an investment in the preferred shares begins with the calculation of the federal and provincial income taxes:

Dividends [($20,000/$25)($1.50)] Gross Up 38% Taxable Dividend Combined Rate (See Part A) Income tax before Dividend Tax Credit Dividend Tax Credit [(6/11 + 27%)($456)] Income Tax Payable

Betty (23%) $1,200 456 $1,656 23% $ 381

Barbra (32.5%) $1,200 456 $1,656 32.5% $ 538

Becky (53%) $1,200 456 $1,656 53% $ 878

( 372) $9

( 372) $ 166

( 372) $ 506

Based on the preceding calculation of combined income tax payable, the after tax returns on the preferred shares are calculated as follows:

Dividends Received Tax Income Payable After Tax Return — Dividends

Betty (23%) $1,200 ( 9) $1,191

Barbra (32.5%) $1,200 ( 166) $1,034

Becky (53%) $1,200 ( 506) $ 694

Comparison A comparison of the after tax rates of return can be made as follows:

After Tax Dividends After Tax Interest Advantage of Preferred Shares

Betty (23%) $1,191 ( 770) $ 421

Barbra (32.5%) $1,034 ( 675) $ 359

Becky (53%) $694 ( 470) $224

Recommendation As would be expected, the preferred shares provide higher after tax returns for each of the three sisters. However, you should also advise them that the preferred shares have a greater level of risk. As the preferred shares are not cumulative, there is the possibility that not all of the scheduled dividends will actually be paid. In addition, the FMV of the shares can vary which could result in fluctuating values that could be more or less than $25 per share at the time of sale. Type: ES Topic: Dividend vs. interest income

95) On January 1, 2022, Mr. Saul Goldfarb is notified that he has won $250,000 in the provincial lottery. This amount is immediately available to Mr. Goldfarb. Mr. Goldfarb has no immediate need for these funds. However, he plans to retire on January 1, 2023 and would like to have the funds available at that time for use in relocating to a warmer climate. Given this, he would like to invest the funds for the 2022 taxation year. He is considering the following alternatives: Guaranteed Investment Certificate (GIC) - The $250,000 can be invested in a GIC that matures on December 31, 2022. The GIC will pay interest of 3%. Common Shares - The $250,000 can be invested in the shares of a Canadian public company. The shares are currently trading at $125 per share and pay an annual eligible dividend of $6.00 per share. Mr. Goldfarb's broker assures him that the shares should be trading at $135 per share by December 31, 2022. Mr. Goldfarb has sufficient employment income that he is in the 29% federal income tax bracket and the 15% provincial income tax bracket. The provincial dividend tax credit for eligible dividends is equal to 30% of the gross up. Required: Write a brief memorandum providing investment advice to Mr. Goldfarb with respect to the alternative investments. Answer: The major considerations in deciding between the two alternative investment strategies are the after tax return and the certainty of the related cash flows. GIC - As long as the GIC is purchased from a financial institution that is guaranteed by the federal government, there is virtually no risk that the principal or interest could be lost. Your combined federal and provincial income tax rate for interest is 44% (29% + 15%). Based on this, the after tax retention on the GIC would be as follows: Interest [(3%)($250,000)] Income Tax [(44%)($7,500)] After Tax Return

$7,500 ( 3,300) $4,200

Common Shares - If you invest the $250,000 in common shares, you will acquire 2,000 shares ($250,000 ÷ $125). With the dividend at $6.00 per share, the total eligible dividend will be $12,000. However, there is no guarantee that the shares will pay a dividend of $6.00 per share in the year. There is the possibility that more or less than $6.00 per share will be paid. In addition, the estimated FMV of at least $135 on December 31, 2022 is also uncertain. The FMV on that date could be higher or lower.

Assuming that the common shares do pay $12,000 in dividends and that you sell the shares for $135 per share on December 31, 2022, your after tax return on the investment is as follows: Dividends Received Gross Up [(38%)($12,000)] Taxable Dividends Taxable Capital Gain [(1/2)(2,000)($135 - $125)] Increase in taxable income Income Tax (29% + 15%) Income Tax before Dividend Tax Credit Dividend Tax Credit [(6/11 + 30%)($4,560)] Income Tax Payable

$12,000 4,560 $16,560 10,000 $26,560 44% $11,686 ( 3,855) $ 7,831

Dividends Received Capital Gain (100%) Income Tax Payable After Tax Return

$12,000 20,000 ( 7,831) $24,169

Conclusion - Based purely on after tax returns, the common shares are preferable as it provides an additional $19,969 ($24,169 - $4,200). However, as previously indicated, the common shares involves more risk and uncertainty. You will have to make a decision as to whether the additional $19,969 warrants the assumption of additional risk. Other factors which may influence your decision are as follows: • The funds are locked into the GIC and can only be withdrawn prior to maturity at a severe interest penalty, if at all. • The investment in common shares would give you more flexibility if you should require some of the funds before the end of the year. All or some portion of the shares could be sold during the year. • Any dividends that are paid will be available for your use as at the payment date. The interest will not be available to you until maturity. Type: ES Topic: Property income - alternative investments

96) On January 1, 2022, Carolyn Jackson received a $200,000 inheritance from her mother. While she has no plans to use any of these funds in 2022, she and her three sisters plan to open a bed and breakfast next year and she will need the funds to purchase her share of the business on January 1, 2023. In the meantime, she would like to invest the $200,000 for a one year period. She is considering the following investments and would like your advice on the appropriate choice: Mutual Trust Fund - On January 1, 2022, this trust is selling for $25 per unit. It makes a distribution of $0.10 per unit per month. This distribution includes a return of capital of $0.01 per month, with the balance of the distribution being property income. Carolyn will sell the units at the end of 2022. She anticipates that these units will be selling for at least $26 per unit at that time. Ventex Inc. Common Shares - On January 1, 2022, the shares of this public company are selling for $80 per share. The Company pays an annual eligible dividend of $3.00 per share. Carolyn anticipates that these shares will be selling for at least $85.00 per share on December 31, 2022. In 2022, Carolyn will continue to work at her present job. Her employment income is such that any additional income will be subject to income tax at a combined federal/provincial rate of 32%. Carolyn resides in a province where the provincial dividend tax credit for eligible dividends is equal to 30% of the gross up. Required: Write a brief memorandum providing investment advice to Carolyn with respect to these two alternative investments. Answer: Analysis The major considerations in deciding between the two alternative investment strategies are the after tax return and the certainty of the related cash flows. Mutual Trust Fund Units - The cash flows associated with investments in trust fund units are not guaranteed. However, the distributions made by these trusts tend to be fairly stable and, in general, involve less risk than dividends on common shares. Your investment of $200,000 will result in you owning 8,000 units ($200,000 ÷ $25). As the monthly per unit distribution includes $0.01 as a return of capital, you will only be taxed on $0.09 per unit of the monthly distribution. Based on this, your income tax payable will be calculated as follows: Trust Income [(12)($0.09)(8,000)] Income Tax Income Tax Payable on Trust Income Distributions

$8,640 32% $2,765

When you sell the units at $26 per unit, there will be additional taxes as follows: POD [($26)(8,000)] ACB: Original Cost Less Tax Free Return of Capital [(12)($0.01)(8,000)] Capital Gain Inclusion Rate Taxable Capital Gain Income Tax Income Tax Payable on Sale of Units

$208,000 $200,000 ( 960)

( 199,040) $ 8,960 1/2 $ 4,480 32% $ 1,434

The $0.01 per unit return of capital included in the monthly distribution increased your capital gain for tax purposes. Your after tax return would be calculated as follows: Cash Flow - Sale of Units [(8,000)($26 - $25)] Trust Distributions [(12)($0.10)(8,000)] Pre Tax Cash Flows Income Tax Payable ($2,765 + $1,434) After Tax Retention - Mutual Trust Fund

$ 8,000 9,600 $17,600 ( 4,199) $13,401

Common Shares - If you invest the $200,000 in the common stock, you will acquire 2,500 shares ($200,000 ÷ $80). The anticipated additional taxable income from these shares for the year is calculated as follows: Eligible Dividends [($3.00)(2,500)] Gross Up [(38%)($7,500)] Taxable Capital Gain on Sale [(1/2)(2,500)($85 - $80)] Additional Taxable Income

$ 7,500 2,850 6,250 $16,600

Based on this figure, your income tax payable would be calculated as follows: Additional Income Income Tax Income Tax Payable before Credits Dividend Tax Credit [(6/11 + 30%)($2,850)] Income Tax Payable

$16,600 32% $5,312 ( 2,410) $2,902

Your after tax return would be calculated as follows: Eligible Dividends Received Capital Gain (100%) Pre Tax Cash Flow Income Tax After Tax Retention - Common Shares

$ 7,500 12,500 $20,000 ( 2,902) $17,098

Conclusion Using your estimates for investment returns, the better investment, based purely on after tax returns, is the common shares. It provides an additional $3,697 ($17,098 - $13,401). However, the common shares generally involves greater risk and uncertainty. You will have to make a decision as to whether the additional $3,697 warrants the assumption of additional risk. Type: ES Topic: Investments in mutual trust fund and common shares

97) As a result of receiving a large inheritance, Ms. Belinda Ho invests in five different types of investments in 2021. The investments, along with their results during the 2022 taxation year, are as follows: Public Company Shares - She acquires 5,000 shares of Avator Inc. at a cost of $20 per share. In 2022, the shares pay eligible dividends of $1.10 per share. On December 31, 2022, the shares are sold for $22 per share. CCPC Shares - She acquires 1,250 shares of a Canadian controlled private company (CCPC) at a price of $80 per share. In 2022, these shares pay non-eligible dividends of $5 per share. She continues to own the shares at December 31, 2022. Riokan Mutual Trust Fund - She acquires 12,500 units of the RioKan Mutual Trust Fund at a cost of $8 per unit. In 2022, the trust makes a distribution of $0.90 per unit. Of this total, $0.40 represents a return of capital, with the balance being interest income. The proceeds of this distribution are invested in additional RioKan units at a cost of $8.75 per unit. She continues to own the units at December 31, 2022. Fidel Cap Mutual Trust Fund - She acquires 4,000 units of Fidel Cap, a mutual trust fund, at a price of $25 per unit. In 2022, the trust makes a distribution of $1.75 per unit. The composition of this distribution is as follows: Capital Gains Eligible Dividends Interest Total Per Unit

$0.60 0.80 0.35 $1.75

Belinda reinvests this distribution in new Fidel Cap Mutual Trust Fund units at $26.50 per unit. She continues to own the units at December 31, 2022. Foreign Term Deposit - On January 1, 2022, she acquires a Euro (€) term deposit with a maturity value of €80,000 at a Canadian dollar cost of $100,000. On December 31, 2022, the principal amount of the term deposit is paid, along with interest of €8,000. Foreign income taxes are withheld equal to 20% of the interest. Assume that throughout 2022, €1.00 = $1.45. This additional investment income will be subject to a federal income tax rate of 29% and a 16% provincial income tax rate. Her other income is sufficient to fully utilize all of her available personal tax credits. She lives in a province where the dividend tax credit on eligible dividends is 30% of the gross up, and on non-eligible dividends is 25% of the gross up. Required: Determine the amount of any additional taxable income and income tax payable as a result of these investments. In addition, calculate the per unit ACB of both the Riokan and Fidel Cap mutual trust funds on December 31, 2022.

Answer: Additional Taxable Income and Income Tax Payable The amount of additional taxable income and income tax payable resulting from the investments would be calculated as follows: Public Company Shares Eligible Dividends [($1.10)(5,000)] Gross Up [($5,500)(38%)] Taxable Capital Gain [(1/2)(5,000)($22 - $20)]

$ 5,500 2,090

$ 7,590 5,000

$12,590

CCPC Shares Non-Eligible Dividends [($5.00)(1,250)] Gross Up [($6,250)(15%)]

$ 6,250 938

7,188

Riokan Mutual Trust Fund Distribution [($0.90)(12,500)] Return of Capital [($0.40)(12,500)]

$11,250 ( 5,000)

6,250

Fidel Cap Mutual Trust Fund Capital Gain [(1/2)($0.60)(4,000)] Eligible Dividends [($0.80)(4,000)] Gross Up [($3,200)(38%)] Interest Income [($0.35)(4,000)]

$ 3,200 1,216

Foreign Term Deposit Foreign Interest [(€8,000)($1.45)] Excess Withholding - See Note [(20% - 15%)(€8,000)($1.45)] Additional Taxable Income Income Tax (29% + 16%) Income Tax before related tax credits Dividend Tax Credit - Eligible Dividends [(6/11 + 30%)($2,090 + $1,216)] Dividend Tax Credit - Non-Eligible Dividends [(9/13 + 25%)($938)] Foreign Tax Credit [(15%)(€8,000)($1.45)] - See Note Total Income Tax Payable on Additional Taxable Income

$ 1,200 4,416 1,400

7,016

$11,600 ( 580)

11,020 $44,064 45% $19,829 ( 2,795) ( 884) ( 1,740) $14,410

Note - Foreign Source Property Income Individuals are able to claim a foreign tax credit equal to 15% of the foreign source income and to claim any excess amount as a deduction against the foreign source income in the calculation of net income.

ACB - RioKan Mutual Trust Fund The investment of the $11,250 [($0.90)(12,500)] distribution will result in an additional 1,285.71 ($11,250 ÷ $8.75) units, for a total of 13,785.71 (12,500 + 1,285.71) units. The ACB of all of the units would be calculated as follows: Original Units [($8.00)(12,500)] Reinvestment in new units [($0.90)(12,500)] Return of Capital [($0.40)(12,500)] ACB

$100,000 11,250 ( 5,000) $106,250

Based on this, the ACB per unit would be: $106,250 ÷ 13,785.71 = $7.71 ACB - Fidel Cap Mutual Trust Fund The investment of the $7,000 [($1.75)(4,000)] distribution at $26.50 per unit will result in an additional 264.15 ($7,000 ÷ $26.50) units, for a total of 4,264.15 units. The total ACB of these units would be $107,000 [(4,000)($25) + $7,000). Given this, the ACB per unit would be $107,000 ÷ 4,264.15 = $25.09 Type: ES Topic: Alternative investments - foreign property income, shares of corporations and mutual trust funds

98) Family Information Christopher Dunn is 37 years old. He has been married to Kathy Dunn for 12 years. In 2022, Kathy has net income of $8,200, all from investments. In 2022, Christopher works 275 hours as a volunteer firefighter in his local community. He did not receive any compensation for this work. After many years of renting, on February 1, 2022, Christopher and Kathy purchase a new residence for $432,000. The property is financed with a $200,000 mortgage at an annual interest rate of 2.5%. Christopher and Kathy's only surviving parent is her father, Jason. He is 66 years old and, while he is dependent on Christopher and Kathy because of a physical infirmity requiring the use of a wheelchair, his condition is not severe enough for him to qualify for the disability tax credit. His 2022 net income is $9,400. This includes OAS payments and a small pension from a former employer. In 2022, Christopher spent $12,000 modifying their new home to accommodate Jason's wheelchair. The work was enduring in nature and will allow Jason to be much more mobile within the home. Christopher paid the following amounts in 2022: Root Canal Fee for Christopher Hair Replacement Fees for Christopher Prescription Glasses and Contact Lenses for Kathy Teeth Whitening Fees for Kathy Psychologist Consulting Fees for Kathy Electric Wheelchair for Jason Physiotherapy Fees for Jason

$1,525 4,300 1,342 2,000 2,450 3,300 3,420

Employment Information Christopher works for a large Canadian public company. His salary is $67,460, none of which is commissions. His employer withholds the following amounts in 2022: Registered Pension Plan (RPP) Contributions (Note 1) EI Premiums CPP Contributions Contributions to Registered Charities

$4,200 953 3,500 3,200

Note 1 - Christopher's employer makes a matching contribution of $4,200. Christopher is required to travel fairly extensively by his employer and uses his own automobile for this purpose. His current non-zero-emission automobile was purchased on January 1, 2022 at a cost of $42,000. In 2022, the automobile was driven 32,000 kilometers, 25,600 of which were employment purposes and 6,400 for personal use. Operating expenses for the year totaled $4,900 none of which were reimbursed by his employer. At the time he purchased the automobile, his employer provided him with an interest free loan of $20,000 to assist in the car purchase. None of this loan will be repaid until 2023. Assume that the relevant prescribed rate of interest on employee loans throughout 2022 was 1%.

In addition to his automobile expenses, his other 2022 travel expenses were: Hotels $2,700 Food while travelling for the employer 1,800 His employer provides him with the following allowances for his travel: Hotels and Food $4,800 Use of personal automobile ($100 per week) 5,200 Investment Information Early in 2022, Christopher's father died of cancer and left him a very large inheritance which Christopher used to create a substantial investment portfolio. Christopher paid off his mortgage on September 25, 2022 with funds from the inheritance. On October 1, 2022, he used his house as collateral for a new $200,000 mortgage at the same 2.5% annual interest rate. He invested the mortgage funds in shares of Canadian public companies. The 2022 results for his investments are: Shares in Canadian Public Companies - During the year he receives $23,000 in eligible dividends. Shares in Canadian Controlled Private Company (CCPC)- He has invested in a local company that has developed a revolutionary new product. As the product is becoming successful, the Company pays Christopher non-eligible dividends of $15,000 in 2022. Foreign Preferred Shares - In 2022 he purchased US$25,000 in preferred shares of U.S. based public companies. At the time he purchased these shares, the exchange rate was US$1.00 = C$1.40. In 2022, these shares pay dividends throughout the year totaling US$1,800. Foreign income taxes of 10% were withheld. The average exchange rate for 2022 was US$1.00 = C$1.35. Mutual Trust Fund - During the year, Christopher's owned mutual trust fund units that made distributions totaling $34,250. The breakdown of these distributions is as follows: Capital Gains Eligible Dividends Interest Income Total

$20,000 9,000 5,250 $34,250

Required: Ignore GST/HST & PST considerations in your solution, as well as the provisions of the U.S./Canada tax treaty. A. Determine Christopher's 2022 net income B. Determine Christopher's 2022 taxable income C. Determine Christopher's 2022 federal income tax payable.

Answer: Part A - Net Income Employment Income Christopher's 2022 employment income would be calculated as follows: Salary Additions: Travel Allowances (Note 1) Hotels and food Use of personal automobile Interest loan benefit [(1%)($20,000)] Deductions: Hotels and Food (Note 1) Automobile Costs (Note 2) RPP Contributions 2022 Employment Income

$67,460

Nil 5,200 200 Nil ( 14,880) (4,200) $53,780

Note 1 - Given his actual costs, the allowance for hotels and food seems reasonable. This means it does not have to be included in income. However, this will prevent Christopher from claiming his actual travel expenses. Note that the actual determination of the reasonableness of an allowance is not based on a comparison of the actual expenses with the allowance. With respect to the allowance for personal use of his automobile, it is not based on kilometers driven and is therefore deemed unreasonable requiring it to be included in income. Note 2 - His deductible automobile costs would be calculated as follows: Operating Expenses CCA on Class 10.1 [(150%)(30%)($30,000)] Interest benefit on loan [(1%)($20,000)] Total Automobile Expenses Employment Related Percentage (25,600 ÷ 32,000) Total Deductible automobile Expenses

$4,900 13,500 200 $18,600 80% $14,880

The luxury car rules for zero-emission vehicles limit the capital cost of the automobile to $30,000 for vehicles purchased in 2022. Also note that the $200 of imputed interest on the car loan is deemed to be interest paid for purposes of determining motor vehicle expenses under ITA 8(1)(j). (ITA 80.5)

2022 Property Income Christopher's property income would be: Public Company Eligible Dividends Gross Up [(38%)($23,000)] Non-Eligible Dividends - Private Company Gross Up [(15%)($15,000)] Foreign Preferred Shares Dividends [(100%)(US$1,800)(C$1.35)] Mutual Trust Fund Eligible Dividends Gross Up [(38%)($9,000)] Mutual Trust Fund Interest Income Less: Interest on loan for investments [(2.5%)($200,000)(3/12)] 2022 Property Income

$23,000 8,740 15,000 2,250 2,430 9,000 3,420 5,250 ( 1,250) $67,840

The interest on the home mortgage taken out to purchase the house is not deductible as the funds were not used to produce income. However, when the original loan was repaid and the house remortgaged, the direct use of the funds was to purchase property that would earn property income. As a result, the interest is deductible. 2022 Taxable Capital Gains Christopher has taxable capital gains from the mutual trust fund distribution as follows: Mutual Fund Taxable Capital Gains [(1/2)($20,000)]

$10,000

2022 Net Income Christopher's 2022 net income can be calculated as follows: Employment Income Property Income Taxable Capital Gains CPP Deduction ($3,500 - $3,039) 2022 Net Income

$ 53,780 67,840 10,000 (461) $131,159

Part B - Taxable Income As Christopher has no taxable income deductions, his 2022 taxable income is equal to his 2022 net income of $131,159.

Part C - Federal Income Tax Payable Christopher's 2022 federal income tax payable would be calculated as follows: Tax on First $100,392 Tax on Next $30,767 ($131,159 - $100,392) at 26% Federal Income Tax before Credits

$17,820 7,999 $25,819

Tax Credits: BPA Spousal ($14,398 - $8,200) Volunteer Firefighters First Time Home Buyers Canada Caregiver for Jason Medical Expenses (Note 3) Home Accessibility Credit (Note 4) EI Premiums CPP Contributions Canada Employment Credit Base Rate

($14,398) ( 6,198) ( 3,000) ( 5,000) ( 7,525) ( 21,276) ( 10,000) ( 953) ( 3,039) ( 1,287) ($72,676) 15%

( 10,901)

Charitable Donations (Note 5) [(15%)($200) + (29%)($3,200 - $200)] Dividend Tax Credits: Eligible Dividends [(6/11)($8,740 + $3,420)] Non-Eligible Dividends [(9/13)($2,250)] Foreign Tax Credit [(10%)(US$1,800)(C$1.35)] 2022 Federal Income Tax Payable

( 900) ( 6,633) ( 1,558) ( 243) $ 5,584

Note 3 - The amount for medical expenses would be calculated as follows: Christopher And Kathy ($1,525 + $1,342 + $2,450) Reduced by the lesser of: • [(3%)($131,159)] = $3,935 • 2022 Threshold Amount = $2,479 Jason's Medical Expenses ($12,000 + $3,300 + $3,420) Reduced by the lesser of: • [(3%)($9,400)] = $282 • $2,479 Allowable Medical Expenses

$ 5,317

( 2,479) $18,720

( 282)

18,438 $21,276

The home modifications were made to allow Jason, who is confined to a wheelchair, to be more mobile within the home. As a result, the costs are allowable medical expenses. As indicated in Note 4, $10,000 of this amount can be used again in the base for the home accessibility credit. The fees for hair replacement and teeth whitening are not allowable medical costs.

Note 4 - The home accessibility tax credit base is equal to the lesser of the actual costs of $12,000 and an unindexed amount of $10,000. Also note that, despite the fact that the full $12,000 was used in the base for the medical expense credit, $10,000 of this amount can be used again in the base for the home accessibility credit. Note 5 - As none of his income is subject to the 33% income tax rate this rate will not apply to the calculation of the charitable donations tax credit. Type: ES Topic: Comprehensive case covering chapters 1 to 7

99) Family Information John Davis is 66 years old. He has been married to Martha Davis for over 40 years. Martha is 72 years old and has 2022 net income of $10,000. This total is made up of OAS payments of $7,400, plus a $2,600 withdrawal from her RRIF. John and Martha have two children. Their 28 year old son, Brian has been blind since birth. He is totally dependant on John and Martha, lives with them, and has no 2022 net income. Their daughter, Nadine Spence is 33 years old and was recently divorced. Her only income is $38,400 in child support that she receives under the provisions of the divorce settlement. She and her two children live with John and Martha. Neither Nadine nor her children have any net income in 2022. In order to establish a new life, Nadine is attending university on a full time basis. Her tuition for 2022 was $11,300, all of which was paid by John. Nadine has agreed to transfer the maximum tuition tax credit to her father. The family's medical expenses, all of which have been paid by John, are as follows: John Martha* Brian Nadine Nadine's Children Total Medical Expenses

$ 900 2,100 11,600 2,450 700 $17,750

*Martha's medical expenses consisted of a $1,000 charge for teeth whitening and $1,100 in charges for 3 pairs of prescription eyeglasses, including prescription sunglasses. Employment and Pension Income While John is over 65 and receives a significant pension from a former employer's RPP, he is a full time employee of Larson Enterprises Ltd. In 2022, his gross salary was $71,500. Larson made the following payroll deductions: RPP Contributions EI Premiums CPP Contributions Union Dues Donations to Registered Charities

$3,890 953 3,500 633 2,200

In 2022, his pension income from his former employer was $51,000. He has not applied for OAS as he knows that all of it will be clawed back. Further, he has not applied for CPP as he is aware that deferring the application will result in larger future benefits.

Property Income In 2022, John received the following dividends (all amounts in Canadian dollars): Eligible Dividends from Taxable Canadian Corporations Non-Eligible Dividends on shares of a CCPC Dividends on foreign shares - 15% foreign income taxes are withheld Total Dividends Received

$13,200 4,100 14,000 $31,300

In addition to dividends, John had 2022 interest income of $2,843. Business Income Because of the project management skills that he has acquired over the years, John started a management consulting business in 2019 which he carries on as a sole proprietor. In that year he acquired a new building to be used as an office for his business. The building cost $523,000 of which $123,000 was attributable to the land and $400,000 to the building. On January 1, 2022, the UCC of the building is $342,847. The building contains office furniture and fixtures that were acquired in 2019 at a cost of $51,000. On January 1, 2022, the UCC is $29,376. In 2022, he spends $37,000 on improving and upgrading the building. In addition, he sells the old furniture and fixtures for $21,300 and purchases replacement furniture and fixtures for $58,000. As John has no reason to keep detailed accounting records, he records his business income on a cash basis. In 2022, his net cash flow from the business was $146,300. Relevant amounts for the beginning and end of 2022 are as follows:

Billed Receivables Unbilled WIP Accounts Payable

January 1 $14,100 18,300 9,200

December 31 $19,100 22,300 10,400

Since the beginning of the business, John has owned an automobile that is used 100% for business purposes. The automobile that he purchased in 2019 was sold in 2021. He purchased a new non-zeroemission vehicle on January 1, 2022 at a cost of $56,200. He financed the automobile through his bank and, in 2022, he made payments on the loan of $12,600. All of this amount was deducted in determining his net cash flow from the business. Of the total, $4,610 represented interest payments with $7,990 representing principal payments. John's automobile operating expenses in 2022 were $8,600. Required: Calculate John’s 2022 minimum net income, taxable income and federal income tax payable. Ignore GST/HST & PST considerations and the possibility of pension income splitting.

Answer: 2022 Employment Income John's employment income would be calculated as follows: Gross Wages RPP Contributions Union Dues 2022 Employment Income

$71,500 ( 3,890) ( 633) $66,977

2022 Property Income John's property income would be calculated as follows: Eligible Dividends Gross Up 38% Non-Eligible Dividends Gross Up 15% Foreign Dividends Interest 2022 Property Income

$13,200 5,016 4,100 615 14,000 2,843 $39,774

2022 Business Income John's business income would be calculated as follows: Net Cash Flow Principal Payments on car loan ($12,600 - $4,610) Non-Deductible Interest [($4,610 - (365)($10 Daily Maximum)] December 31 Billed Receivables January 1 Billed Receivables December 31 WIP January 1 WIP December 31 Accounts Payable January 1 Accounts Payable Subtotal CCA ($23,901 + $16,885 + $13,500) (Note 1) Automobile operating expenses (already deducted) 2022 Business Income

$146,300 7,990 960 19,100 ( 14,100) 22,300 ( 18,300) ( 10,400) 9,200 $163,050 ( 54,286) Nil $108,764

Note 1 - The CCA would be calculated as follows: Class 1 CCA January 1, 2022 UCC Addition Improvements including AccII [(150%)($37,000)] Base For CCA Rate CCA

$342,847 55,500 $398,347 6% $ 23,907

As the building was acquired new and was used 100% for non-residential purposes, it is eligible for the 6% CCA rate as long as an election is made to include the building in a separate class. Note also that the improvement qualify for the AccII since the addition is treated as a separate property component with no CCA having been previously claimed by anyone. This is consistent with the retroactive changes made to the AccII regulations that became law in June 2021. Class 8 CCA

January 1, 2022 UCC Additions Disposals - Lesser of: • POD = $21,300 • Capital Cost = $51,000 AccII Adjustment [(50%)($58,000 - $21,300)] Base For CCA Rate CCA

$29,376 58,000

( 21,300) 18,350 $84,426 20% $16,885

Class 10.1 CCA As the cost of the car exceeds $30,000, the addition to Class 10.1 is limited to $30,000. The maximum deduction for 2022 would be $13,500 [(150%)(30%)($30,000)]. 2022 Net Income and Taxable Income There are no taxable income deductions available therefore taxable income is equal to net income. Employment Income Property Income Business Income Pension Income Deductible CPP ($3,500 - $3,039) 2022 Net and Taxable Income

$ 66,977 39,774 108,764 51,000 ( 461) $266,054

2022 Federal Income Tax Payable Federal Income Tax Payable would be calculated as follows: Tax on First $221,708 Tax on Next $44,346 ($266,054 - $221,708) at 33% Income Tax before Credits Tax Credits: Basic Personal Amount (John) ($12,719) Spouse ($12,719 - $10,000) ( 2,719) Canada Caregiver - Brian ( 7,525) John’s Age Credit [$7,898 - (15%)($266,054 - $39,826)] Nil John’s Pension Credit ( 2,000) EI ( 953) CPP ( 3,039) Canada Employment ( 1,287) Transfer of Spouse’s Age Credit [$7,898 - (15%)($10,100 - $39,826) ( 7,898) Transfer of Spouse’s Pension Credit ( 2,000) Transfer of Brian’s Disability Credit ( 8,870) Transfer of Nadine’s Tuition Credit (Note 1) ( 5,000) Medical Expenses (Note 2) ( 14,750) Total Credit Base ($68,760) Rate 15% Charitable Donations (Note 3) Dividend Tax Credit on: Eligible Dividends [(6/11)($5,016)] Non-Eligible Dividends [(9/13)($615)] Foreign Tax Credit - Amount Withheld [(15%)($14,000)] 2022 Federal Income Tax Payable

$51,345 14,634 $65,979

( 10,314) ( 690) ( 2,736) ( 425) ( 2,100) $49,714

Note 1 - Nadine’s child support received is not included in her 2021 net income as it not taxable. Given this, Nadine has nil net income and would qualify as an eligible dependant of John’s if he was not married. Even though she and her children live with John, he cannot claim the Canada caregiver tax credit for them as they are not mentally or physically infirm. With respect to the transfer of the tuition credit, the maximum transfer would be the lesser of: • The actual tuition cost of $11,300. • The absolute maximum of $5,000.

Note 2 - The claim for medical expenses is determined as follows: Medical Expenses of John and Martha ($900 + $2,100 - $1,000)* Reduced by the lesser of: • [(3%)($266,054)] = $7,982 • 2022 Threshold Amount = $2,479 Balance before Dependants 18 and over Brian’s Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)(Nil)] = Nil Nadine and her children’s Medical Expenses ($2,450 + $700) Reduced by the lesser of: • $2,479 • [(3%)(Nil)] = Nil Total Medical Expense Claim

$2,000

( 2,479) Nil $11,600

Nil

11,600

$ 3,150

Nil

3,150 $14,750

*The $1,000 spent for teeth whitening cannot be added to the credit base as it is for cosmetic purposes. Note 3 - John's charitable donations credit would be calculated as follows: 15% of $200 33% of the lesser of: ($2,200 - $200) = $2,000 ($266,054 - $221,708) = $44,346 29% of [$2,200 - ($2,000 + $200)] Total Credit

$ 30

660 Nil $690

Type: ES Topic: Comprehensive case covering chapters 1 to 7

100) Ms. Jezebel Forest is 67 years old and has been married to Bernard Forest, for over 40 years. She has never applied for OAS as she knows that, for the foreseeable future, it will all be clawed back. In addition, she has not applied for CPP as she is aware that deferring the application will result in larger future benefits. She continues to make contributions towards the CPP. She has been employed by a number of organizations over her working life and, in 2022, she receives pension income from various RPPs totalling $4,000 per month. Currently, she is a full time employee of Dartmor Enterprises Ltd. with an annual salary of $71,500. Dartmor made the following payroll deductions: RPP Contributions EI Premiums CPP Contributions Union Dues Donations to Registered Charities

$2,500 953 3,500 336 1,800

Jezebel's spouse, Bernard Forest is 69 years old and has 2022 net income of $15,200. This consists of pension income from his RRSP and OAS payments. He has not applied for CPP. The couple have two children. Their 42 year old daughter Samantha has been blind since an automobile accident when she was a teenager. She lives with Jezebel and Bernard, is totally dependent on them, and has no 2022 net income. Their 44 year old son Norman has had a long history of substance abuse. However, he is currently living with Jezebel and Bernard and is in a rehabilitation program that seems to be working. The program provides him with a monthly income of $2,000, conditional on his staying enrolled in a university program leading to an accounting degree. In 2022, he attends university on a full time basis for 10 months. His tuition fees are $11,300 and he has textbook costs of $1,100. Jezebel pays all of these costs and Norman has agreed to transfer the maximum education related credits to her. Norman's only tax credits are the BPA and any education related credits. In 2022, Jezebel received the following dividends (all amounts in Canadian dollars): Eligible Dividends from Taxable Canadian Corporations Non-Eligible Dividends on shares in a CCPC Dividends on foreign shares - 15% foreign income taxes are withheld Total Dividends Received

$15,400 2,600 16,000 $34,000

In addition to dividends, Jezebel had 2022 interest income of $1,456. The family’s medical expenses, all of which have been paid by Jezebel, are as follows: Jezebel Bernard Samantha Norman Total Medical Expenses

$ 450 1,475 11,400 8,470 $21,795

Jezebel also carries on a management consulting business which she started in 2019 as a sole proprietor. In that year, she purchased a building to be used exclusively as an office for the business. The building cost $383,000, of which $112,000 is attributable to the land on which the building is situated and $271,000 to the building. On January 1, 2022, the UCC of the building is $232,272. This is the only building owned by Jezebel other than her principal residence. When she purchased the building in 2019, she also purchased office furniture and fixtures at a cost of $18,500. On January 1, 2022, the UCC of the class is $10,656. In 2022, Jezebel spends $23,500 in improvements to the building and $24,500 on new furniture and fixtures. The older furniture and fixtures are sold for $6,200. As the business has expanded, on January 1, 2022, Jezebel purchased a non-zero-emission automobile to be used exclusively in the business. The cost of the automobile is $41,500, all of which was financed with a bank loan. In 2022, interest charges on the bank loan total $4,980, all of which was deducted in determining the cash flows from the business. The 2022 operating expenses for the automobile totaled $5,600. As Jezebel has no reason to keep detailed accounting records, she records business income on a cash basis. In 2022, her net cash flow from the business was $96,400. Relevant amounts for the beginning and end of 2022 are as follows: January 1 $8,400 12,600 6,240

Billed Receivables Unbilled WIP Accounts Payable

December 31 $11,250 18,400 7,485

Required: Calculate Jezebel’s 2022 minimum net income, taxable income and federal income tax payable. Ignore GST/HST & PST considerations and the possibility of pension income splitting. Answer: 2022 Employment Income Jezebel's employment income would be calculated as follows: Gross Wages RPP Contributions Union Dues 2022 Employment Income

$71,500 ( 2,500) ( 336) $68,664

2022 Property Income Jezebel's property income would be calculated as follows: Eligible Dividends Gross Up 38% Non-Eligible Dividends Gross Up 15% Foreign Dividends Interest 2022 Property Income

$15,400 5,852 2,600 390 16,000 1,456 $41,698

2022 Business Income Jezebel's business income would be calculated as follows: Net Cash December 31 Billed Receivables January 1 Billed Receivables December 31 WIP January 1 WIP December 31 Accounts Payable January 1 Accounts Payable Non-Deductible Interest [($4,980 - (365)($10 Daily Maximum)] Automobile Operating Expenses (Already Deducted) CCA ($16,051 + $7,621 + $13,500) (Note 2) 2022 Business Income

$96,400 11,250 ( 8,400) 18,400 ( 12,600) ( 7,485) 6,240 1,330 Nil ( 37,172) $67,963

Note 1 - The CCA would be calculated as follows: Class 1 CCA January 1, 2022 UCC Additional Improvements & AccII [($23,500)(1.5)] Base For CCA Rate CCA For Class 1

$232,272 35,250 $267,522 6% $ 16,051

$10,656 24,500

( 6,200) 9,150 $38,106 20% $ 7,621

Class 10.1 CCA As the cost of the automobile exceeds $30,000, the addition to Class 10.1 is limited to $30,000. The maximum deduction for 2021 would be $13,500 [(150%)(30%)($30,000)].

2022 Net and Taxable Income There are no taxable income deductions available. As a consequence, taxable income is equal to net income. Employment Income Property Income Business Income Pension Income [(12)($4,000)] Deductible CPP ($3,500 - $3,039) 2022 Net and Taxable Income

$ 68,664 41,698 67,963 48,000 ( 461) $225,864

2022 Federal Income Tax Payable The ITA defines dependant as follows: ITA 118(6) Definition of "dependant" – ..."dependant" of an individual for a taxation year means a person who at any time in the year is dependent on the individual for support and is (a) the child or grandchild of the individual or of the individual's spouse or common-law partner; or ... Although Norman has $24,000 in net income, he is living with his parents, in a rehab program and going to university full time. This would indicate that he is dependent on Jezebel for support. In the following calculation, Norman would not qualify for the caregiver tax credit as he is not infirm, but Jezebel can claim his medical expenses as he is a dependant and she has paid his medical expenses.

2022 Federal Income Tax Payable would be calculated as follows: Tax on First $221,708 Tax on Next $4,156 ($225,864 - $221,708) at 33% Federal Income Tax before Credits Tax Credits: BPA (Jezebel) Spouse ($12,719 - $15,200) Canada Caregiver - Samantha (Note 2) Jezebel’s Age Credit [$7,898 - (15%)($226,740 - $39,826)] Jezebel’s Pension Credit EI CPP Canada Employment Transfer of Spouse’s Age Credit (Note 3) ($7,898 - $802) Transfer of Spouse’s Pension Credit (Note 4) Transfer of Samantha’s Disability Credit Transfer of Norman’s Tuition Credits (Note 5) Medical Expenses (Note 6) Total Credit Base Rate Charitable Donations (Note 7) Dividend Tax Credit On: Eligible Dividends [(6/11)($5,852)] Non-Eligible Dividends [(9/13)($390)] Foreign Tax Credit - Amount Withheld [(15%)($16,000)] 2021 Federal Income Tax Payable

$51,345 1,372 $52,717 ($12,719) ( Nil) ( 7,525) Nil ( 2,000) ( 953) ( 3,039) ( 1,287) ( 7,096) ( 2,000) ( 8,870) ( Nil) ( 19,150) ($64,639) 15%

( 9,696) ( 558) ( 3,192) ( 270) ( 2,400) $36,601

Note 2 - As Samantha has a physical infirmity, Jezebel can claim the Canada caregiver credit for her. Note 3 - Bernard's 2022 net income is below the threshold amount for the age credit of $39,826, so his age credit will not be reduced. Since Bernard has no deductions from his Net Income For Tax Purposes, his Taxable Income is equal to $15,200. In order to calculate how much of his age credit can be transferred, he must first reduce his federal income tax payable to nil using a portion of his age credit calculated as follows: Bernard's Taxable Income Bernard's Basic Personal Amount Age Credit Base used by Bernard

$15,200 ( 14,398) $ 802

Note 4 - Bernard can transfer all of his pension income credit since his federal income tax payable has been reduced to nil by the use of his age credit.

Note 5 - Norman's tuition credit is $11,300. While the maximum transfer is $5,000, this amount has to be reduced by the excess of Norman's net income over his basic personal amount. This amount would be $9,602 ($24,000 - $14,398), an amount that would reduce the maximum transfer to nil. Note 6 The claim for medical expenses is determined as follows: Medical Expenses of Jezebel and Bernard ($450 + $1,475) Reduced by the lesser of: • [(3%)($225,864)] = $6,776 • 2022 Threshold Amount = $2,479 Balance before Dependants 18 and over Samantha’s Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)(Nil)] = Nil Norman’s Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($24,000)] = $720 Total Medical Expense Claim

$1,925

$11,400

Nil $ 8,470

$11,400

( 720)

7,750 $19,150

Note 7- Jezebel's charitable donations credit would be calculated as follows: 15% of $200 33% of the lesser of: ($1,800 - $200) = $1,600 ($225,864 - $221,708) = $4,156 29% of $1,800 - ($1,600 + $200) Total Donation Credit

$ 30

528 Nil $558

Type: ES Topic: Comprehensive case covering chapters 1 to 7

( 2,479) Nil

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 8 Capital Gains and Capital Losses 8.1 Online Exercises 1) Describe three different types of capital property dispositions. In each case, indicate how the POD would be determined. Answer: Possible answers here would include: • Sale of the capital property. The POD would be the sales price. • Expropriation by a government body. The POD here would be the amount of compensation paid by the government body. • Destruction through fire, flood, or other natural disasters. The POD here would be any insurance payments received. • Theft. The POD may be nil unless there is insurance coverage in which case any amount paid by the insurer would be the POD. • Deemed dispositions. The deemed POD would be whatever amount is specified in the specific provision of the ITA. Type: ES Topic: Dispositions and POD - general

2) How is government assistance provided for the purchase of capital property dealt with in the ITA? How does this differ from the accounting treatment of government assistance? Answer: Government assistance for the purchase of capital property is a reduction in the capital cost for depreciable property and a reduction in the ACB of non-depreciable capital property. This is, in general, consistent with the accounting treatment of government assistance. Type: ES Topic: Government assistance

3) What is a superficial loss? What is the income tax treatment of such losses? Answer: A superficial loss is one that results from the sale of non-depreciable capital property that is reacquired (identical property) within 30 days before, or 30 days after, the disposition. The reacquisition can be by an affiliated person. Superficial losses are deemed to be nil and therefore cannot be claimed. The superficial loss is added to the ACB of the replacement capital property reducing any future gain on the property for individuals. Superficial losses are handled differently where the person who owns the property is a trust, partnership or corporation. Type: ES Topic: Superficial loss

4) Describe the calculation of a taxable capital gain or an allowable capital loss. Answer: The taxpayer subtracts the sum of the ACB plus selling costs, from the POD. The result is then multiplied by one-half resulting in a taxable capital gain (positive amounts) or an allowable capital loss (negative amount). Type: ES Topic: Capital gains and capital losses - general rules

5) A taxpayer may acquire a number of identical properties at different points in time at different costs. When there is a sale of part of a group of identical properties, how do you determine the ACB of the properties sold? Answer: The ACB would be based on the weighted average cost of the identical properties. Type: ES Topic: Identical properties

6) When a capital property is sold and not all of the POD are receivable in the year of sale, a capital gains reserve is permitted. How is the reserve determined? Answer: The maximum amount of the reserve in each year is the lesser of two amounts. The first is the capital gain multiplied by the ratio of the proceeds due after the end of the year to the total POD. The second is the capital gain multiplied by a percentage which is 20% of the gain multiplied by, 4 minus the number of preceding taxation years ending after the disposition. The latter part of the calculation is designed to ensure that a minimum of 20% of the capital gain is included in income over a five year period. Type: ES Topic: Capital gains reserve

7) When a business sells capital property, it sometimes provides a warranty. This may involve incurring warranty costs in periods subsequent to the sale. How are such warranty expenses treated for income tax purposes? How does this differ from the accounting treatment of such costs? Answer: For income tax purposes, warranty expenses related to the sale of capital property can only be deducted when costs are actually incurred. In other words estimated warranty cost reserves are not permitted for income tax purposes. The income tax treatment depends on the timing of the consideration received by the seller for providing the warranty and the seller incurring expenses to fulfill warranty obligations. If these events occur before the filing date for the taxation year in which the capital property was sold then the warranty consideration increases the POD of the property and the warranty expenses reduce the POD of the property. If the warranty consideration and warranty expenses occur after the filing due date for the income tax return the warranty consideration is treated as a capital gain and the warranty expenses treated as a capital loss. In contrast, for accounting purposes, the business must deduct the estimated cost of providing the warranty in the year in which the property is sold. When actual costs are incurred, they are charged to the allowance that was established in the year of sale. If the actual costs are higher of lower than the estimate, there will be an adjustment which will be charged to income in the year that the warranty expires. Differences between income tax and accounting must be adjusted in the annual reconciliation. Type: ES Topic: Warranties on capital property - ITA 42

8) When a taxpayer disposes of a combination of land and buildings, ITA 13(21.1)(a) contains a special rule for determining the amount of proceeds to be allocated to the building. If applicable, this special rule increases the amount of the proceeds that will be allocated to the building. What is the tax policy objective of this special rule? Answer: When a combination of land and buildings is sold, there will often be a capital gain (only 50% of which is taxable) on the land and a terminal loss on the building which is fully deductible. This result may tempt taxpayers into allocating a larger amount of the total proceeds to the land and a correspondingly smaller amount of the total proceeds to the building. The special rule in ITA 13(21.1)(a) increases the building proceeds to the point where any terminal loss will either be eliminated altogether, or reduced to the point that it does not offset any capital gain on the land. Type: ES Topic: Terminal loss on sale of land and building - ITA 13(21.1)

9) Describe the income tax treatment that will be given to personal use property dispositions. How does this treatment differ if the property is listed personal property? Answer: While capital gains on personal use property are included in income, capital losses cannot be claimed. In addition, a special rule specifies that each property will have a minimum POD of $1,000 and a minimum ACB of $1,000 to effectively weed out any gains and losses on dispositions of small value property. The treatment of listed personal property differs in that capital losses can be claimed but only to the extent of capital gains on listed personal property. Listed personal property is also subject to the same $1,000 POD/ACB rule. Type: ES Topic: Personal use property - general rules

10) A business purchases €100,000 of inventory in France, with the payable reflected in Euros. Between the time of the purchase and the payment of the account, the exchange rate for the Euro increases by $0.04. How will this increase be dealt with for income tax purposes? Will this differ from the accounting treatment of the amount? Answer: The business will be able to deduct the difference as a loss of $4,000 [(€100,000)($0.04)]. The accounting treatment is the same. Type: ES Topic: Foreign exchange gains and losses

11) When the use of capital property changes from personal use to business use, there is a deemed disposition/reacquisition of that property. If the original cost of the property is less than the FMV of the property at the time of the change in use, the cost of the property for UCC purposes is limited to its cost, plus one-half of the difference between the cost and FMV. What is the reason for this limitation? Answer: If the FMV of personal use property exceeds its original cost, there will be a capital gain resulting from the deemed disposition/reacquisition only one-half of which is included in income. Given this, it would not be appropriate to allow the appreciation in value taxed as a capital gain to be fully added to capital cost and therefore fully deductible as CCA. In effect the restriction only allows the taxable part of the capital gain to be added to the UCC of depreciable property which is then available in future years as deductible CCA. Type: ES Topic: Change in use - depreciable property

12) It is not uncommon for a person, when moving out of a principal residence, to retain the property as a rental property. If no election is made, there will be a change in use which will trigger a deemed disposition at FMV, possibly resulting in capital gains some of which may not be eligible for the principal residence exemption. Explain how this result can be avoided, as well as the income tax consequences of making the required election. Answer: This result can be avoided by electing under ITA 45(2) for there not to be a change in use which prevents a deemed disposition. In addition, the individual can continue to designate the property as a principal residence for up to four years after the change in use. The one disadvantage of this election is that the individual will not be able to claim CCA on the rental property. Type: ES Topic: Change in use - principal residence elections

13) When an individual converts a principal residence to a rental property, an election under ITA 45(2) is available to avoid a deemed disposition based on the change in use. Briefly describe how this election works. Answer: When an individual converts a principal residence to a rental property it is a change in use and, in the absence of an election, is treated as a deemed disposition/reacquisition at FMV. However, if the individual makes an election under ITA 45(2), there will be no deemed disposition of the property and it will continue to be eligible for the principal residence exemption for up to four years even though the property was not ordinarily inhabited by the individual or certain family members. However, if the individual claims CCA, the election is rescinded. If the individual leaves the residence because of an employer required move, the election can be extended without limit beyond four years, but the individual must return to that residence while still with the same employer. Type: ES Topic: Change in use - principal residence elections

14) When an individual departs from Canada and severs Canadian residency, there is a deemed disposition of most of the individual's capital property. What major categories of property are exempted from this treatment? Answer: The exceptions that are listed in the text are: • Real property situated in Canada. • Property of a business carried on in Canada through a fixed place of business (permanent establishment) in Canada. • Excluded rights and interests (largely retirement savings plans). Type: ES Topic: Departure from Canada - general rules

15) ITA 44.1 is a provision which allows an individual to defer the taxation of capital gains resulting from the sale of shares of an "eligible small business corporation" (ESBC). What is the definition of an eligible small business corporation? Answer: An ESBC is a CCPC that has substantially all (meaning more than 90%) of the FMV of its assets devoted principally to an active business carried on primarily (meaning more than 50%) in Canada. The corporation's qualifying assets include any shares or debt in other ESBCs that it owns. To be eligible, the small business corporation and corporations related to it cannot have assets with a carrying value in excess of $50 million. Shares or debt of related corporations are not counted when determining the $50 million limit on assets. Type: ES Topic: Capital gains deferral ITA 44.1 (ESBC)

16) When business properties are destroyed in a natural disaster (e.g., flood, tornado, earthquake etc) there may be adverse income tax consequences. Briefly describe the income tax consequences of receiving proceeds of an insurance policy to compensate for the involuntary loss of property in the absence of special elective rules. Answer: Most business properties are insured for their replacement cost. When a property is destroyed by a natural disaster, it is a disposition with the insurance payments constituting the POD. As will often be the case, if the insurance proceeds exceed the cost of the destroyed property, the result will be a taxable capital gain. In addition, the required deduction from the relevant UCC classes may result in recapture if the property is not replaced prior to the end of the taxation year. Both the taxable capital gains and the recapture must be included in income and, in the absence of the replacement property rules, could not be reduced or reversed. Type: ES Topic: Dispositions and POD - general

17) The replacement property rules cover both voluntary dispositions and involuntary dispositions. However, they are applied differently to the two types of dispositions. Briefly describe the differences between the treatment for voluntary dispositions and involuntary dispositions. Answer: There are two differences. The first difference relates to the type of property that is eligible. The rules apply to involuntary dispositions where capital property is lost, stolen, destroyed, or expropriated, without regard to its type. If the disposition is voluntary, only real property is eligible. The second difference relates to the timing of the replacement. For involuntary dispositions, the taxpayer has to replace the property within 24 months after the end of the taxation year in which the POD become receivable. When the disposition is voluntary, the time period is limited to 12 months. Type: ES Topic: Replacement property - general rules

18) In terms of tax planning, capital gains and capital losses have an advantage that is not available for other types of income. Briefly describe this advantage. Answer: The unique income tax planning feature with respect to capital gains and capital losses is that they are within the discretion of the taxpayer. This results from the fact that they are only required to be included in income or deductible when there is a disposition and, in most circumstances, the taxpayer decides when a disposition will occur. Type: ES Topic: Capital gains and capital losses - general rules

19) A superficial loss occurs when, in the 30 days following the disposition that resulted in a capital loss, an identical property is acquired. Answer: TRUE Explanation: Note that it would also be a superficial loss if an identical property was acquired 30 days prior to the disposition. Type: TF Topic: Superficial loss

20) Mr. Schmidt purchased 250 shares of Doss Limited on February 1 of the current year for $20 per share. On May 1 of the current year, he purchased 100 more shares for $25 per share. On June 20 of the current year, Mr. Schmidt sells 100 shares for $15 per share. His allowable capital loss on June 20 is $643. Answer: FALSE Explanation: The ACB of the shares would be equal to their average cost of $21.43 [((250)($20) + (100)($25)) ÷ 350]. This means that the allowable capital loss would be $321.50 [($15.00 - $21.43)(100)(1/2)]. Type: TF Topic: Capital gains and capital losses - general rules

21) When there is a disposition of capital property and not all of the POD are receivable until after the year of disposition, a reserve a capital gains reserve can be claimed. In the year of the disposition, the reserve cannot be less than 80% of the total gain. Answer: FALSE Explanation: The reserve cannot be more than 80% of the total gain. Type: TF Topic: Capital gains reserve

22) Capital gains on a principal residence are not taxable. Answer: FALSE Explanation: Capital gains on a principal residence may be taxable depending on the circumstances. ITA 40(2)(b) provides a formula for determining the portion of the capital gain that is exempt. Type: TF Topic: Principal residence - general rules

23) Capital losses on the disposition of listed personal property can be deducted, but only against net capital gains on listed personal property. Answer: TRUE Explanation: While losses on personal use property can, in general, not be deducted, an exception is made for listed personal property. Type: TF Topic: Listed personal property - general rules

24) A dining room suite that had been purchased for $700 for personal use was sold for $900. The capital gain is $200. Answer: FALSE Explanation: The capital gain is nil since both the POD and ACB are deemed to be $1,000. Type: TF Topic: Personal use property - general rules

25) A dining room suite that had been purchased for $700 for personal use was sold for $500. The allowable capital loss on the transaction is $100. Answer: FALSE Explanation: The capital loss would have been nil since both the POD and ACB would be deemed to be $1,000 (ITA 40(1) and 46). Although there is another provision of the ITA (ITA 40(2)(g)) that deems capital losses on the disposition of personal use property to be nil it would not have applied since there would have been no capital loss as a result of the $1,000 rule. Type: TF Topic: Personal use property - general rules

26) A dining room suite that had been purchased for personal use for $700 was sold for $1,500. The taxable capital gain on the transaction is $250. Answer: TRUE Explanation: The taxable capital gain equals one-half of the $1,500 POD less the deemed ACB of $1,000. Type: TF Topic: Personal use property - general rules

27) When there is a change in use from an income earning use to a personal use or vice versa, there will be a deemed disposition/reacquisition subject to any elective treatment. Answer: TRUE Explanation: There will always be a deemed disposition/reacquisition when there is a change in use subject to elections such as ITA 45(2) with respect to principal residences. Type: TF Topic: Change in use - general rules

28) When an individual emigrates from Canada, there is a deemed disposition of all capital property at FMV. Answer: FALSE Explanation: There is a deemed disposition/reacquisition of most capital property, but there are types of property that are exempt. Type: TF Topic: Departure from Canada - general rules

29) To be an eligible small business corporation (ESBC) for purposes of deferring capital gains (ITA 44.1), one of the conditions requires that more than 50% of the FMV of its assets must be used to earn income from an active business in Canada. Answer: FALSE Explanation: The active business income requirement is 90% or more. Type: TF Topic: Capital gains deferral ITA 44.1 (ESBC)

30) When there is an involuntary disposition of a depreciable property, any resulting capital gain can be eliminated if the cost of the replacement property is equal to or greater than the POD of the property that was replaced, no later than 24 months from the end of the taxation year of the disposition. Answer: TRUE Explanation: If it were a voluntary disposition, replacement would have to occur within 12 months. Type: TF Topic: Replacement property - general rules

31) Which of the following statements with respect to capital gains is NOT correct? A) Insurance proceeds to compensate for the destruction of a building destroyed in a fire is the POD. B) The ACB of non-depreciable capital property is reduced by any related government assistance received. C) The capital gains deduction reduces the amount of taxable capital gains included in net income. D) The expropriation of capital property by a municipal government is considered to be a disposition. Answer: C Explanation: C) The capital gains deduction reduces the amount of taxable capital gains included in taxable income not net income. Type: MC Topic: Capital gains and capital losses - general rules

32) Which of the following statements with respect to capital gains is correct? A) The inclusion rate for taxable capital gains has always been one-half of the capital gain. B) All gains on the sale of Canadian securities are treated as capital gains. C) The superficial loss rules would apply if you sold shares at a loss but your spouse acquired the same shares within thirty days of the sale. D) The capital gains deduction is no longer available to Canadian individuals. Answer: C Explanation: C) The superficial loss rules would apply if you sold shares at a loss but your spouse acquired the same shares within thirty days of the sale. Type: MC Topic: Capital gains and capital losses - general rules

33) Which of the following statements about the income tax treatment of gifts of non-depreciable capital property is NOT correct? A) The ACB to the recipient will be the FMV of the property gifted. B) The income tax treatment of gifts is different when the gift is made to a non-arm's length person rather than to an arm's length person. C) The POD to the person making the gift will be the FMV of the property gifted. D) If the FMV of the property being gifted exceeds its ACB, there will be a capital gain. Answer: B Explanation: B) The tax treatment of gifts is different when the gift is made to a non-arm's length person rather than to an arm's length person. Type: MC Topic: Gifts of capital property

34) Which of the following does NOT represent an ACB adjustment? A) Government assistance. B) CCA claimed in previous years. C) Superficial losses. D) In the case of vacant land, interest and property taxes. Answer: B Explanation: B) CCA claimed in previous years. Type: MC Topic: ACB adjustments - ITA 53

35) On November 12, 2022, Hubert Robbins sells 100 shares of Loser Inc. for $120 per share. He had purchased these shares several years ago at $220 per share. On November 18, 2022, he purchases 80 shares of Loser Inc. for $100 per share. On December 22, 2022, he purchases 50 shares of Loser Inc. at $80 per share. What is the ACB of the 130 shares that he owns after the December 22, 2022 purchase? A) $12,000. B) $20,000. C) $22,000. D) $14,000. Answer: B Explanation: A) $12,000 ($8,000 + $4,000) B) $20,000. The calculations are as follows: November 12 Sale POD [(100)($120)] ACB [(100)($220)] Capital Loss Disallowed Portion [($10,000)(80 ÷ 100)] Allowable Portion

$12,000 ( 22,000) ($10,000) 8,000 ($ 2,000)

Cost of 130 Shares November 18 Purchase [(80)($100)] Disallowed Loss December 22 Purchase [(50)($80)] ACB C) $22,000 ($8,000 + $4,000 + $10,000) D) $14,000 ($8,000 + $4,000 + $2,000)

$ 8,000 8,000 4,000 $20,000

Type: MC Topic: Superficial loss

36) Chi has the following transactions in Smoke Corp. and Mirrors Corp. shares: Smoke 100 @ $22.50 100 @ $28.00 N/A N/A

May 1, 2021 Purchase December 20, 2021 Sale January 3, 2022 Purchase June 1, 2022 Sale

Mirror 100 @ $25.00 100 @ $24.00 100 @ $23.20 100 @ $26.00

Chi's taxable capital gains for 2021 and 2022 are: A) $225 for 2021, $90 for 2022. B) $225 for 2021, $140 for 2022. C) $275 for 2021, $90 for 2022. D) $275 for 2021, $140 for 2022. Answer: C Explanation: A) ($550 — 100) × 50% = $225 B) 100 × ($26.00 — 23.20) × 50% = $140 C) $275 for 2021, $90 for 2022 Smoke shares: 100 × ($28.00 — 22.50) = $550 × 50% = $275 2021 Mirrors shares: 100 × ($25.00 — 24.00) = $100 superficial loss 2022 Mirrors shares: (100 × $26.00) — [ (100 × $23.20) + $100 superficial loss ] = $180 × 50% = $90 Type: MC Topic: Superficial loss

37) With respect to dispositions of non-depreciable capital property, which of the following statements is correct? A) The actual cost of providing warranty coverage on the sale of a capital property cannot be deducted for income tax purposes. B) When identical properties are sold, the cost can be determined using either FIFO or Average Cost valuation. C) The actual cost of providing a warranty can be deducted in full in the determination of business income. D) If a portion of a property is sold, the ACB of that portion must be determined on a reasonable basis which is generally equal to the FMV of the portion sold as a fraction of the total FMV of the property. Answer: D Explanation: D) If a portion of a property is sold, the ACB of that portion must be determined on a reasonable basis which is generally equal to the FMV of the portion sold as a fraction of the total FMV of the property. Type: MC Topic: Capital gains and capital losses - general rules

38) Which of the following statements is NOT correct? A) When there is a disposition of an identical property, the taxpayer must use the average cost of all such properties as the ACB. B) When a taxpayer provides a warranty on the sale of non-depreciable capital property at the end of the second taxation year, the cost incurred to provide the warranty is treated as a capital loss. C) When there is a partial disposition of land that is capital property, the ACB must be based on a proportionate share of the total area of the land. D) When a bad debt arises from the sale of non-depreciable capital property, it is treated as a capital loss. Answer: C Explanation: C) When there is a partial disposition of land that is a capital property, the ACB must be based on a proportionate share of the total area of the land. Proportionate allocation would not be appropriate if there are variances in the quality of the land (e.g., one part was a swamp that could not be used). Type: MC Topic: Capital gains and capital losses - general rules

39) Which of the following statements with respect to capital gains reserves is correct? A) There is no limit on how many years a reserve can be deducted. B) The maximum capital gains reserve is equal to the ratio between the proceeds receivable after the end of the year and the total proceeds, multiplied by the capital gain. C) The maximum capital gains reserve is limited to 20% of the total capital gain in the first year after the sale. D) Any capital gains reserve that is deducted in the current taxation year must be added back to income in the immediately following taxation year. Answer: D Explanation: D) Any capital gains reserve that is deducted in the current taxation year must be added back to income in the immediately following taxation year. Type: MC Topic: Capital gains reserve

The questions below are based on the following information: BMP Products Ltd. (BMP) has carried on business for more than 20 years. Ten years ago, planning for future growth of its manufacturing facilities, BMP purchased a plot of land in an industrial area for $150,000. During the last couple of years, BMP has not met expectations. Business has fallen slightly and cash flows are tight. Due to the decrease in product demand, management does not believe that BMP will use this plot of land in the near future. As a result, during the taxation year ended March 31, 2022, BMP sold the land for $400,000. $150,000 was received in February, 2022, with the remainder to be paid in two equal instalments in February, 2023 and February, 2024. You have been advised that capital gains treatment is appropriate for this transaction. 40) BMP can claim a reserve for the 2022 taxation year of: A) Nil. B) $156,250. C) $200,000. D) $250,000. Answer: B Explanation: B) $156,250 - The maximum reserve that can be claimed is the lesser of: • [($250,000)($250,000/$400,000)] = $156,250 • [($250,000)(20%)(4 - 0)] = $200,000 Type: MC Topic: Capital gains reserve

41) BMP can claim a reserve for the 2023 taxation year of: A) Nil. B) $78,125. C) $125,000. D) $150,000. Answer: B Explanation: B) $78,125 - The maximum reserve that can be claimed is the lesser of: • [($250,000)($125,000/$400,000)] = $78,125 • [($250,000)(20%)(4 - 1)] = $150,000 Type: MC Topic: Capital gains reserve

42) Bob sold a capital property on December 31, 2022 for $300,000 with $20,000 paid in cash and $280,000 payable December 31, 2023. The ACB of the property was $170,000 and the selling costs totalled $10,000. Which one of the following amounts represents the minimum taxable capital gain required to be included in income for the 2022 taxation year? A) $4,000. B) $10,000. C) $12,000. D) $24,000. Answer: C Explanation: C) $12,000 - The maximum reserve that can be claimed is the lesser of: • [(Capital Gain $120,000)($280,000/$300,000)] = $112,000 • [(Capital Gain $120,000)(20%)(4 - 0)] = $96,000 Taxable capital gain = [(1/2)($120,000 - $96,000)] = $12,000 Type: MC Topic: Capital gains reserve

43) Shun Li sold a capital property on July 31, 2022 for $400,000. She received $100,000 at the time of sale with the balance of $300,000 payable on July 31, 2025. The ACB of the property was $160,000. The minimum taxable capital gain that Shun Li is required to include in income for the 2022 taxation year is: A) $30,000. B) $60,000. C) $120,000. D) $180,000. Answer: A Explanation: A) $400,000 - $160,000 = $240,000. [(1/2)($240,000 - $180,000)] = $30,000 • (300,000/400,000)(Capital Gain $240,000) = $180,000 • (20%)(4 - 0)($240,000) = $192,000 Type: MC Topic: Capital gains reserve

44) A business sells real property for $950,000, with $600,000 of this amount attributable to the building and $350,000 to the land. The building, the only property in its Class, had a capital cost of $800,000 and a UCC of $650,000. The ACB of the land was $250,000. What are the income tax consequences of this disposition? A) A capital gain of $100,000 and a terminal loss of $50,000. B) A capital gain of $50,000 and a terminal loss of nil. C) A capital gain of $100,000 and a capital loss of $50,000. D) A capital gain of $50,000 and a terminal loss of $50,000. Answer: B Explanation: B) A capital gain of $50,000 and a terminal loss of nil. The deemed proceeds for the building would be calculated as follows: The lesser of: • The FMV of the land and building Reduced by the lesser of: • The ACB of the land = $250,000 • The FMV of the land = $350,000 • The greater of: • The FMV of the building = $600,000 • The lesser of: The cost of the building = $800,000 The UCC of the building = $650,000

$950,000

( 250,000)

$700,000

$650,000

Based on this, the deemed POD for the land would be $300,000 ($950,000 - $650,000) instead of the original $350,000, resulting in a capital gain of $50,000 ($300,000 - $250,000). The terminal loss on the building would be reduced to Nil ($650,000 - $650,000) from $50,000. In other words $50,000 of capital gains on the land is reduced by $50,000 of terminal loss on the building. Type: MC Topic: Terminal loss on sale of land and building - ITA 13(21.1)

45) The special rules for a disposition of property that includes land and buildings should be applied when: A) there is a capital gain on the land and a capital loss on the building. B) there is a capital gain on the building and a capital loss on the land. C) there is a capital gain on the land and a terminal loss on the building. D) there is a capital gain on the building and a terminal loss on the land. Answer: C Explanation: C) There is a capital gain on the land and a terminal loss on the building Type: MC Topic: Special rule for sales of real property

46) Which of the following statements with respect to principal residences is correct? A) If an individual lives on a house boat the principal residence exemption cannot be used. B) If an individual and their spouse can each own real property in which they reside for a part of the year, they each can claim the principal residence exemption for that year on the property that they own. C) If an individual sells a principal residence and buys another principal residence in a single year, the individual will not be able to completely eliminate any gain on the disposition of the second residence by using the principal residence exemption. D) If an individual owns only one real property, it is only necessary to complete the first page of Form T2091, Designation of a Property as a Principal Residence by an Individual, in order to claim the principal residence exemption. Answer: D Explanation: D) If an individual owns only one real property, it is only necessary to complete the first page of Form T2091, Designation of a Property as a Principal Residence by an Individual, in order to claim the principal residence exemption. Type: MC Topic: Principal residence - general rules

47) Mr. Winestock owned two homes from 2019 to 2021. Home A was purchased in 2007 for $60,000. In 2019, he purchased Home B for $180,000, with the intention of selling Home A immediately. Due to market conditions, mortgage rates, and the asking price, he was unable to sell Home A until 2021. The proceeds received on the sale of Home A were $150,000. In 2022, he was transferred to a different city and sold Home B. He designated 2019 and 2020 to Home A when it was sold. The proceeds received on the sale of Home B were $200,000. What is his taxable capital gain on Home B? A) Nil. B) $2,500. C) $5,000. D) $10,000. E) $20,000. Answer: B Explanation: B) $2,500 taxable capital gain on Home B. Home B owned 4 years (2019 to 2022) • 2019 and 2020 designated to Home A • 2021 and 2022 can be used for Home B In the following formula, A is the number of years the property is designated a principal residence and B is the number of years the property was owned after 1971. Exempt portion of gain = {[Total capital gain][(1 + A) ÷ B]} = [$200,000 - $180,000][(1 + 2)/4] = $15,000 Taxable capital gain = [(1/2)($20,000 - $15,000)] = $2,500 Type: MC Topic: Principal residence - general rules

48) Heidi bought a mountain chalet in 2017 for $150,000 and sold it in 2022 for $180,000. She bought a lakeside cabin in 2018 for $100,000 and sold it in 2022 for $130,000. She lived full-time at the chalet in 2017 and spent an equal amount of time at the chalet and the cabin during the 5 years from 2018 to 2022. How should she designate her principal residence exemption for the year 2018 to minimize her 2022 taxable capital gains? A) 2018 should be designated to the cabin B) 2018 should be designated to the chalet C) 2018 should be split between the cabin and the chalet D) 2018 cannot be designated to either the cabin or the chalet Answer: A Explanation: A) 2018 should be designated to the cabin. Annual gain for the cabin is $6,000 ($30,000 / 5 years) which is greater than the annual gain for the chalet which is $5,000 ($30,000 / 6 years). Type: MC Topic: Principal residence - general rules

49) Which of the following statements regarding the income tax treatment of a principal residence is NOT correct? A) If an individual owns two residences, and both are sold in the same year, the principal residence formula will eliminate the capital gain on only one of the residences. B) If an individual owns two residences, the decision to designate a particular property as the principal residence must be made when the residence is sold. C) If an individual owns only one residence, the principal residence formula will eliminate any capital gain on the sale. D) A capital loss cannot be realized on the sale of a principal residence. Answer: A Explanation: A) If a taxpayer owns two residences, and both are sold in the same year, the principal residence formula will eliminate the capital gain on only one of the residences. Type: MC Topic: Principal residence - general rules

50) Which of the following statements about personal use property is NOT correct? A) Losses on the disposition of personal use property can be deducted to the extent of gains on the disposition of personal use property. B) An antique desk purchased by an individual for their home would be considered personal use property. C) The minimum value for both the POD and the ACB of personal use property that is being sold is $1,000. D) When losses on listed personal property are carried forward, they can be deducted to the extent of net gains on the disposition of listed personal property. Answer: A Explanation: A) Losses on the disposition of personal use property can be deducted to the extent of gains on the disposition of personal use property. Type: MC Topic: Personal use property - general rules

51) Mike sold the following personal use property during the current year: Sales Price $2,500 600 900 1,300

Painting Stamp collection Outboard motor Antique desk

Cost $ 800 1,200 100 1,950

What is his taxable capital gain, net of allowable capital losses, for the current year? A) $325. B) $625. C) $650. D) $750. Answer: C Explanation: C) $650 [(1/2)($1,500 - $200)] The net gain on listed personal property consists of a $1,500 gain ($2,500 - $1,000) on the painting and a $200 loss ($1,000 - $1,200) on the stamp collection. There is no net capital gain on the personal use property as the outboard motor gain is eliminated by the $1,000 rule and the loss on the antique desk is not allowed. Type: MC Topic: Personal use property - general rules

52) Song Ming sold the following personal use property in the current year: Sales Price $1,200 1,800 900 16,500

Diamond Necklace Rare Book Coin Collection Vintage Car

Cost $ 600 1,200 1,100 17,000

What is her taxable capital gain, net of allowable capital losses, for the current year? A) $100 B) $250 C) $350 D) $500 Answer: C Explanation: C) $350 [($1,200 — 1,000) + (1,800 — 1,200) + (1,000 — 1,100)] × 50% = $350 Type: MC Topic: Personal use property - general rules

53) Indicate which of the following is NOT listed personal property. A) A stamp. B) A rare manuscript. C) An antique chair. D) A piece of jewelry. E) A piece of sculpture. Answer: C Explanation: C) An antique chair. Type: MC Topic: Listed personal property - general rules

54) On July 1, 2022, Chester Aguilar acquires 1,000 shares of a foreign company at 10 Foreign Currency units (FC, hereafter) per share. He acquired the funds for this purchase when FC1 = $1.48, a value that did not change prior to the date on which he purchased the shares. He sells the 1,000 shares December 1, 2022 for FC12 per share. On this date the exchange rate is FC1 = $1.46. What is the effect of the sale transaction on Chester's net income for 2022? A) $2,720. B) $1,160. C) $2,520. D) $1,360. Answer: D Explanation: A) $2,720 B) $1,160 ($1,360 - $200) C) $2,520 ($2,720 - $200) D) $1,360. The effect can be calculated as follows: POD [(1,000)(FC12)($1.46)] ACB [(1,000)(FC10)($1.48)] Capital Gain Inclusion Rate Taxable Capital Gain

$17,520 ( 14,800) $ 2,720 1/2 $ 1,360

Type: MC Topic: Foreign currency

55) Which of the following statements related to the taxation of foreign currency transactions is correct? A) All gains or losses that result from foreign currency transactions are treated as either capital gains or capital losses. B) When a Canadian corporation issues foreign currency debt, a gain or loss will only be recognized when the debt is repaid. C) A foreign currency gain or loss may arise when Canadian dollars are converted to a different currency. D) The first $200 of foreign currency gains are exempt for all taxpayers. Answer: B Explanation: B) When a Canadian corporation issues foreign currency debt, a gain or loss will only be recognized when the debt is repaid. Type: MC Topic: Foreign currency

56) Mamie Hanson converts her principal residence into a rental property. This property had cost $850,000 several years ago. It is converted on January 1, 2022 and, at that time, it is estimated that the total value of the property has increased to $1,100,000. At this time the value of the land is unchanged at $400,000 with $700,000 attributable to the house. Provided her rental income before CCA is more than this amount, what is the maximum CCA that Mamie can claim for 2022? A) $48,000. B) $32,000. C) $46,000. D) $23,000. Answer: A Explanation: A) $16,000. The maximum CCA is calculated as follows: Opening UCC Addition Cost ($850,000 - $400,000) Bump Up [(1/2)($1,100,000 - $400,000)] AccII Base For CCA Rate Maximum CCA

Nil $450,000 350,000

$800,000 400,000 $1,200,000 4% $ 48,000

B) $32,000 [(4%)($800,000)] C) $46,000 [(4%)($1,150,000)] D) $23,000 [(4%)(1/2)($1,150,000)]

Type: MC Topic: Change in use - general rules

57) Jose Montana owns a cottage that he purchased in 2013 for $330,000, with $100,000 of this amount reflecting the value of the land and $230,000 for the building. On January 1, 2022, this cottage is converted to a rental property. At the time of conversion, it is estimated that the FMV of the cottage is $600,000, with $150,000 of this amount attributable to the land and $450,000 to the building. In 2022, rental income, net of all expenses except CCA equals $30,200. What is the maximum amount of CCA that Jose can deduct on this rental property for 2021? A) $27,000. B) $20,400. C) $ 9,000. D) $18,000. Answer: B Explanation: A) $27,000 [(4%)(150%)($450,000)] B) $6,800 {[4%][150%][$230,000 + (1/2)($450,000 - $230,000)]}. C) $9,000 [(4%)(1/2)($450,000)] D) $18,000 [(4%)($450,000)] Type: MC Topic: Change in use - general rules

The questions below are based on the following information: Ramon lives in Calgary. In 2019 he purchased a second house in Lethbridge for $180,000 (land $100,000; building $80,000). His grandmother lives in the house rent free and was the only occupant from 2019 to 2022. In March 2022, Ramon converted the house into a duplex. His grandmother lives in one unit rent free and the other unit is rented to tenants. The FMV of the house in March 2022 was $215,000 (land $115,000; building $100,000). 58) What is Ramon's taxable capital gain for the 2022 change in use? He will not use the principal residence exemption for the Lethbridge house. A) $5,000 B) $8,750 C) $10,000 D) $17,500 Answer: B Explanation: A) Capital gain on building only: ($100,000 — 80,000) × 50% (one side) = $10,000 × 50% = $5,000 B) $8,750. Taxable capital gain on entire property: ($215,000 — 180,000) × 50% (one unit) = $17,500 × 50% = $8,750 Type: MC Topic: Change in use - general rules

59) What is Ramon's maximum 2022 CCA deduction for this rental property? The rental income before CCA is $6,000. A) $2,400 B) $2,700 C) $1,600 D) $1,800 Answer: B Explanation: A) No bump -up + AccII B) $2,700 Deemed Cost [1/2][$80,000 + (50%)($100,000 - $80,000)] = $45,000 capital cost. CCA = [(150%)($45,000)(4%) = $2,700 C) No bump -up D) No Half-Year Type: MC Topic: Change in use - general rules

60) A depreciable property owned by an individual that was used in a business carried on by the individual as a sole proprietor.is converted to personal use. The capital cost of the property is $100,000 and the UCC is $80,000. The FMV of the property at the time of the change in use is $150,000. Which of the following statements is NOT correct? A) The deemed disposition will create recapture of $20,000 that is business income. B) The deemed disposition will create a taxable capital gain of $25,000. C) The capital cost for CCA purposes will be $125,000. D) The cost for capital gains purposes will be $150,000. Answer: C Explanation: C) Capital cost is the expression used to describe the cost of depreciable property. Depreciable property is property that is used to earn either business or property income. Since personal use is not an income earning function there can be no capital cost once property is converted to personal. Type: MC Topic: Change in use - general rules

61) Arnold Swartz converted his principal residence into a rental property after having lived in it for 5 years. He has not been able to find a tenant in the current year. The house had cost $1 million. At the time of conversion, the building had a FMV of $1.4 million. What is the UCC balance in the rental property's Class 1 before any CCA is claimed? Assume that the property is a source of income when converted. A) $1,000,000 B) $1,200,000 C) $1,400,000 D) Nil Answer: B Explanation: B) $1,000,000 + (1/2)($1,400,000 - $1,000,000) = $1,200,000. Type: MC Topic: Change in use - general rules

62) In 2014, Rochelle Parsons purchased a home in Calgary, Alberta for $350,000, with $75,000 of this amount being the estimated value of the land and $275,000 for the building. In 2016, she was required by her employer to move to London, Ontario. As she believed Calgary real estate was an outstanding investment, she decided to convert the home to a rental property, but decided not to claim any CCA. She decided to rent a home in London, rather than purchasing a second residence. In 2022, recognizing that she was unlikely to return to Calgary, she sold the Calgary home for $500,000, with $150,000 of this amount being the estimated value of the land and $350,000 the value of the building. What is the minimum capital gain that Rochelle will have to include in her income for 2022? Assume that she filed the election under ITA 45(2) on time. A) $33,333. B) $16,667. C) $50,000. D) $150,000. Answer: B Explanation: A) $33,333 {$150,000 - [($150,000)(7 ÷ 9)]} B) $16,667. The total gain on property is $150,000 ($500,000 - $350,000). Rochelle can designate the property as her principal residence for the 3 years 2014 through 2016. In addition, she can elect to not have a deemed change in use for an additional 4 years, bringing the total to 7 years. Given that her total ownership period was 9 years, the exempt portion of the gain would be calculated as follows: [$150,000][(7 + 1) ÷ 9] = $133,333 Based on this, Rochelle would only have to recognize a gain of $16,667. C) $50,000 {$150,000 - [$150,000][3 + 1) ÷ 9]} D) $150,000 Type: MC Topic: Change in use - principal residence elections

63) Susan Cousins purchased a house in Oshawa in March, 2020, for $250,000 (land; $80,000, building; $170,000). Even though Susan would be unable to reside in the house immediately, she felt it was a very good price and did not want to miss the opportunity to own this house. She rented out the house as of April, 2020. The tenants will move out in December, 2021, and she will move into the house in January, 2022. The FMV of the house at January 1, 2022 was $300,000 (land; $130,000, building; $170,000). The UCC of the house on this date is $163,000. Which of the following is correct? A) The capital cost of the house for CCA purposes at January 1, 2022 is $275,000. B) Susan must recognize a capital gain of $50,000 at January 1, 2022. C) Susan must recognize a capital gain for tax purposes of $25,000 at January 1, 2021. D) Susan can elect to designate the house as her principal residence for the years 2020 and 2021 so there is no capital gain on the house. E) None of the above. Answer: B Explanation: A) There is no capital cost since the property is only used for personal purposes. B) Susan must recognize a capital gain for tax purposes of $50,000 at January 1, 2022. The house would not be considered a principal residence since the facts indicate that she never "ordinarily inhabited" the home. Type: MC Topic: Change in use - principal residence elections

64) In 1999, Ms. Boisvert became a homeowner, acquiring a residence in Halifax at a cost of $135,000. In 2010, she was transferred by her employer to Winnipeg. She rented accommodations in Winnipeg and rented the Halifax residence. Ms. Boisvert elected to be deemed not to have converted the property to an income producing use. She did not claim CCA on the property during the period that it was rented. In July, 2022, after 24 years of ownership, she sold the Halifax house for $207,000. She had decided she would not return to Halifax. Which one of the following amounts represents the minimum capital gain that she must include in her income for 2022? A) Nil. B) $57,000. C) $33,000. D) $36,000. Answer: B Explanation: B) When Ms. Boisvert moved, she filed an election to be deemed not to have converted the property to an income earning use. As a result, she could claim no CCA on the property, but she is able to designate it her principal residence for years in which she did not ordinarily inhabit the home. The additional designation time is limited to four years when the residence is vacated due to a transfer by one's employer and the house is not reoccupied after that employment ceases. In the following formula, A is the number of years the property is designated a principal residence and B is the number of years the property was owned after 1971. Exempt portion of gain = {[Total capital gain][(1 + A) ÷ B]} = [$72,000][(1 + 4) ÷ 24] = $15,000 Minimum capital gain = ($72,000 - $15,000) = $57,000 Note that the election could have been extended for more than four years if Ms. Boisvert had returned to resume habitation of the home, prior to leaving the employer who required her to move. Type: MC Topic: Change in use - principal residence elections

65) On January 1, 2022, Marcus Abbott permanently emigrates from Canada. At that time, his only property consists of his principal residence and a small apartment building. His principal residence was purchased several years ago at a cost of $650,000. Of this total $150,000 relates to the land and $500,000 to the building. The current FMV of his residence is $975,000. The value of the land is unchanged at the time of his departure. The apartment building had a capital cost of $870,000, with $170,000 of this total allocated to the land and $700,000 to the building. The building had a January 1, 2022 UCC of $476,000. At the time of his departure, the FMV of the apartment building is $1,200,000, with the value of the land remaining at $170,000 and the building at $1,030,000. What is the minimum amount to be added to Mr. Abbott's 2022 net income with respect to his emigration from Canada? A) $655,000. B) $724,000 C) $559,000 D) Nil Answer: D Explanation: A) $655,000 [($975,000 - $650,000) + ($1,200,000 - $870,000)] B) $724,000 [($1,200,000 - $870,000) + ($870,000 - $476,000)] C) $559,000 [(1/2)($1,200,000 - $870,000) + ($870,000 - $476,000)] D) Nil As both the residence and the apartment building are real property situated in Canada and are therefore exempt from any deemed disposition. Type: MC Topic: Departure from Canada - general rules

66) When an individual emigrates from Canada, there is a deemed disposition of several types of property. Which of the following properties would NOT be subject to this deemed disposition rule? A) A large painting by a well known Canadian artist. B) Land and building that is being used as a rental property. C) Shares in a CCPC involved in earning active business income. D) Shares in a CCPC that is used to own investments. Answer: B Explanation: B) Land and building that is being used as a rental property. Type: MC Topic: Departure from Canada - general rules

67) Joel has lived in Canada his entire life. He is planning to depart permanently from Canada severing his Canadian residency. The deemed disposition rules on departure would NOT apply to his: A) shares in a Canadian public corporation. B) shares in a Canadian private corporation. C) coin collection. D) house in Ontario. Answer: D Explanation: D) House in Ontario. Type: MC Topic: Departure from Canada - general rules

68) Which of the following statements with respect to the capital gains deferral election of ITA 44.1 is NOT correct? A) The replacement shares must be the common shares of an eligible small business corporation that are acquired within 120 days after the end of the year in which the qualifying disposition took place B) The use of the deferral provision will not affect the ACB of the replacement shares. C) The deferral is limited to a fraction of the capital gain resulting from the qualifying disposition. D) The eligible small business corporation and corporations related to it cannot have assets with a carrying value in excess of $50 million. Answer: B Explanation: B) The use of the deferral provision will not affect the ACB of the replacement shares. Type: MC Topic: Capital gains deferral ITA 44.1 (ESBC)

69) On November 25, 2021 Ervin sold 100 shares of Mighty Ltd., an eligible small business corporation (ESBC), for $32 per share. He purchased the shares in 2020 for $28 per share. On December 15, 2021 he reinvested the proceeds by buying 80 shares of Mouse Ltd. for $40 per share. Mouse Ltd. is also an ESBC so he was able to use the ITA 44.1 election to defer the 2021 capital gain. Ervin sold all of the Mouse Ltd. shares on July 5, 2022 for $52 per share. His taxable capital gain for 2022 is: A) $680. B) $960. C) $480. D) $1,360. Answer: A Explanation: A) $680. Deferred 2022 capital gain = $400 [(100)($32 - $28)]. ACB of Mouse shares = $2,800 [(80)($40) - $400]. Capital gain = $1,360 [(80)($52) - $2,800]. The taxable amount = $680 [(1/2)($1,360)]. B) [($52 - $40)(80)] = $960 C) [($960)(1/2)] D) [(80)($52) - $2,800] = $1,360 Type: MC Topic: Capital gains deferral ITA 44.1 (ESBC)

70) On July 1, 2021, the Flex Company's warehouse was completely destroyed in a fire. The capital cost of the warehouse was $1,500,000 and its January 1, 2021 UCC was $1,248,539. On December 1, 2021, the company received insurance proceeds of $1,650,000, an amount equal to the estimated FMV of the building. On April 1, 2022, the Company acquires an existing warehouse building for $1,800,000. Provided the Company makes all possible elections, what amount will be added to the Class 1 UCC as the result of this acquisition? A) $1,548,539. B) $1,650,000 C) $1,398,539. D) $1,248,539 Answer: C Explanation: A) $1,548,539 ($1,800,000 - $251,461) B) $1,650,000 ($1,800,000 - $150,000 C) $1,398,539. When the insurance proceeds were received in 2021, the Company would have a capital gain of $150,000 ($1,650,000 - $1,500,000) as well as recapture of $251,461 ($1,500,000 - $1,248,539). Since the replacement cost of the new building exceeded the insurance proceeds for the old building, both of these amounts can be reversed through a request to the CRA to reassess the year of the disposition. This will result in a UCC balance of $1,398,539 ($1,800,000 - $150,000 - $251,461). D) $1,248,539 (In Problem) Type: MC Topic: Replacement property - general rules

71) Equipment was stolen from Far East Corp. on May 1, 2022. The cost of the equipment was $10,000 and the UCC was $7,500. The insurance proceeds of $12,000 were received on September 15, 2022 and replacement equipment was purchased for $11,500 on September 30, 2022. Far East makes all replacement property elections. Which of the following statements is correct? A) The 2022 taxable capital gain is $250 and the deemed capital cost of the new equipment is $10,000. B) The 2022 taxable capital gain is $250 and the deemed capital cost of the new equipment is $11,500. C) The 2022 taxable capital gain is $250 and the deemed capital cost of the new equipment is $10,750. D) The 2022 taxable capital gain is $1,000 and the deemed capital cost of the new equipment is $12,000. Answer: A Explanation: A) The 2022 taxable capital gain is $250 and the deemed capital cost of the new equipment is $10,000. Taxable Capital Gain: Lesser of a) $12,000 — 10,000 = $2,000 and b) $12,000 — 11,500 = $500 × 50% = $250 Reversed Capital Gain = $2,000 — 500 = $1,500 Deemed Capital Cost = $11,500 — 1,500 = $10,000 B) $11,500 replacement C) $11,500 — (1,500 × 50%) = $10,750 D) $12,000 insurance proceeds Type: MC Topic: Replacement property - general rules

72) With respect to the deferral provisions for replacement property, which of the following statements is NOT correct? A) In the case of involuntary dispositions, for the deferral provisions to apply, the replacement of the property must occur within 24 months after the end of the year in which the POD were received. B) Provided the replacement cost of the property exceeds the POD, 100% of any capital gain that results from an involuntary disposition can be reversed. C) When the disposition is voluntary, the deferral provisions only apply to former business properties. D) Provided the replacement cost of the property is less than the POD, 100% of any recapture recognized as a result of an involuntary disposition can be reversed. Answer: D Explanation: D) Provided the replacement cost of the property is less than the POD, 100% of any recapture recognized as a result of an involuntary disposition can be reversed. Type: MC Topic: Replacement property - general rules

73) Assume that in all of the following situations the company's taxation year is the calendar year and that recapture arose as a result of a disposition. In which disposition situation would the company NOT be permitted to defer the recognition of the recapture with a replacement property election? A) A warehouse was destroyed in a fire in December, 2020. The insurance proceeds received were used to build a new warehouse that was finished in June, 2022. B) A backhoe was stolen in December, 2020. The insurance proceeds received were used to buy a new backhoe in June, 2022. C) A backhoe was destroyed in a fire in December, 2020. The insurance proceeds received were used to buy a new backhoe in June, 2022. D) A warehouse was sold in December, 2020. A new warehouse was purchased in June, 2022. Answer: D Explanation: D) A warehouse was sold in December, 2020. A new warehouse was purchased in June, 2022. Replacement properties must be purchased within 12 months of the taxation year in which a voluntary disposition of real property occurred. Type: MC Topic: Replacement property - general rules

74) On January 1, 2022, Michaels Inc. purchases a used building at a cost of $4,200,000. Of this amount, $375,000 represents the FMV of the land and $3,825,000 the value of the building. In order to encourage Michaels' move to this location, the local government has provided the company with assistance of $1,100,000 towards the purchase of the building. Michaels Inc. has a December 31 taxation year end. What is the maximum amount of CCA that Michaels can claim with respect to the building for 2022? Answer: The capital cost of this Class 1 building would be $2,725,000 ($3,825,000 - $1,100,000). Given this, the maximum CCA for 2022 would be $163,500 [(150%)($2,725,000)(4%)]. The building does not qualify for the enhanced CCA rates. of either 6% or 10% since it is not new. Type: ES Topic: Government assistance

75) On July 1, 2022, Frodam Ltd. purchases a used building at a cost of $3,400,000. The value of the land is $800,000 and the value of the building $2,600,000. In order to assist with this purchase and encourage the Company's move to this location, the provincial government has provided assistance in the form of a grant of $500,000 towards the purchase of the building. What is the maximum amount of CCA that Frodam can claim with respect to the building for the taxation year that ends on December 31, 2022? Answer: The capital cost of this Class 1 building would be $2,100,000 ($2,600,000 - $500,000). Based on this, the maximum CCA for 2022 would be $126,000 [(150%)($2,100,000)(4%)]. The building does not qualify for the enhanced CCA rates. of either 6% or 10% since it is not new. Type: ES Topic: Government assistance

76) Mr. Franklin Sharp owns 750 shares of Guard Inc. The ACB per share is $21.50. On June 15, 2022, he sells all of these shares for $13.75 each. On June 21, 2022, he purchases 400 shares of Guard Inc. at a cost of $12.15 each. He continues to own the shares at the end of the year. What are the income tax consequences of these transactions including the ACB of the shares on hand at December 31, 2022? Answer: The allowed portion of the loss would be calculated as follows: POD [(750)($13.75)] ACB [(750)($21.50)] Capital Loss Disallowed Loss Portion [(400)($21.50 - $13.75)] Revised Capital Loss Inclusion Rate Allowable Capital Loss

$10,313 ( 16,125) ($ 5,812) 3,100 ($ 2,712) 1/2 ($ 1,356)

The ACB of the shares on hand at December 31, 2022 would be: Purchase Price [(400)($12.15)] Disallowed Loss [(400)($21.50 - $13.75)] ACB

$4,860 3,100 $7,960

Type: ES Topic: Superficial loss

77) Ms. Linda Udall owns 800 shares of Fordam Inc. that she purchased several years ago at $10 per share. On April 30, 2022, she purchases an additional 200 shares at $12 per share. On July 15, 2022, after Fordam releases unexpectedly bad second quarter results, Ms. Udall sells all 1,000 of her shares at $5 per share. On August 1, 2022, she purchases 200 shares at $1 per share as she believes the market has overreacted to the bad news. Ms. Udall continues to own the shares at December 31, 2022. What are the income tax consequences of these transactions including the ACB of the shares owned at December 31, 2022? Answer: The allowed portion of the loss would be calculated as follows: POD [(1,000)($5)] ACB [(800)($10) + (200)($12)]* Capital Loss Disallowed Loss Portion [(200)($10.40* - $5)] Revised Capital Loss Inclusion Rate Allowable Capital Loss *ACB equal $10.40 ($10,400 ÷ 1,000) per share

$ 5,000 ( 10,400) ($ 5,400) 1,080 ($ 4,320) 1/2 ($ 2,160)

The ACB of the shares owned December 31, 2022 is: Initial cost [(200)($1)] Disallowed Loss [(200)($10.40 - $5)] ACB

$ 200 1,080 $1,280

Type: ES Topic: Superficial loss

78) On July 1, 2022, Lorty Inc. sells equipment for $126,000. The capital cost of the equipment is $111,000 and the carrying value for accounting purposes is $93,000. For equipment was included in Class 8. The UCC balance in the class on January 1, 2022 was $103,000. There were no other additions or dispositions to the class during the taxation year ending December 31, 2022. Indicate the reconciliation adjustments that would be required to Lorty Inc.'s accounting income for 2022. Answer: The required adjustments would be as follows: Add: Taxable Capital Gain [(1/2)($126,000 - $111,000)] Recapture ($111,000 - $103,000) Deduct: Accounting Gain ($126,000 - $93,000) Total 2022 Reconciliation Adjustments Type: ES Topic: Depreciable property - reconciliation adjustments

$ 7,500 8,000 ( 33,000) ($17,500)

79) Mr. Levon Park transacts frequently in the common shares of Donner Ltd. Purchases and sales of these shares in 2021 and 2022 are as follows:

January 15, 2021 Purchase March 12, 2021 Purchase September 15, 2021 Sale February 14, 2022 Purchase October 1, 2022 Sale

Shares Purchased (Sold) 700 410 (250) 925 (410)

Per Share Amount $22.75 25.50 26.45 28.25 30.75

Determine Mr. Park's taxable capital gains and allowable capital losses for 2021 and 2022. Answer: The relevant average cost calculations are as follows: Purchase or Sale Date January 15, 2021 Purchase March 12, 2021 Purchase Subtotal September 15, 2021 Sale Subtotal February 14, 2022 Purchase Subtotal October 1, 2022 Sale ACB Year end

Shares Purchased (Sold) 700 410 1,110 ( 250) 860 925 1,785 ( 410) 1,375

Cost Per Share $22.75 25.50 $23.77 $28.25 $26.09

Total Cost $15,925 10,455 $26,380 ( 5,943) $20,437 26,131 $46,568 ( 10,697) $35,871

Mr. Park's taxable capital gain for 2021 is calculated as follows: POD [($26.45)(250)] ACB [($23.77)(250)] Capital Gain Inclusion Rate Taxable Capital Gain

$6,613 ( 5,943) $ 670 1/2 $ 335

Mr. Park's taxable capital gain for 2022 is calculated as follows: POD [($30.75)(410)] ACB [($26.09)(410)] Capital Gain Inclusion Rate Taxable Capital Gain

$12,608 ( 10,697) $ 1,911 1/2 $ 956

Type: ES Topic: Identical properties

Average Cost/Share

$23.77

$26.09

80) For the last two years, Margaret Lane has Invested in the shares of Garod Inc. Details of her purchases and sales of these shares are as follows:

January 2021 Purchase July 2021 Purchase November 2021 Sale July 2022 Purchase December 2022 Sale

Shares Purchased (Sold) 300 200 (250) 400 (150)

Per Share Amount $4.75 5.25 5.40 5.50 4.80

Determine Ms. Lane's taxable capital gains and allowable capital losses for 2021 and 2022. Answer: The relevant average cost calculations are as follows: Purchase or Sale Date January 2021 Purchase July 2021 Purchase Subtotal November 2021 Sale Subtotal July 2022 Purchase Subtotal December 2022 Sale ACB Year End

Shares Purchased (Sold) 300 200 500 ( 250) 250 400 650 ( 150) 500

Cost Per Share $4.75 5.25 $4.95 $5.50 $5.29

Total Cost $ 1,425 1,050 $2,475 ( 1,238) $ 1,237 2,200 $3,437 ( 794) $2,643

Ms. Lane's taxable capital gain for 2021 is calculated as follows: POD [($5.40)(250)] ACB [($4.95)(250)] Capital Gain Inclusion Rate Taxable Capital Gain

$1,350 ( 1,238) $ 112 1/2 $ 56

Ms. Lane's taxable capital gain for 2022 is calculated as follows: POD [($4.80)(150)] ACB [($5.29)(150)] Capital Loss Inclusion Rate Allowable Capital Loss)

$720 ( 794) ($ 74) 1/2 ($ 37)

Type: ES Topic: Identical properties

Average Cost/Share

$4.95

$5.29

81) During the taxation year ending December 31, 2021, Pointer Inc. sells capital property with an ACB of $226,000 for $279,000 which includes a fee for the warranty. The Company provides the purchaser with a one year warranty and the Company estimates that it will cost $4,100 to fulfill the warranty. On September 22, 2022, the Company spends $4,400 to fulfill the warranty. Determine the effect of these transactions on net income for 2021 and 2022. Would your answer change if the warranty expenses were incurred in May of 2022? Answer: For 2021, there will be a taxable capital gain of $26,500 [(1/2)($279,000 - $226,000)]. In 2022, there will be an allowable capital loss of $2,200 [(1/2)($4,400)]. This allowable capital loss will only be deductible in 2022 to the extent there are net taxable capital gains in 2022 (e.g. a positive ITA 3(b) amount). Any capital loss that cannot be claimed in the current year becomes a 2022 net capital loss that can be applied against net income of other taxation years. If the warranty costs were incurred prior to the corporate filing due date of June 30, 2022 then the expenses would reduce the POD of the capital property. In that case the taxable capital gain would be $24,300 [(1/2)($279,000 - $4,400 - $226,000)]. Type: ES Topic: Warranties on capital property - ITA 42

82) In 2021, John Ritton carries on a business as a sole proprietor. He sells non-depreciable capital property with an ACB of $126,000 for $182,000 which includes a fee for a warranty. The warranty is for a one year period that he estimates will cost $2,600. In 2022, he spends $2,400 to fulfill the warranty. Determine the income tax consequences for 2021 and 2022 of the sale of the property and the impact of the warranty expenses. Assume that the warranty expenses were incurred May 19, 2022. Answer: Since the warranty expenses were incurred prior to the 2021 filing due date of June 15, 2022 the warranty costs will reduce the POD of the sale of the property in 2021. The 2021 taxable capital gain will be of $26,800 [(1/2)($182,000 - $2,400 - $126,000)]. Type: ES Topic: Warranties on capital property - ITA 42

83) In June of 2022, Ms. Janet Houston sells capital property with an ACB of $112,500, for $172,300. She receives a down payment of $33,000 in cash, with the balance only due at the end of the following taxation year. What is the minimum amount that she will have to include in her income for 2022 as a result of the sale? Answer: The capital gain on the property would be $59,800 ($172,300 - $112,500). As $139,300 ($172,300 $33,000) of the proceeds are only receivable after the end of the year a capital gains reserve can be claimed equal to the lesser of: • [($59,800)($139,300 ÷ $172,300)] $48,347 • [($59,800)(20%)(4 - 0)] $47,840 The addition to her income for 2021 is $5,980 [(1/2)($59,800 - $47,840)]. Type: ES Topic: Capital gains reserve

84) In 2021, Jack Harris sells capital property with an ACB of $87,200 for $105,300. In accordance with the sales agreement he receives a down payment of $5,300 in 2021, a second payment of $50,000 in 2022, and a final payment of $50,000 in 2023. What is the minimum amount that Jack will have to include in his income for 2021, 2022, and 2023 as a result of the sale? Answer: The capital gain on the property would be $18,100 ($105,300 - $87,200). At the end of 2021, the amount that is receivable after the end of the year is $100,000 ($105,300 - $5,300). Based on this, the 2021 reserve is the lesser of: • [($18,100)($100,000 ÷ $105,300) $17,189 • [($18,100)(20%)(4 - 0)] $14,480 This means that $1,810 [(1/2)($18,100 - $14,480)] will be required to be added to his 2021 income. At the end of 2022, the amount that is receivable after the end of that year is $50,000 ($100,000 - $50,000). Based on this, the 2022 reserve is the lesser of: • [($18,100)($50,000 ÷ $105,300) $ 8,594 • [($18,100)(20%)(4 - 1)] $10,860 The capital gain for 2022 would be calculated as follows: 2021 Reserve 2022 Reserve 2022 Capital Gain

$14,480 ( 8,594) $ 5,886

As a result $2,943 [(1/2)($5,886)] will be required to be added to his 2022 income as a taxable capital gain. At the end of 2022 there is no amount that is receivable after the end of that year and therefore no reserve can be claimed. However, the 2022 reserve will have to be added back to income in 2023 resulting in a taxable capital gain of $4,297 [(1/2)($8,594)]. Type: ES Topic: Capital gains reserve

85) In 2021, non-depreciable capital property with an ACB of $131,000 is sold for $115,000. In accordance with the sale agreement $82,000 is paid in cash on the day of the sale and $33,000 becomes payable in 2022. In 2022, the receivable for $33,000 proves to be uncollectible and there is no ability to recover the property. What are the income tax consequences of these events in 2021 and 2022? Assume the seller will file any necessary elections to minimize income tax. Answer: The sale of the property in 2021 results in an allowable capital loss of $8,000 [(1/2)($115,000 $131,000)]. In 2022, there will be an allowable capital loss of $16,500 [(1/2)(Nil - $33,000)] if an election is filed under ITA 50(1) which would deem the debt to have been disposed of for nil proceeds. Type: ES Topic: Bad debts on capital property - ITA 50(1)

86) In November of 2021, John Bradley sells non-depreciable capital property with an ACB of $182,000, for $213,000. In accordance with the sale agreement he receives $63,000 in cash on the day of the sale with the balance of $150,000 payable December 1, 2022. When the balance becomes due on December 1, 2022, it is clear that none of this amount will ever by paid as the purchaser has since become insolvent. The sale agreement does not allow the seller to recover the property. What are the income tax consequences of these events in 2021 and 2022? Assume that the seller decides not to claim a capital gains reserve. Answer: In 2021, there will be a taxable capital gain of $15,500 [(1/2)($213,000 - $182,000)]. In 2022, the uncollectible balance will result in an allowable capital loss of $75,000 [(1/2)(POD Nil - ACB of the amount owing $150,000)] on the filing of an election under ITA 50(1). The allowable capital loss can be deducted in 2022, to the extent of any net taxable capital gains in that year (e.g. a positive ITA 3(b) amount). Any part of the allowable capital loss that cannot be claimed in 2022 becomes a 2022 net capital loss that can be claimed in other taxation years such as the 2021 taxation year to offset the $15,500 taxable capital gain. Type: ES Topic: Bad debts on capital property - ITA 50(1)

87) Saba Corp. purchased an apartment complex in 2021 for $450,000 ($100,000 for the land, $350,000 for the building) and sold it in 2022 for $460,000 ($120,000 for the land, $340,000 for the building). $7,000 was claimed as CCA in 2021 resulting in a UCC of $343,000 at the beginning of the 2022 taxation year. Determine the income tax consequences of the sale for 2022. Answer: In the absence of the special rules related to the sale of real property, there would be taxable capital gain of $10,000 [(1/2)($120,000 - $100,000)], and a terminal loss on the building of $3,000 [UCC $343,000 - lesser of POD and capital cost $340,000]. However, in these circumstances, ITA 13(21.1)(a) would require a deemed proceeds for the building to be calculated as follows: The Lesser of: • The FMV of the land and building Reduced by the lesser of: • The ACB of the land = $100,000 • The FMV of the land = $120,000 • The Greater of: • The FMV of the building = $340,000 • The Lesser of: The cost of the building = $350,000 The UCC of the building = $343,000

$460,000

( 100,000)

$360,000

$343,000

With the deemed proceeds for the building set at $343,000, the terminal loss on the building would be reduced to nil [(UCC $343,000) - Deemed POD $343,000]. With the addition of $3,000 to the building proceeds, the land proceeds are reduced by an equivalent amount to $117,000, reducing the taxable capital gain to $8,500 [(1/2)($117,000 - $100,000)]. Type: ES Topic: Terminal loss on sale of land and building - ITA 13(21.1)

88) Mr. Jerry Haggard owns a house in Calgary, as well as a cottage in Canmore. He purchased the house in 2011 for $186,000. The cottage was purchased in 2014 for $105,000. In December, 2022, both properties are sold, the house for $263,000 and the cottage for $197,000. He has lived in the Calgary house during the year, but has spent his summers in the Canmore cottage. Determine the minimum capital gain that must be included in his 2022 income as a result of the sale of the two properties. Answer: The capital gain on each of the two properties is as follows: House $263,000 ( 186,000) $ 77,000

Sales Price (POD) ACB Capital Gain Annual Gain - House ($77,000 ÷ 12) Annual Gain - Cottage ($92,000 ÷ 9)

Cottage $197,000 ( 105,000) $ 92,000 $6,417 $10,222

Given these amounts, the years 2015 through 2022 should be designated to the cottage and the years 2011 through 2014 designated for the house. This results in the following capital gain exemption for the two properties: Cottage {[$92,000][(8 + 1) ÷ 9]} City Home {[$77,000][(4 + 1) ÷ 12]}

$92,000 $32,083

This will leave a minimum capital gain on the sale of the two properties of $44,917 ($92,000 - $92,000 + $77,000 - $32,083). Type: ES Topic: Principal residence - general rules

89) Ms. Harriet Lowe owns a city home in Vernon, as well as a chalet at the Silver Star ski area. The city home was purchased in 2009 at a cost of $172,000. The chalet was purchased in 2015 for $89,000. On July 1, 2022, the house is sold for $214,000 and the chalet is sold for $122,000. A real estate commission of 6% was paid on each sale. She has spent some time in each property in every year from 2015 through 2022. Determine the minimum capital gain that she must report for 2022 as a result of the sale of the two properties. Answer: The total capital gain on the two properties can be calculated as follows: City Home $214,000 ( 172,000) ( 12,840) $ 29,160

POD (Sales Price) ACB Sales Commission 6% Capital Gain Annual Gain - City Home ($29,160 ÷ 14) Annual Gain - Chalet ($25,680 ÷ 8)

Chalet $122,000 ( 89,000) ( 7,320) $ 25,680 $2,083 $3,210

Given these amounts, the years 2016 through 2022 should be designated for the chalet. This leaves the years 2009 through 2015 for the Vernon house. This gives the following gain exemption for the two properties: Chalet {[$25,680][(7 + 1) ÷ 8]} City Home {[$29,160][(7 + 1) ÷ 14]}

$25,680 $16,663

This will leave a minimum capital gain of $12,497 ($25,680 - $25,680+$29,160 - $16,663). Type: ES Topic: Principal residence designation

90) During the current year, Robert Langois disposes of several properties. The POD and the ACB of these properties are as follows: Adjusted Cost Base (ACB) $45,000 800 21,000 50,500

Collector Car Marble Sculpture Antique Furniture Stamp Collection

Proceeds of Disposition (POD) $61,000 13,000 12,000 26,000

What are the income tax consequence of the dispositions? Answer: The income tax consequences are as follows: Personal Use Property Gain on Collector Car ($61,000 - $45,000) Loss on Antique Furniture (Personal Use Property) Listed Personal Property Gain on Marble Sculpture ($13,000 - $1,000 floor) $12,000 Loss on Stamp Collection (See Note) ( 12,000) Capital Gain Inclusion Rate Net Taxable Capital Gains

$ 16,000 Nil

Nil $16,000 1/2 $ 8,000

Note: The ACB of the marble sculpture is deemed to be $1,000 using the $1,000 floor rule. While there is a capital loss of $24,500 ($50,500 - $26,000), on the coin collection, it can only be deducted to the extent of the $12,000 capital gain on the sale of the sculpture because it is listed personal property. The balance of $12,500 ($24,500 - $12,000) is a net gain on listed personal property for the current year that can be carried back 3 years and forward 7 years. Type: ES Topic: Personal use property - general rules

91) During the current year, Rhonda Fontaine disposes of several personal use properties. Relevant information with respect to these properties follows: Adjusted Cost Base (ACB) $ 18,000 42,000 24,000 142,000

Coin Collection Sailboat Antique Sports Car Group of Seven Painting

Proceeds of Disposition (POD) $ 11,500 56,000 12,000 145,000

What are the income tax consequence of these dispositions? Answer: The results are as follows: Personal Use Property Gain on Sailboat ($56,000 - $42,000) Loss on Antique Sports Car (Personal Use Property) Listed Personal Property Gain on Group of Seven Painting ($145,000 - $142,000) $3,000 Loss on Coin Collection (See Note) ( 3,000) Capital Gain Inclusion Rate Net Taxable Capital Gains

$14,000 Nil

Nil $14,000 1/2 $ 7,000

Note: While there is a capital loss of $6,500 ($11,500 - $18,000), on the coin collection, it can only be deducted to the extent of the $3,000 capital gain on the sale of the painting. The balance of $3,500 ($6,500 $3,000) is a net gain on listed personal property for the current year that can be carried back 3 years and forward 7 years. Type: ES Topic: Personal use property - general rules

92) On June 1, 2019, Ms. Lorenda Jacks acquires 15,300 Barbadian dollars (B$) at a rate of B$1 = C$0.70. She immediately invests the B$15,300 in 300 shares of a Barbadian company, Tellen Ltd. In September of 2022, the shares are sold for B$85 per share. The Barbadian dollars are immediately converted into Canadian dollars at a rate of B$1 = C$0.72. What amounts will be included in Ms. Jacks' income for 2022 as a result of these transactions? Answer: The taxable capital gain on the sale is calculated as follows: POD [(300)(B$85)(C$0.72)] ACB [(B$15,300)(C$0.70)] Capital Gain Inclusion Rate Taxable Capital Gain

$18,360 ( 10,710) $ 7,650 1/2 $ 3,825

None of this gain qualifies under ITA 39(1.1), so there would be no $200 exemption. Type: ES Topic: Foreign exchange gains and losses

93) In 2020, Lex Steller acquires £10,000 at a rate of £1 = $1.80. The funds are immediately used to acquire 500 shares of a British company, Upper Lip Ltd., at a price of £20 per share. In January, 2022, he sells all of the shares for £32 per share, leaving all of the British pounds in his trading account. At this time, £1 = $1.60. In December of 2022, he converts the British pounds to Canadian dollars at a rate of £1 = $1.70. What amounts will be included in Mr. Steller's income for 2022 as a result of these transactions? Answer: At the time of the January sale, Mr. Steller will have a taxable capital gain, calculated as follows: POD [(500)(£32)($1.60)] ACB [(500)(£20)($1.80)] Capital Gain Inclusion Rate Taxable Capital Gain

$25,600 ( 18,000) $ 7,600 1/2 $ 3,800

When the currency is converted in December 2022, Mr. Steller will have a taxable capital gain calculated as follows: POD [(500)(£32)($1.70)] ACB of Currency [(500)(£32)($1.60)] Foreign Exchange Gain Exclusion (Permitted to Individuals - ITA 39(1.1)) Foreign Exchange Gain Inclusion Rate Foreign Exchange Taxable Capital Gain

$27,200 ( 25,600) $ 1,600 ( 200) $ 1,400 1/2 $ 700

Type: ES Topic: Foreign exchange gains and losses

94) For a number of years, Ms. Danine Post has owned a rural cottage that has been used only for her personal use and enjoyment. The cottage cost $142,000 in 2018 and, on July 1, 2022, the FMV is $242,000. She estimates that the FMV of the land on which the cottage is located is $22,000 on both of these dates. It will not be designated as her principal residence for any of the years owned. On July 1, 2022, she rents the property to an arm's length person for $1,000 per month on a three year rental agreement. Rental income for the year ending December 31, 2022, before the deduction of any CCA, is $4,800. What is the maximum amount of CCA that can be claimed in 2022? Answer: The required calculations are as follows: Cost of Building ($142,000 - $22,000) FMV at Change in Use ($242,000 - $22,000) Cost Gain Bump Up Capital Cost for CCA Purposes = UCC AccII [(50%)($170,000)] CCA Base Rate Maximum 2022 CCA

$120,000 $220,000 ( 120,000) $100,000 1/2

50,000 $170,000 85,000 $255,000 4% $10,200

The short fiscal period rules do not apply to an individual earning property (rental) income. In addition the AccII rules (as amended in June of 2021) apply since no CCA had been previously claimed on the property by anyone for a previous taxation year. CCA, with respect to rental properties, cannot be used to create or increase a loss and is restricted to the rental income after deducting all expenses except CCA. As a result the maximum CCA that can be claimed is $4,800 resulting in nil rental income. Type: ES Topic: Change in use - CCA on rental property

95) On December 1, 2022, Mr. Jordon Jordu converts his summer cottage into a rental property. The cottage has an original cost of $57,000 and it will not be designated as his principal residence for any of the years owned. At the time of the conversion, the FMV of the property is $136,400. The value of the land was originally $20,000 and has not changed. Determine the income tax consequences of the change in use for 2022. Your answer should include the maximum CCA that can be claimed in 2022, and the January 1, 2023 UCC for the rental property, assuming the maximum CCA is claimed. Answer: There would be a taxable capital gain resulting from the change in use as follows: Deemed disposition POD ($136,400 - $20,000) ACB ($57,000 - $20,000) Capital Gain Inclusion Rate Taxable Capital Gain Cost of Building ($57,000 - $20,000) FMV at Change in Use ($136,400 - $20,000) Cost Gain Bump Up Capital Cost for CCA Purposes = UCC AccII [(50%)($76,700)] CCA Base Rate Maximum CCA for 2021

$116,400 ( 37,000) $ 79,400 1/2 $ 39,700 $ 37,000 $116,400 ( 37,000) $79,400 1/2

January 1, 2023 UCC ($76,700 - $4,602)

39,700 $ 76,700 38,350 $115,050 4% $ 4,602 $ 72,098

96) Mr. Ryan Marchand owns publicly traded securities with an ACB of $30,000 and a FMV of $56,000. On August 15, 2022, he becomes a non-resident and emigrates from Canada still owning the shares. What are the income tax consequences of the emigration, if any, with respect to these securities? Answer: There would be a deemed disposition on his departure, resulting in a taxable capital gain of $13,000 [(1/2)($56,000 - $30,000)] which would be added to his income for the short taxation year ending August 15, 2022. The ACB of the shares would increase to $56,000. Type: ES Topic: Emigration

97) On December 1, 2022 Ms. Renee Black becomes a non-resident and emigrates from Canada. At the time of her departure she owns publicly traded securities with an ACB of $45,000 and a FMV of $52,000. What are the income tax consequences of her becoming a non-resident, if any, with respect to these securities? Answer: There would be a deemed disposition on her departure, resulting in a taxable capital gain of $3,500 [(1/2)($52,000 - $45,000)] which would be added to her income for the short taxation year ending December 1, 2022. The ACB of the shares would increase to $52,000. Type: ES Topic: Emigration

98) On January 15, 2022, Chad Brant sells all of the common shares he owns in Brant Inc., an eligible small business corporation (ESBC). He had owned the shares for 15 years. The ACB of the shares is $600,000 and they are sold for $1,100,000. On February 15, 2022, $940,000 of these proceeds are invested in the common shares of Quint Ltd., another ESBC. How much of the capital gain arising on the sale of the Brant Inc. shares can be deferred by the investment in Quint Ltd.? Assuming that the maximum deferral is elected, how will this affect the ACB of the Quint Ltd. shares? Answer: The capital gain on the sale of the Brant shares is $500,000 (POD $1,100,000 - ACB $600,000). As the $940,000 cost of the replacement shares is less than the POD of $1,100,000, the permitted deferral is calculated as follows: [($500,000)($940,000 ÷ $1,100,000)] = $427,273 The deferral reduces the ACB of the Quint Ltd. shares to $512,727 ($940,000 - $427,273). Type: ES Topic: Capital gains deferral ITA 44.1 (ESBC)

99) In early 2022, Carol Martin sells all of the common shares she owns in Martin Ltd., an eligible small business corporation (ESBC). She has owned the shares for 10 years. The shares had an ACB of $895,000 and were sold for $985,000. With the sale proceeds she made two investments in other ESBCs as follows: • $200,000 to invest in Barby Ltd. • $600,000 to invest in Ken Inc. The remaining proceeds of $185,000 are deposited in her savings account at the end of 2022. How much of the capital gain arising on the sale of the Martin Ltd. shares can be deferred by the investments in Barby and Ken? Assuming that the maximum deferral is elected, how will this affect the ACB of the shares purchased? Answer: The required calculations are as follows: Capital Gain ($985,000 - $895,000)

$90,000

Maximum Deferral [($90,000)($800,000 ÷ $985,000)]

$73,096

This reduction will be allocated to the two investments as follows:

Cost of Investments Deferral:

ACB

Barby Shares $200,000

Ken Shares $600,000

[($73,096)($200,000 ÷ $800,000)] [($73,096)($600,000 ÷ $800,000)] $181,726

( 18,274) ( 54,822) $545,178

Type: ES Topic: Capital gains deferral ITA 44.1 (ESBC)

100) Multi Inc., a company with a December 31 taxation year end, that carries on business out of a single Class 1 building that cost $815,000. At the beginning of 2021, the UCC for the class was $648,275. On June 30, 2021, the building was completely destroyed by a tornado. The building was insured for its FMV of $1,000,000 and this amount was received in September, 2021. The building is replaced in 2022 with a used building at a cost of $1,075,000. Multi Inc. wishes to minimize income taxes to the extent possible. Describe the 2021 and 2022 income tax consequences of these events, including the capital cost and UCC for the replacement building at the end of 2022. Ignore any gain or loss related to the land on which the building is situated.

Answer: As the replacement of the building did not occur until 2022, there will be a taxable capital gain and recapture in 2021: Insurance Proceeds (POD) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,000,000 ( 815,000) $ 185,000 1/2 $ 92,500

UCC Disposition - Lesser of Capital Cost = $815,000 POD = $1,000,000 Negative Ending UCC Balance = Recapture

$648,275

( 815,000) ($166,725)

Using the ITA 44(1) election, the revised capital gain for 2021 will be nil, the lesser of: • The reported gain of $185,000 • Nil - The amount by which the POD of the replaced property exceeds the cost of the replacement building ($1,000,000 - $1,075,000) which would be nil. With the ITA 13(4) election, the reassessed 2021 recapture is as follows: January 1, 2021 UCC Deduction: Lesser of: • POD = $1,000,000 • Capital Cost = $815,000 Reduced by the lesser of: • Normal Recapture = $166,725 • Replacement Cost = $1,075,000 Reassessed 2021 Recapture

$648,275

$815,000

( 166,725)

( 648,275) Nil

These revised amounts will be reflected in the tax costs of the new building as follows: Cost of the replacement building Capital Gain Deferred by the election Deemed Capital Cost Recapture Deferred by the election UCC - December 31, 2022

$1,075,000 ( 185,000) $ 890,000 ( 166,725) $ 723,275

These amounts are $75,000 more than the old capital cost and UCC. This reflects the $75,000 ($1,075,000 $1,000,000) over and above the insurance proceeds that the Company spent on replacing the building. Type: ES Topic: Involuntary dispositions

101) In October of 2021 a thief broke into Guda Corporation's head office and stole their electronic communications equipment. The equipment originally cost $18,000 and was in a separate Class 8 with a UCC balance of $12,000. Fortunately, the equipment was insured for replacement cost so Guda received insurance proceeds of $20,000. The equipment was replaced in January of 2022 for $20,000. Guda has a taxation year end of December 31. Provided the appropriate elections are made to minimize 2021 income, determine the income tax consequences of the theft of the equipment, the insurance payout and the capital cost and UCC of the replacement equipment at the end of 2022. Answer: The results in 2021 would be as follows: POD (Insurance proceeds) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$20,000 ( 18,000) $ 2,000 1/2 $ 1,000

January 1, 2021 UCC Lesser of: Capital Cost of $18,000 POD of $20,000 Negative Ending Balance = Recapture

$12,000

( 18,000) ($ 6,000)

Using the ITA 44(1) election, the reassessed capital gain for 2021 will be nil, the lesser of: • The reported gain of $2,000 • Nil - The excess of the proceeds of disposition ($20,000) over the cost of the new equipment ($20,000). With the ITA 13(4) election, the reassessed 2022 recapture is as follows: January 1, 2021 UCC Deduction: Lesser of: • POD = $20,000 • Capital Cost = $18,000 Reduced by the lesser of: • Recapture = $6,000 • Replacement Cost = $20,000 Reassessed 2021 Recapture

$12,000

$18,000

( 6,000)

( 12,000) Nil

Subsequent to the application of these elections, the capital cost and UCC would be determined as: Cost of New Equipment Capital Gain Deferred by the election Deemed Capital Cost of New Equipment Recapture Deferred by the election UCC December 31, 2022

$20,000 ( 2,000) $18,000 ( 6,000) $12,000

Type: ES Topic: Involuntary dispositions

102) On December 1, 2021, Morteaux Ltd. sells its only building in anticipation of moving to a new location in 2022. Morteaux Ltd.'s taxation year ends December 31. The property is sold for $2,300,000 and, at the time of the sale, the ACB and FMV of the land are both $1,200,000, while the capital cost of the building is equal to its FMV of $1,100,000. The UCC is $250,000. In February of 2022, the building is replaced at a cost of $2,700,000, with $1,300,000 attributable to the land and $1,400,000 to the building. The replacement building is a used building. Assume the appropriate replacement property election is made to minimize income tax for each of 2021 and 2022. Calculate the effect on 2021 income of the sale of the old building, purchase of the replacement and the maximum CCA that can be claimed in 2022. Answer: There is no capital gain as the POD is equal to the cost of the property. However, as the replacement did not occur until 2022, there will be recapture of CCA in 2021 calculated as follows: UCC Lesser of: Capital Cost = $1,100,000 POD = $1,100,000 Negative Ending Balance = Recapture of CCA

$ 250,000

( 1,100,000) ($ 850,000)

Using the ITA 13(4) election in 2022, the reassessed 2021 recapture is calculated as follows: January 1, 2021 UCC Deduction: Lesser of: • POD = $1,100,000 • Capital Cost = $1,100,000 Reduced by the lesser of: • Recapture = $850,000 • Replacement Cost = $1,400,000 Reassessed 2021 Recapture

$250,000

($1,100,000)

850,000

The maximum CCA that can be claimed in 2022 is as follows: Capital Cost Recapture Reversal UCC AccII Adjustment [(1/2)($550,000)] CCA Base Rate 2022 CCA

$1,400,000 ( 850,000) $ 550,000 275,000 $ 825,000 4% $ 33,000

Type: ES Topic: Voluntary dispositions

( 250,000) Nil

103) Over the last five years, Mary Blaise has bought and sold the shares of two companies, Sadean Ltd. and Dorcan Inc. Both companies are publicly traded and pay eligible dividends on an irregular basis. Transactions involving Sadean Ltd. shares over this period are as follows: January, 2018 Purchase 1,250 @ $24 November, 2020 Purchase 860 @ 29 June, 2022 Sale 1,750 @ 31 Transactions involving Dorcan Inc. shares over this period are as follows: March, 2018 Purchase 960 @ $ 7.50 September 2019 Purchase 1,230 @ 8.75 February, 2020 Purchase 620 @ 9.20 July, 2020 Sale ( 980) @ 10.15 March, 2021 Purchase 375 @ 11.23 April, 2022 Sale ( 625) @ 8.10 Required: A. Determine the taxable capital gain resulting from the June 2022 sale of the Sadean Ltd. shares. B. With respect to the transactions involving Dorcan Inc., determine the following: • The ACB of the shares that are still on hand on December 31, 2022. • The taxable capital gain or allowable capital loss resulting from the 2020 sale. • The taxable capital gain or allowable capital loss resulting from the 2022 sale. Answer: Part A The average cost of the shares sold during June, 2022 would be calculated as follows: January, 2018 Purchase [(1,250)($24)] November, 2020 Purchase [(860)($29)] Total ACB

$30,000 24,940 $54,940

Average Cost [$54,940 ÷ (1,250 + 860)]

$26.04

Given this average cost, the taxable capital gain on the June, 2022 sale of shares would be calculated as follows: POD [(1,750)($31)] ACB [(1,750)($26.04)] Capital Gain Inclusion Rate Taxable Capital Gain

$54,250 ( 45,570) $8,680 1/2 $4,340

Part B The total cost of the 1,580 shares remaining on December 31, 2022 would be $14,063.65. This is calculated in the following table: Shares Purchased Purchase or Sale Date (Sold) March 2018 Purchase 960 September, 2019 Purchase 1,230 February, 2020 Purchase 620 Subtotal 2,810 July, 2020 Sale ( 980) March, 2021 Purchase 375 Subtotal 2,205 April, 2022 Sale ( 625) December 31, 2022 Balances 1,580

Cost Per Share $ 7.50 8.75 9.20 $ 8.42 11.23 $ 8.90

Total Cost $ 7,200.00 10,762.50 5,704.00 $23,666.50 ( 8,251.60) 4,211.25 $19,626.15 ( 5,562.50) $14,063.65

Average Cost Per Share

$8.42

$8.90

The taxable capital gain resulting from the 2020 sale would be calculated as follows: POD [(980)($10.15)] ACB [(980)($8.42)] Capital Gain Inclusion Rate Taxable Capital Gain

$9,947.00 ( 8,251.60) $1,695.40 1/2 $ 847.70

The allowable capital loss resulting from the 2022 sale would be calculated as follows: POD [(625)($8.10)] ACB [(625)($8.90)] Capital Loss Inclusion Rate Allowable Capital Loss

$5,062.50 ( 5,562.50) ($ 500.00) 1/2 ($ 250.00)

Type: ES Topic: Identical properties

104) For a number of years, Lester Wayne has owned a large tract of undeveloped land near Windsor, Ontario. He had acquired this land at a cost of $1,585,000, all of which was paid in cash. Despite the dwindling activity in its automobile plants, the relatively mild climate of the Windsor area has encouraged population growth in the surrounding region. Because of this, a local developer has offered Lester $3,650,000 for his land, expecting to turn the area into 100 building lots for large, single family homes. The terms of the offer are as follows: • An initial payment of $650,000 will be made on January 1, 2022. • Annual instalments of $1,000,000 will be made on January 1, 2023, January 1, 2024, and January 1, 2025. • Interest on the outstanding balance will be paid to Lester on December 31 of each of the years 2022 to and including 2025. It will be calculated at a rate of 5% of the balance outstanding on January 1 of each year. Also, because of the high level of risk involved in the project, Lester is asked to provide a warranty. Specifically, the builder would like to have a payment of $15,000 for each lot that remains unsold as of July 1, 2024. Lester agrees to this arrangement. The required instalment payments due on January 1, 2023 and 2024, as well as the interest due at the end of the years 2022 and 2023 are paid on time as agreed. However, the developer is not successful in his promotion of the lots. As a result, on July 1, 2024, 40 of the lots remain unsold. Lester makes the required warranty payment of $600,000 [(40)($15,000)]. The developer is unable to sell any additional lots after July 1, 2024. Because of these difficulties, he does not make the required interest payment on December 31, 2024, or the final instalment due on January 1, 2025. When Lester does not receive these payments and grows suspicious of the developer's excuses, he tries very hard to locate the developer. In July, 2025, he finally accepts that this individual has disappeared, leaving many angry creditors. At this point, Lester writes off the interest that was accrued on December 31, 2024, as well as the remaining instalment that was due on January 1, 2025. During the years 2022 to and including 2025, Lester does not have any capital gains or losses, other than those related to the sale of this tract of land. He has pension and investment income totalling more than $80,000 in each year. Required: Determine the income tax consequences of these transactions to Lester for each of the 2022 to 2025 taxation years.

Answer: Capital Gains Reserve With respect to the capital gains, under ITA 40(1)(a)(iii), the amount that can be deducted as a capital gains reserve is equal to the lesser of: • [(Capital Gain)(Proceeds receivable after the end of the year ÷ Total Proceeds)] • [(Capital Gain)(20%)(4 - Number of preceding years ending after the year of disposition)] 2022 Results The capital gain resulting form the disposition of the land would be $2,065,000 ($3,650,000 - $1,585,000. Based on this, the 2022 capital gains reserve would be the lesser of: • [($2,065,000)($3,000,000 ÷ $3,650,000)] = $1,697,260 • [($2,065,000)(20%)(4 - 0)] = $1,652,000 The results for 2022 are therefore as follows: POD ACB Capital Gain Capital Gains Reserve Capital Gain Inclusion Rate 2022 Taxable Capital Gain Interest [(5%)($3,000,000)] Total additional income for 2022

$3,650,000 ( 1,585,000) $2,065,000 ( 1,652,000) $ 413,000 1/2 $ 206,500 150,000 $ 356,500

2023 Results The capital gains reserve would be the lesser of: • [($2,065,000)($2,000,000 ÷ $3,650,000)] = $1,131,507 • [($2,065,000)(20%)(4 - 1)] = $1,239,000 Based on this, the total additional income for 2023 would be as follows: 2022 Capital Gains Reserve 2023 Capital Gains Reserve Capital Gain Inclusion Rate Taxable Capital Gain Interest [(5%)($2,000,000)] Total additional income for 2023

$1,652,000 ( 1,131,507) $ 520,493 1/2 $ 260,247 100,000 $ 360,247

2024 Results The capital gains reserve would be the lesser of: • [($2,065,000)($1,000,000 ÷ $3,650,000)] = $565,753 • [($2,065,000)(20%)(4 - 2)] = $826,000 Based on this, the results would be as follows: 2023 Capital Gains Reserve 2024 Capital Gains Reserve Capital Gain Warranty Payment (a Capital Loss) Capital Loss Inclusion Rate 2024 Allowable Capital Loss

$1,131,507 ( 565,753) $ 565,754 ( 600,000) ($ 34,246) 1/2 ($ 17,123)

The problem states that Lester has no other capital gains or capital losses unrelated to this land sale. This means that the allowable capital loss has no effect on income for 2024. The allowable capital loss becomes a 2024 net capital loss which can be carried over to other taxation years (3 years back and an indefinite carry forward). This net capital loss could be carried back to 2022 and 2023. The only addition to income for 2024 would be as follows: Accrued Interest [(5%)($1,000,000)]

$50,000

2025 Results There are no amounts that are receivable after 2025 and therefore no capital gains reserve can be claimed for the year. 2024 Capital Gains Reserve $ 565,753 2025 Capital Gains Reserve N/A Capital Gain $ 565,753 Bad Debt (a Capital Loss) Requires election ITA 50(1) ( 1,000,000) Capital Loss ($ 434,247) Inclusion Rate 1/2 Allowable Capital Loss ($ 217,124) The allowable capital loss has no effect on income for 2025 instead it represents a 2025 Net capital loss that can be applied to other taxation years (3 years back and an indefinite carry forward). Since Lester has income of more than $80,000, the write-off of the interest accrued decreases his net income by $50,000.

Summary (Not Required) The results can be summarized as follows:

Taxation Year 2022 2023 2024 2025 Totals

Interest $150,000 100,000 50,000 ( 50,000) $250,000

Net Taxable Gain (Allowable Loss) $206,500 260,247 ( 17,123) ( 217,124) $232,500

The amount of the taxable capital gain can be verified as follows: Initial Capital Gain Warranty Payment Bad Debt Capital Gain Inclusion Rate Taxable Capital Gain

$2,065,000 ( 600,000) ( 1,000,000) $ 465,000 1/2 $ 232,500

Type: ES Topic: Warranties, bad debts, and reserves

105) Each of the following independent Cases describes a situation with a proposed tax treatment. 1. Herbert Nash has owned a 200 acre parcel of land for a number of years. He had acquired this land for $250,000 with the intention of eventually building a home on the property. However, he received an offer of $425,000 for 75 acres of the property. Because this 75 acres has waterfront and better road access, he believes that the FMV of the remaining 125 acres is only $175,000. He accepts the offer and plans to use an ACB of $177,083 {[$250,000][$425,000 ÷ ($425,000 + $175,000)]} in calculating his gain or loss. 2. Gregory Hayes sells a capital property with an ACB of $85,000 for $135,000. The $135,000 price includes a charge for a warranty on the property which he anticipates will cost him $5,000 to service. He does not anticipate any of the warranty expenses will be incurred in the year of the sale. He plans to recognize a capital gain on the transaction of $45,000 after the consideration of the estimated warranty costs. 3. During the current year Ms. Kristy Stone sold her sailboat to an arm's length person for $71,000. She had purchased the boat several years ago for $51,000. Also during the year, she sold securities with an ACB of $22,000 for $12,000. She intends to deduct the loss on the securities against the gain on the sailboat. 4. Nellie Ward has a cottage which she has owned for a number of years. The cottage was purchased for $125,000. It is currently worth more than $500,000. While she has rarely used it, preferring to stay in her penthouse in the city, she believes that it will continue to increase in value. Given this, she decides to convert it to a rental property. While she plans to report her future rental income to the CRA, she does not plan to recognize a capital gain on the conversion of the property since there was no actual disposition. 5. During the current year, Ignacio Rogers sells a non-depreciable capital property for $216,000. The ACB of the property was $184,000, resulting in a capital gain of $32,000. Under the terms of the sale, he will receive 10% ($21,600) of the sale price in the year of the sale, with the remainder due in the following year. As a result, he will recognize only $3,200 of the capital gain in year of the sale. Required: In each of the preceding Cases, indicate whether or not you believe that the income tax treatment being proposed is the correct one. Explain your conclusion.

Answer: 1. The proposed treatment is correct. While the parcel sold represents only 37.5% of the total acreage, Mr. Nash can justify the apportionment of the ACB which is based on its relative FMV. This equals 70.8% [$425,000 ÷ ($425,000 + $175,000)] of the total ACB of $250,000 or $177,083. Mr. Nash should obtain a valuation in support of this conclusion in case the CRA questions the allocation. ITA 43 provides that in determining the portion of the ACB of a property that a reasonable approach must be used which supports the allocation. 2. This interpretation is incorrect. No recognition can be given to the estimated warranty expenses prior to the actual provision of the warranty services. As a consequence there will be a capital gain of $50,000. However, if warranty expenses are incurred prior to the filing due date for the taxation year in which the sale is made then the reported capital gain will be reduced by those expenses. If warranty expenses are incurred after that filing due date the actual warranty expenses will be treated as a capital loss in that subsequent taxation year. 3. The proposed treatment is correct. While losses on personal use property (e.g., the sailboat) are not permitted, gains are required to be included in income. The allowable capital loss on the securities can be applied against the taxable capital gain on the sailboat. 4. The described treatment is incorrect. While Nellie has not actually sold the cottage the change in use is deemed to be a disposition at FMV. Any resulting capital gain will have to be included in her income for the year of the change in use. Given the facts, the principal residence exemption is not relevant. If she plans to designate the property as a principal residence she would be required to report the deemed disposition. Failing to do so could result in a penalty. 5. The described treatment is incorrect. The amount of any capital gains reserve is based on the lesser of (1) the gain multiplied by the ratio of the proceeds receivable after the end of the year (the approach that Ignacio is using) to the total proceeds; and (2) the amount of the gain multiplied by the following formula: [(20%)(4 - The number of taxation years ending after the year of the sale). This mean that Ignacio's maximum reserve would be $25,600 [($32,000)(20%)(4 - 0)] which requires him to include a minimum of 20% of the capital gain in the year of the sale. The capital gain would be $6,400 ($32,000 - $25,600). Type: ES Topic: Capital gains - short cases

106) Several years ago, Erin acquired two tracts of land located near the city of Richmond, British Columbia. These tracts cost $325,000 and $430,000. His original intention was to develop the tracts into two subdivisions of 40 lots each for the purpose of then leasing the land to others. However, because of the ongoing responsibilities associated with his position at the University of British Columbia, he has not found time for this project. Even though he has made no effort to market the tracts, he receives two very attractive offers from a developer to purchase them. The terms of the two offers are as follows: Tract 1 - The offer for the $325,000 tract was $879,000. The terms require a down payment on January 1, 2022 of $395,550 (45% of the sales price), with the balance due on December 31, 2025. Interest, calculated at an annual rate of 6% of the beginning of the year balance, is due on December 31 of 2023, 2024, and 2025. Tract 2 - The offer for the $430,000 tract was $1,000,000. The terms require a down payment on January 1, 2022 of $100,000. (10% of the sales price). Further payments of $300,000 each will be required on December 31 of 2023, 2024, and 2025. Interest, calculated at an annual rate of 6% of the beginning of the year balance, is due on December 31 of 2023, 2024, and 2025. Erin decides to accept both of these offers. Required: Determine the minimum amounts that will be required to be included in Erin's income as a result of these transactions. Show the effect for each of the years 2022, 2023, 2024, and 2025 separately. Your answer should include taxable capital gains and any interest income. Assume that the land was purchased as capital property.

Answer: Capital Gains Treatment The amount of the capital gains resulting from the dispositions would be calculated as follows: Tract 1 $879,000 ( 325,000) $554,000 1/2 $277,000

POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Tract 2 $1,000,000 ( 430,000) $ 570,000 1/2 $ 285,000

2022 Solution At the end of 2022, the amounts not receivable until after the end of the year are $483,450 ($879,000 $395,550) for Tract 1 and $900,000 ($1,000,000 - $100,000) for Tract 2. The minimum taxable capital gain to be included in Erin's income for 2022 would be calculated as follows: Tract 1 $554,000

Total Capital Gain Maximum Capital Gains Reserve for 2022: Tract 1 - Lesser of: [($554,000)($483,450 ÷ $879,000)] = $304,700 [($554,000)(20%)(4)] = $443,200 Tract 2 - Lesser of: [($570,000)($900,000 ÷ $1,000,000)] = $513,000 [($570,000)(20%)(4)] = $456,000 Subtotal Inclusion Rate 2022 Taxable Capital Gains

Tract 2 $570,000

( 304,700)

$249,300 1/2 $124,650

( 456,000) $114,000 1/2 $ 57,000

In addition to the taxable capital gains, Erin would have to include the following amounts of interest income: Tract 1 [(6%)($483,450)] Tract 2 [(6%)($900,000)] 2022 Interest income

$29,007 54,000 $83,007

The additional amounts required to be included in Erin's 2022 income is as follows: Tract 1 Taxable Capital Gain Tract 2 Taxable Capital Gain Interest Income Total additional income for 2022

$124,650 57,000 83,007 $264,657

2023 Solution At the end of 2023, the proceeds that are not receivable until after the end of the year are unchanged at $483,450 for Tract 1 and $600,000 ($900,000 - $300,000) for Tract 2. Given this, the minimum taxable capital gains for 2023 can be calculated as follows: Tract 1 $304,700

2022 Capital Gains Reserve 2023 Capital Gains Reserve: Tract A - Lesser of: [($554,000)($483,450 ÷ $879,000)] = $304,700 [($554,000)(20%)(3)] = $332,400 Tract 2 - Lesser of: [($570,000)($600,000 ÷ $1,000,000)] = $342,000 [($570,000)(20%)(3)] = $342,000 Subtotal Inclusion Rate 2023 Taxable Capital Gains

Tract 2 $456,000

( 304,700)

Nil N/A Nil

( 342,000) $114,000 1/2 $ 57,000

In addition to the taxable capital gain, Erin would have to include the following amounts of interest income: Tract 1 [(6%)($483,450)] Tract 2 [(6%)($900,000)] 2023 Interest Income

$29,007 54,000 $83,007

The additional amounts required to be included in Erin's 2023 income is as follows: Tract 1 Taxable Capital Gain Tract 2 Taxable Capital Gain Interest income Total additional income for 2023

$ Nil 57,000 83,007 $140,007

2024 Solution At the end of 2024, the proceeds not receivable until after the end of the year is unchanged at $483,450 for Tract 1 and $300,000 ($600,000 - $300,000) for Tract 2. Given this, the minimum taxable capital gains for 2024 can be calculated as follows: Tract 1 $304,700

2023 Capital Gains Reserve 2024 Capital Gains Reserve: Tract A - Lesser of: [($554,000)($483,450 ÷ $879,000)] = $304,700 [($554,000)(20%)(2)] = $221,600 Tract 2 - Lesser of: [($570,000)($300,000 ÷ $1,000,000)] = $171,000 [($570,000)(20%)(2)] = $228,000 Subtotal Inclusion Rate 2024 Taxable Capital Gains

Tract 2 $342,000

( 221,600)

$ 83,100 1/2 $ 41,550

( 171,000) $171,000 1/2 $ 85,500

In addition to the taxable capital gain, Erin would also have to include the following amounts of interest income: Tract 1 [(6%)($483,450)] Tract 2 [(6%)($600,000)] Total Interest Income

$29,007 36,000 $65,007

The total amount to be included in Erin's 2024 income would be calculated as follows: Tract 1 Taxable Capital Gain $ 41,550 Tract 2 Taxable Capital Gain 85,500 Interest Income 65,007 Total additional income for 2024 $192,057

2025 Solution At the end of 2025, the proceeds not receivable until after the end of the year for both Tract 1 and Tract 2 are nil. Given this, the minimum taxable capital gains for 2025 can be calculated as follows: Tract 1 $221,600

2024 Capital Gains Reserve 2025 Capital Gains Reserve: Tract A - Lesser of: [($554,000)(Nil ÷ $879,000)] = Nil [($554,000)(20%)(1)] = $110,800 Tract 2 - Lesser of: [($570,000)(Nil ÷ $1,000,000)] = Nil [($570,000)(20%)(1)] = $114,000 Subtotal Inclusion Rate 2025 Taxable Capital Gains

Tract 2 $171,000

Nil

$221,600 1/2 $110,800

Nil $171,000 1/2 $ 85,500

In addition to the taxable capital gains, Erin would have to recognize the following amounts of interest income: Tract 1 [(6%)($483,450)] Tract 2 [(6%)($300,000)] Total Interest Income

$29,007 18,000 $47,007

The total amount to be included in Erin's 2025 income would be calculated as follows: Tract 1 Taxable Capital Gain Tract 2 Taxable Capital Gain Interest Income Total additional income for 2025

$110,800 85,500 47,007 $243,307

Verification As calculated at the beginning of this solution, the taxable capital gain on Tract 1 should total $277,000, while the taxable capital gain on Tract 2 should be $285,000. That the use of reserves has produced the same total amount can be verified as follows: Year 2022 2023 2024 2025 Total Gain

Tract 1 $124,650 Nil 41,550 110,800 $277,000

Type: ES Topic: Capital gains reserve

Tract 2 $ 57,000 57,000 85,500 85,500 $285,000

107) Ms. Annalisa Philson has been married to Spiro Philson for over 10 years. While Annalisa is 62, her husband is 75 and has been in poor health for a number of years. They live in a home in Ottawa which Annalisa had just purchased in 2011 for $628,000 prior to the marriage to Spiro. In 2014, Annalisa purchased a condo in downtown Calgary for $325,000. In every year since its purchase, she has spent considerable time with Arnold in this property. Annalisa has decided to sell both properties in 2022. She has spent time in each property during every year of ownership and therefore both properties can be designated as her principal residence for any given year of ownership. Both properties are sold in 2022, with the Ottawa home sold for $724,000 and the Calgary condo selling for $415,000. The real estate commission on each sale are 4% of the sales price. Required: Describe how the residences should be designated to minimize income tax. In addition, calculate the total amount of the gain based on the designation that you have recommended.

Answer: The gains on the two properties can be calculated as follows:

Ottawa Home $724,000 ( 628,000)

POD ACB Real Estate Commissions [(4%)($724,000)] [(4%)($415,000)] Capital Gain

Calgary Condominium $415,000 ( 325,000)

( 28,960) ( 16,600) $ 73,400

$ 67,040

As the period of ownership differs for the two properties, it is necessary to calculate the annual amount of the capital gain: Ottawa Home: $67,040 ÷ 12 = $5,587 Calgary Condominium: $73,400 ÷ 9 = $8,156 As the annual gain is significantly larger on the Calgary condominium and its ownership period is shorter than that of the Ottawa home, this gain should be completely eliminated. Because of the plus 1 in the exemption formula, this can be accomplished by designating the property as her principal residence for the 8 years 2015 through 2022. This leaves the 4 years 2011 through 2014 for designation of the Ottawa home as her principal residence. The required calculations would be as follows:

Ottawa Home $67,040

Total Capital Gain Exemption: Ottawa Home [$67,040][(4 + 1) ÷ 12] Condominium [$73,400][(8 + 1) ÷ 9] Capital Gain Inclusion Rate Taxable Capital Gain

Calgary Condominium $73,400

( 27,933)

$39,107 1/2 $19,554

This gives a total taxable capital gain on the two properties of $19,554. Type: ES Topic: Principal residence - general rules

( 73,400) Nil N/A Nil

108) Due to financial difficulties resulting from unfortunate business decisions, Mr. Bo Godina has been forced to sell a number of items. • An A. Y. Jackson oil painting which he acquired for $140,000 is sold at auction for $180,000, with the auction house claiming a 20% commission on the sale price. • An antique armoire that he acquired for $850 is sold privately for $1,300. No selling costs were incurred. • A vintage Chris Craft boat which he acquired several years ago for $85,000 is sold for $61,000 with no related selling costs. • As a life long admirer of George Bernard Shaw, he had acquired a first edition of the play Pygmalion for $22,000. Since his purchase, the works of Shaw have become less popular and the sale of this manuscript nets Mr. Godina only $4,200. • An extensive stamp collection is sold for $16,000. The cost of all of the stamps totalled $12,500. No selling costs were involved. • Mr. Godina's father left him a vintage automobile in his will several years ago. Mr. Godina's father had purchased it for $23,000 and spent an additional $17,000 restoring the vehicle. The estimated value of the automobile was $60,000 when Mr. Godina received it and he sells it for $110,000, with no related selling costs. Required: Mr. Godina has asked you to determine the minimum amount that would be included in his income for the current year as a result of these dispositions. Indicate any amounts that are available for carry over to other years. Answer: Classification of Property All of the items sold are personal use property. However, any such property that meets the definition of "listed personal property" will receive preferential treatment. Under ITA 54, the following items are listed personal property: (i) print, etching, drawing, painting, sculpture, or other similar work of art, (ii) jewellery, (iii) rare folio, rare manuscript, or rare book, (iv) stamp, or (v) coin. Personal Use Property (Armoire, Boat and Automobile) While gains on the disposition of personal use property are required to be included in income, losses cannot be claimed. As a result the loss on sale of the boat would have no effect on Mr. Godina's net income. However, the gains on both the armoire and the automobile would be required to be included in income. The capital gains, taking into consideration the $1,000 rule, would be calculated as follows:

POD ACB - Automobile (Note 1) ACB - Armoire - Greater of: • Cost = $850 • $1,000 Floor Capital Gain

Automobile $110,000 ( 60,000)

$50,000

Armoire $1,300

( 1,000) $ 300

Note 1 - The ACB of the automobile would be equal to its FMV at the time it was received from his father's estate.

Listed Personal Property (Painting, First Edition, and Stamp Collection) The calculations here are as follows:

POD ACB Selling Costs - Painting [(20%)($180,000)] Capital Gain (Loss)

Painting $180,000 ( 140,000)

First Edition $ 4,200 ( 22,000)

Stamp Collection $16,000 ( 12,500)

( 36,000) $ 4,000

($17,800)

$ 3,500

Summary The total addition to net income would be as follows: Personal Use Property Gain on Automobile Gain on Armoire Loss on Boat Listed Personal Property Gain on Painting Gain on Stamp Collection Total Gain on Listed Personal Property Loss on Manuscript (Note 2) Net Capital Gains Inclusion Rate Addition to net income

$50,000 300 N/A $ 4,000 3,500 $ 7,500 ( 7,500)

$50,300

Nil $50,300 1/2 $25,150

Note 2 - The total loss on the first edition is $17,800. However, it can only be claimed to the extent of the gains on other listed personal property dispositions. The remaining loss of $10,300 ($17,800 - $4,000 $3,500) can be carried over to other years specifically to be carried back 3 years and forward for 7 years to be claimed only against gains on listed personal property in those years. Type: ES Topic: Personal use property - general rules

109) Richie Desjardins is a resident of Canada. On September 4, 2018, he receives an inheritance of $200,000 U.S. dollars (US$, hereafter) from an uncle who was a U.S. resident. The funds are immediately transferred into his brokerage account and used to purchase 4,500 shares of Facehow Industries, a tech company that is traded on the New York Stock Exchange. The shares are acquired at US$43 per share, a total investment of US$193,500. The remaining US$6,500 is left in the brokerage account. The shares pay an annual dividend of US$2.05 per share. Richie receives the dividends of US$9,225 [(4,500)(US$2.05)] on the following dates: June 1, 2019 June 1, 2020 June 1, 2021 All of these funds are left in his brokerage account and his account does not earn interest. On July 13, 2021, all of the Facehow shares are sold for US$35 per share, a total of US$157,500. The US$157,500 balance is left in the brokerage account until January 31, 2022, at which time they are converted, along with the unused US$6,500 balance and the accumulated dividends, into Canadian dollars (C$, hereafter). He withdraws all the funds in his brokerage account on June 6, 2022 in order to purchase a house. Assume relevant exchange rates between the Canadian dollar and the U.S. dollar are as follows: September 4, 2018 June 1, 2019 June 1, 2020 June 1, 2021 July 13, 2021 January 31, 2022 June 6, 2022

US$1.00 = C$0.98 US$1.00 = C$1.03 US$1.00 = C$1.09 US$1.00 = C$1.26 US$1.00 = C$1.28 US$1.00 = C$1.35 US$1.00 = C$1.40

Required: Calculate the minimum amount that will be required to be included in Mr. Desjardins' net income for each of the years 2018 through 2022. Answer: 2018 Result Neither the receipt of the inheritance nor the purchase of shares create any additions to income. Note, however, that the ACB of the shares is: [(4,500)(US$43)(C$0.98)] C$189,630 The ACB of the funds remaining in the account would be calculated as follows: [(US$6,500)(C$0.98)] C$6,370 2019 Result The receipt of the dividends will result in the following addition to Richie's 2019 net income: [(4,500)(US$2.05)(C$1.03)] C$9,501.75 2020 Results The receipt of the dividends will result in the following addition to Richie's 2020 net income: [(4,500)(US$2.05)(C$1.09)] C$10,055.25

2021 Results The receipt of the dividends will result in the following addition to Richie's 2021 net income: [(4,500)(US$2.05)(C$1.26)] C$11,623.50 In addition to the dividends, there will be a taxable capital gain resulting from the sale of the shares: POD [(4,500)(US$35)] = US$157,500 @ $1.28 C$201,600 ACB [(4,500)(US$43)] = US$193,500 @ $0.98 (C$189,630) Gain (Loss) C$ 11,970 Inclusion Rate 1/2 Taxable Capital Gain C$ 5,985 This results in a total addition to Richie's net income of C$17,608.50 (C$11,623.50 + C$5,985.00) 2022 Results At this point, Richie's brokerage account contains cash of US$191,675 [US$6,500 + (3@US$9,225) + US$157,500). There will be a capital gain on the conversion of this amount to Canadian dollars calculated as follows: POD Converted Dollars [(US$191,675)(C$1.35)] ACB: [(US$6,500)(C$0.98)] [(4,500)(US$2.05)(C$1.03)] [(4,500)(US$2.05)(C$1.09)] [(4,500)(US$2.05)(C$1.26)] [(4,500)(US$35)(C$1.28)] Capital Gain ITA 39(1.1) Reduction of Capital Gain Net Capital Gain Inclusion Rate Taxable Capital Gain

C$258,761.25 (C$ 6,370.00) ( 9,501.75) ( 10,055.25) ( 11,623.50) ( 201,600.00)

( 239,150.50) C$ 19,611 ( 200) C$ 19,411 1/2 C$ 9,705.50

Because Richie is an individual, the ITA 39(1.1) deduction of $200 reduces the capital gain on the foreign exchange conversion. Type: ES Topic: Capital gains - foreign securities & foreign exchange

110) Each of the following Cases contains a brief description of an actual court case involving the identification of capital gains. For each Case, indicate whether you believe that the transaction should have generated a capital gain or business income. Explain the basis for your conclusion. Case A - An individual constructed an apartment building and operated it as a rental property for a period of three years. At that time, as the result of an unsolicited offer, the individual decided to sell the building. The decision was also influenced by the fact that there were unexpected difficulties in operating the building. The proceeds of the sale exceeded the cost of the building. (73 DTC 5060) Case B - An operator of a taxicab business decided to sell the business as it had proved to be unprofitable. He was not able to obtain a favourable price for the business as a whole and, as a consequence, he decided to sell the cars separately. During the subsequent two year period, he engaged in over 40 transactions involving the cars, largely because some worn out cabs had to be replaced and trade-ins were accepted from some buyers. A gain/profit was made on most transactions. (57 DTC 144) Case C - A individual carried on a full time interior design business as a sole proprietor. While carrying on the business the individual bought, lived in for short periods of time, and resold numerous residential properties. In most cases, improvements were made and the property modernized prior to resale. The sales prices were usually well in excess of costs. (64 DTC 56) Case D - An optical business purchased the assets of an optical company whose shares were owned by a group of medical doctors. The sale was accompanied by an agreement to pay each doctor a "kickback" for every prescription filled. A provincial statute eventually made these payments illegal, at which point the doctors sold their shares to the optical business. Even though each doctor sold one share, the payments to them varied from $1,800 to $57,000. The payments were to be made over a period of ten years and the agreement required the doctors to continue sending patients to the optical company. The amounts paid to the doctors were proportional to the size of their practices. (57 DTC 48) Case E - The manager of a company that operated vans designed for the transportation of horses engaged in several transactions involving the purchase and sale of racehorses. He attended race tracks on a regular basis and kept numerous horses for his own personal enjoyment. On most of the purchase and sale transactions, the proceeds of the sale exceeded the cost of the horse. (67 DTC 240)

Answer: Case A In this Case, the Federal Court Trial Division decided that the profit on the sale of the apartment building was a capital gain. They based their decision largely on the fact that it appeared that the Intent of the taxpayer was to operate the apartment building as an income producing property. In other words the rental property was capital property and not inventory. Case B In this Case, the Minister of National Revenue argued that because of the frequency of transactions, the taxpayer was in the business of buying and selling cars and, as a consequence, profits on the sale of cars should be treated as business income. However, the taxpayer was successful in refuting the Minister's view by arguing that the nature of the transaction was such that the cars should be viewed as capital property and any resulting gains were capital gains and not business profits. The distinction is important given that in years prior to 1972 capital gains were not taxable at all. This case demonstrates that the nature of the activity is critical. While the tax authorities perceived the formation of a new business of buying and selling cars the court viewed the activity as a method to sell the business. In that case the cars remained capital property. This case the danger of relying on IT bulletins that refer to multiple criteria such as the frequency of transactions and other such criteria to label the nature of a transaction. Case C The gains on the various sales of residential property were considered to be income from a business. The nature of the activity with respect to the purchase of residential properties supported a contention that the properties represented inventory of a business given the level of activity. Gains were therefore considered profits from a business and not capital gains. Case D The Tax Appeals Board (TAB) concluded that the amounts paid represented business income rather than capital gains. The character of the payments were such that had the amounts been received directly the amounts would have been income from the professional business of each doctor. The TAB indicated that the transaction was no more than an ingeniously contrived scheme to pay sums of money for another ten years in return for the right to fill the doctors' prescriptions. Case E The profits on trading in racehorses were considered business income given the level of activity involved in the purchase and sale. Type: ES Topic: Capital gains vs business income (mini cases)

111) Darin Roberts has carried on a consulting business as a sole proprietor out of rented space since 2016. On January 1, 2020, he acquires a property in a suburban location for $1,350,000. The building has 10,000 feet of floor space, and in the year ending December 31, 2020, he uses 2,000 square feet of this space as his principal residence, with the remaining 8,000 square feet used for the business. In 2020, his total dedication to work results in significant business growth. Because of this, on January 1, 2021, he converts 1,000 of the square feet that was being used as his personal residence to business use. This results in 9,000 square feet being used for his business and only 1,000 square feet being used as his residence. Because the business continues to grow, he opens a second location in rented space and hires a business manager. With the availability of space in this new location, he no longer needs as much space in the building that he owns. On January 1, 2022, reflecting this change in his operations, he expands his residential use of the building to 5,000 square feet, leaving the remaining 5,000 square feet for business use. Information on the estimated values associated with the building and the land on which it is situated on January 1, 2020, 2021, and 2022 is as follows: Land $350,000 375,000 390,000

January 1, 2020 January 1, 2021 January 1, 2022

Building $1,000,000 1,150,000 1,300,000

Required: Determine the maximum CCA that can be claimed by Darin in 2020, 2021, and 2022. In addition, ignoring the principal residence exemption, indicate any other income tax consequences that will result from the changes in use of the property. Answer: 2020 Results In 2020, 80% (8,000 ÷ 10,000) of the property is used for income earning purposes. Based on this, the maximum CCA for this year is calculated as follows: Capital Cost [(80%)($1,000,000)] AccII Adjustment [(50%)($800,000)] CCA Base Maximum CCA [(4%)($1,200,000)] AccII Reversal UCC - January 1, 2021

$800,000 400,000 $1,200,000 ( 48,000) ( 400,000) $752,000

The maximum CCA is $48,000. There are no additional income tax consequences during this year. The 6% CCA rate was not available since 90% or more of the building was not used for non-manufacturing business purposes.

2021 Results - Personal Use to Business Use On January 1, 2021, there would be a deemed disposition/acquisition of 10% (1,000 ÷ 10,000) of the total property. This would result in a taxable capital gain on the land calculated as follows: POD [(10%)($375,000)] ACB [(10%)($350,000)] Capital Gain Inclusion Rate Taxable Capital Gain on Land

$37,500 ( 35,000) $ 2,500 1/2 $ 1,250

There would also be a taxable capital gain on the building, calculated as follows: POD [(10%)($1,150,000)] ACB [(10%)($1,000,000)] Capital Gain Inclusion Rate Taxable Capital Gain on Building

$115,000 ( 100,000) $ 15,000 1/2 $ 7,500

The maximum CCA for 2021 would be calculated as follows: January 1, 2021 Add Deemed Cost of 10% of property Cost [(10%)($1,000,000)] Bump Up [(1/2)(10%)($1,150,000 - $1,000,000)] AccII [(50%)($107,500)] CCA Base Maximum CCA [(4%)($913,250)] AccII Reversal January 1, 2022 UCC

UCC $100,000 7,500

$752,000

107,500 53,750 $913,250 ( 36,530) ( 53,750) $822,970

As the change in use is from personal to business, for CCA and recapture purposes, the bump up is limited to one-half of 10 % of the excess of the FMV of the building over its capital cost. The AccII provisions apply as reflected by the amendments made in June of 2021. Specifically since no CCA was previously claimed by anyone in a previous taxation year with respect to the personal use space the AccII would apply as a result. The total taxable capital gain for the year is $8,750 ($1,250 + $7,500). The maximum CCA is $36,530.

2022 Results - Business to Personal Use On January 1, 2022, there would be a deemed disposition/acquisition of 40% (4,000 ÷ 10,000) of the total business use of the property. This would result in a taxable capital gain on the land, calculated as follows: POD [(40%)($390,000)] ACB (See Note) Capital Gain Inclusion Rate Taxable Capital Gain on Land

$156,000 ( 141,111) $ 14,889 1/2 $ 7,445

Note: The ACB of the business portion of the property is as follows: [(80%)($350,000)] [(10%)($375,000)] Total for 90%

($280,000) ( 37,500) ($317,500)

The ACB of the business portion disposed of would be $141,111 (40%/90%)($317,500)] There would also be a taxable capital gain on the building, calculated as follows: POD [(40%)($1,300,000)] ACB: [(80%)($1,000,000)] [(10%)($1,150,000)] (Not Limited) Total for 90% Portion Disposed Capital Gain Inclusion Rate Taxable Capital Gain

$520,000 ($800,000) ( 115,000) ($915,000) 40%/90%

( 406,667) $113,333 1/2 $ 56,667

The maximum CCA for the year would be calculated as follows: January 1, 2022 UCC Disposition - Lesser of: POD [(40%)($1,300,000)] = $520,000 Capital Cost (See Note) CCA Base Maximum CCA [(4%)($419,637)] January 1, 2023 UCC

$822,970

( 403,333) $419,637 ( 16,785) $402,852

Note: The ACB for capital gains purposes of the 10% share acquired in 2021 was $115,000 [(10%)($1,150,000)]. However, for UCC and CCA purposes, the amount is limited to $107,500 [$100,000 + (1/2)($115,000 - $100,000). This gives a total capital cost for 90% of the property of $907,500 ($800,000 + $107,500). The resulting capital cost for the 40% portion disposed of is $403,333 (40%/90%)($907,500)]. The total taxable capital gain for the year is $64,112 ($7,445 + $56,667). The maximum CCA is $16,785.

Note To Instructors We have asked students to ignore the principal residence exemption as the focus of the problem is on the change in use. As CCA was claimed in 2020 on the part of the building that was used for business purposes, Darin would not be able to claim the principal residence exemption on the portion of the building that was changed from personal to business use in 2021. Type: ES Topic: Change in use - depreciable property

112) Elly Councill is 57 years old, was born in Canada and has always been a resident of Canada. Having become fed up with Halifax winters, she decides to move to California. Ms. Councill has come to you for advice prior to leaving Canada for good and becoming a non-resident. She will sever her Canadian residency on December 31, 2022. At that time she owns the following properties which are all located in Canada: ACB $ 33,000 11,000 42,000 63,000 87,000 220,000 72,000 16,000

Oil Painting Coin Collection Shares in Enbridge (A Canadian Public Company) Shares in Veresan (A Canadian Public Company) Vacant Land Principal Residence Power Boat (Recreational use only) Shares in Councill Ltd. (A CCPC)

FMV $ 38,000 4,000 68,000 52,000 108,000 342,000 56,000 48,000

Assume she will make no special elections in connection with the departure/emigration from Canada. Required: Determine the amount of any taxable capital gains or allowable capital losses that Ms. Councill will have for 2022 as a result of her emigration from Canada.

Answer: Ms. Councill's taxable capital gain on deemed dispositions resulting from her departure from Canada would be calculated as follows: Listed Personal Property: Oil Painting ($38,000 - $33,000) $ 5,000 Coin Collection (Note 1) ( 5,000) Enbridge Shares ($68,000 - $42,000) Veresan Shares ($52,000 - $63,000) Vacant Land (Note 2) Personal Residence (Note 2) Power Boat (Note 3) Councill Ltd. Shares Total Net Capital Gain Inclusion Rate 2022 Net Taxable Capital Gain on Emigration

Nil $26,000 ( 11,000) N/A N/A N/A 32,000 $47,000 1/2 $23,500

Note 1 - Both the oil painting and the coin collection are listed personal property. While there is a $7,000 ($11,000 - $4,000) loss on the coin collection, it can only be deducted to the extent of the $5,000 gain on the oil painting. However, the remaining $2,000 ($7,000 - $5,000) can be carried back 3 years to be applied against any gains on listed personal property that occurred in those years. Although it can also be carried forward for up to 7 years, it is unlikely that Ms. Councill will have listed personal property in Canada once she becomes a non-resident. Note 2 - Real property is exempted from the ITA 128.1(4)(b) deemed disposition requirement. However, as it is taxable Canadian property, a later sale of either the vacant land or the principal residence will potentially attract income tax in Canada. She might wish to elect to have a disposition of the residence to take advantage of the principal residence exemption. Note 3 - Losses on personal use property are not deductible. Type: ES Topic: Departure from Canada - general rules

113) For many years, Kargo Inc. has carried on business out of a building in Vancouver. The major properties of this publicly traded Company are as follows: Land and Building — The building was constructed for the Company at a total cost of $3,100,000. It is the only property in Class 1. The January 1, 2022 UCC balance in this Class is $1,286,690. The building is situated on land that the Company acquired at a cost of $430,000. Equipment — All of the Company's equipment falls into Class 8. It has a capital cost of $670,000. The January 1, 2022 balance in Class 8 is $285,371. The Company has become aware that, because of the real estate boom in Vancouver, their property has become very valuable. Further, because of the high cost of housing in the area, it has become almost impossible to attract new employees. Given this, they have decided to relocate. They begin the process by selling their Vancouver properties and temporarily suspending business. The total proceeds for the land and building are $4,800,000, with $1,500,000 of this total reflecting the value of the land and $3,300,000 for the building. The equipment is sold for $523,000. After more investigation than they had anticipated, they finally conclude that Vernon, British Columbia would be an attractive and cost efficient location. In March, 2023, they acquire a property in that city for $4,300,000. Based on estimates, $3,500,000 is for the building and $800,000 for the land. As it is not a new building, it does not qualify for the enhanced Class 1 CCA rate of either 6% or 10%. The Class 8 equipment is replaced at a cost of $723,000. The Company uses a calendar based taxation year ending on December 31. At the end of its 2022 taxation year the company does not own any buildings or equipment as the building Kargo ultimately purchased was not available for use on that date. The Company would like to minimize any capital gains or recapture resulting from the sale of the Vancouver property. Required: A. For the disposition of each property, indicate the income tax consequences for the 2022 taxation year. B. Indicate the effect of replacement property 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 POD). Also indicate the ACB and, where appropriate, the UCC of the replacement properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections. C. Indicate the maximum amount of any reduction in income for the 2022 taxation year from the use of the ITA 44(6) election and calculate the UCC balance that would result from electing to use this amount. Should the Company make the election? Explain your conclusion.

Answer: Part A The 2022 income tax consequences would be as follows: Land — The Company would have a taxable capital gain on the Land calculated as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,500,000 ( 430,000) $1,070,000 1/2 $ 535,000

Building — The Company would have a taxable capital gain and recapture calculated as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$3,300,000 ( 3,100,000) $ 200,000 1/2 $ 100,000

Opening UCC Deduct Disposition - Lesser of: Capital Cost = $3,100,000 POD = $3,300,000 Negative Closing UCC Balance = Recapture Recapture UCC - January 1, 2023

$1,286,690

( 3,100,000) ($1,813,310) 1,813,310 Nil

Equipment — The Company would have recapture calculated as follows: Opening UCC Deduct Disposition - Lesser of: Capital Cost = $670,000 POD = $523,000 Negative Closing UCC Balance = Recapture Recapture UCC - January 1, 2023

$285,371

( 523,000) ($237,629) 237,629 Nil

Part B Land With respect to the Land, the capital gain resulting from the use of the ITA 44(1) election would be the lesser of: • $1,070,000 (regular capital gain); and • $700,000 (the excess of the $1,500,000 POD for the replaced land over the $800,000 cost of the new replacement land). The revised taxable capital gain would be $350,000 [(1/2)($700,000)] and would be included in net income for 2022 replacing the original taxable capital gain of $535,000 [(1/2)($1,070,000)].

If the ITA 44(1) election is filed in 2023, the deemed ACB of the replacement land would be calculated as follows: Actual Cost Capital Gain Reversed by election ($1,070,000 - $700,000) Deemed ACB of Replacement Land

$800,000 ( 370,000) $430,000

Building — If the ITA 44(1) election is filed in 2023, the revised 2022 capital gain would be nil, the lesser of: • $200,000 (regular capital gain); and • Nil (reflecting the fact that there was no excess of the $3,300,000 POD for the old replaced building over the $3,500,000 cost of the replacement building). Using this election will reduce the deemed capital cost for the building as follows: Actual Cost Capital Gain Reversed by election Deemed Capital Cost of Replacement Building

$3,500,000 ( 200,000) $3,300,000

If the ITA 13(4) election is filed in 2023, the revised 2022 recapture would be calculated as follows: January 1, 2022 UCC Balance Deduction: Lesser of: • POD = $3,300,000 • Capital Cost = $3,100,000 Reduced by the lesser of: • Normal Recapture = $1,813,310 • Replacement Cost = $3,500,000 2022 Recapture (Reassessed)

$1,286,690

($3,100,000)

1,813,310

(1,286,690) Nil

If both elections are filed in 2023, the UCC of the replacement building is calculated as follows: Deemed Capital Cost Recapture Reversed by the election UCC - Replacement Building

$3,300,000 ( 1,813,310) $1,486,690

Note that the $1,486,690 UCC for the new building is equal to the UCC of the old building ($1,286,690), plus the additional cost of $200,000 ($3,500,000 - $3,300,000). Equipment — As this is a voluntary disposition, the ITA 13(4) and 44(1) elections can only be used on real property (land and buildings). They cannot be used for the equipment and, as a consequence, the $237,629 in recapture cannot be changed. As the elections cannot be used, both the capital cost and the UCC of the new equipment will be $723,000.

Part C The Election — The ITA 44(6) election applies when there is a disposition involving a combination of land and building. If, for either of the land or building, the POD exceed the ACB, the election allows the transfer of all or part of that excess to be applied to the other property. This can provide some additional relief when ITA 44(1) and ITA 13(4) fail to eliminate all of the capital gains arising on one part of the disposition of the old property. ITA 44(1) fully eliminated the capital gain on the building. However, a $700,000 capital gain remained on the land. This would suggest that it could be advantageous to transfer some of the POD from the land to the building. The excess of the POD of the old land over the cost of the replacement land was $700,000 ($1,500,000 $800,000). This is the amount that would be required to eliminate the capital gain on the land. However, the excess of the cost of the replacement building over the old building's proceeds of disposition is only $200,000 ($3,500,000 - $3,300,000). If a transfer in excess of this amount is made, any reduction in the capital gain on the land will be matched by an increased capital gain on the building. Applying ITA 44(6) in an optimal manner will result in the following adjusted POD: Land $1,500,000 ( 200,000) $1,300,000

Actual POD POD Transfer Land to Building Adjusted POD

Building $3,300,000 200,000 $3,500,000

Application to the Land — If both ITA 44(1) and ITA 44(6) are applied, the resulting capital gain on the land will be calculated as the lesser of: • $870,000 ($1,300,000 - $430,000); and • $500,000 (the excess of the $1,300,000 adjusted POD for the replaced land over the $800,000 cost of the replacement land). This is a reduction of $200,000 ($700,000 - $500,000) from the amount that was calculated when only ITA 44(1) was applied. However, the ACB of the land would be unchanged by the use of ITA 44(6): Actual Cost $800,000 Capital Gain Reversed by election ($870,000 - $500,000) ( 370,000) Deemed ACB of the Replacement Land $430,000 Application to the Building — With the POD transfer limited to $200,000, the capital gain on the building remains nil. Specifically, the gain will be the lesser of: • $400,000 ($3,500,000 - $3,100,000); and • Nil (reflecting the fact that there was no excess of the $3,500,000 adjusted POD for the replaced building over the $3,500,000 cost of the replacement building).

However, the capital cost and UCC of the building will be reduced by the application of ITA 44(6): Actual Cost Capital Gain Reversed by the Elections Deemed Capital Cost Recapture Reversed by election UCC - Replacement Building

$3,500,000 ( 400,000) $3,100,000 ( 1,813,310) $1,286,690

The UCC of the replacement building is now equal to the UCC of the old building. 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.

Capital Gains Land Building Replacement Property ACB of Land Capital Cost of Building UCC

No ITA 44(6)

With ITA 44(6)

$700,000 Nil

$500,000 Nil

$ 430,000 3,300,000 1,486,690

$ 430,000 3,100,000 1,286,690

As you can see in the table, the use of ITA 44(6) has reduced the capital gain on the land by $200,000. However, it has done so at the cost of reducing the capital cost and UCC of the replacement building. There is an income tax cost associated with this trade off in that only one-half of the capital gain would have been included in income in the current year, whereas the future CCA that has been lost of $200,000 would have been fully deductible. Type: ES Topic: Voluntary dispositions - with ITA 44(6) election

114) Kontex Ltd. is a Canadian public company with a December 31 taxation year end. The Company carries on business out of a single building that was purchased several years ago at a cost of $1,782,000 with $400,000 for the land and $1,382,000 for the building. The building is the only property in Class 1 and, on January 1, 2022, the UCC is $985,926. On October 1, 2022, the building is completely destroyed in a fire that was started by a disgruntled former executive. While the Company could rebuild on the site of the destroyed building, it expects significant growth in the next few years and decides to purchase a larger building. Given this, the Company sells the site for $550,000 on December 5, 2022 and begins to search for a replacement site. As it does not appear that the Company had any involvement in starting the fire, on December 1, 2022, the Company receives insurance proceeds equal to the $1,600,000 FMV of the building. A replacement building is acquired on July 15, 2023 at a cost of $2,500,000, of which $1,700,000 is for the building and $800,000 for the land. It is a new building that will be used 100% for non-residential purposes, none of which is manufacturing. The company will elect to place the building in a separate Class 1 in order to take advantage of a higher CCA rate. Required: A. Indicate the income tax consequences of the involuntary disposition for the 2022 taxation year. B. Indicate the revisions that will be made to the 2022 income tax consequences ae a result of filing elections under ITA 13(4) (to defer recapture) and ITA 44(1) (to defer capital gains). In addition, determine the capital cost and UCC for the replacement property as a result of the election. C. Calculate the maximum CCA that Kontex will be able to claim for the new building in the 2023 taxation year, assuming the Company makes the elections under ITA 13(4) and ITA 44(1).

Answer: Part A The 2022 income tax consequences of the involuntary disposition would include both taxable capital gains and recapture. The amounts would be calculated as follows: Land

POD: Sale Price of Land Insurance Proceeds for Building ACB Capital Gain Inclusion Rate Taxable Capital Gain

Building

$550,000 ( 400,000) $150,000 1/2 $ 75,000

January 1, 2022 UCC Balance Lesser of: • Cost = $1,382,000 • POD = $1,600,000 December 31, 2022 UCC Recapture January 1, 2023 UCC

$1,600,000 ( 1,382,000) $ 218,000 1/2 $ 109,000 $ 985,926

( 1,382,000) ($ 396,074) 396,074 Nil

For the taxation year ending December 31, 2022, no CCA can be claimed. Instead, there is $396,074 in recaptured CCA that must be included as business income. As a result of this involuntary disposition, Kontex will have an addition to 2022 net income of $580,074 ($75,000 + $109,000 + $396,074). Part B After the land and building are replaced in the taxation year ending December 31, 2023, an election can be filed under ITA 44(1), revising amounts included in income in 2022. The capital gains will be revised to nil, the lesser of the amounts calculated in Part A and the following: Land $550,000 ( 800,000) Nil

POD Less: Cost of Replacement Property Excess, if any

Building $1,600,000 ( 1,700,000) Nil

The reversed amounts will reduce the capital costs of the replacement property, resulting in the following revised cost: New Land New Building $800,000 $1,700,000 ( 150,000) ( 218,000) $650,000 $1,482,000

Cost Capital Gain Reversed by Election Deemed Cost

These amounts can also be determined or verified by taking the ACB of the replaced property of $400,000 and $1,382,000, and adding the additional amounts spent to purchase the replacement property($250,000 for the land and $100,000 for the building). An election can also be made under ITA 13(4) to revise the recapture for 2022 to nil. The calculation would be as follows: January 1, 2022 UCC Balance Deduction: Lesser of: • POD = $1,600,000 • Capital Cost = $1,382,000 Reduced by the lesser of: • Normal Recapture = $396,074 • Replacement Cost = $1,700,000 2022 Recapture (Reassessed)

$985,926

$1,382,000

( 396,074)

( 985,926) Nil

The UCC of the new building will be adjusted for this change as follows: Deemed Capital Cost of Building (See Preceding Calculation) Recapture Reversed - ITA 13(4) Election UCC

$1,482,000 ( 396,074) $1,085,926

This $1,085,926 can also be calculated as the old UCC of $985,926, plus the additional amount of $100,000 ($1,700,000 - $1,600,000) spent to purchase the replacement property in excess of the insurance proceeds. Part C The CCA claim for the 2023 taxation year would be determined as follows: Opening UCC Balance Addition of New Building UCC AccII Adjustment CCA Base Enhanced Rate for Class 1 Non-Residential Buildings CCA for 2023

Nil $1,085,926 542,963 $1,628,889 6% $ 97,733

Type: ES Topic: Involuntary dispositions - No ITA 44(6) election

115) On August 1, 2021, the only building owned by Wilson Ltd. is completely destroyed in a fire. The building was acquired several years ago at a cost of $890,000, of which $140,000 is for the land and $750,000 for the building. Wilson Ltd. has a June 30 taxation year end. On July 1, 2021, the UCC of the building was $599,298. Within six months of the fire, the company receives insurance proceeds equal to $1,250,000, the FMV of the destroyed building. As the building site is not large enough for the planned replacement, the land on which it was situated is sold for $250,000. The replacement building is acquired on November 1, 2022 at a cost of $1,600,000, of which $300,000 is for the land and $1,300,000 for the building. It is a new building that will be used exclusively (100%) for nonresidential purposes, none of which is manufacturing. The company will file the necessary election to place the building in a separate Class 1. Required: A. Indicate the income tax consequences of the involuntary disposition for the 2022 taxation year. B. Indicate the revisions to the reported amounts for 2022 provided the Company files elections under ITA 13(4) (to defer recapture) and ITA 44(1) (to defer capital gains). In addition, determine the capital cost and UCC for the replacement property, as a result of these elections. C. Calculate the maximum CCA that Wilson will be able to claim for the building for the taxation year ending June 30, 2023, again assuming the Company files the elections under ITA 13(4) and ITA 44(1). Answer: Part A The 2022 income tax consequences as a result of the involuntary disposition are as follows:

POD: Sale Price of Land Insurance Proceeds for Building ACB Capital Gain Inclusion Rate Taxable Capital Gain

Land $250,000 ( 140,000) $110,000 1/2 $ 55,000

July 1, 2021 UCC Balance Lesser of: • Cost = $750,000 • POD = $1,250,000 June 30, 2022 UCC Recapture July 1, 2022 UCC

Building

$1,250,000 ( 750,000) $ 500,000 1/2 $ 250,000 $ 599,298

( 750,000) ($ 150,702) 150,702 Nil

No CCA claim can be made for the 2022 taxation year since there is no property in the class on the last day of the taxation year. Instead, there is $150,702 of recapture that will be added to business income.

As a result of this involuntary disposition,Wilson will have an addition to net income in 2022 of $455,702 ($55,000 + $250,000 + $150,702). Part B When the land and building are replaced in the taxation year ending June 30, 2023, an election can be filed under ITA 44(1), and revisions processed for the 2022 taxation year. The capital gains will be revised to nil since the original POD does not exceed the replacement cost of the land and building. This is illustrated as follows:

POD Less: Cost of Replacement Property Revised Capital Gain

Land $250,000 ( 300,000) Nil

Building $1,250,000 ( 1,300,000) Nil

The elimination of the capital gains impacts the cost of the replacement property with the following results: New Land New Building Cost $300,000 $1,300,000 Capital Gain Reversed by Election ( 110,000) ( 500,000) Deemed Cost $190,000 $ 800,000 These amounts can also be verified by taking the costs of the replaced property of $140,000 and $750,000, and adding the additional amounts required to replace the properties - ($50,000 for the land and $50,000 for the building). An election can also be made under ITA 13(4) to revise the recapture for the 2022 taxation year to nil. The calculation would be as follows: July 1, 2021 UCC Balance Deduction: Lesser of: • POD = $1,250,000 • Capital Cost = $750,000 Reduced by the lesser of: • Normal Recapture = $150,702 • Replacement Cost = $1,300,000 Recapture of 2022 CCA (Reassessed)

$599,298

$750,000

( 150,702)

( 599,298) Nil

The UCC of the new building will be adjusted for this change as follows: Deemed Capital Cost of Building (See Preceding Calculation) Recapture Reversed - ITA 13(4) Election UCC

$ 800,000 ( 150,702) $ 649,298

This $649,298 can be verified as the UCC of the replaced building of $599,298, plus the $50,000 ($1,300,000 - $1,250,000) in additional amounts spent in excess of the insurance proceeds.

Part C The CCA claim for the taxation year ending June 30, 2023 would be calculated as follows: Opening UCC Addition of New Building UCC AccII One-Half Net Additions CCA Base Enhanced Rate for new Class 1 Non-Residential Buildings Maximum CCA for 2023

Nil $649,298 324,649 $973,947

Type: ES Topic: Involuntary dispositions - No ITA 44(6) election

6% $ 58,437

116) Each of the following independent Cases describes a situation with a proposed tax treatment. 1. Mr. Acker has owned a small triplex for a number of years and, throughout this period, all three of the units have been rented. In determining his income from this property, CCA has been claimed in each year with respect to all three units. In the current year, Mr. Acker has moved into one of the three units and, as a result, will be reporting rental income for only two of the three units. As he has not actually sold any of the units, he will not report any capital gains or losses during the current year. 2. Mr. Jones sold non-depreciable capital property with an ACB of $72,000 for $105,000. He is providing a warranty on the property that he estimates will cost him $6,000 to service. No service related expenses are expected until late in the second year after the year of the sale. As a consequence, he is recognizing a capital gain of $27,000. 3. Ms. Turner sold her dining room table to her daughter for $400 and a painting to her brother for $900. The sale prices were based upon the estimated FMV of both properties. Several years ago, she purchased the table for $950, and the painting for $667. She does not plan to report these dispositions since there would not be any capital gains as a result of these sales. Ms. Turner has no other income in the year and will therefore not be filing an income tax return. 4. Mrs. Brown purchased corporate bonds for $11,200, of which $800 was accrued interest and $10,400 represented the principal. The bonds were later sold for $11,600 that includes $200 for accrued interest. Mrs. Brown recognizes a taxable capital gain of $500. 5. Several years ago, Miss Lee sold three sports cars for their combined FMV of $182,000, to a corporation she had incorporated for all of the preferred shares of the company. The cars were used in a business she had carried on as a sole proprietor. During the current year, all of the cars are destroyed in a fire. Unfortunately, the cars were not insured. As the corporation had no assets other than the cars, there was no reason for her to continue to own the shares. In view of this situation, she sells the preferred shares to a friend who required a corporation for business purposes for $500. Miss Lee plans to use the resulting allowable capital loss of $90,750 [(1/2)($182,000 - $500)] to offset taxable capital gains realized from real estate transactions. Required: In each of the preceding Cases, indicate whether or not you believe that the income tax treatment being proposed is the correct one. Explain your conclusion.

Answer: 1. The income tax treatment is incorrect. While Mr. Acker has not sold any of the units, a part of his building has undergone a change in use from an income earning use to a personal use. As a consequence, there will be a deemed disposition at FMV for that portion of the building that he is now occupying. Any resulting capital gain will have to be included in income for the year of the change in use. No part of any capital gain could be exempted as a result of the principal residence exemption since the property was never used for personal purposes since its acquisition. In addition no election could be filed under ITA 45(2) which requires that the property was used at one time for personal use. 2. The intended reporting is incorrect since the capital gain is reduced by the expected warranty service expenses. Since the warranty expenses are only expected late in the second year they will be treated as a capital loss at that time when incurred. The individual will have to include $16,500 in income for the current year with respect to the sale [(1/2)(POD $105,000 - ACB $72,000)]. 3. While the $1,000 POD/ACB rule applies to both properties with the result that there is no capital gain or capital loss ITA 150(1.1) technically requires the filing of an income tax return when capital property is sold regardless of whether there is a capital gain or a capital loss. This reporting allows the CRA to question the amounts if they so choose at some later time. 4. The described capital gain treatment is correct. POD ($11,600 - $200) $11,400 ACB ($11,200 - $800) ( 10,400) Capital Gain $ 1,000 Inclusion Rate 1/2 Taxable Capital Gain $ 500 The accrued interest would also have to be included in her income. 5. The recognition of the allowable capital loss is correct. Type: ES Topic: Capital gains - short cases

117) Family Information Owen Winehouse is 51 years old and has been married to Arlene Winehouse for over 25 years. Having made his fortune through a wildly successful initial public offering, he devotes most of his time to mentoring young entrepreneurs and participating in volunteer activities. Arlene is also very active in various charitable causes. For the 2022 taxation year, her net and taxable income is $7,650. Owen and Arlene have two daughters: Martha is 14 years old and is in good health. She has net income from part time summer jobs of $5,620. Marlene is 19 years old. She is in good health and attends university on a full time basis for 9 months of the year. Owen pays all of her costs including tuition of $11,400, textbook costs of $1,600, and residence fees of $10,400. Marlene has no income of her own. Given this, she has agreed to transfer the maximum tuition credit to her father. Owen's father, Philip lives with the family. He is 73 years old and in good health. His net income for 2022 is $17,300. Other Information Other information relevant to Owen for 2022 is the following: 1. Owen received eligible dividends from Canadian public companies in the amount of $42,400. 2. For several years Owen has owned shares of an eligible small business corporation (ESBC). The ACB of the shares is $520,000. On January 4, 2022, the shares are sold for $600,000. Assume that none of the gain is eligible for the capital gains deduction. Owen uses $500,000 of the proceeds to immediately invest in another ESBC. The new ESBC paid non-eligible dividends of $22,000. 3. The residence occupied by Owen and Arlene was purchased in 2007 for $320,000. As their space needs have grown considerably, particularly since Philip has moved in, they have decided to look for a bigger place. The residence is sold in February, 2022 for $375,000. Selling costs, including real estate commissions, total $20,000. Their new residence, purchased at the beginning of 2022, cost $458,000. 4. Owen purchased a cottage for the family's use in 2012 for $215,000, of which $65,000 reflects the cost of the land on which the cottage is situated and $150,000 for the building. The family has made some use of the cottage in every subsequent year. Anticipating spending more time in their new and larger city residence, Owen decides to convert the cottage to a rental property. On January 4, 2022, it is estimated that the FMV of the property is $235,000, of which $75,000 can be allocated to the land and $160,000 to the building. As Owen plans to claim CCA on this property, he does not elect under ITA 45(2) to have the property continue as his principal residence. In addition, Owen spends $42,000 furnishing the cottage. All of the furnishings are Class 8 property. On March 1, 2022, the cottage is rented for $4,000 per month for the remainder of the year. Expenses, other than CCA, total $23,600 for March 1 to December 31, 2022. 5. In 2021, Owen purchased 1,000 units of ReCan, a mutual trust fund, at $40 per unit. In July, 2022, the trust fund makes a distribution of $2 per unit of which $0.75 is designated as a return of capital and $1.25 is interest income. All of this distribution is re-invested in ReCan units at a price of $42 per unit. No other distributions are made in the year. In December, 2022, all of the units are sold for $39 each. 6. In 2021, Owen sold a piece of undeveloped land for $125,000. This land had been purchased several years before for $100,000. While Owen's original intent was to construct a backwoods retreat for personal use on the site, he had not found the time to improve the land and decided the offer of $125,000 was too attractive to turn down. Owen had paid a total of $2,000 in property taxes on the land prior to its sale. The terms of the sale required the buyer to provide a down payment of $37,500, with the remaining balance to be paid in 2023. Owen uses reserves to defer as much of the income tax on the capital gain as possible.

7. For several years, Owen has been interested in a French common shares Debit Agricole (DA). The shares trade in Euros (€€) and Owen's first purchase of 1,000 shares was made on October 1, 2019 for €€14.00 per share. Assume he acquired the Euros at a rate of €€1 = $1.57. Subsequent transactions were as follows:

Quantity Purchased (Sold) 300 (400) 600

Date November 4, 2020 January 6, 2021 June 24, 2022

Price Per Share (€) €14.50 15.00 15.50

Assumed Exchange Rate (Canadian $) $1.55 1.54 1.51

On December 2, 2022, he sells all of the shares for €€13.00 each. Assume at this time €€1 = $1.50. The Euros are immediately converted into Canadian Dollars. 8. As Owen will no longer have use of his cottage, he decides to sell his vintage power boat. He had purchased this boat several years ago in damaged condition for $10,000. He subsequently spent $24,627 restoring it to mint condition. As a result, he was able to sell it for $50,000 in 2022. 9. Owen sold his stamp collection for $12,000. The total cost of the collected stamps was $8,000. He also sold an oil painting for $700. This painting, which he had always hated, had been a gift from Arlene's mother. At the time of the gift, the painting had a value of $4,000. 10. Owen spends 225 hours volunteering in a search and rescue program sponsored by the province in which he lives. He receives no compensation for this work. 11. Owen makes contributions to registered charities in the amount of $5,000. 12. Owen pays for medical expenses provided to various family members as follows: Dental Work (Root Canal) for Arlene Dental Work (Cavities) for Martha Physiotherapy (Back Pain) for Arlene Surgery (Tummy Tuck) for Owen Total

$1,500 875 1,300 1,800 $5,475

Required: Determine Owen's 2022: A. Minimum net income. B. Minimum taxable income. C. Minimum federal income tax payable or refund. Ignore any GST/HST & PST considerations.

Answer: Part A - Net Income 2022 Property Income — Owen's property income can be calculated as follows: Eligible Dividends Gross Up [(38%)($42,400)] Non-Eligible Dividends Gross Up [(15%)($22,000)] Rental Income (Note 1) Trust Fund Distribution [(1,000)($1.25)] 2022 Income from Property

$42,400 16,112 22,000 3,300 Nil 1,250 $85,062

Note 1 - Rental income can be calculated as follows: Gross Rents [(10)($4,000)] Expenses other than CCA Income before CCA CCA Building (See Following Calculation) Furnishings [(20%)(150%)($42,000)] 2022 Rental Income

$40,000 ( 23,600) $16,400 ($ 3,800) ( 12,600)

( 16,400) $ Nil

Original Cost of Building $150,000 FMV at Change in use $160,000 Original Cost ( 150,000) Excess $ 10,000 Bump Up 50% 5,000 Cost for CCA Purposes $155,000 AccII [(50%)($155,000)]* 77,500 CCA Base $232,500 Rate 4% CCA - Class 1 $ 9,300 The property qualifies for the AccII since no CCA was claimed by anyone in a previous taxation year. This reflects a change in the AccII that became law in June of 2021. The maximum CCA claim is restricted to the rental income before any deduction for CCA. 2022 Capital Gains — Owen's net taxable capital gains are calculated as follows: ESBC Shares (Note 2) House And Cottage (Note 3) Trust Fund Units (Note 4) Land (Note 5) Debit Agricole Shares (Note 6) Power Boat (Note 7) Net Gain on Stamp Collection and Oil Painting (Note 8) Net Capital Gains Inclusion Rate Net Taxable Capital Gains

$ 13,333 16,364 ( 393) 2,500 ( 4,678) 15,373 1,000 $43,499 1/2 $21,750

Note 2 - The capital gain to be recognized on the sale of ESBC shares can be calculated as follows: POD ACB Capital Gain Deferral (See Following Calculation) Capital Gain

$600,000 ( 520,000) $ 80,000 ( 66,667) $ 13,333

If Owen had invested all of the proceeds in a different ESBC, the entire $80,000 gain could be deferred. However, since he only used $500,000 of the proceeds for re-investment, the deferral is limited to $66,667 [($80,000)($500,000 ÷ $600,000)]. Note that the ACB of the new ESBC shares is reduced by the deferred gain to $433,333 ($500,000 - $66,667). Note 3 - While there is a gain on both the sale of the house and the deemed disposition of the cottage, the principal residence exemption can be applied against either or both of these properties. The relevant calculations are as follows: House $375,000 ( 320,000) ( 20,000) $ 35,000

POD (Actual and Deemed) ACB Selling Costs Capital Gain

Cottage $235,000 ( 215,000) N/A $ 20,000

As the house was owned for 16 years, the annual gain on this property is $2,187.50 ($35,000 ÷ 16). The annual gain on the cottage, owned for 11 years, is $1,818.18 ($20,000 ÷ 11). As the annual gain on the house is larger, the maximum number of required years should be applied to that property. This would be the 15 years 2007 through 2021, leaving the year 2022 for the cottage. The results are as follows: House $35,000

Pre-Exemption Gain Exemption: House [($35,000)(15 + 1) 16] Cottage [($20,000)(1 + 1) 11] Capital Gain after Exemption

( 35,000) Nil

Cottage $20,000

( 3,636) $16,364

Note 4 - The total distribution by this trust was $2,000 [(1,000)($2)]. At a price of $42 per unit, this would result in Owen acquiring an additional 47.62 (2,000 ÷ $42) units, resulting in a total of 1,047.62 (1,000 + 47.62) units. Based on this, the capital loss on the sale of the trust units would be calculated as follows: POD [(1,047.62)($39.00)] ACB Original Cost [(1,000)($40)] Additional Investment Return of Capital [(1,000)($0.75)] Capital Loss

$40,857 $40,000 2,000 ( 750)

( 41,250) ($ 393)

Note 5 - Since the land had not been used to earn income, the property taxes are not deductible and not added to the ACB of the land. The capital gain on the 2022 sale of the land would be calculated as follows: POD ACB Capital Gain before Reserve

$125,000 ( 100,000) $ 25,000

At the end of 2021, the proceeds that are only receivable after the end of the year are $87,500 ($125,000 $37,500). Given this, the maximum 2021 capital gain reserve would have been $17,500, the lesser of: • [($25,000)($87,500 $125,000] = $17,500 • [($25,000)(20%)(4 - 0)] = $20,000 At the end of 2022, the proceeds receivable after the end of the year are unchanged at $87,500. Based on this, the capital gain to be recognized for 2023 would be as follows: 2021 Capital Gains Reserve 2022 Capital Gains Reserve - Lesser of: [($25,000)($87,500 $125,000] = $17,500 [($25,000)(20%)(4 - 1] = $15,000 2022 Capital Gain

$17,500

( 15,000) $ 2,500

Note 6 - The cost of Owen's purchases of the Debit Agricole shares, converted to Canadian dollars, is as follows: Cost In Canadian Purchase/Sale Date Dollars October 1, 2019 Purchase [(1,000)(€14.00)($1.57)] $21,980 November 4, 2020 Purchase [(300)(€14.50)($1.55)] 6,743 Sub-Total $28,723 January 6, 2021 Sale [(400)($28,723 ÷ 1,300)] (Rate Irrelevant) ( 8,838) Sub-Total (900 Shares) $19,885 June 24, 2022 Purchase [(600)(€15.50)($1.51)] 14,043 ACB on December 2, 2022 $33,928 There would be a capital loss on the sale of the 1,500 shares, calculated as follows: POD [(1,500)(€13.00)($1.50)] ACB Capital Loss

$29,250 ( 33,928) ($ 4,678)

Since Owen immediately converts the Euros to dollars, there is no gain or loss on the foreign currency conversion.

Note 7 - The power boat is personal use property. While losses on such property are not deductible, capital gains are required to be included in income. The capital gain would be calculated as follows: POD Original Cost Restoration Costs (Capital expenditures) Capital Gain

($10,000) ( 24,627)

$50,000 ( 34,627) $15,373

Note 8 - The net capital gain on listed personal property would be calculated as follows: Stamp Collection $12,000 ( 8,000) $ 4,000

POD ($1,000 Floor) ACB Capital Gain (Loss)

Oil Painting $1,000 ( 4,000) ($3,000)

As losses on listed personal property can be deducted against gains on listed personal property, the net inclusion is $1,000 ($4,000 - $3,000). Based on the preceding calculations, Owen's 2022 net income is determined as follows: Income from Property Net Taxable Capital Gains 2022 Net Income

$85,062 21,750 $106,812

Part B - 2022 Taxable Income As Owen has no taxable income deductions, his taxable income is equal to his net income.

Part C - 2022 Federal Income Tax Payable or Refund Owen's federal income tax payable or refund would be calculated as follows: Tax on First $100,392 Tax on next $6,420 ($106,812 - $100,392) at 26% Federal Income Tax Payable before Credits Tax Credits: BPA Spousal ($14,398 - $7,650) Canada Caregiver - Philip is not infirm Volunteer Search and Rescue Transfer of Tuition - Lesser of: • Maximum $5,000 • Actual Tuition of $11,400 Medical Expenses (Note 9) Credit Base Rate Charitable Donations (Note 10) [(15%)($200) + (29%)($5,000 - $200)] Dividend Tax Credits: Eligible Dividends [(6/11)($16,112)] Non-Eligible Dividends [(9/13)($3,300)] 2022 Federal Income Tax Payable

$17,820 1,669 $19,489 ($14,398) ( 6,748) N/A ( 3,000)

( 5,000) ( 1,196) ($30,342) 15%

( 4,551) ( 1,422) ( 8,788) ( 2,285) $ 2,443

Note 9 - All of the $5,475 of services paid for by Owen would be eligible medical expenses, with the exception of his tummy tuck surgery which would generally be cosmetic. Given this, the available credit would be calculated as follows: Eligible Expenses ($5,475 - $1,800) Reduced by the lesser of: • [(3%)($106,812)] = $3,204 • 2022 Threshold Amount = $2,479 Allowable Medical Expenses

$3,675

( 2,479) $1,196

Note 10 - As none of his income is taxed at 33%, this rate is not applied in the determination of the charitable donations tax credit. Type: ES Topic: Comprehensive case covering chapters 1 to 8

118) Family Information Mrs. Joan Brockton is 42 years of age and lives with her husband Jack Brockton. They have two children who live with them. Their son Joshua is 15 years old and has net income for 2022 of $5,600, largely from part-time summer employment. Their daughter Anna is 12 and qualifies for the disability tax credit. Anna has no net income for 2022. Joan's husband Jack is 41 years old and has gone back to university on a full time basis for all of 2022. His tuition fees for the year are $11,500. Jack's 2022 net income is $8,400, largely from investment income. The family's 2022 medical expenses are as follows: Joan Jack Joshua Anna (No Attendant Care expenses) Total Medical Expenses

$ 1,800 2,500 3,400 11,500 $19,200

Joan makes donations to registered Canadian charities of $2,300 in 2022. Employment Information Joan is employed by a large public corporation at an annual salary of $122,000. In addition, she received $46,000 in commissions. Her employer withholds the following amounts from her income: RPP Contributions EI CPP Professional Association Dues

$2,700 953 3,500 1,500

Joan's employer makes a matching contribution to her RPP of $2,700. Her employer requires her to maintain an office in her home and has provided her with a signed Form T2200. The office use accounts for 15% of the floor space (including a component for common areas) in her home including an allocation for the use of common areas. The 2022 home office expenses are: Maintenance and Utilities Property Taxes Insurance Mortgage Interest

$2,200 4,800 950 9,800

Several years ago, Joan's employer granted her options to purchase 2,000 shares of the company's common shares at a price of $20 per share. The option price was equal to the FMV of the shares at the time the options were granted. In January, 2022, when the shares are trading at $32 per share, Joan exercises all of the options. In December, 2022, she sells all of the 2,000 stock option shares for $35 each.

Joan’s employer pays her an allowance of $1,500 per month to cover all of her employment related expenses, including her use of a personally owned automobile. The automobile was purchased in 2021 at a cost of $29,500. She claimed CCA in 2021 based on the automobile being used 75%of the time for employment purposes 25% for personal use. In 2022, only 60% of the use of the automobile was for employment purposes with 40% for personal use. Joan’s employment related expenses during the year are: Automobile Operating Expenses Hotels Airline and other Transportation Business Meals and Entertainment

$4,200 5,500 7,600 6,400

Other 2022 Information 1. Joan received eligible dividends of $2,350. 2. At the beginning of 2022, Joan owned 1,000 units of the Torstar Mutual Trust Fund. The ACB of these units at that time was $12 each. In 2022, the trust made a distribution of $1.00 per unit, all of which was interest income. Joan had all of this distribution invested in additional units at $14 per unit. In December, 2022, all of her Torstar units were sold for $16 each. 3. At the beginning of 2022, Joan owned land with an ACB of $125,000. She had owned the land for a number of years, hoping at some point to construct a rental property on the site. However, in 2022 she receives an unsolicited offer for the property of $375,000. She accepts the offer and immediately receives a payment of $100,000. The remaining $275,000 will be paid in 11 annual instalments of $25,000, beginning in 2023. Joan would like to the capital gains reserve to defer as much income tax as possible on any capital gain. 4. For many years, Joan has owned a cottage on a nearby lake that had cost $75,000, including an estimated value for the land of $20,000 and $55,000 for the building. In January of 2022, because of her family’’s declining use of this property, Joan decides to convert the property to a rental property. At this time, the property is appraised at $250,000, with $50,000 representing the value of the the land and $200,000 for the building. Rental income in 2022 before the deduction of CCA is $3,900. Joan does not intend to designate the cottage as her principal residence in any of her years of ownership. 5. Joan owns a painting with an ACB of $2,000. She sells the painting in 2022 for $22,000. Required: calculate Mrs. Brockton’’s minimum net income, taxable income and her minimum federal income tax payable or refund for 2022. Ignore any income tax instalments she may have paid during the year, any income tax withholdings made by her employer, and GST/HST & PST considerations.

Answer: 2022 Employment Income Joan's employment expenses that would have been restricted by commission income will not be restricted given that the commissions received exceed her available employment expenses. The required calculations here would be as follows: Salary Additions Commissions Expense Allowance [(12)($1,500)] Stock Option Benefit [(2,000)($32 - $20)] Deductions: RPP Contributions Professional Association Dues Home Office Expenses (Note 1) Automobile Costs CCA (Note 2) Operating expenses [(60%)($4,200)] Hotel expenses Airline and other Transportation Business Meals and Entertainment [(1/2)($6,400)] 2022 Employment Income

$122,000 46,000 18,000 24,000 ( 2,700) ( 1,500) ( 1,193) ( 2,921) ( 2,520) ( 5,500) ( 7,600) ( 3,200) $ 182,866

Note 1 - As Joan has commission income, she can deduct 15% of all of the expenses except the mortgage interest. This will provide a deduction of $1,193 [(15%)($2,200 + $4,800 + $950)]. Note 2 - The 2022 CCA would be based on a UCC calculated as though 100% of the available CCA had been claimed in 2021. The 100% CCA for 2021 would be $13,275 [(50%)($29,500)+($29,500)][(30%)]. Using this amount, the deductible 2022 CCA would be $2,921 [(60%)(30%)($29,500 - $13,275)]. 2022 Property Income The required calculations here would be as follows: Eligible Dividends Gross Up [(38%)($2,350)] Mutual Trust Fund Distribution [(1,000)($1.00)] Rental Income (Note 3) 2022 Income from Property

$2,350 893 1,000 Nil $4,243

Note 3 - As the change in use is from personal to business, the base for calculating CCA would be as follows: Cost of Building FMV at the Change in use Cost Increase In Value Inclusion Factor Cost for UCC and CCA Purposes AccII [(50%)($127,500)] CCA Base Rate For Class 1 CCA

$200,000 ( 55,000) $145,000 1/2

$55,000

72,500 $127,500 63,750 $191,250 4% $ 7,650

Using this CCA amount, rental income would be $ Nil ($3,900 - $3,900) since CCA cannot be used to increase or create a rental loss. Note that the AccII is available since no CCA had previously been claimed by anyone with respect to the cottage. This change is reflected in amendments made to the AccII provisions that retroactively became law in June of 2021. 2022 Net Taxable Capital Gains The required calculations here would be as follows: Stock Option Shares [(2,000)($35 - $32)] Torstar Mutual Trust Fund (Note 4) Land Sale (POD $375,000 - ACB $125,000) Reserve For Land Sale (Note 5) Painting ($22,000 - $2,000) Change in Use: Cottage - Land ($50,000 - $20,000) Cottage - Building ($200,000 - $55,000) Total Capital Gains Inclusion Rate 2022 Net Taxable Capital Gains

$250,000 ( 183,333)

$ 30,000 145,000

$ 6,000 4,143 66,667 20,000

175,000 $271,810 1/2 $135,905

Note 4 - The $1,000 mutual trust fund distribution was used to purchase 71.43 additional units ($1,000 ÷ $14). Using this amount, the capital gain calculation would be as follows: POD [(1,071.43)($16)] ACB [(1,000)($12) + $1,000)] Capital Gain

$17,143 ( 13,000) $ 4,143

Note 5 - The gain on the land would be $250,000 ($375,000 - $125,000). The maximum reserve would be $183,333, the lesser of: • $183,333 [($250,000)($275,000 ÷ $375,000)] • $200,000 [($250,000)(20%)(4 - 0)]

2022 Net and Taxable Income The required calculations here would be as follows: Employment Income Income from Property Net Taxable Capital Gains Deductible CPP ($3,500 - $3,039) 2022 Net Income Stock Option Deduction [(1/2)($24,000)] 2022 Taxable Income

$182,866 4,243 135,905 ( 461) $322,553 ( 12,000) $310,553

2022 Federal Income Tax Payable or Refund The required calculations here would be as follows: Tax on first $221,708 Tax on next $88,845 ($310,553 - $221,708) at 33% Federal Income Tax before Credits Tax Credits: BPA Spouse ($12,719 - $8,400) Canada Caregiver for child - Anna Transfer of Anna’s Disability Disability Supplement Transfer of Tuition - Lesser of: • Maximum of $5,000 • Actual Tuition of $11,500 Medical Expenses (Note 6) EI CPP Canada Employment Credit Total Credit Base Rate Subtotal Charitable Donations Credit (Note 7) Dividend Tax Credit [(6/11)($893)] 2022 Federal Income Tax Payable

$51,345 29,319 $80,664 ($12,719) ( 4,319) ( 2,350) ( 8,870) ( 5,174)

( 5,000) ( 16,721) ( 953) ( 3,039) ( 1,287) ($60,432) 15%

( 9,065) $71,599 ( 723) ( 487) $70,389

Note 6 - The base for the medical expense tax credit would be calculated as follows: Total Medical Expenses Reduced by the lesser of: • [(3%)($322,553)] = $9,677 • 2022 Threshold Amount = $2,479 Medical Expense Tax Credit Base

$19,200

( 2,479) $16,721

Note 7 - The charitable donations tax credit would be calculated as follows: 15% of $200 $ 30 33% of the lesser of: $2,300 - $200 = $2,100 $31,553 - $221,708 = $88,845 693 29% of Nil [$2,300 - ($200 + $2,100)] Nil Total Charitable Donations Credit $723 Type: ES Topic: Comprehensive case covering chapters 1 to 8

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 9 Other Income and Deductions, and Other Issues 9.1 Online Exercises 1) What is a retiring allowance and what are the income tax consequences associated with receiving a retiring allowance? Answer: A retiring allowance is an amount received by an individual, either on, or after retirement in recognition of long service or, alternatively, an amount received in respect of a loss of employment. The full amount of such allowances must be included in income in the year that it is received. Within specified limits, all or part of the retiring allowance may be transferred to an RRSP and deducted in the calculation of net income. Type: ES Topic: Retiring allowance

2) What is a death benefit? Indicate any special income tax consequences associated with the receipt of a death benefit. Answer: A death benefit is the total of all amounts received by an individual in a taxation year on or after the death of an employee in recognition of the employee's service in an office or employment. The first $10,000 of such amounts are not required to be included in income. Type: ES Topic: Death benefits

3) Briefly describe the treatment of amounts received as scholarships. Answer: In general, there is 100% exemption of scholarships and prizes that are received in connection with: • an education program in which the student is a "qualifying student". A qualifying student is generally a student taking a university or college course that is at least three weeks long and that requires at least 10 hours of effort per week; and • an elementary or secondary school education program. However, there are a number of exceptions to this exemption: • At the post-secondary level, the exemption will only be available to the extent it relates to a college or CEGEP diploma, or a bachelor, masters or doctoral degree. This means it will not be available for most post-doctoral fellowships. • Again, at the post-secondary level, the exemption will only be available in situations where it is reasonable to conclude that the scholarship was received to support the taxpayer's enrolment in a postsecondary program. • With respect to scholarships received in connection with part-time enrollment, except in cases where the need to enroll on a part time basis is related to a physical or mental impairment, the exemption will be limited to the amount of tuition paid, plus costs of program-related materials. Type: ES Topic: Scholarships

4) Tax policy is not to impose income tax upon social assistance or worker's compensation payments. The ITA however requires that these amounts be added to net income but then allows a taxable income deduction for the same amount so that none of these amounts are included in taxable income. Why are these amounts included in net income at all? Wouldn't it be preferable to exempt them altogether? Answer: The amounts are included in net income because net income is used in a number of situations that set threshold levels for some form of income tax assistance. For example, to get the full tax credit for an infirm dependant over 17, the dependant's income must be less than a threshold amount. Since the policy is to reduce this credit in proportion to the dependant's income in excess of that amount, it is important that all types of receipts be included in net income irrespective if the end goal is not to impose income tax on those amounts. To accomplish this goal, social assistance and workers' compensation payments are included in the calculation of net income and then deducted in the calculation of taxable income. Type: ES Topic: Social assistance & workman's compensation

5) List the situations in which an individual can deduct moving expenses. Answer: Deductibility of moving expenses is available to three categories of taxpayers. They are as follows: - Taxpayers who move to a new work location (a new work location may not involve a new employer), either as: • employees, • to carry on a business, or • Individuals who move in order to commence full time attendance at a post-secondary institution and receive income from the educational institution that increases their net income such as non-exempt scholarships, bursaries. fellowships and research grants. Type: ES Topic: Moving expenses - general rules

6) Can an employer reimburse an employee for a loss on a home that was sold because the employee was required to move, without creating a taxable benefit for the employee? Explain your conclusion. Answer: An employer can compensate an employee for a loss on the sale of a home that was sold because of a required move. However, the tax free amount of the reimbursement is limited to the first $15,000, plus one-half of any reimbursement in excess of $15,000. This means that one-half of any amount of compensation in excess of $15,000 will be treated as a taxable benefit to the employee. The unreimbursed portion of a housing loss does not qualify as a moving expense. Type: ES Topic: Eligible relocation - housing loss

7) For purposes of deducting child care expenses, what is an "eligible child"? Answer: An eligible child is defined in ITA 63(3) as a child of an individual, their spouse or commonlaw partner, or a child who is dependent on the individual or their spouse or common-law partner and whose income does not exceed the BPA of $14,398 for 2022. In addition, the child must be under 16 years of age at some time during the year or dependent on the individual or their spouse or common-law partners by reason of a physical or mental infirmity. Type: ES Topic: Child care expenses - general rules ITA 63

8) What is the objective of providing a disability supports deduction. Cite two examples of costs that can be deducted using this provision. Answer: The objective of providing the disability supports deduction is to assist individuals with the extra costs that a disabled person incurs when attending school, performing employment duties or carrying on of a business. Examples of such costs that are cited in the text are as follows: • sign-language interpretation services, a teletypewriter or similar device; • a Braille printer; • an optical scanner, an electronic speech synthesizer; • note-taking services, voice recognition software, tutoring services; and • talking textbooks. Type: ES Topic: Disability supports deduction - ITA 64

9) Splitting pension income with a spouse or common-law partners may not always be a desirable income tax planning strategy. Explain this statement. Answer: When there is a significant disparity in the incomes of a couple, pension income splitting is usually beneficial providing overall income tax savings. However, if the disparity is not very significant, pension income splitting may not be beneficial. Factors that have to be considered include loss of the transferee's age credit or a decrease in the medical expenses credit. The OAS clawback may also be involved in the analysis. Making a decision in this area requires a case-by-case analysis. Type: ES Topic: Pension income splitting - ITA 60.03

10) What are the conditions that must be met for spousal support payments to be deductible to the payor and required to be included in the income of the recipient? Answer: The specific conditions that must be met are set out in IT Folio S1-F3-C3 as follows: • the amount is paid as alimony or an allowance for the maintenance of the spouse or common-law partner, or former spouse or common-law partner; • the spouses or common-law partners, or former spouses or common-law partners, are living separate and apart at the time the payment is made and throughout the remainder of the year, and were separated pursuant to a divorce, judicial separation, or written separation agreement; • the amount is paid pursuant to a decree, order, or judgment of a competent tribunal or pursuant to a written agreement; • the recipient has discretionary use of the amount; and • the amount is payable on a periodic basis. Type: ES Topic: Support payments - spousal, common-law partner and child

11) John Withers is receiving an annuity payment of $500 per month. How will this payment be taxed? Answer: The answer depends on how the annuity was acquired. If it was purchased with tax deferred funds (e.g., funds from an RRSP), the full amount of the annuity will be included in net income and there will be no offsetting deduction. Alternatively, if the annuity was not purchased within a tax deferred plan the full amount of the payment will still be included in income. However, there will be an offsetting deduction to reflect the fact that part of the payment is a return of capital. The amount of the deduction will be based on the cost of the annuity, divided by total payments to be received under the annuity, with this fraction multiplied by the individual annuity payment. The end result is that only the income component of the annuity payment in the latter case would be included in income. Type: ES Topic: Annuity payments

12) What are the income tax advantages and other benefits associated with making contributions to a Registered Education Savings Plan (RESP)? Answer: The major advantages would include: • The fact that making contributions results in additional contributions being made by the government in the form of Canada Education Savings Grants. (CESG) • The fact that earnings on the invested contributions are not subject to income tax since the RESP is a trust exempt from income tax. • The fact that these plans allow parents to effectively redirect income to their children without triggering the income attribution rules. • While earnings distributed from an RESP are required to be included in income the payment of such amounts to an eligible student will result in little to no income tax given that the eligible student will likely be in the lowest income tax bracket. Type: ES Topic: Registered education savings plans (RESP)

13) What is the Canada Learning Bonds (CLB) program? Briefly describe the program. Answer: In the CLB program, the government will make contributions to an RESP for a child whose family qualifies for the National Child Benefit supplement. The contributions will be made in each year that the child's family qualifies for the supplement, beginning with the year that the child is born and ending in the year that the child reaches age 15. The first payment will be for $500, plus an additional $25 to help defray the costs of establishing an RESP for the child. Subsequent payments will be for $100 in each year that the family qualifies. Unlike Canada Education Savings Grants, there is no requirement for contributions to be made to the RESP to receive the CLB contributions. Type: ES Topic: Canada learning bonds (CLB)

14) What are the major income tax advantages of Tax Free Savings Accounts (TFSAs)? Answer: There are several major advantages to the use of TFSAs: • Earnings in the plan accumulate on a tax free basis since the TFSA is a tax exempt trust. • Withdrawals from the plan are not included in income. • Amounts earned in the plan are not subject to the income attribution rules. • Reductions in contribution room related to withdrawals can be reinstated in the year following the withdrawal. Type: ES Topic: Tax free savings account (TFSA)

15) How is the balance in a Tax Free Savings Account (TFSA) dealt with when the beneficiary of the plan dies? Answer: If an individual's spouse or common-law partner is designated as a successor, their TFSA can be transferred to the beneficiary spouse or common-law partner. It can either be maintained by the individual as a separate TFSA or, alternatively, rolled over into their own TFSA without being treated as a contribution. Income earned in the bequeathed TFSA will continue to accumulate on a tax free basis. If the TFSA is transferred to any other individual beneficiary, that individual can withdraw the funds in the plan at the time of the transferor's death without income tax consequences. However, any amounts received in excess of the FMV of the property in the plan at the time of the transferor's death will be required to be included in income of that individual beneficiary. Type: ES Topic: Tax free savings account (TFSA)

16) ITA 69 deals with non-arm's length dispositions of property at amounts that are different from the FMV of the property. Why would an individual wish to dispose of a property to an adult child at an amount that is below the FMV of that property? Briefly explain your conclusion. Answer: A disposition below FMV would result in reduction in income as compared to a disposition at FMV. In the absence of ITA 69, the transferee would have a reduced cost for the property, resulting in increased income to the transferee on a subsequent disposition assuming that the FMV did not decrease. The most logical reason for a disposition at less than FMV would be that the transferor is in a higher income tax bracket than the transferee. The transaction would effectively shift income on a disposition of the property from the high income earner to a low income earner. Type: ES Topic: Non-arm's length transactions - ITA 69

17) An individual wishes to transfer several properties to related persons, some of whom are in higher income tax brackets and some of whom are in lower income tax brackets. What advice would you give this individual with respect to the consideration received for the disposition of the property? Answer: The consideration should either be equal to the FMV of the transferred property or nil (i.e., gift the property). If the transfer is made for consideration in excess of FMV, the transferee's cost will be limited to the FMV, resulting in the potential for excessive income tax of the difference between the FMV and the transfer price. If the transfer is made for consideration that is less than FMV, the transferor's proceeds will be deemed to be FMV, again resulting in the potential for excessive income tax of the difference between the transfer price and the FMV of the property. Type: ES Topic: Non-arm's length transactions - ITA 69

18) What are the normal income tax consequences when an individual disposes of capital property to a spouse or common-law partner? Is there an elective option that can be used to alter the results? If so, briefly describe the effect of the election. Answer: A capital property disposed of to a spouse or common-law partner is deemed to occur on a rollover basis meaning that the POD is deemed to be equal to the transferor's ACB with respect to nondepreciable capital property and the recipient spouse or common law partner is deemed to have purchased that same property for that same ACB. For depreciable capital property the POD is equal to the proportional UCC of the property. The recipient spouse or common-law partner will retain the capital cost and any difference between that capital cost and the proportional UCC will be considered to be deemed CCA. As a result there are no income tax consequences for the transferor. The transferor can opt out of the rollover treatment by reporting the disposition as a disposition at FMV in their income tax return for the taxation year in which the transfer took place. Type: ES Topic: Transfer of capital property between spouses and common-law partners - ITA 73

19) When there is a non-arm's length disposition of depreciable property where the FMV of the property exceeds its capital cost, the capital cost to the transferee for UCC and recapture purposes will equal the transferor's capital cost, plus one-half of the difference between the FMV and the transferor's capital cost. What is the purpose of this rule? Answer: From the point of view of the transferor, the excess of the FMV of the property over its capital cost is a capital gain, only one-half of which is required to be included in income. If the transferee was allowed to treat the full FMV as its capital cost, this excess would become fully deductible CCA when only half of that difference would have been subject to income tax. To prevent this from happening, the transferee is only allowed to include one-half of the excess in the capital cost, resulting in future increased CCA equal to the transferor's taxable capital gain. In other words the rule creates symmetry between the transferor and transferee. Type: ES Topic: Non-arm's length disposition of depreciable property

20) Briefly describe the general rules for the treatment of an individual's capital property on death. Answer: There is a deemed disposition of all of an individual's capital property immediately before death. The results of these dispositions can be described as follows: Non-Depreciable Capital Property - A deceased individual is deemed to have disposed of nondepreciable capital property at its FMV immediately before death. This ensures that the income tax consequences associated with a FMV disposition are included in the individual's final income tax return. The person inheriting the property is deemed to have acquired the property at that same time, at an amount equal to that FMV. Depreciable Capital Property - The basic rules for depreciable property are the same. There is a deemed disposition of the property by the deceased individual immediately before death at FMV, and a deemed cost to the person inheriting the property at that same amount. When the capital cost of the property exceeds its FMV, the person is deemed to inherit the original capital cost, with the difference being treated as deemed CCA. This puts the person inheriting the property in the same position as the deceased individual with respect to tax values of the property. Type: ES Topic: Death of an individual taxpayer - general rules

21) The general rules dealing with the income tax treatment of the capital property of an individual at death requires a deemed disposition and a deemed acquisition by an inheriting person at FMV. There are however a few exceptions to this default FMV rule that provide rollover treatment in specific circumstances. Briefly describe two of these exceptions. Answer: The two basic rollovers that are available when an individual dies are: Rollover to Spouse, Common-Law Partner, or Spousal or Common-law partner Trust - This rollover allows the deceased's capital property to be transferred at the tax values of the underlying property (UCC or ACB). This rollover applies automatically unless the representatives of the deceased elect not to have the rollover apply which results in dispositions and acquisitions at FMV. Rollover of Farm or Fishing Property - This rollover allows farming or fishing property to be transferred to a child or grandchild at tax values. This election also applies automatically unless the representatives of the deceased elect not to have the rollover apply in which case the disposition and acquisition take place at FMV. Type: ES Topic: Death of an individual taxpayer - general rules

22) When a disposition of property is made to a spouse or common-law partner, the attribution rules may apply. Briefly describe the conditions that would cause the attribution rules to apply. Answer: When there is a transfer of a capital property to a spouse or common-law partner, attribution will apply in the following circumstances: 1. The income from the transferred property is income from property. Income attribution is not generally applicable to business income. 2. The transferor does not opt out of the spousal/common-law partner rollover of ITA 73(1). Failure to meet this condition would result in attribution regardless of the consideration paid by the transferee. 3. If the transferor opts out of ITA 73(1), attribution will still apply unless the transferee pays full FMV consideration for the property. Type: ES Topic: Attribution - general rules

23) A parent is considering gifting a portfolio of publicly traded shares to immediate family members. (e.g. spouses, common-law partners and minor children). On the basis of income tax considerations, provide advice to this individual as to whether the shares should be gifted to the parent's 12 year old child or, alternatively, to the individual's spouse. Assume that, if the gift is to the spouse, that the individual will not opt out of ITA 73(1). Answer: If the individual gifts the shares to a spouse and does not elect out of ITA 73(1), the shares will be transferred on a rollover basis at their tax costs and, as a result, there will be no income tax consequences to the individual gifting the shares. However, any dividends or capital gain or capital losses resulting from a subsequent disposition by the spouse will be attributed back to the gifting individual. Alternatively, if the shares are gifted to a minor child, the transfer will take place at FMV, resulting in a capital gain or a capital loss at that time. Until the child becomes 18 years of age, any dividends paid on the shares will be attributed back to the gifting parent. However, if the daughter sells the shares, any resulting capital gain or capital loss will be included in the income of the child. Type: ES Topic: Attribution - general rules

24) One of your clients is a successful business person with a spouse and a minor child that have no income of their own. The individual would like to transfer some sources of their income to their spouse or child to reduce their income which is subject to income tax at a high tax rate. However, the individual is concerned about the attribution rules. Provide the individual with three acceptable income tax tips to avoid the attribution rules. Answer: There are a number of acceptable potential ways to effectively split income with family members while avoiding the attribution rules: • Contributing to an RESP for the child. • Contributing to a spousal or common-law partner RRSP. • Contributing to a TFSA for a spouse or common-law partner. • Contributing to a TFSA for the child once the child becomes 18 years of age. • If there is a source of business income, reasonable salaries can be paid to family members. • If pension income is received, make use of pension income splitting. • Gifting capital property with anticipated capital gains to the child rather than the spouse. • Making loans to family members at the prescribed rate of interest to allow the family members to purchase investments with rates of return that are higher than the prescribed rate. Ensure that interest is actually paid within 30 days following the end of the year. • Structuring family businesses that would allow family members to an equity interest in the business at minimal cost. Type: ES Topic: Attribution - general rules

25) The widow of Peter Toscan received a death benefit from his employer of $25,000. She must include the $25,000 in income for the year in which it is received. Answer: FALSE Explanation: She must include only $15,000 ($25,000 - $10,000) in income in the year of receipt. Type: TF Topic: Death benefits

26) The entire amount of a retiring allowance received must be included in income, even if some part of the allowance qualifies for an additional RRSP contribution. Answer: TRUE Explanation: While the entire amount must be included, a deduction is available for eligible amounts that are transferred to an RRSP. The retiring allowance is separately included in full and a separate deduction is claimed for the RRSP contribution. Type: TF Topic: Retiring allowance

27) Chris Shaffer is being transferred by his employer from Prince George, British Columbia to Red Deer, Alberta. His airfare from Prince George to Red Deer is a deductible moving expense. Answer: TRUE Explanation: His airfare from Prince George to Red Deer is a deductible moving expense. Type: TF Topic: Moving expenses - general rules

28) Chris Shaffer is being transferred by his employer from Prince George, British Columbia to Red Deer, Alberta. His wife spent $750 for gas, meals, and lodging while driving their car from Prince George to Red Deer. The $750 is a deductible moving expense. Answer: TRUE Explanation: The $750 is a deductible moving expense. Type: TF Topic: Moving expenses - general rules

29) Chris Shaffer is being transferred by his employer from Prince George, British Columbia to Red Deer, Alberta. The Shaffers paid $1,000 in legal fees to sell their Prince George home and $800 in legal fees to buy their new home in Red Deer. The total $1,800 in legal fees is a deductible moving expense. Answer: TRUE Explanation: The total $1,800 in legal fees is a deductible moving expense. Type: TF Topic: Moving expenses - general rules

30) Chris Shaffer is being transferred by his employer from Prince George, British Columbia to Red Deer, Alberta. Before moving into their new home, the Shaffers had to pay $2,000 to repair faulty wiring. The $2,000 is a deductible moving expense. Answer: FALSE Explanation: The $2,000 is not a deductible moving expense. Type: TF Topic: Moving expenses - general rules

31) Chris Shaffer is being transferred by his employer from Prince George, British Columbia to Red Deer, Alberta. The $5,000 in real estate fees paid to sell their Prince George house is a deductible moving expense. Answer: TRUE Explanation: The $5,000 in real estate fees paid to sell their Prince George house is a deductible moving expense. Type: TF Topic: Moving expenses - general rules

32) Chris Shaffer is being transferred by his employer from Prince George, British Columbia to Red Deer, Alberta. All moving expenses can only be deducted from income earned in Red Deer in the year of the move. There are no carry forward provisions for moving expenses. Answer: FALSE Explanation: There is an unlimited carry forward for unused moving expenses. Type: TF Topic: Moving expenses - general rules

33) Sarah and David Johnston paid $5,500 during the year for child care for their three children, aged 3, 5, and 7. Sarah's annual salary was $8,000 and David's annual salary was $30,000. Sarah can deduct the $5,500 paid in determining her net income. Answer: FALSE Explanation: Sarah can deduct a maximum of $5,333 [(2/3)($8,000)]. Type: TF Topic: Child care expenses - determining the deduction ITA 63

34) For purposes of claiming child care expenses, an "eligible child" must be under 16 at some time during the year. Answer: FALSE Explanation: An eligible child does not have to be under 16 at some time during the year if the child is dependent on an individual or their spouse or common-law partner because of a physical or mental infirmity. Type: TF Topic: Child care expenses - general rules ITA 63

35) If the lower income spouse was in prison for the entire year, the higher income spouse would be able to claim child care expenses for that year. Answer: TRUE Explanation: Imprisonment of the lower income spouse is one of the situations in which the higher income spouse is permitted to claim child care expenses. Type: TF Topic: Child care expenses - general rules ITA 63

36) Jim and Shirley Noonan decide to separate after ten years of marriage. They have no children. To keep the separation amicable, they decide not to involve lawyers or the courts at this stage. They have a written separation agreement in which Shirley agrees to pay Jim $500 per month until he remarries. The payments will be included in Jim's net income and will be deductible to Shirley in determining her net income. Answer: TRUE Explanation: The payments will be included in Jim's net income and will be deductible to Shirley in determining her net income. As there are no children, the amounts paid are spousal support. Type: TF Topic: Support payments

37) The income tax treatment of amounts received under an annuity contract will depend on whether the annuity was purchased within a tax deferred plan such as an RRSP or outside such plans. Answer: TRUE Explanation: If an annuity is not purchased within a tax deferred plan, the capital element of the annuity payment can be deducted from the amount received so that only the income component is effectively added to income. Alternatively, if RRSP funds are used, the entire annuity payment will be included in income and therefore subject to income tax, with no offsetting deduction for a capital element. Type: TF Topic: Annuity payments

38) The total contributions that can be made to an RESP for one beneficiary are limited to $50,000. Answer: TRUE Type: TF Topic: Registered education savings plans (RESP)

39) Earnings on amounts contributed to an RESP accumulate on a tax free basis. Answer: TRUE Explanation: While contributions are not deductible, earnings resulting from the investment of these contributions are not subject to income tax until the funds are withdrawn from the plan. An RESP is a tax exempt trust. Type: TF Topic: Registered education savings plans (RESP)

40) In 2022, contributions to a Tax Free Savings Account (TFSA) are limited to a maximum of $6,000 for the year. Answer: FALSE Explanation: There is no annual limit. While contribution room did increase by $6,000 in 2022 annual contributions are based on an individual's total contribution room. Type: TF Topic: Tax free savings account (TFSA)

41) While earnings on property in a Tax Free Savings Account (TFSA) will not be subject to income tax while the property remains in the plan, the accumulated income will be required to be included in income when withdrawn from the plan. Answer: FALSE Explanation: Withdrawals from a TFSA are not required to be included in income regardless of whether they represent the capital contributions or accumulated income. Type: TF Topic: Tax free savings account (TFSA)

42) A rollover is a term that is used to describe any transfer of property between non-arm's length persons. Answer: FALSE Explanation: The term rollover is used to describe transfers (e.g. dispositions) of property between persons whether or not they are non-arm's length. Type: TF Topic: Rollovers - general concepts

43) The term arm's length can apply to transactions involving trusts, corporations, and individuals. Answer: TRUE Explanation: The term arm's length can apply to transactions involving trusts, corporations, and individuals. Type: TF Topic: Arm's length - general concepts

44) Johan Deroi owns shares with an ACB of $1,000 and a FMV of $1,500. If he sells the shares to his brother for $2,000, he will have a capital gain of $1,000. Answer: TRUE Explanation: Johan's capital gain will be $1,000. However, his brother's ACB will be limited by ITA 69 to $1,500. Type: TF Topic: Non-arm's length transactions - ITA 69

45) Martha Stuart owns depreciable property with a UCC of $50,000, a capital cost of $80,000, and a FMV of $100,000. If she gifts this property to her spouse without making any election, she will realize a capital gain of $20,000. Answer: FALSE Explanation: There will be no capital gain. The property is deemed to have been disposed of at the UCC ensuring there are no income tax consequences to the transferor. Type: TF Topic: Non-arm's length disposition of depreciable property

46) When an individual dies, there is a deemed disposition of all of the capital property owned by that individual at FMV, without regard to the relationship between that individual and any beneficiaries. Answer: FALSE Explanation: If the beneficiary is a spouse or common-law partner, the disposition occur at the tax values of the capital property rather than FMV. Type: TF Topic: Death of an individual taxpayer - general rules

47) At the time of her death on August 1 of the current year, Nancy Mori owned shares with an ACB of $11,000 and a FMV of $20,000, and a term deposit of $30,000. She also owned a building that had a capital cost of $98,750, FMV of $110,000, and a UCC of $70,000. She bequeaths all of her properties to a spousal trust. No amount is added to her net income as a result of deemed dispositions occurring as a result of her death. Answer: TRUE Explanation: If she bequeaths all of her properties to a spousal trust, the deemed POD will equal the tax costs with the result that no amounts will be added to her net income for the year in which she died. Type: TF Topic: Death of an individual taxpayer - general rules

48) On her death on August 1 of the current year, Nancy Mori owned shares with an ACB of $11,000 and a FMV of $20,000, and a term deposit of $30,000. She also owned a building that had a capital cost of $98,750, a FMV of $110,000, and a UCC of $70,000. She bequeaths all of these properties to her daughter, Christine. $10,125 will be added to her net income on death as a result of deemed dispositions. Answer: FALSE Explanation: If she bequeaths all of the properties to her daughter, Christine, her net income at death arising from the dispositions totals $38,875. This is comprised of a taxable capital gain of $4,500 [(1/2)($20,000 - $11,000)] on the shares, a taxable capital gain on the building of $5,625 [(1/2)($110,000 $98,750)], and recapture of $28,750 ($98,750 - $70,000) on the building. Type: TF Topic: Death of an individual taxpayer - general rules

49) On her death on August 1 of the current year, Nancy Mori owned shares with an ACB of $11,000 and a FMV of $20,000, and a term deposit of $30,000. She also owned a building that had a capital cost of $98,750, a FMV of $110,000, and a UCC of $70,000. She bequeaths all of these properties to her daughter, Christine, who sells the building before the end of the current year for $125,000. Christine will add $7,500 to her net income as a result of the sale of the building. Answer: TRUE Explanation: Christine will add a taxable capital gain of $7,500 [(1/2)($125,000 - $110,000)] to her net income as a result of the sale of the building. Christine's ACB of the building is $110,000 which is the FMV at the time of her mother's death and is deemed to be her cost. Type: TF Topic: Death of an individual taxpayer - general rules

50) A father gifts $10,000 in public company shares to his 19 year old daughter who is living at home. Any dividends declared on the shares will be attributed to the father. Answer: FALSE Explanation: Any dividends declared on the public company shares will not be attributed to the father because his daughter is 18 years of age or older. Type: TF Topic: Attribution - general rules

51) Brian Lawson gifts public company shares to his 15 year old son. If the shares are sold, in the following year, for more than their FMV at the time of the gift, the resulting capital gain will be included in Brian Lawson's net income. Answer: FALSE Explanation: There is no income attribution for capital gains that are realized on property that has been transferred to a related minor. Type: TF Topic: Attribution - general rules

52) Which of the following statements is NOT correct? A) The $10,000 exemption from income for a death benefit is only available to a spouse or common-law partner. B) Social assistance payments will increase the net income of an individual recipient but not their taxable income. C) The minimum withdrawal amount from a RRIF must be included in income, even if it is not actually withdrawn. D) Research grants are included in income net of unreimbursed expenses related to carrying on the research. Answer: A Explanation: A) The $10,000 exemption from income for a death benefit is only available to a spouse or common-law partner. Type: MC Topic: Other income - Subdivision d

53) Which of the following statements with respect to Subdivision d income is correct? A) 100% of any death benefit received by a spouse or common-law partner must be included in income. B) 100% of any scholarships received must be included in income. C) 100% of any retiring allowance received must be included in income. D) Social assistance payments are not required to be included in net income. Answer: C Explanation: C) While a deduction can be made for transfers to an RRSP it is a deduction separate from the retiring allowance all of which has to be included in net income. Type: MC Topic: Other income - Subdivision d

54) Which of the following receipts would NOT result in an increase in the taxable income of an individual? A) Amounts that are withdrawn from an individual's RRSP. B) A research grant received by a student in a university program. C) Workers' compensation payments. D) Spousal support payments. Answer: C Explanation: C) Workers' compensation payments. The amount is included in net income but deducted in determining taxable income. Type: MC Topic: Other income - Subdivision d

55) Dwayne Brooks carries on a business as a sole proprietor and is required to make a 2022 CPP contribution of $7,000 [(2)($3,500)]. How will this affect his 2022 net and taxable income? A) Both his net and taxable income will be reduced by $7,000. B) Both his net and taxable income will be reduced by $3,961. C) Neither his net or taxable income will be affected. D) Both his net and taxable income will be reduced by $1,050. Answer: B Explanation: B) Both his net and taxable income will be reduced by $3,456. ($7,000 - the maximum personal tax credit amount of $3,039). D) Note that [(15%)($7,000)] = $1,050 Type: MC Topic: CPP deduction - ITA 60(e) & (e.1)

56) Adhira carries on a business as a sole proprietor (e.g. self-employed) and has net and taxable income of $110,000 before any consideration of a CPP deduction. She is in the 26% federal income tax bracket. How much will her federal income tax payable decrease as a result of the maximum 2022 CPP contribution of $7,000? A) $456 B) $1,486 C) $912 D) $1,580 Answer: B Explanation: A) $456 [($3,039)(15%)] B) $1,486 [($3,039)(15%) + ($3,961)(26%)] C) $912 [(2)($3,039)(15%)] D) $1,580 [(2)($3,039)(26%) Type: MC Topic: CPP deduction - ITA 60(e) & (e.1)

57) Which of the following statements related to the costs of an eligible relocation is correct? A) If the employer provides an allowance for the moving expenses that is less than the actual moving expenses, the employee cannot claim any moving expenses. B) All legal and other costs associated with acquiring a residence in the new work location are deductible. C) The costs of visiting the new work location in order to find a new residence are deductible. D) The costs of selling a residence where the individual lived prior to the relocation is always deductible. Answer: D Explanation: B) Only possible if the employee owned the previous home. D) The costs of selling a residence where the individual lived prior to the relocation is always deductible. Type: MC Topic: Moving expenses - general rules

58) Stan Aiken changed employers in 2022 and, as a result of the change, moved 191 kilometers, from Windsor, Ontario to London, Ontario. His new employer was located in London and reimbursed 50% of Stan's eligible moving expenses. For 2022 Stan can: A) claim none of his moving expenses. B) claim 50% of his moving expenses to the extent of all of his 2022 employment income. C) claim 50% of his moving expenses to the extent of income from his new employment. D) claim 100% of his moving expenses to the extent of all of his 2022 employment income. Answer: C Explanation: C) The claim can only be made to the extent of employment income earned at the new location. Type: MC Topic: Moving expenses - determining the deduction

59) In 2022, Mr. Kumar moved from Saskatchewan to Prince Edward Island (PEI) to begin to carry on a new business. Business profits in 2022 exceeded $50,000. Mr. Kumar incurred the following moving expenses: Transport of household effects Travel - self, spouse, and three children Legal fees - house purchase in PEI Cancellation costs - lease in Saskatchewan Temporary accommodation while waiting for new house at $70 per day for 30 days House-hunting trip (prior to move)

$5,000 2,000 900 750 2,100 500

Which one of the following amounts represents the maximum amount that Mr. Kumar may claim for moving expenses for 2022? A) $ 8,800. B) $ 9,700. C) $10,200. D) $11,250. Answer: A Explanation: A) $8,800 [$5,000 + $2,000 + $750 + (15/30)($2,100)]. Legal fees are not deductible as Mr. Kumar did not own a house prior to moving; house hunting trips are not deductible; costs for temporary accommodation are limited to 15 days. Type: MC Topic: Moving expenses - determining the deduction

60) Jan Harding accepted an employment transfer from British Columbia to Ontario in 2022. She will begin her new employment on December 1, 2022. Her annual salary will be $102,000 or $8,500 monthly. Upon arriving, Jan spent 25 days staying in a hotel due to an unfortunate delay in moving into her new residence. Jan incurred expenses related to the move of $13,402. Included in this total was $1,125 for meals and $2,125 for hotel stays while waiting for her new residence to be ready. How much can she claim as moving expenses for 2022? A) $ 8,500. B) $12,102. C) $12,952. D) $13,402. Answer: A Explanation: A) $8,500 ($102,000 ÷ 12). The deduction is limited to the income earned at the new location. Any unclaimed amount can be carried forward indefinitely but can only be claimed to the extent of employment income at the same new location. Type: MC Topic: Moving expenses - determining the deduction

61) Maxine has lived and been employed in Alberta for many years. She recently accepted new employment in Ontario. The new job pays an annual salary of $105,600, or $8,800 monthly. She moved there with her family in October of 2022, so she could start her new job on November 1, 2022. While she had rented her accommodations in Alberta, she bought a new house in Ontario. She incurred the following expenses as a result of the move: • canceling the lease on her rental apartment, $1,200. • hiring movers to pack and move her household effects, $12,000. • legal fees on the house purchase, $1,400. • land transfer tax on the house purchase, $3,000. • cost of disconnecting utilities in Alberta, $100. • cost of connecting utilities in Ontario, $200. • gas, food, and lodging while traveling from Alberta to Ontario, $2,800. How much can she claim for moving expenses for the year of the move? A) $16,000. B) $16,300. C) $17,700. D) $20,700. Answer: B Explanation: B) $16,300 ($1,200 + $12,000 + $100 + $200 + $2,800). Type: MC Topic: Moving expenses - determining the deduction

62) Which of the following statements with respect to child care expenses is NOT correct? A) In calculating earned income, business income is included, but business losses are excluded. B) Amounts paid to a person under the age of 18 are never deductible. C) The higher income spouse can deduct child care expenses if the lower income spouse is a person confined to a prison or similar institution throughout a period of not less than 2 weeks in the year. D) There is no requirement that amounts be spent on specific children. Answer: B Explanation: B) Amounts paid to a person under the age of 18 are never deductible. Deduction is permitted provided the person is not related to the individual to whom child care services are provided. Type: MC Topic: Child care expenses - general rules ITA 63

63) John and Alexandria are married and they have two children, aged 2 and 5. They pay Alexandria's 22 year old sister $150 per week or $7,200 for the year to take care of their children for 48 weeks each year. John works full time and earns a salary of $90,000 per year. Alexandria works part time, earning an annual salary of $28,000. She also goes to college part time during the fall semester, for a total of 17 weeks, or 4 months, each year. Which of the following is correct with respect to John and Alexandria's ability to claim child care expenses? A) Neither John nor Alexandria can claim child care expenses because they paid a relative to take care of their children. B) Alexandria must claim all of the child care expenses because she is the supporting person with the lower net income. C) John can claim child care expenses of $1,600 and Alexandria can claim the remaining $5,600. D) John can claim child care expenses of $7,200. Answer: C Explanation: C) John's claim is limited to $1,600 [($200)(2)(4 months)]. Since Alexandria's attendance is part-time, the sum of the Periodic Amounts is multiplied by the number of months of part-time attendance, not weeks. Type: MC Topic: Child care expenses - determining the deduction ITA 63

64) Charam and Baka each have income of over $200,000. During the year, they paid a nanny $20,000 to care for their three children. Divya, age 5, has no income. Elina, age 10 is disabled and eligible for the disability tax credit. Hinda is 12 and has income of $25,000 which he earns from a TV acting job. What is the maximum that can be claimed as child care expenses for the family? A) $18,000 B) $19,000 C) $24,000 D) $22,000 Answer: B Explanation: A) $18,000 [$8,000 + $5,000 + $5,000] B) $19,000 [$8,000 + $11,000]. Hinda cannot be claimed as he is not an eligible child due to his income level. C) $24,000 [$8,000 + $11,000 + $5,000 D) $22,000 [$11,000 + $11,000] Type: MC Topic: Child care expenses - determining the deduction ITA 63

65) Which of the following statements with respect to the disability supports deduction is correct? A) To qualify for this deduction, the individual must be an employee. B) The total amount of the deduction is limited to $15,000 per taxation year. C) Some amounts can be claimed both as a disability supports deduction and for the medical expense tax credit. D) This deduction is available to individuals who do not qualify for the disability tax credit. Answer: D Explanation: D) This deduction is available to individuals who do not qualify for the disability tax credit. Type: MC Topic: Disability supports deduction - ITA 64

66) Which of the following statements is NOT correct with respect to the Disability Supports Deduction? A) The deduction is limited to individuals who qualify for the disability tax credit. B) The deduction is available to disabled individuals who are carrying on research. C) The deduction is available to disabled individuals who are attending a designated educational institution. D) Many of the items that can be claimed under the disability supports deduction can also be claimed as medical expenses for the medical expense tax credit. A choice however must be made between the deduction and the credit. Answer: A Explanation: A) The deduction is limited to individuals who qualify for the disability tax credit. Type: MC Topic: Disability supports deduction - ITA 64

67) Katrina has early stages of cerebral palsy, but does not qualify for the disability tax credit. In 2022, she earned $75,000 employed at a facility for disabled children. In order to work, Katrina required full time attendant care that cost $25,000. Of this total, $10,000 was paid for by her employer, and $5,000 by her benefit plan. In addition, Katrina purchased equipment to increase her mobility at work costing $12,000. What is Katrina's maximum claim for the disability supports deduction? A) $10,000 B) $12,000 C) $22,000 D) $32,000 Answer: C Explanation: A) $10,000 [$25,000 - $10,000 - $5,000] B) $12,000 [The amount paid for equipment C) $22,000 [($25,000 - $10,000 - $5,000) + $12,000] D) $32,000 [($25,000 - $5,000) + $12,000] Type: MC Topic: Disability supports deduction - ITA 64

68) Which of the following statements with respect to pension income splitting is NOT correct? A) Neither income from OAS nor CPP are eligible for pension income splitting. B) If an individual and their spouse are in different marginal income tax brackets, pension income splitting will always reduce their combined federal income tax payable. C) An individual can allocate up to 50% of their qualifying pension income to a spouse or common-law partner. D) Lump sum withdrawals from RRSPs are not eligible for pension income splitting. Answer: B Explanation: B) If an individual and their spouse are in different marginal income tax brackets, pension income splitting will always reduce their combined federal income tax payable. Type: MC Topic: Pension income splitting - ITA 60.03

69) Aaron, aged 65 and Abbie, aged 63 are married. Aaron received OAS of $4,000 and pension income of $65,000 from a plan that was sponsored by a former employer. If Aaron splits the maximum amount of pension income with Abbie, his net income will be? A) $32,500. B) $34,500. C) $36,500. D) $69,000. Answer: C Explanation: A) $32,500 [(1/2)($65,000)] B) $34,500 [(1/2)($65,000 + $4,000)] C) $36,500 [(1/2)($65,000) + $4,000] D) $69,000 Type: MC Topic: Pension income splitting - ITA 60.03

70) Elijah, aged 62 and Dara, aged 68 are married. Elijah collects CPP of $7,200 and has a $35,000 withdrawal from his RRSP. If Elijah splits the maximum amount of pension income with Dara, what will his net income be? A) $17,500. B) $21,100. C) $24,700. D) $42,200. Answer: D Explanation: A) $17,500 [(1/2)($35,000)] B) $21,100 [(1/2)($7,200 + $35,000)] C) $24,700 [(1/2)($35,000) + $7,200] D) $42,200 ($35,000 + $7,200). Neither CPP received nor RRSP withdrawals whether annuity or lump-sum when under 65 can be split. Type: MC Topic: Pension income splitting - ITA 60.03

71) With respect to spousal and child support, which of the following statements is NOT correct? A) Any amounts that are not specifically identified in the agreement as spousal support will be considered child support. B) An amount qualifies as a support payment if it is payable or receivable as an allowance on a periodic basis. C) The recipient of child support payments will not be able to claim the tax credit for an eligible dependant. D) Deductible support payments reduce an individual's earned income for RRSP purposes. Answer: C Explanation: C) The recipient of child support payments will not be able to claim the tax credit for an eligible dependant. It is the payor who is subject to this restriction. Type: MC Topic: Spousal and child support payments

72) Which of the following is NOT a requirement for spousal support payments to be deductible? A) The payments must be made on a periodic basis. B) The payments must be made for a period of time that the spouses, or former spouses, are living separate and apart as a result of the breakdown of the marriage or common-law partnership. C) The payments must be made pursuant to a separation agreement. D) None of the above. Answer: D Explanation: D) None of the above. Type: MC Topic: Spousal and child support payments

73) Jack and his spouse, Sally, separated in 2019. The written separation agreement requires Jack to make periodic payments for the maintenance of Sally and their child. Payments were set at $250 a month for Sally and $150 a month for their child. In 2022 Jack made payments of $4,000. How much of the 2022 payments can Jack claim as a deduction? A) $4,000. B) $3,000. C) $1,800. D) $2,200. Answer: D Explanation: D) $2,200 [($4,000 - $1,800)]. Deductible spousal support is limited to the $4,000 amount paid, less the annual amount required of $1,800 for child support. Type: MC Topic: Spousal and child support payments

74) Which of the following statements about annuity payments received is correct? A) Net income is increased by the amount of any annuity payment received. B) If an individual uses funds from a savings account to purchase an annuity, the taxable amount of any payment is reduced by the capital element included in the payment. C) To qualify as an annuity, the payments cannot extend beyond the life of the annuitant. D) If the annuity was purchased inside an RRSP, none of the payments will be required to be included in net income. Answer: B Explanation: B) If an individual uses funds from a savings account to purchase an annuity, the taxable amount of any payment is reduced by the capital element included in the payment. Type: MC Topic: Annuity payments

75) Mr. Dayani purchases an annuity with funds from his savings account on January 1, 2022. The annuity has a 5 year term, and cost $25,000. Payments are made annually on December 31 in the amount of $5,772. The annuity provides an effective yield of 5%. How much of the annuity payment is required to be included in net income for 2022? A) Nil B) $772. C) $1,250. D) $5,000. Answer: B Explanation: A) Nil B) $772 [$5,772 — ($25,000 ÷ $28,860)($5,772)] C) $1,250 ($25,000 × 5%) D) $5,000 [($25,000 ÷ $28,860)($5,772)] Type: MC Topic: Annuity payments

76) Arnold Ingram has $5,000 in funds that he does not currently need. He has a young son who he expects will pursue university education when he is older. Arnold is trying to decide whether the unneeded funds should be invested in a TFSA or an RESP. With respect to this decision, which of the following statements is NOT correct? A) His current income tax payable will not be affected by the choice between the two types of plans. B) Withdrawals from either plan will be tax free. C) If he chooses the RESP, the plan will receive additional funds from the federal government in the form of Canada Education Savings Grants. D) Contributions from either type of registered plan can be withdrawn tax free. Answer: B Explanation: B) Withdrawals from either plan will be tax free. Type: MC Topic: Registered savings plans - general concepts

77) With respect to the income tax rules for Registered Education Savings Plans (RESPs), which of the following statements is NOT correct? A) The total contributions to one plan cannot exceed $50,000. B) Earnings paid from the plan are required to be included in the income of the recipient. C) The annual contributions made by any one individual cannot exceed $4,000. D) Distributions can be made to a beneficiary of a plan when they commence full-time studies at a qualifying educational institution. Answer: C Explanation: C) There is no limit on the amount of annual contributions that can be made. It is only the overall contributions that are limited. Type: MC Topic: Registered education savings plans (RESP)

78) There are a number of income tax benefits and advantages associated with Registered Education Savings Plans (RESPs). Which of the following is NOT a benefit or advantage? A) Contributions to the plans are deductible. B) Earnings within the plan are not subject to income tax within the RESP. C) The government makes contributions in the form of Canada Education Savings Grants (CESG) and Canada Learning Bonds (CLB). D) Distributions from the plan may be received by no or low income recipients and as a result may result in little or no income tax. Answer: A Explanation: A) Contributions to the plan are deductible. Type: MC Topic: Registered education savings plans (RESP)

79) With respect to Tax Free Savings Accounts (TFSAs), which of the following statements is NOT correct? A) Contributions to the accounts are not deductible. B) Contributions to the accounts can be withdrawn tax free at any time. C) Earnings within the plan accumulate tax free. D) Withdrawals of accumulated earnings will not be required to be included in income. Answer: D Explanation: D) Withdrawals of accumulated earnings will not be required to be included in income. Type: MC Topic: Tax free savings account (TFSA)

80) Ms. Eli has $10,000 in pre-tax income that she does not need in the current year, but will require in two years to purchase a condo. She is considering whether she should use this money to contribute to a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). She expects her marginal income tax rate to increase in two years. She expects her invested funds will earn the same rate of return in either account. Which of the following statements is correct with respect to an investment decision? A) Whether she invests in the RRSP or the TFSA, the effect on her net income will be the same. B) Ms. Eli should invest in the RRSP. C) Ms. Eli should invest in the TFSA. D) Ms. Eli should not invest in the either the RRSP or the TFSA since she will need the money in two years. Answer: C Explanation: C) A TFSA withdrawal in two years avoids the increased income tax that is expected that would occur if the withdrawal was from an RRSP which would be required to be included in income. Type: MC Topic: Registered savings plans - general concepts

81) Which of the following statements regarding the Tax Free Savings Account (TFSA) is NOT correct? A) Any Canadian resident individual over 17 years of age can establish a TFSA. B) Any unused amounts not contributed in a year may be carried forward indefinitely to future years. C) The contributions are deductible from net income up to a maximum of $6,000 for 2022. D) Capital gains realized within TFSAs are not subject to income tax. Answer: C Explanation: C) The contributions are deductible from net income up to a maximum of $6,000 for 2022. Type: MC Topic: Tax free savings account (TFSA)

82) With respect to non-arm's length dispositions of capital property, which of the following statements is correct? A) Gifting a non-depreciable capital property with an accrued capital gain to a non-arm's length individual can result in double taxation of some part of that gain. B) When there is a non-arm's length disposition of depreciable property with a FMV that exceeds the capital cost to the transferor, the capital cost to the transferee will be the same as the capital cost to the transferor. C) When there is a non-arm's length disposition of depreciable property with a FMV that is less than the transferor's capital cost, the transferee's new capital cost is deemed to be equal to the transferor's capital cost. D) If there is a disposition of non-depreciable capital property at an amount that is less than its FMV, the ACB to the transferee will be the FMV of that property. Answer: C Explanation: C) When there is a non-arm's length disposition of depreciable property with a FMV that is less than the transferor's capital cost, the transferee's new capital cost is deemed to be equal to the transferor's capital cost. Type: MC Topic: Non-arm's length transactions - ITA 69

83) John Bartel owns land with an ACB of $250,000 and a FMV of $320,000. He sells the land to his son for $250,000. Which of the following statements is correct? A) John will have a taxable capital gain of $70,000 and the ACB to his son will be $250,000. B) John will have a taxable capital gain of $70,000 and the ACB to his son will be $320,000. C) John will have a taxable capital gain of $35,000 and the ACB to his son will be $320,000. D) John will have a taxable capital gain of $35,000 and the ACB to his son will be $250,000. Answer: D Explanation: D) John will have a taxable capital gain of $35,000 and the ACB to his son will be $250,000. Type: MC Topic: Non-arm's length transactions - ITA 69

84) John Bartel owns land with an ACB of $250,000 and a FMV of $320,000. He gifts the land to his son. Which of the following statements is correct? A) John will have a taxable capital gain of $70,000 and the ACB to his son will be $250,000. B) John will have a taxable capital gain of $70,000 and the ACB to his son will be $320,000. C) John will have a taxable capital gain of $35,000 and the ACB to his son will be $320,000. D) John will have a taxable capital gain of $35,000 and the ACB to his son will be $250,000. Answer: C Explanation: C) John will have a taxable capital gain of $35,000 and the ACB to his son will be $320,000. Type: MC Topic: Non-arm's length transactions - ITA 69

The questions below are based on the following information: Jolinda Morris has a depreciable property with a capital cost of $225,000, a UCC of $175,000, and a FMV of $240,000. Because of his exceptional performance during the last year, she gifts this property to her common-law partner. 85) How much will her net income increase as a result of the gift if she does not opt out of the rollover of ITA 73(1)? A) $57,500. B) $65,000. C) $7,500. D) Nil. Answer: D Explanation: D) Nil. ITA 73(1) applies a rollover with the result that there are no immediate income tax consequences as a result of the gift. Type: MC Topic: Non-arm's length transactions - ITA 69

86) How much will her net income increase as a result of the gift if she does opt out of ITA 73(1)? A) $57,500. B) $65,000. C) $7,500. D) Nil. Answer: A Explanation: A) $57,500. Taxable capital gain = (POD $240,000 — ACB $225,000) × 50% = $7,500 Recapture = $175,000 — $225,000 = $50,000 $7,500 + 50,000 = $57,500 Type: MC Topic: Non-arm's length transactions - ITA 69

87) What is the most likely motivation for Ms. Morris to opt out of the rollover of ITA 73(1)? A) To avoid attribution. B) She is in a higher tax bracket than her common-law partner. C) She has some unused terminal losses. D) She has unused current capital losses, a net capital loss carryover or a non-capital loss carryover. Answer: D Explanation: D) She has unused current capital losses, a net capital loss carryover or a non-capital loss carryover. Type: MC Topic: Non-arm's length transactions - ITA 69

88) Sonya owns 500 shares of Roxy Corp. that she bought in 2021 for $10 per share. On June 1, 2022 Sonya sold all of her shares to her sister for $15 per share and then later the same day her sister sold the shares for their FMV of $18 per share. The taxable capital gain for each sister is: A) $2,000 for Sonya and $750 for her sister. B) $1,250 for Sonya and $750 for her sister. C) $750 for Sonya and $1,250 for her sister. D) $1,000 for Sonya and $1,000 for her sister. Answer: A Explanation: A) $2,000 for Sonya and $750 for her sister. (POD $18 — ACB $10) × 500 × 50% =$2,000, (POD $18 — ACB $15) × 500 × 50% = $750 B) (POD $15 — ACB $10) × 500 × 50% = $1,250, (POD $18 — ACB $15) × 500 × 50% = $750 C) (POD $18 — ACB $15) × 500 × 50% = $750, $2,000 - 750 = $1,250 D) ($2,000 split between the two) Type: MC Topic: Non-arm's length transactions - ITA 69

89) Hugo owns a farm. Both Hugo and his son work on the farm raising sheep. On February 16, 2022 Hugo sold a shearing machine to his son for $5,000. The original cost of the machine was $10,000, the UCC is $8,000 and the FMV is $5,000. The machine was the last property in its CCA class. On September 1, 2022, his son took the machine to an auction in another province where an enthusiast bidder paid $6,000 for it. The income tax consequences to Hugo and his son are: A) Hugo has a terminal loss of $3,000 and his son has a taxable capital gain of $500. B) Hugo has a terminal loss of $3,000 and his son has recapture of CCA of $1,000. C) Hugo has a terminal loss of $2,000 and his son has no tax consequences. D) Hugo has no income tax consequences and his son has a terminal loss of $2,000. Answer: B Explanation: B) Hugo has a terminal loss of $3,000 and his son has recapture of CCA of $1,000. Since it is a non-arms' length disposition at an amount that is less than Hugo's capital cost, ITA 13(7)(e) deems the son's new capital cost to be equal to Hugo's capital cost. In effect the son inherits the same tax costs of the depreciable property as his father (capital cost = $10,000; deemed CCA = $2,000 and UCC = $8,000). Type: MC Topic: Non-arm's length disposition of depreciable property

90) Lance Mann dies, leaving a depreciable property to his son, Paul Mann. The capital cost of the property is $150,000 and its FMV $120,000. It is the only property in its class with a UCC balance of $100,000. The income tax consequences of this bequest would be: A) recapture of $20,000 for Lance and the capital cost of the property to Paul will be $150,000. B) a taxable capital gain for Lance of $10,000 and a capital cost of the property to Paul of $150,000. C) recapture of $20,000 for Lance and a capital cost of the property to Paul of $120,000. D) recapture of $20,000 for Lance and a capital cost of the property to Paul of $100,000. Answer: A Explanation: A) Recapture of $20,000 for Lance and the capital cost of the property to Paul will be $150,000. ITA 13(7) does not apply to modify the capital cost in a non-arm's length disposition as a result of death. Type: MC Topic: Death of an individual taxpayer - general rules

91) Which of the following statements that relate to the death of an individual is NOT correct? A) A farm property owned at the time of death can be transferred to a child on a tax free basis. B) When an individual dies, there is a deemed disposition of all of their capital property. C) When an individual dies all of their capital property is deemed to be disposed of at FMV. D) When the capital cost of a property that was owned by an individual at the time of their death exceeds its FMV, the beneficiary is required to retain the original capital cost, with the difference being treated as deemed CCA. Answer: C Explanation: C) When an individual dies all of their capital property is deemed to be disposed of at FMV. Type: MC Topic: Death of an individual taxpayer - general rules

92) Erica Ho dies, leaving a depreciable property to her daughter that has a capital cost of $150,000, a FMV of $90,000, and a UCC of $65,000. Which of the following statements related to this event is NOT correct? A) Erica will have no taxable capital gain. B) Erica will have recapture of $25,000. C) If her daughter later sells the property for $100,000, she will have a capital gain of $10,000. D) The UCC for the daughter will be $90,000. Answer: C Explanation: C) If her daughter later sells the property for $100,000, she will have a capital gain of $10,000. As the daughter will retain Erica's original capital cost, the $10,000 will be recapture. In effect the daughter inherits the tax characteristics of the property. Type: MC Topic: Death of an individual taxpayer - general rules

93) Which of the following statements is correct on the death of an individual? A) Capital property that is bequeathed to a spouse or common-law partner is transferred on a rollover basis. B) Capital property that is bequeathed to a spousal or common-law partner trust is deemed to be disposed of for POD equal to FMV. C) Capital property, whether bequeathed to a spouse, a common-law partner or any other person, is transferred on a rollover basis. D) Capital property, whether bequeathed to a spouse, a common-law partner or to any other person, is deemed to be disposed of for POD equal to FMV. Answer: A Explanation: A) Capital property that is bequeathed to a spouse or common-law partners is transferred on a rollover basis. Type: MC Topic: Death of an individual taxpayer - general rules

94) When Alyssa Weinstein died, she left her estate to her spouse and daughter as shown below. Property she owned at the time of her death had the following tax costs and FMV: Property Jewelry - Cost = $10,000, FMV = $17,000 Automobile - Cost = $55,000, FMV = $20,000 Rental building - Cost = $100,000, UCC = $70,000, FMV = $220,000 Common shares - Cost = $140,000, FMV = $500,000

Beneficiary Spouse Daughter Daughter Spouse

What is the minimum amount that must be included in Ms. Weinstein's income for her final income tax return in respect of these properties? A) $60,000 B) $72,500 C) $90,000 D) $273,500 Answer: C Explanation: A) [(1/2)($220,000 - $100,000)] = $60,000 B) $90,000 - [(1/2)($55,000 - $20,000) = $72,500 C) Any capital property transferred to the spouse on death are automatically rolled over with no income tax consequences. The automobile is personal use property therefore the loss cannot be claimed. The only property that will affect the final income tax return is the building. Recapture = $30,000, taxable capital gain = [(1/2)(POD $220,000 - ACB $100,000)] = $60,000. Total = $90,000. D) $90,000 + [(1/2)($7,000 + $360,000) = $273,500 Type: MC Topic: Death of an individual taxpayer - general rules

95) Which of the following situations will NOT result in the attribution of income to the transferor? A) The disposition of capital property to a spouse or common-law partner for FMV consideration where the transferor does not opt out of the rollover of ITA 73(1). B) The transfer of capital property to a spouse or common-law partner in return for a non-interest bearing promissory note. The transferor opts out of the rollover of ITA 73(1). C) The transfer of a business to a spouse or common-law partner. The transferor does not elect out of ITA 73(1). D) The transfer of capital property to a minor child of the transferor's sister. Answer: C Explanation: C) The transfer of an unincorporated business to a spouse. The transferor does not elect out of ITA 73(1). Type: MC Topic: Attribution - general rules

96) Mr. Johnson wants to help his daughter, Erin, save for her college education. To this end, in 2020, when she was 15 years old, he put $3,000 into a GIC in her name, for a one year term. The GIC renews on an annual basis. On its maturity in 2021, Erin moved the $3,000 into another GIC for another year and the interest earned during the first year into a second one-year GIC for $300. In 2022, the interest earned on the two GICs was $240 and $24 respectively. How much of this interest, if any, is attributed to Mr. Johnson in 2022? A) Nil. B) $24. C) $240. D) $264. E) None of the above. Answer: C Explanation: C) $240 (compound interest does not attribute). See paragraph 9-202 of the textbook. Type: MC Topic: Attribution rules - the attribution of income

97) Agatha Harkness wishes to gift mutual funds to her three grandchildren, all of whom are under the age of 6. She wants to minimize any income attribution. Which one of the following mutual funds will best accomplish this goal? A) An equity fund that invests in preferred shares of top Canadian corporations and earns primarily dividend income. B) A bond fund that invests in long-term, interest-bearing Government of Canada bonds, earning interest income and capital gains. C) A growth fund that invests in corporations with a history of paying minimal dividends and earns its income primarily in the form of capital gains. D) A money-market fund that invests in short-term treasury bills and earns only interest income. Answer: C Explanation: C) A growth fund that invests in corporations with a history of paying minimal dividends and earns its income primarily in the form of capital gains. This is because capital gains to minors are not attributed back to the transferor. Type: MC Topic: Attribution rules - the attribution of income

98) William Choring owned shares in two publicly traded companies, as follows:

TriStar Limited Global Inc.

FMV on date of Disposition $1,000 2,500

ACB $10,000 200

William gifted the TriStar Limited shares to his spouse on July 1, 2022. His spouse kept the shares and received $138 of taxable dividends (grossed up amount) in September of 2022. William sold the Global Inc. shares on the open market. Assuming William had no other income, did not opt out of the rollover of ITA 73(1), and that these are the only transactions that occurred in the year, what is William's net income for 2022? A) Nil. B) $1,150. C) $1,250. D) $1,288. Answer: D Explanation: D) William's 2022 net income is $1,288. Taxable Capital Gain on Disposition of Global Inc. [($2,500 - $200)(1/2)] $1,150 Allowable Capital Loss on Gift - TriStar Limited (Superficial loss) Nil Attribution of Dividend 138 William's 2021 Net Income $1,288 Type: MC Topic: Attribution rules - the attribution of income

99) Hans Myers wishes to transfer an investment to his spouse, Olga. However, Olga does not have sufficient cash to purchase the investment for at their current FMV. Hans would like to loan the funds to Olga to facilitate the purchase, as he wants the income on this investment to be included in her income and not his income. Olga will pay interest on the loan using the investment income she expects to receive. Which one of the following is NOT a requirement to ensure that the income on this investment will be included in Olga's income and not attributed to Hans, in the future? A) Hans must elect to realize any gains inherent in the property at the transfer date by opting out of the ITA 73(1) rollover. B) Interest on the loan at the prescribed rate in effect at the time of the transfer must be paid by Olga to Hans each year and by January 30 of the following year. C) Olga must pay consideration equal to the FMV of the investment. D) The interest rate on the loan must be the FMV rate, even though that rate is greater than the prescribed interest rate. Answer: D Explanation: D) Hans must opt out of the ITA 73(1) rollover, Olga must pay consideration equal to FMV, and the loan must include interest at the prescribed rate at a minimum that must actually be paid within 30 days of the end of each year. Type: MC Topic: Attribution - general rules

100) Martin has a marginal income tax rate of 46%. His spouse, Carmen, has a marginal income tax rate of 26%. In order to provide Carmen with a supplemental source of income, he gifted her a portion of his investment portfolio. Carmen's new investment portfolio generated interest income of $6,800 and taxable capital gains of $9,900. Which of the following statements is NOT correct? A) Martin faces additional income tax of $3,128 as a result of Carmen's interest income. B) Martin faces additional income tax of $4,554 as a result of Carmen's taxable capital gains. C) Carmen has no income tax liability as a result of the gifted investment portfolio. D) Carmen faces an income tax liability of $2,574 as a result of the taxable capital gains. Answer: D Explanation: D) Carmen faces an income tax liability of $2,574 as a result of the taxable capital gains. Type: MC Topic: Attribution rules - the attribution of income

101) Sandy gifts $12,000 to each of the following people. Each of them used the money they received from Sandy to invest in shares of publicly listed corporations. In which situation will any resulting dividend income NOT be attributed back to Sandy? A) The gift is to Sandy's long-time business partner. B) The gift is to Sandy's spouse. C) The gift is to Sandy's 14 year old nephew. D) The gift is to Sandy's 10 year old daughter. Answer: A Explanation: A) The gift is to Sandy's long-time business partner. Type: MC Topic: Attribution rules - the attribution of income

102) Pere gifted shares in a public corporation with a FMV of $50,000 to his 12 year old son, Fils. After Fils received $1,000 in eligible dividends, the shares were sold for $53,000. What are the income tax consequences of the dividend and the sale? A) Pere will include the grossed-up dividends of $1,380 in his income, be entitled to a dividend tax credit of $207 [(6/11)($380)] and Fils will include the taxable capital gain of $1,500 in his income. B) Fils will include the grossed-up dividends of $1,380 in his income,m be entitled to a dividend tax credit of $207 and a taxable capital gain of $1,500 in his income. C) Pere will include the grossed-up dividends of $1,380 in his income, be entitled to a dividend tax credit of $207 and a taxable capital gain of $1,500 in his income. D) Fils will include the grossed-up dividends of $1,380 in his income, be entitled to a dividend tax credit of $207 and Pere will claim the taxable capital gain of $1,500 in his income. Answer: A Explanation: A) Pere will include the grossed-up dividends of $1,380 in his income, be entitled to a dividend tax credit of $207 [(6/11)($380)] and Fils will include the taxable capital gain of $1,500 in his income. Type: MC Topic: Attribution rules - the attribution of income

103) On November, 15, 2022, at the request of his employer, Mr. John Havlik moves from Halifax to Moncton (Moncton is 260 kilometers from Halifax). He lived in a rented apartment in Halifax, but has purchased a house in Moncton. Legal fees and other costs associated with the purchase of this house totaled $3,250. The total cost of the actual move, including the costs of moving his personal possessions, is $8,300. In addition, he spent $650 on a house hunting trip to Moncton, but he did not decide on a house until his return to Halifax. He also incurred a $1,200 penalty for breaking his lease in Halifax. During the year, his salary totaled $53,000, of which $6,625 was earned at the new location from November 15, 2022 to December 31, 2022. His employer is prepared to pay up to $6,000 towards the cost of the move. Determine Mr. Havlik's maximum moving expense for 2022, as well as any carry forward available. Answer: Reimbursement from the employer $6,000 Acquisition cost of New House ( 3,250) House Hunting Trip ( 650) Balance $2,100 Moving expenses ( 8,300) Lease penalty ( 1,200) Available Deduction ($7,400) Income at the new work location = Maximum Deduction 6,625 Carry Forward ($ 775) Since he did not own a house in Halifax, he cannot deduct the $3,250 in costs associated with acquiring the new home in Moncton. Further, there is no provision for deducting the $650 cost of the house hunting trip to Moncton. However, these amounts can be paid for by his employer without creating a taxable benefit as long as it is clear that the reimbursement is specifically intended to pay these expenses. The maximum moving expense deduction for 2022 is limited to the income at the new work location of $6,625. The remaining $775 can be carried forward and deducted against income earned at the new location in a subsequent year. Type: ES Topic: Moving expenses - determining the deduction

104) On November 1, 2022, Joan Hatch moves from Windsor to Toronto at the request of her employer. Prior to this date, she spent $950 on a house hunting trip to Toronto. However, she was not successful and, given this, she has signed a one-year lease for an apartment at her new work location. The legal fees and real estate commissions associated with the sale of her Windsor house were $7,200. The actual costs of the move, including amounts paid to a moving company, totaled $12,600. Her employer agreed to pay $7,000 of her moving expenses. Ms. Hatch's salary for 2022 was $54,000. Determine Ms. Hatch's maximum moving expense deduction for 2022, as well as any carry forward that is available. Answer: Payment from Employer $ 7,000 House Hunting Trip ( 950) Balance $ 6,050 Cost of Selling Windsor House ( 7,200) Moving Costs ( 12,600) Available Deduction ($13,750) Income at New Work Location [(2)($54,000 ÷ 12)] 9,000 Carry Forward ($ 4,750) There is no provision for deducting the $950 cost of the house hunting trip to Toronto. However, this amount can be paid for by her employer without creating a taxable benefit since the move is primarily for the benefit of the employer. It is important that the payment from the employer specify which costs are reimbursed. The maximum deduction is limited to $9,000, the income earned at the new work location. The remaining $4,750 can be carried forward indefinitely but is limited to income earned at the new work location. Type: ES Topic: Moving expenses - determining the deduction

105) Mr. Renaud and Ms. Fortune have lived together for over 15 years and have three children. The ages of the children at the end of the current year are 3, 11, and 15. All three children are in good health and do not suffer from any infirmity. Mr. Renaud carries on a business as a sole proprietor and has business income for the year of $52,000. Ms. Fortune has business income of $62,000. The child care expenses for the current year total $11,200. Determine the maximum child care expense deduction and identify the individual that can make the claim. Answer: As Mr. Renaud is the low income spouse, he will claim the deduction. The deduction will be the least of the following amounts: • The actual expenses of $11,200. • The annual limit of $18,000 [(1)($8,000) + (2)($5,000)]. • $34,667 [(2/3)($52,000)] The least of these three amounts is $11,200. Type: ES Topic: Child care expenses - determining the deduction ITA 63

106) Mrs. and Mr. Anders have three children who, at the end of the current year, are 4, 12, and 18 years of age. The 18 year old child has a serious physical infirmity, but does not qualify for the disability tax credit. Mrs. Anders had earned income of $18,000, while Mr. Anders had earned income of $69,000. Payments for child care were $190 per week for 50 weeks. During the current year, Mrs. Anders spent six weeks in jail as the result of a conviction for possession of an illegal substance. Following her release, Mr. Anders spent three weeks in the hospital because of a stress related disorder. Determine the maximum deduction for child care expenses and identify the individual who can make the claim. Answer: As the 18 year old child has a physical infirmity, he/she is an eligible child for purposes of deducting child care expenses. While child care expenses are normally deducted by the lower income spouse, the higher income spouse can claim a deduction for periods when the lower income spouse is in prison. The amount that can be deducted, however, is limited to $175 per week in the case of the four year old and $100 per week for the other children. Given this, Mr. Anders' deduction is limited as shown in the following calculation:

Actual Payments [(50)($190)] Annual Expense Limit [(1)($8,000) + (2)($5,000)] 2/3 of Earned Income [(2/3)($69,000)] [(2/3)($18,000)] Periodic Expense Limit [(6)($200)(1) + (6)($125)(2)]

Mr. Anders $ 9,500 $18,000

Mrs. Anders $ 9,500 $18,000

$46,000 $ 2,700

$12,000 N/A

The least of the amounts for Mr. Anders is $2,700. The least of the amounts for Mrs. Anders is $9,500. Mrs. Anders' deduction would be reduced by the $2,700 deducted by Mr. Anders, leaving her with a deduction of $6,800 ($9,500 - $2,700). Type: ES Topic: Child care expenses - determining the deduction ITA 63

107) Lara Craft has several disabilities, none of which are severe enough to allow a claim for the disability tax credit. Despite her disabilities, in 2022, she works full time as a financial consultant, earning employment income of $94,000. Her need for full time attendant care has been certified by a medical practitioner and, in 2022, the cost of this care was $32,000. Additional costs related to her disabilities totaled $17,000. Her medical insurance reimbursed her for $8,000 of these costs. None of these costs will be used to claim a medical expense tax credit. Determine the amount of Lara's disability supports deduction for 2022. Answer: As Lara is not eligible for the disability tax credit, she can deduct the cost of full time attendant care under ITA 64. When combined with the other disability support costs and the reimbursement, the qualifying costs total $41,000 ($32,000 + $17,000 - $8,000). As this is less than her income from employment, she will be able to deduct the full amount as her disability supports deduction. Type: ES Topic: Disability supports deduction - ITA 64

108) Jerry Mason lives with his spouse, Janice Sparks. Both Jerry and Janice are 66 years old and,in 2022, they each receive $7,700 in OAS payments. As the result of many years with his employer, Jerry receives $88,000 from a registered pension plan (RPP). Janice's only income is the OAS amounts she receives. Neither Jerry nor Janice have applied for CPP and they have no tax credits other than the BPA, the age credit, and pension income tax credit. Jerry has asked you to determine the federal income tax savings that would result from electing pension income splitting for 2022.

Answer: In the absence of pension income splitting, Janice would have no federal income tax payable [(15%)($7,700) - (15%)($14,398)]. Jerry's 2022 net income, before any OAS clawback, would be $95,700 ($88,000 + $7,700). There would be an OAS clawback of $2,091 [(15%)($95,700 - $81,761)], leaving Jerry with 2022 net and taxable income of $93,609 ($95,700 - $2,091). Based on this amount the federal income tax owing would be calculated as follows: Tax on first $50,197 Tax on next $43,412 ($93,609 - $50,197) at 20.5% Total before Credits Credits: BPA Spousal ($14,398 - $7,700) Age [$7,898 - (15%)($93,609 - $39,826) Pension Spouse's Age Total Rate 2022 Federal Income Tax Payable OAS Clawback Total amount owing without pension splitting

$ 7,530 8,899 $16,429 ($14,398) ( 6,698) Nil ( 2,000) ( 7,898) ($30,994) 15%

( 4,649) $11,780 2,091 $13,871

If maximum pension splitting is used, it will give both Jerry and Janice net and taxable income of $51,700 [($88,000 ÷ 2) + $7,700]. Since this is below the OAS income threshold of $81,761,for 2022 there will be no clawback of OAS for either Jerry or Janice. Based on these revised amounts, the federal income tax owing for both Jerry or Janice would be the same and calculated as follows: Tax on first $50,197 Tax on next $1,503 ($51,700 - $50,197) at 20.5% Tax Before Credits Credits: BPA Age [$7,898 - (15%)($51,700 - $39,826) Pension Total Rate 2022 Federal Income Tax Payable OAS Clawback Total amount owing for each with pension splitting

$7,530 308 $7,838 ($14,398) ( 6,117) ( 2,000) ($22,515) 15%

( 3,377) $ 4,461 N/A $ 4,461

With pension income splitting, the total amount owing by Jerry and Janice would be $8,922 [(2)($4,461)]. This is an improvement of $4,949 over the $13,871 that Jerry would have paid without income splitting. Additional savings would be available for provincial income taxes. Quebec however does not allow pension splitting for individuals who are under 65 years of age. Type: ES Topic: Pension income splitting - ITA 60.03

109) On May 1, 2022, Leon and Shannon Weiss sign a separation agreement that calls for Shannon to pay Leon $1,200 per month in child support (Leon will have custody of their three children) and $2,100 per month in spousal support beginning on June 1. By the end of 2022, Shannon's payments total only $9,500. How will these payments be treated to both Shannon and Leon in 2022? Answer: The total required child support is $8,400 [(7 Months)($1,200)] and Shannon's payments will be deemed to have paid that child support first meaning that $8,400 is child support and the remaining $1,100 ($9,500 - $8,400) will be considered spousal support. Leon will include the $1,100 of spousal support in his 2022 net income and Shannon can deduct that same amount in determining her 2022 net income. Type: ES Topic: Spousal and child support payments

110) Under the terms of their divorce settlement, Barry Low must pay his former spouse, Mandy Brock, $1,000 a month in child support and $1,800 a month in spousal support. Prior to 2022 Barry has always paid the full amounts required by the settlement agreement. In 2022 however payments total only $14,000. How will the payments be treated to both Barry and Mandy for 2022? Answer: The required payments for child support in 2022 were $12,000 [(12)($1,000)]. The ITA deems the first payments to be paid as child support with any remaining amounts actually paid to be spousal support. This means that, of the $14,000 in payments, $12,000 is considered child support and $2,000 spousal support. Mandy will include the $2,000 in spousal support in her net income for 2022 and Barry will be entitled to a deduction of $2,000 in determining his net income for 2022. Type: ES Topic: Spousal and child support payments

111) On January 1 of the current year, Ms. Lorraine Brock uses $10,000 of her savings to purchase a fixed term annuity. The term of the annuity is three years, the annual payments are $4,020, the payments are received on December 31 of each year, and the rate inherent in the annuity is 10%. What is the effect of the $4,020 annual annuity payment on Ms. Brock's net income. Answer: A total of $12,060 [(3)($4,020)] in payments will be received during the life of the annuity. The $4,020 will be included in her income (ITA 56(1)(d)) and she will be entitled to a deduction equal to $3,333 [($10,000 ÷ $12,060)($4,020)] (ITA 60(a)). As a result, Ms. Brock's net income will increase by $687 ($4,020 $3,333) in each of the three years. Type: ES Topic: Annuity payments

112) On January 1, 2022, Sal Miner uses $2,673 of his savings to purchase an annuity that will return $1,000 at the end of each year in 2022, 2023, and 2024. The effective rate of interest in this annuity is 6%. What is the effect of the $1,000 payment on Mr. Miner's 2022 net income? Answer: Over the life of the annuity Sal will receive total payments of $3,000 [(3)($1,000)]. In 2022, the $1,000 payment received will be included in his net income (ITA 56(1)(d)) and he will be entitled to a deduction for the capital component of the payment of $891 [($1,000)($2,673 ÷ $3,000)] (ITA 60(a)). The net increase in net income for 2022 is therefore $109 ($1,000 - $891). Type: ES Topic: Annuity payments

113) Marco was born in 2021. As his mother is very keen on income tax planning, she establishes an RESP for him by contributing $1,000 to the plan in 2021. Marco's grandmother contributes an additional $400 to the plan on the same day. In 2022, Marco's mother contributes $2,200 to the plan, while his grandmother contributes an additional $1,900. Marco's family has never had family income of more than $40,000. Determine the amount of the Canada Education Savings Grant (CESG) that would be added to Marco's RESP in 2021 and 2022. Answer: The total 2021 contributions to Marco's RESP are $1,400 ($1,000 + $400). As this is within the $2,500 limit for contribution eligible for CESGs, the 2021 CESG would be $380 {[(40%)($500)] + [(20%)($1,400 - $500)]}. For 2022, contributions to Marco's RESP total $4,100 ($2,200 + $1,900). However, at this point, the plan has accumulated only $5,000 [(2)($2,500)] in room for contributions eligible for CESGs. As $1,400 of this was used in 2021, only $3,600 remains for use in 2022. Given this, the 2022 CESG amount would be $820 {[(40%)($500)] + [(20%)($3,600 - $500)]}. Type: ES Topic: Canada education savings grants (CESG)

114) Ms. Veronica Lox owns shares with an ACB of $150,000 and a FMV of $175,000. She sells the shares to her father for $130,000. He immediately sells them to an arm's length person for $175,000. Determine the income tax consequences to Ms. Lox and her father. Answer: Since the disposition is between non-arm's length persons and the transaction price is less than the FMV of the shares ITA 69 will apply a one-sided adjustment that will deem Veronica to have received FMV of $175,000. As a result she will include a taxable capital gain of $12,500 [(1/2)($175,000 - $150,000)] in her income for the year of the disposition. The price of $130,000 paid by her father is not adjusted by ITA 69 and remains the cost and ACB of the shares to him. When her father sells the shares for $175,000, he will include a taxable capital gain of $22,500 [(1/2)($175,000 - $130,000) in his income for the year. Type: ES Topic: Non-arm's length transactions - ITA 69

115) Ms. Veronica Lox owns shares with an ACB of $150,000 and a FMV of $175,000. She sells the shares to her father for $210,000. He immediately sells them to an arm's length person for $175,000. Determine the income tax consequences to Ms. Lox and her father. Answer: Since the disposition is between non-arm's length persons and the transaction price is greater than the FMV of the shares ITA 69 will apply a one-sided adjustment that will deem the father to have paid FMV of $175,000 for the shares which becomes his cost and ACB. Veronica is not affected by ITA 69 and she is considered to have sold the shares for the actual price of $210,000. As a result she will include a taxable capital gain of $30,000 [(1/2)($210,000 - $150,000)] in her income for the year of the disposition. When the father sells the shares in an arm's length transaction for $175,000 there is no capital gain or capital loss $30,000 [(1/2)(POD $175,000 - ACB $175,000)]. Type: ES Topic: Non-arm's length transactions - ITA 69

116) Marilyn Fox owns land that she purchased several years ago for $85,000. For several years, she has been using the property to carry on a business as a sole proprietor of providing a high security parking lot with around the clock surveillance. On January 1, 2022, she gifts the property to her common-law partner Ellen Degen. At this time, the FMV of the land is $170,000. Marilyn does not opt out of the rollover of ITA 73(1). In 2022, Ellen continues the parking lot business, which results in business income of $8,500. On January 1, 2023, Ellen sells the parking lot for $190,000. What are the income tax consequences of these events for Marilyn and Ellen for the 2022 and 2023 taxation years? If there are no income tax consequences for either individual in a given year, clearly state this in your answer. Answer: The income tax consequences for Marilyn and Ellen in each of the two years would be as follows: 2022 for Marilyn — There would be no income tax consequences for Marilyn as a result of the ITA 73(1) rollover between spouses and common-law partners. 2023 for Marilyn — When Ellen sells the land, the taxable capital gain of $52,500 [(1/2)($190,000 - $85,000)] would be attributed to Marilyn to be included in her net income. 2022 for Ellen — The $8,500 in income from the parking lot business would be included in Ellen's net income since business income is not subject to attribution. 2023 for Ellen — The taxable capital gain of $52,500 is included in Marilyn's net income and not that of Ellen. Type: ES Topic: Transfer of capital property between spouses and common-law partners - ITA 73

117) During the current year, Geoff Lionel sells depreciable property to his spouse. The FMV of the property at the time of the sale was $200,000. The capital cost is $160,000, and the UCC $107,000. It is the only property in its CCA class. His spouse pays $200,000 from funds that she received as an inheritance. Describe the income tax consequences to Mr. Lionel and the tax cost of the property to his spouse as a result of the sale assuming that he does not opt out of the rollover of ITA 73(1). How would the results change if Mr. Lionel opts out of ITA 73(1)? Answer: ITA 73(1) Applies — If Mr. Lionel does not opt out of ITA 73(1), the property will be deemed to have been disposed of for POD equal to the UCC of $107,000. As a result there would be no income tax consequences as a result of the non-arm's length disposition. The spouse would inherit the tax characteristics of the property with a capital cost of $160,000, deemed CCA of $53,000 and a UCC of $107,000. The $200,000 paid as POD would not change this result. Opt out of ITA 73(1) — Mr. Lionel can opt out of ITA 73(1) by including the taxable capital gain of $20,000 [(1/2)(POD $200,000 - ACB $160,000)], as well as recapture of $53,000 ($160,000 - $107,000) in his income for the year of the disposition. For capital gains purposes, the ACB to the spouse would be $200,000. However, for CCA and recapture purposes ITA 13(7)(e) would deem the capital cost to be $180,000 [$160,000 + (1/2)($200,000 - $160,000)]. Type: ES Topic: Transfer of capital property between spouses and common-law partners - ITA 73

118) Mr. Norman Low owns a depreciable property that is used in a business he carries on as a sole proprietor. The capital cost of the property is $145,000 and the FMV is $132,000. It is the only property in its CCA class and the UCC is $63,500. Mr. Low sells the property to his father for $132,000. Mr. Low's father sells the property late in the same year for $135,000. Determine the income tax consequences to Mr. Low and his father as a result of these transactions. Answer: Mr. Low — When Mr. Low sells the depreciable property for $132,000, the only income tax consequence will be recapture of $68,500 (lesser of capital cost of $145,000 and POD of $132,000 - UCC of $63,500). Since the POD does not exceed the ACB (e.g. the capital cost) there is no capital gain. In addition there can never be a capital loss on depreciable property. Mr. Low's Father — Since the sales price of $132,000 is less than Mr. Low's capital cost of $145,000, ITA 13(7)(e) applies to preserve the potential for future recapture. should the FMV of the property increase. As a result Mr. Low's capital cost will be deemed to be equal to $145,000, with the $13,000 excess over the price of $132,000, deemed to be CCA claimed in previous years with the result that the UCC is $132,000. This means that when Mr. Low's father sells the property for $135,000, he will subtract the lesser of the POD of $135,000 and the deemed capital cost of $145,000 from the UCC of $132,000. The result will be recapture of $3,000 ($132,000 - $135,000). Type: ES Topic: Non-arm's length disposition of depreciable property

119) John Travis owns a depreciable property with a FMV of $295,000. Its capital cost is $350,000, the UCC $245,000 and it is the only property in the CCA class. John sells the property to his brother for $295,000. Later in the same year his brother sells the property for $315,000. Determine the income tax consequences for Mr. Travis and his brother as a result of these transactions. Answer: John Travis —When John sells the property for $295,000, the only income tax consequence are a recapture of $50,000 (lesser of capital cost of $350,000 and POD of $295,000 -UCC of $245,000). Since the POD does not exceed the ACB (e.g. the capital cost) there is no capital gain. In addition there can never be a capital loss on depreciable property. John's Brother — Since the sales price of $295,000 is less than John's capital cost ITA 13(7)(e) will apply to deem the capital cost to the brother to be equal to John's capital cost, with the $55,000 ($350,000 $295,000) difference treated as deemed CCA. This means that, when the brother sells the property for $315,000, the lesser of the POD of $315,000 and the deemed capital cost of $350,000 will be deducted from the UCC of $295,000. This will result in recapture of $20,000 ($295,000 - $315,000). Type: ES Topic: Non-arm's length disposition of depreciable property

120) Mrs. Betty Wong owns farm property consisting of (1) land with an ACB of $271,000 and a FMV of $365,000, and (2) a barn with a UCC of $90,000, a capital cost of $120,000, and a FMV of $110,000. The property is transferred to her 67 year old son in return for a payment of $300,000 for the land. No payment is made for the barn. Determine the income tax consequences of this transfer, for both Mrs. Wong and her son. Answer: With respect to the land, the $300,000 paid is between the floor of $271,000 for the ACB and the ceiling of $365,000 for the FMV. Therefore, the POD would be deemed to be $300,000, resulting in a taxable capital gain for Mrs. Wong of $14,500 [(1/2)($300,000 - $271,000)]. The $300,000 would also represent the ACB to her son. With respect to the barn and in the absence of any payment (e.g. consideration), the transfer would be deemed to take place at the UCC of $90,000. There would be no income tax consequences for Mrs.Wong. With respect to her son, he would inherit the tax characteristics of the barn to his mother. As a result his capital cost is deemed to be $120,000, there would be deemed CCA of $30,000 with a resulting UCC of $90,000. Type: ES Topic: Inter vivos transfer of farm property to a child - ITA 73(3.1) and (4.1)

121) Martin Ho owns the following farm properties: Land — The ACB is $435,000 and the FMV $584,000. Barn — The barn has a UCC of $140,000, a capital cost of $165,000, and a FMV of $175,000. The property is transferred to his son. The son pays $470,000 for the land. No payment is made for the barn. Determine the income tax consequences of the property transfers for both Martin and his son. Answer: The $470,000 that was paid for the land is between the $435,000 ACB floor and the $584,000 FMV ceiling. This means that the POD is acceptable at $470,000, resulting in a taxable capital gain for Martin of $17,500 [(1/2)($470,000 - $435,000)]. The ACB to the son would also be $470,000. As no consideration was paid for the barn, the transfer would take place at the UCC floor of $140,000. For Martin, there would be no income tax consequences. With respect to her son, he would inherit the tax characteristics of the barn to his father. As a result his capital cost is deemed to be $165,000, there would be deemed CCA of $25,000 with a resulting UCC of $140,000. Type: ES Topic: Inter vivos transfer of farm property to a child - ITA 73(3.1) and (4.1)

122) Mr. Norm Norten dies in July of 2022. At the time of his death, he owned two backhoes that were used in his construction business. His will leaves one backhoe to his spouse, Linda, with the other backhoe going to his daughter, Mary. The backhoes cost $180,000 each and each had a FMV at the time of Mr. Norten's death of $122,000. The UCC balance for the class that contains the backhoes is $148,000. What are the income tax consequences resulting from Mr. Norten's death with respect to the two backhoes? Assume that his spouse and daughter will continue to carry on the construction business. Your answer should include the capital cost and UCC for the backhoes to Linda and Mary. Answer: With respect to the transfer to his spouse Linda, the transfer would occur at the proportional UCC of $74,000 (1/2)($148,000)]. As a result there would be no income tax consequences to Mr. Norten's. Linda would inherit the tax characteristics of the property such that the deemed capital cost would be $180,000, deemed CCA would be $106,0000 and the UCC would be $74,000. The transfer to his daughter, Mary, would take place at the FMV of $122,000. This means that the POD for the two backhoes would be $196,000 ($74,000 + $122,000). As a result there would be recapture of $48,000 (lesser of capital costs of $360,000 and POD of $196,000 - UCC of $148,000) which would be included in Mr. Norten's income on his final income tax return. Mary would also retain her father's original capital cost of $180,000, with deemed CCA of $58,000 for a UCC of $122,000. Type: ES Topic: Death of an individual taxpayer - general rules

123) At the time of her death, Nancy Stein owned two depreciable properties. Her will leaves one of the properties to her spouse Mark and the other to her son Nick. Each of the properties cost $125,000 and, at the time of Nancy's death, they each have a FMV of $86,000. They are the only properties in their CCA class. The UCC at the time is $104,000. What are the income tax consequences resulting from Ms. Stein's death with respect to the two depreciable properties? Assume that his spouse and son will continue to carry on the business in which the depreciable properties were used. Your answer should include the capital cost and UCC for the properties to Mark and Nick. Answer: The transfer to Nancy's spouse Mark would take place on a rollover basis at the proportional UCC of $52,000 [(1/2)($104,000)]. As a result there would be no income tax consequences to Nancy. Mark would inherit the tax characteristics of the property such that the deemed capital cost would be $125,000, deemed CCA would be $73,000 and the UCC would be $52,000. The transfer to Nick would take place at the FMV of $86,000. This means that the POD for the two properties would be $138,000 ($52,000 + $86,000). As a result there would be recapture of $34,000 (lesser of total capital costs of $250,000 and POD of $138,000 - UCC of $104,000) being included in Nancy's income on her final income tax return. Nick would retain Nancy's capital cost of $125,000, with deemed CCA of $39,000 for a UCC of $86,000. Type: ES Topic: Death of an individual taxpayer - general rules

124) On December 28, 2021, Mrs. Charlene Blue gives her spouse shares in a public company with an ACB of $42,000 and a FMV of $38,000. In 2022, the shares pay eligible dividends of $3,600. On December 1, 2022, Mr. Blue sells the shares for $53,000. Assume that Mrs. Blue does not opt out of the rollover of ITA 73(1). What are the income tax consequences for Mr. and Mrs. Blue in each of 2021 and 2022? If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: ITA 73(1) provides for a tax free rollover of capital property between spouses and common-law partners. The income tax consequences for Mr. and Mrs. Blue for 2021 and 2022 are as follows: • 2021 for Mr. Blue - none. Shares are deemed to have been disposed of for POD of $42,000. • 2021 for Mrs. Blue - none. Shares are deemed to have been acquired for $42,000. • 2022 for Mr. Blue - none. Dividends received and capital gains realized with respect to these shares are not required to be included in Mr. Blue's income. • 2022 for Mrs. Blue - Total income of $10,468. She would include in her income taxable dividends of $4,968 (138%)($3,600)] and a taxable capital gain of $5,500 [(1/2)(POD $53,000 - ACB $42,000)] both of which are attributed to her. Type: ES Topic: Attribution rules - the attribution of income

125) On December 31, 2021, Mr. Tom London gifts shares with an ACB of $21,500 and a FMV of $35,200 to his spouse, Barbara. On February 24, 2022, the shares pay eligible dividends of $2,060 and, on August 31, 2022, Barbara sells the shares for $39,800. Assume that Mr. London does not opt out of the rollover of ITA 73(1). What are the income tax consequences for Mr. and Mrs. London in each of 2021 and 2022? If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: ITA 73(1) provides for a tax free rollover of capital property between spouses and common-law partners. The income tax consequences for Mr. and Mrs. London for 2021 and 2022 are as follows: • 2021 for Mrs. London - none. Shares are deemed to have been disposed of for POD of $21,500. • 2021 for Mr. London - none. Shares are deemed to have been acquired for $21,500. • 2022 for Mrs. London - none. Dividends received and capital gains realized with respect to these shares are not required to be included in Barbara's income. • 2022 for Mr. London - total income of $11,993. He would include in his income taxable dividends of $2,843 (138%)($2,060)] and a taxable capital gain of $9,150 [(1/2)(POD $39,800 - ACB 21,5000)] both of which are attributed to him. Type: ES Topic: Attribution rules - the attribution of income

126) In 2021, Charlotte Ramp gifts shares to her spouse Michael Ramp. The ACB of the shares is $23,000 and the FMV $35,000. Charlotte opts out of the rollover of ITA 73(1) in her income tax return for the year of the gift. In 2022, the shares pay eligible dividends of $1,800. In late 2022, Michael sells the shares for $42,000. What are the income tax consequences to Charlotte and Michael in each of 2021 and 2022? If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: The income tax consequences for Charlotte and Michael for each of 2021 and 2022 are as follows: • 2021 for Charlotte - Opting out of ITA 73(1) causes the transaction to occur at FMV and as a result Charlotte will realize a taxable capital gain of $6,000 [(1/2)(POD $35,000 - ACB $23,000)]. • 2021 for Michael. Michael is deemed to have a cost of the shares equal to the FMV of $35,000. • 2022 for Charlotte - Since Michael did not provide FMV consideration taxable dividends of $2,484 [(138%)($1,800)] will be attributed to Charlotte and required to be included in her income. In addition, the taxable capital gain of $3,500 [(1/2)(POD $42,000 - ACB $35,000)] will also be attributed to her. • 2022 for Michael - none. The dividends and taxable capital gains are not included in his income. Type: ES Topic: Attribution rules - the attribution of income

127) On December 31, 2021, Mr. Tom London gifts shares to his 10 year old son Patrick. The shares have an ACB of $21,500 and a FMV of $35,200. On February 24, 2022, the shares pay eligible dividends of $2,060 and, on August 31, 2022, Patrick sells the shares for $39,800. What are the income tax consequences for Mr. London and Patrick in each of 2021 and 2022? If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: There is no rollover provision with respect to a transfer of shares to a child. The income tax consequences for Tom and Patrick are as follows: • 2021 for Patrick. He is deemed to have acquired the shares for their FMV of $35,200. • 2021 for Tom - a taxable capital gain of $6,850 [(1/2)($35,200 - $21,500)]. • 2022 for Patrick - a taxable capital gain of $2,300 [(1/2)($39,800 - $35,200)]. • 2022 for Tom - taxable dividends of $2,843 [(138%)($2,060)] attributed to him. Type: ES Topic: Attribution rules - the attribution of income

128) In 2021, Charlotte Ramp gifts shares to her 12 year old daughter Vanessa. The shares have an ACB of $23,000 and, at the time of the gift, the FMV is $35,000. In 2022, the shares pay eligible dividends of $1,800. Late in 2022, Vanessa sells the shares for $42,000. What are the income tax consequences to Charlotte and Vanessa for 2021 and 2022? If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: There is no rollover provision with respect to a transfer of shares to a child. Given this, the income tax consequences for Charlotte and Vanessa for 2021 and 2022 are as follows: • 2021 for Charlotte - a taxable capital gain of $6,000 [(1/2)($35,000 - $23,000)]. • 2022 for Vanessa. She is deemed to have acquired the shares for their FMV of $35,000. • 2022 for Charlotte - Taxable dividends of $2,484 [(138%)($1,800)] will be attributed to Charlotte and included in her income. • 2022 for Vanessa - a taxable capital gain of $3,500 [(1/2)($42,000 - $35,000)]. Type: ES Topic: Attribution rules - the attribution of income

129) Mr. Randy Cleroux owns 1,000 shares of Lyton Industries Ltd. The ACB of the shares is $105 per share and the FMV $156 per share. Randy gifts 400 of the shares to his 12 year old son and the remaining 600 shares to his spouse. The shares pay eligible dividends of $4.50 per share in 2022. On December 31, 2022, both his son and his spouse sell all of their gifted shares for $142 each. Assume that Mr. Cleroux does not opt out of the rollover of ITA 73(1). What are the income tax consequences of these transactions to Mr. Cleroux, his son, and his spouse, in each of 2021 and 2022. If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: The income tax consequences are as follows: 2021 • Mr. Cleroux has a taxable capital gain of $10,200 [(1/2)(400)($156 - $105)] with respect to the shares gifted to his son and no capital gain or capital loss for the shares gifted to his spouse $ Nil [(1/2)(600)($105 - $105)]. • His son has no income tax consequences other than that he is considered to have acquired the shares for $156 each. • His wife has no income tax consequences other than that she is considered to have acquired the shares for $105 each. 2022 • Mr. Cleroux has taxable dividends of $6,210 [(400 + 600)($4.50)(138%)] attributed to him from both his son and spouse. • Mr. Cleroux has a taxable capital gain of $11,100 [(1/2)(600)($142 - $105)] attributed to him from his spouse. • His son has an allowable capital loss of $2,800 [(1/2)(400)($142 - $156)]. • His wife has no income tax consequences. Type: ES Topic: Attribution rules - the attribution of income

130) On December 31, 2021, Mrs. Danielle Lafarge gifts corporate bonds to her spouse in exchange for a promissory note for $131,000. The ACB of the corporate bonds is $119,000 and their FMV is $131,000. The promissory note from her spouse is interest free and is on a demand basis (e.g. has no specific maturity date but can be called by the holder at any time). Mrs. Lafarge does not opt out of the ITA 73(1) rollover and therefore does not include any capital gain in her income for 2021 as a result of the gift. The bonds pay interest to Mr. Lafarge in the amount of $5,600 in 2022. On October 1, 2022, immediately after an interest payment, Mr. Lafarge sells the bonds for $134,000. He uses $131,000 of the proceeds to pay off the promissory not owing to his spouse. What are the income tax consequences for Mr. and Mrs. Lafarge in each of 2021 and 2022? Answer: Since Mrs. Lafarge does not elect out of ITA 73(1) there will be no income tax consequences for either Mr. or Mrs. Lafarge in 2021 other than that Mrs. Lafarge has disposed of capital property for POD equal to the ACB resulting in no capital gain or capital loss. In addition Mr. Lafarge will be deemed to have acquired the bonds for $119,000. As the promissory note was interest free, all of the 2022 interest income on the bonds will be attributed to Mrs. Lafarge and included in her income. In addition to the interest of $5,600, there would also be a taxable capital gain of $7,500 [(1/2)($134,000 - $119,000)], which would also be attributed to Mrs. Lafarge to be included in her income. The total addition to Mrs. Lafarge's income for 2022 is $13,100 ($5,600 + $7,500). There will be no income tax consequences to Mr. Lafarge in 2022. Type: ES Topic: Attribution rules - use of loans and indebtedness

131) In December of 2021, John Barton gifts corporate bonds to his spouse Julie Barton, in exchange for a non-interest bearing promissory note for $210,000. The ACB of the bonds is $205,000 and their FMV is $210,000. John elects out of the rollover under ITA 73(1). One of the conditions of the promissory note is that the note must be repaid when the bonds are sold. The bonds pay interest of $11,000 in 2022. Immediately after receiving the interest payment, Julie sells the bonds for $216,000. What are the income tax consequences for John and Julie in each of 2021 and 2022? If you conclude that there are no income tax consequences for either individual in a given year state this clearly in your answer. Answer: The income tax consequences for John and Julie in 2021 and 2022 are as follows: • 2021 for John - John will realize a taxable capital gain of $2,500 [(1/2)($210,000 - $205,000)]. • 2021 for Julie. She is deemed to have acquired the bonds for $210,000. • 2022 for John - The $11,000 of interest income will be attributed to John and included in his income. In addition, he will have a taxable capital gain of $3,000 [(1/2)($216,000 - $210,000)] which is also attributed to him. While Julie provided John with FMV consideration, the fact that it was interest free meant that the attribution rules applied. • 2022 for Julie - None. Type: ES Topic: Attribution rules - use of loans and indebtedness

132) On December 15, 2022, Jasmine Li dies in a motorcycle accident. She was 52 years old at the time of her death. She is survived only by her 23 year old son, Mark Li. Jasmine had been a full time employee of Arbor Landscapers for many years. In recognition of her long time service, the employer pays a death benefit of $12,000. It will be paid in three annual instalments of $4,000, beginning on December 31, 2022. The payments will be made to her son, Mark. Required: What effect will this death benefit have on the Mark's 2021, 2022 and 2023 net income? Answer: ITA 56(1)(a)(iii) requires receipts of death benefits to be included in income in the year received. However, ITA 248 defines "death benefits" as excluding the first $10,000 from being included in income when paid to a surviving spouse, common-law partner or other persons. The $10,000 exclusion is given first to spouses and common-law partners before any other persons but in this case since there are no surviving spouse or common-law partner Mark can utilize the exclusion. The payments will result in the following inclusions in Mark's net income: • 2022 = Nil $4,000 received which is less than the $10,000 exclusion • 2023 = Nil $8,000 received which is again less than the $10,000 exclusion • 2024 = $2,000 ($4,000 + $4,000 + $4,000 - $10,000) After the first $10,000 in death benefits is reached any subsequent death benefits received will represent a death benefit that will be required to be included in income. The death benefit will have no effect on the final return of income for of Ms. Li. Type: ES Topic: Death benefits

133) Ms. Latricia Mode has worked for a small company in Edmonton for several years but realized that there were few advancement opportunities. As a result she resigned as of May 1, 2022 and began negotiations with a prospective employer in Winnipeg, She accepted the position at a starting salary of $4,000 per month to begin November 1, 2022. After accepting the job, Latricia listed her Edmonton house for sale and flew to Winnipeg in order to find a new home. After 3 days she purchased a suitable house that would be available on October 28, 2022. In order to acquire furnishings, she remained in Winnipeg an additional 4 days after the purchase. Her expenses for this 7 day trip were as follows: Air Fare (Edmonton - Winnipeg, Return) Car Rental (7 Days at $45) Hotel (7 Nights at $122) Food (7 Days - Total)

$ 586 315 854 455

Her house in Edmonton proved difficult to sell since there were many homes in her neighbourhood that were for sale. The one offer she received wanted possession at the end of the day on October 1, 2022. Reluctantly, she accepted the offer. On October 1, 2022 Latricia supervised the packing and moving of her property. She then spent 2 days in an Edmonton hotel while she finalized arrangements for her departure. Expenses during these 2 days were as follows: Hotel (2 Nights at $115) Food (2 Days - Total)

$230 26

On October 3, she leaves Edmonton by automobile, arriving in Winnipeg on October 7. The trip is 1,304 kilometers. As her new residence is not yet available, she lives in a hotel in Winnipeg until October 28. Her expenses for the period October 3 through 28 are as follows: Gasoline during the travel to Winnipeg Hotel (4 Nights en route+21 nights in Winnipeg at $135) Food (25 Days - Total)

$ 297 3,375 1,820

She received the following statements from her attorney: Real estate commission - Edmonton Home $ 16,800 Legal Fees - Edmonton Home 1,800 Unpaid Property Taxes on Edmonton home to date of sale 1,350 Legal Fees - Winnipeg Home 1,950 On moving into the new residence, Latricia is required to pay the moving company a total of $2,850. This fee includes $725 for the 23 days of storage required because the Winnipeg home was not available when the furnishings arrived. Latricia's only income for 2022 was employment income as follows:

Old employment (4 Months) New employment (2 Months) 2022 Employment Income

$14,000 8,000 $22,000

Latricia's new employer did not provide any reimbursement for moving expenses. Latricia will use the simplified method of determining vehicle and food costs in calculating her moving expenses. Assume that the relevant flat rate for automobile kilometres is $0.55 and the flat rate for meals is $69 a day. Required: Calculate the maximum allowable moving expenses that Latricia can deduct for 2022 and any amount that can be carried forward to a subsequent year. Answer: Costs for food and lodging at or near an old or new residence are limited to a maximum period of 15 days. Only the cost of meals and lodging that were incurred in the 4 days after the purchase of the new residence would be eligible. The airfare, the cost of car rentals, and the cost of meals and lodging prior to the purchase of the new residence would not be deductible. Latricia has a total of 27 eligible days: 4 days on her first trip to Winnipeg, the 2 days in Edmonton and 21 days during which she lived in a hotel on arriving in Winnipeg. Note that the 4 days spent travelling to Winnipeg are not included in the 15 day total. As the hotel in Winnipeg in October is the most expensive, she will claim all 15 days using a $135 per night rate. The allowable moving expenses are the following: First Trip Hotel and Food Selling Costs of Edmonton home ($16,800 + $1,800) Legal Fees for Winnipeg Home Edmonton Hotel and Food Expenses of Travel to Winnipeg: Alberta Vehicle Rate [(1,304 @ $0.55) Hotel (4 Nights at $135) Food (4 Days at $69 Flat Rate) Moving Company Fees Hotel and Food in Winnipeg [15 Days/Nights at $204 ($135 + $69)] Total Allowable Moving Expenses for 2022 Employment Income In New Location Carry Forward of Moving Expenses

N/A $18,600 1,950 N/A $717 540 276

1,533 2,850 3,060 $27,993 ( 8,000) $19,993

Notes: 1. The vehicle flat rate used is the one for the province from which the move began. 2. The property taxes on the Edmonton home would not be an allowable moving expense. 3. The storage costs are allowable moving expenses. 4. The unused moving expense balance of $19,993 can be carried forward to subsequent years to be claimed to the extent of income at the new work location. Type: ES Topic: Moving expenses - determining the deduction

134) Mr. Lawrence Harvey has been employed in Halifax for many years. In 2022 he decides on a change of location and asks his employer for a transfer to another location. Lawrence and his employer agree on a move to the company's main office in Ottawa. Lawrence will begin in the Otawa office at the beginning of December, 2022. Lawrence's salary is $8,000 per month. Lawrence sells the home he owned in Halifax in October of 2022 for $435,000. As he was anxious to sell quickly, he realizes a loss on the sale of $52,000. Costs associated with the sale of his Halifax residence are as follows: Real Estate Commissions Legal Fees Unpaid Property Taxes to date of sale Cost of cleaning and minor repairs prior to sale

$21,000 800 1,500 3,800

In October of 2022, Lawrence flies to Ottawa to find a new home. As he lives alone, he decides to lease a condominium. After 2 days, he finds a suitable property which he leases for $2,500 a month, beginning November 1. He remains in Ottawa for an additional 4 days in order to purchase furniture, appliances and other household effects. The expenses associated with the house hunting trip to Ottawa are: Air Fare - Return Rental Car Costs (6 Days) Hotel (6 Nights at $200) Food (6 Days - Total)

$1,250 420 1,200 510

His employer has agreed to the following assistance towards the move: • An $18,000 allowance to cover his general moving expenses. • Compensation, to the extent of $30,000, for the loss on the sale of his house in Halifax. All of these amounts will be paid by the Ottawa office in December of 2022. On November 7, 2022 Lawrence leaves for Ottawa by air. Because the acquired furnishings and appliances have not been delivered yet, he has to live in an Ottawa hotel until November 25. His expenses for the period November 7 through November 25, 2022 are as follows: Air Fare - One Way Hotel Room with kitchenette (19 Nights at $160) Food (19 Days – Total including groceries for cooking in Hotel)

$ 600 3,040 660

He also hires a specialty moving company to transport his car to Ottawa which is delivered November 8. The cost for this service is $1,100. A moving company takes care of moving Lawrence's personal belongings to Ottawa. The invoice for this service is $3,500. In addition, there is a $1,200 charge for storing these belongings until the Ottawa condominium becomes available.

Lawrence begins working in Ottawa on December 1, 2022. He would like to claim the maximum moving expense possible for 2022. Lawrence will use the simplified method of determining food costs in calculating his moving expenses. Assume that the flat rate for meals is $69 per day. Required: Determine the amount of Lawrence's maximum 2022 moving expenses. In addition, indicate the amount of any carry forward that is available for years subsequent to 2022. Answer: Income at New Work Location As both the general moving allowance and the compensation for the housing loss were paid for by the Ottawa office, these would be considered employment income at the new work location. As a result, Lawrence's employment income at the new work is determined as follows: General Moving Allowance Compensation for Housing Loss on Halifax Home (Note 1) Salary at New Work Location (1 Month at $8,000) 2022 Employment Income at New Work Location

$18,000 7,500 8,000 $33,500

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 $30,000, the inclusion would be $7,500 [(1/2)($30,000 - $15,000)]. Deductible Moving Expenses Deductible moving expenses can be calculated as follows: Real Estate Commission - Halifax Home Legal Fees - Halifax Home Other Halifax Home Costs (Not Deductible) Fee for transporting the car Moving Company Costs ($3,500 + $1,200) Costs of Lodging (Note 2): House Hunting Trip (4 Nights at $200) In Ottawa (11 Nights at $160) Food - Maximum (15 Days at $69 Flat Rate) Costs of Airfare on move to Ottawa Moving Expense Claim for 2022

$21,000 800 Nil 1,100 4,700 800 1,760 1,035 600 $31,795

Note 2 - 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. Costs of food and lodging at or near the old or new residence are limited to a maximum period of 15 days. Lawrence has a total of 23 eligible days, 4 days after he signs a lease at $200 per day and 19 days at $160 per day prior to the delivery of his furnishings and appliances. Lawrence can claim the lodging costs of $800 [(4)($200)] for the 4 days after the lease is signed. The costs for the remaining 11 days total $1,760 [(11)($160)].

Actual Deduction As the deductible costs are less than the income at the new location, they can be claimed in full reducing his 2022 net and taxable income. There would be no carry forward moving expenses. Type: ES Topic: Moving expenses - determining the deduction

135) Andrew Brock carries on a business as a sole proprietor which, in most years, has been very profitable, producing more than $200,000 if business income annually. However, in 2022, his gross sales decline to only $125,000 resulting in business income of $24,000. Andrew has no other income in 2022. During a slow period, Andrew enrolled in an organizational behaviour course at a local university. The course lasted 7 weeks and required a minimum of 12 hours of work each week. His spouse, Andrea Brock is an accountant for a large public company. In 2022, the details of her taxable income are as follows: Gross Salary RPP Contributions Fees for preparing income tax returns for friends and family Taxable Capital Gains Interest Income Taxable Income

$ 92,300 ( 4,000) 12,700 8,500 7,200 $116,700

In January of 2022, as the result of a serious snowboarding accident, Andrea was hospitalized for a period of one week. Subsequent to her release, she was in a wheel chair for an additional 6 weeks. A doctor has certified that, during this 7 week period, Andrea was not capable of caring for her children. In 2022, the couple paid child care expenses of $350 per week for 50 weeks. Required: Determine the maximum amount that can be claimed by Mr. and Mrs. Brock for 2022 for child care expenses under the following assumptions: A. They have two children, neither of whom qualify for the disability tax credit. The children are 2 and 12 years of age. B. They have three children. The children are 2, 4, and 12 years of age. The 2 year old is sufficiently disabled that the child qualifies for the disability tax credit. Answer: Andrea Brock Generally, the spouse with the lower income must claim the deduction for child care expenses. However, under certain circumstances, for example if this spouse is a full time student, the spouse with the higher income can claim the deduction for the period the spouse is a student. Under this provision, Andrea can claim the least of the following: Case A $17,500 $70,000

Actual Payments [($350)(50)] 2/3 of Earned Income [(2/3)($105,000)]* Annual Expense Limit: Case A ($5,000 + $8,000) Case B ($5,000 + $8,000 + $11,000) Periodic Expense Limit: Case A [($125 + $200)(7)] Case B [($125 + $200 + $275)(7)]

$13,000

$ 2,275

*Andrea's Earned Income would be calculated as follows:

Case B $17,500 $70,000

$24,000

$ 4,200

Gross Salary (No RPP Deduction) Tax Preparation Fees (Business income) Earned Income

$ 92,300 12,700 $105,000

In Case A, the least of these amounts is $2,275, the Periodic Expense Limit. In Case B, the least of the amounts is $4,200, also the Periodic Expense Limit. Andrew Brock The calculations for Andrew are as follows: Case A $17,500 $16,000

Actual Payments [($350)(50)] 2/3 of Earned Income [(2/3)($24,000)]* Annual Expense Limit: Case A ($5,000 + $8,000) Case B ($5,000 + $8,000 + $11,000)

$13,000

Case B $17,500 $16,000

$24,000

* It is business income of $24,000 and not gross revenues that is used to calculate earned income. The least of the amounts in Case A is $13,000, the annual expense limit. Deducting from this the amount claimed by Andrea leaves a deduction for Andrew of $10,725 ($13,000 - $2,275). In Case B, the least of the amounts is $16,000. Deducting from this the amount claimed by Andrea leaves a deduction for Andrew of $11,800 ($16,000 - $4,200). As Andrea is the higher income spouse, the number of weeks she is unable to care for the children has no effect on the child care expense calculations. No Carry Forward In both Cases, the total deductible child care expenses is less than the actual amount paid. Any amounts paid in the year that are not deductible are lost and cannot be carried forward. Type: ES Topic: Child care expenses - determining the deduction ITA 63

136) Marco and Valentina Parker have been married 17 years. Unfortunately, during the first five months of 2022, Marco was unemployed. After much searching, he found employment as of June 1, 2022. His gross employment income for the remaining seven months of 2022 was $42,000. In addition, he also had interest income of $4,000 and received eligible dividends from public companies of $56,000 in 2022. Valentina was employed throughout 2022, earning gross employment income of $81,000. RPP contributions of $3,800 were withheld by her employer. She had no other income in 2022. In an effort to improve her management skills, Valentina attended a human resources course at a local university. The course lasted 14 weeks and required her to spend about 22 hours per week in classes and preparing assignments. As both Marco and Valentina had busy schedules, the couple paid child care expenses of $17,500 ($350 a week for 50 weeks). Required: Determine the maximum amount that can be claimed by each of Mr. and Mrs. Parker in 2022 for child care expenses under the following assumptions: A. They have three children, none of whom qualify for the disability tax credit. The children are 1, 3, and 4 years of age. B. They have four children, none of whom qualify for the disability tax credit. The children are 3, 5, 9, and 12 years of age.

Answer: Marco Child care expenses are normally claimed by the spouse with the lower income. While only Marco's employment income is considered earned income for purposes of determining the allowable child care expenses, his overall income is higher than Valentina's, making her the lower income spouse. However, during the 14 week period when Valentina is attending the human resources course, Marco is eligible to claim some of the child care expenses. The maximum deduction would be calculated as follows: Case A $17,500 $28,000

Actual Payments [($350)(50)] 2/3 of Earned Income* [(2/3)($42,000)] Annual Expense Limit: Case A [(3)($8,000)] $24,000 Case B [(2)($8,000) + (2)($5,000)] Periodic Expense Limit: Case A [(3)($200)(14 weeks)] $ 8,400 Case B {[(2)($200)(14 weeks)] + [(2)($125)(14 weeks)]}

Case B $17,500 $28,000

$26,000

$ 9,100

*Only Marco's employment income is relevant to this calculation. In both Case A and Case B, the Periodic Expense Limit is the least of the four amounts. This provides for a deduction of $8,400 for Case A and $9,100 for Case B. Valentina The calculations for Valentina are as follows: Case A $17,500 $54,000

Actual Payments [($350)(50) 2/3 of Earned Income [(2/3)($81,000)]* Annual Expense Limit: Case A [(3)($8,000)] Case B [(2)($8,000) + (2)($5,000)]

Case B $17,500 $54,000

$24,000 $26,000

*Earned Income is based on gross employment income, before the deduction of the RPP contributions. The lowest amount in both Case A and Case B is the $17,500 of actual child care expenses. Given this, Valentina's deduction is $9,100 ($17,500 - $8,400) in Case A and $8,400 ($17,500 - $9,100) in Case B. Type: ES Topic: Child care expenses - determining the deduction ITA 63

137) Alex Barrett is 68 years old and his wife of many years, Laura Barrett, is 70 years old. They are both retired and they are both in good health. They have no taxable income deductions and their respective incomes for 2022 are as follows: Alex $ 7,700 11,000 52,000 2,000 $72,700

OAS Income CPP Income RPP Income Interest 2022 Net and Taxable Income

Laura $ 7,700 3,000 Nil 500 $11,200

The only tax credits that are available to Alex and Laura are the following: • BPA • spousal • age • pension income Required: Determine the savings in federal income tax that would occur if Alex and Laura made maximum use of pension income splitting. Describe the factors that created the difference in the combined federal income tax payable. Answer: 2022 Federal Income Tax Payable - Without Pension Income Splitting Laura Laura's federal income tax payable would be: Income tax before credits [(15%)($11,200)] BPA [(15%)($14,398) Age - Transferred to Alex Pension - No Qualifying Pension Income 2022 Federal income tax payable - Laura

$1,680 ( 2,160) Nil Nil Nil

Alex Alex's federal income tax payable would be: Tax on first $50,197 Tax on next $22,503 ($72,700 - $50,197) at 20.5% Total before credits Credits: BPA Spousal ($14,398 - $11,200) Age [$7,898 - (15%)($72,700 - $39,826)] Transfer of Age from Laura Pension Total Rate Federal Income Tax Payable OAS Clawback 2021 Federal Income Tax Payable - Alex

$ 7,530 4,613 $12,143 ($14,398) ( 3,198) ( 2,967) ( 7,898) ( 2,000) ($30,461) 15%

( 4,569) $ 7,574 N/A $ 7,574

As Alex's net income of $72,700 is less than the 2022 OAS clawback threshold of $81,761, there is no OAS clawback. 2022 Federal Income Tax Payable - With Pension Income Splitting Revised Taxable Incomes — Neither income from OAS or CPP are eligible for pension income splitting. Given this, only Alex's $52,000 in income from an RPP can be split between the spouses. With this $26,000 [(1/2)($52,000)] reallocation, Alex's net and taxable income will be $46,700 ($72,400 $26,000) and Laura net and taxable income will be $37,200 ($11,200 + $26,000). Laura — With pension income splitting, Laura's 2022 federal income tax payable would be: Federal income tax before credits [(15%)($37,200)] Credits: BPA Age [$7,898 - (15%)($37,200- $39,826) Pension Total Rate Federal Income Tax Payable OAS Clawback 2022 Federal Income Tax Payable - Laura

$5,580 ($14,398) ( 7,898) ( 2,000) ($24,296) 15%

( 3,644) $1,936 N/A $1,936

Alex — With pension income splitting, Alex's 2022 federal income tax payable would be: Federal income tax before credits [(15%)($46,700)] Credits: BPA Spousal ($14,398 - $37,200) Age [$7,898 - (15%)($46,700 - $39,826) Pension Total Rate Federal Income Tax Payable OAS Clawback 2022 Federal Income Tax Payable - Alex

$7,005 ($14,398) N/A ( 6,867) ( 2,000) ($23,265) 15%

( 3,490) $3,515 N/A $3,515

Comparison The results, with and without pension income splitting can be compared as follows: Federal Tax Payable - No Pension Income Splitting Federal Tax Payable - With Pension Income Splitting ($1,936 + $3,515) Savings resulting from Pension Income Splitting

$7,574 ( 5,451) $2,123

Factors Creating Federal Income Tax Payable Difference • Income tax savings since all of Alex's income is now taxed at 15% instead of partial ly taxed at 20.5%. • Income tax savings from an increase in the value of Alex's age credit, while not eroding Laura's age credit. • Income tax savings since Laura can now claim a pension income credit of $2,000. • Increased combined federal income tax payable to a modest degree from the elimination of the small spousal credit. Note that it might be possible to request that Alex's CPP benefits be split, especially as they have been married many years. The portion paid separately to Laura would be included in her income as if it was earned by her. The ability to split CPP is not part of the pension splitting rules of the ITA but is part of the CPP legislation. Type: ES Topic: Pension income splitting - ITA 60.03

138) Felipe and Martina Gomez are both 66 years of age. They are both in good health and have been married for over 30 years. Over the years, Martina has accumulated a portfolio of investments in shares that pay regular dividends. In 2022, the investment paid eligible dividends of $35,000. Her only other income in 2022 was from OAS totaling $7,700. In 2022 Felipe had rental income of $25,000, a withdrawal from his Registered Retirement Income Fund (RRIF) of $84,000 and income from OAS of $7,700. Felipe and Martina are considering splitting Felipe's pension income from the RRIF withdrawal and have come to you for advice. To assist in deciding whether or not the pension income splitting joint election should be made they have asked you to provide information under each of two alternatives: Alternative 1 — No election is made for pension income splitting and Felipe does not apply for OAS since the amounts would be clawed back because of his high level of income. Alternative 2 — A joint election is made to split pension income with $42,000 of the RRIF pension to each spouse. Assume that Felipe had previously applied for OAS and received OAS income of $7,700 in 2022. Neither Felipe or Martina have any taxable income deductions. The couple also has available medical expenses of $18,700 for 2022 that will be claimed by Felipe under each of the two alternatives. Neither Felipe nor Martina are eligible for any personal tax credits other than the: • BPA • age credit • dividend tax credit • pension income credit, and • medical expenses tax credit. Required: A. Calculate the amount of net and taxable income for both Felipe and Martina under each of the two alternatives. B. Based on the amounts determined in Part A, calculate the federal income tax payable or refund for both Felipe and Martina under each of the two alternatives. Provide a comparison of the amounts owing under the two alternatives. C. Comment on the advantage/disadvantage of having the lower income spouse claim the medical expenses in both alternatives.

Answer: Part A - 2022 Net and Taxable Income Felipe's Income Rental Income Pension Income (RRIF Withdrawal) Pension Income Split to Martina OAS Net Income before OAS Clawback OAS Clawback (Notes 1 and 2) 2022 Net and Taxable Income

Alternative 1 $ 25,000 84,000 N/A N/A $109,000 N/A $109,000

Alternative 2 $ 25,000 84,000 ( 42,000) 7,700 $ 74,700 N/A $ 74,700

Martina's Income OAS Eligible Dividends Received Gross Up [(38%)($35,000)] Pension Income from Felipe Net Income before OAS Clawback OAS Clawback (Note 3) 2022 Net and Taxable Income

Alternative 1 $ 7,700 35,000 13,300 N/A $56,000 Nil $56,000

Alternative 2 $ 7,700 35,000 13,300 42,000 $98,000 ( 2,436) $95,564

Note 1 - As Felipe did not apply for OAS in Alternative 1, there can be no clawback. Martina's income is below the 2022 OAS clawback threshold of $81,761 and therefore she is not subject to the clawback. In alternative 1 Felipe could have applied for OAS with the result that only part of the OAS payments would have been clawed back. The clawback would have been the lesser of $7,700 and $4,086 [(15%)($109,000 - $81,761)]. Note 2 - In Alternative 2, Felipe's net income is less than the 2022 OAS clawback income threshold of $81,761 so there is no clawback. Note 3 - With pension income splitting, the 2022 OAS clawback for Martina would be the lesser of $7,700 and $2,436 [(15%)($98,000 - $81,761)]. Part B - Alternative 1 Without pension income splitting, Felipe's 2022 federal income tax payable would have been: Tax on first $100,392 Tax on next $8,608 ($109,000 - $100,392) at 26% Total before Credits Credits: BPA ($14,398) Age [$7,898 - (15%)($109,000 - $39,826)] Pension ( 2,000) Medical Expenses* Total ($32,619) Rate 15% Federal Income Tax Payable OAS Clawback 2022 Federal income tax payable - Felipe

$17,820 2,238 $20,058

Nil ( 16,221) ( 4,893)

$15,165 N/A $15,165

*The credit for medical expenses would be calculated as follows: Total Lesser of:

$18,700

• [(3%)($109,000)] = $3,270 • 2022 Threshold Amount = $2,479 Credit Base

( 2,479) $16,221

Without pension income splitting ,Martina's 2022 federal income tax payable or refund would be: Tax on first $50,197 Tax on next $5,803 ($56,000 - $50,197) at 20.5% Total before Credits Credits: BPA ($14,398) Age [$7,898 - (15%)($56,000 - $39,826)] ( 5,337) Total ($19,735) Rate 15% ( 2,960) Dividend Tax Credit [(6/11)($13,300)] 2022 Federal income tax payable - No Clawback - Martina

$7,530 1,190 $8,720

( 7,255) Nil

Part B - Alternative 2 With pension income splitting and the OAS payments, Felipe's 2022 federal income tax payable or refund would be: Tax on first $50,197 Tax on next $24,503 ($74,700 - $50,197) at 20.5% Tax before Credits Credits: BPA ($14,398) Age [$7,898 - (15%)($74,700 - $39,826)] ( 2,667) Pension ( 2,000) Medical Expenses* ( 16,459) Total ($35,524) Rate 15% ( 5,329) 2022 Federal income tax payable - No Clawback - Felipe

$ 7,530 5,023 $12,553

$ 7,224

*The credit for medical expenses would be calculated as follows: Total Lesser of:

$18,700

• [(3%)($74,700)] = $2,241 • 2022 Threshold Amount = $2,479 Credit Base

( 2,241) $16,459

With pension income splitting , Martina's Amount Owing would be calculated as follows: Tax on first $50,197 Tax on next $45,367 ($95,564 - $50,197) at 20.5% Tax before Credits Credits: BPA ($14,398) Age [$7,898 - (15%)($95,564 - $39,826)] Pension ( 2,000) Total ($16,398) Rate 15% Dividend Tax Credit [(6/11)($13,300)] Federal Tax Payable OAS Clawback 2022 Federal income tax payable - Martina

$ 7,530 9,300 $16,830

Nil

( 2,460)

( 7,255) $ 7,115 2,436 $ 9,551

Part B - Comparison of After Tax Cash This amount would be calculated as follows: Amount Owing - Alternative 1 Amount Owing - Alternative 2 ($7,224 + $9,551) OAS Benefits Received - Alternative 2 Cash Advantage (Disadvantage) - Alternative 2

($16,775) 7,700

$15,165 ( 9,075) $ 6,090

In this situation, pension income splitting has resulted in a significant increase in the couple's combined cash retained. The most important factor in this improvement was the fact that Felipe was able to retain his OAS payments of $7,700. We would note, however, that Alternative 2 may not be the best solution. Finding the optimum solution is not an intuitive process and would require the proper use of income tax software such as Intuit Profile. Part C - Medical Expenses Claimed by lower income spouse Martina is the lower income spouse under Alternative 1. While her low income would result in a larger base for the credit, her claim would be wasted since her other personal tax credits are sufficient to reduce her 2022 federal income tax payable to nil without the use of the medical expense credit. Under Alternative 2, Felipe is the lower income spouse, so there would be no change in the solution. Type: ES Topic: Pension income splitting - ITA 60.03

139) Katrina Watts is 42 years old and has custody of her two children from a previous marriage. The son is 11 years old and the daughter is 9 years old. They are both in good health. She is currently married to very successful electrician who earns an annual income in excess of $300,000. As her children are now in school most of the year, she has decided to pursue a career in environmental design. To this end, she has enrolled, on a full time basis, at the University of Calgary. Her studies began on January 1, 2022. As she was very successful in her first term of studies, she was able to obtain summer employment as an assistant in an environment study in Cold Lake, Alberta. As this location was over 600 kilometres from Calgary, she and her children moved to a rented cottage in Cold Lake for the three month period of June 1, 2022 to September 1, 2022. As this was a temporary move, it was accomplished using a rented van at a total cost of $685. During her summer in Cold Lake, Ms.Watts required someone to take care of her two children while she was at work. For this service, she paid a local retired teacher $125 per week for a period of 12 weeks. She returned to Calgary on September 1, 2022 in order to resume her studies at the University of Calgary. Once again, the move was accomplished using a rented van. The total cost was $826. During the fall term, she found a part time job working in a Calgary architectural firm. On January 1, 2022, Ms. Watts did not have a Tax Free Savings Account (TFSA). In October, 2022, she opened a TFSA and deposited $4,500. Her spouse also made a contribution to her TFSA of $5,000. In 2022, Ms. Watts received the following amounts: Employment income at Cold Lake Employment income in Calgary (Part-time) Scholarship Granted by University for September 2022 Semester Eligible Dividends Child Support Inheritance from Aunt TFSA Withdrawal

9,600 600 4,000 3,500 10,500 30,000 8,000

In November, 2022 Ms.Watts establishes RESPs for each of her two children. She contributes $1,000 to each of the plans. Required: A. Determine Ms. Watts minimum 2022 net income. Provide reasons for omitting any amounts that you have not included as part of the net income calculations. Also, indicate any amounts that can be carried forward to future years. B. Provide any advice that would assist her in future planning with respect to the RESPs that have been established for her children.

Answer: Part A - Net Income The minimum 2022 net income is calculated as follows: Employment from Cold Lake Moving expenses to Cold Lake (Note 1)

$9,600 ( 685)

8,915

Scholarship received Exempt Portion of Scholarship (100%)

$4,000 ( 4,000)

Nil

Child Care Expenses (Note 2)

( 1,500)

Employment income in Calgary Moving expenses to Calgary (Note 1)

$600 ( 600)

Eligible Dividends Gross Up [(38%)($3,500)] Child Support (Note 3) Inheritance (Not income) TFSA Contributions (Note 4) TFSA Withdrawal (Note 4) RESP Contributions (Note 5) 2022 Net Income

Nil 3,500 1,330 Nil Nil Nil Nil Nil $12,245

Note 1 - The cost of the move to Cold Lake is deductible to the extent of the employment earned at Cold Lake given that it is more than 40 km from Calgary. The moving expenses related to the move back to Calgary can be claimed to the extent of her employment income at that location. The remaining $226 ($826 - $600) can be carried forward to apply against any eligible income that is earned in Calgary in years subsequent to 2022. Note 2 - As she is the lower income spouse, Ms. Watts will deduct child care expenses. The deduction is the least of the following amounts: • The amount paid = $1,500 [(12)($125)]. • The annual child care expense amount = $10,000 [(2)($5,000)]. • Two-thirds of earned income = $6,800 [(2/3)($9,600 + $600)]. Note 3 - Child support payments are not deductible to the payor and are not included in the income of the recipient. Note 4 - There are no income tax consequences of making contributions to and withdrawals from TFSAs. In addition the attribution rules do not apply to TFSA contribution made by a spouse or common-law partner to the TFSA of the other spouse or common-law partner. Note 5 - Contributions to RESPs are not deductible.

Part B - Registered Education Savings Plan While contributions to RESPs are not deductible, earnings within the RESP trust accumulate on a tax free basis since an RESP trust is exempt from income tax under Part I. Further, when the earnings are withdrawn for qualifying education they are likely to be included in the income of plan beneficiaries who are in the lowest income tax bracket. This arrangement can involve a considerable savings in income tax. In addition, for contributions of up to $2,500 per year, the federal government will make additional contributions under the Canada Education Savings Grants (CESG) program. These contributions will add a minimum of $500 to the first $2,500 of annual contributions. Note, however, that given her spouse's level of income, the family will not be eligible for the Canada Learning Bonds program which is directed at low income families. Given the potential income tax savings, as well as the federal government contributions under the CESG program, Ms. Watts and her spouse should consider contributing at least $2,500 per year to each of the children's RESPs. Since her children have not had RESPs before, they have CESG contribution room carried forward. Ms. Watts should determine the contribution schedule required to maximize the CESGs for both children so that she can plan to take advantage of the CESG contribution room if there are sufficient funds available. Type: ES Topic: Other income and other deductions including RESP

140) Erik Gladstone owns 10,000 shares of Publix Inc., a Canadian public corporation. The shares were purchased at a cost, including brokerage fees, of $125,000. The current FMV of the shares is $175,000. Erik plans on disposing of the shares. The following four Cases make different assumptions as to the identity of the purchaser or recipient of a gift of the shares, the circumstances of the sale or gift, and the POD. In each Case, assume that the purchaser or recipient of a gift immediately resells the shares for their FMV of $175,000. Case 1 - Erik needs cash to purchase a condominium and he sells the shares to an arm's length person for $175,000. Case 2 - Erik gifts the shares to his 16 year old daughter. She sells the shares and uses the proceeds to finance her continued education abroad. Case 3 - Erik sells the shares to his impoverished sister for $100,000 to create a loss as he has realized significant capital gains in the current year. Since his sister has no income, she will be subject to federal income tax on the taxable capital gain from the resale at the minimum federal income tax rate of 15%. Case 4 - Erik's mother has realized a large amount of capital gains during the current year. To help his mother (and because he could really use the cash), Erik sells the shares to her for $250,000. She plans to use the loss on the immediate resale to offset her capital gains. Required: For each of the four Cases, advise Erik of the income tax consequences to him of the sale of all of the shares and indicate the income tax consequences to the purchaser of the shares when they are resold. In addition, in Cases 3 and 4, indicate whether the stated income tax planning objective was successful. Answer: Case 1 - An arm's length Sale The result for Erik would be as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$175,000 ( 125,000) $ 50,000 1/2 $ 25,000

The income tax consequences to the arm's length purchaser on an immediate resale would be: POD ACB Capital Gain

$175,000 ( 175,000) Nil

Case 2 - Gift to Daughter The result for Erik would be as follows: Deemed POD - ITA 69(1)(b) ACB Capital Gain Inclusion Rate Taxable Capital Gain - Erik

$175,000 ( 125,000) $ 50,000 1/2 $ 25,000

With respect to the subsequent sale by Erik's daughter, the results for her would be as follows: POD ACB (Deemed cost as a result of the gift) Capital Gain - Daughter

$175,000 ( 175,000) Nil

The fact that his daughter is younger than 18 years of age does not alter the result. Case 3 - Non-arm's length Sale to Sister (less than FMV) The income tax consequences to Erik would be as follows: Deemed POD - ITA 69(1)(b) ACB Capital Gain Inclusion Rate Taxable Capital Gain - Erik

$175,000 ( 125,000) $ 50,000 1/2 $ 25,000

With respect to the subsequent sale by Erik's sister, the results for her would be as follows: POD (Actual) ACB - Amount Paid Capital Gain Inclusion Rate Taxable Capital Gain - Sister

$175,000 ( 100,000) $ 75,000 1/2 $ 37,500

With respect to the income tax planning objective of creating a loss, this goal has not been successful because ITA 69(1) adjusted the POD to Erik in an amount equal to the FMV of the shares without adjusting the cost to his sister. The shares have appreciated in value by $50,000 since Erik purchased them but the total gain included in income is $125,000. In effect there has been excessive income tax as a result of the way in which this transaction was structured. Case 4 - Non-arm's length Sale to Mother (greater than FMV) The result for Erik would be as follows: POD (Actual) ACB Capital Gain Inclusion Rate Taxable Capital Gain - Erik

$250,000 ( 125,000) $125,000 1/2 $ 62,500

With respect to the subsequent sale by Erik's mother, the results for her would be: POD (Actual) ACB - ITA 69(1)(a) limited to FMV Capital gain/Loss

$175,000 ( 175,000) Nil

The income tax planning objective was not successful since ITA 69(1) adjusts only the excessive cost of $250,000 of the mother to FMV of $175,000. As a result the $50,000 appreciation in value that would have been included in income in an arm's length transaction set at $175,000 is penalized in such a manner that Erik is deemed to realize a gain of $125,000 and his mother realizes no capital loss. Type: ES Topic: Non-arm's length transactions - ITA 69

141) In 2022, Joey Zieman sells three depreciable properties. In each case, the property sold is the last one in its class. Depreciable Property A - The capital cost of this property is $123,400 and, at January 1, 2022, the UCC is $87,323. The property is sold to Joey's father for its FMV of $53,200. Depreciable Property B - The capital cost of this property is $87,600 and, at January 1, 2022, the UCC is $62,246. The property is sold to Joey's mother for its FMV of $92,500. Depreciable Property C - The capital cost of this property is $163,400 and, at January 1, 2022, the UCC is $93,472. The property is sold to Joey's sister for its FMV of $110,000. Required: For each of the three properties, determine the income tax consequences of a sale by Joey to his family members. In addition, identify the income tax characteristics of each property to the family members (e.g. capital cost, UCC and deemed CCA if any). Answer: Depreciable Property A Note To Instructor: The terminal loss on depreciable property A would be disallowed under ITA 13(21.2). This provision is discussed in Chapter 16, Rollovers Under Section 85. At this point in the textbook, a student should not be expected to be aware of the disallowed terminal loss. The results of the non-arm's length disposition for Joey can be calculated as follows: UCC Deduct lesser of: POD = $53,200 Capital Cost = $123,400 Positive UCC Balance No property = Terminal Loss

$87,323

( 53,200) $34,123

As there is a positive balance in the UCC class and no property remaining in the class, the $34,123 is a terminal loss that is subtracted in the determination of either 2022 business or 2022 property income depending upon the source of income to which it relates. In this case, because it is a non-arm's length transaction and the FMV of the property is less than its capital cost, ITA 13(7)(e) deems the purchaser's capital cost to be equal to the seller's capital cost of $123,400. This capital cost will be used for purposes of determining any subsequent recapture on a future disposition. For Joey's father, the UCC balance will equal the sale price of $53,200 with the $70,200 ($123,400 - $53,200) difference between his deemed capital cost and the transfer price of $53,200 considered to be deemed CCA.

Depreciable Property B The results of the non-arm's length disposition for Joey can be calculated as follows: UCC Deduct lesser of: POD = $92,500 Capital Cost = $87,600 Negative UCC Balance = Recapture

$62,246

( 87,600) ($25,354)

POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$92,500 ( 87,600) $ 4,900 1/2 $ 2,450

Joey's 2022 net income will increase by $27,804 ($25,354 + $2,450). For his mother, her ACB will be the transfer price of $92,500. However, because it is a non-arm's length transaction and the FMV of the property of $92,500 exceeded its original capital cost of $87,600, ITA 13(7)(e) will limit the capital cost for CCA and recapture purposes to: [$87,600 + (1/2)($92,500 - $87,600)] = $90,050 Depreciable Property C The results of the non-arm's length disposition for Joey can be calculated as follows: UCC Deduct lesser of: POD = $110,000 Capital Cost = $163,400 Negative UCC Balance = Recapture

$93,472

( 110,000) ($ 16,528)

Joey's 2022 net income will increase by $16,528. In this case, because it is a non-arm's length transaction and the FMV of the property is less than its capital cost, ITA 13(7)(e) deems the purchaser's capital cost to be $163,400 which is equal to the seller's capital cost. This capital cost will be used for purposes of determining any subsequent recapture. The $53,400 ($163,400 - $110,000) difference between the deemed capital cost and the transfer price will be considered deemed CCA. The resulting UCC balance of $110,000 will be used by Joey's sister for purposes of calculating future CCA. Type: ES Topic: Non-arm's length disposition of depreciable property

142) Kacy Conner is 67 years old and has been married to Jason Conner for over 30 years. They have one son, Karson who is a very successful organic farmer. On January 1, 2022, Kacy owns the following properties: Farm Land — Kacy owns farm land with a cost of $340,000 and a current FMV of $525,000. The land is farmed by Kacy's son Karson. Conner Ltd. — Conner Ltd. is a Canadian controlled private company (CCPC). Kacy started this Company several years ago with an investment of $210,000. She owns all of the voting shares. The FMV of these shares are $450,000. Any capital gains on the shares would not be eligible for the capital gains deduction. Sololex Inc. — Kacy owns 4,000 shares of Sololex Inc., a Canadian public company. These shares were purchased for $8.00 each and are currently trading at $8.50 each. Rental Property — Kacy owns a rental property that was purchased for $850,000 with $150,000 paid for the land and $700,000 for the building. The rental property has been appraised at a FMV of $975,000, with $175,000 attributable to the land and $800,000 to the building. The UCC of the building is $632,218. Required: Assuming that no special elections are filed and that the normal disposition rules apply, explain the income tax consequences to Kacy or her estate in each of the following three Cases: A. Kacy dies on January 4, 2022, leaving all of her property to her adult son Karson. B. Kacy dies on January 4, 2022, leaving all of her property to her spouse Jason. C. Kacy severs her Canadian residency and emigrates from Canada on January 4, 2022. Answer: Case A - Non-arm's length disposition to Adult Child With the exception of the farm property, the transfers to Karson would be treated as deemed dispositions at FMV. There is, however, a rollover provision for the transfer of a farm property to a child. The income tax consequences of these transfers to Kacy would be as follows: Farm Land — In the case of farm land that is being used by the individual taxpayer or a member of their family, ITA 70(9.01) permits a income tax free disposition to a child. The deemed POD would be equal to Kacy's ACB of $340,000, resulting in no income tax consequences to the estate. Karson, would be deemed to have purchased the land for the same $340,000. Shares — For both the shares of Conner Ltd. and Sololex Inc., there would again be a deemed disposition at FMV. The income tax consequences to Kacy would be as follows:

Deemed POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Conner Ltd. $450,000 ( 210,000) $240,000 1/2 $120,000

Sololex Inc. $34,000 ( 32,000) $ 2,000 1/2 $ 1,000

Rental Property — The rental property would be deemed to be disposed of at FMV resulting in the following income tax consequences to Kacy: UCC Deduct Disposition - lesser of: • Capital Cost = $700,000 • Deemed POD = $800,000 Negative Closing UCC = Recapture

$632,218

( 700,000) ($ 67,782) Land $175,000 ( 150,000) $ 25,000 1/2 $ 12,500

Deemed POD ACBV Capital Gain Inclusion Rate Taxable Capital Gain

Building $800,000 ( 700,000) $100,000 1/2 $ 50,000

In this case the total amount to be added to Kacy's 2022 income would be $251,282 ($120,000 + $1,000 + $67,782 + $12,500 + $50,000). Case B - Non-arm's length disposition to Spouse While the transfers to Jason would be considered deemed dispositions immediately prior to death, ITA 70(6) provides that the deemed POD will be equal to the ACB of non-depreciable capital property and the UCC of depreciable property. This means that there would be no immediate income tax consequences associated with the transfers to Kacy's spouse Jason. Note, however, that on a subsequent disposition by Jason, the tax attributes of the inherited properties would be the same as those of Kacy at the time of her death. Case C - Emigration from Canada With respect to the emigration from Canada, ITA 128.1(4)(b) indicates that when a taxpayer ceases to be a resident of Canada, they are deemed to have disposed of all of their property except real property, property of a business carried on in Canada by an individual, and excluded personal property [a variety of items specified in ITA 128.1(9)]. This means that, of the property owned by Kacy, the rental property and the farm land (real property) would be exempt. Given this, there would be a deemed disposition of both the Conner Ltd. shares and the Sololex Inc. shares for POD equal to their FMV at the time that residency was severed (e.g. at emigration). The results would be as follows: Conner Ltd. $450,000 ( 210,000) $240,000 1/2 $120,000

Deemed POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Sololex Inc. $34,000 ( 32,000) $ 2,000 1/2 $ 1,000

The total increase in Kacy's 2022 net income would be $121,000 ($120,000 + $1,000). Type: ES Topic: Death - deemed dispositions and emigration

143) Mr. Cheever is 66 years of age and his spouse, Doreen, is 56. They have one daughter, Mary, who is 32 years of age. On July 1 of the current year, Mr. Cheever owns the following properties: Rental Property — Mr. Cheever owns a rental property that was purchased for $550,000 ($100,000 of this amount represents the estimated value of the Land on which the building is situated and $450,000 is for the building). On July 1 of the current year, its UCC is $270,000 and the FMV is $970,000 (the estimated value of the land is unchanged at $100,000 and the building valued at $870,000). Brazeway Dynamics — Mr. Cheever owns 2,500 shares of Brazeway Dynamics, a Canadian public company. These shares have a cost of $275,000 and a current FMV of $425,000. Mr. Cheever has never owned more than a fraction of the outstanding shares of the Company. Farm Land — Mr. Cheever owns farm land with a cost of $525,000 and a current FMV of $750,000. The land is farmed on a full time basis by Mr. Cheever's daughter, Mary. Cheever Inc. — Mr. Cheever owns all of the voting shares of Cheever Inc., a Canadian controlled private corporation (CCPC). The Company was established with an investment of $155,000 and the current FMV is $227,000. Any capital gain on the disposition of the Cheever Inc. shares would not be eligible for the capital gains deduction. Required: Assuming that no special elections are filed and that the normal disposition rules apply, explain the income tax consequences to Mr. Cheever for the current year, in each of the following Cases: A. Mr. Cheever dies on July 1 of the current year, leaving all of his property to his spouse, Doreen. B. Mr. Cheever dies on July 1 of the current year, leaving all of his property to his daughter, Mary. C. Mr. Cheever severs his Canadian residency and emigrates from Canada on July 1 of the current year. Answer: Case A - Non-arm's length disposition to Spouse When an individual dies, there is a deemed disposition of all of their property immediately prior to the time of death. If the deemed disposition is to a spouse, the deemed POD is set at the ACB of nondepreciable capital property and at the proportional UCC of depreciable property. This would mean that there would be no immediate income tax consequences associated with Mr. Cheever's death in this Case, since all of the property is transferred to the spouse. Note, however, that on a subsequent disposition by Doreen, the tax attributes of the inherited properties would be the same as those of Mr. Cheever at the time of his death. Case B - Non-arm's length disposition to Adult Child This Case is more complex and would follow the general rules of deemed dispositions that would apply to transfers made at death to anyone other than a spouse or common-law partner. Such transfers, unless they involve farm property, will be deemed to have been disposed of for POD equal to the FMV at the time of death. Farm Land — In the case of farm land that is being used by the individual or a member of their family, ITA 70(9.01) permits a a disposition on a rollover basis of such property to a child. The deemed POD would be set at the ACB to Mr. Cheever at the time of his death, resulting in no income tax consequences. Mr. Cheever's daughter, Mary, would be considered to have purchased the land for an amount equal to the same ACB to Mr. Cheever.

Rental Property — In the case of the rental property, the income tax consequences to Mr. Cheever would be as follows: Land $100,000 ( 100,000) Nil N/A Nil

Deemed POD ACB Capital Gain Inclusion Rate Taxable Capital Gain UCC Deduct Disposition - lesser of: • Capital Cost = $450,000 • Deemed POD= $870,000 Negative UCC Balance = Recapture

Building $870,000 ( 450,000) $420,000 1/2 $210,000 $270,000

( 450,000) ($180,000)

Shares - In the case of the Brazeway Dynamics shares and the shares of Cheever Inc., the deemed POD would equal the FMV at the time of death and the income tax consequences to Mr. Cheever would be:

Deemed POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Brazeway Dynamics $425,000 ( 275,000) $150,000 1/2 $ 75,000

Cheever Inc. $227,000 ( 155,000) $ 72,000 1/2 $ 36,000

Mr. Cheever's net income will increase by $501,000 ($210,000 + $180,000 + $75,000 + $36,000). Case C - Emigration from Canada With respect to the emigration from Canada in which residency is severed, ITA 128.1(4)(b) indicates that an individual is deemed to have disposed of all property except real property, property of a business carried on in Canada, and excluded personal property [a variety of items specified in ITA 128.1(9)]. As the farm land and the rental property are real property, there would be no deemed disposition of these properties. There would, however, be a deemed disposition of both the Brazeway Dynamics shares and the Cheever Inc. shares. The results would be as follows:

Deemed POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Brazeway Dynamics $425,000 ( 275,000) $150,000 1/2 $ 75,000

Cheever Inc. $227,000 ( 155,000) $ 72,000 1/2 $ 36,000

The result is an increase in net income of $111,000 ($75,000 + 36,000). Type: ES Topic: Death - deemed dispositions and emigration

144) Valerie Nixon is a partner in a national CPA firm. Her annual income normally exceeds $350,000. She is married to Betty Blake. Valerie and Betty have two adopted children. Their son, Richard is 14 years old while their daughter, Patricia is 19 years old. To this point in time, Valerie has not gifted or sold property to any of the members of her immediate family. With her high level of income, Valerie has accumulated a significant amount of investments. Her current portfolio includes the following: • Shares in a Canadian controlled private company (CCPC), Nixon Distributors. Valerie incorporated the company many years ago capitalizing it with an equity investment of $823,000 in which she received all of the voting shares. Valerie is the sole shareholder. It is estimated that the shares are currently worth $1,800,000. Any capital gain on a disposition of these shares would not be eligible for the capital gains deduction. • Shares of Royal Bank. The 15,000 shares that she owns have a FMV of $1,230,000 and an ACB of $1,050,000. • As she grew up in rural Ontario, Valerie has always had a love of farming. This is reflected in ownership of Farm Land that she purchased several years ago for $650,000. The current FMV of this land is $960,000. Betty operates the farm on a full time basis to grow organic vegetables. • A 10 unit residential Rental Property that she purchased for $1,300,000. At the time of the purchase, the value of the land was estimated to be $400,000 and the building $900,000. At January 1 of the current year, the UCC of the property was $749,124. A recent appraisal indicates that the FMV of the land has increased to $600,000 and the building to $1,300,000. Valerie has been diagnosed with an incurable disease, with her doctor indicating that she has less than two years to live. Given this, she would like to begin gifting her properties to Betty, Richard, and Patricia. In the case of gifts to Betty, she will not opt out of the spousal rollover of ITA 73(1). Assume that the recipient of the gift sells the property prior to Valerie's death. Required: Valerie will gift the investments to her immediate family members. Determine the income tax consequences to Valerie if all of the properties are gifted to each family member at the exclusion of other family members. Your answer should include the different results related to the three possible gift recipients. 1. The income tax consequences to Valerie at the time of the gift. 2. The tax cost of the properties to the recipient of the gift. 3. The tax treatment of any income on the property subsequent to the gift and before the property is sold. 4. The income tax consequences that would result from a subsequent sale of the gifted property, (prior to Valerie's death), at a price that is $100,000 more than the FMV at the time of the gift. In the case of the rental property, assume that the extra $100,000 is allocated to the building, with no change in the value of the land. Also in the case of the rental property, assume that the recipient of the gift does not claim any CCA prior to a sale.

Answer: Part 1 - Income Tax Consequences to Valerie of gifting the properties The income tax consequences associated with gifting each property would be as follows: Nixon Distributors Shares — If this property is gifted to Betty and Valerie does not elect out of ITA 73(1), there would be no income tax consequences at the time of the gift since the POD to Valerie and the cost to Betty will equal the tax cost of property gifted resulting in no immediate income tax consequences. If this property is gifted to either of her children, there would be a taxable capital gain calculated as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,800,000 ( 823,000) $ 977,000 1/2 $ 488,500

Royal Bank Shares — If these shares are gifted to Betty and Valerie does not elect out of ITA 73(1), the results are the same as those for the Nixon Distributors shares. If this property is gifted to either of her children, there would be a taxable capital gain calculated as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,230,000 ( 1,050,000) $ 180,000 1/2 $ 90,000

Farm Land — If this property is gifted to Betty and Valerie does not elect out of ITA 73(1), the results will be the same as the Nixon Distributors shares. In addition, ITA 73(3) permits the transfer of farm property used by the individual or her family to be transferred to a child on a rollover basis. This means that would be no immediate income tax consequences for Valerie at the time of the gift to either child. Rental Property — If this property is gifted to Betty and Valerie does not elect out of ITA 73(1), there would be no immediate income tax consequences at the time of the gift. The results are the same as those for the Nixon Distributors shares.

If this property is gifted to either of her children, there would be a disposition at FMV resulting in the following income tax consequences to Valerie: Land $600,000 ( 400,000) $200,000 1/2 $100,000

POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Building $1,300,000 ( 900,000) $ 400,000 1/2 $ 200,000

Capital Cost of Building UCC Recapture

$900,000 ( 749,124) $150,876

Part 2 - Tax Cost of gifted property to the Recipient The tax costs for each property would be as follows: Nixon Distributors Shares — As Valerie did not elect out of ITA 73(1), the tax cost of these shares to Betty would be Valerie's tax cost (ACB) of $823,000. For either child, the tax cost (ACB) would be the $1,800,000 FMV at the time of the gift. Royal Bank Shares — As Valerie did not elect out of ITA 73(1), the tax cost of these shares to Betty would be Valerie's tax cost (ACB) of $1,050,000. For either child, the tax cost (ACB) would be the $1,230,000 FMV at the time of the gift. Farm Land — With the use of ITA 73(1) and ITA 73(3), no gain would be recognized if the land was gifted to any of the three possible recipients. As a result each recipient's tax cost (ACB) would be equal to Valerie's ACB of $650,000. Rental Property — As Valerie did not elect out of ITA 73(1), the tax costs to Betty would be Valerie's tax costs. This means $400,000 ACB for the land and $900,000 ACB for the building. The building's UCC for Betty is equal to Valerie's UCC of $749,124. For either child, the ACB of the land would be $600,000 and the capital cost of the building would be $1,300,000. However, for CCA purposes, ITA 13(7)(e) would limit the UCC to $1,100,000, calculated as follows: Valerie's capital cost of the Building FMV when gifted Valerie's capital cost Excess Fraction Deemed Capital Cost for CCA purposes

$1,300,000 ( 900,000) $ 400,000 1/2

$ 900,000

200,000 $1,100,000

Part 3 - Income earned subsequent to the Gift The required information for each property would be as follows: Nixon Distributors Shares — If the shares are gifted to Betty, any dividend income she receives would be attributed to Valerie and not included in her income. This would also be the situation if she gifts the shares to her 14 year old son, Richard. However, as her daughter Patricia is over 18, income would not be attributed to her if she is the recipient of the shares. Depending on the circumstances the TOSI may apply to dividends received by the adult child. Royal Bank Shares — The results are identical to the results of the Nixon Distributor shares with the exception that the TOSI would not apply to a gift of these shares to the adult child. Farm Land — Farm income is generally considered business income rather than property income. As there is no attribution of business income, any farm income that is earned subsequent to the gift will not be attributed to Valerie nor will the TOSI rules apply. Rental Property — If the gift is to either Betty or Richard, any rental income earned subsequent to the gift will be attributed back to Valerie. If the gift is to her 19 year old daughter Patricia, any rental income earned subsequent to the gift would not be attributed back to Valerie nor would the TOSI rules apply. Part 4 - Income Tax Consequences of a Subsequent Sale by the recipient The required income tax consequences are determined as follows: Nixon Distributors Shares — If Betty is the recipient of the gift, the ACB of the shares would be $823,000. Based on this, the subsequent sale would have the following income tax consequence: POD ($1,800,000 + $100,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,900,000 ( 823,000) $1,077,000 1/2 $ 538,500

This gain would be attributed back to Valerie. If either child is the recipient of the gift, their ACB would be $1,800,000. Based on this, the subsequent sale would have the following income tax consequences: POD ($1,800,000 + $100,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,900,000 ( 1,800,000) $ 100,000 1/2 $ 50,000

This gain would be included in the income of the recipient child and would not be attributed back to Valerie.

Royal Bank Shares — If Betty is the recipient of the gift, the ACB of the shares would be $1,050,000. Based on this, the subsequent sale would have the following income tax consequence: POD ($1,230,000 + $100,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,330,000 ( 1,050,000) $ 280,000 1/2 $ 140,000

This gain would be attributed back to Valerie. If either child is the recipient of the gift, their ACB would be $1,230,000. Based on this, the subsequent sale would have the following tax consequence: POD ($1,230,000 + $100,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,330,000 ( 1,230,000) $ 100,000 1/2 $ 50,000

This gain would be included in the income of the recipient child and would not be attributed back to Valerie. Farm Land — The ACB for each of the 3 potential recipients would be $650,000. Based on this, the sale of the farm land would result in a taxable capital gain calculated as follows: POD ($960,000 + $100,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,060,000 ( 650,000) $ 410,000 1/2 $ 205,000

If the gift was to Valerie's 19 year old daughter Patricia, the gain would be included in her income and not attributed to Valerie. Alternatively, if the gift was to either Betty or Richard, the gain would be attributed back to Valerie. While there is usually no attribution of capital gains related to transfers to minors, there is an exception to this when farm property is transferred on a rollover basis.

Rental Property — If Betty is the recipient of the gift, the ACB for the land would be $400,000, the capital cost and ACB of the building would be $900,000, deemed CCA would be $150,876 and UCC would be $749,124. Based on this, the sale would have the following income tax consequences: Land $600,000

POD ($1,300,000 + $100,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

( 400,000) $200,000 1/2 $100,000

Building $1,400,000 ( 900,000) $ 500,000 1/2 $ 250,000

Capital Cost of Building UCC Recapture

$900,000 ( 749,124) $150,876

Both the taxable capital gain and the recapture would be attributed to Valerie. The capital cost for either child for capital gains purposes would be $600,000 for the land and $1,300,000 for the building. Based on this, there would be no taxable capital gain on the sale of the land. However, there would be a taxable capital gain on the building as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$1,400,000 ( 1,300,000) $ 100,000 1/2 $ 50,000

The taxable capital gain would be included in the income of the gift recipient child. It would not be attributed to Valerie. While the capital cost for determining capital gains is $1,300,000, for recapture and CCA purposes, the building’s capital cost would be limited to $1,100,000. (See Part 2 of this solution.) Given this, there would be recapture determined as follows: UCC Lesser of: POD = $1,400,000 Capital Cost = $1,300,000 Recapture

$1,100,000

( 1,300,000) ($ 200,000)

If the gift was to Valerie's 19 year old daughter Patricia, the recapture would be included in her income and not attributed to Valerie. Alternatively, if the gift was to Richard, the recapture would be attributed to Valerie. Type: ES Topic: Non-arm's length gifts and income attribution

145) For several years, Ms. Tiffani Langston has owned 21,000 shares of Modal Inc., a Canadian public company. These shares were acquired at a cost of $10 each. On January 12, 2022, Tiffani gifts 7,000 of these shares to her spouse Hugh Langston. She does not opt out of the spousal rollover of ITA 73(1). On the same date, Tiffani gifts the remaining 14,000 shares to her 9 year old son, Mark. On this date, the shares are trading at $11 each. On August 2, 2022, the shares pay an eligible dividend of $0.50 per share. On December 15, 2022, both her spouse, Hugh and her son,Mark sell all of their shares for $13 each. Required: (1) Determine the impact on the 2022 net income for Tiffani, her spouse Hugh, and her son Mark, as a result of the share transactions. (2) Assume Tiffani dies on November 11, 2022. Would your answer change as a result? Answer: Tiffani At the time of the gift As Tiffani did not opt out of the ITA 73(1) spousal rollover, there will be no recognition of any capital gain or capital loss as a result of the gift to her spouse Hugh since the POD and ACB will be the same. However, there is no rollover for the transfer of public company shares to an individual who is not a spouse or common-law partner. This means there will be a taxable capital gain on the gift of 14,000 shares to her son as follows: Deemed POD [($11)(14,000)] ACB [($10)(14,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$154,000 ( 140,000) $ 14,000 1/2 $ 7,000

Dividends As all of the shares were gifted to a spouse and a related minor, all of the dividend income would be attributed to Tiffani increasing her 2022 net income by $14,490 [(21,000)(138%)($0.50)]. Subsequent Sale of Shares As there is no attribution of capital gains when shares are disposed of to a related minor, the sale of shares by Tiffani's son would have no effect on her 2022 net income. However, the capital gain on the sale of shares by her spouse would be attributed to her. The amount is calculated as follows: POD [($13)(7,000)] AACB [($10)(7,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$91,000 ( 70,000) $21,000 1/2 $10,500

Hugh (Spouse) None of these transactions would have any effect on Hugh's 2022 net income since all amounts are included in Tiffani's income and excluded from his net income. Mark (minor child) When Mark sells the shares, he will have a taxable capital gain calculated as follows: POD [($13)(14,000)] ACB [($11)(14,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$182,000 ( 154,000) $ 28,000 1/2 $ 14,000

If Tiffani Dies Since Tiffani dies after the dividends are paid, but before Hugh sells the shares, the dividends will still be attributed back to Tiffani, but the taxable capital gain on the sale of Hugh's shares of $10,500 will be included in Hugh's 2022 net income. The taxable capital gain on the sale of Mark's shares is already being included in Mark's income, so there would be no change in income tax consequences for Mark if Tiffani were to die. Type: ES Topic: Attribution rules - the attribution of income

146) On January 1, 2022, Ms. Fawn Halpern owned 9,500 shares of Zunit Inc., a Canadian public company. These shares were purchased several years ago at a cost of $23.50 per share, a total investment of $223,250. The following transactions took place in 2022: • On February 1, she gifts 3,500 of the shares to her common-law partner Melvin Young. The shares are trading at $25.00 per share at that time. Fawn does not opt out of the spousal/common-law partner rollover of ITA 73(1). • On March 1, she gifts the remaining 6,000 shares to her 15 year old daughter Clare. The FMV of the shares have declined to $22.50 at that time. • On July 1 and September 1, the Zunit Inc. shares pay an eligible dividend of $0.80 per share. • On December 1, both Melvin and Clare sell all of their shares for $26.25 each. Required: A. Determine the impact on the 2022 net income for each of Fawn, her common-law partner Melvin, and her daughter Clare, as a result of the preceding share transactions. B. How would your answer change if Fawn died on July 15, 2022? Answer: Part A - Fawn February 1, 2022 As Fawn did not opt out of the ITA 73(1) rollover, there will be no immediate income tax consequences as a result of disposing of the 3,500 shares by way of a gift to her common-law partner Melvin (e.g.the POD and ACB would both be the same). March 1, 2022 There is no rollover provision for the disposition of publicly traded shares by way of a gift to a related minor. ITA 69(1) treats a gift as a disposition at FMV with the following results to her daughter Clare: Deemed POD [(6,000)($22.50)] Deemed ACB [(6,000)($23.50)] Capital Gain Inclusion Rate Allowable Capital Loss

$135,000 ( 141,000) ($ 6,000) 1/2 ($ 3,000)

July 1 and September 1, 2022 All of the dividends, both those received by Melvin and those received by Clare, would be attributed to Fawn. The result would be an increase in her 2022 net income of $20,976 [(138%)(2)($0.80)(3,500 + 6,000 Shares)].

December 1, 2022 There would be no attribution of the capital gain on the shares sold by Fawn's daughter Clare. However, the capital gain on the disposition of Melvin's shares would have to be included in Fawn's income. The amount would be calculated as follows: POD [(3,500)($26.25)] ACB - Clare's Original [(3,500)($23.50)] Capital Gain Inclusion Rate Taxable Capital Gain

$91,875 ( 82,250) $ 9,625 1/2 $ 4,813

Fawn's Additional 2022 net income The total addition to Fawn's 2022 net income would be: Taxable Dividends $20,976 Taxable Capital Gain 4,813 Allowable Capital Loss* ( 3,000) Total $22,789 *The allowable capital loss can be claimed as it is less than the taxable capital gain. Part A - Melvin (Common-law partner) None of the transactions affect Melvin's 2022 net income. All the dividends that he received, as well as the December 1 capital gain, were all included in Fawn's 2022 net income. Part A - Clare (Minor Child) While the dividends that were received by Clare were attributed to Fawn, this would not be the case with the December 1 taxable capital gain which would increase Clare's 2022 net income as follows: POD [(6,000)($26.25)] ACB [(6,000)($22.50)] Capital Gain Inclusion Rate Taxable Capital Gain

$157,500 ( 135,000) $ 22,500 1/2 $ 11,250

Part B Income attribution ceases on the death of the transferor. As the July 1 dividends were paid prior to Fawn's death on July 15, 2022, they would be attributed to her and included in her final income tax return. However, the September 1 dividends and the sale of the shares occurred after her death. As a result, this income would not be attributed to her. Fawn If Fawn died on July 15, 2022, the only addition to Fawn's 2022 net income would be $10,488 [(138%)(1)($0.80)(3,500 + 6,000 Shares)] due to the attribution of the July 1 dividend.

Melvin (Common-law partner) The $4,813 taxable capital gain on Melvin's shares would not be attributed to Fawn, but would be included in Melvin's 2022 net income. Similarly, his September 1 taxable dividends of $3,864 [(138%)(1)($0.80)(3,500)] would be also be included in his 2022 net income. The total increase in 2022 net income would therefore be $8,677. Clare (Minor Child) Clare's September 1 taxable dividends of $6,624 [(138%)(1)($0.80)(6,000)] would not be attributed to Fawn, but would be included in Clare's 2022 net income. Type: ES Topic: Attribution rules - the attribution of income

147) Ms. Peta Jansan is 37 years old and divorced from her former spouse. She has two children from the marriage, Lotte, aged 5 and Bram, aged 9. Neither of these children have any income in 2022. The divorce agreement, which was issued in 2020, requires her former spouse to pay $3,000 per month in child support and an additional $1,000 per month in spousal support. While all of the payments for previous years have been made, in 2022, her former spouse has experienced financial difficulties and has paid only $40,000 of the required amounts of $48,000. Ms. Jansan also provides care for her 85 year old grandfather who lives with her and her children. While her grandfather is not mentally or physically infirm, his 2022 net income is only $7,950 which makes him partly dependant on Ms. Jansan. Ms. Jansan is employed by Dutch Foods Ltd., a large public company. In 2022, she has a annual base salary of $75,000. In 2021, she was awarded a bonus of $19,500, all of which was paid in January of 2022. The corporate employer provides her with an automobile which the company leases for $560 a month. Ms. Jansan is required to pay all of the operating and maintenance costs of the automobile. In 2022, these costs totaled $6,300. The automobile was available for her use for 11 months during 2022 and was driven a total of 43,360 kilometers, 35,120 of which were driven for employment use and 8,240 for personal use. Her employer made the following payroll withholdings in 2022: RPP Contributions EI Premiums CPP Contributions Life Insurance Premium

$3,400 953 3,500 250

Her employer pays her Alberta provincial health care premium of $582 ($44 monthly). In 2022, Ms. Jansan is transferred by Dutch Foods Ltd. from their Edmonton office to their Calgary office. The Company has agreed to fully compensate her for any loss on the sale of her Edmonton house, but will not compensate her for the legal fees associated with the sale. In addition the employer will provide her with a one time payment of $15,000 when she purchases a home in Calgary to compensate her for the higher cost of housing in Calgary. Dutch Foods Ltd. is also providing her with a $200,000 interest free housing loan to help finance her new house in Calgary. This loan is received on April 1, 2022 and must be repaid in full on March 31, 2027. In addition to these other amounts, the employer also provides a $10,000 allowance to cover any additional moving expenses. On January 3, 2022, Ms. Jansan flies to Calgary at a cost of $325 on a house hunting trip. During the three days that she is in Calgary, her food and lodging costs total $575. Both the air fare and the food and lodging costs are reimbursed by Dutch Foods Ltd. After considering the properties that she has seen, she makes an offer on a property on January 10, 2022. The offer is accepted that same day. Later that month she sells her Edmonton home which she purchased for $265,000 in 2020. The house is sold for $257,800. While Ms. Jansan managed to sell the house without using a real estate agent, legal fees associated with the sale total $950.

Ms. Jansan and her family leave Edmonton on March 15 and arrive in Calgary that same day. She uses the employer provided automobile. This milage is included in the 43,360 kilometer total and is viewed as being employment related. As the family brought a picnic lunch for the trip, she ignores food costs for the day. Unfortunately, her new Calgary home is not available until April 3 and, as a consequence, she, her children and her grandfather stay in a Calgary suite hotel from March 15 through April 3 (19 days). The rate for a two room suite is $325 per day, but Ms. Jansan has a discount voucher that provides her with a daily rate of $200 per day for a one week period (7 nights). Assume that the 2022 allowable daily rate for meals is $69 a person. The cost for moving her household effects and leaving them in storage until her Calgary home was ready totaled $3,640. Her legal fees associated with purchasing the Calgary home are $600. Ms. Jansan has belonged to her employer’s stock purchase plan since 2020. In that year she purchased 360 shares at $5.00 each. In 2021, she acquired an additional 500 shares at $5.25 each. On February 1, 2022, she acquired 400 more shares at $6.00 each. On July 1, 2022, her shares paid an eligible dividend of $0.30 per share. In order to help finance some of the costs of the move, she sold 900 of these shares in December of 2022 for $6.10 per share. On January 1, 2022, Ms. Jansan purchases an annuity for $28,733. The annuity was purchased with aftertax funds outside of a tax deferred income plan and will provide a payment of $5,000 at the end of each year for eight years. Given its price, the effective yield on the annuity is 8%. In 2022, Ms. Jansan contributes $6,000 to her TFSA and $5,500 to a TFSA that she opens for her grandfather. Before moving to Calgary, child care expenses in Edmonton were $200 per week for 11 weeks. In Calgary, the weekly cost increased to $250 per week and was paid for a total of 36 weeks. In the summer, both children spent four weeks at an exclusive summer camp. The weekly fees at this camp were $500 for each child. The 2022 medical expenses for Ms. Jansan and her dependants, which were all paid for by Ms. Jansan, are as follows: Ms. Jansan Lotte Bram Grandfather Total Medical Expenses

$ 465 493 245 12,473 $13,676

Assume a prescribed rate of 2% applied throughout 2022 on employee loans. Required: Calculate Ms. Jansan's: • minimum 2022 net income, • minimum 2022 taxable income, and • minimum 2022 federal income tax payable. Ignore GST/HST & PST considerations, as well as any amounts of income tax that would have been withheld by Ms. Jansan's employer. Answer: 2022 Employment Income Ms. Jansan's 2022 employment income would be calculated as follows: Base Salary Bonus (Received in 2022) Standby Charge on Automobile (Note 1) Automobile Operating expenses (Note 2) RPP Contributions Provincial Health Care Premium [(12)($44)] Life Insurance Premiums (Note 3) Housing Compensation (Note 4) Housing Loan Benefit [(2%)($200,000)(9/12)] Moving Allowance (Note 5) 2022 Employment Income

$ 75,000 19,500 1,845 ( 5,103) ( 3,400) 528 Nil 15,000 3,000 10,000 $116,370

Note 1 - The reduced standby charge would be calculated as follows: [(2/3)($560)(11)][8,240 ÷ 18,337] = $1,845 Note 2 - As Ms. Jansan pays her own operating expenses, she can deduct the portion that relates to employment use. This amount would be $5,103 [($6,300)(35,120 ÷ 43,360)]. Note that since the employer does not pay any part of the automobile operating expenses that would relate to the personal use of the automobile there is no operating cost benefit. Note 3 - An employee's payments for life insurance premiums are not deductible. Note that if the employer had made a contribution towards Peta's life insurance, the amount paid by the employer would have been a taxable benefit. Note 4 - As Ms. Jansan is being relocated, the loss on her Edmonton home is an ITA 6(22) eligible housing loss. Under ITA 6(20), only one-half of amounts in excess of $15,000 of such compensation have to be included in income. As the compensation here was only $7,200 ($257,800 - $265,000), none of this amount is included in her employment income. However, there is no similar provision which allows tax free treatment of amounts paid for higher costs in the new location. As a consequence, the full $15,000 of the compensation for higher housing costs in Calgary would have to be included in employment income. This is further supported by ITA 6(23).

Note 5 - As the moving allowance is general in nature, it will have to be included in income. 2022 Property Income Ms. Jansan's only property income would be the dividends on the Dutch Foods Ltd. shares. Dividends Received [(1,260)($0.30)] Gross Up [($378)(38%)] 2022 Taxable Dividends

$378 144 $522

2022 Taxable Capital Gain Ms. Jansan's only capital gain would be on the sale of the Dutch Foods Ltd. shares. It would be calculated as follows: POD [(900)($6.10)] ACB (Note 6) Capital Gain Inclusion Rate 2022 Taxable Capital Gain

$5,490 ( 4,878) $ 612 1/2 $ 306

Note 6 - The average per share cost of the Dutch Foods shares is $5.42 {[(360)($5.00) + (500)($5.25) + (400)($6.00)] ÷ 1,260}. The ACB of the shares sold is therefore $4,878 [(900)($5.42)]. 2022 Other Income and Other Deductions Mr. Jansan’s other income and other deductions would be calculated as follows: Spousal Support (Note 7) Annuity Income (Note 8) Moving Expenses (Note 9) Child Care Expenses (Note 10) Deductible CPP ($3,500 - $3,039) Total 2021 Other Income and Other Deductions

$ 4,000 1,408 ( 13,830) ( 12,500) ( 461) ($21,383)

Note 7 - When incomplete support payments are made, the ITA deems the payments to be made first as child support than as spousal support. As a result the deemed spousal support is $4,000 [$40,000 (12)($3,000)]. Note 8 - The net inclusion of annuity income would be calculated as follows: Payment - ITA 56(1)(d) Return of Capital - ITA 60(a) [($5,000)($28,733 ÷ $40,000)] Annuity Income

$5,000 ( 3,592) $1,408

Note 9 - The deductible amount of moving expenses would be determined as follows: Calgary Lodging [(12)($325) + (3)($200)] Calgary Food [(15)($69)(4)] Moving and Storing Household Effects Legal Costs of Selling Edmonton Home Legal Costs of Calgary Home Total 2022 allowable moving expenses

$ 4,500 4,140 3,640 950 600 $13,830

The cost of the house hunting trip to Calgary to find a new home was reimbursed and is not a taxable benefit. With respect to the costs of staying in a hotel in Calgary, ITA 62(3)(c) allows only 15 days of such costs as a deduction and the cost of the remaining 4 days is not deductible. Moving costs are maximized if Ms. Jansan deducts 12 nights at the higher rate. You should note that if the employer had paid directly for the costs of these 4 days, it would not have created a taxable benefit. Unfortunately, they chose to pay a general allowance, all of which has to be included in Ms. Jansan’s income. Note 10 - The child care expenses would be $12,500, the least of the following three amounts: • Actual Costs and Deductible Camp Costs $12,500 • Annual Limit ($8,000 + $5,000) $13,000 • Income Limit [(2/3)($124,873)] $83,249 Actual costs are limited to $200 per week for Lotte and $125 per week for Bram during the four week period the children are at camp. When combined with the other costs, the total is as follows: Edmonton - 11 Weeks at $200 Per Week Calgary - 36 Weeks at $250 Per Week Camp - 4 Weeks at $325 ($200 + $125) Per Week Total

$ 2,200 9,000 1,300 $12,500

The income limit is based on gross employment income, without consideration of the car operating costs deduction or RPP contributions. This figure is $83,249 [(2/3)($116,370 + $5,103 + $3,400)]. 2022 Net Income and Taxable Income Ms. Jansan’s 2021 Net and Taxable Income would be: Employment Income Property Income Taxable Capital Gain Other Income and Other Deductions 2022 Net and Taxable Income

$116,370 522 306 ( 21,383) $ 95,815

Note that the contributions to the TFSAs are not eligible for a deduction and therefore have no impact on net income. 2022 Federal Income Tax Payable Tax on first $50,197 Tax on next $45,618 ($95,815 - $50,197) at 20.5% Tax before Credits Tax Credits: BPA Eligible Dependant (Either Child) Canada Caregiver (Grandfather is not Infirm) EI CPP Canada Employment Medical Expenses (Note 11) Total Credit Base Rate Dividend Tax Credit [(6/11)($144)] 2022 Federal Income Tax Payable

$ 7,530 9,352 $16,882 ($14,398) ( 14,398) N/A ( 953) ( 3,039) ( 1,287) ( 12,234) ($46,309) 15%

( 6,946) ( 79) $ 9,857

Note 11 - The medical expenses eligible for the credit are: Medical Expenses of Ms. Jansan and her children ($465 + $493 + $245) Lesser of: • [(3%)($95,815)] = $2,874 • 2022 Threshold Amount = $2,479 Balance Before Dependants 18 and over Grandfather’s Medical Expenses Reduced by the lesser of: • $2,479 • [(3%)($7,950)] = $239 2022 Allowable Medical Expenses

$ 1,203

$12,473

( 239)

Type: ES Topic: Comprehensive case covering chapters 1 to 9

( 2,479) Nil

12,234 $12,234

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 10 Retirement Savings and Other Special Income Arrangements 10.1 Online Exercises 1) What are the income tax advantages associated with making contributions to an RPP or an RRSP? Answer: The major advantages can be described as follows: • Eligible contributions are fully deductible and, as a result, provide an immediate reduction in income tax payable. • While the contributions are invested in the plan, earnings on the investments accumulate without any income tax since both types of plans are trusts which are exempt from tax under Part I. • When distributions are made, the individual may be in a lower income tax bracket than when the contributions were made. When this is the case, there is a permanent income tax savings equal to the difference in income tax between the contribution marginal tax rate and the tax rate in effect at the time of the withdrawal. • The payments from an RPP and RRSP may be eligible for both the pension income tax credit and for pension income splitting. • An additional advantage for RRSPs only is that funds can be temporarily withdrawn without the imposition of income tax where the withdrawals qualify for the home buyers plan or the lifelong learning plan. Type: ES Topic: Registered savings plans - RPPs vs RRSPs

2) In almost all cases, making contributions to an RRSP will provide for the deferral of income tax. In some cases, making such contributions may result in avoidance of tax. Explain these statements. Answer: With respect to the first statement, making contributions to an RRSP results in deferral as the contributions reduce income when made, but will only be required to be included in income when withdrawn. As the withdrawal will usually be in a later taxation year, the payment of income taxes is effectively deferred from the year of contribution to the year of withdrawal. In some cases, an individual may be subject to the same income tax rate in the year of withdrawal as the year of contribution. However, if the income tax rate is lower, either because of the individual's income level or because applicable rates have changed, the amount of income tax on withdrawal will be less than the income tax savings attributable to the contribution in the year in which it was made. This results in a permanent overall reduction in income tax which becomes actual acceptable income tax avoidance. Type: ES Topic: RRSPs - general concepts

3) Tax advisors generally recommend making RRSP contributions as early as possible in the year in which the deduction will be claimed. Why is that the case? Answer: The reason tax advisors make these recommendations is to extend the period of tax free compounding within the RRSP. A contribution made on January 1 will benefit from a full extra year of tax free earnings, as compared to a contribution made on December 31 of that year. Type: ES Topic: RRSPs - general concepts

4) Describe the difference between a defined benefit pension plan and a defined contribution or money purchase pension plan. Answer: In defined benefit plans, the plan sponsor (typically the employer) undertakes to provide a specified benefit, usually expressed as a percentage of earnings, for each year of qualifying service. In promising this benefit, the employer has effectively agreed to make whatever amount of contributions is required to ensure that these benefits can be provided. In contrast, in a defined contribution or money purchase plan, the employer agrees to make specified contributions for each plan participant. In this case, the employer has no responsibility beyond making the required contributions. The benefit that will be received by the employee will depend upon the amounts accumulated within the plan and the investment return on those funds. Type: ES Topic: RPPs - general concepts

5) An individual owns shares that have declined in value since they were purchased several years ago. The individual is short of cash and would like to make a contribution to the individual's RRSP with the shares. As his tax advisor, would you approve of this decision? Answer: Such a contribution would not be a good idea. ITA 40(2)(g)(iv) does not allow the recognition of a loss when an individual transfers property to an RRSP and the individual, their spouse or their common-law partner is an annuitant of the RRSP. This means that there would be no loss allowed to the individual. If the individual is short of cash, the better alternative would be to sell the shares, realize the loss and use the proceeds from the sale to make the RRSP contribution. Type: ES Topic: RRSP contributions - calculating the deduction

6) In many cases, investors typically have investments that they own personally as well as an interest in an RRSP which also owns various types of investments. When this is the case, tax advisors are inclined to suggest that share investments (equity securities) be owned personally while investments that earn interest (debt securities) be owned by the RRSP. What is the basis for this advice? Answer: The income earned by equity securities generally consists of dividends and capital gains, both of which receive favourable income tax treatment with lower overall income tax rates to individuals. Debt securities however generally result in interest income which is taxed much more heavily. As a general rule since an RRSP is a Part I exempt trust it is preferable that it own investments which produce income that is subject to the same high rates of income tax that would apply to individuals. Another reason for the advice is that if an RRSP realizes capital gains and dividend income the favourable income tax treatment that benefits individuals loses that status since 100% of amounts withdrawn from an RRSP are required to be included in the income of an individual annuitant. In other words the fact that the withdrawals technically include capital gains and taxable dividends would have no bearing on the fact that the individual must include all withdrawals in income. Type: ES Topic: RRSPs - general concepts

7) The RRSP Deduction Limit, as defined in ITA 146(1), is not a limit on contributions that can be made to an RRSP in a given year. Explain this statement. Answer: The RRSP Deduction Limit, as the name implies, is a limit on the amount of contributions that can be deducted in a particular year. Contributions made in earlier years that were not deducted in those years, contributions made in the current year or contributions made in the first 60 days of the following year, can be deducted under the RRSP Deduction Limit for the current year within the limitations imposed by the RRSP deduction limit. In addition an individual may over-contribute to an RRSP but over-contributions in excess of $2,000 are subject to a penalty tax. Type: ES Topic: RRSP contributions - calculating the deduction

8) How is Earned Income defined for purposes of determining the RRSP Deduction Limit? Answer: The components of Earned Income for purposes of determining the RRSP Deduction Limit are as follows: • Add Employment income determined by excluding any deduction of RPP contributions. • Add Royalties, provided the individual is the author, inventor, or composer. • Add Spousal support received; • Deduct: Spousal support paid; • Add: Supplementary unemployment benefits (excluding EI); • Add: Business income; • Deduct: Business losses; • Add: Business income allocated to an active partner of a partnership; • Deduct: Business losses allocated to an active partner of a partnership. • Add: Rental income: • Deduct: Rental losses: • Add: CPP and QPP disability benefits. Type: ES Topic: RRSP - earned income

9) In calculating an individual's Pension Adjustment (PA), it is necessary to have a mechanism for equating contributions in defined contribution plans with benefits earned in defined benefit plans. How does the RRSP legislation deal with this issue? Would you consider this approach to be fair to all taxpayers? Explain your conclusion. Answer: In simplified terms, benefits earned in defined benefit plans are converted to a contributionlike number by multiplying the benefits earned by an individual by the number 9. The use of this approach does not take into consideration the fact that it would take a much larger contribution to provide $1 of benefits to a 64 year old individual who will retire in one year, than it would to provide $1 of benefits to a 20 year old individual who will not receive the benefit for 45 years. This would suggest that the approach used is systematically unfair to younger taxpayers. Type: ES Topic: Pension adjustments - PAs, PSPAs & PARs

10) An individual's RRSP deduction room is reduced by past service pension adjustments (PSPA). Describe two situations that would give rise to such adjustments. Answer: • A new RPP is implemented by an employer and benefits are extended retroactively for years of service prior to the plan initiation. • The benefit formula is changed, increasing the percentage that is applied to pensionable earnings to determine benefits earned. A PSPA is created only if the increased benefits are extended retroactively to years of service prior to the plan amendment. • An individual, either voluntarily or because of terms contained in the plan, works for a number of years without being a member of the plan. On joining the plan, the employee is credited for years of service prior to entry into the plan. Type: ES Topic: Pension adjustments - PAs, PSPAs & PARs

11) Describe the circumstances that give rise to pension adjustment reversals (PAR). Answer: PARs arise whenever an employee terminates membership in an RPP or DPSP and receives less from the plan than the total of the PAs and PSPAs reported for the employee. If the non-vested benefits are lost, the employer must report a PAR to add the previously deducted PAs back to the individual's RRSP deduction room. Non-vested benefits are typically lost where employment is terminated before a stated employment period has been reached. If, for example, pension benefits related to employer contributions only vest after three years of employment then an employee who leaves at the end of the second year of employment would not be entitled to the employer contributions. Type: ES Topic: Pension adjustments - PAs, PSPAs & PARs

12) Many individuals do not have sufficient funds to maximize their contributions to both an RRSP and a TFSA. Briefly compare the income tax features of these two alternative plans. Answer: Contributions: Contributions to an RRSP are deductible whereas contributions to a TFSA are not deductible. Plan Income: Income earned within both plans are not subject to Part I tax. Withdrawals: Withdrawals from an RRSP are required to be included in the income of the RRSP annuitant without regard to the type of income earned by the RRSP trust. In contrast, withdrawals from a TFSA are not required to be included in income. Contributions/Withdrawals: In general, amounts withdrawn from an RRSP do not re-establish the contribution room if the amounts are returned to the RRSP. This means that withdrawals represent a permanent reduction in an individual's RRSP deduction room. In contrast, amounts withdrawn from a TFSA can be returned to the plan in the following year. Such returned amounts restore the contribution room that was removed by earlier withdrawals. Type: ES Topic: Registered savings plans - RRSPs vs TFSAs

13) If an individual wishes to terminate their RRSP, making a lump-sum withdrawal is generally not the best alternative. Describe three disadvantages of lump-sum RRSP withdrawals. Answer: • The withdrawals can be subject to a high marginal rate of income tax. • The withdrawals are not eligible for the pension income tax credit. • The withdrawals are not eligible for pension income splitting. Type: ES Topic: RRSPs - general concepts

14) Briefly describe the RRSP options available to individuals in the year the individual becomes 71 years of age. Also indicate the income tax consequences of each alternative. Answer: When an individual reaches 71 years of age, the RRSP must be terminated. The basic alternatives for withdrawing the funds in the plan, along with the income tax consequences, are as follows: • All of the property in the plan can simply be withdrawn. This alternative will result in the FMV of all of that property being included in the individual's income in the year of the withdrawal. • The property in the plan can be converted to cash with the proceeds used to purchase an annuity. There will be no immediate income tax consequences of liquidating the plan property or the purchase of the annuity however annuity payments will be fully included in the individual's income in the year in which they are received. • All of the property in the RRSP can be transferred to a RRIF. There are no income tax consequences associated with the transfer which is made on a rollover basis. However, the individual will be required to include a minimum amount from the RRIF in each year. If the individual withdraws amounts in excess of the minimum then the full amount of all withdrawal in a given taxation year will be required to be included in income. Note that combinations can be used such as transferring half of the RRSP property to a RRIF, with the remaining half used to purchase an annuity). Type: ES Topic: Registered savings plans - RRSPs at 71 years of age

15) Under what circumstances would it be desirable for an individual to make contributions to an RRSP for their spouse or common-law partner (spousal plan)? What are the advantages of making such contributions? Answer: Contributions to a spousal plan are desirable when the individual's spouse or common-law partner is currently in a lower income tax bracket and is expected to remain in that bracket. There are two advantages to making such contributions: • Acceptable Income splitting. When the contributions are withdrawn they will be included in the income of the spouse or common-law partner and therefore subject to their low income tax rate. • In situations where the spouse or common-law partner has no other source of pension income, withdrawals from the spousal plan could be eligible for the pension income tax credit. Note that although these results could also be achieved through the use of the provisions which allow for the splitting of qualified pension income, a spousal RRSP provides the couple with more flexibility in planning retirement income. Type: ES Topic: RRSPs - spousal or common-law partner plans

16) Explain the income attribution rule that applies to spousal or common-law partner RRSPs. Answer: If an individual has made any contribution to an RRSP where the spouse or common-law partner is the annuitant, it is a spousal RRSP. With respect to such plans, if a contribution is made, either in the year of a withdrawal or in either of the two preceding calendar years, that withdrawal must be included in the contributor's income to the extent of the spousal contributions made in the year of the withdrawal and in both the two preceding calendar years. Type: ES Topic: RRSPs - spousal or common-law partner plans

17) One of your clients is considering the withdrawal of a portion of their RRSP under the provisions of the Home Buyers' Plan (HBP). List and briefly explain any factors that should be considered as to whether the withdrawal should be made under the HBP. Answer: The basic factors to consider would be as follows: • Whether the required funds could be obtained through a conventional mortgage. • The interest rate on conventional mortgage financing. • The rate of return earned on RRSP property. • The fact that the RRSP earnings lost while the funds are removed from the plan can never be put back into the plan, resulting in a permanent loss of some tax assisted savings. Type: ES Topic: RRSP - home buyers' plan

18) An individual is returning to university after several years of full time employment. The individual has a substantial RRSP account balance and is considering making a withdrawal under the lifelong learning plan (LLP). What factors should be considered in choosing this method of financing the individual's education? Answer: The basic factors to consider would be as follows: • Alternative sources of financing. • The interest rate on alternative sources of financing. • The investment rate of return on RRSP property. • The fact that the earnings lost as a result of an RRSP withdrawal can not be replaced, resulting in a permanent loss of some tax assisted savings. Type: ES Topic: RRSP - lifelong learning plan

19) Describe the alternative income tax situations that may arise when an individual dies as the annuitant of an unmatured RRSP. Answer: The general default rule is that the FMV of RRSP property will be included as income in the deceased annuitant's final income tax return. However, there are two exceptions to this rule: • If the beneficiary of the RRSP is the deceased individual's spouse or common-law partner, there is a rollover provision that allows the transfer of the RRSP to a spouse or common-law partner without any immediate income tax consequences. In effect, the spouse or common-law partner becomes the new annuitant of the plan and there are no income tax consequences for the deceased annuitant. • If the beneficiary of the RRSP is a financially dependent child or grandchild, the FMV of the RRSP property will be included in the income of that dependent. In addition, if the child or grandchild has a physical or mental infirmity, the dependant can avoid including any amount in income by transferring the RRSP property of the deceased to an RRSP, RRIF or RDSP for themselves or using the property to purchase an annuity. Type: ES Topic: RRSP - death of an annuitant

20) Describe the types of individuals that can be members of a pooled registered pension plan (PRPP). Answer: There are two classes of potential members. One class would be employees of an employer that offers participation in a PRPP. The second class of members would include employees of an employer that does not offer a PRPP, as well as self-employed individuals. Type: ES Topic: Registered savings plans - pooled RPPs

21) Describe the basic differences between an RRSP and a RRIF. Answer: The basic differences are as follows: • RRIFs are only funded through a transfer from an RRSP or another RRIF. In contrast, the individual can make deductible contributions or transfer funds from another retirement savings plan (RRSP, RPP, DPSP) in order to get funds into an RRSP. • There is no requirement to make minimum annual withdrawals from an RRSP. In contrast, an individual must make a minimum withdrawal each year from a RRIF. • An individual can have a RRIF after the age of 71. They cannot have an RRSP after that age. • RRIFs are not eligible for withdrawals under either the home buyers plan or the lifelong learning plan. Type: ES Topic: Registered savings plans - RRSPs vs RRIFs

22) Employee Profit Sharing Plans (EPSPs) are not as tax efficient as Deferred Profit Sharing Plans (DPSPs) in providing tax advantaged compensation to employees. Why is that the case? Answer: DPSPs provide tax deferral in that employer contributions to these plans do not create a taxable benefit or any income to the employees until they are withdrawn from the plan. There is further deferral in the fact that amounts earned on the DPSP investments within the plan accumulate tax free, with these amounts also not being taxed until they are withdrawn from the plan. In contrast, employer contributions to a EPSP are treated as taxable benefits to employees. In addition, amounts earned within the EPSP and allocated to employees are included in the income of the employees but retains its character capital gains, dividends, interest etc. While there may be resource or motivational reasons for using EPSPs, the use of these plans does not provide the income tax advantages to employees provided by DPSPs. Type: ES Topic: Registered savings plans - DPSPs vs EPSPs

23) Describe the tax features associated with retirement compensation arrangements (RCA). Answer: An employer's contributions to an RCA are fully deductible in computing net income. However, all contributions are subject to a Part XI.3 refundable tax at a rate of 50%. In addition, all of the earnings on property held within an RCA are also subject to the same 50% refundable tax. The Part XI.3 taxes that the employer pays or that the plan pays are refunded at a 50% rate when payments are made to the beneficiaries of the plan. The recipients are required to include payments made to them from the RCA in their income. Type: ES Topic: Retirement compensation arrangements (RCA)

24) What is a salary deferral arrangement (SDA)? Answer: As defined in ITA 248(1), an SDA is a plan or arrangement, whether funded or not, under which any person has a right to receive an amount in a year subsequent to the year in which it was earned. The definition also requires that one of the main purposes of the arrangement is to defer income tax. The definition goes on to exclude such items as RPPs, sabbatical arrangements, and bonuses that are paid within three calendar years. Type: ES Topic: Salary deferral arrangements (SDA)

25) In terms of income tax planning, the use of RRSPs can provide for both tax deferral and tax avoidance. Answer: TRUE Explanation: In general, income tax deferral occurs where individuals can claim a current deduction for contributions made to an RRSP saving income tax immediately and are only required to include RRSP amounts in their income when received which is generally at their discretion. Income tax is only required when RRSP amounts are subsequently withdrawn. The difference between the tax savings and the tax rate in effect when the RRSP amounts are included in their income can also represent a permanent tax savings and therefore tax avoidance where the marginal tax rates in effect for the year of the deduction exceeds the marginal tax rate in effect when RRSP amounts are eventually included in income. Type: TF Topic: Registered savings plans - RRIFs

26) A pension plan that provides for a pension equal to 3% of an employee's average annual salary for each year of service is a defined benefit plan. Answer: TRUE Explanation: A pension plan that provides for a pension at a guaranteed amount would be a defined benefit plan. Type: TF Topic: Registered savings plans- RPPs (defined benefit vs defined contribution)

27) Earned income for RRSP purposes includes spousal support received, business losses, and rental income. Answer: TRUE Explanation: All of these amounts are components of earned income for RRSP purposes. Type: TF Topic: RRSP - earned income

28) All RRSP contributions that cannot be deducted in the current year will be subject to a penalty tax of 1% per month. Answer: FALSE Explanation: Only those undeductible contributions in excess of $2,000 are subject to the penalty tax. Type: TF Topic: RRSPs - penalty tax for excessive contributions

29) An RRSP is considered to be a spousal RRSP if a spouse or common-law partner has made any contributions to the plan at any time since its inception. Answer: TRUE Explanation: Once a spouse or common-law partner has made a contribution, the plan is permanently designated a spousal RRSP. Type: TF Topic: RRSPs - spousal or common-law partner plans

30) Amounts withdrawn from an RRSP under the provisions of the Home Buyers' Plan (HBP) must be repaid over a period of 15 years, beginning in the second calendar year after the year of the HBP withdrawal. Answer: TRUE Explanation: The amounts must be repaid over 15 years, beginning in the second calendar year after withdrawal. Type: TF Topic: RRSP - home buyers' plan

31) Eligible amounts withdrawn from an RRSP under the provisions of the Lifelong Learning Plan (LLP) require that the individual or their spouse or common-law partners must be enrolled as a full-time student in a qualifying educational program at a designated educational institution. Answer: TRUE Explanation: The tax free withdrawal is conditional on being enrolled in a qualified educational program at a designated educational institution. Type: TF Topic: RRSP - lifelong learning plan

32) A corporate employer with a December 31 taxation year contributes $25,000 to a Registered Pension Plan (RPP) on March 1, 2022. Each of the 15 employees in the plan has contributed $1,000 to the plan in 2022. The employer can deduct a maximum of $15,000 in contributions for the 2022 taxation year. Answer: FALSE Explanation: The employees' contributions have no effect on the deductibility of the employer's contributions. A maximum of $25,000 is deductible to the employer for 2022. Type: TF Topic: RPPs - general concepts

33) Employees are considered to have received a taxable benefit for all amounts that an employer contributes to a Deferred Profit Sharing Plan. (DPSP). Answer: FALSE Explanation: Employer contributions to DPSPs are not considered to be taxable benefits to employees. Type: TF Topic: Registered savings plans - DPSPs

34) Income tax legislation establishes both the minimum and maximum withdrawal that can be made from a Registered Retirement Income Fund (RRIF) in a particular year. Answer: FALSE Explanation: The ITA only sets out minimum withdrawal limits. There is no maximum amount that can be withdrawn. Type: TF Topic: Registered savings plans - RRIFs

35) Which of the following statements with respect to registered pension plans (RPP) is correct? A) Pension adjustment reversals can only arise when the plan is a defined contribution plan. B) If the pension adjustment is based on the employer and employee contributions, it is a defined benefit plan. C) A plan in which the benefit is based on employer contributions is a defined benefit plan. D) Past Service Pension Adjustments can only arise when the plan is a defined benefit plan. Answer: D Explanation: D) Past Service Pension Adjustments can only arise when the plan is a defined benefit plan. Type: MC Topic: Registered savings plans- RPPs (defined benefit vs defined contribution)

36) With respect to a defined benefit Registered Pension Plan (RPP), which of the following statements is correct? A) The employer is required to make a fixed contribution to the plan each year. B) The employer promises each employee a retirement benefit that is based on a contractually specified formula. C) The Pension Adjustment that will be calculated for each employee is based on the amounts of contributions that have been made by the employer. D) Employees cannot make contributions to this type of plan. Answer: B Explanation: B) The employer promises each employee a retirement benefit that is based on a contractually specified formula. Type: MC Topic: Registered savings plans- RPPs (defined benefit vs defined contribution)

37) With respect to a defined contribution Registered Pension Plan (RPP), which of the following statements is NOT correct? A) The employer agrees to make a specified contribution for each year of service. B) The Pension Adjustment that will be calculated for each employee is based on the amounts of contributions that have been made by the employee and employer. C) Both the employee and employer can make contributions to such plans. D) The employee's pension benefit is affected by the rate of return earned by the pension plan. Answer: D Explanation: D) The employee's pension benefit is affected by the rate of return earned by the pension plan. Type: MC Topic: Registered savings plans- RPPs (defined benefit vs defined contribution)

38) Which of the following statements with respect to RRSP terminations is NOT correct? A) All RRSPs must be terminated in the year an individual turns 71 years of age. B) A lump sum withdrawal from an RRSP is not eligible for pension income splitting. C) If an individual has terminated their RRSP because they have reached 71 years of age, the individual can no longer make RRSP contributions, even if the individual has earned income. D) If RRSP funds are used to purchase a life annuity, only the annuity payments would be included in income. Answer: C Explanation: C) If an individual has terminated an RRSP because the individual has reached 71 years of age, the individual can no longer make RRSP contributions, even if the individual has earned income. Such an individual can continue making contributions to a spousal or common-law partner RRSP provided that the spouse or common-law partner has not reached 71 years of age by December 31st of that year. Type: MC Topic: RRSPs - general concepts

39) With respect to self-administered RRSP, which of the following would NOT be a qualified investment? A) Shares in a public corporation. B) A mortgage on the principal residence of the plan beneficiary. C) Direct investments in rental properties. D) A five-year guaranteed investment certificate. Answer: C Explanation: C) Direct investments in rental properties. Type: MC Topic: RRSPs - general concepts

40) In 2021, Donna Collins has employment income before the deduction of any RPP contributions of $40,000, a rental loss of $16,000, interest income of $6,000, and income from royalties of $7,000. The royalties were on a book written by Ms. Collins in her undergraduate years at university. She has no unused RRSP deduction room from previous years. Ms. Collins is a member of a money purchase RPP in which, during 2021, she has contributed $2,000 and her employer has contributed $3,000. Her maximum deductible RRSP contribution for 2022 is: A) $2,580. B) $580. C) $3,580. D) $1,660. Answer: B Explanation: A) $2,580 [(18%)($40,000 - $16,000 + $7,000) - $3,000)]. B) $580 [(18%)($40,000 - $16,000 + $7,000) - PA ($2,000 + $3,000)]. C) $3,580 [(18%)($40,000 - $16,000 + $7,000) - ($2,000)]. D) $1,660 [(18%)($40,000 - $16,000 + $7,000 + $6,000) - ($2,000 + $3,000)]. Type: MC Topic: RRSP contributions - calculating the deduction

41) In 2021, Ramona Collins has employment income before the deduction of any RPP contributions of $40,000, a business loss of $16,000, interest income of $6,000, and income from royalties of $7,000. The royalties were on a book written by Ms. Collins in her undergraduate years at university. She has no unused RRSP deduction room from previous years. She is a member of a DPSP in which, during 2021, her employer has contributed $3,000 per employee. Her maximum deductible RRSP contribution for 2022 is: A) $3,660. B) $1,320. C) $5,580. D) $2,580. Answer: D Explanation: A) $3,660 [(18%)($40,000 - $16,000 + $7,000 + $6,000) - $3,000. B) $1,320 [(18%)($40,000 - $16,000) - $3,000]. C) $5,580 [(18%)($40,000 - $16,000 + $7,000)]. D) $2,580 [(18%)($40,000 - $16,000 + $7,000) - $3,000]. Type: MC Topic: RRSP contributions - calculating the deduction

42) In 2021, Wilma Collins has employment income before the deduction of any RPP contributions of $40,000, a rental loss of $16,000, dividends from taxable Canadian corporations with a total grossed up amount of $6,000, and income from royalties of $7,000. The royalties were on a book written by Ms. Collins in her undergraduate years at university. She has no unused RRSP deduction room from previous years. She is not a member of a RPP or a DPSP in 2021. Her maximum deductible 2022 RRSP contribution is: A) $5,400. B) $5,580. C) $6,660. D) $9,540. Answer: B Explanation: A) $5,400 [(18%)($40,000 - $16,000 + $6,000)]. B) $5,580 [(18%)($40,000 - $16,000 + $7,000)]. C) $6,660 [(18%)($40,000 - $16,000 + $7,000 + $6,000)]. D) $9,540 [(18%)($40,000 + $6,000 + $7,000)]. Type: MC Topic: RRSP contributions - calculating the deduction

43) In 2021, Joyce Collins has employment income before the deduction of any RPP contributions of $40,000, a rental loss of $16,000, interest income of $6,000, and income from royalties of $7,000. The royalties were on a book written by Ms. Collins in her undergraduate years at university. She has no unused RRSP deduction room from previous years. She is not a member of a RPP during 2021. She has contributed $2,000 to her spouse's RRSP in 2022. The maximum deductible 2022 RRSP contribution to her own plan is: A) $3,580. B) $5,580. C) $4,660. D) $6,660. Answer: A Explanation: A) $3,580 [(18%)($40,000 - $16,000 + $7,000) - $2,000]. B) $5,580 [(18%)($40,000 - $16,000 + $7,000)]. C) $4,660 [(18%)($40,000 - $16,000 + $6,000 + $7,000) - $2,000]. D) $6,660 [(18%)($40,000 - $16,000 + $6,000 + $7,000)]. Type: MC Topic: RRSP contributions - calculating the deduction

44) Mrs. Jacks is employed by RME Industries Ltd. RME Industries Ltd. does not offer a RPP or a DPSP to its employees. She has no earned income prior to 2020. Given the following, what is the maximum RRSP contribution that Mrs. Jacks can deduct in 2022?

Earned Income RRSP Contributions Deducted

2020 $50,000 Nil

2021 $52,000 $ 6,000

2022 $53,000 ?

A) $9,000. B) $9,360. C) $12,000. D) $12,360. E) None of the above. Answer: D Explanation: D) $12,360. Unused RRSP Deduction Room carried forward from 2021: Lesser of: • ($27,230 - $6,000) = $21,230* • [(18%)($50,000) - $6,000] = $3,000 $ 3,000 Plus 2022 RRSP deduction room Lesser of: • 2022 RRSP Dollar Limit = $29,210 • [(18%)($52,000)] = $9,360 9,360 RRSP Deduction Limit for 2022 $12,360 * Previous year's RRSP dollar limit is not needed as $3,000 is the lesser amount. Type: MC Topic: RRSP contributions - calculating the deduction

45) Which one of the following lists includes amounts that are all included in the determination of earned income for RRSP purposes? A) Author's royalties, rental income or losses, and spousal support received/paid. B) Auto standby charge, salesperson's expenses, and resource royalties. C) Business income or losses, CPP retirement benefits, and research grants. D) Rental income or losses, salaries, and scholarships. Answer: A Explanation: A) Resource royalties, CPP retirement benefits and scholarships do not form part of the Earned Income calculation for RRSP purposes. Type: MC Topic: RRSP - earned income

46) With respect to RRSP contributions, which of the following statements is correct? A) Contributions made during the current year and within 30 days of the end of the current year, must be deducted in the current year. B) Contributions in excess of available deduction room cannot be deducted in the current year or in any subsequent year. C) There is no penalty for making contributions that are in excess of available deduction room. D) Contributions made during the current year can be deducted in any subsequent year. Answer: D Explanation: D) Contributions made during the current year can be deducted in any subsequent year. Type: MC Topic: RRSPs - general concepts

47) On April 1, 2021 Mrs. Wu contributed $1,000 to her RRSP. On October 1, 2021 Mr. Wu contributed $1,000 to Mrs. Wu's RRSP. On June 1, 2022 Mrs. Wu withdrew $1,600 from her RRSP. As a result of the withdrawal: A) Mrs. Wu's 2022 net income increased by $1,600. B) Mr. Wu's 2022 net income increased by $1,600. C) Mrs. Wu's 2022 net income increased by $800 and Mr. Wu's increased by $800. D) Mrs. Wu's 2022 net income increased by $600 and Mr. Wu's increased by $1,000. Answer: D Explanation: D) Mrs. Wu's 2022 net income increased by $600 and Mr. Wu's increased by $1,000. Type: MC Topic: RRSPs - spousal or common-law partner plans

48) Harleen, who is 70 years old, withdrew $10,000 from her RRSP on November 1, 2022. Which of the following statements is correct? A) She will receive cash of $8,000 and her 2022 net income will increase by $10,000. B) She will receive cash of $9,000 and her 2022 net income will increase by $9,000. C) She will receive cash of $8,000 and her 2022 net income will increase by $8,000. D) She will receive cash of $10,000 and her 2022 net income will increase by $10,000. Answer: A Explanation: A) She will receive cash of $8,000 and her 2022 net income will increase by $10,000. $10,000 less 20% withholding tax = $8,000. Type: MC Topic: RRSPs - general concepts

49) Mehrdad contributed $10,000 to an RRSP ten years ago when he was 39 years of age. On May 1, 2022 the FMV of the RRSP is $15,000 due solely to eligible dividends reinvested by the fund. On May 2, 2022 Mehrdad withdrew $2,000 from his RRSP. Which of the following statements is correct? A) His income tax payable will be reduced by the dividend tax credit on $2,000 of eligible dividends. B) His net income will be increased by the sum of the $2,000 received plus the gross up on $2,000 of eligible dividends. C) His income tax payable will be reduced by the pension income credit on $2,000 of pension income. D) His net income will be increased by $2,000. Answer: D Explanation: C) The pension credit would only be available for RRSPs to individuals who are 65 years of age and over if the RRSP payment is from an annuity. D) His net income will be increased by $2,000. Type: MC Topic: RRSPs - general concepts

50) Yukie is not a member of an RPP. She has employment income of $35,000. During the year, she received spousal support payments of $8,000, child support payments for her 10 year old daughter of $12,000 and an inheritance consisting of a $50,000 term deposit that paid interest of $2,000 in the year. Her Earned Income for RRSP purposes for the current year is: A) $35,000. B) $43,000. C) $45,000. D) $55,000. Answer: B Explanation: B) $43,000 (Employment income of $35,000 + spousal support of $8,000) Type: MC Topic: RRSP - earned income

51) Which of the following statements about the Home Buyers' Plans (HBPs) is correct? A) If a withdrawal is made under the plan, any contributions made 90 days prior to the withdrawal cannot be deducted. B) Any RRSP contribution made in a particular year will count first towards the HBP repayment requirement for that year. C) Repayments in excess of an annual requirement will reduce future annual requirements. D) When an individual dies with an outstanding Home Buyers' Plan balance, this balance will not be required to be included in income. Answer: C Explanation: A) Some or all contributions may still be deductible depending upon whether RRSP contributions were made in prior years. B) Amounts have to be designated by the individual as an HBP repayment. C) Repayments in excess of an annual requirement will reduce future annual requirements. While the applicable fraction will not change, the balance to which the fraction will apply will be reduced. Type: MC Topic: RRSP - home buyers' plan

52) Which of the following statements with respect to the Home Buyers' Plan (HBP) is NOT correct? A) All amounts withdrawn must be repaid within 10 years of the year of withdrawal. B) Amounts withdrawn must be used to acquire a dwelling by October 1 of the year following withdrawal. C) The maximum RRSP withdrawal is $35,000 per individual. D) In the year an individual ceases to be a resident of Canada, any outstanding HBP balance must be repaid by the earlier of the due date for the filing of the income tax return for the year in which the individual became a non-resident or 60 days after becoming a non-resident. Answer: A Explanation: A) All amounts withdrawn must be repaid within 10 years of the year of withdrawal. Type: MC Topic: RRSP - home buyers' plan

53) Cecilia withdrew $24,000 from her RRSP under the Home Buyers' Plan in 2019 and used the funds for a down payment on a qualifying home. She made a repayment of $1,000 in 2021. Her minimum repayment for 2022 will be: A) $1,493.33. B) $1,533.33. C) $1,600.00. D) $1,642.86. Answer: C Explanation: A) $1,493.33 ($22,400 × 1/15) B) $1,533.33 ($24,000 — 1,000) = $23,000 × 1/15 C) $1,600.00 ($24,000 — 1,000 payment — 600 included in 2021 net income) = $22,400 × 1/14 = $1,600. The minimum required annual repayment beginning in 2021 would be $1,600 with any shortfall required to be included in income. D) $1,642.86 ($23,000 × 1/14) Type: MC Topic: RRSP - home buyers' plan

54) Parviz withdrew $15,000 from his RRSP under the Home Buyers' Plan in 2020 and used the funds for a down payment on a qualifying home. He made a repayment of $700 in 2022. Taking into consideration his repayment, his Home Buyers' Plan will have what effect on his net income for 2022? A) An increase of $1,000. B) An increase of $300. C) A decrease of $700. D) No effect. Answer: B Explanation: B) An increase of $300. (min. repayment of $1,000 — 700) Type: MC Topic: RRSP - home buyers' plan

55) Which of the following statements about Lifelong Learning Plans (LLPs) is NOT correct? A) The maximum withdrawal is $10,000 in any single year, to a cumulative total of $20,000 over four years. B) An individual can only participate in this program once during their life. C) Repayments must begin no later than the fifth year after the year of the first Lifelong Learning Plan withdrawal (actually the sixth year if payments are made within 60 days of the end of the fifth year). D) If an individual ceases to be a resident of Canada, any unpaid balance under the LLP must be repaid before the date the tax return for the year of departure should be filed, or 60 days after becoming a nonresident, whichever date is earlier. Answer: B Explanation: B) An individual can only participate in this program once during his life. There is no limit on the number of times, as long as all previous withdrawals have been repaid. Type: MC Topic: RRSP - lifelong learning plan

56) Which of the following statements is correct about the Lifelong Learning Plan? A) The maximum tax-free withdrawal is $10,000 per year for up to four years. B) A taxpayer cannot participate in a Home Buyers' Plan and a Lifelong Learning Plan in the same year. C) Minimum repayments must be made over a period of ten years. D) Tax-free withdrawals can be made by a part-time student as long as they are repaid within two years. Answer: C Explanation: C) Minimum repayments must be made over a period of ten years. Type: MC Topic: RRSP - lifelong learning plan

57) Jenelle was a full-time student in a four-year qualifying program from September 2018 to April 2022. She withdrew $5,000 from her RRSP each year on September 1 under the Lifelong Learning Plan to finance her education. Her first repayment is due on: A) September 1, 2022. B) March 1, 2023. C) September 1, 2023. D) March 1, 2024. Answer: D Explanation: D) March 1, 2024. Since 2023 is the fifth year after the first withdrawal, she has 60 days after the year end to make the repayment. Type: MC Topic: RRSP - lifelong learning plan

58) Which of the following statements with respect to Registered Pension Plans (RPPs) is NOT correct? A) An employer can sponsor both an RPP and a DPSP. B) Employee contributions provide the contributor with a personal tax credit rather than a deduction. C) Employer contributions are not a taxable benefit to the employee. D) Employee options at retirement are determined by the terms of the plan. Answer: B Explanation: B) Employee contributions provide the contributor with a personal tax credit rather than a deduction. Type: MC Topic: RPPs - general concepts

59) Eileen is a member of her employer's Registered Pension Plan (RPP) to which her employer contributed $3,500 and Eileen contributed $2,600 in the current year. Which of the following statements is correct? A) Eileen can deduct her contribution from her employment income and her employer's contribution is not considered a taxable benefit. B) Eileen cannot deduct her contribution from her employment income and her employer's contribution is not considered a taxable benefit. C) Eileen can deduct her contribution from her employment income and she must include her employer's contribution in her employment income as a taxable benefit. D) Eileen cannot deduct her contribution from her employment income and her employer's contribution is considered a taxable benefit. Answer: A Explanation: A) Eileen can deduct her contribution from her employment income and her employer's contribution is not considered a taxable benefit. Type: MC Topic: RPPs - general concepts

60) Which of the following statements about a RPP is NOT correct? A) Contributions can be made only by employers. B) Pension adjustments reflect the benefits earned under both money purchase and defined benefit RPPs. C) Contributions made by an employer to an unregistered pension plan are not deductible. D) An RPP from a previous employer may be transferred into the new employer's plan. Answer: A Explanation: A) Contributions can be made only by employers. Type: MC Topic: RPPs - general concepts

61) Which of the following statements with respect to Registered Retirement Income Funds (RRIFs) is NOT correct? A) Withdrawals from a RRIF are not eligible for pension income splitting. B) Withdrawals from a RRIF are eligible for the pension income tax credit. C) An individual can have multiple RRIFs. D) Registered Pension Plan balances can be transferred to a RRIF on a tax free basis. Answer: A Explanation: A) Withdrawals from a RIFF are not eligible for pension income splitting. Type: MC Topic: Registered savings plans - RRIFs

62) Which of the following statements with respect to Registered Retirement Income Funds (RRIFs) is correct? A) An individual can make non-deductible contributions to a RRIF. B) The minimum annual withdrawal from a RRIF is always determined by dividing the FMV of the property in the plan by 90, less the age of the beneficiary at the beginning of the year. C) Earnings accumulate within the RRIF are not subject to Part I income tax. D) A RRIF can only be established by individuals over the age of 71. Answer: C Explanation: C) Earnings accumulate within the RRIF on a tax free basis. Type: MC Topic: Registered savings plans - RRIFs

63) Mrs. Yus is 96 years old. She has a RRIF which was established in 1987. On January 1, 2022 the FMV of the property of the RRIF is $62,000. Her minimum withdrawal for 2022 is: A) $12,400. B) $10,333. C) $10,000. D) $8,333. Answer: A Explanation: A) $12,400 ($62,000 × 20%) B) $10,333 ($62,000 / 6) C) $10,000 ($50,000 × 20%) D) $8,333 ($50,000 / 6) Type: MC Topic: Registered savings plans - RRIFs

64) Which of the following statements with respect to Deferred Profit Sharing Plans (DPSPs) is correct? A) Both the employers and employees can make contributions to DPSPs. B) Contributions to DPSPs are limited to one-half the money purchase limit for the year. C) Employer contributions are treated as a taxable benefit to the employees. D) Withdrawals from DPSPs are not required to be included in the income of the recipient. Answer: B Explanation: B) Contributions to DPSPs are limited to one-half the money purchase limit for the year. Type: MC Topic: Registered savings plans - DPSPs

65) On January 1, 2022 Mr. Yang celebrated his 65th birthday and transferred $85,000 from his RRSP into a RRIF. For what reason would he make this transfer? A) He wants to pension split his RRIF withdrawal with his spouse. B) He wants to decrease his net income by transferring his high income earning investments from his RRSP. C) He can no longer maintain an RRSP because of his age. D) He is terminally ill and a RRIF will have more tax advantages to his spouse on his death than his RRSP would have had. Answer: A Explanation: A) He wants to pension split his RRIF withdrawal with his spouse. Type: MC Topic: Registered savings plans - transfers between plans

66) There are a number of rollovers that allow certain registered savings plans to be transferred to other registered savings plans. Which of the transfers indicated is NOT eligible for this rollover treatment. A) Registered Pension Plan to Registered Retirement Savings Plan. B) Registered Retirement Savings Plan to Registered Retirement Income Fund. C) Employee Profit Sharing Plan to Deferred Profit Sharing Plan. D) Deferred Profit Sharing Plan to Registered Pension Plan. E) Registered Pension Plan to different Registered Pension Plan. Answer: C Explanation: C) Employee Profit Sharing Plan to Deferred Profit Sharing Plan. Type: MC Topic: Registered savings plans - transfers between plans

67) The most common reason to transfer funds from an RRSP to a RRIF is: A) the individual has officially retired. B) the list of qualified investments is much broader for a RRIF. C) the individual reaches 65 years of age. D) the individual reaches 71 years of age. Answer: D Explanation: D) the individual reaches 71 years of age Type: MC Topic: Registered savings plans - transfers between plans

68) Which of the following statements with respect to Retirement Compensation Arrangements (RCAs) is NOT correct? A) Contributions to RCAs are fully deductible to the employer. B) Contributions to RCAs are subject to a 50 %, non-refundable tax. C) Contributions can only be made by an employer, a former employer of a taxpayer, or by a person with whom the employer or former employer does not deal at arm's length. D) Any taxes on contributions or earnings within the arrangement are refunded at the rate of 50%. Answer: B Explanation: B) Contributions to RCAs are subject to a 50%, non-refundable tax. The tax is refundable. Type: MC Topic: Retirement compensation arrangements (RCA)

69) Mr. Smith, the sole shareholder and employee of Smithco Ltd. since its incorporation in 1977, has decided to sell the shares of the corporation and retire in 2022. He has never belonged to a pension plan, and wishes to maximize his RRSP. Which one of the following amounts represents the largest retiring allowance from Smithco that Mr. Smith can transfer to his RRSP in the year he retires? A) $40,000. B) $59,500. C) $56,000. D) $70,000. Answer: C Explanation: C) The amount of the retiring allowance which Mr. Smith can transfer to his RRSP in the year he retires is $56,000 [(19)($2,000) + (12)($1,500)]. This is $2,000 per year prior to 1996, plus $1,500 per year prior to 1989 during which no employer contributions vested to a pension plan. Type: MC Topic: RRSPs - transfer of retiring allowances

70) Which of the following would be eligible for the pension income tax credit to an individual who is 65 years of age or older? A) A lump sum withdrawal from an RRSP B) A lump sum withdrawal from a RRIF C) A lump sum withdrawal from a spousal RRSP D) All of the above Answer: B Explanation: B) a lump sum withdrawal from a RRIF Type: MC Topic: Personal tax credits - pension income credit ITA 118(3)

71) Barry Notting has just received an inheritance of $50,000 in cash. As he is a very successful professional, he does not need the funds currently. Given this, he intends to invest the funds in preferred shares which pay an annual eligible dividend of 5.5%. He intends to purchase a new home in five years and will liquidate the investment at the end of that period. He is considering two alternatives: Alternative 1 - Purchase the $50,000 of preferred shares personally. Alternative 2 - Contribute the $50,000 to his RRSP (he has sufficient unused deduction room) and claim the RRSP deduction. The income tax savings resulting from the RRSP deduction would be personally invested in the same preferred shares that pays annual eligible dividends of 5.5%. In addition the RRSP can also purchase the same preferred shares. Barry's marginal income tax rate is 43% on ordinary income and is 26% on eligible dividends. The 26% rate represents the income tax on a grossed-up eligible dividend minus the dividend tax credit. Ignoring the effect of any reinvestment of the dividends received, determine which alternative will provide Barry with the largest amount of funds towards the purchase of a home.

Answer: Alternative 1 - The $50,000 inheritance is not included in income and is therefore not subject to income tax allowing for the full amount to be invested or contributed to an RRSP. Given this, the results over the five year period are as follows: Dividends Received [(5.5%)($50,000)(5)] Taxes [(26%)($13,750)] After Tax Income Principal Amount Available Funds for the Home Purchase

$13,750 ( 3,575) $10,175 50,000 $60,175

Alternative 2 - When the inheritance is contributed to an RRSP there will be income tax savings of $21,500 [([(43%)($50,000)], as a result of the RRSP deduction. Assuming that he invests these savings directly in the preferred shares, he would have the following amount available for his home purchase after 5 years: Dividends Received [(5.5%)($21,500)(5)] Taxes [(26%)(5,913)] After Tax Income Principal Amount Available Personal Funds for Home Purchase

$ 5,913 ( 1,537) $ 4,376 21,500 $25,876

In addition the RRSP would have received eligible dividends that are not subject to Part I tax by the RRSP trust. As a result Barry would be able to withdraw the RRSP balance at the end of year 5 but would be required to include that full amount in his income at that time. The net amount available would be determined as follows: Dividends Received by the RRSP [(5.5%)($50,000)(5)] Contribution Withdrawn Total Withdrawal Taxes [(43%)($63,750)] Available RRSP Funds for Home Purchase

$13,750 50,000 $63,750 ( 27,413) $36,337

When this $36,337 amount is combined with the $25,876, the total is $62,213. This is an improvement of $2,038 over the $60,175 that was available in the first alternative. Type: ES Topic: RRSPs - direct personal investments vs investments through an RRSP

72) Mr. Marco Marconi has employment income of $78,300 which includes an RPP deduction of $2,400. In addition, he has a business loss of $6,750, taxable dividends of $5,640, and pays $12,400 of spousal support to his former spouse. What is Mr. Marconi's earned income for RRSP purposes for the year? Answer: His earned income for RRSP purposes is $61,550 ($78,300 + $2,400 - $6,750 - $12,400). Type: ES Topic: RRSP - earned income

73) Susan Copley has employment income of $56,200 which includes an RPP deduction of $1,800. In addition she has taxable capital gains of $4,500, a rental loss of $2,300, spousal support payments received of $12,000, and eligible dividends received of $1,500. What is her earned income for RRSP purposes for the year? Answer: Her earned income for RRSP purposes is $67,700 ($56,200 + $1,800 - $2,300 + $12,000). Type: ES Topic: RRSP - earned income

74) Ms. Calvin's employer sponsors both a money purchase RPP and a DPSP. During the current year, her employer contributes $2,600 to the RPP and $1,700 to the DPSP on behalf of Ms. Calvin. Ms. Calvin contributes $2,600 to the RPP. Calculate the amount of her Pension Adjustment for the current year. Answer: The Pension Adjustment will be $6,900 ($2,600 + $1,700 + $2,600). Type: ES Topic: Pension adjustments - PAs, PSPAs & PARs

75) John Darby's employer sponsors both a money purchase RPP and a DPSP. During the current year, the employer contributes $2,500 to the RPP and $1,250 to the DPSP on behalf of Mr. Darby. Mr. Darby contributes $2,500 to the RPP. Calculate the amount of his Pension Adjustment for the current year. Answer: The Pension Adjustment is $6,250 ($2,500 + $1,250 + $2,500). Type: ES Topic: Pension adjustments - PAs, PSPAs & PARs

76) Mrs. Alison Lair has 2021 earned income for RRSP purposes of $43,500. She is not a member of an RPP or a DPSP. At the end of 2021, her unused RRSP deduction room was $5,100 and she has no undeducted contributions. In 2022, she contributes $7,000 to her RRSP and claims akes an RRSP deduction of $5,200. What is the amount of Mrs. Lair's unused RRSP deduction room and undeducted RRSP contributions at the end of 2022? Answer: The required calculation would be as follows: Unused Deduction Room - End of 2021 Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $43,500 = $7,830 Less 2022 RRSP Deduction Unused RRSP Deduction Room - End of 2022

$5,100

7,830 ( 5,200) $7,730

Mrs. Lair has undeducted contributions of $1,800 ($7,000 - $5,200) that can be carried forward and deducted in any subsequent year as there is sufficient RRSP deduction room. Type: ES Topic: RRSPs - unused deduction room

77) For 2021, Andrew Flack has earned income for RRSP purposes of $96,000. He is not a member of an RPP or a DPSP. While he had no undeducted contributions at the end of 2021, he had unused RRSP deduction room of $6,500. In 2022, he contributes $9,000 to his RRSP and claims an RRSP deduction of $8,500. What is the amount of Mr. Flack's unused RRSP deduction room and undeducted RRSP contributions at the end of 2022? Answer: The required calculation would be as follows: Unused Deduction Room - End of 2021 Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $96,000 = $17,280 Less 2022 RRSP Deduction Unused RRSP Deduction Room - End of 2022

$6,500

17,280 ( 8,500) $15,280

Mr. Flack has undeducted contributions of $500 ($9,000 - $8,500) that can be carried forward and deducted in any subsequent year as there is sufficient RRSP deduction room. Type: ES Topic: RRSPs - unused deduction room

78) In 2021, Mrs. White has taxable capital gains of $21,750, rental income of $5,720, pays spousal support of $15,000, and has employment income of $80,200 after claiming an RRP deduction of $3,000. Based on her RPP contributions of $3,000 and the matching contributions made by her employer, her employer reports a 2021 PA of $6,000. At the end of 2021, Mrs. White has unused RRSP deduction room of $11,120. In addition at the end of 2021 she has undeducted RRSP contributions of $6,275. In 2022, she makes additional contributions to her RRSP of $13,000. Determine Mrs. White's maximum RRSP deduction for 2022. Assuming she deducts the maximum, determine the amount of her unused RRSP deduction room at the end of 2022, and indicate the amount of any undeducted contributions remaining at the end of 2022. Answer: The required calculations would be as follows: Employment Income RPP Contributions Rental Income Spousal Support Deducted 2021 Earned Income

$80,200 3,000 5,720 ( 15,000) $73,920

Unused Deduction Room - End of 2021 Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $73,920 = $13,306 Less 2021 PA 2022 RRSP Deduction Limit RRSP Deduction is lesser of: • RRSP Deduction Limit = $18,426 • Available Contributions = $19,275 ($6,275 + $13,000) Unused RRSP Deduction Room - End of 2022

$11,120

13,306 ( 6,000) $18,426

( 18,426) Nil

Mrs. White has undeducted contributions of $849 ($19,275 - $18,426) that can be carried forward and deducted in a subsequent year in which there is sufficient RRSP deduction room. Type: ES Topic: RRSP contributions - calculating the deduction

79) For the 2021 taxation year, Marion Blue has employment income of $45,000 which includes an RPP deduction of $1,800, spousal support received of $18,000, a business loss of $3,500, and interest income of $1,600. She is a member of her employer's RPP to which she contributes $1,800. Her employer makes a matching contribution and reports a 2021 PA of $3,600. At the end of 2021, she has unused RRSP deduction room of $4,800 and undeducted RRSP contributions of $3,800. In early 2022, she contributes $9,400 to her RRSP. Determine Marion's maximum RRSP deduction for 2022. Assuming she deducts the maximum, determine the amount of any unused RRSP deduction room that she will have available at the end of 2022, and indicate the amount of any undeducted contributions remaining at the end of 2022. Answer: The required calculations would be as follows: Employment Income RPP Contributions Spousal Support Received Business Loss 2021 Earned Income

$45,000 1,800 18,000 ( 3,500) $61,300

Unused Deduction Room - End of 2021 Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $61,300 = $11,034 Less 2021 PA 2022 RRSP Deduction Limit RRSP Deduction is lesser of: • RRSP Deduction Limit = $12,234 • Available Contributions = $13,200 ($3,800 + $9,400) Unused RRSP Deduction Room - End of 2022

$ 4,800

11,034 ( 3,600) $12,234

( 12,234) Nil

Ms. Blue has undeducted contributions of $966 ($13,200 - $12,234) that can be carried forward and deducted in a subsequent year in which there is sufficient RRSP deduction room. Type: ES Topic: RRSP contributions - calculating the deduction

80) Mr. Jack Parnell is not a member of an RPP or a DPSP. At the beginning of 2021, Mr. Parnell has no unused RRSP deduction room. His earned income for each of 2020 and 2021 is $75,000. On July 1, 2021, he makes a $13,500 RRSP contribution, but does not claim any deduction for the year. In 2022, he has earned income of $60,000, makes a $16,000 contribution on May 1, but still does not claim a deduction for the year. Determine any penalty tax that will be charged to Mr. Parnell for excess contributions during either 2021 and 2022. Answer: The required calculations are as follows: 2021 Contribution 2022 Addition to Deduction Room [(18%)($75,000)] Excess Contribution

$13,500 ( 13,500) Nil

2022 Contribution $2,000 Cushion 2022 Addition to Deduction Room [(18%)($75,000)] Excess Contribution subject to penalty tax

$16,000 ( 2,000) ( 13,500) $ 500

As the $16,000 contribution was made on May 1, 2022, there will be a 2022 penalty of $40 [(1%)($500)(8 months)]. Whether an RRSP deduction is claimed is irrelevant since the purpose of the penalty is to prevent excess contributions which can then earn income without Part I tax. Type: ES Topic: RRSPs - penalty tax for excessive contributions

81) At the beginning of 2021, Bob Pilon has no unused RRSP deduction room. His earned income for each of 2020 and 2021 is $105,000. On August 1, 2021, he makes an $18,900 contribution to his RRSP. On April 1, 2022, he makes an additional contribution of $22,000. He does not claim an RRSP deduction in either 2021 or 2022. He is not a member of an RPP or a DPSP. Determine any penalty that will be assessed to Mr. Pilon for excess contributions during either 2021 or 2022. Answer: The required calculations are as follows: 2021 Contribution 2021 Addition to Deduction Room [(18%)($105,000)] Excess Contributions

$18,900 ( 18,900) Nil

2022 Contribution $2,000 Cushion 2022 Addition to Deduction Room [(18%)($105,000)] Excess Contribution subject to penalty tax

$22,000 ( 2,000) ( 18,900) $ 1,100

As the $22,000 contribution was made on April 1, 2022, there will be a 2022 penalty of $99 [(1%)($1,100)(9 months)]. The fact that there no RRSP deduction was claimed is irrelevant to the application of the penalty. Type: ES Topic: RRSPs - penalty tax for excessive contributions

82) In 2020, Austin Peters makes a $1,500 contribution to an RRSP in which his spouse is the annuitant. His spouse also makes a $2,800 contribution to her RRSP in 2020. In 2021, Austin makes a $2,000 contribution to the spousal RRSP. In 2022, Austin's spouse withdraws $4,300 from her RRSP. How will the withdrawal be treated? Answer: The spouse's RRSP is a spousal plan as contributions to the plan have been made by Mr. Peters. Given this, when the 2022 withdrawal is made, any contributions made by Mr. Peters in 2022, or the two preceding calendar years (2020 and 2021) are attributed to him. This means that $3,500 ($1,500 + $2,000) of the 2022 withdrawal will be included in his income with the remaining $800 ($4,300 - $3,500)included in the 2022 income of his spouse. Type: ES Topic: RRSPs - spousal or common-law partner plans

83) Cody Bryant's spouse has had an RRSP for several years. For the first time, in 2020, Cody makes a contribution to his spouse's RRSP in the amount of $4,500 and in 2021 an additional contribution of $5,500. Cody claims a deduction for both of the spousal contributions. At the beginning of 2022, his spouse's RRSP has a balance of $226,000. In 2022 she withdraws $11,000 from her RRSP. How will this withdrawal be treated? Answer: The wife's plan is a spousal plan as contributions to the plan have been made by a spouse or common-law partner. Any withdrawal from the spousal plan in 2022 will be attributed to the extent of contributions made by the spouse in the year and the two immediately preceding calendar years. This means that $10,000 ($4,500 + $5,500) of the 2022 withdrawal will be included in his 2022 net income with the remaining $1,000 ($11,000 - $10,000) included in the 2022 net income of his spouse. Type: ES Topic: RRSPs - spousal or common-law partner plans

84) Mr. John Debon withdrew $15,000 from his RRSP in 2019, using the provisions of the Home Buyers' Plan (HBP). In 2020 he repaid $8,500 of the HBP balance. What is the minimum repayment that must be paid in 2021? If he makes no payment for 2021, what will be the minimum payment that must be made in 2022? Answer: Mr. Debon's minimum payment for 2021 would be $433 [(1/15)($15,000 - $8,500)]. Note that the voluntary payment that was made in 2020 did not reduce the fraction of the remaining balance that must be repaid in 2021. If he does not make this payment, then that amount will be added to his 2021 net income and subtracted from his HBP balance owing. Without regard to whether or not he makes this $433 payment, his minimum payment for 2022 would again be $433 [(1/14)($15,000 - $8,500 - $433)]. Type: ES Topic: RRSP - home buyers' plan

85) In early 2019, Jason Borshiov withdrew $21,000 from his RRSP under the provisions of the Home Buyers' Plan (HBP). Because of a large bonus received from his employer, he repays $7,000 of the HBP in 2020. What is the minimum required payment for 2021? If he makes no payment in 2021, what will be the minimum required payment in 2022? Answer: Mr. Borshiov's minimum payment for 2021 would be $933 [(1/15)($21,000 - $7,000)]. Note that the voluntary payment made in 2020 did not reduce the fraction of the remaining balance that must be repaid in 2021. If no payment is made in 2021, the $933 will be added to his 2021 net income and subtracted from his HBP balance owing. Whether or not he makes the 2021 payment, the minimum payment for 2022 would again be $933 [(1/14)($21,000 - $7,000 - $933)]. Type: ES Topic: RRSP - home buyers' plan

86) Mr. Jules Forsyth enrolls full time in a four year university program running from September, 2017, through to April, 2021. In order to finance this program under the provisions of the Lifelong Learning Plan (LLP), he withdraws $10,000 from his RRSP in September, 2017, a further $5,000 in September, 2018, and an additional $5,000 in September, 2019. The university course is completed successfully. Designated repayments of $2,900 is made in June, 2022, and a second of $1,500 in November, 2023. Explain the income tax consequences of the withdrawals and repayments. Answer: As the withdrawals are within the annual limit of $10,000 and the overall limit of $20,000, there will be no income tax consequences associated with the withdrawals from Mr. Forsyth's RRSP. In other words no amounts are required to be included in income as a result of these LLP withdrawals. The repayment period will begin in 2022, as this is the fifth year (the maximum delay) of LLP participation. It did not begin earlier because he was enrolled in a qualifying education program in the years 2017 through 2021. There are no income tax consequences in 2022, as his designated repayment of $2,900 exceeds the required amount of $2,000 ($20,000 ÷ 10). The required repayment for 2023 is $1,900 [($20,000 - $2,900) ÷ 9]. The shortfall in his payment of $400 ($1,900 - $1,500) will be included in his net income for 2023. This illustrates the fact that excess payments in some years cannot be applied against shortfalls in subsequent years. Type: ES Topic: RRSP - lifelong learning plan

87) Charles Botterill enrolls full time in a three year university program which runs from September, 2017 through to May, 2020. To assist with financing this program, Charles uses the provisions of the Lifelong Learning Plan (LLP) to withdraw $6,000 from his RRSP in each of the three years 2017, 2018, and 2019. He is successful in completing the university program and receives his degree in April, 2020. In 2022, he makes a designated repayment of $2,200. This is followed by a designated repayment of $1,200 in 2023. Explain the income tax consequences of the withdrawals and repayments. Answer: As the withdrawals are within the annual limit of $10,000 and the overall limit of $20,000, there will be no income tax consequences associated with the $18,000 [(3)($6,000)] of withdrawals from Mr. Botterill's RRSP. The required repayment period begins in 2022, the fifth year of his participation in the LLP. This is the maximum delay for repayment. There are no income tax consequences for 2022 as Mr. Botterill's designated payment of $2,200 exceeds the required minimum of $1,800 ($18,000 ÷ 10). The required payment in 2023 is $1,756 [($18,000 - $2,200) ÷ 9]. The shortfall of $556 ($1,756 - $1,200) will be included in his net income for 2023. Type: ES Topic: RRSP - lifelong learning plan

88) On January 1, 2022, Ms. Sheila Salon transfers the balance of her RRSP to a RRIF. At this time, Ms. Salon is 67 years of age. On January 1, 2022, the FMV of the fund property is $1,450,000. The corresponding balance on January 1, 2023 is $1,350,000. What is the minimum withdrawal that Ms. Salon must make from the RRIF in 2022 and 2023? Answer: There is no required withdrawal from a RRIF in the year it is created. As a result there is no minimum withdrawal in 2022. In 2023, the minimum withdrawal is $61,364 [$1,350,000 ÷ (90 - 68)]. Type: ES Topic: RRIF - minimum withdrawal

89) In 2022, Saul Bronson transfers his entire RRSP balance to a RRIF. At this time, Mr. Bronson is 69 years of age. On January 1, 2022, the FMV of the fund is $2,400,000 and on January 1, 2023 it is $2,600,000. What is the minimum withdrawal that Mr. Bronson must make from the RRIF in 2022 and 2023? Answer: There is no required withdrawal from a RRIF in the year it is created. As a result there is no minimum withdrawal in 2022. In 2023, the minimum would be $130,000 [$2,600,000 ÷ (90 - 70)]. Type: ES Topic: RRIF - minimum withdrawal

90) As of December 31, 2022, Mrs. Mary Barth has worked for her current employer for 37 years. On this date she retires and, in recognition of her devoted service, her employer pays her a retiring allowance of $85,000. Her employer has never sponsored an RPP or DPSP. What is the maximum deductible contribution that Mrs. Barth can make to her RRSP as a result of receiving this retiring allowance? Answer: If Mrs. Barth has worked for 37 years as of 2022, she must have started in 1986. Given this, she can rollover a total of $24,500 [($2,000)(10 Years before 1996) + ($1,500)(3 Years Before 1989)]. The remaining $60,500 ($85,000 - $24,500) will be included in her taxable income and will be subject to income tax in 2022. Type: ES Topic: RRSPs - transfer of retiring allowances

91) As of the end of 2022, Merideth Jones has worked for her current employer for 39 years. She retires at the end of December of 2022 and, under the terms of the applicable collective agreement, she receives a retiring allowance of $62,000. Her employer has never sponsored an RPP or DPSP. What is the maximum deductible contribution that Ms. Jones can make to her RRSP as a result of receiving this retiring allowance? Answer: If Ms. Jones has worked for 39 years as of 2022, she must have started in 1984. Given this, she can rollover a total of $31,500 [($2,000)(12 Years before 1996) + ($1,500)(5 Years before 1989)]. The remaining $30,500 ($62,000 - $31,500) will be included in her taxable income and will be subject to income tax in 2022. Type: ES Topic: RRSPs - transfer of retiring allowances

92) The Canadian retirement savings system makes an effort to treat all taxpayers equally, without regard to the type of retirement savings plan they have access to. In order to implement this objective, it is necessary to have Pension Adjustments (PAs), Past Service Pension Adjustments (PSPAs), and Pension Adjustment Reversals (PARs) to ensure that a certain level of benefits is generally available to all. The following independent Cases serve to illustrate the calculations that are required for these pension adjustments. Lorina Heyman Ms. Heyman began working for Unafase Ltd. in 2019. The Company sponsors a defined contribution pension plan which requires 5 years of service prior to pension benefits becoming vested. For the 3 years 2019 through 2021, a total of $16,000 in PAs were reported for Ms. Heyman by the employer. In January 2022, Ms. Heyman decided to quit. As a result she lost the pension benefits that had not yet become vested. Required: Calculate Ms. Heyman's PAR for 2022. Reyes Club Mr. Club has worked for Konlane Inc. since January 1, 2020. On January 1, 2022, the Company implements a defined benefit pension plan. The pension agreement requires the Company to retroactively extend benefits for all years of service prior to 2022. The plan provides a benefit of 1.2% of pensionable earnings for year of service. Mr. Club's pensionable earnings for his years of service are as follows: 2020 2021 2022

$72,000 76,000 82,000

Required: Calculate Mr. Club's 2022 PSPA, as well as his 2022 PA. Carrie Salisbury Ms. Salisbury's employer sponsors both a defined contribution RPP and a DPSP. In 2022, the employer contributed $4,600 to the RPP and $2,100 to the DPSP. Ms. Salisbury was required to make a matching contribution of $4,600 to the RPP. Required: Calculate Ms. Salisbury's 2022 PA. Pablo Godley Mr. Godley's employer sponsors a defined benefit RPP. In 2022, Mr. Godley's employer contributes $4,500 to the RPP on his behalf. In addition, Pablo is required to make a matching contribution of $4,500. The plan provides a benefit of 1.35% of pensionable earnings for each year of service. For 2022, Mr. Godley has pensionable earnings of $103,000. Required: Calculate Mr. Godley's 2022 Pension Adjustment (PA).

Willis Hack Mr. Hack has worked for his current employer since 2020. He earns vested benefits under a defined benefit RPP that is sponsored by his employer. Mr. Hack and his employer contribute the same amount to the plan each year. Mr. Hack's total RPP contributions to the plan (employer and employee) and pensionable earnings for these years were as follows: Year 2020 2021 2022

Total RPP Contributions $4,200 $4,400 $4,800

Earnings $71,000 73,000 69,000

Prior to 2022, the plan provided a benefit of 1.1% of pensionable earnings for each year of service. As of 2022 the benefit percentage was increased to 1.2%. This change will be applied retroactively to all prior years of service. Required: Calculate Mr. Hack's 2022 PSPA and his 2022 PA. Answer: Lorina Heyman The required PAR would be $16,000. This is simply the total of the PAs to Lorina for the 2019 through 2021 years. Reyes Club The required PSPA would be calculated as follows: 2020 Amount [(1.2%)(9)($72,000)] 2021 Amount [(1.2%)(9)($76,000)] 2022 PSPA

$ 7,776 8,208 $15,984

In addition to the PSPA calculated above, there would be a 2022 PA calculated as follows: [(1.2%)(9)($82,000)] = $8,856 Carrie Salisbury The required PA would be calculated as follows: Employer's Contribution to DPSP Employer's Contribution to RPP Carrie's Contribution to RPP 2022 PA

$ 2,100 4,600 4,600 $11,300

Pablo Godley The required 2022 PA would be calculated as follows: [(1.35%)(9)($103,000)] = $12,514.50 Note that the actual contributions made during the year have no influence on the PA for a defined benefit RPP.

Willis Hack The required PSPA would be calculated as follows: 2020 Amount [(1.2% - 1.1%)(9)($71,000)] 2021 Amount [(1.2% - 1.1%)(9)($73,000)] 2022 PSPA

$ 639 657 $1,296

In addition to the 2022 PSPA calculated above, there would be a 2022 PA calculated as follows: [(1.2%)(9)($69,000)] = $7,452 Note that actual contributions made have no impact on the PSPA or PA for a defined benefit RPP. Type: ES Topic: Pension adjustments - PAs, PSPAs & PARs

93) On January 1, 2020, Kerri Kmatz had unused RRSP deduction room of $18,500. In addition, because she was unemployed in the two previous years, she had undeducted contributions of $14,700. She had no earned income for RRSP purposes in either 2018 or 2019. While she manages to live on accumulated savings during the year, she also has no 2020 earned income. In 2021 she has several periods of part time employment and has earned income of $17,300. In addition, as the result of an incredible lucky streak at the blackjack tables in the Montreal Casino, she has accumulated winnings of over $100,000. In her excitement, she immediately makes a $20,000 contribution to her RRSP, on October 1, 2021. Without deducting any RRSP contributions for 2021, she has no income tax payable for the year. In 2022, she finally finds full time employment, resulting in 2022 earned income of $45,000. She makes no further contributions in the year and claims her maximum RRSP deduction for 2022. Required: A. Determine Kerri's maximum RRSP deduction for 2022. B. Determine any penalty tax that will be charged for 2022 for excessive RRSP contributions. C. Determine the amount of contributions that Kerri would have to withdraw from her RRSP on January 2, 2023 to avoid further penalty tax. What advice would you give to Kerri regarding her retirement savings? Answer: Part A - Maximum RRSP Deduction Kerri's maximum 2022 RRSP deduction would be calculated as follows: Unused Deduction Room - January 1, 2020 2020 Addition (Based on 2019 Earned Income of Nil) 2021 Addition (Based on 2020 Earned Income of Nil) 2022 Addition - Lesser of: RRSP Dollar Limit - $29,210 18% of 2021 Earned Income [(18%)($17,300)] = $3,114 Maximum 2022 RRSP Deduction

$18,500 Nil Nil

3,114 $21,614

Part B - Penalty for Excess RRSP Contributions Kerri would have been charged the penalty tax for excess RRSP contributions for 2021. However, the problem only requires the calculation for 2022. The 2022 penalty tax for excess RRSP contributions would be calculated as follows: Undeducted Contributions January 1, 2021 Balance 2021 Addition 2022 Deduction Unused Deduction Room January 1, 2021 2022 Addition 2022 Deduction Permitted Cushion Excess Subject to Penalty Tax Penalty Rate Monthly Penalty Months January to December Penalty Tax for 2022

$14,700 20,000 ( 21,614) $18,500 3,114 ( 21,614)

$13,086

Nil ( 2,000) $11,086 1% $ 111 12 $ 1,332

Part C - Recommended Withdrawal and Advice Kerri's Earned Income for 2022 is $45,000. This will result in a 2023 addition to her deduction room of $8,100 [(18%)($45,000)]. Provided she wishes to leave the permitted cushion of $2,000 in her RRSP, she should immediately withdraw $2,986 ($11,086 - $8,100) from her RRSP in order to avoid additional penalties in 2023. Although she would not be able to deduct the $2,000 cushion, the RRSP would enjoy the benefit of earning income on that $2,000 amount without income tax under PArt I. An over contribution to her RRSP would be deductible in a future year as long as there is sufficient RRSP deduction room. As she obviously does not need the funds, they should be contributed to a TFSA. As long as the withdrawal is made prior to the end of 2023 (the year after the assessment for 2022 was made), an offsetting RRSP deduction is available. In the future, Kerri should verify her RRSP deduction room prior to contributing to her RRSP as she should not be paying any penalty tax for excess RRSP contributions. Type: ES Topic: RRSP - comprehensive problem

94) Hazel Swilling had married shortly after graduating from college at the age of 22 and had no earned income prior to 2021. The marriage ended with a divorce in 2021 and she immediately began to look for full-time employment. In November of 2021 she found employment with an annual salary of $36,000. Her gross employment income for November and December of 2021 was $6,000. Hazel's new employer sponsors a defined benefit RPP. In 2021, $400 was withheld from Hazel's salary as an RPP contribution with the employer making a matching contribution. On August 31, 2021, as part of the divorce settlement, ownership of a rental property that had been owned by her former spouse prior to the marriage was transferred to her. The rental property had been purchased for $423,000 with $100,000 for the land and $323,000 for the building. Information on this property is as follows: FMV on receipt in 2021 Land Building January 1, 2021 UCC of Building Rental Loss (Before CCA) For September 1 to December 31, 2021

$120,000 375,000 280,054 2,600

Hazel also received a lump-sum payment of $98,000 on September 1, 2021, plus $2,500 as monthly spousal support beginning September 1, 2021 as part of the divorce settlement. The $98,000 was deposited in a savings account and, for the period September 1 through December 31, 2021 Hazel received interest income of $653. All spousal support payments were made on time. In 2021 Hazel also received the following amounts: • An inheritance from her mother's estate of $62,000. • Eligible dividends from Canadian public companies of $1,800. For both 2021 and 2022, Hazel does not anticipate that her income will exceed the limit for the lowest federal income tax bracket of 15%. However, she anticipates that for the 2023 taxation year, her income will put her in the 26% federal income tax bracket. Required: A. Calculate Hazel's 2021 employment income. B. Determine Hazel's maximum deductible RRSP contribution for 2022. C. As Hazel's personal financial consultant, what advice would you give her regarding TFSA and RRSP contributions and deductions for 2022?

Answer: Part A Hazel's 2021 employment income is $5,600, her gross salary of $6,000 minus a deduction for her RPP contributions of $400. Part B The annual addition for 2022 would be the lesser of the 2022 dollar limit of $29,210 and 18% of earned income which would be calculated as follows: Employment Income (Part A) Add Back RPP deduction Spousal Support Received [(4)($2,500)] Rental Loss 2021 Earned Income Percent 2022 Addition (Less than $29,210)

$ 5,600 400 10,000 ( 2,600) $13,400 18% $ 2,412

Hazel's maximum deductible RRSP contribution for 2022 would be calculated as follows: Opening Unused Deduction Room 2022 Addition Less 2021 PA ($400 + $400) Maximum 2022 Deductible RRSP Contribution

Nil $2,412 ( 800) $1,612

Part C As Hazel has made no RRSP contributions prior to 2022, she has no undeducted contributions. In addition, she has interest income and dividends that are subject to income tax. Given this, as well as the fact that her lump-sum payment of $98,000 and $62,000 inheritance, both of which are not required to be included in her income, leaves her with cash in excess of her needs, she should contribute the maximum deductible RRSP contribution of $1,612 for 2022. While she could deduct the $1,612 in 2022, it would be advantageous to defer this deduction until 2023 when she expects to be in a higher income tax bracket. At the federal level, the income tax savings will be $177 [(26% - 15%)($1,612)] larger if the RRSP deduction is claimed in 2023 instead of 2022. Given her available funds, Hazel should be advised to consider contributing the maximum allowable amount to a TFSA, as well as over contributing up to $2,000 to her RRSP. Although she would not be able to deduct the $2,000 cushion, the RRSP would enjoy the benefit of earning income on that $2,000 amount without income tax under Part I. An over contribution to her RRSP would be deductible in a future year as long as there is sufficient RRSP deduction room. All of these contributions should be made as soon as possible in order to maximize the amount of time in which the earnings are exempt from income tax under Part I while the funds are within a RRSP or TFSA. Type: ES Topic: RRSPs - calculating the deduction, TFSAs and some tax planning

95) After being unemployed for two years, Donald Parker found employment with a large, public corporation in early 2021. In 2021 his salary was $40,000 plus commissions of $20,000 and in 2022 his salary was $53,000 plus commissions of $32,000. Deductible employment expenses were $3,000 in 2021 and $4,000 in 2022. Donald's employer withheld the following amounts: 2022 $19,000 3,500 953 250 1,500

Federal and Provincial Income Tax CPP Contributions EI Premiums Disability Insurance Premiums RPP Contributions

2021 $11,000 3,166 890 250 1,400

The RPP is a money purchase plan in which the employer makes contributions equal to that of the employees. In addition the employer also disability insurance premiums in an amount equal to the premiums paid by employees. The employer also provided Donald with a low interest loan at a rate below what the employee could negotiate with a bank. The taxable interest benefit on the loan was $2,750 in 2021 and $2,500 in 2022. Other information for the years 2021 and 2022 is as follows: 2022 $1,400 2,600 ( 3,600) ( 2,200) 875 273

Rental Income (Loss) Spousal Support received Spousal Support paid Capital Gains (Losses) Royalties* Interest Income

2021 ($2,500) 2,400 ( 3,500) 1,750 920 496

*The royalties are on a song written by Donald's mother in 1962. In 2018, just prior to losing his job, Donald contributed $7,500 to an RRSP. As he realized he would be in the minimum income tax bracket until he found other employment, Donald did not claim a deduction for this RRSP contribution prior to 2022. His Unused RRSP Deduction Room at the end of 2021 is $25,000. In November, 2022, Donald wins $200,000 in a lottery. He would like to put as much of this amount as possible into his RRSP before the end of 2022. Required: A. Determine Donald's 2022 RRSP Deduction Limit. B. Calculate the amount you would recommend that Donald contribute to his RRSP in 2022.

Answer: Part A Donald's maximum 2022 RRSP deduction will include the lesser of $29,210 and 18% of his 2021 earned income which is is calculated as follows: Salary Commissions Employment expenses Taxable Benefit on Loan Rental Loss Spousal Support Received Spousal Support Paid Royalties (Note) 2021 Earned Income Percent 2022 Addition (Less than $29,210)

$40,000 20,000 ( 3,000) 2,750 ( 2,500) 2,400 ( 3,500) Nil $56,150 18% $10,107

Note - Royalties received due to someone else's work are not part of earned income for RRSP purposes. Donald's maximum 2022 RRSP deduction is calculated as follows: Opening Unused RRSP Deduction Room 2022 Addition 2021 Pension Adjustment (PA) [(2)($1,400)] RRSP Deduction Limit for 2022

$25,000 10,107 ( 2,800) $32,307

The PA is equal to the sum of the employee and employer contributions to the RPP. Part B Since Donald wants to contribute the maximum allowable to his RRSP, the appropriate advice would be to contribute enough to make the maximum 2022 deduction, plus the allowed over contribution of $2,000. This amount would be calculated as follows: RRSP Deduction Limit for 2022 Allowable Excess Amount Non-Penalty Contribution Limit Undeducted Contributions from previous years Maximum Contribution for 2022

$32,307 2,000 $34,307 ( 7,500) $26,807

Given his available funds, Donald should be advised to also consider contributing the maximum allowable amount to a TFSA. Type: ES Topic: RRSP contributions - calculating the deduction

96) Henry Plate's earned income for RRSP purposes for 2020 was $52,000. In 2021 Mr. Plate and his employer each contributed $2,500 to the employer sponsored money purchase RPP. At the end of 2021 there was no unused RRSP deduction room or undeducted RRSP contributions. Mr. Plate's 2022 earned income was $65,000. In 2022 Mr. Plate and his employer each contributed $2,800 to the employer sponsored money purchase RPP. Mr. Plate made a $5,000 contribution to his RRSP on April 30, 2022. Required: Indicate which of the RRSP and RPP contributions that have been made by Mr. Plate can be deducted for 2022. In addition, if he makes the maximum RRSP deduction in 2022, indicate any carry forwards available for subsequent years. Answer: Registered Pension Plan His 2022 RPP contribution of $2,800 will be deductible against employment income in 2022. Registered Retirement Savings Plan Mr. Plate's maximum 2022 RRSP deduction would be calculated as follows: Opening Unused Deduction Room Annual Addition - Lesser of: • 2022 RRSP Deduction Limit = $29,210 • [(18%)($52,000)] = $9,360 2021 Pension Adjustment ($2,500 + $2,500) 2022 RRSP Deduction Limit

Nil

$9,360 ( 5,000) $4,360

If he deducts the $4,360 limit for the year, he will have an unused contribution of $640 ($5,000 - $4,360) that can be carried forward for deduction in subsequent years. Type: ES Topic: RRSP contributions - calculating the deduction

97) Ms. Suzanne Sharp established an RRSP in 2014. As of January 1, 2021, Suzanne had no unused RRSP deduction room and no undeducted RRSP contributions. Her 2020 earned income was sufficient for her to make the maximum 2021 contribution of $27,830. However, as she acquired a new home in 2021, she made no contributions to her RRSP for that year. With the new home and furnishing purchases behind her and the receipt of a sizable inheritance from her mother's estate, she has sufficient funds to maximize her RRSP contribution in 2022. She would like you to advise her as to the maximum contribution that she can make in 2022 without incurring any penalty tax for excess RRSP contributions. The following information relates to the 2021 taxation year: Employment Income Salary RPP Contributions (Note 1) CPP Withheld EI Withheld Donations to Registered Charities Withheld Stock Option Benefit Deductible Employment Expenses Interest Free Loan Benefit

$225,000 7,600 3,166 890 1,500 3,400 4,800 2,600

Other Information Business Income (Note 2) Spousal Support Paid Interest Income Eligible Dividends Received Net Taxable Capital Gains Royalty Income (Note 3)

21,400 18,000 2,500 10,300 7,400 6,200

Note 1 - Suzanne's employer makes a matching contribution of $7,600. Note 2 - The business income is from a mail order business that Suzanne carries on as a sole proprietor from her home. Note 3 - The royalty income is from a university textbook that her mother wrote prior to her death. Required: Show the details of all the required calculations and ignore all GST/HST & PST considerations. A. Calculate Suzanne's 2021 Employment Income. B. Calculate Suzanne's 2021 Earned Income. C. Calculate the maximum 2022 RRSP contribution that Suzanne can make without incurring the penalty tax for excess RRSP contributions.

Answer: Part A Suzanne's 2021 Employment Income would be calculated as follows: Salary RPP Contributions CPP Withheld ($2,876 available for a tax credit) EI Withheld (Available for a tax credit) United Way Contributions Withheld (same as EI) Stock Option Benefit Deductible Employment Expenses Interest Free Loan Benefit 2021 Employment Income

$225,000 ( 7,600) N/A N/A N/A 3,400 ( 4,800) 2,600 $218,600

Part B Suzanne's 2021 Earned Income would be calculated as follows: Employment Income $218,600 Add Back RPP Contributions 7,600 Business Income 21,400 Spousal Support Paid ( 18,000) Interest Income N/A Eligible Dividends Received N/A Net Taxable Capital Gains N/A Royalty Income* N/A 2021 Earned Income $229,600 *As Suzanne was not the author of the textbook on which the royalties were paid, they are not included in 2021 Earned Income. Part C The calculation of Suzanne's maximum deductible RRSP contribution for 2022 is: Opening Unused Deduction Room 2021 RRSP Dollar Limit Annual Addition - Lesser of: 2022 RRSP Dollar Limit = $29,210 18% of 2021 Earned Income [(18%)($229,600)] = $41,328 2021 PA [(2)(7,600)] Maximum Deductible RRSP Contribution for 2022 Permitted Additional Contribution Maximum Penalty Free RRSP Contribution for 2022 Type: ES Topic: RRSP contributions - calculating the deduction

$27,830

29,210 ( 15,200) $41,840 2,000 $40,860

98) At the end of 2021, Mr. Jonathan Detwiller had unused RRSP deduction room of $10,000 and undeducted contributions of $4,500. Mr. Detwiller's various types of income and deductions for 2021 are as follows: Employment income Eligible dividends received Gross up [(38%)($7,800)] Subdivision e deductions (child care expenses) Taxable capital gains Allowable capital losses Rental loss

$56,000 7,800 2,964 ( 2,500) 5,400 ( 8,200) ( 9,000)

Required: A. Calculate Mr. Detwiller's 2021 net income without considering an RRSP deduction. In addition identify any carry over amounts. B. For each of the following independent cases, calculate: • the maximum RRSP contribution that Mr. Detwiller can make for 2022 without incurring the penalty tax for excess RRSP contributions; • Mr. Detwiller's maximum RRSP deduction for 2022, assuming that he makes the maximum contribution that you have calculated. Case 1 - In 2021, he is a member of a money purchase RPP in which he has contributed $1,500 and his employer has contributed $3,000. He is also a member of a DPSP to which his employer has contributed $1,000. Case 2 - In 2021, 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 - In 2021, he is not a member of a RPP or DPSP. Assume that in addition to the preceding information, he also has business income of $220,000. Answer: Part A Mr. Detwiller's 2021 Net Income would be determined as follows: Income ITA 3(a): Employment Income Eligible Dividends Gross Up [(38%)($7,800)] Income ITA 3(b): Taxable Capital Gains Allowable Capital Losses Balance of ITA 3(a) + 3(b) Less: subdivision e deductions ITA 3(c) Deductions under ITA 3(d): Rental Loss 2021 Net Income

$56,000 7,800 2,964 $ 5,400 ( 8,200)

$66,764

Nil $66,764 ( 2,500) $64,264 ( 9,000) $55,264

Mr. Detwiller's 2021 net income is $55,264 and there is also a 2021 net capital loss of $2,800 ($5,400 $8,200). Part B - Case 1 Mr. Detwiller's 2021 earned income would be calculated as follows: Employment Income Add Back RPP Contributions Rental Loss 2021 Earned Income

$56,000 1,500 ( 9,000) $48,500

Given this, his maximum 2022 RRSP contribution would be calculated as follows: Unused Deduction Room - End of 2021 Annual Addition - Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $48,500 = $8,730 Less 2021 PA ($1,500 + $3,000 + $1,000) 2022 RRSP Deduction Limit Allowable Excess Amount Non-Penalty Contribution Limit Undeducted Contributions from previous years Maximum 2022 RRSP Contribution

$10,000

8,730 ( 5,500) $13,230 2,000 $15,230 ( 4,500) $10,730

If Mr. Detwiller makes a contribution of $10,730, his 2022 RRSP deduction will be $13,230 and he will carry forward undeducted RRSP contributions of $2,000 ($4,500 + $10,730 - $13,230). Part B - Case 2 Mr. Detwiller's 2021 Earned Income would be calculated as follows: Employment Income Rental Loss 2021 Earned Income

$56,000 ( 9,000) $47,000

The maximum 2022 RRSP that would avoid any penalty tax would be: Unused Deduction Room - End of 2021 Annual Addition - Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $47,000 = $8,460 Less 2021 PA 2022 RRSP Deduction Limit Allowable Excess Amount Non-Penalty Contribution Limit Undeducted Contributions from previous years Maximum 2022 RRSP Contribution

$10,000

8,460 ( 4,500) $13,960 2,000 $15,960 ( 4,500) $11,460

If Mr. Detwiller makes a contribution of $11,460, his 2022 RRSP deduction will be $13,960 and he will carry forward undeducted RRSP contributions of $2,000 ($4,500 + $11,460 - $13,960). Part B - Case 3 Mr. Detwiller's 2021 Earned Income would be calculated as follows: Employment Income Rental Loss Business Income 2021 Earned Income

$ 56,000 ( 9,000) 220,000 $267,000

The maximum 2022 RRSP contribution that would avoid any penalty tax would be: Unused Deduction Room - End of 2021 Annual Addition - Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $267,000 = $48,060 Less 2020 PA 2021 RRSP Deduction Limit Allowable Excess Amount Non-Penalty Contribution Limit Undeducted Contributions from previous years Maximum 2022 RRSP Contribution

$10,000

29,210 Nil $39,210 2,000 $41,210 ( 4,500) $36,710

If Mr. Detwiller makes a contribution of $36,710, his 2022 RRSP deduction will be $39,210 and he will carry forward undeducted RRSP contributions of $2,000 ($4,500 + $36,710 - $39,210). Type: ES Topic: RRSPs - calculating the deduction plus net income

99) Stefanie Heiner provides you with the following information for 2022: 1. Her savings account earned interest of $875. 2. She realized taxable capital gains of $16,090. 3. She realized allowable capital losses on the sale of shares of $3,625. 4. She received eligible dividends of $4,620. 5. She paid periodic spousal support of $12,000. 6. She received royalties of $8,600 for a textbook that she wrote for the elementary school market. In addition she carried on a business as a sole proprietor with a December 31 fiscal period. Business income for accounting purposes is $156,470. Other business related information for the year is as follows: • Amortization in the amount of $23,400 was deducted in the determination of accounting business income. Maximum CCA, which Stefanie intends to claim, is $31,460. • As a result of meetings with various clients and suppliers, Stefanie incurred meal and entertainment expenses of $8,560. This amount was deducted in determining the accounting business income. • In 2022 depreciable property used in the business was sold for $26,500. The carrying value for accounting purposes was $15,900. The capital cost of the depreciable property sold was $31,000, and the UCC in the class on January 1, 2022 was $12,349. There were no additions to the class in the year. At the beginning of 2022, Stefanie had unused RRSP deduction room of $7,300. She also had undeducted contributions of $3,200. Required: A. Calculate Stefanie's minimum 2022 net income before any RRSP deduction. Ignore CPP contributions in your calculations. B. Calculate Stefanie's maximum 2022 RRSP deduction. Assume that Stefanie's 2021 earned income is equal to her 2022 earned income. In addition determine the amount of additional contributions that she would have to make in order to maximize her 2022 RRSP deduction.

Answer: Part A Minimum 2022 Net Income would be calculated as follows: Business Income Accounting Business Income Additions: Accounting Amortization Recapture (Note 1) Meals and Entertainment (Note 2) Deductions: Maximum CCA (Given) Accounting Gain on sale of property ($26,500 - $15,900) Business Income Property Income Interest Eligible Dividends Gross Up [(38%)($4,620)] Royalties Taxable Capital Gains Taxable Capital Gain Allowable Capital Loss Spousal Support Paid 2022 Net Income before RRSP Deduction

$156,470 23,400 14,151 4,280 ( 31,460) ( 10,600) $156,241

875 4,620 1,756 8,600 16,090 ( 3,625) ( 12,000) $172,557

Note 1 - Recapture of CCA would be calculated as follows: UCC - January 1, 2022 Reduced by the lesser of: Capital Cost = $31,000 POD = $26,500 Negative Ending UCC = Recapture

$12,349

( 26,500) ($14,151)

Note 2 - Only one-half of the $8,560 in business meals and entertainment tare deductible for income tax purposes therefore $4,280 [(1/2)($8,560)] must be added back since the accounting business income deducted the full amount.

Part B The calculation of 2021 earned income which is considered to be the same as 2022 earned income is as follows: Business Income Royalties (Individual was the Author) Spousal Support Paid 2021 Earned Income

$156,241 8,600 ( 12,000) $152,841

Using this information, the maximum 2022 RRSP deduction would be: Unused Deduction Room - January 1, 2022 Lesser of: 2022 RRSP Limit = $29,210 [(18%)($152,841)] = $27,511 PA Maximum 2022 RRSP Deduction

$ 7,300

27,511 N/A $34,811

The required amount of additional contributions would be calculated as follows: Maximum 2022 Deduction Undeducted Contributions Required Additional Contributions for 2022

Type: ES Topic: RRSPs - calculating the deduction plus net income

$34,811 ( 3,200) $31,611

100) Mr. Allen Arnold lives in Burlington, Ontario. He is 38 years old. His spouse Brenda is 32 years old and has 2022 net income of $8,500. They have two children both of whom are in perfect health. Their daughter Sarah is 12 and has net income from part time jobs of $300. Their son Derek is 10 and has no income of his own. Mr. Arnold works for a large public company and, in 2022, his basic salary is $103,000 and he earns commission income of $26,140. In 2022, his employer makes the following payroll withholdings: RPP Contributions CPP Contributions EI Premiums Donations to Registered Charities Union Dues Payments for personal use of company automobile Premiums to company's disability insurance plan

$4,200 3,500 953 1,200 260 600 1,200

Other Information: 1. Mr. Arnold's employer makes a matching $4,200 contribution to the company's RPP on behalf of Mr. Arnold. 2. Mr. Arnold's employer makes a matching $1,200 contribution to the company's disability insurance plan on behalf of Mr. Arnold. The comprehensive disability insurance plan provides periodic benefits during any period of disability to compensate for lost employment income. Due to a two month sick leave, Mr. Arnold receives disability insurance benefits of $10,950. Mr. Arnold has been making a $1,200 contribution each year since 2019. He has had no disability insurance claims in any of the years 2019 to 2021. 3. Mr. Arnold's employer provides him with an automobile that was purchased in 2019 for $38,000. His employer pays all of the operating expenses which, in 2022 totalled $9,800. In 2022, Mr. Arnold drove the automobile a total of 48,000 kilometers, 42,000 of which were for employment use with 6,000 for personal use. The automobile was only available to Mr. Arnold's for 10 months of the year. 4. Medical expenses for Mr. Arnold's family are as follows: Allen $3,650 Brenda 2,600 Sarah 1,300 Derek 6,200 5. Mr. Arnold is required to maintain an office in his home without reimbursement from his employer. His employer provides the required T2200 form. He uses 20% of the home's usable floor space for his office which includes a component for common areas. The home office expenses are: Utilities and Maintenance $ 5,000 Insurance 4,500 Property Taxes 7,600 Mortgage Interest 9,600 6. Mr. Arnold receives an annual travel allowance of $4,800 to cover hotel expenses while travelling for employment purposes. His actual hotel expenses for 2022 were $5,100. In addition, he spent $6,300 on client meals and entertainment. His employer does not reimburse any of these expenses. 7. As with all of the other employees, Mr. Arnold received a $750 gift certificate for use at a local department store. He also received a $300 cash reward for sales performance in 2022.

8. In addition to his employment income, Mr. Arnold has taxable capital gains from stock market trading of $4,500, a rental loss of $6,000 from a residential rental property, and $8,600 of profits from a business he carries on as a sole proprietor. 9. Mr. Arnold supports the church that he attends with monthly donations of $200 throughout 2022. 10. Mr. Arnold's 2021 net income was $98,000. This was composed of employment income of $93,000 (after the deduction of $4,000 for RPP contributions), interest income of $3,000, a rental loss of $7,000, and business income of $9,000. 11. At the end of 2021, Mr. Arnold's unused RRSP deduction room was $6,200 and he had no undeducted RRSP contributions. His employer reported a 2021 PA of $8,000. Required: Ignore GST/HST & PST considerations. A. Calculate Mr. Arnold's maximum deductible RRSP contribution for 2022. B. Assume that Mr. Arnold contributes the amount calculated in Part A to his RRSP. Calculate Mr. Arnold's minimum 2022: • Net Income, • Taxable Income, and • Federal Income Tax Payable ignoring any income tax that may have been withheld by the employer or paid by instalments. Answer: Part A - RRSP Contribution In order to determine his maximum 2022 RRSP deduction, we need to calculate Mr. Arnold's 2021 earned income which is calculated as follows: Employment Income Add back RPP Contributions Rental Loss Business Income 2021 Earned Income

$93,000 4,000 ( 7,000) 9,000 $99,000

His maximum deductible 2022 RRSP contribution is determined as follows: Unused Deduction Room - End of 2021 Annual Addition - Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of 2021 Earned Income of $99,000 = $17,820 Less 2021 PA Maximum Deductible RRSP Contribution for 2022

$ 6,200

17,820 ( 8,000) $16,020

Part B Employment Income Mr. Arnold's 2022 employment income would be calculated as follows: Gross Salary Additions: Commission Income Automobile Benefit (Note One) Disability Benefit (Note Two) Hotel Allowance (Note Three) Gift Certificate (Note Four) Award (Note Four) Deductions: RPP Contributions Union Dues Employment Expenses (Note Five) 2022 Employment Income

$103,000 26,140 3,503 6,150 Nil 750 300 ( 4,200) ( 260) ( 6,570) $128,813

Note One - The taxable automobile benefit would be calculated as follows: Standby Charge [(2%)($38,000)(10)(6,000 / 16,670)] Operating Cost Benefit - Lesser of: • [(6,000)($0.29)] = $1,740 • [(1/2)($2,735)] = $1,368 Total Benefit before payments for Personal Use Payments for Personal Use 2022 Taxable Automobile Benefit

$2,735

1,368 $4,103 ( 600) $3,503

As Mr. Arnold's employment related driving is more than 50% of the total, he is eligible for the reduced standby charge calculation. This also means that he is eligible to use the alternative operating cost benefit calculation based on one-half the standby charge and this option produces the lower operating cost benefit. Note Two - As Mr. Arnold's employer contributes to the disability plan, the $10,950 benefit must be included in income. However, the amount can be reduced by the $4,800 [($1,200)(4 Years)] contributions that he made in 2018 through 2021. The net increase is therefore $6,150 ($10,950 - $4,800). Note Three - As the $4,800 hotel allowance appears to be reasonable, it will not be included in Mr. Arnold's income. As it is not included in his income, he cannot deduct the actual expenses of $5,100. Note: The fact that the allowance is close to the amount of actual expenses is not determinative when determining reasonableness. Note Four - The department store gift certificate would be viewed as a near cash award and would not be eligible for the $500 annual gift exemption granted by CRA as an administrative concession. Performance awards must always be included in income and are not eligible for the CRA administrative concession. Note Five - As Mr. Arnold has commission income, he can deduct a pro rata share of insurance and property taxes in addition to a pro rata share of utilities and maintenance with respect to the home office.

However, as an employee, he cannot deduct the mortgage interest or claim CCA on his home. In addition because he earns commission income he is entitled to claim 50% of unreimbursed meal and entertainment expenses. The result is the following allowable employment expense for 2022: Utilities and Maintenance Insurance Property Taxes Total Home Office Expenses Workspace Use Deductible Home Workspace Expenses Business Meals and Entertainment [(50%)($6,300)] 2022 Employment Expense

$ 5,000 4,500 7,600 $17,100 20% $ 3,420 3,150 $ 6,570

As this total is less than Mr. Arnold's commission income, he does not need to consider any alternative calculation of deductible employment expenses. 2022 Net Income and Taxable Income As Mr. Arnold has no taxable income deductions, his 2022 taxable income is equal to his 2022 net income. These amounts are determined as follows: Employment Income (See Preceding Calculations) Taxable Capital Gains (Given) Rental Loss (Given) Business Income (Given) RRSP Deduction (Part A) Deductible CPP ($3,500) - $3,039) 2022 Net Income and Taxable Income

$128,813 4,500 ( 6,000) 8,600 ( 16,020) ( 461) $119,432

2022 Federal Income Tax Payable The required calculations here are as follows: Tax on first $100,392 Tax on next $19,040 ($119,432 - $100,392) at 26% Tax Before Credits Tax Credits: BPA Spousal ($14,398 - $8,500) Employment Insurance Canada Pension Plan Canada Employment Medical Expenses (Note Six) Total Credit Base Rate Charitable Donations (Note Seven) [(15%)($200) + (29%)($1,200 + $2,400 - $200)] 2022 Federal Income Tax Payable

$17,820 4,950 $22,770 ($14,398) ( 5,898) ( 953) ( 3,039) ( 1,287) ( 11,271) ($36,846) 15%

( 5,527) ( 1,016) $16,227

Note six - The base for Mr. Arnold's medical expense credit would be calculated as follows: Allen Brenda Sarah Derek Total Lesser of: • [(3%)($119,432)] = $3,583 • 2022 Threshold Amount = $2,479 Tax Credit Base

$ 3,650 2,600 1,300 6,200 $13,750

( 2,479) $11,271

Note seven - As none of his taxable income is subject to the income tax rate of 33 %, this rate will not be used in the calculation of the charitable donations tax credit. Type: ES Topic: Comprehensive case covering chapters 1 to 10

101) Family Information Aldo Broome is 39 years old and has been married to Cynthia Broome for 17 years. They have a 13 year old son Martin, and an 8 year old daughter Ruth, both of whom are in good health. Martin has income from part time jobs of $1,400, while Ruth has no income of her own. Other family information for 2022 is as follows: • Aldo worked 212 hours as a search and rescue volunteer. He received no compensation for this work. • The family's medical expenses, all of which were paid for by Aldo, were as follows: Hair Replacement Fees for Aldo Prescription Contact Lenses for Cynthia Teeth Whitening Fees for Cynthia Prescription Glasses for Martin Psychologist Counselling Fees for Martin Physiotherapy Fees for Ruth Total 2022 Medical Expenses

$4,300 850 950 350 1,500 725 $8,675

Aldo's Business Income Aldo is an accountant who carries on his professional practice as a sole proprietor. His business uses a December 31 fiscal period. When he began his practice in 2017, he purchased an office building for $750,000, of which $180,000 was for the land and $570,000 for the building. It was a new building and had been allocated to a separate Class 1. Aldo uses all of the building for his practice. On January 1, 2022, the UCC of the was $431,676. In an attempt to attract a wealthier clientele, Aldo upgrades his office in March, 2022. He spent $204,000 on new furniture and fixtures. The capital cost of the old furniture and fixtures was $93,000 and were sold for $31,000. The UCC of the class containing the furniture and fixtures was $34,284 at the time. Other purchases of capital property in 2022 included the following: New Computer Applications Software Client List from retiring accountant

$ 1,200 2,044 41,000

As many of his clients are elderly or disabled, his business requires an automobile to be used to provide in-home services. On January 1, 2022 he purchased a new non-zero-emission automobile at a cost of $42,000. In 2022, it was driven a total of 32,000 kilometers, of which 29,000 related to providing in-home services for his clients and 3,000 kilometers were for personal use. Operating expenses for the year totaled $4,800.

Other business expenses for 2022, determined on an accrual basis, are as follows: Building Operating Expenses Payments to employees Miscellaneous Office expenses Meals with clients

$24,300 42,000 17,500 15,300

In 2022, Aldo's total billed and unbilled work in process totaled $354,800. Cynthia's Employment Income Cynthia works for a large Canadian public company. Her 2022 salary is $62,000, none of which includes commissions. Her employer withholds the following amounts during the year: RPP Contributions* EI Premiums CPP Contributions

$2,500 953 3,500

*Cynthia's employer makes a matching RPP contribution of $2,500. In order to deal with her employer's out-of-town customers, Cynthia is required to travel on occasion. She uses her own non-zero-emission automobile for the travel which she purchased on January 1, 2022 at a cost of $38,000. In 2022, she drove 36,000 kilometers, of which 31,500 were employment related and 4,500 were for personal use. Her operating expenses for the year totaled $3,465. In addition to automobile costs, Cynthia has other travel expenses as follows: Hotels Food on out of town trips

$3,200 1,300

Cynthia's employer provides her with the following travel allowances, in addition to her salary: Hotels and Food Use of personal automobile ($100 Per Week)

$4,400 $5,200

Investment Information Through careful spending for himself and his family, Aldo has been able to accumulate an investment portfolio of over $500,000. All of these funds have been invested in Mutual trust funds and, in 2022, trust fund distributions totaled $36,960. The breakdown of these distributions is as follows: Capital Gains Eligible Dividends Interest Income Total

$22,960 8,500 5,500 $36,960

All of these investments are owned by Aldo. Cynthia has no property income or capital gains or capital losses in 2022.

RRSP Information Both Aldo and Cynthia have invested regularly in RRSPs. Information for these plans is as follows: Aldo's Plan — At the beginning of 2022, there was $11,000 in unused deduction room in Aldo's RRSP. There were also $13,000 in undeducted contributions in the plan. In 2022, he contributes $22,000 to his plan. He plans to take the maximum deduction available on the basis of this information. In December, 2019, Aldo withdrew $25,000 from his RRSP under the provisions of the Home Buyers' Plan (HBP). In January, 2020, he used these funds, along with funds from his savings account, to purchase a new home. Because he purchased the home for a lower price than anticipated, he repaid $10,000 of the HBP balance in 2020. He did not make any repayment in 2021 or 2022. Aldo's Earned Income for 2021 was $123,000. There was no 2021 pension adjustment (PA). Cynthia's Plan — At the beginning of 2022, there was unused deduction room in Cynthia's plan of $7,000. She had no undeducted contributions. In February, 2020, Aldo made a contribution to Cynthia's plan of $5,000 and deducted it in his 2019 income tax return. Since then he has learned of the attribution rules associated with spousal plans and has made no further contributions to Cynthia's plan. In December, 2022, Cynthia withdraws $7,000 from her RRSP to loan to her brother. In February, 2023, her brother, after a successful trip to Las Vegas, pays her back the $7,000, along with a gift of $5,000 for being such a great sister. Cynthia immediately contributes the $7,000 to her RRSP. She plans to take the maximum deduction available for 2022 based on this information. At the beginning of 2022, Cynthia's employer agrees to increase the benefit formula for the RPP. In prior years the benefit was based on 1.5% of pensionable earnings for each year of service. The new agreement calls for a benefit based on 1.75% of pensionable earnings for each year of service. This change will be applied retroactively. Cynthia has been a member of the plan since 2019. Her pensionable earnings during those years are as follows: Year 2019 2020 2021

Pensionable Earnings $40,000 45,000 48,000

Cynthia's 2021 earned income was $51,000. Her employer reported a 2021 PA of $4,800. Aldo and Cynthia will allocate tax credits between them to minimize the family's total income tax liability. Where either spouse can claim the credit and it makes no difference in the combined income tax payable, Aldo will claim the credit. Required: Ignore GST/HST & PST considerations in your solution. A. Determine Cynthia's 2022 Net Income and Taxable Income. B. Determine Aldo's 2022 Net Income and Taxable Income. C. Determine Cynthia's 2022 federal income tax payable. D. Determine Aldo's 2022 federal income tax payable.

Answer: Part A - Cynthia's 2022 Net Income and Taxable Income Cynthia's Employment Income Cynthia's employment income would be determined as follows: Salary Additions: Travel Allowances (Note 1) Hotels and Food Use of personal automobile Deductions: Hotels and Food (Note 1) Automobile Expenses (Note 2) RPP Contributions 2022 Employment Income

$62,000

Nil 5,200 Nil ( 16,419) ( 2,500) $48,281

Note 1 - Given her actual expenses, the allowance for hotels and food seems reasonable. This means it does not have to be included in income. However, this will prevent Cynthia from deducting her actual expenses which total to more than the allowance. With respect to the allowance for personal use of her automobile, it is not based on kilometers driven and therefore is deemed to be unreasonable requiring the allowance to be included in income. Note 2 - Her deductible automobile expenses would be calculated as follows: Operating expenses CCA on Class 10.1 [(150%)(30%)($34,000)]* Total Automobile expenses Personal use [($18,765)(4,500 ÷ 36,000)] Total Deductible automobile expenses

$ 3,465 15,300 $18,765 ( 2,346) $16,419

*The luxury automobile rules for Class 10.1 limit the capital cost of the automobile to $34,000 for automobiles purchased on or after January 1, 2022 and whether new or used. Cynthia's 2022 Net Income and Taxable Income As Cynthia has no taxable income deductions, her taxable income and net income will be the same. Cynthia's 2022 net income would be calculated as follows: Employment Income RRSP Withdrawal ($7,000, minus $5,000 Attributed to Aldo) (Note 3) RRSP Deduction (Note 4) Gift from brother (Not a source of income) Deductible CPP ($3,500) - $3,039) 2022 Net Income and Taxable Income

$48,281 2,000 ( 7,000) Nil ( 461) $42,820

Note 3 - As Aldo's contribution to Cynthia's plan occurred in one of the two calendar years prior to her withdrawal of $7,000, the $5,000 amount of his contribution will be included in his net income. The fact that he deducted the contribution in 2019 does not change the result.

Note 4 - Cynthia's maximum 2022 RRSP deduction is calculated as follows: Unused Deduction Room at January 1, 2022 Addition - Lesser of: • 2022 RRSP Dollar Limit = $29,210 • 18% of $51,000 Earned Income for 2021 = $9,180 2021 PA 2022 PSPA (Note 5) 2022 Available Deduction Room Maximum Deduction (Limited to Contribution) Unused Deduction Room - December 31, 2022

$7,000

9,180 ( 4,800) ( 2,993) $8,387 ( 7,000) $1,387

Note 5 - In the 3 years prior to 2022 that Cynthia was a member of her employer's RPP, her pensionable earnings totaled $133,000 ($40,000 + $45,000 + $48,000). Given this, the Past Service Pension Adjustment (PSPA) resulting from the increased benefit formula would be calculated as follows: [(1.75% 1.5%)(9)($133,000)] = $2,993 Part B - Aldo's 2022 Net Income and Taxable Income Aldo's Business Income Aldo’s minimum 2022 business income can be calculated as follows: Aldo Broome Statement of Business Income For Year Ending December 31, 2022 Total Revenue Vehicle Operating expenses [($4,800)(29,000 ÷ 32,000)] Building Operating Expenses Payments to employees Miscellaneous Office expenses Business Meals [(50%)($15,300)] CCA (Note 6) Total Expenses 2022 Business Income

$354,800 $ 4,350 24,300 42,000 17,500 7,650 103,611 $199,411 $155,389

Note 6 - The total CCA deductible would be as follows: Class 1 (Calculation Follows) Class 8 (Calculation Follows) Class 50 (Calculation Follows) Class 12 (Calculation Follows) Class 10.1 (Calculation Follows) Class 14.1 (Calculation Follows) Total CCA

$25,901 58,757 990 1,022 13,866 3,075 $103,611

Class 1 - As the building is used 100% for non-residential purposes, it is eligible for the enhanced rate of 6%. The maximum CCA would be: Class 1 [($431,676)(6%)] $25,901 Class 8 - The required calculations are as follows: Opening Balance Additions Disposal - Lesser of: • POD = $31,000 • Capital Cost = $93,000 AccII Adjustment [(150%)($173,000)] CCA Base Rate Class 8 CCA

$204,000

( 31,000)

$ 34,284

173,000 86,500 $293,784 20% $ 58,757

Class 50 - The CCA on the new computer would be calculated as follows: Class 50 [(150%)(55%)($1,200)] $990 Class 12 - The CCA on the applications software would be calculated as follows: Class 12 [(1/2)(100%)($2,044)] $1,022 Class 10.1 - As the automobile cost more than $34,000, it must be put into a separate Class 10.1. The addition is limited to $34,000. The deductible CCA is reduced by the personal use of the car and would be calculated as follows: Maximum Class 10.1 CCA [(150%)(30%)($34,000)] Personal Use [(3,000/32,000)($15,300)] Deductible Class 10.1 CCA

$15,300 ( 1,434) $13,866

Class 14.1 - The CCA on the client list would be calculated as follows: Class 14.1 [(150%)(5%)($41,000)] $3,075 Aldo's Income from Property & Net Taxable Capital Gains Aldo's income from investment would be calculated as follows: Taxable Capital Gains [(1/2)($22,960)] Eligible Dividends Gross Up [(38%)($8,500)] Interest Income Total Income from Property & Net Taxable Capital Gains

$11,480 8,500 3,230 5,500 $28,710

Aldo's 2022 Net Income and Taxable Income As Aldo has no taxable income deductions and therefore his taxable income and net income will be the same. Aldo's 2022 net income and taxable income would be calculated as follows: Business Income Income from Property & Net Taxable Capital Gains Spousal RRSP Attribution (Note 3) Home Buyers' Plan Inclusion (Note 7) RRSP Deduction (Note 8) Deductible CPP Contributions [(2)($3,500) - $3,039] (Note 9) 2022 Net Income and Taxable Income

$155,389 28,710 5,000 1,000 ( 33,140) ( 3,961) $152,998

Note 7 - Aldo's 2019 Home Buyers' Plan withdrawal was $25,000. While no repayment was required until 2020, he made a voluntary repayment of $10,000 in 2020, reducing the outstanding balance to $15,000. Based on this, he should have made a repayment in 2021 of $1,000 ($15,000 ÷ 15). As he didn't make a payment, this $1,000 was added to his 2021 net income and deducted from the required HBP balance. The required payment for 2022 would also be $1,000 [($15,000 - $1,000) ÷ 14]. As he again failed to make the payment, it will be added to his 2022 net income . Note 8 - Aldo's maximum RRSP deduction for 2022 would be calculated as follows: Unused Deduction Room at January 1, 2022 Addition - Lesser of: 2022 RRSP Dollar Limit = $29,210 18% of $123,000 Earned Income for 2021 = $22,140 2022 Deduction Room

$11,000

22,140 $33,140

Aldo has available contributions of $35,000 ($13,000 + $22,000). Given this he can deduct the full $33,140 of available room. This means that there will be no unused deduction room at the end of the year. However, there will be $1,860 ($35,000 - $33,140) of undeducted contributions for 2022. Note 9 - Given his business income, Aldo must pay the maximum CPP contributions for self employed individuals of$7,000 for 2022. Since CPP contributions are deducted under ITA 60(e) of subdivision e, they will not affect the calculation of business income, which, in turn, means that they will not affect earned income for RRSP purposes.

Part C - Cynthia's 2022 Federal Income Tax Payable Cynthia's 2022 federal income tax payable will be calculated as follows: Tax Before Credits [(15%)(42,820)] Tax Credits: BPA EI Premiums CPP Contributions Canada Employment Medical Expenses - (Note 10) Total Credit Base Rate Cynthia's 2022 Federal Income Tax Payable

$6,423 ($14,398) ( 953) ( 3,039) ( 1,287) ( 2,140) ($21,817) 15%

( 3,273) $3,150

Note 10 - Cynthia claims the medical expenses as she will have a higher medical expense credit base since her net income is lower than Aldo's and 3% of her net income is less than the income threshold. Although Aldo paid the expenses, as stated in Chapter 4: "Both ITA 118.2 and Income Tax Folio S1-F1-C1, state that medical expenses can only be deducted by the individual who paid for them. However, in the T1 Guide, this rule is administratively modified for couples. According to this Guide, either spouse can claim the medical expense credit, without regard to who actually paid for the expenses." The $4,300 cost of hair replacement and the $950 paid for teeth whitening would be considered cosmetic and cannot be included in the base for the medical expense tax credit. Given this, the base for the medical expense tax credit would be calculated as follows: Eligible Expenses ($8,675 - $4,300 - $950) Reduced by the lesser of: [(3%)($42,820)] = $1,285 2022 Threshold Amount = $2,479 2022 Base for Medical Expenses Credit

$3,425

( 1,285) $2,140

Part D - Aldo's 2022 Federal Income Tax Payable Aldo's 2022 federal income tax payable will be calculated as follows: Tax on First $100,392 Tax on Next $52,606 ($152,998 - $100,392) at 26% Tax Before Credits Credits: BPA Spousal (Income too high) Volunteer Search and Rescue CPP (Maximum) Medical Expenses - Claimed by spouse Credit Base for Personal Credits Rate Dividend Tax Credit [(6/11)($3,230)] Aldo's 2022 Federal Income Tax Payable

$17,820 13,678 $31,498 ($14,398) Nil ( 3,000) ( 3,039) Nil ($20,437) 15%

Type: ES Topic: Comprehensive case covering chapters 1 to 10

( 3,066) ( 1,762) $26,670

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 11 Taxable Income and Tax Payable for Individuals Revisited 11.1 Online Exercises 1) ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination benefit. What tax policy objective is served by this provision? Answer: Such lump-sum payments often reflect compensation for services rendered over several years. The fact that it is received in a single year can result in significant portions of it being subject to income tax rates higher than would have been the case had it been received over the several years during which it was earned. The deduction of such amounts provides the basis for an alternative income tax payable calculation which attempts to adjust the amount paid to the amount that would have been paid if the amount had actually been received over several years. The objective of such provisions is fairness or equity. Type: ES Topic: Lump-sum payments - ITA 110.2

2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that the ITA provides for the types of losses that it identifies. Answer: The carryover periods for the various types of losses identified in the Income Tax Act and covered in the text up to Chapter 11 are as follows: • Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years back. • Net Capital Loss: Unlimited forward and 3 years back • Listed Personal Property Losses: 7 years forward and 3 years back. • Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss with unlimited carry forward in year 11. • Foreign Tax Credits: 10 years forward and 3 years back. Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry forward, but only against the partnership income to which they relate. Type: ES Topic: Loss carry overs - general concepts

3) When a business has several types of loss carry overs, why is it necessary to keep separate balances for each type? Answer: There are two reasons for having to track each type of loss carry forward separately. First, different types of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for capital losses). Second, some types of losses can only be applied against the equivalent type of income (e.g., capital losses can only be carried over and applied against capital gains). Type: ES Topic: Loss carry overs - general concepts

4) Tax advisors will normally recommend that loss carry overs not be used to reduce taxable income to nil for an individual. What is the basis for this recommendation? Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and cannot be carried over to other years. This means that, unless an individual taxpayer has taxable income and federal income tax payable, the value of these credits is simply lost. This, in effect, is what would happen if various types of loss carry overs were used to reduce taxable income to nil. Type: ES Topic: Loss carry overs - individual

5) Briefly describe the income tax treatment of losses on listed personal property. Answer: Losses on listed personal property can be deducted during the current year, but only against net gains on listed personal property for the year. If the loss cannot be used during the current year, it can be carried back three years or forward seven years. Type: ES Topic: Losses - listed personal property

6) If a taxpayer has both net capital and non-capital losses and does not have sufficient income in the current and previous years to claim these amounts, which type of loss should be deducted first? Answer: There is no clear cut answer to this question. Net capital losses have an unlimited life but can only be carried over to the extent of net taxable capital gains in the carry over period. This would suggest that, if net taxable capital gains are present in the current year, the use of net capital losses should receive priority. This would be particularly true if additional net taxable capital gains are not expected in future years. In contrast, non-capital losses can be deducted against any type of income. However, the downside here is that their carry forward period is limited to 20 years. While no firm conclusion is available, in most cases the lengthy carry forward period for non-capital losses, would suggest using net capital losses first. However, this tentative conclusion would be altered if the taxpayer commonly has net taxable capital gains. Type: ES Topic: Loss carry overs - general concepts

7) John Broley has a 2021 $50,000 non-capital loss and a $50,000 2021 net capital loss. In 2022 his only income is a $50,000 taxable capital gain. He has asked your advice as to which of the two loss carry forwards he should claim. What advice would you give him? Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time limited and will expire at the end of 20 years. In contrast, the net capital loss will never expire but can only be applied against net taxable capital gains. If Mr. Broley is concerned about having sufficient income to use the non-capital loss in the time remaining until it expires, he should claim that loss. Alternatively, if he feels that he is likely to have sufficient income in that period, but that he is unlikely to have further capital gains, he should claim the net capital loss. There is no clear answer to this question as it involves estimates about the future. Type: ES Topic: Loss carry overs - general concepts

8) If an individual dies and has a net capital loss in the year of the death or unused net capital losses from previous years, these balances are subject to a different treatment than would be the case if the individual were still alive. Briefly describe how this treatment is different. Answer: ITA 111(2) contains a special provision with respect to both net capital losses from years prior to death and to net capital losses arising in the year of death. Essentially, this provision allows these loss balances to be applied against any type of income in the year of death, or the immediately preceding year, as long as the capital gains deduction has not been claimed. If the capital gains deduction had been claimed in previous years then the net capital losses that can be claimed against any type of income will be reduced. Type: ES Topic: Losses - net capital losses at death

9) What is an Allowable Business Investment Loss (ABIL)? What special tax provisions are associated with this type of loss? Answer: An Allowable Business Investment Loss (ABIL) is the deductible portion of a capital loss resulting from the disposition of shares or debt of a small business corporation. The special provisions associated with this type of loss are: • It can be deducted against any type of income in the year in which it occurs. • To the extent it cannot be fully used it becomes part of a non-capital loss for that year and can be carried over to other years as a non-capital loss for 10 years after which it becomes part of a net capital loss for the eleventh year. • It is disallowed as an ABIL (i.e., it becomes a regular allowable capital loss), to the extent that the individual has previously used the capital gains deduction. • The realization of an ABIL reduces the annual gains limit that is used to determine the maximum capital gains deduction for the year. Type: ES Topic: Allowable business investment losses

10) What is a Small Business Corporation as defined in the ITA? Answer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private corporation (CCPC) of which "all or substantially all", of the FMV of its assets are used in an active business carried on "primarily" in Canada. The term "substantially all" generally means 90% or more, while "primarily" is generally interpreted to mean more than 50%. Type: ES Topic: Small business corporation - ITA 248(1)

11) With respect to the deductibility of their losses, farmers fall into three categories. What are these three categories and how are losses treated in each category? Answer: The three categories, along with the treatment of their losses, are as follows: Hobby Farmer - This is an individual who runs a farming operation on a part time basis as a hobby or as a way of enhancing his or her lifestyle. The operation has no reasonable expectation of a profit and therefore it is not a business and not a source of income. As a result its losses are not recognized for income tax purposes. Part Time Farmer - This is an individual for whom farming is subordinate to some other source of income. However, if there is a reasonable expectation of a profit and therefore a business, the individual farmer is allowed to deduct a portion of their farm losses. In each year, the portion of the farm loss that can be deducted against any source of income is limited to the first $2,500, plus one-half of the next $30,000, to a maximum amount of $17,500. Losses in excess of this deductible amount are referred to as restricted farm losses and, when they are carried over to earlier or later years, they can only be deducted to the extent of any farm income in that year. Full Time Farmer - This is an individual for whom farming is their principal source of income and activity. For this category of farmer, farm losses are fully deductible against any other source of income. Type: ES Topic: Losses - farming

12) The capital gains deduction is available when an individual taxpayer has a gain on the disposition of shares in a "qualified small business corporation" (QSBC shares). What are the conditions that must be met for the shares to qualify as QSBC shares? Answer: In order to be shares of a QSBC for the purposes of the capital gains deduction, the corporation must be a "small business corporation" at the time of the disposition of the shares. This means that substantially all (90% or more) of the FMV of its assets must be used to produce active business income, primarily (more than 50%) in Canada. If the small business corporation test is met, two other conditions must be met for the shares to qualify. These are as follows: • the shares must not be owned by anyone other than the individual or a related person for at least 24 months preceding the disposition; and • throughout that 24 month period, more than 50% of the FMV of the corporation's assets must be used in an active business carried on primarily in Canada. Type: ES Topic: Capital gains deduction - shares of a QSBC

13) An individual has a capital gain on qualified farm property (QFP). The individual has no other capital gains during the year. Explain how the annual gains limit would be calculated in determining the individual's capital gains deduction for the year. Answer: In these circumstances, the annual gains limit is equal to the taxable capital gain on the QFP, less: • Allowable capital losses realized during the current year. • Net capital loss carry overs from previous deducted in the current year. • Allowable Business Investment Losses realized during the current year. Type: ES Topic: Capital gains deduction - annual gains limit

14) In computing net income, ITA 3 requires that subdivision e deductions be subtracted prior to deducting business or property losses. Explain why this rule is usually beneficial to a taxpayer. Answer: Most subdivision e deductions such as child care expenses cannot be carried forward to other years. This means that, if they are not deducted in the current year, they are lost forever. In contrast, business and property losses can be both carried back to other years. In contrast to subdivision e deductions, business and property losses are not lost if they are not fully deducted during the current year. ITA 4(2) acts to prevent subdivision e deductions from being expensed as part of a source of income. Type: ES Topic: Net income - ITA 3

15) What types of current year losses are included in the definition of a non-capital loss? What types of losses are not included? Answer: Non-capital losses would include current year employment losses, most business losses, property losses, and allowable business investment losses. The definition excludes farm losses (a type of business loss) and current year capital losses, but does make an adjustment for net capital losses deducted in the current year. Type: ES Topic: Losses - non-capital loss

16) Describe the conditions under which the tax on split income (TOSI) applies. Answer: The TOSI may apply when a Specified Individual receives income from a related business. In general, a business is related when a person related to a Specified Individual is connected to the business. This latter individual is referred to as a Source Individual. This connection occurs when the Source Individual: • carries on the business as a sole proprietor, or • owns shares in a private corporation that carries on the business. Note that such income is only subject to the TOSI if it is not an Excluded Amount. Where the business is a partnership, the Source Individual must have a direct or indirect interest in the partnership. If the business is carried on by a corporation, the business will be a related business if the Source Individual owns shares that represent 10% or more of the FMV of all of the corporation's issued voting shares. As was the case with the definition of a Specified Individual, the definition of a Source Individual requires the individual to be a Canadian resident. Type: ES Topic: Tax on split income (TOSI)

17) List two types of income that would not be subject to the tax on split income (TOSI). Answer: The two items that are specifically mentioned in the text are employment income and compound income resulting from the re-investment of split income amounts. Other items (e.g., dividends from publicly traded shares), could also be mentioned if they do not fall within the definition of split income. Type: ES Topic: Tax on split income (TOSI)

18) Under the TOSI legislation, what is the meaning of the term Excluded Business? Answer: Amounts received from an Excluded Business are not considered to be Split Income and are not subject to the TOSI. An Excluded Business is one in which the individual taxpayer is actively engaged on a regular, continuous, and substantial basis. This active engagement must be in the current year or in at least 5 prior taxation years. Note, however, the years do not have to be current or consecutive. That is, any 5 years of active engagement will satisfy this condition. The TOSI rules add what is referred to as a "bright line test" that considers an individual to have met the level of involvement in the business if they work in the business at least 20 hours a week during the period in the year in which the business is carried on. Type: ES Topic: Tax on split income (TOSI)

19) Under the TOSI legislation, what is the meaning of the term Excluded Shares? Answer: For shares to be classified as Excluded Shares, the individual must be 25 years of age or older and must own, in terms of both FMV and voting rights, at least 10% of the outstanding shares of the corporation. In addition, the corporation must meet the following conditions: • It must not be a professional corporation. • Less than 90% of its income in the previous year was from providing services. • Less than 10% of its income in the previous year was from a related business. Type: ES Topic: Tax on split income (TOSI)

20) Under the TOSI legislation, in determining whether an amount of income represents a reasonable return, the test for individuals age 25 or over is different than the test for individuals between 18 and 24. Describe this difference. Answer: For individuals 25 years of age or older, the measurement of a Reasonable Return requires consideration of labour contributions, capital contributions, as well as the assumption of business risk. For individuals between the age of 18 and 24, the reasonableness test is more restrictive. It does not take into consideration either active engagement in the business or business related risk assumed. It is based solely on capital contributions to the business. Type: ES Topic: Tax on split income (TOSI)

21) Under what circumstances can dividends be transferred from a spouse or common-law partner to the other spouse or common-law partner? Answer: Dividends can be transferred from a spouse or common-law partner if the result is to create or increase the amount of the spousal tax credit. Type: ES Topic: Transfer of dividends to a spouse - ITA 82(3)

22) Briefly describe the four major categories of charitable donations. Answer: As presented in the text, the descriptions are as follows: 1. Total Charitable Gifts is defined to include all eligible amounts donated by an individual to a registered charity, a registered Canadian amateur athletic association, a Canadian municipality, the United Nations or an agency thereof, a university outside of Canada which normally enrolls Canadian students, and a charitable organization outside of Canada to which Her Majesty in right of Canada has made a gift in the year or in the immediately preceding year. 2. Total Crown Gifts is defined as the aggregate of eligible amounts donated to Her Majesty in right of Canada (the Federal government) or to a province or territory. 3. Total Cultural Gifts is defined as the aggregate of all eligible gifts of objects that the Canadian Cultural Property Export Review Board has determined meet the criteria of the Cultural Property and Import Act. 4. Total Ecological Gifts is defined as all eligible gifts of land certified by the Minister of the Environment to be ecologically sensitive land, the conservation and protection of which is important to the preservation of Canada's environmental heritage. The beneficiary of the gift must be a Canadian municipality or a registered charity, the primary purpose of which is the conservation and protection of Canada's environmental heritage. Type: ES Topic: Charitable donations - general rules

23) If a taxpayer is donating non-depreciable capital property with a FMV that exceeds its ACB, a taxpayer can elect any amount between the FMV and ACB amount of the donation. Why is it generally appropriate to elect the higher FMV amount? Answer: Donations in excess of $200 provide the donor with a federal tax credit equal to either 29% or 33% of the amount of the donation (the rate depends on the taxable income of the individual). If the donation involves a non-depreciable capital property, electing the higher FMV will result in a capital gain, only one-half of which will be included in income. This means that the effective income tax rate for an individual in the highest federal income tax bracket on the excess amount elected is only 16.5% [(1/2)(33%)]. This assures the individual that the value of the federal credit resulting from the extra amount elected will usually be double the increase in federal income tax on the resulting capital gain. Type: ES Topic: Charitable donations - general rules

24) Capital gains resulting from donations of publicly listed shares are, in general, deemed to be nil. Why is an additional rule required to avoid taxing income resulting from gifts of publicly listed shares that have been acquired through stock options? Answer: When there is a disposition of publicly listed shares that have been acquired through stock options, the difference between the FMV at the time the shares were exercised and the option price at which they were acquired is treated as employment income, not as a capital gain.While the general rule under ITA 38(a.1) deems capital gains on such donations to be nil, a special rule is required to exempt the employment income which may arise on such dispositions. The solution takes the form of an additional one-half deduction under ITA 110(1)(d.01) which completely offsets the remaining employment stock option benefit amount. Type: ES Topic: Charitable donations - general rules

25) Compare the income tax treatment of foreign tax credits on foreign non-business income with the income tax treatment of tax credits on foreign business income for individuals. Answer: Both credits are based on the lesser of the amount withheld and an amount determined by the following formula: [Foreign Non-Business Income ÷ Adjusted Division B Income][Tax Otherwise Payable] The differences are as follows: • For individuals, the figure used for the amount withheld for the non-business foreign credit is limited to 15% of the foreign non-business income. Any amount of withholding in excess of 15% becomes a deduction in the determination of net income (ITA 20(11). There is no such limit on the actual amount for the foreign business income credit. • When the amount withheld on foreign business income exceeds the amount that can be deducted, the excess foreign tax credit can be carried back 3 years and forward 10 years to apply against tax payable in those years. The taxpayer may decide instead to claim any excess as a net income deduction (ITA 20(12)). • The foreign business income credit is further limited by the amount of tax otherwise payable, reduced by any foreign non-business tax credit taken in the year. In effect, the credit is the least of the actual amount withheld, the amount determined by the formula, and tax otherwise payable reduced by any foreign non-business tax credit. Type: ES Topic: Foreign tax credits - general rules

26) The alternative minimum tax (AMT) is an attempt to deal with an income tax policy issue. What is this issue and, in general terms, how does the AMT deal with this issue? Answer: The income tax policy issue is the fact that some individuals, through the use of tax privileges and preferences (e.g., capital gains deduction, the non-taxable component of capital gains, or employee stock option deductions) can wind up paying little or no tax, despite having significant income. The AMT deals with this by requiring an alternative calculation of income in which these tax privileges and preferences are neutralized by adding them back to income. After the deduction of a basic $40,000 exemption, the minimum income tax rate of 15% is applied to the balance. If the result is an income tax payable amount that exceeds the regular income tax calculation, then the AMT must be paid. Any excess of the AMT over the regular federal income tax payable can be carried forward for up to seven years to be applied against any future excess of regular federal income tax payable over the AMT for that carryover year. Type: ES Topic: Alternative minimum tax - general concepts

27) If an individual has no loss carry overs from other years, the current year net income will be equal to taxable income. Answer: FALSE Explanation: There are other deductions that can create a difference between net income and taxable income. Type: TF Topic: Taxable income

28) An individual has a non-capital loss. It can be carried back three years and forward indefinitely. Answer: FALSE Explanation: It can be carried back 3 years and forward 20 years. Type: TF Topic: Losses - non-capital loss

29) An individual sells shares in a Canadian controlled private corporation that qualifies as a small business corporation to an arm's length person. The ACB of the shares is $50,000 and they are sold for $30,000. The $20,000 loss is an Allowable Business Investment Loss. Answer: FALSE Explanation: The Allowable Business Investment Loss is $10,000 [(1/2)($20,000)]. Type: TF Topic: Allowable business investment losses

30) A corporation sold a long-term investment in common shares with an ACB of $25,000, for $10,000 in the current year. It also sold land that is considered capital property with an ACB of $8,000, for $12,000. Its net capital loss for the current year is $11,000. Answer: FALSE Explanation: Its net allowable capital loss for the year is $5,500 [(1/2)($11,000)]. Type: TF Topic: Losses - net capital loss

31) Net capital losses can be carried forward or back, but can only be deducted to the extent of net taxable capital gains in the carry back or carry forward year. Answer: TRUE Explanation: Net capital losses can only be carried forward or back to be deducted against net taxable capital gains. Type: TF Topic: Losses - net capital loss

32) Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holidays operating a farm she purchased this year. She is confident that within two years her farm will be making a profit. In the current year, the farm had a loss of $18,000. In the current year, she can deduct a maximum of $2,500 of the farm loss against other income. Answer: FALSE Explanation: In the current year, she can deduct a maximum of $10,250 [$2,500 + (1/2)($18,000 - $2,500)] of the farm loss against other income. Type: TF Topic: Losses - restricted farm losses ITA 31

33) Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holidays operating a farm she purchased this year. She is confident that within two years her farm will be making a profit. In the current year, the farm had a loss of $18,000. In the current year, she can deduct $10,250 of the farm loss against other income but the remaining loss of $7,750 [$18,000 - $10,250] can only be carried forward for 7 years. Answer: FALSE Explanation: Any loss that is not deductible in the current year can be carried forward for a maximum of 20 years. Type: TF Topic: Losses - restricted farm losses ITA 31

34) Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holidays operating a farm she purchased this year. She is confident that within two years her farm will be making a profit. In the current year, the farm had a loss of $18,000. Any loss that is not deductible in the current year can only be applied to the extent of farm income in the carry over year. Answer: TRUE Explanation: A restricted farm loss can only be used to the extent of farm income in the carry over period. Type: TF Topic: Losses - restricted farm losses ITA 31

35) In 2022, an individual, who has never claimed the capital gains deduction, has taxable capital gains on the disposition of shares in a qualified small business corporation (QSBC shares). The capital gains deduction can be used to eliminate up to $456,815 of the taxable capital gains on the disposition. Answer: TRUE Explanation: The $456,815 deduction can be used towards taxable capital gains arising on the disposition. Type: TF Topic: Capital gains deduction - general rules

36) If a 10 year old child receives dividends from a private company all of the shares of which are owned by the mother, it will always be subject to the tax on split income (TOSI). Answer: TRUE Explanation: There are no Excluded Amounts in this type of situation. Type: TF Topic: Tax on split income (TOSI)

37) If a 22 year old Specified Individual receives dividends from a private company in which the individual owns 20% of the FMV of the company shares and 20% of its voting shares, the dividends will not be subject to the Tax On Split Income (TOSI). Answer: FALSE Explanation: For the shares to be Excluded Shares, the Specified Individual must be 25 years of age or older. Type: TF Topic: Tax on split income (TOSI)

38) Dividends received by the spouse of an individual can be transferred to that individual and included in net income and excluded from the income of the spouse. Answer: TRUE Explanation: ITA 82(3) only allows such transfers when the spousal credit is either created or increased for the other spouse or common-law partner. Type: TF Topic: Transfer of dividends to a spouse - ITA 82(3)

39) When an individual makes a gift of publicly listed shares to a registered charity, any capital gain that results from the disposition is deemed to be nil. Answer: TRUE Explanation: Any gain would be deemed to be nil. Type: TF Topic: Charitable donations - general rules

40) The base for the charitable donations tax credit is always limited to 75% of an individual's net income. Answer: FALSE Explanation: The limit also includes 25% of any capital gains resulting from the donation and 25% of any recapture that results from the donation. Type: TF Topic: Charitable donations - general rules

41) An individual owns bonds issued in a foreign country. Tax of $2,000 is withheld in that country from the gross interest of $10,000. The foreign tax credit cannot exceed $1,500. Answer: TRUE Explanation: For individuals, the foreign tax credit cannot exceed 15% of the foreign investment income. In this case it is $1,500. The remaining $500 would be a net income deduction under ITA 20(11). Type: TF Topic: Foreign tax credits - general rules

42) Individuals with taxable income in excess of $300,000 will always pay some amount of AMT. Answer: FALSE Explanation: Regardless of their income level, individuals will only pay the AMT if they have some amount of what the legislation refers to as preference items (e.g., losses on tax shelters, capital gains deduction etc). Type: TF Topic: Alternative minimum tax - general concepts

43) An excess of AMT over regular federal income tax payable can be carried forward for up to 7 years to be applied against any future excess of regular federal income tax payable over the AMT in the carryover year. Answer: TRUE Type: TF Topic: Alternative minimum tax - general concepts

44) Martin is worried about how much income tax he will have to pay this year and he is looking for anything that he might have missed that will generate a taxable income deduction. All of the following could decrease his taxable income, with the exception of: A) the capital gains deduction. B) the deduction of a net capital loss. C) the deduction of a non-capital loss. D) a credit for a charitable donation. Answer: D Explanation: D) A credit for a charitable donation. Type: MC Topic: Taxable income

45) Which of the following would generate a taxable income deduction? A) A non-capital loss. B) A charitable donation carried forward from a previous year. C) Adoption expenses. D) Medical expenses. Answer: A Explanation: A) A non-capital loss carried forward from a previous year. Type: MC Topic: Taxable income

46) Shelly is seeking your advice on how she can claim various deductions and credits. Which of the following items would generate a taxable income deduction? i. A net capital loss. ii. A charitable donation. iii. Contributions to an RESP. iv. Stock option deduction. A) i, ii, and iv B) ii and iv C) i and iv D) i, iii, and iv Answer: C Explanation: C) i and iv. Type: MC Topic: Taxable income

47) Reuben Chechetto had to take his employer to court in 2022, to sue for wages owing to him over an 8 year period ending in 2022. In 2022, he receives a court settlement of $80,000, representing $10,000 for each of the eight years. In all years, Reuben had taxable income of $60,000. What are the income tax consequences be with respect to the receipt of $80,000 in back wages in 2022? A) Mr. Chechetto will have to include the full $80,000 in additional employment income in 2022. There are no choices. B) As these funds were awarded through a court settlement, they are not required to be included in income. C) Mr. Chechetto can use a special relief mechanism in the ITA which will have the effect of spreading the lump-sum payment over a maximum period of 5 years. D) Mr. Chechetto can use a special relief mechanism in the ITA which will have the effect of spreading the lump-sum payment over the 8 taxation years affected. Answer: D Explanation: D) Mr. Chechetto can use a special relief mechanism in the ITA which will have the effect of spreading the lump-sum payment over the 8 taxation years affected. Type: MC Topic: Lump-sum payments - ITA 110.2

48) Which of the following statements with respect to loss carry overs is NOT correct? A) Losses on the disposition of listed personal property can be carried back 3 years and forward 7 years. B) Restricted farm losses can only be claimed in the carryover period in which there is farm income. C) Net capital losses cannot be deducted in years in which net income is nil, even if there are taxable capital gains in that year. D) If an individual can deduct either a $10,000 non-capital loss or a $10,000 net capital loss, the effect on taxable income of deducting either is the same. Answer: C Explanation: C) Net capital losses cannot be deducted in years in which net income is nil, even if there are taxable capital gains in that year. Type: MC Topic: Loss carry overs - general concepts

49) Which of the following statements is correct with respect to the disposition of a valuable coin collection? A) If a loss occurs, it cannot be deducted against any type of income. B) If a loss occurs, one-half of this amount can be applied against one-half of any capital gain. C) If a capital gain occurs, one-half of this amount can be offset by allowable capital losses on the disposition of any type of capital property. D) If a capital gain occurs, it will not be included in income because this is personal use property. Answer: C Explanation: C) If a capital gain occurs, one-half of this amount can be offset by allowable capital losses on the disposition of any type of capital property. Type: MC Topic: Loss carry overs - general concepts

50) As a part time employee, Derek earns $20,000 per year of employment income. He recently started up his own business as a sole proprietor. For the current year, his business revenues were $12,000 and his business expenses were $28,000. Derek has some investments that resulted in taxable dividend income of $1,400 and related interest expense of $2,000. Assuming this accounts for all of Derek's income, what is his non-capital loss for the year? A) Nil. B) $600. C) $3,400. D) $16,000. Answer: A Explanation: A) Nil. [ITA 3(a) & (c) = $20,000. ITA 3(d) = $16,600 (business loss $16,000 + property loss from investments of $600 ($2,000 - $1,400). Net income = $3,400. ITA 3(d) does not exceed the ITA 3(c) amount. Type: MC Topic: Losses - non-capital loss

51) With respect to net capital loss, which of the following statements is NOT correct? A) In the year of death when such losses are deducted, the amount deducted will be based on the capital gains inclusion rate which applied in the year in which the loss was realized. B) When such losses are carried back, they can be deducted only to the extent of net taxable capital gains arising in the carry back period. C) Such losses can be carried back three years. D) Such losses can be carried forward for a maximum of 20 years. Answer: D Explanation: D) Such losses can be carried forward for 20 years. Type: MC Topic: Losses - net capital loss

52) Daria is a part time employee who recently started up her own business as a sole proprietor. For the current year, she had the following types of income and loss: Part time employment income Business loss Taxable (grossed up) dividend income Interest expense on loan to purchase investments Capital gain Capital loss

$15,000 18,000 1,200 2,000 12,000 16,000

What is her non-capital loss carry forward for the year? A) $3,000. B) $3,800. C) $5,800. D) $18,000. Answer: B Explanation: A) $3,000 [ $18,000 - $15,000] B) $3,800. [$18,000 + ($1,200 - $2,000)] - $15,000 (ITA 3(c) amount) C) $5,800. [deducts the full allowable capital loss of $8,000 D) $18,000. Type: MC Topic: Losses - non-capital loss

53) For which of the following types of losses is it not necessary to segregate the loss by type in order to track the balance carried forward as a separate balance? A) Net capital losses. B) Limited Partnership Losses. C) Restricted farm losses D) Business losses. Answer: D Explanation: D) Business losses. Type: MC Topic: Loss carry overs - general concepts

54) Under which set of circumstances would it be advisable to utilize a loss carry over to reduce taxable income to nil in the carry over year? A) When the taxpayer is carrying a loss back to a prior year, taxable income can be reduced to nil without negative consequences. B) When the taxpayer is carrying a loss forward, taxable income can be reduced to nil without negative consequences. C) Net capital losses are the only type of loss that should be used to reduce taxable income to nil in the carry over year. D) It is never advisable to use a loss carry over to reduce taxable income to nil in the carry over year. Answer: D Explanation: D) It is never advisable to use a loss carry over to reduce taxable income to nil in the carry over year. This is particularly the case for individuals who have personal tax credits that could offset the income tax on a certain amount of taxable income, Type: MC Topic: Loss carry overs - general concepts

55) Which of the following types of losses cannot be carried forward for at least 20 years? A) Listed personal property losses. B) Non-capital losses. C) Net capital losses. D) Restricted farm losses. Answer: A Explanation: A) Listed personal property losses. Type: MC Topic: Loss carry overs - general concepts

56) Tabari has income from employment of $25,000 during the year. As well, he has a capital gain on Listed Personal Property of $8,000 on the sale of a stamp collection, and a capital gain from the sale of some shares of $6,000. Last year, he had a capital loss on Listed Personal Property of $10,000 that he was unable to use and carried forward to the current year. What is his net income for the year? A) $27,000. B) $28,000. C) $31,000. D) $32,000. Answer: B Explanation: A) $27,000. [deducts full amount of LPP loss] B) $28,000. [$25,000 + (1/2)($8,000) +(1/2)($6,000) - (1/2)($8,000) (LPP loss carry forward can only be used against LPP gains in calculation of net income)] C) $31,000. [does not apply 50% inclusion rate to capital gain] D) $32,000. [does not deduct any of LPP loss, thinking it is deducted after net income has been determined, or that LPP losses are not deductible.] Type: MC Topic: Loss carry overs - general concepts

57) Zina Chaburi has a full time job as a nurse in her local hospital. In her spare time she has a goat farming operation. The goat farm began in 2021, which resulted in a loss of $10,000. She deducted the maximum allowable amount against her 2021 income. In 2022, most of the problems had been worked out, and Zina had realized a profit from the farm operation of $5,000, as well as employment income of $90,000. Determine Ms. Chaburi's minimum taxable income for 2022. A) $85,000. B) $88,750. C) $91,250. D) $95,000. Answer: C Explanation: A) $85,000. [$90,000 + $5,000 - $10,000 deducts full amount of farm loss carry forward in 2022] B) $88,750. [$90,000 + $5,000 - $6,250 (full amount of restricted farm loss carry forward deducted)] C) $91,250. [$90,000 + $5,000 — carry forward of $3,750). Deducted $6,250 [$2,500 + (1/2)($10,000 - $2,500) in 2021. This leave a carry forward of $3,750 ($10,000 - $6,250) D) $90,000 + $5,000 Type: MC Topic: Losses - restricted farm losses ITA 31

58) In 2019, Lorrie Meller used the capital gains deduction to offset a $10,000 taxable capital gain. In 2022, she had employment income of $50,000, a capital gain of $26,000, and a capital loss of $30,000 that meets the qualification for treatment as a business investment loss. What is the amount of Lorrie's 2022 taxable income? A) $45,000 B) $58,000 C) $46,000 D) $48,000 Answer: D Explanation: A) $45,000 ($50,000 - $5,000) B) $58,000 ($50,000 + $13,000 - $5,000) C) $46,000 ($50,000 + $26,000 - $20,000 - $10,000) D) $48,000 Loss on Disposition Disallowed by use of ITA 110.6 Business Investment Loss Inclusion Rate Allowable Business Investment Loss

$30,000 ( 20,000) $10,000 1/2 $5,000

Employment Income Taxable Capital Gain [(1/2)($26,000)] Disallowed Loss [(1/2)($20,000)] Allowable Business Investment Loss 2022 Net Income and Taxable Income

$50,000

$13,000 ( 10,000)

Type: MC Topic: Allowable business investment losses

3,000 ( 5,000) $48,000

59) Which of the following statements about Allowable Business Investment Losses is correct? A) They are losses that result from the disposition of shares or debt in a Canadian controlled public corporation. B) They can only be deducted against business income. C) If they are not used during the current year, they become part of a net capital loss for the year. D) If they are not used during the current year, they become part of the non-capital loss for the year. Answer: D Explanation: D) If they are not used during the current year, they become part of the non-capital loss for the year. Type: MC Topic: Allowable business investment losses

60) With respect to an Allowable Business Investment Loss (ABIL), which of the following statements is NOT correct? A) An ABIL can be deducted against any type of income. B) If not used during the current year, an ABIL can only be applied against net taxable capital gains in the carry over period. C) An ABIL results from an arm's length disposition of shares of a small business corporation. D) An ABIL is the deductible portion of a Business Investment Loss. Answer: B Explanation: B) If not used during the current year, an ABIL can only be applied against net taxable capital gains in the carry over period. Type: MC Topic: Allowable business investment losses

61) Which of the following statements with respect to the capital gains deduction is correct? A) For purposes of calculating this deduction, the annual gains limit is reduced by the amount of the individual's CNIL. B) It is always preferable to deduct net capital loss carry overs prior to making any use of the capital gains deduction C) In 2022, the maximum deduction for QSBC shares is different than the maximum deduction for qualified farm and fishing property (QFP). D) The cumulative gains limit includes the annual gains limits for all previous years, but not for the current year. Answer: C Explanation: C) In 2022, the maximum deduction for QSBC shares is different than the maximum deduction for qualified farm and fishing property (QFP). Type: MC Topic: Capital gains deduction - general rules

62) Which of the following transactions could result in an individual taxpayer being able to claim a capital gains deduction? A) An individual sells 100% of the shares of a CCPC that uses 85% of its assets in carrying on an active business in Canada. B) An individual sells 15% of the shares of a CCPC that uses 95% of its assets in carrying on an active business in Canada. C) A CCPC sells 100% of the shares of another CCPC that uses 100% of its assets in the carrying on of an active business. D) An individual sells 25% of the shares of a CCPC that uses 30% of its assets to earn income from property. Answer: B Explanation: B) An individual sells 15% of the shares of a CCPC that uses 95% of its assets in the carrying on of an active business in Canada. C) Corporations cannot use the capital gains deduction. Type: MC Topic: Capital gains deduction - general rules

63) With respect to the capital gains deduction, which of the following statements is NOT correct? A) The deduction is only available to individuals. B) The Cumulative Gains Limit is reduced by any CNIL balance at the end of the year. C) The Annual Gains Limit is reduced by Allowable Business Investment Losses realized during the year. D) The deduction is available on any disposition of shares or debt of a qualified small business corporation. Answer: D Explanation: D) The deduction is available on any disposition of QSBC shares but not debt. Type: MC Topic: Capital gains deduction - general rules

64) Which of the following is NOT a requirement for shares to qualify as QSBC shares? A) At the time the shares are sold, the corporation must use all or substantially all of its assets in an active business primarily carried on in Canada. B) More than 50% of the FMV of the assets of the business must have been used in an active business throughout the preceding 24 months. C) The shares must not have been owned by a related person in the past 24 months. D) The shares must not have been owned by a non-related person in the past 24 months. Answer: C Explanation: C) The shares must not have been owned by a related person in the past 24 months. Type: MC Topic: Capital gains deduction - shares of a QSBC

65) With respect to the use of loss carryovers, which of the following statements is correct? A) Net-capital losses must always be used before any other type of loss. B) Non-capital losses must be used last if a taxpayer has several different types of loss carryovers to choose from. C) Within a particular type of loss, the oldest losses must be utilized first. D) Claiming a non-capital loss carry forward will reduce the amount of the capital gains deduction available in the year. Answer: C Explanation: C) Within a particular type of loss, the oldest losses must be utilized first. Type: MC Topic: Loss carry overs - general concepts

66) Elena is 12 years old. In 2022 she earns interest of $10,500 on funds she inherited when her maternal grandfather died, as well as non-eligible dividends of $15,300 received from a CCPC that is controlled by her father. Her only personal tax credits are the BPA of $14,398 and the dividend tax credit. What is the amount of her 2022 federal income tax payable? A) $554. B) $4,218. C) $2,146. D) $3,721. Answer: B Explanation: A) $554 {[15%][(115%)($15,300) + $10,500] — $2,160 — [9/13][15%][$15,300]} B) $4,218 [(33%)(115%)($15,300) — (9/13)(15%)($15,300)] C) $2,146 [(33%)(115%)($15,300) — $2,160 — (9/13)(15%)($15,300)] D) $3,721 [(33%)(115%)($15,300) + (15%)($10,500) — $2,160 — (9/13)(15%)($15,300)] Type: MC Topic: Tax on split income (TOSI)

67) Katrina is 27 years old. In 2022 she receives a non-eligible dividend of $12,000 from a private company controlled by her mother. Because she has never been actively engaged in the business, has assumed no risk or contributed capital to the corporation and holds only non-voting shares, these dividends are classified as Split Income. In addition to the dividends, she has interest income of $6,000 on funds that she inherited when her grandmother passed away. Her only personal tax credits are the BPA of $14,398 and the dividend tax credit. What is her 2022 federal income tax payable? A) Nil B) $1,237. C) $2,137. D) $3,308. Answer: D Explanation: A) nil {[15%][(115%)($12,000) + $6,000] — $2,160 — [9/13][15%][$12,000]} B) $1,237. [(33%)(115%)($12,000) — $2,160 — (9/13)(15%)($12,000)] C) $2,137. [(33%)(115%)($12,000) + (15%)($6,000) — $2,160 — (9/13)(15%)($12,000)] D) $3,308 [(33%)(115%)($12,000) — (9/13)(15%)($12,000)] Type: MC Topic: Tax on split income (TOSI)

68) Which of the following statements with respect to the Tax on Split Income (TOSI) is NOT correct? A) For purposes of this tax, a Specified Individual is a resident of Canada, without regard to their age. B) The federal tax is applied at a 33% rate to all of the income of a Specified Individual. C) Split Income can include interest received from a private company. D) The only tax credits that can be applied against the TOSI are dividend tax credits and foreign income tax credits that are related to the income. Answer: B Explanation: B) The federal tax is applied at a 33% rate to all of the income of a Specified Individual. Type: MC Topic: Tax on split income (TOSI)

69) Which of the following statements with respect to the Tax On Split Income (TOSI) is correct? A) A Specified Individual's holding of private company shares will be classified as Excluded Shares if their FMV is equal to or greater than 10% of the FMV of all of the company's shares. B) A Specified Individual can only claim that dividends are from an Excluded Business if they are actively engaged in the business during the current taxation year. C) Specified Individuals under the age of 18 can never claim that income received is from an Excluded Business. D) Potential Split Income received by any Specified Individual can be an Excluded Amount, provided it is reasonable in terms of the individual's labour, capital, or risk contribution to the source business. Answer: C Explanation: C) Specified Individuals under the age of 18 can never claim that income received is from an Excluded Business. Type: MC Topic: Tax on split income (TOSI)

70) Which of the following amounts are NOT considered "split income" of an individual under 18 years of age? A) Employment income from a private corporation. B) Shareholder benefits received from a private corporation. C) Eligible dividends received from a private corporation. D) Non-eligible dividends received from a private corporation. Answer: A Explanation: A) Employment income earned by a Specified Individual from a private corporation. Type: MC Topic: Tax on split income (TOSI)

71) Mrs. Perry's total income consisted of $10,000 in eligible dividends received from taxable Canadian corporations. Mrs. Perry's BPA and dividend tax credits are sufficient to offset all of her federal income tax payable. Because she receives these dividends, Mr. Perry is only able to claim a spousal tax credit of $598 [$14,398 - $13,800]. Mr. Perry's income is such that any additional income from the transfer would be taxed at the federal income tax rate of 20.5%. By what amount would Mr. Perry's federal income tax payable increase or decrease if Mrs. Perry's dividends were transferred to him? A) A decrease of $1,314. B) An increase of $756. C) An Increase of $669. D) A decrease of $1,319. Answer: A Explanation: A) A decrease of $1,054. Increase in Income Tax Payable [(20.5%)(138%)($10,000)] Increase in Spousal Tax Credit [(15%)($13,800)] Dividend Tax Credit [(38%)(6/11)($10,000)] Increase (Decrease) in 2022 Federal Income Tax Payable

$2,829 ( 2,070) ( 2,073) ($1,314)

B) An increase of $756 ($2,829 - $2,073) C) An increase of $669 ($2,829 - $2,160) D) A decrease of $1,319 [(20.5%)(115%)($10,000)] - [(15%)(9/13)($10,000)] Type: MC Topic: Transfer of dividends to a spouse - ITA 82(3)

72) Which of the following statements with respect to charitable donations is NOT correct? A) Amounts of eligible donations that are not used during the current year can be carried forward for up to 5 years. B) When making a gift of non-depreciable capital property with an FMV in excess of its ACB, it is always advisable to elect the FMV amount for the gift. C) The basis for a charitable donations tax credit for the current year can never exceed 75% of the individual's net income. D) Any capital gain arising on gifts of ecologically sensitive land are deemed to be nil. Answer: C Explanation: C) The basis for a charitable donations tax credit for the current year can never exceed 75% of the individual's net income. This limit can be exceeded where there are capital gains and/or recapture as a result of the donation disposition. Type: MC Topic: Charitable donations - general rules

73) In 2022, Liane Stanfield has net income of $102,000. This includes foreign non-business income of $30,000. This amount was before the withholding of taxes by the foreign government of $6,000. In calculating her 2022 taxable income, she intends to deduct a 2020 net capital loss of $10,000 and a 2019 non-capital loss of $30,000. After applying her BPA of $14,398, the tax otherwise payable for foreign tax credit purposes is $7,790. What is the amount of Liane's foreign non-business tax credit? A) $6,000 B) $2,540 C) $4,500 D) $3,769 Answer: B Explanation: A) $6,000 B) $2,540 Tax Otherwise Payable = $7,530 + (20.5%)$62,000 - $50,197) = $9,950 - $2,160 = $7,790 The credit would be the lesser of $4,500 [($30,000)(15%)] and an amount determined by the following formula: [$30,000 ÷ ($102,000 - $10,000)][$7,790] = $2,540 C) $4,500 [($30,000)(15%)] D) $3,769 [$30,000 ÷ ($102,000 - $10,000 - $30,000)][$7,790] Type: MC Topic: Foreign tax credits - non-business

74) Mrs. Mantz receives eligible dividend income of $12,000 every year. Her spouse is unable to utilize the spousal credit because of the dividends received by Mrs. Mantz. She is considering transferring the dividends to her spouse which will then enable him to claim some or all of the spousal credit. Under what circumstances would this most likely be tax advantageous? A) If Mrs. Mantz is receiving OAS. B) If Mr. Mantz is in the 15 % federal income tax bracket. C) If Mr. Mantz is in the 33% federal income tax bracket. D) If Mr. Mantz can claim the full spousal credit. Answer: B Explanation: B) If Mr. Mantz is in the 15% federal income tax bracket. Type: MC Topic: Transfer of dividends to a spouse - ITA 82(3)

75) An individual has net income of $147,500 for the current year. In the current year, the individual donates a depreciable property with a FMV of $300,000, a capital cost and ACB of $225,000 and a UCC $147,000. It is the only property in its CCA class and no additions are made in the year and subsequent to the gift. If the individual elects to have the donation valued at its FMV, what is the maximum amount that this individual can claim as the basis for his charitable donations tax credit for the current year? A) $300,000 B) $110,625 C) $139,500 D) $148,875 Answer: C Explanation: C) $139,500 [(75%)($147,500) + (25%)(1/2)($300,000 - $225,000) + (25%)($225,000 - $147,000)] Type: MC Topic: Charitable donations - donations of depreciable property

76) Which of the following amounts would NOT be considered to be a charitable donation for purposes of the charitable donations tax credit? A) A donation to a charitable organization outside of Canada to which the taxpayer's province of residence has also made a donation. B) A donation to her Majesty in right of Canada (Federal government). C) A gift of land to a Canadian municipality that has been certified by the Minister of the Environment to be ecologically sensitive land. D) A gift to a registered Canadian athletic association. Answer: A Explanation: A) A donation to a charitable organization outside of Canada to which the taxpayer's province of residence has also made a donation. Type: MC Topic: Charitable donations - general rules

77) Assume that any foreign income is subject to foreign income tax. Which one of the following types of foreign income generates foreign tax credits that may be applied to other taxation years? A) Business income only. B) Capital gains only. C) Employment income only. D) Investment income only. Answer: A Explanation: A) Business income only. Type: MC Topic: Foreign tax credits - general rules

78) Assuming that foreign income is subject to foreign income tax, which of the following types of income results in foreign tax withholdings that could generate both a tax credit and a tax deduction for individuals? A) Foreign business income. B) Foreign employment income. C) Foreign investment income that is interest. D) All foreign income. Answer: C Explanation: C) Foreign investment income that is interest. Type: MC Topic: Foreign tax credits - general rules

79) With respect to the Foreign Non-Business Income Tax Credit and the Foreign Business Income Tax Credit for individuals, which of the following statements is correct? A) The Foreign Business Income Tax Credit is limited to 15% of the foreign business income. B) The Foreign Non-Business Income Tax Credit is limited to 15% of the foreign non-business income. C) The Foreign Business Income Tax Credit cannot exceed tax otherwise payable for the year. D) Any unused Foreign Non-Business Income Tax Credit can be carried forward for 10 years and carried back 3 years. Answer: B Explanation: B) The Foreign Non-Business Income Tax Credit is limited to 15% of the foreign nonbusiness income. Type: MC Topic: Foreign tax credits - general rules

80) Djohn Django had all of the following types of income subjected to foreign income tax in the current year. Which type of foreign income can generate a foreign tax credit that can be carried forward and applied against Canadian income tax payable in other years? A) Employment income from a foreign employer. B) Property income on dividends from foreign shares. C) Business income from a contract with a foreign entity. D) Taxable capital gains on the sale of foreign shares. Answer: C Explanation: C) Business income from a contract with a foreign entity Type: MC Topic: Foreign tax credits - general rules

81) In the calculation of Adjusted Taxable Income in the AMT calculation, which of the following are NOT considered tax preference items? A) Losses arising through the deduction of CCA on Certified Canadian Films. B) Dividend tax credits. C) Employee stock option deductions. D) Limited partnership losses. Answer: B Explanation: B) Dividend tax credits. Type: MC Topic: Alternative minimum tax - general concepts

82) Which one of the following would NOT affect the calculation of the AMT? A) Stock options not yet exercised. B) The deduction of an Allowable Business Investment Loss (ABIL). C) A taxable capital gain resulting from the sale of a cottage. D) Dividends received from a taxable Canadian corporation. Answer: A Explanation: A) Stock options not yet exercised. Type: MC Topic: Alternative minimum tax - general concepts

83) In 2021, Ms. Jessica Michaels was unemployed and had no income of any kind. In order to cover her living costs, she sold a painting on December 1, 2021 for $78,000. This painting had been left to Ms. Michaels by her father and, at the time of his death, it had a FMV of $102,000. In 2022, Ms. Michaels finds employment and has employment income of $69,000. In addition, during June, she sells a second painting for $7,000. She had purchased this painting several years ago for $1,100. She has no other income in 2022. Determine Ms. Michaels' 2022 net income and taxable income. Indicate the amount and type of any losses available for carry over to other years. Assume the December 1, 2021 sale had been of publicly listed shares instead of a painting. How would this change your answer? Answer: Ms. Michaels will have a 2021 listed personal property loss of $12,000 [(1/2)($78,000 $102,000)]. This can be claimed against the 2022 taxable capital gain on listed personal property of $2,950 [(1/2)($7,000 - $1,100)]. Based on this, her 2022 net income and taxable income would be calculated as follows: Income ITA 3(a) Income ITA 3(b) ($2,950 - $2,950) 2022 Net Income and Taxable Income

$69,000 Nil $69,000

In this case, there is a 2021 listed personal property loss balance of $9,050 ($12,000 - $2,950) that can only be applied against net taxable capital gains on listed personal property. If the sale had been of shares instead of a painting, Ms. Michaels would have had a 2021 net capital loss of $12,000. Her 2022 net income and taxable income would have been determined as follows: Income ITA 3(a) Income ITA 3(b) 2022 Net Income 2021 Net Capital Loss (Limited to the ITA 3(b) amount) 2022 Taxable Income

$69,000 2,950 $71,950 ( 2,950) $69,000

In this case, the remaining balance of the 2021 net capital loss is $9,050 which can be claimed to the extent of the ITA 3(b) amount in carryover years. While the taxable income remained the same the net income was different for the two scenarios. Type: ES Topic: Losses - listed personal property

84) In 2021, Jude Legal sold an important piece of jewelry for $120,000. He had paid $150,000 for it several years earlier. In 2022, he sells a block of publicly listed shares for $125,000. The ACB of the shares was $72,000. He has no other types of income in either 2021 or 2022. Determine Jude's 2022 net income and taxable income. Indicate the amount and type of any losses available for carry forward for 2022. If the 2021 sale had been of publicly listed shares instead of jewelry, how would the results for 2022 have changed? Answer: Mr. Legal will have a 2021 listed personal property loss in the amount of $15,000 [(1/2)($150,000 - $120,000)]. In 2022 he will have a taxable capital gain of $26,500 [(1/2)($125,000 - $72,000)]. As the 2021 listed personal property loss cannot be claimed against this type of income or gain, Mr. Legal's 2022 net income and taxable income will both be $26,500. This will leave the 2021 listed personal property loss balance unchanged at $15,000. If the 2021 loss had been on publicly listed shares, it would have been a regular capital loss and could be applied as follows: 2022 Net Income 2021 Net Capital Loss 2022 Taxable Income

$26,500 ( 15,000) $11,500

There would be no remaining net capital loss balance. Type: ES Topic: Losses - listed personal property

85) Mr. John Klaus carries on a business as a sole proprietor which uses a December 31 fiscal period. In 2021, its first year of business, there is $19,000 of business income and a taxable capital gain of $3,000 [(1/2)($6,000)]. The following amounts relate to the 2022 taxation year: Business Loss Taxable Capital Gains Allowable Capital Losses

($56,000) 1,600 ( 4,900)

Mr. Klaus has no other types of income or deductions in either year. Assume that he wishes to minimize any net capital and non-capital losses, without regard to his ability to claim personal tax credits for 2021. Calculate his 2021 and 2022 net income and taxable income plus any revised amounts for 2021 as a result of loss carryovers. Indicate the amount and type of any losses available for carry forward to other years. Answer: The original 2021 result is as follows: Business Income Taxable Capital Gain 2021 Net Income Deductions 2021 Taxable Income

$19,000 3,000 $22,000 Nil $22,000

His 2022 net and taxable income would both be nil. After the maximum carry backs from 2022, the revised 2021 results would be as follows: Business Income $19,000 Taxable Capital Gain 3,000 2021 Net Income $22,000 2022 Net Capital Loss (Limited to Net Taxable Capital Gains) ( 3,000) 2022 Non-Capital Loss (Amount required to Reduce taxable income to nil) ( 19,000) 2021 Revised Taxable Income Nil Subsequent to the carryback of the 2021 net capital loss and the 2021 non-capital loss the remaining losses would be as follows: • 2022 Net Capital Loss = [($4,900 - $1,600) - $3,000] = $300 • 2022 Non-Capital Loss = ($56,000 - $19,000) = $37,000 Type: ES Topic: Losses - applying the carryovers

86) Maria Shank carries on a business as a sole proprietor which, during the fiscal period ending December 31, 2021 has business income of $28,000 and a taxable capital gain of $6,500 [(1/2)($13,000)]. In 2022, the business experiences a business loss of $85,000. In addition to this loss, the disposition of capital property results in an allowable capital loss of $10,800. There are no taxable capital gains or any other types of income. Assume that she wishes to minimize her net capital and non-capital loss carry overs, without regard to her ability to claim any available personal tax credits for 2021. Calculate her 2021 and 2022 net income and taxable income and any revisions to 2021 as a result of loss carrybacks. Indicate the amount and type of any losses available for carry forward to other years. Answer: The original 2021 results were as follows: Business Income Taxable Capital Gain 2021 Net Income Deductions 2021 Taxable Income

$28,000 6,500 $34,500 Nil $34,500

Her 2022 net income and taxable income would both be nil. After maximum carry backs from 2022, the revised 2021 results would be as follows: Business Income $28,000 Taxable Capital Gain 6,500 2021 Net Income $34,500 2022 Net Capital Loss Carry Back (Limited to Net Taxable Capital Gain) ( 6,500) 2022 Non-Capital Loss Carry Back (Amount required to reduce Taxable Income to Nil) ( 28,000) Revised 2021 Taxable Income Nil Subsequent to the carryback of the 2021 net capital loss and 2021 non-capital loss the remaining loss balances would be as follows: • 2022 Net Capital Loss Balance = ($10,800 - $6,500) = $4,300 • 2022 Non-Capital Loss Balance = ($85,000 - $28,000) = $57,000 Type: ES Topic: Losses - applying the carryovers

87) Ms. Jean Claus carries on a business as a sole proprietor. The business uses a December 31 fiscal period. In 2021, the first year of business, there was business income of $45,000 and an allowable capital loss of $5,250 [(1/2)($10,500)], which could not be deducted because of the absence of any taxable capital gains. The following amounts relate to 2022: Business Loss Taxable Capital Gains Allowable Capital Losses

($83,000) 6,300 ( 3,150)

Ms. Claus has no other types of income or deductions in either year and does not anticipate realizing capital gains in the foreseeable future. Assume she wishes to maximize the use of any loss carryovers to reduce taxable income in any carryover years, without regard to her ability to claim any personal tax credits. Calculate her 2021 and 2022 net income and taxable income and any revisions to 2021 net income and taxable income. Indicate the amount and type of any losses available for carry forward to other years. Answer: For 2021, Ms. Claus had net income and taxable income of $45,000. There would also be a 2021 net capital loss of $5,250. In 2022, she has a net taxable capital gain of $3,150 [($6,300 - $3,150)], providing an opportunity to apply the 2021 net capital loss. Based on this course of action, the 2022 non-capital loss would be calculated as follows: Amount E ($83,000 + $3,150) Income ITA 3(c) 2022 Non-Capital Loss

$86,150 ( 3,150) $83,000

Of this amount, $45,000 can be carried back to 2021, resulting in revised taxable income as follows: 2021 Net Income Less: 2022 Non-Capital Loss Carry Back Revised 2021 Taxable Income

$45,000 ( 45,000) Nil

Subsequent to the application of the 2021 net capital and 2022 non-capital losses the remaining loss balances would be as follows: • 2021 Net Capital Loss Balance = ($5,250 - $3,150) = $2,100 • 2022 Non-Capital Loss Balance = ($83,000 - $45,000) = $38,000 Type: ES Topic: Losses - applying the carryovers

88) Ms. Dora McLean carries on a business as a sole proprietor. The business uses a December 31 fiscal period. In the 2021 taxation year, there was business income of $95,000 and Dora also realized an allowable capital loss of $9,250 [(1/2)($18,500) that could not be deducted because of the absence of any taxable capital gains. Unfortunately, in 2022, there was a business loss of $123,000 and there was a taxable capital gain of $7,200 [(1/2)($14,400)]. Dora has no other types of income or deductions in 2021 or 2022. She does not anticipate realizing any additional capital gains in the foreseeable future. Assume that Dora wishes to maximize the use of any loss carryovers to minimize income tax in other years. without regard to her ability to claim any available personal tax credits for 2021. Calculate her 2021 and 2022 net income and taxable income and any revised amounts for 2021. Indicate the amount and type of any losses available for carry forward after any loss applications to other years. Answer: For 2021, Dora had net income and taxable income of $95,000 and a 2021 net capital loss of $9,250. This loss will be applied to the 2022 year to the extent of the $7,200 of net taxable capital gains in that year. The 2022 non-capital loss would therefore be calculated as follows: Amount E ($123,000 + $7,200) Income Under ITA 3(c) 2022 Non-Capital Loss

$130,200 ( 7,200) $123,000

Of this amount, $95,000 can be carried back to 2021, resulting in the following revisions: 2021 Net Income 2022 Non-Capital Loss Revised 2021 Taxable Income

$95,000 ( 95,000) Nil

Subsequent to the application of the 2021 net capital loss and the 2022 non-capital losses the remaining loss balances would be as follows: • 2021 Net Capital Loss Balance = ($9,250 - $7,200) = $2,050 • 2022 Non-Capital Loss Balance = ($123,000 - $95,000) = $28,000 Type: ES Topic: Losses - applying the carryovers

89) Ms. Tanya Forester dies in August of 2022. At the time of her death, she has a 2019 net capital loss balance of $21,800 [(1/2)($43,600)]. As the result of a deemed disposition on her death of her art collection, there is a taxable capital gain of $15,500. Ms. Forester has made no previous use of the capital gains deduction. Her 2022 employment income in the period prior to her death was $47,000. Describe the income tax treatment of these amounts in her final income tax return for 2022. Answer: The net amount that would be included in Ms. Forester's income as a result of these amounts would be calculated as follows: Employment Income Taxable Capital Gain 2019 Net Capital Loss applied against Taxable Capital Gain [(1/2)($31,000)] Net Capital Loss applied against other Income [(1/2)($43,600 - $31,000)] 2022 addition to Net Income

$47,000 15,500 ( 15,500) ( 6,300) $40,700

As it is Ms. Forester's year of death, the net capital loss can be deducted against any type of income except to the extent that the capital gains deduction had previously been claimed. Type: ES Topic: Losses - net capital losses at death

90) Barton Foster dies in July of 2022. He has a 2020 net capital loss balance of $27,000 [(1/2)($54,000)] at the time of his death. His death results in a deemed disposition of his portfolio of public company shares which results in taxable capital gains of $16,000. Mr. Foster has made no previous use of the capital gains deduction. In addition, prior to his death, he has employment income of $61,000. Describe the income tax treatment of these amounts in his final income tax return for 2022. Answer: The net amount that would be included in Barton's final income tax return as a result of these amounts would be calculated as follows: Employment Income Taxable Capital Gain 2020 Net Capital Loss applied against Current Taxable Capital Gain Net Capital Loss applied against other Income [(1/2)($54,000 - $32,000)] Increase to 2022 Net Income

$61,000 16,000 ( 16,000) ( 11,000) $50,000

As it is Barton's year of death, the net capital loss can be deducted against any type of income. Type: ES Topic: Losses - net capital losses at death

91) In 2021, Mrs. Lacinda Brown used $15,000 [(1/2)($30,000)] of her capital gains deduction. In 2022, she has taxable capital gains on publicly listed shares of $10,500, and a capital loss of $47,000 on the disposition of shares of a small business corporation which would qualify for treatment as an allowable business investment loss (ABIL). Her 2022 employment income is over $250,000. Determine the amount of the ABIL in 2022, as well as the amount and type of any losses available for carry over for 2022. Answer: The 2022 ABIL would be calculated as follows: Actual Capital Loss Disallowed by Capital Gains Deduction Use Business Investment Loss Inclusion Rate 2022 ABIL

$47,000 ( 30,000) $17,000 1/2 $ 8,500

All of the $8,500 can be applied against Mrs. Brown's employment income. With respect to the disallowed $30,000, it becomes an ordinary allowable capital loss of $15,000 of which $10,500 can be applied against the current year's taxable capital gains on the publicly listed shares. This leaves a 2022 net capital loss of $4,500 [$15,000 - $10,500]. Type: ES Topic: ABILs and the capital gains deduction

92) For many years, Jasmine Ho has had employment income in excess of $300,000. This will also be the case in 2022. In 2022, she has a $38,000 loss on the disposition of shares of a small business corporation that would qualify for treatment as a business investment loss. Also in 2022, she has taxable capital gains on publicly listed shares of $2,500. The only other year in which she realized taxable capital gains was in 2014. In that year she had a taxable capital gain of $4,000 on the sale of shares of a family farm corporation. She used her capital gains deduction to offset all of that gain. Determine her ABIL for 2022, as well as the amount and type of any 2022 losses available for carry over to other years. Answer: The 2022 ABIL would be calculated as follows: Actual Loss on Disposition Disallowed by Capital Gains Deduction Use Business Investment Loss Inclusion Rate 2022 ABIL

$38,000 ( 8,000) $30,000 1/2 $15,000

The $15,000 ABIL can be applied against Jasmine's employment income. With respect to the $8,000 disallowed portion of the capital loss, it becomes an allowable capital loss of $4,000 which can be applied to the extent of the taxable capital gain of $2,500. This will leave a 2022 net capital loss balance of $1,500 [($4,000 - $2,500)]. Type: ES Topic: ABILs and the capital gains deduction

93) Despite having a full time teaching position at a Canadian university, Bob Fife has considerable amounts of free time. Given this, he has started a farming business as a sole proprietor on land situated near the university where he teaches. In 2021, he had a farming loss of $24,000. He deducted the maximum possible amount in that year. Bob expects the farming activity to become profitable in a few years. In 2022, he has employment income of $105,000 and farming income of $6,000. Determine Bob's minimum 2022 net income and taxable income. Also, determine the amount and type of any loss carryovers for 2022. Answer: It appears that Bob's farming activities are a business but a subordinate source of income meaning that the farm losses are subject to the restrictions set out in ITA 31. Given this, the deduction of the 2021 farming loss would be limited to $13,250 [$2,500 + (1/2)($24,000 - $2,500)]. The remaining $10,750 ($24,000 - $13,250) is a restricted farm loss (RFL) for 2021. Bob's 2022 net income and taxable income would be as follows: Employment Income Farm Income 2022 Net Income Less: 2021 RFL (Limited to Farm Income) 2022 Taxable Income

$105,000 6,000 $111,000 ( 6,000) $105,000

This leaves a 2021 RFL of $4,750 ($10,750 - $6,000). Type: ES Topic: Losses - restricted farm losses ITA 31

94) Prior to 2022, Ms. Henny Close has had two capital gains and one capital loss. In 2017, she had a capital gain of $18,000 and in 2019, she had a capital gain of $54,000. Both of these gains were on dispositions of QSBC shares. Given this, she used the capital gains deduction to offset the taxable amount of these gains. She also has a 2020 net capital loss balance of $30,000. This resulted from a 2020 capital loss of $60,000. She intends to deduct the 2020 net capital loss in 2022. She has never had an ABIL. In 2022, she has a $748,000 capital gain on the sale of QSBC shares. Ms. Close has a CNIL balance on December 31, 2022 of $23,000. Determine Ms. Close's maximum capital gains deduction for 2022. Provide all of the calculations required to determine the maximum deduction. Answer: Ms. Close's maximum 2022 capital gains deduction is the least of the following three amounts: Available Deduction - Her remaining deduction would be $420,815 [$456,815 - (1/2)($18,000 + $54,000)]. Annual Gains Limit - In the absence of capital gains on non-qualified property in any of the years under consideration, the simplified version of this calculation can be used. The annual gains limit for 2022 would be as follows: Qualified Taxable Capital Gain [(1/2)($748,000)] Less: 2020 Net Capital Loss Deducted Annual Gains Limit

$374,000 ( 30,000) $344,000

Cumulative Gains Limit - This amount would be calculated as follows: Sum of Annual Gains Limits ($9,000 + $27,000 + $344,000) Previous Years' Capital Gains Deduction ($9,000 + $27,000) CNIL Cumulative Gains Limit

$380,000 ( 36,000) ( 23,000) $321,000

The least of these three amounts is $321,000, the Cumulative Gains Limit. Type: ES Topic: Capital gains deduction - calculating the deduction

95) At the beginning of 2022, Joanne Chance had the following loss balances available: 2019 Restricted Farm Losses 2020 Non-Capital Losses 2018 Net Capital Losses [(1/2)($50,000)]

$ 7,200 41,000 25,000

In 2022, she had the following amounts of income: Taxable Capital Gains Business Income Employment Income Farm Income

$ 10,500 14,200 61,000 2,950

Determine Joanne's minimum 2022 net income and taxable income. Indicate the amount and type of any loss balances available to be applied to other years. Answer: Joanne's 2022 net income would be calculated as follows: Income Under ITA 3(a): Employment Income Business Income Farming Income Income Under ITA 3(b): Taxable Capital Gains 2022 Net Income

$61,000 14,200 2,950

$78,150 10,500 $88,650

Joanne's 2022 Taxable Income is as follows: 2022 Net Income Loss Carry Forwards: 2019 Restricted Farm Losses (Limited to farming income) 2018 Net Capital Losses (Limited to taxable capital gains) 2020 Non-Capital Losses (All) 2022 Taxable Income

( 2,950) ( 10,500) ( 41,000) $34,200

Loss Balances • 2019 Restricted farm loss ($7,200 - $2,950) • 2018 Net capital loss ($25,000 - $10,500) • 2020 Non-capital loss

$ 4,250 14,500 Nil

Type: ES Topic: Losses - applying the carryovers

$88,650

96) At the beginning of 2022, Cindy Burke had the following loss carryover balances: 2020 Non-Capital Losses 2018 Restricted Farm Losses 2018 Net Capital Losses [(1/2)($64,000)]

$25,000 4,000 32,000

In 2022 she has the following amounts of income: Farm Income Taxable Capital Gains Business Income

$ 2,500 21,000 74,000

Determine Cindy's 2022 net income and minimum taxable income. Indicate the amount and type of any losses available for application to other years. Answer: Cindy's 2022 net income would be calculated as follows: Income Under ITA 3(a): Business Income Farming Income Income Under ITA 3(b): Taxable Capital Gains 2022 Net Income

$74,000 2,500

$76,500 21,000 $97,500

Cindy's 2022 minimum Taxable Income is as follows: 2022 Net Income Loss Carry Forwards: 2019 Restricted Farm Losses (Limited to farming income) 2018 Net Capital Losses (Limited to net taxable capital gains) 2020 Non-Capital Losses (All) 2022 Taxable Income

( 2,500) ( 21,000) ( 25,000) $49,000

Loss Balances • 2019 Restricted farm loss ($4,000 - $2,500) • 2018 Net capital loss ($32,000 - $21,000) • 2020 Non-capital loss

$ 1,500 11,000 Nil

Type: ES Topic: Losses - applying the carryovers

$97,500

97) In 2022, Harriet Humber, who is 15 years old, receives non-eligible dividends of $13,000 from a private corporation controlled by her father. In addition, she has income of $13,100 from her modeling contracts. Assume her only available personal tax credits are the BPA of $14,398 and the dividend tax credit. Determine Harriet's 2022 federal income tax payable. Answer: Harriet's regular 2022 federal income tax payable would be calculated as follows: Taxable Non-Eligible Dividends [(115%)($13,000)] Modeling Income Deduction for Split Income - Non-Eligible Dividends 2022 Net Income = Taxable Income Rate Tax Payable before Credit BPA [(15%)($14,398)] 2022 Regular Federal Income Tax Payable

$14,950 13,100 ( 14,950) $13,100 15% $ 1,965 ( 2,160) $ Nil

Her income tax on Split Income would be calculated as follows: Split Income - Taxable Non-Eligible Dividends Rate Tax Payable before Dividend Tax Credit Dividend Tax Credit [(9/13)(15%)($13,000)] 2022 Income Tax Payable on Split Income

$14,950 33% $ 4,934 ( 1,350) $ 3,584

Harriet's total 2022 federal income tax payable would be $3,584 ($Nil + $3,584). Type: ES Topic: Tax on split income (TOSI)

98) Mrs. Mary Senton is 42 years old and has over $250,000 in taxable income in 2022. Her spouse's only income for 2022 is $9,000 (grossed up amount of $12,420) in eligible dividends. In terms of federal income tax payable, would Mrs. Senton benefit from the use of the ITA 82(3) election to include the dividends received by her spouse in her net income? Explain your conclusion. Answer: In the absence of the transfer, Mrs. Senton would a have no a small spousal tax credit of $299 [$12,719 - $12,420]. In contrast, with the transfer, she would be eligible for the full spousal credit of $12,719 an increase of $12,420. As a result the ITA 82(3) election would be available since the effect of the transfer would be to increase the spousal credit. Given this, the analysis of her position at the federal level would be as follows: Additional Tax on Dividends [($12,420)(33%)] Increase in the Spousal Tax Credit [(15%)($12,420)] Dividend Tax Credit [(6/11)(38%)($9,000)] Tax Increase (Decrease)

$4,099 ( 1,863) ( 1,865) $ 371

As there is an increase in 2022 federal income tax payable, the election would not be beneficial in this case. Type: ES Topic: Transfer of dividends to a spouse - ITA 82(3)

99) Ms. Katrina Wave owns a painting that she purchased many years ago for $22,000. Its current FMV is $132,500. In 2022, she gifts the painting to the Renfrew Art Gallery. As the Gallery is a registered Canadian charity, it provides Ms. Wave with a tax receipt for the full value of $132,500. Before consideration of any income resulting from this gift, Ms. Wave's only other income is investment income of $12,500. She has no personal tax credits other than the BPA of $14,398 and the charitable donations credit resulting from the gift of the painting. Required: Determine Ms. Wave's: • 2022 Net Income; • her maximum federal charitable donations tax credit for 2022; • the amount of the donation she should claim in 2022 in order to reduce her federal income tax payable to nil; and • the amount of donations that can be carried forward to subsequent years, assuming that she claims the amount of contributions that would reduce her federal income tax payable to nil. Answer: 2022 Net Income - Ms.Wave's gift will result in a taxable capital gain of $55,250 [(1/2)($132,500 - $22,000)]. Her 2022 net income will therefore be $67,750 ($12,500 + $55,250). Maximum Donation Credit - Note that, because Ms.Wave's taxable income is less than $221,708, the 33% income tax rate is not relevant to the calculation of the charitable donations tax credit. The maximum base for the charitable donations is calculated as follows: 75% of 2022 net income [(75%)($67,750)] 25% of Taxable Capital Gain [(25%)($55,250)] 2022 Charitable Donations Credit Base Limit

$50,813 13,813 $64,626

This base results in a potential maximum credit of $18,714 [(15%)($200) + (29%)($64,626 - $200)]. Donation Credit required to reduce federal income tax payable to Nil - The credit claim that will reduce 2022 federal income tax payable to nil is calculated as follows: Tax on first $50,197 Tax on next $17,553 ($67,750 - $50,197) at 20.5% Tax Payable Before Credits BPA [(15%)($14,398)] 2022 Federal Tax Payable before Donations Credit

$ 7,530 3,598 $11,128 ( 2,160) $ 8,968

In order to determine the donation that will produce a charitable donations credit of $8,968, the following equation must be solved: $8,968 = [(15%)($200) + (29%)(X - $200)] Solving this equation results in a value for X of $31,021. Using this amount of her credit base will result in the required $8,968 [(15%)($200) + (29%)($31,021 - $200)], thereby reducing her 2022 federal income tax payable to nil. Carry Forward - This will leave a carry forward balance of $101,479 ($132,500 - $31,021). Type: ES Topic: Charitable donations - non-depreciable capital property

100) Lara Rand owns land that she had acquired many years ago for $18,000. In 2022, she gifts the land to a registered Canadian charity. At the time of the gift, the FMV of the land is $84,000, with the charity issuing an income tax receipt for that amount. In addition to the capital gain resulting from this gift, Lara has 2022 rental income of $23,000. She has no personal tax credits other than the BPA of $14,398 and the charitable donations credit resulting from the gift of the land. Required: Determine Ms. Rand's: • 2022 Net Income; • her maximum federal charitable donations tax credit for 2022; • the amount of the donation she should claim in 2022 in order to reduce her federal income tax payable to nil; and • the amount of contributions that can be carried forward to subsequent years, assuming that she claims the amount of contributions that would reduce her 2022 federal income tax payable to nil. Answer: 2022 Net Income - Lara's gift will result in a taxable capital gain of $33,000 [(1/2)($84,000 $18,000)]. Given this, her 2022 net income is $56,000 ($23,000 + $33,000). Maximum Credit - Note that, because Lara's taxable income is less than $221,708, the 33% income tax rate is not relevant in calculating the charitable donations tax credit. The maximum base for the charitable donations tax credit is calculated as follows: 75% of Net Income [(75%)($56,000)] 25% of Taxable Capital Gain [(25%)($33,000)] 2022 Charitable Donations Credit Base Limit

$42,000 8,250 $50,250

This base results in a maximum credit of $14,545 [(15%)($200) + (29%)($50,250 - $200)]. Donation Credit required to reduce federal income tax payable to Nil - The credit claim that will reduce 2022 federal income tax payable to nil is calculated as follows: Tax on first $50,197 Tax on next $5,803 ($56,000 - $50,197) at 20.5% Tax Payable Before Credits BPA [(15%)($14,398)] 2022 Federal Tax Payable before Donations Credit

$7,530 1,190 $8,720 ( 2,160) $6,560

In order to determine the donation that will produce a charitable donations credit of $6560, the following equation must be solved: $6,560 = [(15%)($200) + (29%)(X - $200)] Solving this equation gives a value for X of $22,717. The use of $22,717 of her donation will generate a credit of $6,560 [(15%)($200) + (29%)($22,717 - $200)], an amount sufficient to reduce her 2022 federal income tax payable to nil. Carry Forward - This will leave a carry forward balance of $61,283 ($84,000 - $22,717). Type: ES Topic: Charitable donations - non-depreciable capital property

101) Mr. Gerald Deveau owns a rental property that, in 2022, he gifted to a registered charity to house its continuing operations. The building had originally cost Mr. Deveau $172,000, of which $34,000 was allocated to the land and $138,000 was allocated to the building. At the time of the gift, the UCC of the building is $43,000, and the FMV of the property is $346,000, including $86,000 for the land and $260,000 for the building. The charity issues an income tax receipt for $346,000. Before consideration of any income resulting from this gift, Mr.Deveau's only other income is rental income of $8,300. His only personal tax credits are his BPA and the charitable donations credit resulting from the gift of the land and building. Required: Determine Mr. Deveau's: • 2022 Net Income; • his maximum federal charitable donations tax credit for 2022; • the amount of the donations he should claim in 2022 in order to reduce his federal income tax payable to nil; and • the amount of contributions that can be carried forward to subsequent years, assuming that he claims the amount of contributions that would reduce his 2022 federal income tax payable to nil. Answer: 2022 Net Income - Mr. Deveau's 2022 net income is calculated as follows: Rental Income Taxable Capital Gain - Land [(1/2)($86,000 - $34,000) Taxable Capital Gain - Building [(1/2)($260,000 - $138,000)] Recapture ($138,000 - $43,000) 2022 Net Income

$ 8,300 26,000 61,000 95,000 $190,300

Maximum Credit - Note that, because Mr. Deveau's taxable income is less than $221,708, the 33% income tax rate is not relevant in calculating the charitable donations tax credit. The maximum base for the charitable donations tax credit is calculated as follows: 75% of Net Income [(75%)($190,300)] 25% of Taxable Capital Gain [(25%)($26,000 + $61,000)] 25% of Recapture [(25%)($95,000)] Charitable Donations Credit Base Limit for 2022

$142,725 21,750 23,750 $188,225

This base results in a maximum charitable donations tax credit of $54,557 [(15%)($200) + (29%)($188,225 $200)]. Donation Credit required to reduce federal income tax payable to Nil - The credit claim that will reduce federal income tax payable to nil is calculated as follows: Tax on first $155,625 Tax on next $34,675 ($190,300 - $155,625) at 29% Tax Payable before Credits BPA [(15%)($13,517*)] 2022 Federal Income Tax Payable before Donations Credit *$14,398 - [$1,679][($190,300 - $155,625) ÷ 66,033)]= $13,517

$32,181 10,056 $42,237 ( 2,028) $40,209

In order to determine the donation that will produce a charitable donations credit of $40,209, the following equation must be solved: $40,209 = [(15%)($200) + (29%)(X - $200)] Solving this equation gives a value for X of $138,748. The use of $138,748 of his donation will produce a credit of $40,209 [(15%)($200) + (29%)($140,209 - $200)], an amount sufficient to reduce his 2022 federal income tax payable to nil. Carry Forward - This will leave a carry forward of $207,252 ($346,000 - $138,748). Type: ES Topic: Charitable donations - donations of depreciable property

102) In 2022, Victor Flood donates a rental property to a registered Canadian charity. The property had a cost of $226,000, including a value for the land of $50,000 and a value for the building of $176,000. At the time of the gift, the estimated FMV of the property is $396,000, with the value of the land unchanged at $50,000 and the value of the building at $346,000. The UCC of the building is $110,000 at the time of the donation. The charity issues an income tax receipt for $396,000. Other than the income generated by the gift, Victor's only other 2022 income is rental income of $16,000. His only 2022 personal tax credits are his BPA and the charitable donations credit resulting from the gift. Required: Determine Victor's: • 2022 Net Income; • his maximum federal charitable donations tax credit for 2022; • the amount of the donations he should claim in 2022 in order to reduce his federal income tax payable to nil; and • the amount of contributions that can be carried forward to subsequent years, assuming that he claims the amount of contributions that would reduce his 2022 federal income tax payable to nil. Answer: 2022 Net Income - Victor's 2022 net income is calculated as follows: Rental Income Taxable Capital Gain - Land Taxable Capital Gain - Building [(1/2)($346,000 - $176,000)] Recapture ($176,000 - $110,000) 2022 Net Income

$16,000 Nil 85,000 66,000 $167,000

Maximum Credit - Note that, because Victor's taxable income is less than $221,708, the 33% income tax rate is not relevant in calculating the charitable donations tax credit. The maximum base for the charitable donations tax credit for 2022 is calculated as follows: 75% of Net Income [(75%)($167,000)] 25% of Taxable Capital Gain [(25%)($85,000)] 25% of Recapture [(25%)($66,000)] 2022 Charitable Donations Credit Base Limit

$125,250 21,250 16,500 $163,000

This base results in a maximum charitable donations tax credit of $47,242 [(15%)($200) + (29%)($163,000 $200)]. Donation Credit required to reduce 2022 federal income tax payable to Nil - The credit claim that will reduce federal income tax payable to nil is calculated as follows: Tax on first $155,625 Tax on next $11,375 ($167,000 - $155,625) at 29% Tax Payable before Credits BPA [(15%)($14,109)] 2022 Federal Income Tax Payable before Donations Credit *$14,398 - [$1,679][($167,000 - $155,625) ÷$66,083)]= $14,109

$32,181 3,299 $35,480 ( 2,116) $33,364

In order to determine the donation that will produce a charitable donations credit of $33,364, the following equation must be solved: $33,364 = [(15%)($200) + (29%)(X - $200)] Solving this equation for X gives a value of $115,145. The use of $115,145 of his donation will produce a credit of $33,364 [(15%)($200) + (29%)($115,145 - $200)], an amount sufficient to reduce his 2022 federal income tax payable to nil. Carry Forward - This will leave a carry forward of $280,855 ($396,000 - $115,145). Type: ES Topic: Charitable donations - donations of depreciable property

103) In 2022, Kevin Fung has net income of $56,500, an amount that includes $3,900 of foreign nonbusiness income. The foreign jurisdiction withheld 13% of this amount, resulting in a net receipt of $3,393. In calculating taxable income, he deducts a 2020 non-capital loss of $5,000 and a 2019 net capital loss of $3,200, resulting in taxable income of $48,300. His only personal tax credits are the BPA and the nonbusiness foreign tax credit. What is the amount of his foreign non-business income tax credit for 2022? A calculation of federal income tax payable is NOT required. Answer: Mr. Fung's Adjusted Division B Income would be calculated as follows: 2022 Net Income 2019 Net Capital Loss Deducted Adjusted Division B Income 2020 Non-Capital Loss Carry Forward 2022 Taxable Income

$56,500 ( 3,200) $53,300 ( 5,000) $48,300

His Tax Otherwise Payable would be calculated as follows: Tax before Credit [(15%)($48,300)] BPA [(15%)($14,398)] 2022 Tax Otherwise Payable

$7,245 ( 2,160) $5,085

Mr. Fung's credit for foreign tax paid would be the lesser of the foreign tax withheld of $507 [(13%)($3,900)] and an amount determined by the following formula: [(Foreign Non-Business Income ÷ Adjusted Division B Income)(Tax Otherwise Payable)] = [($3,900 ÷ $53,300)($5,085)] = $372 As the amount determined by the formula would be the lesser of the two amounts, his foreign tax credit would be $372. Type: ES Topic: Foreign tax credits - non-business

104) In 2022, Andy Loon earned $4,500 in foreign non-business income. The foreign jurisdiction withheld 20% of this amount, resulting in a net receipt of $3,600. His only other income in 2022 is a taxable capital gain of $38,000. His only taxable income deduction is a 2017 net capital loss of $26,000. His only personal tax credits are the BPA and the non-business foreign tax credit. Determine Mr. Loon's 2022 net income, his 2022 taxable income, and his 2022 federal income tax payable. Answer: The total foreign tax withheld is $900 [(20%)($4,500)] However, because he is an individual, Andy's credit is limited to 15% of the non-business income or $675 [(15%)($4,500)]. The remaining $225 ($900 - $675) is deductible under ITA 20(11). Given this, Andy's 2022 net income and taxable income are calculated as follows: Foreign Non-Business Income ($4,500 - $225) Taxable Capital Gain 2022 Net Income Less: 2017 Net Capital Loss 2022 Taxable Income = Adjusted Division B Income

$ 4,275 38,000 $42,275 ( 26,000) $16,275

His adjusted Division B Income is $16,275, the same amount as his taxable income. His Tax Otherwise Payable for foreign tax credit purposes would be calculated as follows: Tax before Credit [(15%)($16,275)] BPA [(15%)($14,398)] Tax Otherwise Payable

$2,441 ( 2,160) $ 281

His credit against federal income tax payable for foreign tax withheld would be the lesser of $675 [(15%)($4,500)] and an amount determined by the following formula: [(Foreign Non-Business Income ÷ Adjusted Division B Income)(Tax Otherwise Payable)] = [($4,500 ÷ $16,275)($281)] = $78 As the amount determined by the formula would be the lesser of the two amounts, his foreign tax credit would be $78. This would result in a final 2022 federal income tax payable of $203 ($281 - $78). Type: ES Topic: Foreign tax credits - non-business

105) In 2022, Mr. Glenn Leigh has net income of $144,288. This amount is made up of taxable capital gains of $120,000 and taxable eligible dividends of $24,288 [(138%)($17,600)]. As the taxable capital gain was on a disposition of QSBC shares, he reduced his taxable income to $24,288 through the use of the capital gains deduction. His only personal tax credits are the BPA and the dividend tax credit. Determine whether Mr. Leigh would have a liability for the federal AMT and, if so, the amount of the tax. Answer: Mr. Leigh's regular federal income tax payable would be calculated as follows: $24,288 at 15% BPA [(15%)($14,398)] Dividend Tax Credit [(6/11)(38%)($17,600)] 2022 Federal Income Tax Payable - Regular

$3,643 ( 2,160) ( 3,648) Nil

His Adjusted Taxable Income for AMT purposes would be calculated as follows: Regular Taxable Income 30% of Capital Gains [(30%)(2)($120,000)] Dividend Gross Up [(38%)($17,600)] Adjusted Taxable Income

$24,288 72,000 ( 6,688) $89,600

The calculation of the AMT would be as follows: Adjusted Taxable Income Basic Exemption Amount Subject to the AMT Rate Minimum Tax Before Credit BPA 2022 AMT

$89,600 ( 40,000) $49,600 15% $ 7,440 ( 2,160) $ 5,280

As the AMT exceeds the regular income tax payable, the AMT would have to be paid. The $5,280 excess over regular income tax payable can be carried forward to be applied against any excess of regular tax payable over AMT over the next seven years. Type: ES Topic: Alternative minimum tax - calculating the tax

106) In 2022, Shelly Large sold QSBC shares for $580,000 resulting in a taxable capital gain of $200,000. She intends to deduct the taxable amount of this gain as a capital gains deduction. Her only other income in the year was eligible dividends of $23,000 (taxable amount $31,740). Her only personal tax credits are the BPA and the dividend tax credit. Determine whether Ms. Large would be liable for the federal AMT and, if so, the total amount of the liability. Answer: Shelly's regular 2022 federal income tax payable would be calculated as follows: $31,740 at 15% BPA [(15%)($14,398)] Dividend Tax Credit [(6/11)(38%)($23,000)] 2022 Federal Income Tax Payable - Regular

$4,761 ( 2,160) ( 4,767) Nil

Her Adjusted Taxable Income for AMT purposes would be calculated as follows: Regular Taxable Income 30% of Capital Gains [(30%)(2)($200,000)] Dividend Gross Up [(38%)($23,000)] Adjusted Taxable Income

$31,740 120,000 ( 8,740) $143,000

The calculation of the AMT would be as follows: Adjusted Taxable Income Basic Exemption Amount Subject to Tax Rate Minimum Tax before Credit BPA [(15%)($14,398)] 2022 AMT

$143,000 ( 40,000) $103,000 15% $ 15,450 ( 2,160) $ 13,290

As the AMT exceeds the regular income tax payable, the AMT of $13,290 would have to be paid. The $13,290 excess can be carried forward to be applied against any excess of regular federal income tax payable over AMT in the next seven years. Type: ES Topic: Alternative minimum tax - calculating the tax

107) Martin Dornet commences a new retail business on January 1, 2019 that he carries on as a sole proprietor. The fiscal period of the business is January 1 to December 31. Relevant information for 2019 and the three subsequent taxation years (2020 to 2022) follows. 2019 Taxation Year During this first year of operations, Martin's business income is $32,600. In addition to his new retail business, he begins a farming operation which loses $14,200 during its first year. He has always been an active investor in the stock market and, in 2019, he has the following income tax results: Eligible Dividends Taxable Capital Gains Allowable Capital Losses

$3,050 1,150 6,860

2020 Taxation Year The 2020 operations of his retail business result in a business loss of $23,700. His farming business generates income of $3,600. His investment results for 2020 are as follows: Eligible Dividends Taxable Capital Gains

$3,850 3,470

2021 Taxation Year His retail business has business income of $53,200 and the farming business income of $5,480. His 2021 investment results are as follows: Eligible Dividends Taxable Capital Gains

$4,860 3,870

2022 Taxation Year The retail business experiences a business loss of $32,670 and a farm loss of $2,460. Investment results are as follows: Eligible Dividends Taxable Capital Gains Allowable Capital Losses

$ 7,920 23,360 24,940

Because his farming activities are secondary to his business activities, any farm losses are restricted by ITA 31. In each of the four years 2019 to and including 2022, Martin needs $23,618 in taxable income to absorb his personal tax credits. When he has a choice, Martin would prefer to deduct maximum net capital losses. He will also carry back any current loss carryovers to the earliest possible taxation year. Prior to 2019, because of significant health issues,Martin had no income tax payable. This means that it would not be useful to carry back any type of loss to years prior to 2019.

Required: Calculate Martin's minimum net income and taxable income for each of the four years. Indicate the revised amounts for any years to which losses are carried back. Also indicate the amount and types of loss carry overs that would be available at the end of each year. Answer: 2019 Analysis The required information can be calculated as follows: ITA 3(a) Business Income Taxable Dividends [(138%)($3,050)] ITA 3(b) Taxable Capital Gains Allowable Capital Losses ITA 3(c) ITA 3(d) Farm Loss (See Note) 2019 Net Income and Taxable Income

$32,600 4,209 $ 1,150 ( 6,860)

$36,809

Nil $36,809 ( 8,350) $28,459

Note - Martin's farm losses are restricted as follows: Total Farm Loss Deductible Amount: First $2,500 One-Half of $11,700 ($14,200 - $2,500) 2019 Restricted Farm Loss

$14,200 ($2,500) ( 5,850)

( 8,350) $ 5,850

As noted in the problem, none of the losses can be carried back before 2019. This would leave the following 2019 loss balances: • 2019 Restricted Farm Loss $5,850 • 2019 Net Capital Loss ($6,860 - $1,150) $5,710 2020 Analysis The required information can be calculated as follows: ITA 3(a) Farm Income Taxable Dividends [(138%)($3,850)] ITA 3(b) Taxable Capital Gains Allowable Capital Losses ITA 3(c) ITA 3(d) Business Loss 2020 Net Income 2019 Net Capital Loss 2020 Taxable Income

$ 3,600 5,313 $ 3,470 Nil

$ 8,913

3,470 $12,383 ( 23,700) Nil ($ 3,470) Nil

Since there are net taxable capital gains in 2020, and the problem states that Martin would like to deduct the maximum amount of net capital losses, the net capital loss carry forward of $3,470 is added to the balance of the non-capital loss. The 2020 non-capital loss is calculated as follows: Business Loss 2019 Net Capital Loss Deducted ITA 3(c) 2020 Non-Capital Loss

$23,700 3,470 ( 12,383) $14,787

The entire 2020 non-capital loss carry over could be carried back to 2019, but since Martin requires $23,618 in taxable income to fully utilize his personal tax credits, the maximum carry back to 2019 is only $4,841 calculated as follows: 2019 Taxable Income (As Initially Reported) 2020 Non-Capital Loss deducted 2019 Revised Taxable Income (Minimum)

$28,459 ( 4,841) $23,618

This carry back leaves Martin with his required $23,618 in taxable income. There would be the following loss balances at the end of 2020: • 2019 Restricted Farm Loss Carry Forward (Unchanged) $5,850 • 2019 Net Capital Loss Carry Forward ($5,710 - $3,470)] 2,240 • 2020 Non-Capital Loss Carry Forward ($14,787 - $4,841) 9,946 2021 Analysis The required information can be calculated as follows: ITA 3(a) Business Income Farm Income Taxable Dividends [(138%)($4,860)] ITA 3(b) Taxable Capital Gains Allowable Capital Losses 2021 Net Income 2019 Restricted Farm Loss (Equal to Farm income) 2019 Net Capital Loss (Less Than $3,870) 2020 Non-Capital Loss (All) 2021 Taxable Income

$53,200 5,480 6,707 $3,870 Nil

There would be the following loss balances at the end of 2021: • 2019 Restricted Farm Loss ($5,850 - $5,480) $ 370

$65,387

3,870 $69,257 ( 5,480) ( 2,240) ( 9,946) $51,591

2022 Analysis The required information can be calculated as follows: ITA 3(a) Taxable Dividends [(138%)($7,920)] ITA 3(b) Taxable Capital Gains Allowable Capital Losses ITA 3(c) ITA 3(d) Business Loss Farm Loss 2022 Net Income and Taxable Income

$10,930 $23,360 ( 24,940)

($32,670) ( 2,460)

Nil $10,930

( 35,130) Nil

$32,670 2,460

$35,130 ( 10,930) $24,200

Although technically, the farm loss is accounted for separately from the non-capital loss, since the farm loss is less than $2,500 it is treated as an unrestricted farm loss and can be applied against all types of income. ITA 31 states that any loss allowed under that provision is considered an unrestricted loss from a farming business for the year for the purposes of calculating any loss carry over. As a result, the preceding loss carry over of $24,200 is available for carry back to 2021 and can be applied against any type of income. With respect to the 2022 net capital loss of $1,580 ($24,940 - $23,360), there are $1,630 ($3,870 - $2,240) in taxable capital gains left in 2021 as the basis for a carry back. This means that all of the 2022 net capital loss can be carried back. If, in addition to the net capital loss carry back, all of the non-capital loss is carried back, Martin's revised 2021 taxable income would be as follows: 2021 Taxable Income (As Initially Reported) 2022 Non-Capital Loss 2022 Net Capital Loss 2021 Revised Taxable Income

$51,591 ( 24,200) ( 1,580) $25,811

These loss carry backs leave Martin with his required $23,618 in 2021 taxable income. With these carry backs being deducted, there would be the following loss balances at the end of 2022: • 2019 Restricted Farm Loss Balance (Unchanged) $ 370 • 2022 Net Capital Loss Balance ($1,580 - $1,580)] Nil • 2022 Non-Capital Loss Balance ($24,200 - $24,200) Nil Type: ES Topic: Losses - applying the carryovers

108) In 2019, Mr. Larry Atkins invested $275,000 to purchase 100% of the common shares of a corporation involved in the manufacture of plastic containers. The company was a Canadian controlled private corporation (CCPC) with a January 31 taxation year. All of its properties were used in an active business carried on in Canada. In 2019 and 2020, the company operated successfully, but did not pay any dividends. In 2021, it began to experience serious financial difficulties. In 2022, the company shut down and all of the business properties were sold. After the priority claims of the creditors were settled, Mr. Atkins' shares were canceled and he received a final payment of $65,000. Other financial data for Mr. Atkins for the 2021 and 2022 taxation years is as follows: 2021 $36,870 5,250 13,808

Rental income Interest Income BPA

2022 $41,200 5,650 14,398

The only personal tax credit available to Mr. Atkins in either year is the BPA. Mr. Atkins had no income in 2019 and 2020. At the beginning of 2020, he did not have any losses from previous years. Mr. Atkins has never claimed the capital gains deduction. Required: Determine Mr. Atkins' optimum taxable income for 2021 and 2022. In your solution, consider the effect of the BPA. Indicate any loss carry over that is available, and the rules applicable to claiming the loss carry over. Answer: The calculation of Mr. Atkins' 2021 taxable income would be as follows: Rental Income Interest Income 2021 Net Income and Taxable Income

$36,870 5,250 $42,120

In 2022, there is a capital loss of $210,000 ($275,000 - $65,000) on the common shares. As these were shares in a CCPC that used all of its properties in an active business carried on in Canada the loss would qualify as a business investment loss (BIL). The allowable portion (ABIL) would be $105,000 [(1/2)($210,000)]. In contrast to other types of capital losses, ABILs can be deducted against any type of income. Based on this analysis, Mr. Atkins' 2022 taxable income would be calculated as follows: Rental Income Interest Income ABIL 2022 Net Income and Taxable Income

$41,200 5,650

$46,850 ( 105,000) Nil

As the ABIL was recognized in 2022, it must first be used to reduce that year's net income to nil. Note that, because of this rule, Mr. Atkins cannot deduct a smaller amount in order to have sufficient income to absorb his BPA for that year. This will use up $46,850 of the $105,000 total and leave a balance of $58,150 to be carried over to other years as a 2022 non-capital loss [ABIL $105,000 - ITA 3(c) amount of $46,850]. In carrying the 2022 non-capital loss back to 2021, the optimum solution would leave $13,808 of taxable income so that Mr. Atkins can take advantage of his BPA for that year. Note that the calculation of the optimum carry back uses the BPA of the carry back year, not the current year. This means that Larry will need a loss carry back deduction of $28,312 ($42,120 - $13,808) in 2021. This deduction will leave taxable income of $13,808. As planned, the income taxes on this amount will be offset by Larry's BPA of $13,808. A carry back of $28,312 in 2021 leaves a 2022 non-capital loss balance of $29,838 ($58,150 - $28,312) to be used in other years. For the next 10 years, the undeducted ABIL will be treated as a non-capital loss that can be deducted against any type of income. If it has not been utilized within the 10 years, it then converts to a net capital loss in year 11, deductible for an unlimited number of future taxation years, but only against net taxable capital gains. in the carryover year. Type: ES Topic: Allowable business investment losses

109) The following information is for Doug Santiago for the 2022 taxation year: • Doug sold shares of Flop Inc., a small business corporation the shares of which do not qualify for the capital gains deduction. The shares had cost $345,000 and the POD were $78,000. • Doug sold QSBC shares, for $480,000. The ACB of the shares was $187,000. and selling costs were $4,000. • Doug had employment income of $142,000. • At the end of 2022, Doug had a CNIL of $2,300. • Doug has a 2020 net capital loss balance of $3,400 [(1/2)($6,800)]. Doug claimed the capital gains deduction to eliminate a 2014 capital gain of $29,500, as well as a 2017 capital gain of $49,000. Doug has not claimed any other amounts as a capital gains deduction prior to 2022. Required: Calculate Doug's minimum 2022 net income and taxable income. Provide all of the calculations required to determine the maximum capital gains deduction assuming: A. Doug would prefer to make the maximum deduction of his 2020 net capital loss balance, before claiming the capital gains deduction. B. Doug would prefer to make the maximum use of the capital gains deduction before deducting any losses. Answer: To the extent that the capital gains deduction has been claimed in previous years, business investment losses (BILs) are reduced. When they are reduced, the reduction become an ordinary capital loss that must be deducted first in the current year to the extent of net taxable capital gains. Given this, the non-disallowed portion of the BIL would be calculated as follows: 2022 BIL Realized ($345,000 - $78,000) Less: Previous capital gains deductions ($29,500 + $49,000) Remaining BIL Inclusion Rate 2022 ABIL

$267,000 ( 78,500) $188,500 1/2 $ 94,250

Doug's 2022 net income would be calculated as follows: Employment Income ABIL Net Taxable Capital Gains: Taxable Capital Gain [(1/2)($480,000 - $187,000 - $4,000)] Allowable Capital Loss (Disallowed ABIL) [(1/2)($78,500)] 2022 Net Income

$142,000 ( 94,250)

$144,500 ( 39,250)

105,250 $153,000

Doug's 2020 taxable income under the two different assumptions would be calculated as follows: Part A $153,000 ( 3,400) ( 5,300) $144,300

2022 Net Income 2020 Net Capital Loss Deducted Capital Gains Deduction (Note) 2022 Taxable Income

Part B $153,000 Nil ( 8,700) $144,300

Note: As the only capital gains during 2022 are on qualified property, the simplified formula for the annual gains limit can be used. Given this, the capital gains deduction is the cumulative gains limit for both Part A and B as it is the least of the following: Part A $456,815 ( 39,250) $406,859

Amount Available [(1/2)($913,630*)] Amount Used [(1/2)($29,500 + $49,000)] Capital Gains Deduction Available in 2022

Part B $456,815 ( 39,250) $406,859

*This is the 2022 limit for gains on dispositions of QSBC shares. For gains on QFP, the 2022 limit would be $1,000,000.

Taxable Capital Gain on Qualified Property ABIL Realized Allowable Capital Loss Deducted (Disallowed ABIL) 2020 Net Capital Loss Deducted Annual Gains Limit

Sum of Annual Gains Limits ($14,750 + $24,500 + $7,600) ($14,750 + $24,500 + $11,000) Amounts Deducted in Previous Years ($14,750 + $24,500) CNIL (Given) Cumulative Gains Limit

Part A $144,500 ( 94,250) ( 39,250) ( 3,400) $ 7,600

Part B $144,500 ( 94,250) ( 39,250) Nil $ 11,000

Part A

Part B

$46,850 $50,250 ( 39,250) ( 2,300) $ 5,300

( 39,250) ( 2,300) $ 8,700

In Part B, Doug will still have his $3,400 2020 net capital loss balance, but will have used $3,400 more of his capital gains deduction. His 2022 taxable income in both cases is the same. Type: ES Topic: ABILs and the capital gains deduction

110) In the following three cases, one or more individuals receive dividends from a private company. For each individual, determine whether the dividends received will be considered Split Income subject to the TOSI. Explain your conclusion. Case A Jane owns 70% of Jahil Inc., a Canadian private corporation involved in manufacturing. Her common-law partner Jill owns the remaining 30% of the shares. All of the shares have the same market value and voting rights. Both Jane and Jill are in their mid-40s. Since the inception of the business in 2019, Jane has devoted all of her working time to the business, averaging more than 50 hours per week. Jill has a thriving accounting practice and has never worked in Jahil's operations. In 2022, Jahil pays a total dividend of $150,000, with $105,000 paid to Jane and $45,000 paid to Jill. Case B Justor is a Canadian private corporation that has carried on a manufacturing business since 2014. During the period 2014 to and including 2021, all of the shares were owned by George Sessions. During this period of time George's son Gary worked full time in the business, receiving a salary that was sufficient for him and his family to live comfortably. In late 2021, George concludes that the business would benefit from his son having an MBA. In keeping with this view, in January 2022, Gary enrolls in an executive MBA program that will require two years to complete. In order to provide income for his son now that he is no longer working in the business, George has Justor issue to Gary a new class of non-voting shares. In 2022, these shares pay dividends to Gary of $150,000. Case C Tom and Trisha Braxton were married in 2012. Trisha has been the family's income earner, a role she satisfied by operating Braxton Industries, a Canadian private company involved in an active business. Trisha was the sole shareholder of this company and worked full time in its operations. In late 2021, citing irreconcilable differences, the couple was divorced. As part of the settlement agreement, Trisha was required to have Braxton Industries issue a second class of shares to Tom. These shares are non-voting. In 2022, as required by the divorce settlement, these shares pay taxable dividends to Tom in the amount of $50,000.

Answer: Case A As Jane is actively engaged in the business on a regular, continuous, and substantial basis, the corporation is an Excluded Business to her. Given this, Jane's dividends will not be considered Split Income. As Jill has never been actively involved in Jahil, it is not an Excluded Business to her. However, Jill owns more than 10% of the number of voting rights and market value of the Jahil shares. In addition, Jahil is not a professional corporation, less than 90% of its business involves performing services, and substantially all of its income is not derived from a related business. Given this, Jill's shares would be Excluded Shares and the dividends she received would not be considered Split Income. Case B While Gary is no longer actively involved with Justor's business in 2022, he was actively engaged in a continuous and substantial manner for more than five years (2014 to and including 2021). Given this, Justor would be an Excluded Business to him and the taxable dividends that he received in 2022 would not be considered Split Income. While this is not required in dealing with the case, you should note that Gary's shares, because they are non-voting, would not be considered Excluded Shares. Case C The taxable dividends received by Tom originated from property that was transferred to him pursuant to a separation agreement. Given this they would be an Excluded Amount and would not be considered Split Income. While this is not required in dealing with the case, you should note that Tom's shares, because they are non-voting, would not be considered Excluded Shares. Type: ES Topic: Tax on split income (TOSI)

111) Despite being 75 years old, Mr. Igor Resso has retained a full time position with a Canadian university. His salary in 2022 is $95,000. While the university continues to deduct maximum EI contributions ($953 for 2022), he is collecting CPP payments of $9,500 per year and no longer makes contributions to the plan. Because of the continuing high level of his income, he has never applied for or received OAS benefits. When Mr. Resso turned 69, he could no longer make contributions to the university's pension plan and had to begin receiving pension payments from the plan. In 2022, these payments totaled $31,000. In addition to his other income Mr. Resso was required to withdraw $18,000 from his RRIF in 2022. In 2021, while visiting family in Russia, Mr. Resso met Ivana and they were married later in that year. Unfortunately, as the result of a stroke suffered during their whirlwind honeymoon in 2021, Ivana was disabled to such a degree that she qualified for the disability tax credit after she moved to Canada. In the 2020 divorce from her Russian husband, Ivana received a substantial settlement. After her marriage, she invested much of it in blue chip shares of Canadian public companies. In 2022, she receives eligible dividends from Canadian companies in the amount $14,000. While Ivana is 68 years old, she does not meet the residency requirements for receiving OAS benefits. Beyond personal credits and employment related credits, the only other 2022 credit available to the couple is based on qualifying medical expenses of $16,000. Assume that Mr. and Mrs. Resso do not elect to split any pension income. Required: A. Calculate Mr. and Mrs. Resso's 2022 minimum federal income tax payable assuming that no transfer of dividends is made under ITA 82(3). B. Determine whether a transfer of dividends under ITA 82(3) would be permitted. C. Calculate Mr. and Mrs. Resso's 2022 minimum federal income tax payable assuming that all of Mrs. Resso's dividends are transferred to Mr. Resso under ITA 82(3). Comment on whether the dividend transfer should be done.

Answer: Part A Mr. and Mrs. Resso's 2022 Taxable Income would be calculated as follows:

Employment Income CPP Income RPP Income RRIF Withdrawals Eligible Dividends Received Gross Up (38 %) 2022 Net Income and Taxable Income before any Transfer of Dividends

Mrs. Resso Nil Nil Nil Nil $14,000 5,320

Mr. Resso $95,000 9,500 31,000 18,000 Nil Nil

$19,320

$153,500

Mrs. Resso's 2022 federal income tax payable would be calculated as follows: Federal Tax before Credits [(15%)($19,320)] Tax Credits BPA Age and Disability (Transferred to Mr. Resso) Medical Expenses (Note 1) Total Base Rate Dividend Tax Credit [(6/11)($5,320)] 2022 Federal Income Tax Payable - Mrs. Resso

$2,898 $14,398 Nil Nil $14,398 15%

( 2,160) ( 2,902) Nil

Note 1 - Without regard to who pays for them, medical expenses can be claimed by either spouse. As they must be reduced by the lesser of $2,479 and 3% of the individual's net income, in some circumstances, it is better for the expenses to be claimed by the lower income spouse. However, after the application of the BPA and dividend tax credits, Mrs. Resso has no federal income tax payable, resulting in a situation where she cannot make any use of the medical expense credit. Given this, Mr. Resso should claim the medical expenses, despite the fact that they will be reduced by a larger amount than would have been the case had Mrs. Resso claimed them. The transfer to Mr. Resso would be calculated as follows: Credits Available For Transfer: Age Disability Total Available Reduced by excess of: Mrs. Resso's net income Over BPA Available for Transfer to Mr. Resso

$ 7,898 8,870 $16,768 ($19,320) 14,398

( 4,922) $ 11,846

Since Mr. Resso has not applied for OAS, there can be no OAS clawback. The 2022 federal income tax payable for Mr. Resso would be calculated as follows: Tax on first $100,392 Tax on next $53,108 ($153,500 - $100,392) at 26% Tax Credits BPA Spousal Including Infirm Amount (Income Too High) Additional Caregiver Amount (Note 1) EI Canada Employment Age {$7,898 - [(15%)($153,500 - $39,826)]} Pension Medical Expenses (Note 2) Transfer from Spouse (Preceding Calculation) Credit Base Rate 2022 Federal Income Tax Payable - Mr. Resso

$ 17,820 13,808

$31,628

($14,398) Nil ( 1,650) ( 953) ( 1,287) Nil ( 2,000) ( 13,521) ( 11,846) ($45,655) 15%

( 6,848) $24,780

Note 1 - Mrs. Resso's income is above the Canada caregiver income threshold of $17,670. Given this, the additional Canada caregiver amount would be $1,650 ($19,320 - $17,670). Note 2 - The allowable medical expenses would be calculated as follows: Medical Expenses Reduced by the lesser of: • [(3%)($153,500)] = $4,605 • 2022 Threshold Amount = $2,479 Allowable Medical Expenses

$16,000

( 2,479) $13,521

Part B - Eligibility For Transfer Mr. Resso's current base for the spousal credit is nil. If Mrs. Resso's dividends are transferred, she would be left with net income of nil, resulting in Mr. Resso being eligible for the full spousal tax credit of $14,398. As this is an increase from the previous amount, the transfer is permitted. Part C If Mrs. Resso’s dividends are transferred to Mr. Resso, their new taxable income amounts would be calculated as follows: Mrs. Resso Net Income $19,320 Dividend Transfer ( 14,000) Gross Up Transfer ( 5,320) 2022 Net Income and Taxable Income after ITA 82(3) Nil

Mr. Resso $153,500 14,000 5,320 $172,820

The transfer to Mr. Resso would be calculated as follows: Credits Available For Transfer: Age Disability Total Available Reduced by excess of: Mrs. Resso’s Net Income Over BPA Available for Transfer to Mr. Resso

$ 7,898 8,870 $16,768 Nil 14,398

( Nil) $16,768

With respect to Mr. Resso, his 2022 federal income tax payable would be calculated as follows: Tax on first $155,625 Tax on next $17,195 ($172,820 - $155,625) at 29% Tax Credits BPA (Note 3) Spousal Including Infirm Amount ($13,961 + $2,350) Additional Caregiver Amount (Note 4) EI Canada Employment Age {$7,898 - [(15%)($153,500 - $39,826)]} Pension Medical Expenses (Note 5) Transfer From Spouse (Preceding Calculation) Credit Base Rate Dividend Tax Credit [(6/11)($5,320)] 2022 Federal Income Tax Payable - Mr. Resso

$32,181 4,987

$37,168

($13,961) ( 16,311) ( Nil) ( 953) ( 1,287) Nil ( 2,000) ( 13,521) ( 16,768) ($64,801) 15%

( 9,720) ( 2,902) $24,546

Note 3 - Mr. Russo's BPA would be calculated as follows: $14,398 - [$1,679][($172,820 - $155,625) ÷ 66,083] = $13,961 Note 4 - The spousal credit for Mrs. Resso is larger than the $7,525 Canada caregiver amount. Given this, the additional Canada caregiver amount would be nil. Note 5 - The allowable medical expenses would be calculated as follows: Medical Expenses Reduced by the lesser of: • [(3%)($172,820)] = $5,185 • 2022 Threshold Amount = $2,479 Allowable Medical Expenses

$16,000

( 2,479) $13,521

Conclusion The use of the ITA 82(3) dividend transfer has decreased Mr. Resso’s federal income tax payable by $234, from $24,780 to $24,546. The dividend transfer should therefore be done. Type: ES Topic: Comprehensive tax credits with dividend transfer

112) The following two independent cases involve individual taxpayers who might be subject to the AMT in 2022. Case One Serge Lawson has made the following estimates of the various types of income and deductions that he anticipates in 2022. Rental Income Eligible Dividends Received RRSP Contributions

$73,100 14,000 22,000

Prior to 2022, Serge has never managed to have enough funds to make any RRSP contributions, leaving him with nearly $100,000 in unused deduction room. However, in 2022, his gambling habit finally pays off, providing sufficient winnings to make a $22,000 contribution. He plans to deduct the full amount in 2022. Case Two Sarah Bonito has made the following estimates of the various types of income and deductions that she anticipates for in 2022. Eligible Dividends Received Net Taxable Capital Gains Capital Gains Deduction Claimed

$ 26,000 263,000 260,000

In both Cases, assume the only tax credits available are the BPA and the dividend tax credit related to any dividends received. Required: For both Cases, determine whether there is an AMT liability and, if so, the amount of that liability. In addition, calculate any related carry forwards available. Answer: Case One The regular 2022 federal income tax payable calculation for Serge Lawson would be as follows: Rental Income Eligible Dividends Received Gross Up [(38%)($14,000)] RRSP Deduction 2022 Net Income and Taxable Income

$73,100 14,000 5,320 ( 22,000) $70,420

Tax on first $50,197 Tax on next $20,223 ($70,420 - $50,197) at 20.5% Tax Before Credits BPA [(15%)($14,398)] Dividend Tax Credit [(6/11)($5,320)] 2022 Regular Federal Income Tax Payable

$ 7,530 4,146 $11,676 ( 2,160) ( 2,902) $ 6,614

The AMT calculations are as follows: Regular Taxable Income Dividend Gross Up Adjusted Taxable Income AMT Exemption AMT Base Rate Federal AMT before Credit BPA [(15%)($14,398)] 2022 AMT

$70,420 ( 5,320) $65,100 ( 40,000) $25,100 15% $ 3,765 ( 2,160) $ 1,605

Since the regular federal income tax payable is greater than the AMT, there is no AMT liability and no related carry forward. Case Two The 2022 regular federal income tax payable calculation for Sarah Bonito would be as follows: Eligible Dividends Gross Up [(38%)($26,000)] Net Taxable Capital Gains 2022 Net Income Less: Capital Gains Deduction 2022 Taxable Income

$ 26,000 9,880 263,000 $298,880 ( 260,000) $ 38,880

Federal Tax before Credit [(15%)($38,880)] BPA [(15%)($14,398)] Dividend Tax Credit [(6/11)($9,880)] 2021 Regular Federal Income Tax Payable

$ 5,832 ( 2,160) ( 5,389) Nil

The AMT calculations are as follows: Regular Taxable Income 30% of Capital Gains [(30%)(2)($263,000)] Dividend Gross Up Adjusted Taxable Income AMT Exemptions AMT Base Rate Federal AMT before Credit BPA [(15%)($14,398)] 2022 AMT

$ 38,880 157,800 ( 9,880) $ 186,800 ( 40,000) $146,800 15% $ 22,020 ( 2,160) $ 19,860

Since the regular federal income tax payable is nil, the AMT must be paid. The excess AMT over regular income tax payable for Sarah of $19,860 can be carried forward for 7 years and applied against any future excess of regular income tax payable over the AMT for that year. Type: ES Topic: Alternative minimum tax - calculating the tax

113) The two cases which follow are designed to illustrate the basic features of the AMT. In both cases, you are given information about an individual's income and deductions for 2022. The two cases are independent of each other. Case One Marita Ulman provides the following estimates of her various types of income and deductions for 2022: Employment Income Net Taxable Capital Gains Capital Gains Deduction Claimed

$ 32,000 206,000 206,000

Case Two Fiona Acevedo provides the following estimates of her various types of income and deductions for 2022: Employment Income Taxable Capital Gains Eligible Dividends Received Rental Loss (Note) Stock Option Deduction [(1/2)($63,000)] RRSP Deduction

$149,000 12,000 41,000 17,000 31,500 32,000

Note - The rental loss consisted of gross rental income of $18,000, interest paid of $15,000 and other rental expenses of $20,000. No CCA was claimed on the rental property. In both Cases, assume the only tax credits available are the BPA and the dividend tax credit related to any dividends received. Required: For both Cases, determine whether there is an AMT liability and, if so, the amount of that liability. In addition, calculate any related carry forwards available. Answer: Case One The regular 2022 federal income tax payable calculation for Marita Ulman would be as follows: Employment Income Net Taxable Capital Gains 2022 Net Income Less: Capital Gains Deduction 2022 Taxable Income

$ 32,000 206,000 $238,000 ( 206,000) $ 32,000

Federal Tax before Credit [(15%)($32,000)] BPA [(15%)($14,398)] 2021 Regular Federal Income Tax Payable

$4,800 ( 2,160) $2,640

The AMT calculations are as follows: Regular Taxable Income 30% of Capital Gains [(30%)(2)($206,000)] Adjusted Taxable Income AMT Exemptions AMT Base Rate Federal AMT before Credit BPA [(15%)($14,398)] 2022 AMT

$ 31,500 123,600 $155,100 ( 40,000) $115,100 15% $ 17,265 ( 2,160) $ 15,105

Since the AMT is larger than the regular federal income tax payable, it must be paid. The excess AMT over regular income tax payable for Marita of $12,465 ($15,105 - $2,640) can be carried forward for 7 years and applied against any future excess of regular income tax payable over the AMT. Case Two The 2022 regular federal income tax payable calculation for Fiona Acevedo would be as follows: Employment Income Eligible Dividends Received Gross Up [(38%)($41,000)] Taxable Capital Gains Rental Loss RRSP Deduction 2022 Net Income Less: Stock Option Deduction 2022 Taxable Income

$149,000 41,000 15,580 12,000 ( 17,000) ( 32,000) $168,580 ( 31,500) $137,080

Tax on first $100,392 Tax on next $36,688 ($137,080 - $100,392) at 26% Tax Before Credits BPA [(15%)($14,398)] Dividend Tax Credit [(6/11)($15,580)] 2022 Regular Federal Income Tax Payable

$17,820 9,539 $27,359 ( 2,160) ( 8,498) $16,701

The AMT calculations are as follows: Regular Taxable Income Excess of Interest Charges Deducted Over Rental Loss of $2,000 ($18,000 - $20,000) Stock Option Deduction [(3/5)($31,500)] 30% of Capital Gains [(2)($12,000)(30%)] Dividend Gross Up Adjusted Taxable Income AMT Exemption AMT Base Rate Federal AMT before Credit BPA [(15%)($14,398)] 2022 AMT

$137,080 15,000 18,900 7,200 ( 15,580) $162,600 ( 40,000) $122,600 15% $ 18,390 ( 2,160) $ 16,230

Since the AMT is less than the regular federal income tax payable, the regular federal income tax payable is the amount that will be paid and not the AMT. Type: ES Topic: Alternative minimum tax - calculating the tax

114) Mr.Wally Bronson is 67 years old and has been retired for several years. His spouse,Melissa, is 62 and has been blind for the last ten years. They live in Ottawa. Mr. Bronson receives pension income of $83,000 in 2021 from his employer's RPP. Due to his high income in the last few years, Mr. Bronson has not applied for OAS benefits. However, he has applied for the CPP and received $10,680 in CPP benefits in 2022. Melissa has no income and none of the family's investments are owned by her. Wally and Melissa have two children. Their son, Jerome, is 42 years old and their daughter, Jerri, is 38 years old. Neither child is dependent on Mr. Bronson. While Jerome has no children, Jerri has a 12 year old daughter, Brenda. In December of 2021, Mr. Bronson is diagnosed with a terminal illness, with the doctor indicating that he probably has about a year to live. To this point,Mr. Bronson had not dealt with the prospect of death and, beyond the preparation of a fairly simple will which left all of his assets to Melissa, had done little in the way of estate planning. Given his current state of health, he has decided to undertake a number of transactions in order to minimize the income tax consequences of his death. He is particularly concerned with the fact that, in the province in which he lives, probate fees of 1.5% are charged on the FMV of almost all of the assets that are transferred in his will. Given this, he intends to transfer a significant amount of his assets prior to his death. At this time he also revises his will, leaving some property to his two children with the remainder going to his spouse. Mr. Bronson owns two tracts of vacant land. Plot A cost $125,000 and has a FMV of $150,000. Plot B cost $175,000 and has a FMV of $210,000. While he had intended to build rental properties on these sites, he has decided that this is no longer feasible and the properties should be sold. Because his younger brother, Phil, is in a low income tax bracket, during 2022, he sells Plot A to him, with the only consideration being a promissory note for $50,000 which is paid in full on December 1, 2022. In contrast, his older brother, Gary, is very wealthy and is in the highest income tax bracket. In gratitude for Wally's help during a family crisis, Gary offers to buy Plot B for $250,000 in cash. Wally accepts the offer, thinking of Melissa. On January 1, 2022, Mr. Bronson purchases units in the YP Mutual Trust Fund at a cost of $300,000. These units make distributions of $800 per month on the 25th of each month. This distribution represents only rental income and does not include dividends, capital gains, or a return of capital. On February 1, 2022, after receiving the January payment of $800, Mr. Bronson gifts all of these units to his granddaughter, Brenda. At this time, the FMV of the units is $310,000. Mr. Bronson owns a large block of Baron Inc. shares. He purchased 4,000 shares of this widely held public company at $50 each and purchased an additional 8,000 shares at $65 each. On March 1, 2022, he gifts 1,500 shares to both of his children and an additional 1,500 shares to his spouse. At this time, the shares are trading at $68 per share. On July 1, 2022, Baron Inc. pays an eligible dividend of $1.50 per share. Mr. Bronson owns three identical units in a condominium building. Each unit cost $300,000 nine years ago and, on January 1, 2022, each unit was in a separate class with a UCC for each of $205,000. The land is leased from the National Capital Commission for 100 years. In 2022, these units generated rental income, before consideration of CCA, of $93,750.

On December 31, 2022, Mr. Bronson dies peacefully in his home. On this date he has the following property: Baron Inc. Shares — The 7,500 shares that remain on this date are trading at $70 per share. Mr. Bronson’s will leaves all of these shares to his spouse, Melissa. Condominium Units — In his will, Mr. Baron has left one of these units to each of his two children, with the remaining unit going to his spouse. On the date of Mr. Bronson’s death, each of these units has a FMV of $420,000. Principal Residence — Mr. Bronson and his wife have lived in the same home for 20 years. The house is owned by Mr. Bronson. It cost $145,000 and has a current FMV of $562,000. Mr. Bronson’s will leaves the residence to his spouse. In 2022, medical expenses for Mr. Bronson totaled $45,000, while those of his spouse totaled $12,000. At his death, Mr. Bronson had a 2020 net capital loss balance of $30,000 [(1/2)($60,000)]. Required: Ignore GST/HST & PST considerations. A. Assume Mr. Bronson’s accountant does not split his pension income with his spouse. Calculate Mr. Bronson’s minimum 2022 net income, taxable income and his minimum 2022 federal income tax payable without consideration of any instalment payments he may have made. B. Assume Mr. Bronson’s accountant splits his pension income with his spouse and allocates $41,500 in pension income to her. Calculate the overall federal income tax savings as a result of the pension splitting. Answer: The various components of Mr. Bronson's 2022 net income would be calculated as follows: Pension Income RPP Income CPP Income Pension Income

$83,000 10,680 $93,680

Land Sales (Note 1) Capital Gain on Plot A ($150,000 - $125,000) Capital Gain on Plot B ($250,000 - $175,000) Total Capital Gain Inclusion Rate Taxable Capital Gain

$ 25,000 75,000 $100,000 1/2 $ 50,000

Note 1 - As these are non-arm's length sales, ITA 69 is applicable. Plot A was sold below FMV and, because of this, the POD are deemed to equal the FMV of $150,000. Note that Phil's ACB would be limited to the $50,000 that was paid. Since the note was paid in 2022, there is no capital gains reserve available. Plot B was sold at an amount in excess of FMV and, in this case, ITA 69 treats the sale price as the POD. Note that Gary's ACB would equal the FMV of $210,000.

YP Real Estate Income Trust Units (Note 2) Income Distribution [(1)($800) + (11)($800)]

$ 9,600

Capital Gain ($310,000 - $300,000) Inclusion Rate Taxable Capital Gain

$10,000 1/2 $ 5,000

Note 2 - As Brenda is under 18 years of age, all of the income on the trust units that is paid to her ($8,800) would be attributed to Mr. Bronson. The income attribution will stop when Mr. Bronson dies. As there is no rollover provision with respect to transfers to a minor, Mr. Bronson must transfer the units for POD equal to FMV and will have to pay income tax on the taxable capital gain resulting from the gift to Brenda. If Brenda had sold the units while he was alive, there would have been no attribution of any capital gains. Gift of Baron Inc. Shares POD (Note 3) ACB [(4,500)($60)] Capital Gain Inclusion Rate Taxable Capital Gain

$294,000 ( 270,000) $ 24,000 1/2 $ 12,000

Note 3 - The ACB of the Baron Inc. shares would be their average cost, determined as follows: 1st Purchase (4,000 Shares @ $50) 2nd Purchase (8,000 Shares @ $65) Total Cost

$200,000 520,000 $720,000

Based on this cost, the average cost of the shares is $60 ($720,000 ÷ 12,000) per share. Since the problem requires the minimum 2022 net income, Mr. Bronson will not elect out of the ITA 73(1) rollover. As a result, the 1,500 shares gifted to his spouse will be transferred at their ACB. In contrast, the POD for the shares gifted to his children would be at their FMV of $68 per share. Given this, the POD would be calculated as follows: 1,500 Shares @ $60 3,000 Shares @ $68 Total POD

$ 90,000 204,000 $294,000

Dividends on Baron Inc. Shares Dividends Received and Attributed (Note 4) Gross Up of 38% Taxable Dividends

$13,500 5,130 $18,630

Note 4 - The dividends on the 1,500 shares gifted to Melissa would be attributed to Mr. Bronson. The dividends on the shares gifted to his (adult) children will be included in their income. Since he owns 7,500 shares on July 1, 2022 the taxable dividends will be included in his income which total $13,500 [(1,500 + 7,500)($1.50)].

Condominium Units - Immediately before the time of Mr. Bronson’s death, there is a deemed disposition of all of his capital property. If the beneficiary is a spouse, the deemed POD are equal to the tax cost of the property (UCC in this case). This means that the unit transferred to Melissa will be transferred at its tax cost of $205,000. She will, however, retain the original capital capital cost of $300,000, with the difference treated as deemed CCA. For the transfers to the children, the transfer will be deemed to take place at FMV. That will result in following income tax consequences for Mr. Bronson: POD [(2)($420,000)] ACB [(2)($300,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$840,000 600,000 $240,000 1/2 $120,000

Capital Cost [(2)($300,000)] UCC [(2)($205,000)] Recapture

$600,000 ( 410,000) $190,000

In addition to the taxable capital gain and recapture, the properties earned $93,750 of rental income prior to Mr. Bronson's death. Other Properties at Death Baron Inc. Shares — At the time of his death, Mr. Baron owns the 7,500 remaining shares of Baron Inc. As these are transferred to his spouse, the deemed POD will be equal to the tax cost of the shares and there will be no 2022 income tax consequences. Principal Residence — As with the Baron Inc. shares, the property can be transferred to Melissa at its tax value. Alternatively, the executor could elect to transfer it at FMV and use the principal residence gain reduction formula to eliminate the $417,000 capital gain. In either case, there are no income tax consequences for Mr. Bronson.

Part A - 2022 Net Income and Taxable Income Mr. Bronson’s minimum 2022 net income and taxable income would be calculated as follows: Pension Income Mutual Trust Fund Distribution Taxable Dividends Rental Income Recapture Taxable Capital Gains: Land Trust Units Gift of Baron Inc. Shares Condominium Units 2022 Net Income Less: 2020 Net Capital Loss 2022 Taxable Income

$ 93,680 9,600 18,630 93,750 190,000 $ 50,000 5,000 12,000 120,000

187,000 $592,660 ( 30,000) $562,660

Part A - 2022 Federal Income Tax Payable Mr. Bronson’s minimum 2022 federal income tax payable would be calculated as follows: Tax on first $221,708 Tax on next $340,952 ($562,660 - $221,708) at 33% Income Tax before Credits Tax Credits: BPA Spousal Including Infirm Amount ($12,719 + $2,350) Age (Income Too High) Pension Income Spouse’s Disability Medical Expenses (Note 5) Total Credit Base Rate Dividend Tax Credit [(6/11)($5,130)] 2022 Federal Income Tax Payable

$ 51,345 112,514 $163,859 ($12,719) ( 15,069) Nil ( 2,000) ( 8,870) ( 54,521) ($93,179) 15%

( 13,977) ( 2,798) $147,084

Note 5 - The base for the medical expenses tax credit would be the total medical expenses of $57,000 ($45,000 + $12,000), reduced by the lesser of $17,780 [(3%)($592,660)] and $2,479.

Part B - Pension Income Splitting Tax Savings If the pension income splitting of Mr. Bronson’s RPP payments is for $41,500, it will increase Melissa’s income by $41,500 and decrease Wally ’s by the same amount. Melissa’s 2022 federal income tax payable and Wally ’s net income tax savings will be as follows: Tax before Credits [(15%)($41,500)] BPA Disability Pension (Not Previously Available) Total Credit Base Rate Melissa’s 2022 Federal Income Tax Payable

($14,398) ( 8,870) ( 2,000) ($25,268) 15%

Wally’s Tax Saving [(33%)($41,500)] Spousal Credit Including ($2,350 + $12,719) Disability Credit Taken By Melissa Total Credits Lost Rate Wally’s 2022 Income Tax Savings

($15,069) ( 8,870) ($23,939) 15%

$6,225

( 3,790) $2,435 $13,695

( 3,591) $10,104

With pension income splitting , the total federal income tax savings amount to $7,669 ($10,104 - $2,435). Further income tax savings would be available at the provincial or territorial level. Note that the total medical expenses are much greater than Melissa’s income. As a result, although Melissa could claim a larger medical expense credit given her lower net income, she could not fully utilize that credit, so it remains to be claimed by Wally. Type: ES Topic: Comprehensive personal tax payable including death and pension income splitting

115) Mr. Jack Leonard has asked you to assist him in preparing his 2022 income tax return. To this end, he provides you with the following information. Mr. Leonard's employer is a large, publicly traded corporation. In 2022, Mr. Leonard received a gross annual salary of $58,000, living accommodations having a FMV of $3,000 per month, and an award of $2,100 in recognition of outstanding job performance. The accommodations that were provided were not located in a remote region or prescribed zone. Awards for performance are paid instead of investing in employee benefits, so there is no pension plan and Mr. Leonard's 2021 Pension Adjustment (PA) amount is nil. His employer withheld the 2022 maximum for CPP contributions and EI premiums. On August 1, 2022, his employer granted him an option to purchase 100 of its shares at a price of $7 per share. The market price of the shares at that time was $7 per share. On December 1, 2022, the market price of the shares had increased to $16 per share. On that date, Mr. Leonard exercises his option and purchases the 100 shares. He continues to own the shares on December 31, 2022. Mr. Leonard provides the following list of receipts and disbursements for 2022: Receipts Director's Fees Royalties on Patent Purchased in 2014 Bond Interest

$ 1,300 24,070 430

Disbursements RRSP Contribution on July 6, 2022 Rent Paid to Employer for Living Accommodation Financial Support of his Aunt

$16,000 12,000 7,100

You ascertain that his aunt is physically infirm, is wholly dependent upon Jack Leonard for support, had income of $3,000 during the year, and lives in Florida for health reasons. Mr. Leonard provides you with the following information on his dispositions of property during the year:

Diamond Ring Painting Pistol Collection

POD $1,200 1,100 2,000

ACB $ 950 1,800 1,400

On further enquiry, you learn that he is married and has one 19 year old son. Mr. Leonard's wife had 2022 net income of $2,990. His son lives at home and was employed during twelve weeks of the summer at a golf course as a greens keeper, at a weekly salary of $250. In September, he left his employment to commence full time studies at university. Tuition fees paid for the 2022 calendar year amounted to $4,860, and were paid by Mr. Leonard. The son's only other income was $700 in interest income on bonds received from his father as a birthday gift in 2012. He will transfer the maximum tuition credit to his father.

Assume Mr. Leonard's 2021 earned income for RRSP purposes was equal to his 2022 earned income. At the beginning of 2022, Mr. Leonard has no unused deduction room or undeducted contributions. Required: For 2022, compute the following amounts for Mr. Leonard: A. Employment income. B. Income from property. C. Net taxable capital gains. D. Net Income. E. Taxable Income. F. Federal Income Tax Payable. Show all required calculations, including those necessary to determine the maximum RRSP deduction for the year. In addition, indicate any available loss carry over amounts and the applicable loss carry over provisions.

Answer: Part A Mr. Leonard's employment income would be calculated as follows: Salary Housing Benefit (12 Months at $3,000 - $1,000 paid) Award Director's Fees Stock Option Benefits [(100)($16 - $7)] 2022 Employment Income

$58,000 24,000 2,100 1,300 900 $86,300

Part B Since Mr. Leonard's son is over 17 years of age, the interest on the bonds is not attributed to Mr. Leonard. Mr. Leonard's income from property would be calculated as follows: Royalties on Patent Interest income on Bonds 2022 Income from Property

$24,070 430 $24,500

Part C Mr. Leonard's net taxable capital gains would be calculated as follows: Listed Personal Property: POD from Ring Deemed ACB POD from Painting ACB Personal Use Property: POD from Pistols ACB Capital Gain Inclusion Rate 2022 Net Taxable Capital Gains

$1,200 ( 1,000) $1,100 ( 1,800)

$ 200 ( 700) $2,000 ( 1,400) $ 600 1/2

Nil

$300 $300

The preceding calculations indicate that Mr. Leonard would be left with a listed personal property loss of $250 [(1/2)($200 - $700)]. This unused loss can be carried back three years and forward for seven years, but it can only be deducted against net taxable capital gains on listed personal property.

Part D Mr. Leonard's 2022 net income would be calculated as follows: Employment Income Income From Property Taxable Capital Gain RRSP Contribution (See Note) Deductible CPP ($3,500 - $3,039) 2022 Net Income

$ 86,300 24,500 300 ( 15,534) ( 461) $95,105

Note - Mr. Leonard's RRSP Deduction Limit for 2022 is the lesser of $29,210 and 18% of his 2021 earned income. His earned income for 2021 is assumed to be equal to his 2022 earned income. The only amount in his 2022 earned income is his employment income of $86,300, 18% of which is $15,534, less than the $29,210 RRSP deduction limit for 2022. As there is no PA to take into consideration and he has contributed $16,000, his maximum deduction will be $15,534. Part E Mr. Leonard's 2022 Taxable Income would be calculated as follows: 2022 Net Income Less: Stock Option Deduction [(1/2)($900)] 2022 Taxable Income

$95,105 ( 450) $94,655

Part F Mr. Leonard's 2022 federal income tax payable would be calculated as follows: Federal Tax on first $50,197 Federal Tax on next $44,458 ($94,655 - $50,197) at 20.5% Federal Tax before Credits Tax Credits: BPA ($14,398) Spousal ($14,398 - $2,990) ( 11,408) CPP ( 3,039) EI ( 953) Canada Employment ( 1,287) Transfer of Son's Tuition Credit - Lesser of (See Note) • The Absolute Limit of $5,000 • The Actual Tuition of $4,860 ( 4,860) Credit Base ($35,945) Rate 15% 2022 Federal Income Tax Payable

$7,530 9,114 $16,644

( 5,392) $11,252

Note - As his son's income is $3,700 [(12)$250) + $700], he will have no income tax payable and Mr. Leonard will be able to claim the full credit. There is no credit for his aunt because she is not a resident of Canada. Type: ES Topic: Comprehensive personal federal income tax payable

116) Mr.Wilson Kim is married and has a 19 year old son. Mr. Kim's spouse had 2022 net income of $3,400. The son lives at home and, during the summer of 2022, he earned employment income of $3,300. At the end of the summer, he began full time studies at a university. His tuition fees, which totaled $6,500 for 2022, were paid for by his father. The son's only other income was $2,200 of eligible dividends on a $40,000 portfolio of public company shares that were given to him by his father on his 16th birthday. The son has agreed to transfer any unused tuition credit to Mr. Kim. Mr. Kim has asked you to assist him in preparing his 2022 income tax return. To this end, he provides you with the following list of receipts and disbursements for 2022: Receipts Director's Fees Royalties on Patent Purchased in 2014 TFSA Withdrawal in January Bond Interest income

$ 1,372 29,400 10,000 960

Disbursements Spousal RRSP Contribution in July TFSA Contribution in December (Less than the Contribution Limit) Rent Paid to Employer for Living Accommodation Financial Support of his father*

$ 4,200 4,000 18,000 17,100

*You ascertain that his father is physically infirm, is wholly dependent on Mr. Kim for support, had income of $4,200 during the year, and lives in Arizona for health reasons. Mr. Kim is employed by a large public corporation. His basic salary for 2022 is $71,500. Other information related to his employment is as follows: • As part of his compensation package, his employer provides living accommodations that has a FMV $2,500 per month. • Mr. Kim is provided with a performance award of $3,600 in recognition of his outstanding performance. • His employer sponsors a defined contribution RPP. For 2022, Mr. Kim and his employer each contributed $3,100 to this plan. These contributions are the same as those made in 2021. • His employer withheld the maximum for CPP contributions and EI premiums for 2022. • On September 1, 2022, Mr. Kim's employer granted him an option to purchase 500 of its shares at a price of $5 per share. The market price of the shares at that time was $4 per share. On December 1, 2022, the market price of the shares had increased to $9 per share. On that date, Mr. Kim exercises his option and purchases the 500 shares. He still owns the shares on December 31, 2022. • His employer provides him with an automobile to use for his employment duties. The automobile cost $41,000 in 2021. The UCC of the automobile at January 1, 2022 is $25,500. The Company pays all of the operating expenses which totaled $12,300 for 2022. Mr. Kim drives the vehicle 42,000 kilometers during 2022, of which 38,000 were for employment purposes and 4,000 for personal use. The automobile was available to Mr. Kim throughout all of 2022.

Mr. Kim provides you with the following information on his dispositions of property during the year: POD $1,100 3,800 800 8,000

Diamond Necklace Oil Painting Graphic Novel Collection Antique weapons Collection

ACB $ 750 5,100 2,500 6,200

Assume Mr. Kim's 2021 earned income for RRSP purposes was equal to his 2022 earned income. At January 1, 2022, Mr. Kim had no unused deduction room and no undeducted RRSP contributions. Required: For Parts A to F, compute the required amounts for Mr. Kim for 2022. Show all calculations, including all those necessary to determine the maximum RRSP deduction for the year. A. Employment income. B. Income from property. C. Net taxable capital gains. D. Net Income. E. Taxable Income. F. Federal Income Tax Payable. G. Indicate any available carry over amounts for Mr. Kim and his son and the applicable carry over provisions. H. Mr. Kim's son would like some advice on whether he should contribute to a TFSA and/or an RRSP. What would you suggest he do and why? Answer: Part A Mr. Kim's 2022 employment income would be calculated as follows: Salary RPP Contributions Housing Benefit (12 Months at $2,500 - $1,500 paid) Director's Fees Performance Award Automobile Benefit: Standby Charge [(2%)(12)($41,000)(4,000 ÷ 20,004*)] Operating Cost: Lesser of: • [(1/2)($1,968)] = $984 • [(0.29)(4,000)] = $1,160 Stock Option Benefits [(500)($9 - $5)] 2022 Employment Income

$71,500 ( 3,100) 12,000 1,372 3,600 1,968

984 2,000 $90,324

* [(12)(1,667)]

Part B Since Mr. Kim's son is over 17 years of age, the eligible dividends are not attributed to Mr. Kim. Mr. Kim's income from property would be calculated as follows: Royalties on Patent Interest income on Bonds 2022 Income from Property

$29,400 960 $30,360

Part C Mr. Kim's net taxable capital gains would be calculated as follows: Listed Personal Property: POD from Necklace Deemed ACB ($1,000 Floor) POD from Painting ACB

$1,100 ( 1,000)

$ 100

$3,800 ( 5,100)

( 1,300)

Personal Use Property: Graphic Novel Collection

Nil

POD from Antiques weapons collection ACB Capital Gain Inclusion Rate 2022 Net Taxable Capital Gains

$8,000 ( 6,200) $1,800 1/2

$900 $900

See Part G for Listed Personal Property loss carry forward. The loss on the graphic novel collection of $1,500 ($1,000 Floor - $2,500) is not deductible as it is personal use property. Part D The TFSA withdrawal and contribution have no effect on net income. Mr. Kim's 2022 net income would be calculated as follows: Employment Income Income From Property Taxable Capital Gain Spousal RRSP Contribution (Actual - See Note) Deductible CPP ($3,500 - $3,039) 2022 Net Income

$ 90,324 30,360 900 ( 4,200) ( 461) $116,923

Note - As you are asked to assume that Mr. Kim's RRSP earned income for 2021 is equal to his earned income for 2022, then earned income would be: Employment Income RPP Deduction 2022 RRSP Earned Income

$90,324 3,100 $93,424

Given this, his RRSP deduction room for 2022 would be calculated as follows: January 1, 2022 Unused Deduction Room 2021 Addition - Lesser of 2022 Limit = $29,210 [(18%)($93,424)] = $16,816 2021 PA [(2)($3,100)] Maximum 2022 Deduction Room

Nil

$16,816 ( 6,200) $10,616

While Mr. Kim's deduction room is $10,616, his actual deduction is limited by the fact that his spousal contribution during 2022 is only $4,200. Part E Mr. Kim’s 2022 taxable income would be calculated as follows: 2022 Net Income Stock Option Deduction [(1/2)($2,000)] 2022 Taxable Income

$116,923 ( 1,000) $115,923

Part F Mr. Kim’s 2022 federal income tax payable would be calculated as follows: Federal Tax on first $100,392 Federal Tax on next $15,531 ($115,923 - $100,392) at 26%t Federal Tax before Credits Tax Credits: BPA Spousal ($14,398 - $3,400) CPP EI Canada Employment Transfer of Son’s Tuition - Lesser of: (See Note) • Absolute Limit of $5,000 • Actual Tuition of $6,500 Credit Base Rate 2022 Federal Income Tax Payable

$17,820 4,038 $21,858 ($14,398) ( 10,998) ( 3,039) ( 953) ( 1,287)

( 5,000) ($35,675) 15%

( 5,351) $16,507

Note - As his son’s income of $6,336 [$3,300 + (138%)($2,200)] is below his BPA of $14,398, he will have no federal income tax payable and he will be able to transfer the maximum $5,000 tuition credit amount. There is no Canada caregiver credit for Mr. Kim's father because he is not a resident of Canada.

Part G Mr. Kim would have a listed personal property loss carry over of $1,200 [(1/2)($100 - $1,300)]. This unused loss can be carried back three years and forward for seven years, but it can only be deducted against net taxable capital gains on listed personal property. Mr. Kim's son has an unused tuition amount of $1,500 ($6,500 - $5,000). He can carry it forward and deduct it in any future year. Part H Since Mr. Kim's son is 19, in 2022 he can contribute up to $12,000 ($6,000 for 2021 + $6,000 for 2022) into a TFSA. As there is no information on his prior employment income, it is not possible to calculate his RRSP deduction room for 2022, but given his $3,300 employment income, he can contribute at least $594 [(18%)($3,300)] in 2023. Since he currently has a portfolio of public company shares, it would be advisable that he sell some of those shares to contribute the maximum each year to a TFSA and an RRSP where the earnings can accumulate tax free. Although the shares could be transferred, with the low transaction costs available, transferring shares directly has minimal advantages and possible disadvantages since any gains are taxable and any losses are non-deductible. He should not deduct the RRSP contributions unless doing so will enable him to transfer more of his tuition to his father (if that is still the agreement) or he has an income tax liability. Type: ES Topic: Personal federal income tax payable, TFSA and RRSP

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 12 Taxable Income and Tax Payable for Corporations 12.1 Online Exercises 1) List three items that would be added to accounting income as part of the reconciliation to determine net income for ITA purposes. Answer: The required three items can be selected from the list presented in Figure 12-1 of the text. These items are: • Income tax expense • Amortization, depreciation, and depletion of tangible and intangible assets (accounting amounts) • Recapture of CCA • Tax reserves deducted in the prior year • Losses on the disposition of capital assets (accounting amounts) • Pension expense (accounting amounts) • Scientific research expenditures (accounting amounts) • Warranty expense (accounting amounts) • Amortization of discount on long-term debt issued (see discussion in Chapter 7) • Foreign income tax paid (accounting amounts) • Excess of taxable capital gains over allowable capital losses • Interest and penalties on income tax assessments • Non-deductible automobile expenses • 50% of business meals and entertainment expenses • Club dues and cost of recreational facilities • Non-deductible reserves (accounting amounts) • Charitable donations • Asset write-downs including impairment losses on intangibles • Fines, penalties, and illegal payments Type: ES Topic: Net income - reconciliation from accounting income

2) Indicate three taxable income that are available to individuals but not available to corporations. Answer: The required items can be selected from the following list: • employee stock option deduction • deduction for payments (social assistance and workers' compensation benefits) • lump-sum payments • capital gains deduction • northern residents deduction Type: ES Topic: Taxable income

3) One of your more socially conscious friends has just learned that taxable dividends received by a Canadian corporation from other Canadian corporations are not subject to Part I income tax. In his view, this is additional evidence of how the government is allowing corporations to "rip-off" the Canadian public. Do you agree with the view being expressed by your friend? Explain your position. Answer: A corporation does not get a tax deduction for dividends paid. As a consequence, dividends are paid out of the corporation's after tax income. When such dividends are received by an individual, they are subject to taxation (the gross up and tax credit procedures result in dividends being taxed at favourable rates). However, if a corporation had to pay income tax on dividends received out of the after tax income of another corporation, it would involve double taxation of the same income. In fact, if the income passed through more than one corporation, the result could be triple or even higher multiples of taxation. This would clearly not be an equitable situation and, as a consequence, a corporation is generally not required to pay income tax on taxable dividends received from another taxable Canadian corporation. Type: ES Topic: Integration

4) What is the purpose of the stop loss rule applicable to shares that a corporation sells at a loss? When does this rule apply? Answer: The stop loss rules reflect the fact that the value of shares usually falls when dividends are paid. Further, the payment of such dividends is, in general, fairly predictable. Given this, a corporation could purchase shares in anticipation of receiving a dividend payment. As dividend payments to corporations are, in general, not subject to tax, this dividend payment could be received tax free. Provided the value of the shares falls after the dividend payment, the corporation could then sell the shares at a loss. The net result would be the receipt of tax free income, combined with a deductible loss for a similar amount even though the full share investment would have been recovered through the sale plus the dividends received. As this is not an appropriate result, the stop loss rules will disallow the loss if: • the shares are held for less than one year; or • if the corporation holding the shares, along with other non-arm's length persons, owns more than 5% of the class of shares on which the dividend was received. Type: ES Topic: Stop loss rules - ITA 112(3)

5) Compare the income tax treatment of charitable donations for corporations with the treatment of charitable donations for individuals. Answer: For corporations, charitable donations are a taxable income deduction. In contrast, charitable donations made by an individual form the basis for a credit against federal income tax payable. Note, however, that the other rules associated with contributions are the same for corporations and individuals (e.g., they can only be used to the extent of 75% of net income and unused amounts can be carried forward for 5 years). Type: ES Topic: Charitable donations - individuals vs corporate tax treatment

6) Briefly explain why taxable dividends received are included in the definition of a Non-Capital Loss for a corporation. Answer: For corporations, taxable dividends received are included in net income, but claimed as a taxable income deduction. A non-capital loss is defined as the difference between current year business losses and certain other amounts such as ABILs and property losses minus income as determined under ITA 3(c). Since income determined under ITA 3(c) includes taxable dividends and that those same taxable dividends do not make it through to taxable income because of ITA 112(1) it is important to neutralize the taxable dividend income that is included in ITA 3(c). The legislators could have opted to subtract the taxable dividends from the ITA 3(c) amount but chose instead to add that amount as part of the noncapital loss definition producing the same result. Type: ES Topic: Losses - non-capital loss

7) A corporation has non-capital and net capital losses. How does management decide which of these losses should be deducted first? Answer: ITA 111(3) requires that losses within any single category must be deducted in chronological order. That is, if a corporation chooses to deduct a portion of its non-capital loss balance during the current year, the oldest losses of this type must be deducted first. However, there are no rules with respect to the order in which the individual types of loss carryovers must be deducted. In deciding which loss should be deducted first, management must evaluate which type of loss is more likely to expire or can be used more quickly. Non-capital loss carry forwards have restrictions on the time for which they are available. If there are losses that are nearing the end of their expiration date (20 years) and there is uncertainty of whether there will be sufficient income in that period to be able to use the losses, these losses should be deducted first. While there is no restriction on the period of availability for net capital losses, these amounts can only be used to the extent that there are net taxable capital gains (e.g. a positive ITA 3(b) amount for the year) during the period. For a corporation that experiences only limited or unpredictable capital gains, these restrictions may be a more important consideration than the period of time during which the loss will be available. Net capital losses have an indefinite carry forward period. A decision will have to be made on the basis of considerations such as these. Type: ES Topic: Losses - applying the losses

8) How does a corporation determine the amount of taxable income that will be allocated to the various provinces and territories? Answer: Provincial and territorial income taxes are paid in provinces where the corporation has permanent establishments (PEs). The amount allocated to each province is based on the simple average of two percentages – the percentage of gross revenue in the province or territory and the percentage of wages and salaries paid in the province or territory attributable to the PEs. Type: ES Topic: Corporate tax - federal abatement

9) The federal abatement will sometimes be less than 10% of taxable income. Explain this statement. Answer: The 10% federal abatement is only fully available on income that is allocated to a Canadian province or territory. If, for example, only 80% of taxable income was allocated to a Canadian province or territory, the 10% abatement would only apply to 80% of that abatement or 8% of taxable income. Type: ES Topic: Corporate tax - federal abatement

10) The Canadian system of corporate taxation has goals other than raising revenue. Describe two of these other goals, including an example of a provision designed to achieve the goal described. Answer: The required two goals and related examples can be selected from the ones in the text. These are as follows: • Incentives For Small Business - While there are several features of the income tax system directed at encouraging incorporated small businesses, the major income tax incentive for these corporations is the small business deduction. • Incentives For Certain Business Activities - The Canadian income tax system provides generous investment tax credits for scientific research as well as for the employment of apprentices. Support is also provided to the natural resource industries through a variety of tax incentive provisions. • Incentives For Certain Regions - Certain regions of Canada are given assistance through investment tax credits and through other provisions. • Integration - One of the goals of the Canadian income tax system is to keep the level of income taxes paid on income the same, regardless of whether or not a corporation is placed between the original source of the income and the ultimate recipient. The dividend gross up and tax credit procedures are in place to improve integration. Type: ES Topic: Corporate taxation - general concepts

11) What are the general conditions that are required to be eligible for the small business deduction? Answer: The general conditions are as follows: • The corporation must be a CCPC. • The income must be active business income. • The deduction is only available on the first $500,000 of active business income. • The $500,000 limit must be shared amongst associated corporations. Type: ES Topic: Corporate tax - calculating the small business deduction (SBD)

12) What is a specified investment business? This definition represents a solution to an administrative problem that caused difficulties for the CRA for many years. What was this problem? Answer: A specified investment business is a business carried on by a corporation, the principal purpose of which is to earn property income, but does not include a corporation that employs more than five full time employees in the business throughout the year. The problem that was resolved by this definition was that, while the government did not want to make the small business deduction available to individuals attempting to simply shelter income earned by their investments, it did recognize that it was possible to have a business that was "actively" engaged in earning property income. The specified investment business definition provided a clear, though somewhat arbitrary, criteria for identifying such businesses. Type: ES Topic: Corporate tax - SBD specified investment business

13) Under what circumstances can interest income qualify as active business income for the purposes of the small business deduction? Answer: Interest income will be considered to be active business income in the following circumstances: • The interest results from the investment of temporary cash balances associated with fluctuations in producing active business income. • The income is earned by a CCPC with more than five full time employees and its principal business is producing property income. • The interest received has been deducted by another CCPC that is an associated corporation in its determination of active business income. Type: ES Topic: Corporate tax - SBD active business income

14) With respect to both the small business deduction and the M&P deduction, the available amount is limited by the corporation's taxable income for the year. Why is this limitation included in the calculation of these tax credits? Answer: This limitation is included in order to ensure that these deductions are not given on amounts of income that have not been subject to income tax. Amounts of active business income and/or M&P profits that have been included in net income may be effectively offset by either charitable donations or noncapital losses, resulting in their not being included in taxable income and therefore not being subject to income tax. Type: ES Topic: Corporate taxation - general concepts

15) While charitable donations cannot be deducted by a corporation, they can be used as the basis for a tax credit. Answer: FALSE Explanation: Corporations deduct charitable donations as a taxable income deduction. Type: TF Topic: Charitable donations - individuals vs corporate tax treatment

16) Charitable contributions that are not used during the current year can be carried forward for five years, without regard to whether the taxpayer is an individual or a corporation. Answer: TRUE Explanation: The carry forward rules are the same for corporations and individuals. Type: TF Topic: Charitable donations - carry forward

17) When a corporation receives eligible dividends, they do not gross them up by 38% and include the grossed up amount in net income. Answer: TRUE Explanation: Only individuals and trusts use the dividend gross up and tax credit procedures. Type: TF Topic: Integration

18) For a corporation, dividends received from other taxable Canadian corporations are a component of the non-capital loss definition. Answer: TRUE Explanation: Such dividends are included in the E component of the non-capital loss calculations. Type: TF Topic: Losses - non-capital loss

19) Because they expire after 20 years, non-capital losses should always be deducted prior to deducting net capital losses which have an unlimited carry forward period. Answer: FALSE Explanation: The fact that net capital losses can only be applied against net taxable capital gains may make it more appropriate to deduct these losses first. Type: TF Topic: Losses - applying the losses

20) Non-capital losses must be deducted in the chronological order in which they were created, the oldest one first, followed by non-capital losses of subsequent years. Answer: TRUE Explanation: While there is no requirement that non-capital losses be deducted prior to other types of losses, ITA 111(3) requires that a given type be deducted in the order in which the losses were incurred on a first-in-first-out (FIFO) basis. Type: TF Topic: Losses - applying the losses

21) Full rate taxable income does not include income that is eligible for the small business deduction, but it does include income that is eligible for the M&P deduction. Answer: FALSE Explanation: Full Rate Taxable Income does not include income that is eligible for the M&P deduction. Type: TF Topic: Corporate tax - general rate reduction - ITA 123.4(2)

22) In certain circumstances, rental income can be considered active business income. Answer: TRUE Explanation: If a corporation's ownership of rental units was so extensive as to constitute a business (e.g., a hotel chain with 1,000 rooms), the rental income would be considered active business income. Type: TF Topic: Corporate tax - SBD active business income

23) A Specified Investment Business is a business that primarily earns income from property and employs in the business, throughout the year, more than 5 full-time employees. Answer: FALSE Explanation: If a business earning income from property employs more than 5 full time individuals, it is not a Specified Investment Business. Type: TF Topic: Corporate tax - SBD specified investment business

24) If a corporation is classified as a Personal Services Business, the only deductions in the determination of its net income will be for salaries, wages, and other expenses that would normally be deductible against employment income. Answer: TRUE Explanation: Not only does the corporation lose access to the SBD and GRR, the deductions for the corporation are limited to salaries, wages, and other expenses that would normally be deductible against employment income. Type: TF Topic: Corporate tax - SBD personal service business

25) A Canadian controlled private company (CCPC) will never be able to use the General Rate Reduction. Answer: FALSE Explanation: CCPCs may have income that it not eligible for the small business deduction (e.g., active business income in excess of $500,000). Active business income that is not eligible for the small business deduction would be considered Full Rate Taxable Income and would be eligible for the General Rate Reduction provision. Type: TF Topic: Corporate tax - general rate reduction - ITA 123.4(2)

26) The base used for calculating the M&P deduction is reduced by the amount of the small business deduction. Answer: FALSE Explanation: The base used for calculating the M&P deduction is reduced by the amount that is eligible for the small business deduction, not by the amount of the actual small business deduction. Type: TF Topic: Corporate tax - M&P ITA 125.1

27) If amounts of income tax paid on foreign business income are not used as a tax credit during the current year, they can be carried back 3 taxation years and forward 10 taxation years. Answer: TRUE Explanation: Income tax paid on foreign business income not used during the current year can be carried back 3 taxation years and forward 10 taxation years. Type: TF Topic: Corporate tax - foreign tax credits

28) A corporation's non-business foreign income tax credit is limited to 15% of foreign non-business income earned. Answer: FALSE Explanation: This rule applies to individuals only and not to corporations. Type: TF Topic: Corporate tax - foreign tax credits

29) In its 2022 taxation year, a corporation sells Class 8 depreciable property with a capital cost of $130,000 for $140,000. The carrying value of the property for accounting purposes is $112,000. It was not the last property in Class 8 and, prior to the disposition, the UCC balance was $96,000. What are the reconciliation adjustments that will be required in the conversion of the corporation's accounting income to net income for purposes of the ITA? A) A deduction of $28,000, an addition of $5,000, and an addition of $34,000. B) An addition of $5,000 and an addition of $34,000. C) An addition of $44,000. D) A deduction of $28,000 and an addition of $5,000. Answer: A Explanation: A) A deduction of $28,000 [removes accounting gain of $28,000 ($130,000 - $112,000)], an addition of $5,000 [adds taxable capital gain of $5,000 (1/2)($140,000 - $130,000)], and an addition of $34,000 [adds recapture of $34,000 ($130,000 - $96,000)]. B) An addition of $5,000 [adds taxable capital gain of $5,000 (1/2)($140,000 - $130,000)], and an addition of $34,000 [adds recapture of $34,000 ($130,000 - $96,000)]. C) $44,000 = ($140,000 - $96,000) D) A deduction of $28,000 [removes accounting gain of $28,000 ($130,000 - $112,000)] and an addition of $5,000 [adds taxable capital gain of $5,000 (1/2)($140,000 - $130,000)] Type: MC Topic: Net income - reconciliation from accounting income

30) In its 2022 taxation year, Brocko Ltd. has a business loss of $375,000, net taxable capital gains of $67,000, an Allowable Business Investment Loss of $23,000, and taxable dividends from taxable Canadian corporations of $53,000. What is the non-capital loss for 2022? A) $384,000. B) $398,000. C) $322,000 D) $331,000. Answer: D Explanation: A) $384,000 ($451,000 - $67,000) B) $398,000 ($451,000 - $53,000) or ($375,000 + $23,000) C) $322,000 ($375,000 - $53,000) D) The correct amount is calculated as follows: Amount E Business Loss Allowable Business Investment Loss Taxable Dividends Amount F Net Taxable Capital Gains Taxable Dividends 2022 Non-Capital Loss

$375,000 23,000 53,000 ( $67,000) ( 53,000)

Type: MC Topic: Losses - non-capital loss

$451,000

( 120,000) $331,000

31) When taxable dividends are paid by one taxable Canadian corporation to another taxable Canadian corporation, the taxable dividends will be include in: A) both net and taxable income, but with an offsetting credit against income tax payable. B) both net and taxable income, with no offsetting credit against income tax payable. C) neither net or taxable income. D) net income, but not taxable income. E) taxable income, but not net income. Answer: D Explanation: D) Included in net income, but not in taxable income as a result of ITA 112(1). Type: MC Topic: Net and taxable income for corporations

32) With respect to charitable donations made by a corporation, which of the following statements is correct? A) They create a credit against income tax payable, based on the corporation's income tax rate prior to the deduction of the federal abatement. B) If they cannot be used during the current year, they can be carried back three years. C) They are a taxable income deduction and do not affect corporate net income. D) The amount of contributions that can be deducted is limited by 100% of the corporation's net income. Answer: C Explanation: C) They are a taxable income deduction and do not affect corporate net income. Type: MC Topic: Net and taxable income for corporations

33) Which of the following amounts are a taxable income deduction to a corporation? A) Taxable dividends from taxable Canadian corporations. B) Charitable contributions. C) The capital gains deduction. D) Net capital losses. Answer: C Explanation: C) The capital gains deduction. Type: MC Topic: Net and taxable income for corporations

34) Ottawa Corporation has accounting income for the taxation year ended October 31, 2022 of $76,000. Included in this calculation are the following amounts: Meals and entertainment expenses Amortization and depreciation Landscaping costs Taxable Dividend from Canadian subsidiary Charitable donations

$38,000 69,000 32,000 52,000 2,500

You have correctly determined CCA to be $61,000. What is the corporate net income and taxable income? A) Net Income - $105,500; Taxable Income - $51,000. B) Net Income - $103,000; Taxable Income - $51,000. C) Net Income - $73,500; Taxable Income - $19,000. D) Net Income - $21,500; Taxable Income - $19,000. Answer: A Explanation: A) Net Income - $105,500; Taxable Income - $51,000. Net Income = $76,000 + (1/2)($38,000) + $69,000 + $2,500 — $61,000 = $105,500; Taxable Income = $105,500 - $2,500 - $52,000 = $51,000. B) Net Income - $103,000 (no charitable contributions added back); Taxable Income - $51,000. C) Net Income - $73,500 (landscaping deducted); Taxable Income - $19,000. D) Net Income - $21,500 (landscaping and dividends deducted); Taxable Income - $19,000 (no taxable dividends deducted) Type: MC Topic: Net and taxable income for corporations

35) On November 23, 2021, Victoria Ltd. purchased 20% of the 15,000 issued shares of Vancouver Ltd. for $32.50 per share. On December 20, 2021, these shares paid a taxable dividend of $2.25 per share, and on August 15, 2022, Victoria sells the shares for $29 per share. What is the amount of the capital loss on the Vancouver Ltd. shares for Victoria Ltd. for the taxation year ended August 31, 2022? A) Nil B) $ 3,750 C) $ 10,500 D) $ 17,250 Answer: B Explanation: B) $3,750 [(20%)(15,000)($29 - $32.50) - (20%)(15,000)($2.25)]. The stop loss rules apply as Victoria owns over 5% of the shares of Vancouver, and also because the shares were owned for less than one year. C) $ 10,500 [(20%)(15,000)($29 - $32.50)] D) $ 17,250 [(20%)(15,000)($29 - $32.50) + (20%)(15,000)($2.25)] Type: MC Topic: Stop loss rules - ITA 112(3)

36) CCC Inc. is a Canadian controlled private corporation (CCPC). In its 2022 taxation year, CCC Inc. made charitable donations of $13,000. It has unused charitable donation from 2021 of $2,000. CCC Inc.'s net income for 2022 consisted of $91,000 of active business income, $10,000 of taxable dividends from taxable Canadian corporations and a rental loss of $84,000. The maximum charitable donation deduction for CCC Inc. in the current year is: A) $13,000. B) $12,750. C) $15,000. D) $4,250. Answer: B Explanation: B) Net income = $91,000 + $10,000 - $84,000 = $17,000 $17,000 × 75% = $12,750 Type: MC Topic: Net and taxable income for corporations

37) The two variables used to allocate income between permanent establishments (PEs) when a corporation has PEs in more than one province are: A) gross salaries and net income of the PE. B) gross revenue and salaries and wages attributable to the PE. C) gross revenue and net income of the PE. D) gross salaries and allocated revenue of the PE. Answer: B Explanation: B) Gross revenue and salaries and wages attributable to the PE. Type: MC Topic: Corporate tax - federal abatement

38) Calgary Corporation has PEs in Alberta, British Columbia and in the United States. Gross revenues, Net Income and salaries and wages for each PE are:

Alberta British Columbia United States Total

Gross Revenue $ 5,000,000 4,000,000 4,500,000 $13,500,000

Net Income $500,000 98,000 325,000 $923,000

Salaries and Wages $3,500,000 3,000,000 2,000,000 $8,500,000

For the purposes of calculating the federal abatement, the percentage of income allocated to a Canadian province or territory would be: A) 64.79%. B) 65.72%. C) 70.63%. D) 71.57%. Answer: D Explanation: A) 64.79% [($500,000 + $98,000)/($923,000)] B) 65.72% {100% - [ 1/2][($4,500,000/$13,500,000)(100) + ($325,000/$923,000)(100)]} C) 70.63% {100% - [ 1/2][($325,000/$923,000)(100) + ($2,000,000/$8,500,000)(100)]} D) 71.57% (100% - 28.43%) Foreign percentage = {[1/2][($4,500,000/$13,500,000) + ($2,000,000/$8,500,000)]} = 28.43% Type: MC Topic: Corporate tax - federal abatement

39) With respect to corporate federal income tax payable, which of the following statements is NOT correct? A) The effective federal income tax rate on the active business income of a Canadian public company is 15%. B) The federal abatement is always equal to 10% of corporate federal income tax payable. C) CCPCs may be eligible for the GRR on some part of their taxable income. D) The M&P deduction will not reduce the overall income tax payable of a public company. Answer: B Explanation: B) The federal abatement is always equal to 10% of corporate federal income tax payable. Type: MC Topic: Corporate tax payable - general rules and basic concepts

40) With respect to the determination of income tax payable for a corporation, which of the following statements is NOT correct? A) The federal abatement percentage is reduced when less than 100% of the corporation's income is allocated to a province or territory. B) The basic federal tax rate applicable to corporations is 38%. C) Provincial and territorial corporate income tax is based on a flat rate applied to taxable income. D) Full rate taxable income includes any income that is not eligible for the SBD. Answer: D Explanation: D) Full rate taxable income includes any income that is not eligible for the SBD. Type: MC Topic: Corporate tax payable - general rules and basic concepts

41) Which of the following statements is correct? A) Public and private corporations are eligible for the GRR. B) All private corporations are eligible for the SBD. C) Canadian controlled public and private corporations are eligible for the SBD. D) If a corporation claims the SBD, it cannot claim the GRR. Answer: A Explanation: A) Public and private corporations are eligible for the GRR. B) Only private corporations that are CCPCs. Type: MC Topic: Corporate tax payable - general rules and basic concepts

42) With respect to determining provincial or territorial corporate income tax payable, which of the following statements is correct? A) The provincial and territorial systems use a graduated rate structure similar to that used federally for individuals, and, except for Alberta and Quebec, the calculation of taxable income is the same as that used federally for corporations. B) The provincial and territorial systems use a rate structure similar to the federal system for corporations, however, except for Alberta and Quebec, the calculation of taxable income is different from that used federally. C) The provincial and territorial systems use a rate structure similar to the federal system for corporations and, except for Alberta and Quebec, the calculation of taxable income is the same as that used federally. D) The provincial and territorial systems use a graduated rate structure similar to that used federally for individuals, however, except for Alberta and Quebec, the calculation of taxable income is different from that used federally. Answer: C Explanation: C) The provincial and territorial systems use a rate structure similar to the federal system for corporations and, except for Alberta and Quebec, the calculation of taxable income is the same as that used federally. Type: MC Topic: Corporate tax payable - general rules and basic concepts

43) During the 2022 taxation year ending December 31, 2021, Oxdor Ltd., a CCPC had the following income: Active Business Income earned in Canada Active Business Income earned in the U.S.A. Net Taxable Capital Gains Rent Received on an unused portion of the Company's Cdn Manufacturing Facility Investment Income earned in Canada 2022 Net Income

$223,000 126,000 43,000

Taxable Income

$245,000

8,000 16,000 $416,000

The Company paid no foreign income taxes on its foreign business income and it is not associated with any other corporation. What is the maximum amount of income on which the Company can claim the SBD? A) $223,000 B) $349,000 C) $231,000 D) $357,000 Answer: C Explanation: C) $231,000 ($223,000 + $8,000) Type: MC Topic: Corporate tax - calculating the small business deduction (SBD)

44) Which of the following statements with respect to the SBD is correct? A) If there are no associated companies, its annual business limit will always be $500,000. B) A Specified Investment business of a CCPC means a business the primary purpose of which is earning income from property and that has less than 5 full-time employees. C) As long as the controlling shareholders of a corporation are residents of Canada for at least part of a calendar year, the corporation will be considered a CCPC for all of that calendar year. D) Interest or rents earned by a CCPC are not eligible for the SBD. Answer: B Explanation: A) If the TCEC or AAII grinds apply or there is a short taxation year the business limit for that year will be less than $500,000. B) A Specified Investment business of a CCPC means a business the primary purpose of which is earning property income and that has less than 5 full-time employees. Type: MC Topic: Corporate tax - calculating the small business deduction (SBD)

45) The SBD is only available on: A) income earned in Canada by a resident corporation. B) the first $500,000 in M&P income earned by a CCPC. C) the active business income of a private corporation with no more than five full-time employees devoted to earning income from property. D) all of the income earned in Canada by a CCPC. E) None of the above. Answer: E Explanation: E) None of the above. Type: MC Topic: Corporate tax - calculating the small business deduction (SBD)

46) Which of the following is an example of a CCPC? A) A Canadian corporation in which 55% of the voting shares are owned by Canadian residents and the remaining 45% of the voting shares are owned by non-residents. B) A wholly-owned Canadian subsidiary of a public company. C) A Canadian corporation in which Canadian residents, Mr. Adams and Mr. Peters each own 50% of the shares. D) Both B and C. E) Both A and C. Answer: E Explanation: E) Both A and C. Type: MC Topic: Corporate tax - Canadian controlled private corporation (CCPC)

47) Village Concrete Inc. (Village) is a CCPC with a taxation year end of December 31, 2022. The controlling shareholder of Village also legally controls Bob's Roofing Inc. (Bob's), another CCPC with active business income for the taxation year ended December 31, 2022 of $116,500. The business limit will be allocated so as to ensure that all the active business income of the two CCPCs are subject to income tax at the small business rate. Other than the income related items listed below, you may assume that Village's income is from an active business carried on in Canada. Other information about Village: 1. Village had a taxable capital gain in the year of $2,000. 2. Charitable donations were $2,500. 3. Recaptured CCA from depreciable property used in the business was $1,000. 4. Net Income for the year is $185,000. What is the small business deduction for Village? A) $34,770. B) $34,675. C) $35,150. D) $72,865. Answer: B Explanation: B) The small business deduction is calculated as the least of three amounts: Net Income Taxable Capital Gain Village's Active Business Income

$185,000 ( 2,000) $ 183,000

Net Income Charitable Donations Village's Taxable Income

$185,000 ( 2,500) $182,500

Annual Business Limit Allocation To Bob's Business Limit

$500,000 ( 116,500) $383,500

Therefore, the SBD is $34,675 [($182,500)(19%)].

Type: MC Topic: Corporate tax - calculating the small business deduction (SBD)

48) Which of the following is a specified investment business? A) A business which principally derives its income from rental property and has less than 5 full-time employees. B) A business which principally derives its income from rental property and has more than 5 full-time employees. C) A business which partially derives its income from a rental property and has 5 or more full-time employees. D) A business which partially derives its income from rental property and has more than 5 full-time employees. Answer: A Explanation: A) A business which principally derives its income from rental property and has less than 5 full-time employees. Type: MC Topic: Corporate tax - SBD specified investment business

49) In which of the following situations is a corporation earning incidental property income? A) Regina Corporation has built up its cash reserves over several years, and its staff invests this surplus cash in a variety of publicly traded corporations, earning dividend income. This income is approximately 10% of corporate income on an annual basis. B) A branch of Moose Jaw Corporation invests surplus cash for 2-3 months every year earning interest income which is less than 1% of corporate income. C) Saskatoon Corporation has one rental property which is leased to a retail outlet. The rental income from this property is 5% of corporate income. D) Lethbridge Limited sells its factory building resulting in a capital gain which represent 10% of corporate income. Answer: B Explanation: B) A branch of Moose Jaw Corporation invests surplus cash for 2-3 months every year earning interest income which is less than 1% of corporate income. Type: MC Topic: Corporate tax - SBD active business income

50) A CCPC has Taxable Capital Employed in Canada for the 2021 taxation year of $14 million, and $13.5 million for the 2022 taxation year. AAII is less than $50,000 in each of the 2021 and 2022 taxation years. The company has Canadian active business income of $535,000, taxable income of $435,000, and no foreign income. It is not associated with any other CCPC. What is the 2022 annual business limit reduction for this company? A) $304,500. B) $350,000. C) $348,000. D) $400,000. Answer: D Explanation: D) $400,000 [($500,000)(0.225%)($14,000,000 - $10,000,000) ÷ $11,250] Type: MC Topic: Corporate tax - SBD the annual business limit reductions

51) A CCPC has Taxable Capital Employed in Canada for the 2021 taxation year of $14 million, and $13 million for the 2022 taxation year. AAII is less than $50,000 in each of the 2021 and 2022 taxation years. The company has Canadian active business income of $420,000, taxable income of $385,000, and no foreign income. It is not associated with any other CCPC. What is the 2022 SBD for this company? A) $14,630 B) $31,160. C) $19,000. D) $38,000. Answer: C Explanation: A) $14,630. {19%}{$385,000 - [($385,000)(0.225%)($14,000,000 - $10,000,000) ÷ $11,250]} B) $31,160. {19%}{$500,000 - [($420,000)(0.225%)($14,000,000 - $10,000,000) ÷ $11,250]} C) $19,000. {19%} {$500,000 - [($500,000)(0.225%)($14,000,000 - $10,000,000) ÷ $11,250]} D) $38,000. {19%}{$500,000 - [($500,000)(0.225%)($13,000,000 - $10,000,000) ÷ $11,250]} Type: MC Topic: Corporate tax - SBD the annual business limit reductions

52) Ammar Dayani is a senior executive in a large oil producing company in Canada. He has heard that it would be beneficial from an income tax perspective if he resigned his position, established a company in which he would be the only shareholder and employee, and then have the new company sign a contract with his former employer to provide the same services he currently provides as an employee. If Ammar proceeds with this idea, what deductions would the company be able to take that he cannot take as an employee? A) The company would be able to deduct all of the costs of operating the company, and would have the ability to pay a salary to Ammar and other family members to split income and reduce taxes. B) The company would be able to deduct only the salary paid to Ammar. C) The company would be able to deduct the salary paid to Ammar, any benefits paid on his behalf, and any other expenses that would qualify as employment expenses. D) The company would not be able to deduct any expenses as this would be a personal services corporation. Answer: C Explanation: C) The company would be able to deduct the salary paid to Ammar, any benefits paid on his behalf, and any other expenses that would qualify as employment expenses. (This is a personal services business corporation, and these are the only expenses it will be permitted to deduct.) Type: MC Topic: Corporate tax - SBD personal service business

53) DDD Ltd. is a private corporation with a taxation year ending on December 31. The sole shareholder is Donald Darwin Dorsey who is a Canadian resident throughout 2022. In 2022, DDD Ltd. had the following: Canadian Active Business Income Net Income Taxable Income

$145,500 183,700 157,800

What is the maximum SBD for DDD Ltd. for 2022? A) Nil B) $27,645 C) $34,903 D) $29,982 Answer: B Explanation: B) [(19%)($145,500)] = $27,645

Type: MC Topic: Corporate tax - calculating the small business deduction (SBD)

54) DDD Ltd. is a private corporation with a taxation year ending on December 31. The sole shareholder is Donald Darwin Dorsey who was a Canadian resident until November 1, 2022. On November 1 he severed his Canadian residency and became a U.S. resident. Since the company lost its CCPC status on November 1, 2022 there is a deemed taxation year ending October 31, 2022. For the taxation year January 1, 2022 to October 31, 2022, DDD Ltd. had the following: Canadian Active Business Income Net Income Taxable Income

$145,500 183,700 157,800

What is the maximum SBD for DDD Ltd. for the taxation year ending October 31, 2022? A) Nil B) $23,025 C) $27,645 D) $29,982 Answer: B Explanation: B) (19%)($145,500)(304/365)] = $23,025 Type: MC Topic: Corporate tax - calculating the small business deduction (SBD)

55) Samson and Delilah are high fashion hair stylists who worked for Philistines Inc., a large chain of hair salons, for 6 years. They incorporated Haaiir Inc. 2 years ago and each own 50% of all of the one class of issued shares. They are the only employees of Haaiir Inc. and the corporation's only revenues are from work done for Philistines Inc. What type of income is Haaiir Inc. earning? A) Income from a Specified investment business B) Manufacturing and processing income C) Income from a Personal services business D) Active business income Answer: C Explanation: C) Income from a Personal services business Type: MC Topic: Corporate tax - SBD personal service business

56) Grande Ltd. is a CCPC that is not associated with any other corporation. In 2022, it has active business income of $723,000, of which $617,000 is M&P profits. In addition, it has taxable capital gains on the disposition of capital property used in the business of $65,000. This results in a net income of $788,000. This is also the Company's taxable income. What is the amount of Grande's M&P deduction for the year? A) $80,210 B) $ 6,760 C) $15,210 D) $37,440 Answer: C Explanation: A) $80,210 [(13%)($617,000)] B) $6,760 [(13%)($$617,000 - $500,000 - $65,000)] C) $15,210 The base for the SBD is limited to the annual business limit of $500,000. Given this, the M&P deduction would be equal to 13% of the lesser of: M&P Profits Amount Eligible for the SBD

$617,000 ( 500,000) $117,000

Taxable Income Amount Eligible for the SBD Aggregate Investment Income

$788,000 ( 500,000) ( 65,000) $223,000

The deduction would be $15,210 [(13%)($117,000)]. D) $37,440 [(13%)($788,000 - $500,000)] Type: MC Topic: Corporate tax - M&P ITA 125.1

57) With respect to the M&P deduction, which of the following statements is NOT correct? A) The M&P deduction is available to any corporation that has any income from M&P. B) At the federal level, there is no income tax advantage associated with the use of the M&P deduction. C) The amount of M&P profits is determined by a formula that is found in the Income Tax Regulations. D) The base for the M&P deduction cannot exceed M&P profits, reduced by the amount eligible for the SBD. Answer: A Explanation: A) The M&P deduction is available to any corporation that has any income from M&P. M&P has to be 10% or more of Canadian active business income. Type: MC Topic: Corporate tax - M&P ITA 125.1

58) In 2022, Fosfo Inc., a CCPC, has Taxable Income of $396,000. In calculating federal income tax payable, the company claimed a SBD of $38,950 and an M&P deduction of $6,500. What is the amount of Fosfo's GRR for 2022? A) Nil. B) $18,330. C) $45,572. D) $51,480. Answer: B Explanation: A) Nil B) $18,330 [(13%)($396,000 - ($38,950 ÷ 19%) - ($6,500 ÷ 13%)] C) $45,572 [(13%)($396,000 - $38,950 — $6,500)] D) $51,480 [(13%)($396,000)] Type: MC Topic: Corporate tax - general rate reduction - ITA 123.4(2)

59) Which of the following statements with respect to the GRR for corporations is NOT correct? A) The GRR is 13% of full rate taxable income. B) Full rate taxable income for a public company is reduced by the income eligible for the M&P deduction. C) The GRR is not available to CCPCs. D) Full rate taxable income for a CCPC is reduced by the income eligible for the M&P deduction. Answer: C Explanation: C) The GRR is not available to CCPCs. Type: MC Topic: Corporate tax - general rate reduction - ITA 123.4(2)

60) St. John Corporation, a CCPC that has taxable income of $250,000 in 2022, 87% of which is earned in a Canadian province or territory. The company reported Canadian active business income of $235,000 for the year, and no foreign income taxes were paid. The corporation has no M&P activity. It is associated with one other company, which is allocated $200,000 of the annual business limit. What is the federal income tax payable for St. John Corporation for the 2022 taxation year? A) $ Nil. B) $23,400. C) $26,650. D) $29,975. Answer: C Explanation: A) Nil [(38%)($250,000) — (10%)(87%)($250,000) — (19%)($235,000) — (13%)($250,000)] B) $23,400 [(38%)($250,000) — (10%)($250,000) — (19%)($235,000) — (13%)($250,000 - $235,000)] C) $26,650 [(38%)($250,000) — ( 10%)(87%)($250,000) — ( 19%)($235,000) — (13%)($250,000 - $235,000)] D) $29,975 [(38%)($250,000) — (10%)(87%)($250,000) — (19%)(87%)(250,000) — (13%)($250,000 $235,000)] Type: MC Topic: Corporate tax payable - calculating the Part I tax

61) With respect to the following statements about foreign source income and related tax credits for corporations, which one is NOT correct? A) If a credit related to foreign business income cannot be used during the current period, it can be carried back 3 years and carried forward 10 years. B) Any amount of a corporation's foreign non-business tax credit in excess of 15% of foreign non-business income must be deducted in determining net income. C) The foreign non-business tax credit may be less than the amount of foreign income tax paid. D) The gross amount of foreign source income, without the deduction of amounts withheld, must be included in net income. Answer: B Explanation: B) Any amount of a corporation's foreign non-business tax credit in excess of 15% of foreign non-business income must be deducted in determining net income. This only applies to individuals not corporations. Type: MC Topic: Corporate tax - foreign tax credits

62) With respect to foreign business tax credits for corporations, which of the following statements is NOT correct? A) If the credit cannot be used during the current period, it can be carried back three years and forward ten years. B) In the formula that limits this credit, the Tax Otherwise Payable is reduced by the federal abatement. C) In the formula that limits this credit, the Tax Otherwise Payable is reduced by the general rate reduction. D) In the formula that limits this credit, the Adjusted Division B Income is reduced by taxable dividends that are deducted in the determination of Taxable Income. Answer: B Explanation: B) In the formula that limits this credit, the Tax Otherwise Payable is reduced by the federal abatement. Type: MC Topic: Corporate tax - foreign tax credits

63) Gander Limited is a CCPC. In the current taxation year, the company has taxable income calculated as follows: Net Income Taxable Dividends Non-capital losses deducted Net capital losses deducted Taxable Income

$246,000 ( 30,000) ( 45,000) ( 5,000) $166,000

The company earned foreign non-business income of $25,000, from which tax of $2,500 was withheld as foreign income tax. What is the Adjusted Division B Income for Gander Limited for the current taxation year? A) $166,000 B) $171,000 C) $191,000 D) $211,000 Answer: D Explanation: A) $166,000 [$246,000 - $ 45,000 - $5,000 - $30,000] B) $ 171,000 [$246,000 - $45,000 - $30,000] C) $ 191,000 [$246,000 - $5,000 - $30,000 - $25,000] D) $ 211,000 [$246,000 - $5,000 - $30,000] Type: MC Topic: Corporate tax - foreign tax credits

64) Fredericton Corp. earned $60,000 in foreign business income in the current fiscal year and foreign income tax of $7,500 was paid on this income. Fredericton Corp. has correctly calculated its federal income tax payable before the foreign business income tax credit as $15,250, calculated as follows: Base Amount of tax Federal Abatement SBD GRR Federal Income Tax before Foreign Business Tax Credit

$48,000 ( 12,000) ( 19,250) ( 1,500) $15,250

What is the amount of Tax Otherwise Payable for purposes of the foreign business income tax credit calculation? A) $27,250. B) $34,500. C) $46,500. D) $48,000. Answer: C Explanation: A) $27,250 [$48,000 - $1,500 - $19,250] B) $ 34,500 [$48,000 - $1,500 - $12,000] C) $ 46,500 [$48,000 - $1,500] D) $48,000 Type: MC Topic: Corporate tax - foreign tax credits

65) You have been asked to prepare a reconciliation of accounting income and net income for purposes of the ITA for the taxation year ending December 31. Available information for the current year includes the following: 1. A depreciable property was sold near the end of the year for $93,000. The ACB was $89,300 and the carrying value for accounting purposes was $26,400. It was not the last property in its CCA class and the UCC was $263,000 before the disposition. There were no other additions or dispositions during the year. 2. The company has expensed estimated warranty costs of $22,000. 3. The Company purchased goodwill at a cost of $68,000. Since there was no impairment of the goodwill during the year, no write-down was required for accounting purposes. 4. Discount amortization on the company's bonds payable was $2,300. Required: Determine the reconciliation adjustments required to convert accounting income to net income for ITA purposes with respect to the items described above. Answer: Item 1 You would deduct the accounting gain of $66,600 ($93,000 - $26,400). You would also add the taxable capital gain of $1,850 [(1/2)($93,000 - $89,300)], for a net deduction of $64,750. Item 2 You would add the estimated warranty costs of $22,000. Item 3 The $68,000 cost of the goodwill would be added to Class 14.1. As this Class is eligible for the AccII provisions and specifies maximum amortization at a rate of 5%, the resulting CCA of $5,100 [(5%)(1.5)($68,000)] would be deducted from accounting income. Item 4 You would add the discount amortization of $2,300.

Type: ES Topic: Net income - reconciliation from accounting income

66) The following four items may involve a reconciliation adjustment of a corporation's accounting income to net income for ITA purposes. 1. Premium amortization on the company's bonds payable was $5,600 for the current year. 2. The company incurred landscaping costs of $16,000 during the current year. For accounting purposes, these costs are being amortized at the rate of $1,600 per year. 3. The company sold a depreciable property for $145,000. The ACB of the property was $120,000 and the carrying value for accounting purposes was $85,000. It was not the last property in its CCA class and the UCC of this class was $105,000 before the disposition. There were no other additions or dispositions made during the year. 4. For accounting purposes, the company deducted $4,500 of interest charged on late income tax instalments. Required: Describe the required adjustments, their amounts and whether they should be added or subtracted in the reconciliation process. Answer: Item 1 Deduct the premium amortization of $5,600. Item 2 Add the accounting amortization of $1,600, and deduct the full cost of $16,000. Item 3 Deduct the accounting gain of $60,000 ($145,000 - $85,000), add the taxable capital gain of $12,500 [(1/2)($145,000 - $120,000)], and add the recapture of CCA of $15,000 ($105,000 - $120,000). Item 4 Add the $4,500 of interest charged on late income tax instalments. Type: ES Topic: Net income - reconciliation from accounting income

67) The FG Company had net income for the taxation year ending December 31, 2022 of $275,000. This amount included $13,720 in taxable capital gains, as well as $15,600 in taxable dividends received from taxable Canadian corporations. The Company also made donations to registered charities of $9,100 in 2022. At the beginning of the year, the Company had available a 2020 non-capital loss balance of $74,000, as well as a 2020 net capital loss balance of $20,000 [(1/2)($40,000)]. Determine the Company's minimum taxable income for the 2022 taxation year and the amount and type of any carryover balances available to be claimed in other taxation years. Answer: 2022 Net Income $275,000 Taxable Dividends ( 15,600) Charitable Donations ( 9,100) 2020 Non-Capital Loss deducted (All) ( 74,000) 2020 Net Capital Loss deducted* ( 13,720) 2022 Taxable Income $162,580 *While there is a $20,000 net capital loss available, the actual deduction is limited to the current year's net taxable capital gains of $13,720. The remaining 2020 net capital loss balance is $6,280 ($20,000 - $13,720). Type: ES Topic: Corporate taxable income

68) For the taxation year ending December 31, 2022, Garba Inc. had net income of $472,000. This amount included $22,000 in taxable dividends received from taxable Canadian companies, as well as $12,400 in net taxable capital gains. The Company also made charitable donations of $14,500 in 2022. At the beginning of 2022, the Company had a 2020 non-capital loss balance of $102,000, as well as a 2020 net capital loss balance of $56,000. Determine the Company's minimum 2022 taxable income and the amount and type of any carryover balance available at the end of the year to be applied to other taxation years. Answer: 2022 Net Income $472,000 Taxable Dividends ( 22,000) Charitable Donations ( 14,500) 2020 Non-Capital Loss deducted (All) ( 102,000) 2020 Net Capital Loss deducted* ( 12,400) 2022 Taxable Income $321,100 *While there is a $56,000 net capital loss available, the actual deduction is limited to the current year's net taxable capital gains of $12,400. The remaining 2020 net capital loss balance is $43,600 ($56,000 - $12,400). Type: ES Topic: Corporate taxable income

69) On February 21, 2022, Markham Inc. purchases 1,000 shares of Darcy Ltd., a widely held public company, at a cost of $27.60 per share. on March 1, 2022, these shares pay a taxable dividend of $1.97 per share. Markham sells the shares on March 25, 2022 for $22.11 per share. Markham Inc. has taxable capital gains of $23,000 in the year. What is Markham Inc.'s allowable capital loss from the sale of the Darcy Ltd. shares on March 25, 2022? Answer: As Markham has not owned the shares for 365 days, this transaction would be subject to the stop loss rule of ITA 112(3). The allowable capital loss would be calculated as follows: POD [($22.11)(1,000)] ACB [($27.60)(1,000)] Total Loss Disallowed Portion [($1.97)(1,000)] Capital Loss Inclusion Rate Allowable Capital Loss

$22,110 ( 27,600) ($ 5,490) 1,970 ($ 3,520) 1/2 ($ 1,760)

Type: ES Topic: Stop loss rules - ITA 112(3)

70) In March of 2022, Invest Inc. purchased 5,000 shares of Glee Ltd., a widely held public company for $18.95 per share. In May of 2022, the directors of Glee declare and pay a taxable dividend of $1.50 per share. In September of 2022, Invest sells the 5,000 Glee shares for $16.75 per share. Invest Inc. has over $50,000 in 2022 taxable capital gains on other share transactions. What is the allowable capital loss from the sale of the Glee Ltd. shares that occurred in September of 2022? Answer: As Invest has not owned the Glee shares for 365 days, this transaction would be subject to the stop loss rule of ITA 112(3). Given this, the deductible loss would be calculated as follows: POD [(5,000)($16.75)] ACB [(5,000)($18.95)] Total Loss Disallowed Portion [(5,000)($1.50)] Capital Loss Inclusion Rate Allowable Capital Loss

$83,750 ( 94,750) ($11,000) 7,500 ($ 3,500) 1/2 ($ 1,750)

Type: ES Topic: Stop loss rules - ITA 112(3)

71) Badon Inc. is a Canadian public company. The following information pertains to its 2022 taxation year: Taxable Capital Gains Allowable Capital Losses Allowable Business Investment Loss (ABIL) Canadian Taxable Dividends Canadian Interest Income Business Loss

$102,000 85,500 10,450 87,000 53,100 427,500

The Company also has a 2019 net capital loss balance of $37,400. It would like to deduct this loss in the current year. Determine the 2022 non-capital loss for Badon Inc. and any remaining 2019 net capital loss balance after claiming the maximum amount. Answer: The 2022 non-capital loss would be calculated as follows: Amount E Business Loss ABIL Taxable Dividends Deducted under ITA 112(1) 2019 Net Capital Loss Deducted* Total For Amount E Amount F - ITA 3(c) Income Taxable Dividends Interest Net Taxable Capital Gains [($102,000 - $85,500)] 2022 Non-Capital Loss

$427,500 10,450 87,000 16,500 $541,450 ($87,000) ( 53,100) ( 16,500)

( 156,600) $384,850

*While there is a net capital loss balance of $37,400 available, the deduction is limited to the net taxable capital gains of $16,500 [($102,000 - $85,500)]. This leaves a 2019 net capital loss balance of $20,900 ($37,400 - $16,500). Type: ES Topic: Losses - non-capital loss

72) For the taxation year ending December 31, 2022, Rude Ltd., has the following information: Business Loss Canadian Interest Income Net Taxable Capital Gains Taxable Dividends Allowable Business Investment Loss (ABIL)

$286,000 42,000 18,000 34,000 23,000

The Company also has a 2020 net capital loss balance of $24,000. Determine the 2022 non-capital loss for Rude Ltd. and the balance of the 2020 net capital loss after claiming the maximum amount. Answer: The 2022 non-capital loss is calculated as follows: Amount E Business Loss ABIL Taxable Dividends Deducted under ITA 112(1) 2020 Net Capital Loss Deducted* Total For Amount E Amount F - ITA 3(c) Income: Dividends Interest Net Taxable Capital Gains 2022 Non-Capital Loss

$286,000 23,000 34,000 18,000 $361,000 ($34,000) ( 42,000) ( 18,000)

( 94,000) $267,000

*While there is a net capital loss balance of $24,000 available, the deduction is limited to the net taxable capital gains of $18,000. This leaves a net capital loss balance of $6,000 ($24,000 - $18,000). Type: ES Topic: Losses - non-capital loss

73) In the taxation year ending December 31, 2021, Melanor Ltd. had accounting income before income taxes of $225,000. In the following 2022 taxation year the company had an accounting loss before income taxes of $372,000. Both of these accounting amounts were determined using ASPE. Included in the above income were the following amounts: 2021 $ 7,100 33,000 23,000

Donations to Registered Charities Gains (Losses) on the sale of shares Canadian Taxable Dividends

2022 $ 9,600 ( 17,000) 37,000

The above accounting gains (losses) on the sale of shares are equal to the capital gains (losses) on the sale of the shares. At the beginning of the 2021 taxation year, the Company had a 2019 non-capital loss balance of $12,000 and a 2019 net capital loss balance of $10,000. It is the policy of Melanor Ltd. to maximize the use of any non-capital losses. Required: Calculate the minimum net income and taxable income for 2021 and 2022 and indicate the amount and type of any available carryovers that may be claimed in other taxation years.

Answer: The required calculations for 2021 would be as follows: Accounting income Adjustments: Donations Accounting Gain on sale of shares Taxable Capital Gain [(1/2)($33,000)] 2021 Net Income Charitable Donations Taxable Dividends 2019 Non-Capital Loss deducted (All) 2019 Net Capital Loss deducted (All) 2021 Taxable Income

$225,000 7,100 ( 33,000) 16,500 $215,600 ( 7,100) ( 23,000) ( 12,000) ( 10,000) $163,500

There are no remaining loss carryovers. The business loss for 2022 would be calculated as follows: Accounting Loss Charitable Donations Accounting Loss on sale of shares Taxable Dividends included in Accounting Income 2022 Business Loss

($372,000) 9,600 17,000 ( 37,000) ($382,400)

The 2022 net income and taxable income would both be nil, calculated as follows: Business Loss Taxable Dividends 2022 Net Income and Taxable Income

($382,400) 37,000 Nil

The 2022 non-capital loss is calculated as follows: Amount E Business Loss Taxable Dividends Amount F (Income Under ITA 3(c) - Dividends) 2022 Non-Capital Loss

$382,400 37,000

$419,400 ( 37,000) $382,400

Of the $382,400 loss, $163,500 can be carried back to 2021, leaving a 2022 non-capital loss balance of $218,900 ($382,400 - $163,500). As the policy of the Company is to maximize the use of non-capital losses, none of the 2022 net capital loss can be carried back. This will leave a 2022 net capital loss balance of $8,500 [(1/2)($17,000)]. There is also a carry forward of unused 2022 charitable donations of $9,600. Type: ES Topic: Losses - applying the losses

74) In the 2021 taxation year, Durham Inc. had ASPE based accounting income before income tax of $427,000 and an accounting loss of $625,000 for the 2022 taxation year. Included in these figures were the following amounts: 2021 $41,000 12,100 65,000

Canadian Taxable Dividends Donations to Registered Charities Gains (Losses) on the sale of shares

2022 $58,000 17,600 ( 31,000)

The above accounting gains (losses) on the sale of shares are equal to the capital gains (losses) on the sale of the shares. Durham had a 2018 non-capital loss balance of $26,000 and a 2018 net capital loss balance of $19,000. It is the policy of Durham to maximize use of any non-capital losses. Required: Calculate the minimum net income and taxable income for each of the 2021 and 2022 taxation years and indicate the amount and type of any carryover balances that may be claimed in other taxation years.

Answer: The 2021 net income and taxable income would be calculated as follows: Accounting Income Adjustments: Donations Accounting Gains Taxable Capital Gains [(1/2)($65,000)] 2021 Net Income Donations Taxable Dividends 2018 Non-Capital Loss deducted (All) 2018 Net Capital Loss deducted (All) 2021 Taxable Income

$427,000 12,100 ( 65,000) 32,500 $406,600 ( 12,100) ( 41,000) ( 26,000) ( 19,000) $308,500

There are no remaining loss carryovers from 2018. The 2022 business loss would be calculated as follows: Accounting Loss Donations Accounting Loss on sale of shares Taxable Dividends Included in Accounting Income 2022 Business Loss

($625,000) 17,600 31,000 ( 58,000) ($634,400)

The 2022 net income and taxable income would both be nil, calculated as follows: Business Loss Dividends Received 2022 Net Income and Taxable Income

($634,400) 58,000 Nil

The 2022 non-capital loss can be calculated as follows: Amount E Business Loss Taxable Dividends Deducted Amount F - (Income Under ITA 3(c) - Dividends) 2022 Non-Capital Loss

$634,400 58,000

$692,400 ( 58,000) $634,400

The 2022 non-capital loss can be carried back to 2021 to the extent of that year's taxable income of $308,500. This will leave a 2022 non-capital loss balance of $325,900 ($634,400 - $308,500). As the Company's policy is to maximize use of non-capital losses, none of the share loss can be deducted. This leaves a 2022 net capital loss balance of $15,500 [(1/2)($31,000)]. There is also a $17,600 carryover of unused 2022 charitable donations. Type: ES Topic: Losses - applying the losses

75) Ramsden Inc., a Canadian public company, has taxable income for the 2021 taxation year of $242,000. It has Canadian permanent establishments (PE) in Saskatchewan and Alberta. The Company's gross revenues for the 2022 taxation year are $3,013,000, with $1,520,000 of this attributable to the PE in Saskatchewan, and $912,000 attributable to the PE in Alberta. Wages and salaries total $192,000 for the year. Of this total, $63,000 is attributable to the PE in Saskatchewan and $85,000 to the PE in Alberta. Ramsden has sales to the U.S. through a PE in the U.S. Calculate 2022 federal income tax payable. Ignore any foreign income tax implications. Answer: The percentage of taxable income earned in each province would be calculated as follows:

Saskatchewan Alberta Not attributable to a Province Total

Gross Revenues Amount Percent $1,520,000 50.4% 912,000 30.3% 581,000 19.3% $3,013,000 100.0%

Wages And Salaries Amount Percent $ 63,000 32.8% 85,000 44.3% 44,000 22.9% $192,000 100.0%

The average of the two percentages applicable for income not attributable to a province or territory is 21.1%, leaving an average for income related to a province of 78.9%. Given this, federal income tax payable can be calculated as follows: Base Amount [(38%)($242,000)] Federal Abatement [(10%)(78.9%)($242,000)] GRR [(13%)($242,000)] 2022 Corporate Federal Income Tax Payable

Type: ES Topic: Corporate tax - geographical allocation of income

$91,960 ( 19,094) ( 31,460) $41,406

76) Marsden Inc., a Canadian public company, has taxable income for 2022 of $362,000. It has permanent establishments (PE) in Ontario, Manitoba and the U.S. Its 2022 gross revenues and 2022 wages and salaries at the three PEs are as follows: Gross Revenues $ 840,000 1,080,000 480,000 $2,400,000

Ontario Manitoba U.S. Total

Wages and Salaries $ 300,000 540,000 360,000 $1,200,000

Calculate federal income tax payable for the 2022. Ignore any foreign tax implications. Answer: The percentage of taxable income earned in each province or territory would be calculated as follows:

Ontario Manitoba U.S. Total

Gross Revenues Amount Percent $ 840,000 35% 1,080,000 45% 480,000 20% $2,400,000 100.0%

Wages and Salaries Amount Percent $ 300,000 25% 540,000 45% 360,000 30% $1,200,000 100.0%

The average of the two percentages applicable to the U.S. is 25%, leaving an average for income related to a province of 75%. Given this, federal income tax payable can be calculated as follows: Base Amount [(38%)($362,000)] Federal Abatement [(10%)(75%)($362,000)] GRR [(13%)($362,000)] 2022 Federal Corporate Income Tax Payable

Type: ES Topic: Corporate tax - geographical allocation of income

$137,560 ( 27,150) ( 47,060) $ 63,350

77) Meridian Inc. is a CCPC and is not associated with any other corporation. Meridian has 2022 net income of $422,000. This amount is made up of taxable dividends from taxable Canadian corporations of $22,000, active business income of $380,000, and foreign non-business income of $20,000. The foreign income was subject to a 13% income tax in the foreign jurisdiction. Meridian receives a foreign tax credit against federal income tax payable that is equal to the amount withheld. Meridian has a 2020 non-capital loss balance of $145,000 which it intends to claim in 2022. The TCEC was less than $10 million in 2021 and the AAII was less than $50,000 in 2021. Determine Meridian's small business deduction (SBD) for the 2022 taxation year. Answer: As a CCPC with no associated companies, Meridian is eligible for the full amount of the $500,000 annual business limit. The amount eligible for the SBD is the least of: Active Business Income Adjusted Taxable Income (See following calculation) Annual Business Limit

$380,000 $245,714 $500,000

2022 Net Income Taxable Dividends 2020 Non-Capital Loss deducted 2022 Taxable Income 100/28 Times Foreign Non-Business Tax Credit [(100/28)(13%)($20,000)] Adjusted Taxable Income

$422,000 ( 22,000) ( 145,000) $255,000 ( 9,286) $245,714

The SBD is equal to $46,686 [(19%)($245,714)].

Type: ES Topic: Corporate tax - calculating the small business deduction (SBD)

78) Sardo Ltd. is a CCPC and is not associated with any other corporation. Its 2022 net income is $422,000 and is made up of the following components: Active Business Income Taxable Dividends Foreign Non-Business Income (100%)

$375,000 15,000 32,000

The foreign jurisdiction withheld $3,200 in profits tax from the foreign non-business income. The Company is entitled to a foreign tax credit equal to the amount withheld. The TCEC was less than $10 million in 2021 and the AAII was less than $50,000 in 2021. The Company has a 2019 non-capital loss balance of $96,000 that it intends to claim in 2022. Determine Sardo's small business deduction (SBD) for the 2022 taxation year. Answer: As a CCPC and with no associated companies, Sardo is eligible for the full amount of the $500,000 annual business limit. The amount eligible for the small business deduction is the least of: Active Business Income Adjusted Taxable Income (See following calculation) Annual Business Limit

$375,000 $299,571 $500,000

2022 Net Income Taxable Dividends 2019 Non-Capital Loss deducted 2022 Taxable Income 100/28 Times Foreign Non-Business Tax Credit [(100/28)($3,200)] Adjusted Taxable Income

$422,000 ( 15,000) ( 96,000) $311,000 ( 11,429) $299,571

The SBD is equal to $56,918 [(19%)($299,571)].

Type: ES Topic: Corporate tax - calculating the small business deduction (SBD)

79) Teeny Ltd. is a CCPC. Its net income for 2022 is $652,000, all of which is active business income, except for $21,000 in foreign source non-business income. The foreign jurisdiction withheld 10% in income tax. The corporation is entitled to a foreign tax credit equal to the foreign taxes withheld. The corporation's only taxable income deduction is for a 2020 non-capital loss balance of $415,000. The corporation had Taxable Capital Employed in Canada (TCEC) of $12,950,000 for 2021, and $13,100,000 for 2022. The AAII in 2021 was $39,000 and increased to $42,000 in 2022. It is not associated with any other corporation. Determine the amount of Teeny Ltd.'s 2022 small business deduction (SBD). Answer: The B component of the ITA 125(5.1) reduction formula is $6,638 [(.00225)($12,950,000 $10,000,000)]. Given this, the required reduction would be calculated as follows: [($500,000)($6,638 ÷ $11,250)] = $295,022 Reduction This reduction results in an annual business limit of $204,978 ($500,000 - $295,022). The 2022 SBD for Teeny Ltd. is equal to 19% of the least of: • Active Business Income ($652,000 - $21,000) • Taxable Income ($652,000 - $415,000) [(100/28)(10%)($21,000)] • Reduced Annual Business Limit

$631,000 $237,000 ( 7,500)

$229,500 $204,978

The small business deduction is equal to $38,946 [(19%)($204,978)]. Type: ES Topic: Corporate tax - calculating the small business deduction (SBD)

80) Lax Inc. is a CCPC. For its 2022 taxation year, its net income and taxable income is made up of active business income of $285,000, plus Aggregate Investment Income of $95,000. For 2021, its AAII was $75,000. Its Taxable Capital Employed In Canada (TCEC) was $7 million for 2022 and $6 million for 2021. Because of its association with Slax Inc., it is only allocated a business limit of $200,000. Slax's TCEC was $1,000,000 for both 2021 and 2022. Its AAII is nil for both 2021 and 2022. Determine the amount of the 2022 small business deduction (SBD) for Lax Inc. Answer: The required reduction in the annual business limit would be calculated as follows: [($200,000/$500,000)][(5)($75,000 - $50,000)] = $50,000 Reduction This reduction would leave the company's annual business limit at $150,000 ($200,000 - $50,000). The 2022 SBD for Lax Inc. would be 19% of the least of: • Active Business Income $285,000 • Taxable Income $380,000 • Reduced Annual Business Limit $150,000 The SBD would therefore be equal to $28,500 [(19%)($150,000)] for 2022. Type: ES Topic: Corporate tax - calculating the small business deduction (SBD)

81) Limited Inc. is a CCPC. Its 2022 net income of $475,000 is made up of active business income of $360,000 and $115,000 of Aggregate Investment Income. In 2021, the company's Adjusted Aggregate Investment Income (AAII) was $84,000. Its only 2022 taxable income deduction is a 2020 non-capital loss balance of $75,000. Because of its association with another company, Limited's share of the annual business limit is $375,000. The associated company has no AAII for either of 2021 or 2022. Determine Limited's 2022 small business deduction (SBD), assuming that the combined Taxable Capital Employed In Canada (TCEC) of Limited and its associated company was: Case 1 - $11,000,000 for 2022 and $14,500,000 for 2021. Case 2 - $13,500,000 for 2022 and $10,800,000 for 2021. Answer: Case 1 - The B component of the TCEC reduction formula is $10,125 [(.00225)($14,500,000 - $10,000,000)]. Given this, the required reduction would be calculated as follows: [($375,000)($10,125 ÷ $11,250)] = $337,500 Reduction The calculation of the AAII grind would be calculated as follows: [($375,000/$500,000)][(5)($84,000 - $50,000)] = $127,500 Reduction The greater of these reductions is the TCEC grind amount of $337,500. This leaves an annual business limit of $37,500 ($375,000 - $337,500). Using this, the 2022 SBD for Limited Inc. would be 19% of the least of: • Active Business Income $360,000 • Taxable Income ($475,000 - $75,000) $400,000 • Reduced Annual Business Limit $ 37,500 The small business deduction in this Case 1 is equal to $7,125 [(19%)($37,500)]. Case 2 - The B component of the TCEC reduction formula is $1,800 [(.00225)($10,800,000 - $10,000,000)]. Given this, the required reduction would be calculated as follows: [($375,000)($1,800 ÷ $11,250)] = $60,000 Reduction The AAII reduction would be the same $127,500 that was determined in Case 1. Given this, the greater amount would be $127,500, resulting in an annual business limit of $247,500 ($375,000 - $127,500). Based on this, the 2022 SBD for Limited Inc. is equal to 19% of the least of: • Active Business Income $360,000 • Taxable Income ($475,000 - $75,000) $400,000 • Reduced Annual Business Limit $247,500 The 2022 SBD in this Case 2 is equal to $47,025 [(19%)($247,500)]. Type: ES Topic: Corporate tax - SBD the annual business limit reductions

82) Bartlett Operations Inc. is a CCPC. It has 2022 net income of $476,000, an amount that includes $424,000 in M&P profits (as per ITR 5200). The $476,000 also includes foreign source business income of $25,000 and taxable capital gains of $27,000. Because of income tax on the foreign source business income, the Company is entitled to a foreign tax credit of $3,700. The Company's only taxable income deduction is donations to registered Canadian charities in the amount of $201,000. Bartlett is not associated with any other company and anticipates large increases in taxable income in the next few years. The 2021 TCEC of the company is $2,900,000 and the AAII is $17,000. Determine the amount of Bartlett's 2022 SBD and M&P deduction, assuming that the Company deducts all of the charitable donations. Do you believe that deducting all of the donations is the best option for Bartlett? Explain your conclusion. Answer: The 2022 SBD for Bartlett Operations Inc. is 19% of the least of: • Canadian Active Business Income • Taxable Income ($476,000 - $201,000) Less 4 Times Business Income FTC of $3,700 • Annual Business Limit

$275,000 ( 14,800)

$424,000 $260,200 $500,000

Based on this, the 2022 SBD would be $49,438 [(19%)($260,200)]. The M&P deduction would be equal to 13% of the lesser of: • M&P Profits Less Amount Eligible for the SBD

$424,000 ( 260,200)

• Taxable Income Less: Amount Eligible for the SBD 4 Times Business Income FTC of $3,700 Aggregate Investment Income (Taxable Capital Gain)

$275,000 ( 260,200) ( 14,800) ( 27,000)

$163,800

Nil

The M&P deduction would be nil. It would have been possible to increase the amount eligible for the 2022 SBD to the $424,000 of active business income by increasing taxable income to $438,800 ($424,000 + $14,800). This could be accomplished by deducting only $37,200 ($476,000 - $438,800) of the charitable donations. The remaining unclaimed donations of $163,800 ($201,000 - $37,200) could be carried forward for up to five years. Although this increases taxable income and the total 2022 federal income tax payable, there could still be an ultimate income tax savings with this approach, as the SBD cannot be carried to another taxation year while charitable donations can be carried forward. As the Exercise states that Bartlett expects large increases in taxable income in the future, this approach would be advantageous if Bartlett's expectations turn out to be correct. Type: ES Topic: Corporate tax payable - M&P and SBD

83) Lardon Inc. is a CCPC and is not associated with any other company. The Company has 2022 net income of $632,000, an amount that includes $553,000 in M&P profits (as per ITR 5200). The Company's net income also includes foreign source business income of $40,000 and net taxable capital gains of $39,000. The jurisdiction in which the foreign business income was carried on through a fixed place of business (PE) resulted in foreign income taxes that entitled the company to a foreign business tax credit of $6,000. The Company's only taxable income deduction is a donation to a registered charity of $187,000. Due to rumours of illegal activities, just prior to the end of the 2022 taxation year, Lardon lost two major customers and many of its key employees. Determine the amount of Lardon's 2022 SBD and M&P deduction, assuming that the Company deducts all of the $187,000 of charitable donations. Do you believe that deducting all of the donations is the best option for Lardon? Explain your conclusion. Answer: The 2022 SBD for Lardon Inc. would be equal to 19% of the least of: • Canadian Active Business Income • Taxable Income ($632,000 - $187,000) Less 4 Times Business Income FTC of $6,000 • Annual Business Limit

$445,000 ( 24,000)

$553,000 $421,000 $500,000

Based on this, the 2022 SBD would be $79,990 [(19%)($421,000)]. The M&P deduction would be equal to 13% of the least of: • M&P Profits Less Amount Eligible for the SBD

$553,000 ( 421,000)

• Taxable Income ($632,000 - $187,000) Less: Amount Eligible for the SBD 4 Times Business Income FTC of $6,000 Aggregate Investment Income (Taxable Capital Gain)

$445,000 ( 421,000) ( 24,000) ( 39,000)

$132,000

Nil

The M&P deduction would be equal to nil. It would have been possible to increase the amount eligible for the SBD to the $500,000 annual business limit by increasing taxable income to $524,000 ($500,000 + $24,000). This could be accomplished by deducting only $108,000 ($632,000 - $524,000) of the charitable donations. The remaining unclaimed donations of $79,000 ($187,000 - $108,000) could then be carried forward for up to five years. Although this increases taxable income and the total 2022 federal income tax payable, there could still be an ultimate income tax savings with this approach, as the SBD cannot be carried forward, while charitable donations can be carried forward. On the other hand, Lardon's loss of customers and staff may result in substantially lower income in the future. If all income in the foreseeable future will benefit from the SBD, it would be advantageous to minimize taxable income by deducting all of the charitable donations in the current 2022 taxation year. Type: ES Topic: Corporate tax payable - M&P and SBD

84) For the 2022 taxation year, Tuleta Ltd., a Canadian public company, has taxable income of $296,000. Of this total, $165,000 qualifies for the M&P deduction. Calculate Tuleta Ltd.'s 2022 federal income tax payable. Include in your solution any M&P deduction available. Answer: The 2022 federal income tax payable for Tuleta Ltd. would be calculated as follows: Base Amount [(38%)($296,000)] Federal Abatement [(10%)($296,000)] M&P Deduction [(13%)($165,000)] GRR [(13%)($296,000 - $165,000)] 2022 Federal Income Tax Payable

Type: ES Topic: Corporate tax payable - simple for a public company

$112,480 ( 29,600) ( 21,450) ( 17,030) $ 44,400

85) During its current taxation year, Odaon Ltd., a Canadian public company, has taxable income of $625,000. Of this total $362,000 qualifies for the M&P deduction. Calculate Odaon's federal income tax payable for the current taxation year. Include in your solution any M&P deduction available. Answer: The federal income tax payable for Odaon Ltd. would be calculated as follows: Base Amount [(38%)($625,000)] Federal Abatement [(10%)($625,000)] M&P Deduction [(13%)($362,000)] GRR [(13%)($625,000 - $362,000)] Federal Income Tax Payable

Type: ES Topic: Corporate tax payable - simple for a public company

$237,500 ( 62,500) ( 47,060) ( 34,190) $ 93,750

86) Danforth Inc. is a CCPC. The Company has 2022 taxable income of $262,000, all of which is active business income. Of this amount, $201,000 results from M&P activity. As it is associated with two other corporations, its share of the annual business limit is $117,000. Determine the Company's 2022 federal income tax payable. Include in your solution any M&P deduction available. Assume that the combined 2021 TCEC and AAII for all associated companies is below the threshholds for the SBD reductions. Answer: The 2022 federal income tax payable for Danforth Inc. would be calculated as follows: Base Amount [(38%)($262,000)] Federal Abatement [(10%)($262,000)] SBD (Note One) M&P Deduction (Note Two) GRR (Note Three) 2022 Federal Income Tax Payable

$99,560 ( 26,200) ( 22,230) ( 10,920) ( 7,930) $32,280

Note One - The 2022 SBD is equal to 19% of the least of active business income ($262,000), taxable income ($262,000), and the Company's business limit ($117,000). The deduction is therefore $22,230 [(19%)($117,000)]. Note Two - The M&P deduction is equal to 13% of the lesser of $84,000 (M&P profits of $201,000, reduced by the $117,000 that is eligible for the SBD), and $145,000 (taxable income, reduced by the $117,000 that is eligible for the SBD). The M&P deduction would therefore be $10,920 [(13%)($84,000)]. Note Three - The 2022 GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction Full Rate Taxable Income Rate GRR

$262,000 ( 117,000) ( 84,000) $ 61,000 13% $ 7,930

Type: ES Topic: Corporate tax payable - simple for a CCPC

87) For the 2022 taxation year, Brokton Inc. has taxable income of $472,000, all of which is active business income. Of this total, $305,000 results from M&P activity. The Company is a CCPC and is associated with three other CCPCs. The companies have agreed that Brokton's share of the annual business limit will be $140,000. Determine the Company's 2022 federal income tax payable. Include in your solution any M&P deduction available. Assume that the 2021 combined TCEC and AAII are below the threshholds for determining a reduction to the annual business limit. Answer: The 2022 federal income tax payable for Brokton Inc. would be calculated as follows: Base Amount [(38%)($472,000)] Federal Abatement [(10%)($472,000)] SBD (Note 1) M&P Deduction (Note 2) GRR (Note 3) 2022 Federal Income Tax Payable

$179,360 ( 47,200) ( 26,600) ( 21,450) ( 21,710) $ 62,400

Note 1 - The SBD is equal to 19% of the least of: • Active Business Income • Taxable Income • Company's Business Limit The amount would be $26,600 [(19%)($140,000)].

$472,000 $472,000 $140,000

Note 2 - The M&P deduction is equal to 13% of the least of: • $165,000 - M&P profits, less the amount eligible for the SBD ($305,000 - $140,000). • $332,000 - Taxable income, less the amount eligible for the SBD ($472,000 - $140,000). The amount would be $21,450 [(13%)($165,000)]. Note 3 - The GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction Full Rate Taxable Income Rate GRR

$472,000 ( 140,000) ( 165,000) $167,000 13% $ 21,710

Type: ES Topic: Corporate tax payable - simple for a CCPC

88) Tembina Ltd. is a Canadian public company. For its 2022 taxation year, it has net income of $135,000, including foreign business income of $27,000. Foreign income tax of $4,050 was paid on this income. None of the Company's income involves M&P and, based on the ITR 402(3) formula, 91% of the Company's income was allocated to a province or territory. The Company claims taxable income deductions of $23,000 in taxable dividends received from taxable Canadian corporations, a 2020 noncapital loss balance of $51,000, and a 2020 net capital loss balance of $19,000. Determine the Company's 2022 federal income tax payable. Include in your answer any carryovers available to be used in other taxation years. Answer: 2022 taxable income is $42,000 ($135,000 - $23,000 - $51,000 - $19,000). Based on this amount, the required calculation of 2022 federal income tax payable would be as follows: Base Amount [(38%)($42,000)] Federal Abatement [(91%)(10%)($42,000)] GRR [(13%)($42,000)] Foreign Business Income Tax Credit (See Note) 2022 Federal Income Tax Payable

$15,960 ( 3,822) ( 5,460) ( 3,048) $ 3,630

Note - The foreign business income tax credit would be the least of: • The income tax paid • [$27,000 ÷ ($135,000 - $23,000 - $19,000)][$15,960 - $5,460] • $15,960 - $5,460

$ 4,050 $ 3,048 $10,500

The unused foreign business tax amount of $1,002 ($4,050 - $3,048) can be carried back 3 years and forward for 10 years. In calculating the allowable tax credit for such carryovers, these unused amounts will be added to the foreign income tax paid factor in the calculation of the foreign business income tax credit. Type: ES Topic: Corporate tax payable - simple but including foreign tax credits

89) For the 2022 taxation year, Sundal Ltd. has net income of $235,000. Included in this amount is foreign business income of $48,000 of which the foreign income taxes of $7,200 were paid. Sundal is a Canadian public company and none of its income involves M&P activity. It has been determined that 89% of the Company's taxable income is allocated to a province or territory. Taxable income deductions were made for taxable dividends of $11,000, a 2019 non-capital loss balance of $105,000, and a 2019 net capital loss balance of $36,000. Determine the Company's 2022 federal income tax payable. Include in your answer any carryovers available to be applied to any other taxation years. Answer: 2022 taxable income is $83,000 ($235,000 - $11,000 - $105,000 - $36,000). Based on this figure, Sundal's 2022 federal income tax payable is calculated as follows: Base Amount [(38%)($83,000)] Federal Abatement [(89%)(10%)($83,000)] GRR [(13%)($83,000)] Foreign Business Income Tax Credit (See Note) 2022 Federal Income Tax Payable

$31,540 ( 7,387) ( 10,790) ( 5,298) $ 8,065

Note - The foreign business income tax credit would be the least of: • The amount withheld • [$48,000 ÷ ($235,000 - $11,000 - $36,000)][$31,540 - $10,790] • $31,540 - $10,790

$ 7,200 $ 5,298 $20,750

The unused foreign business tax amount of $1,902 ($7,200 - $5,298) can be carried back 3 years and forward for 10 years. In calculating the allowable tax credit for carryover purposes, these unused amounts will be added to the foreign tax paid factor in the calculation of the foreign business income tax credit to the year in which the credit is to be applied. Type: ES Topic: Corporate tax payable - simple but including foreign tax credits

90) Jaxtor Inc. is a Canadian public company that uses a December 31 taxation year. As a public company it must provided financial statements based on IFRS. For the year ending December 31, 2022, these financial statements show accounting income of $543,267. In order to assist in preparing the Company's 2022 corporate income tax return, the following additional information is available with respect to the 2022 taxation year. 1. The Company's financial statements disclosed interest on the Company's bonds payable of $12,460. This included discount amortization of $460. 2. The financial statements show a charge for amortization of $62,500. Maximum CCA which the Company intends to deduct, is $71,300. This does not include any CCA on Class 14.1 property. 3. As part of a business combination, the Company purchased goodwill of $189,000. The Company's accountant determined that the goodwill was not impaired in 2022. 4. The Company sold temporary investments for $13,450. The ACB of these investments was $9,980. 5. The Company donated a Class 10 depreciable property to a registered charity. A charitable donation receipt equal to the FMV of $132,000 was issued. The capital cost and ACB were both $117,000, the carrying value for accounting purposes was $105,300 and the UCC $94,670. There were other properties in Class 10 at year end. 6. The Company had a liability for estimated warranties of $6,240. During the year, warranty costs were incurred in the amount of $5,650 and, at the end of the year, the remaining warranty liability was estimated to be $4,890. 7. The Company disposed of Class 8 property for $71,000. The property had a capital cost and ACB of $79,000 and a carrying value of $68,000 for accounting purposes. At the beginning of the current year, the UCC balance was $66,720. There were no property in the class at year end. Required: Make the necessary reconciliation adjustments to convert accounting income of $543,267 to net income for ITA purposes. Indicate the amount of the adjustment together with a description (accounting gain. recapture etc) and whether the adjustment is to be add or subtracted in the reconciliation process.

Answer: The required adjustments would be as follows: 1. Add the $460 bond discount. 2. Two adjustments would be required: • The $62,500 amortization charge would be added. • The $71,300 of maximum CCA would be deducted. 3. The goodwill will be added to Class 14.1. The CCA would be $14,175 [(1.5)(5%)($189,000)] and would be deducted. As there was no accounting charge for goodwill impairment no further goodwill adjustments are required, 4. Two adjustments would be required: • The accounting gain of $3,470 ($13,450 - $9,980) would be deducted. • The taxable capital gain of $1,735 [(1/2)($13,450 - $9,980)] would be added. 5. Several adjustments are required: • The $132,000 deduction for the donation would be added back. • The accounting gain of $26,700 ($132,000 - $105,300) would be deducted. • The taxable capital gain of $7,500 [(1/2)($132,000 - $117,000)] would be added. • The recapture of $22,330 ($117,000 - $94,670) would be added. 6. The decrease in the warranty liability of $1,350 ($6,240 - $4,890) would be deducted. 7. Two adjustments are required: • The accounting gain of $3,000 ($71,000 - $68,000) would be deducted • The recapture of $4,280 ($71,000 - $66,720) would be added • There would be no capital loss to be adjusted Type: ES Topic: Net income - reconciliation from accounting income

91) The following information on Dunway Ltd., a Canadian public company, applies to its 2022 taxation year ending June 30, 2022: Business Revenues Business Expenses Canadian Taxable Dividends from Controlled Subsidiary Canadian Dividends from Non-Controlled Public Companies Capital Gain on Investment Sale Taxable Dividends Paid Donation to Canadian Government Donations to Registered Canadian Charities

$825,000 533,000 17,500 15,000 22,000 182,000 26,000 141,000

The Company has a 2019 net capital loss balance of $18,000 and a 2019 non-capital balance of $137,000. Dunway Ltd. does not anticipate any capital gains in the foreseeable future. The accounting business income is equal to the business income for income tax purposes therefore there are no reconciliation adjustments required. Required: Calculate the minimum 2022 net income and taxable income. Indicate the amount and type of any carryovers that will be available to apply to other taxation years.

Answer: The Taxable income of Dunway Ltd. would be determined as follows: Business Income ($825,000 - $533,000) Taxable Dividends ($17,500 + $15,000) Taxable Capital Gain [(1/2)($22,000)] 2022 Net Income Taxable Income Deductions: Taxable Dividends Donation to Government (Note 1) Donations to Registered Charities (Note 1) 2019 Net Capital Loss (Note 2) Taxable Income before Non-Capital Loss 2019 Non-Capital Loss (Note 3) 2022 Taxable Income

$292,000 32,500 11,000 $335,500 ($ 32,500) ( 26,000) ( 141,000) ( 11,000)

( 210,500) $125,000 ( 125,000) Nil

Note 1 - There is no addition to net income with respect to the donations as this calculation does not start with accounting income. In other words, a reconciliation is not required. The donations to registered Canadian charities total less than 75% of net income and are therefore entitled to a taxable income deduction. Note 2 - The 2019 net capital loss can only be deducted to the extent of the $11,000 of the net taxable capital gain. Note 3 - The 2019 non-capital loss has only been claimed to the extent of the amount required to reduce taxable income to nil. It would have been possible to carry forward the donations instead, but the noncapital loss carry forward period is 20 years compared to only 5 years for donations. In this case there are 17 years remaining on the life of the 2019 non-capital loss. Loss Carryover balances • 2019 net capital loss balance is $7,000 ($18,000 - $11,000). • 2019 non-capital loss balance is $12,000 ($137,000 - $125,000). Type: ES Topic: Net and taxable income for corporations

92) While for many years, Sweat Ltd. used a December 31 taxation year end, a 2022 change in the nature of its business resulted in the Company requesting a change in their taxation year end to August 31 to coincide with an anticipated annual slow point in the business. Based on the information provided, the CRA accepted this change. The change will be implemented in 2022. The income statement for the period January 1, 2022 to August 31, 2022, prepared by the accountants is as follows: Sweat Ltd. Income Statement 8 Month Period Ending August 31, 2022 Sales (All Within Canada) Cost of goods sold Gross Margin Other Expenses (Excluding Income Taxes): Wages and Salaries Amortization Rent Interest Expense Foreign Exchange Loss Travel and Promotion Bad Debt Expense Warranty Expense Charitable Donations Other Business Expenses Business Income Gain on sale of investments 2022 Accounting Income before income taxes

$916,000 ( 485,000) $431,000 ($153,400) ( 49,300) ( 56,700) ( 5,500) ( 4,200) ( 44,300) ( 5,400) ( 5,800) ( 3,100) ( 19,800)

( 347,500) $ 83,500 3,900 $ 87,400

Other Information relevant to the new 2022 taxation year: 1. In determining the cost of goods sold, the Company deducted a $17,800 reserve for inventory obsolescence. 2. Wages and salaries includes a $35,000 bonus to Sweat Ltd.'s CEO. Because the CEO anticipates retiring in December of 2022, the bonus will not be paid until January of 2024. 3. Amortization is on the furniture and fixtures and delivery vehicles. The capital cost of the furniture and fixtures is $147,000 and, at January 1, 2022, the Class 8 UCC balance is $79,800. New furniture was purchased at a cost of $20,500 in the new 2022 taxation year and old furniture with a capital cost of $14,200 was sold for $9,500 in the same period. On January 1, 2022, the Class 10 UCC balance was $103,400. There were no additions or disposals in this Class during the 8 month period ending August 31, 2022. 4. The interest expense relates to a line of credit that was used to finance seasonal fluctuations in inventory. 5. The foreign exchange loss resulted from financing costs related to the purchase of inventory in the United Kingdom.

6. The travel and promotion expense consisted of the following items: Business Meals and Entertainment Hotels and Airfare Golf Club Memberships Total Travel and Promotion Expense

$15,200 21,400 7,700 $44,300

7. For accounting purposes, the Company establishes a warranty reserve based on estimated costs. On The reserve established December 31, 2021 was $5,400 and a new reserve of $6,200 was established August 31, 2022. 8. The accounting gain on the sale of investments is equal to the capital gain for income tax purposes. 9. During the period January 1, 2022 to August 31, 2022, the Company declared and paid taxable dividends of $27,600. 10. The Company has a 2020 non-capital loss balance of $18,700 and a 2020 net capital loss balance of $6,250. Required: Reconcile the accounting income to net income for ITA purposes and determine the taxable income for Sweat Ltd. for the 8 month period ending August 31, 2022. Indicate the amount and type of any carryovers that are available to be applied to other taxation years. Answer: The reconciliation of accounting income to net income and the determination of taxable income of Sweat Ltd. for the 8 month period ending August 31, 2022 is as follows: Accounting Income before Income Taxes Add: Reserve for Inventory Obsolescence (Included in Cost of goods sold) Bonus (Note 1) Amortization Non-Deductible Meals and Entertainment [(1/2)($15,200)] Golf Club Memberships Increase in Warranty Reserve ($6,200 - $5,400) Charitable Donations Taxable Capital Gain on Investments [(1/2)($3,900)] Deduct: Accounting Gain on Sale of Investments CCA (Note 2) 2022 Net Income Deduct: Charitable Donations 2020 Net Capital Loss (Note 3) 2020 Non-Capital Loss (All) 2022 Taxable Income

$ 87,400

$17,800 35,000 49,300 7,600 7,700 800 3,100 1,950

($ 3,900) ( 33,474)

($ 3,100) ( 1,950) ( 18,700)

123,250

( 37,374) $173,276

( 23,750) $149,526

Note 1 - As the bonus is not paid until more than 180 days from the end of the taxation year ending August 31, 2022 and it is less than 3 years after the Company's 2022 taxation year end, it cannot be deducted until it is actually paid. Note 2 - The CCA for the 8 month period ending August 31, 2022 (243 days), can be calculated as follows: Class 8 Opening UCC Additions Disposals - Lesser of: • Capital Cost = $14,200 • POD = $9,500 AccII Adjustment [(1/2)($11,000)] CCA Base Rate (Class 8) Full Year Amount Proration for Short Taxation Year Class 8 CCA

$20,500

( 9,500)

$79,800

11,000 5,500 $96,300 20% $19,260 243/365 $12,822

The total CCA for the 8 month period ending August 31, 2022 would be as follows: Class 8 CCA (Preceding Calculation) Class 10 CCA [(30%)($103,400)(243/365)] Total CCA

$12,822 20,652 $33,474

Note 3 - The 2020 net capital loss deduction is limited to the net taxable capital gain of $1,950. This deduction will leave a 2020 net capital loss balance of $4,300 ($6,250 - $1,950). The following additional points are also relevant to the solution: • Taxable dividends declared and paid are not deductible in the calculation of either net income or taxable income. • The interest expense is fully deductible. • Where a foreign exchange loss arises in the normal course of business, it is fully deductible. Type: ES Topic: Net and taxable income for corporations including reconciliation

93) Maxitech is a Canadian public company. It has always used a December 31 taxation year end. On January 1, 2022, the Company had the following carryover balances: • 2019 Net Capital Losses $75,600 • 2020 Non-Capital Losses 51,400 • 2021 Charitable Donations 4,600 In the 2022 taxation year, Maxitech has the following results for income tax purposes: Business Loss Taxable Capital Gains Allowable Capital Losses Charitable Donations Dividends received from taxable Canadian corporations

$142,000 21,400 6,500 3,200 30,400

Required: Calculate the corporation's 2022 minimum net income and taxable income. Indicate any carryover that are available to apply to other taxation years under each of the two following assumptions: A. It is the policy of the Company to maximize the use of net capital losses before using any other carryover balances. B. It is the policy of the Company to maximize the use of non-capital losses before using any other carry over balances. Answer: Part A The required calculation of 2022 net income and taxable income is as follows: ITA 3(a) Dividends ITA 3(b) Taxable Capital Gains Allowable Capital Losses ITA 3(c) ITA 3(d) Business Loss 2022 Net Income Taxable Dividends ITA 112(1) 2019 Net Capital Loss (Limited to ITA 3(b) amount)) Charitable Donations 2022 Taxable Income

$ 30,400 $21,400 ( 6,500)

The carry forward balances are as follows: 2019 Net Capital Loss Opening Balance Claimed in 2022 2019 Net Capital Loss Balance

$75,600 ( 14,900) $60,700

Total Unused Charitable Donations 2021 Balance 2022 addition Claimed in 2022 Unused Charitable Donations

$4,600 3,200 Nil $7,800

14,900 $ 45,300 ( 142,000) Nil ($ 30,400) ( 14,900) Nil Nil

$142,000 30,400 14,900 $187,300 ( 45,300) $142,000

Total Non-Capital Losses 2020 non-capital loss balance 2022 non-capital loss balance Claimed in 2022 Total Non-Capital Losses

$ 51,400 142,000 Nil $193,400

As per the policy stated in Part A, this solution maximizes the use of net capital losses. Part B The required calculation of 2022 net income and taxable income is as follows: ITA 3(a) Dividends ITA 3(b) Taxable Capital Gains Allowable Capital Losses ITA 3(c) ITA 3(d) Business Loss 2022 Net Income Taxable Dividends 2019 Net Capital Loss Charitable Donations 2022 Taxable Income

$ 30,400 $21,400 ( 6,500)

14,900 $ 45,300 ( 142,000) Nil ($ 30,400) Nil Nil Nil

The carry forward balances available at the end of the year are as follows: 2019 Net Capital Loss Opening Balance Claimed in 2022 2019 Net Capital Loss Balance

$75,600 Nil $75,600

Unused Charitable Donations 2021 Balance 2022 Balance Claimed in 2022 Total Unused Charitable Donations

$4,600 3,200 Nil $7,800

$142,000 30,400 Nil $172,400 ( 45,300) $127,100

Total Non-Capital Losses 2020 non-capital loss balance 2022 non-capital loss balance Claimed in 2022 Total Non-Capital Losses

$ 51,400 127,100 Nil $ 178,500

Note that, in contrast to Part A, the non-capital loss carryforward is $14,900 lower ($193,400 - $178,500), reflecting the fact that in this Part we were asked to maximize the use of non-capital losses, as opposed to claiming net capital losses first. As you would expect, the net capital loss balance is $14,900 higher ($75,600 - $60,700). Comparison (Not Required) A comparison of the carryover balances under the two alternatives are as follows: Part A $ 60,700 193,400 7,800 $261,900

Net Capital Losses Non-Capital Losses Unused Charitable Donations Total Carryovers

Type: ES Topic: Net and taxable income for corporations with carryovers

Part B $ 75,600 178,500 7,800 $261,900

94) In 2022, Lyric Ltd. has a 2020 net capital loss balance of $78,250, a 2020 non-capital loss balance of $61,400 and 2020 unused charitable contributions of $6,400. It is the policy of the Company to maximize the use of any net capital losses before using any other carryover balances. In 2022, the Company business was unsuccessful, resulting in a business loss of $225,000. Offsetting this were $51,500 in taxable dividends received from taxable Canadian corporations and taxable capital gains of $20,750 However, the taxable capital gains were offset in part by allowable capital losses of $3,650. Despite the business loss, the Company made charitable donations of $6,300 in 2022. Required: Calculate the corporation's 2022 minimum net income and taxable income. Indicate any carryover balances available to be applied to other taxation years.

Answer: The required calculation of 2022 net income and taxable is as follows: ITA 3(a) Dividends ITA 3(b) Taxable Capital Gains Allowable Capital Losses ITA 3(c) ITA 3(d) Business Loss 2022 Net Income Taxable Dividends ITA 112(1) 2020 Net Capital Loss (Limited to the ITA 3(b) amount) Charitable Donations 2022 Taxable Income

$ 51,500 $20,750 ( 3,650)

17,100 $ 68,600 ( 225,000) Nil ($ 51,500) ( 17,100) Nil Nil

The carry forward balances available to be applied to other taxation years are as follows: 2020 Net Capital Loss Opening Balance Less: Claimed in 2022 2020 Net Capital Loss Balance

$78,250 ( 17,100) $61,150

Charitable Donations 2020 Balance 2022 addition Less: Claimed in 2022 Total Charitable Donation Balances

$ 6,400 6,300 Nil $12,700

$ 51,500 225,000 17,100 $293,600 ( 68,600) $225,000

Non-Capital Losses 2020 Balance 2022 Balance Less: Claimed in 2022 Total Non-Capital Loss Balances

$ 61,400 225,000 N/A $286,400

As per the policy of the Company, this solution maximizes the use of the net capital losses. Type: ES Topic: Net and taxable income for corporations with carryovers

95) Lisgar Ltd. is a CCPC that was incorporated on January 1, 2019. For the first four years, the Company had accounting income, charitable donations, capital gains (losses) and taxable dividends received as follows:

2019 2020 2021 2022

Accounting Income (Loss) $165,000 ( 263,000) 127,000 ( 62,100)

Charitable Donations $4,100 7,800 5,600 3,400

Capital Gains (Losses) (Note 1) $26,000 ( 13,500) 18,400 3,700

Dividends (Note 2) $17,100 28,900 27,600 15,100

Note 1 - All of the gains and losses were as a result of the sale of investments. The accounting gains and losses are equal to the capital gains and capital losses for income tax purposes. Note 2 - All of the taxable dividends are received from taxable Canadian corporations. It is the policy of the Company to first deduct charitable donations, then non-capital losses and finally net capital losses to the extent possible to minimize taxable income. Assume that the company deducted charitable donations in determining its accounting income or loss. Required: For each of the four taxation years 2019 through 2022, provide the following information: • The minimum net income and taxable income. Indicate the amount and type of any current year losses that are available to be applied against taxable income of other taxation years. • The revised results for any taxation years to which loss carryovers are applied. • An analysis of the amount and type of carryovers that would be available to be applied against taxable income of other taxation years. Answer: 2019 Analysis Net Income and Taxable Income The required calculations for net income and taxable income are as follows: Accounting Income Charitable Donations Accounting Gain on Disposition of investments Taxable Capital Gains [(1/2)($26,000)] 2019 Net Income Charitable Donations Taxable Dividends ITA 112(1) 2019 Taxable Income

$165,000 4,100 ( 26,000) 13,000 $156,100 ( 4,100) ( 17,100) $134,900

Carryover Balances There are no loss or donation carryover amounts for 2019.

2020 Analysis Net income and taxable income are determined as follows: Accounting Loss Charitable Donations Accounting Loss on Disposition of investments 2020 Net Income Taxable Dividends ITA 112(1) 2020 Taxable Income

($263,000) 7,800 13,500 Nil ( 28,900) Nil

The allowable capital loss is equal to $6,750 [(1/2)($13,500)] which becomes a 2020 net capital loss of $6,750. The accounting loss of $263,000 includes taxable dividends received of $28,900, an accounting loss on the sale of shares of $13,500, and a deduction for charitable donations of $7,800. Given this, the business loss must be $270,600 ($263,000 + $28,900 - $13,500 - $7,800). This can be verified by the following schedule: Business Income (Loss) Taxable Dividends Accounting Loss on Disposition of investments Charitable Donations 2020 Accounting Loss

($270,600) 28,900 ( 13,500) ( 7,800) ($263,000)

Using this information, the 2020 non-capital loss would be calculated as follows: Component E ($270,600 + $28,900) Income ITA 3(c) - Dividends 2020 Non-Capital Loss

$299,500 ( 28,900) $270,600

Loss Carry Back and revision to 2019 As the Company's policy is to deduct non-capital losses prior to deducting net capital losses, there is a $134,900 carry back of the 2020 non-capital loss to 2019. The revised 2019 taxable income is as follows: 2019 Taxable Income as Originally Assessed Less: 2020 Non-Capital Loss Revised 2019 Taxable Income

$134,900 ( 134,900) Nil

2020 Carryovers The following 2020 carryovers are available to be applied to other taxation years: 2020 Charitable Donations = $7,800 - All of the charitable donations of $7,800 will be carried forward. Note that donation carryovers cannot be carry back. 2020 Net Capital Loss = $6,750 - As the non-capital loss carry back eliminated all of the 2019 taxable income, the 2020 net capital loss is $6,750. 2020 Non-Capital Loss = $135,700 - The 2020 non-capita loss is equal to $135,700 ($270,600 - $134,900).

2021 Analysis 2021 Net Income and Taxable Income The required calculations are as follows: Accounting Income Charitable Donations Accounting Gain on Disposition of investments Taxable Capital Gain [(1/2)($18,400)] 2021 Net Income Charitable Donations Taxable Dividends - ITA 112(1) 2021 Taxable Income before Carryovers 2020 Charitable Donations (All) 2020 Non-Capital Loss (Note) 2021 Taxable Income

$127,000 5,600 ( 18,400) 9,200 $123,400 ( 5,600) ( 27,600) $90,200 ( 7,800) ( 82,400) Nil

Note The amount of the 2020 non-capital loss carryover that was deducted was the amount required to reduce the 2021 taxable income to nil. Carryovers The following carryover amounts are available to be applied to other taxation years. Charitable Donations = Nil - All of the 2020 and 2021 charitable donations were deducted. 2020 Net Capital Loss = $6,750 - The 2020 net capital loss balance remains available to applied to other taxation years. 2020 Non-Capital Loss = $53,300 - The 2020 non-capital loss balance is calculated as follows: Opening balance Less: Claimed in 2024 2020 Non-capital loss balance

$135,700 ( 82,400) $ 53,300

2022 Analysis 2022 Net Income and Taxable Income The required calculations for 2022 net income and taxable income are as follows: Accounting Loss Charitable Donations Accounting Gain on Disposition of investments Taxable Capital Gain [(1/2)($3,700)] 2022 Net Income Taxable Dividends - ITA 112(1) 2022 Taxable Income

($62,100) 3,400 ( 3,700) 1,850 Nil ( 15,100) Nil

The accounting loss of $62,100 includes taxable dividends of $15,100, the accounting gain on the sale of shares of $3,700, and a deduction for charitable donations of $3,400. Given this, the business loss must be $77,500 ($62,100 + $15,100 + $3,700 - $3,400). This can be verified by the following schedule: Business Loss Taxable Dividends Accounting Gain on Disposition of investments Charitable Donations 2022 Accounting Loss

($77,500) 15,100 3,700 ( 3,400) ($62,100)

Based on this, the 2022 non-capital loss would be calculated as follows: Component E ($77,500 + $15,100) Income ITA 3(c) [$15,100 + (1/2)($3,700)] 2022 Non-Capital Loss

$92,600 ( 16,950) $75,650

As the 2021 taxable income was reduced to nil, none of the 2022 non-capital loss can be applied to that year. Carryovers The following carryover amounts are available to be applied to other taxation years. 2022 Charitable Donations = $3,400 - There is a $3,400 carry forward of charitable donations. 2020 Net Capital Loss = $6,750 - Since the corporate policy is to claim non-capital losses before net capital losses the existence of taxable capital gains in 2021 and 2022 has no impact on the application of the 2020 net capital loss since the non-capital loss is used against those taxable capital gains. As a result the 2020 net capital loss remains unchanged. Non-Capital Losses - The non-capital losses available to be applied to other taxation years are determined as follows: 2020 non-capital loss balance 2022 non-capital loss balance Total non-capital losses available

$ 53,300 75,650 $128,950

Type: ES Topic: Net and taxable income for corporations with multi-year carryovers

96) Geotech Inc. has permanent establishments (PEs) in British Columbia, Alberta, Saskatchewan, and the United States. During the current year, the company had total wages and salaries of $1,472,000 and gross revenues of $4,620,000. These were distributed among the provinces where the Company has PEs in the following manner: Province British Columbia Alberta Saskatchewan United States (USA) Total

Wages & Salaries $ 309,120 559,360 220,800 382,720 $1,472,000

Gross Revenues $1,155,000 1,570,800 877,800 1,016,400 $4,620,000

For the current taxation year, the Company's Taxable Income totaled $1,127,000. Required: Calculate the amount of the Geotech Inc.'s taxable income for the current taxation year that would be allocated to each province and the USA. Any percentages used in your calculations should be rounded to one decimal place. Ignore any foreign income tax implications. Answer: The allocation to each of these provinces and the USA are based on the following calculations:

Province British Columbia Alberta Saskatchewan United States Total

Salaries & Wages Amount Percent $ 309,120 21% 559,360 38% 220,800 15% 382,720 26% $1,472,000 100%

Gross Revenues Amount Percent $1,155,000 25% 1,570,800 34% 877,800 19% 1,016,400 22% $4,620,000 100%

The province by province average of the two percentages, calculated above, would be used to allocate the total taxable income of $1,127,000 as follows:

Province British Columbia Alberta Saskatchewan United States Total

Wages 21% 38% 15% 26% 100%

Revenues 25% 34% 19% 22% 100%

Type: ES Topic: Corporate tax - geographical allocation of income

Average 23% 36% 17% 24% 100%

Taxable Income $ 259,210 405,720 191,590 270,480 $1,127,000

97) Wankana Ltd. is a CCPC that uses a December 31 taxation year end. Information relevant to the Company's 2022 taxation year is as follows. 1. Taxable Income is $1,235,000. This was made up of Canadian active business income of $1,172,000, along with foreign business income of $63,000. The jurisdiction in which the foreign business income was earned withheld $12,600 in foreign income tax. 2. Gross revenues were $3,450,000, with $621,000 of this total earned through a PE outside of Canada. Total salaries and wages amounted to $561,000, with $67,320 of this total paid to employees reporting to the PE outside of Canada. 3. Wankana is associated with four companies. Wankana is allocated $100,000 of the annual business limit. The Taxable Capital Employed in Canada (TCEC) for Wankana and the associated companies is $13,477,000 for 2022 and $12,417,000 in 2021. 4. The Adjusted Aggregate Investment Income (AAII) for Wankana and its associated companies is nil for both the 2021 and 2022 taxation year. Required: Calculate Wankana's minimum 2022 federal income tax payable. Assume that Wankana's foreign tax credit is equal to the amount of foreign income taxes paid.

Answer: Wankana's 2022 federal income tax payable would be calculated as follows: Base Amount [(38%)($1,235,000)] Federal Abatement [(10%)(85%)($1,235,000)] (Note One) Foreign Business Tax Credit (Assumed equal to the foreign income tax paid) SBD (Note Two) GRR (Note Three) 2022 Federal Income Tax Payable

$469,300 ( 104,975) ( 12,600) ( 9,816) ( 153,834) $188,075

Note One - The federal abatement must be reduced because of the foreign business income earned through a PE. The percentage would be calculated as follows: Canadian Gross Revenues as a percentage of total [($3,450,000 - $621,000) ÷ $3,450,000] Canadian Wages and Salaries as a percentage of total [($561,000 - $67,320) ÷ $561,000]

82% 88%

Using these figures, the average is 85% [(82% + 88%) ÷ 2]. Note Two - Since Wankana and its associated companies have combined TCEC for 2021 that was greater than $10 million, its SBD is reduced. The B component of the ITA 125(5.1) reduction formula is $5,438 [(.00225)($12,417,000 - $10,000,000)]. In addition, because of Wankana's association with other companies, the A component of the formula would be reduced to $100,000 [($500,000)(20%)]. Given these considerations, the reduction would be calculated as follows: [($100,000)($5,438 ÷ $11,250)] = $48,338 Reduction Using this information, Wankana's SBD is equal to 19% of the least of: Canadian Active Business Income (Given) Taxable Income Less: Foreign Business Tax Credit Adjustment [(4)($12,600)] Reduced Annual Business Limit ($100,000 - $48,338)

$1,235,000 ( 50,400)

$1,172,000

$1,184,600 $51,662

The small business deduction would be $9,816 [(19%)($51,662)]. Note Three - The GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Full Rate Taxable Income Rate GRR

$1,235,000 ( 51,662) $1,183,338 13% $ 153,834

Type: ES Topic: Corporate tax payable - calculating the Part I tax

98) For the 2022 taxation year, Devza Ltd. has a net income of $792,400. This consists of $746,300 of Canadian active business income, and $46,100 of taxable dividends received from various Canadian public companies. Based on the formula that is included in the Income Tax Regulations, $584,600 of the active business income qualifies as M&P profits. Devza also has a 2020 non-capital loss balance of $123,450. Management intends to deduct the maximum amount of the 2020 non-capital loss in its 2022 taxation year. The Company makes contributions to registered charities $102,600 in 2022. Devza Ltd. is a CCPC that uses a December 31 taxation year end. It is associated with one other company and the two companies have agreed that Devza will be allocated $200,000 of the annual business limit. The combined Taxable Capital Employed In Canada (TCEC) for Devza and its associated company is less than $10 million in both 2021 and 2022. The combined Adjusted Aggregate Investment Income (AAII) of the two companies is $44,000 in 2021. Required: A. Determine the minimum 2022 taxable income and federal income tax payable for Devza Ltd. Show all calculations, whether or not they are necessary to the final solution. As the corporation carries on business in a province that has a reduced provincial income tax rate for M&P activity, a separate calculation of the federal M&P deduction is required. B. Assume that none of the active business income was related to M&P. How would your answer change in these circumstances? Answer: Part A The minimum 2022 taxable income for Devza Ltd. would be calculated as follows: 2022 Net Income Taxable Income Deductions: Taxable Dividends - ITA 112(1) Charitable Donations 2020 Non-Capital Loss 2022 Taxable Income

$792,400 ($ 46,100) ( 102,600) ( 123,450)

( 272,150) $520,250

Based on this, the Company's 2022 Federal Income Tax Payable would be calculated as follows: Base Amount [(38%)($520,250)] Federal Abatement [(10%)($520,250)] SBD (Note 1) M&P Deduction (Note 2) GRR (Note 3) 2022 Federal Income Tax Payable

$197,695 ( 52,025) ( 38,000) ( 41,633) Nil $ 66,037

Note 1 - The SBD is based on the least of the following: Canadian Active Business Income Taxable Income (no foreign tax credit adjustment needed) Annual Business Limit

$746,300 520,250 200,000

The SBD is equal to $38,000 [(19%)($200,000)]. Note 2 - The base for the M&P deduction would be the lesser of: M&P Profits (Given) Amount Eligible for the SBD

$584,600 ( 200,000)

$384,600

Taxable Income Amount Eligible for the SBD Aggregate Investment Income

$520,250 ( 200,000) Nil

$320,250

Based on these amounts, the deduction would be equal to $41,633 [(13%)($320,250)]. Note 3 - The GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction Base

$520,250 ( 200,000) ( 320,250) Nil

Part B While the M&P deduction would be eliminated, the GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Base Rate GRR

$520,250 ( 200,000) $320,250 13% $ 41,633

Using these revised amounts, the final 2022 Federal Income Tax Payable would be unchanged from Part A. This is shown in the following table: Base Amount [(38%)($520,250)] Federal Abatement [(10%)($520,250)] SBD (Note 1) M&P Deduction GRR 2022 Federal Income Tax Payable

$197,695 ( 52,025) ( 38,000) Nil ( 41,633) $ 66,037

Type: ES Topic: Corporate tax payable - calculating the Part I tax

99) Worldwide Enterprises is a CCPC that was incorporated 15 years ago. Its head office is situated in Vancouver and it has branches (permanent establishments (PEs)) in both Seattle, Washington and Portland, Oregon. Its taxation year end is December 31. All of the Company's Canadian income is active business income. The Company's 2022 net income and taxable income is $219,000. This amount includes $32,000 (Canadian) in active business income that was earned by the two PEs in the United States. U.S. income taxes of $9,600 were paid with respect to the $32,000 earned in the U.S. For purposes of calculating the federal abatement, assume that 90% of the Company's taxable income is allocated to a province or territory. Worldwide's Taxable Capital Employed In Canada (TCEC) was $8 million in both 2021 and 2022. Adjusted Aggregate Investment Income (AAII) was nil in both 2021 and 2022. Required: A. Calculate Worldwide Enterprises' 2022 federal income tax payable. Assume the foreign business income tax credit is equal to the foreign income tax paid. B. Using the amounts determined in Part A, calculate the actual foreign tax credit. Show all calculations, whether or not they are necessary to the final solution.

Answer: Part A - 2022 Federal Income Tax Payable The calculation of the 2022 Federal Income Tax Payable would be as follows: Canadian Active Business Income Foreign Income (U.S. PEs) 2022 Net Income and Taxable Income

$187,000 32,000 $219,000

Base Amount [(38%)($219,000)] Federal Abatement [(10%)(90%)($219,000)] - Note One SBD - Note Two GRR - Note Three Foreign Business Income Tax Credit — Given 2022 Federal Income Tax Payable

$ 83,220 ( 19,710) ( 34,314) ( 4,992) ( 9,600) $ 14,604

Note One - Since only 90% of the Company's 2021 taxable income is allocated to Canadian provinces or territories, the abatement is limited to 90% of the allowable amount. Note Two - The SBD would be equal to 19% of the least of: 1. Canadian Active Business Income 2. Taxable Income $219,000 Less [(4)($9,600)] ( 38,400) 3. Annual Business Limit

$187,000 $180,600 $500,000

The least of the three amounts is $180,600, and 19% of this amount is $34,314. Note Three - The GRR would be calculated as follows: Taxable Income Less: Amount Eligible for the SBD Full Rate Taxable Income Rate GRR

$219,000 ( 180,600) $ 38,400 13% $ 4,992

Part B - Foreign Tax Credit The foreign business income tax credit is $9,600, the least of the following three amounts: 1. Actual Foreign Income Tax Paid $9,600 2. An amount calculated as follows: [Foreign Business Income ÷ Adjusted Net Income][Tax Otherwise Payable] = [($32,000 ÷ $219,000)($83,220 - $4,992)] $11,431 3. Tax Otherwise Payable, Less Non-Business Foreign Tax Credit Deducted [($83,220 - $4,992) - Nil] $78,228 Note that the tests of the foreign tax credit amounts include the effect of the GRR. Type: ES Topic: Corporate tax payable - calculating the Part I tax

100) Zenox Ltd. is a CCPC with all of its business located in Saskatchewan. Sharon Zenox is the sole shareholder of the company. The Company has a 2019 non-capital loss balance of $54,000 which it intends to claim in 2022. Zenox's 2022 net income is $545,000. This is made up of $523,000 in active business income and $22,000 in taxable dividends from various Canadian public companies. It has been determined that $416,000 of the active business income is from M&P activity. The Company also donated $46,000 to a registered Canadian charity in 2022. Zenox Ltd. is associated with one other CCPC. The two companies have agreed that each company will be allocated half of the annual business limit. The combined Taxable Capital Employed In Canada (TCEC) of the two companies is less than $10 million in both 2021 and 2022. The combined Adjusted Aggregate Investment Income (AAII) of the two companies was $36,000 in 2021. Required: Determine the minimum 2022 taxable income and federal income tax payable. Show all calculations, whether or not they are necessary to the final solution. As the corporation carries on M&P activity in a province with a reduced provincial income tax rate for M&P activity, a separate calculation of the federal M&P deduction is required.

Answer: The minimum 2022 taxable income for Zenox Ltd. would be calculated as follows: 2022 Net Income Taxable Income Deductions: Taxable Dividends - ITA 112(1) Charitable Donations 2019 Non-Capital Loss 2022 Taxable Income

$545,000 ($22,000) ( 46,000) ( 54,000)

( 122,000) $423,000

Based on this, the Company's 2022 Federal Income Tax Payable would be calculated as follows: Base Amount [(38%)($423,000)] Federal Abatement [(10%)($423,000)] SBD (Note 1) M&P Deduction (Note 2) GRR (Note 3) 2022 Federal Income Tax Payable

$160,740 ( 42,300) ( 47,500) ( 21,580) ( 910) $ 48,450

Note 1 - The SBD is based on 19% of the least of the following: Active Business Income Taxable Income (no foreign tax credit adjustment needed) Annual Business Limit [(1/2)($500,000)]

$523,000 423,000 250,000

The SBD is equal to $47,500 [(19%)($250,000)]. Note 2 - The base for the M&P Deduction would be the lesser of: M&P Profits (Given) Amount Eligible for the SBD

$416,000 ( 250,000)

$166,000

Taxable Income Amount Eligible for the SBD

$423,000 ( 250,000)

$173,000

Based on these amounts, the deduction is equal to $21,580 [(13%)($166,000)]. Note 3 - The GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction Full Rate Taxable Income Rate GRR

$423,000 ( 250,000) ( 166,000) $ 7,000 13% $ 910

Type: ES Topic: Corporate tax payable - calculating the Part I tax

101) For the taxation year ending December 31, 2022, the income statement of Morland Industries Ltd. (MIL), a CCPC, prepared in accordance with ASPE, is as follows: Business Revenues Business Expenses: Cost of Goods Sold Selling and Administrative Expenses Amortization Expense Other Expenses Business Income Other Income and Losses Foreign Business Income (Net of $2,400 in foreign income tax) Taxable Dividends Gain on sale of Building Gain on sale of Vacant Land Loss on sale of Vehicles 2022 Accounting Income before Income Tax

$1,870,100 ($456,000) ( 270,000) ( 285,000) ( 246,000)

( 1,257,000) $ 613,100

$ 9,400 37,000 75,000 51,000 ( 40,000)

132,400 $ 745,500

Other Information relevant to the 2022 taxation year: 1. On January 1, 2022, MIL had the following UCC balances: Class 1 Class 8 Class 10 Class 13

$819,354 985,261 96,417 187,000

The Class 1 balance relates to a single building purchased at a cost of $1,145,000 - the cost of the land was $200,000 and the building $945,000. On February 1, 2022, this building was sold for $1,185,000, which included $225,000 for the land and $960,000 for the building. For accounting purposes, the carrying value of land was $200,000 and $910,000 for the building. The old building is replaced on February 15, 2022 with a new building acquired at a cost of $1,425,000, of which $260,000 is for the land and $1,165,000 for the building. The building is used 95% for M&P activity and an election is made to include the building in a separate Class 1. There are no dispositions of Class 8 property during the year but there are purchases totaling $98,000. As the Company has decided to lease all of its vehicles in the future, all of the Class 10 properties are sold during the year. The capital cost of these properties was $193,000 and the POD was $77,000. The carrying value of the Class 10 properties for accounting purposes was $117,000. The Class 13 balance relates to a single lease that began on January 1, 2020. The lease has an initial term of 7 years, with two successive options to renew, for 3 years each. Capital expenditures on the lease were $180,000 in 2020 and $36,000 in 2021. There were no capital expenditures made in 2022. The write-off of these expenditures for accounting purposes is included in Amortization Expense. It is the policy of MIL to deduct maximum CCA in each year.

2. Some years ago, MIL acquired land for $572,000. Until recently, they had intended to construct a new building for their business on this site. However, with the 2022 purchase of a new building, their plans changed and the company sold the land for $623,000. The buyer provided a $50,000 cash down payment, and MIL provided a mortgage for the balance of $573,000. The balance will be paid in 10 equal annual instalments beginning in 2023. 3. Selling and Administrative expenses include $32,000 in business meals and entertainment and $14,600 for membership fees that were paid for several employees in a local golf and country club. This club is used for entertaining business clients. 4. Other Expenses also includes the following: Bond discount amortization Donations to registered charities Interest on late income tax instalments Interest on late municipal tax payments

$3,500 16,900 900 475

5. The Company spent $15,000 during the year on landscaping for its new building. For accounting purposes this was treated as an asset. MIL will not amortize this balance for accounting purposes as it believes the work has an unlimited life. 6. MIL has a 2020 net capital loss balance of $128,000 and a 2020 non-capital loss balance of $46,800. 7. MIL has active business income in Canada of $613,168, none of which results from M&P activity. 8. 93% of MIL's taxable income is earned in a province or territory. 9. MIL is associated with several other CCPCs. MIL's share of the group's annual business limit for 2022 is $150,000. The combined Taxable Capital Employed In Canada (TCEC) of the group of associated companies is less than $10 million in both 2021 and 2022. 10. The combined Adjusted Aggregate Investment Income (AAII) of the group of associated companies is equal to $48,500 for 2021. Required: A. Calculate the minimum 2022 net income for Morland Industries Ltd. In addition, calculate the UCC for each class of property as of January 1, 2023. B. Calculate the minimum 2022 taxable income for Morland Industries Ltd. for 2022. Indicate the amount, and type, of any carryovers that are available to be applied to other taxation years. C. Calculate the minimum 2022 federal income tax payable for Morland Industries Ltd. Assume that the foreign business tax credit is equal to the foreign income taxes paid.

Answer: Note to Instructor - As the ART is not covered until Chapter 13, this problem does not require the calculation of the ART which would be nil due to the deduction of the 2020 net capital loss. Part A - 2022 Net Income The calculation of MIL's 2022 Net Income would be as follows: Accounting Income before Income Tax Additions: Amortization Expense (Income Statement) Taxable Capital Gain on Building (Note 1) Taxable Capital Gain on Land (Note 1) Taxable Capital Gain on Vacant Land (Note 2) Recapture on Building (Note 3) Accounting Loss on Vehicles (Income Statement) Non-Deductible Meals and Entertainment (50% of $32,000) Golf Club Membership Fees Bond Discount Amortization Donations to Registered Charities Interest on Late Income Tax Instalments Foreign Income Tax Paid Deductions: Accounting Gain on Building (Income Statement) Accounting Gain on Vacant Land (Income Statement) Landscaping CCA (Note 3) Terminal Loss (Note 3) 2021 Net Income

$ 745,500 $285,000 7,500 12,500 5,100 125,646 40,000 16,000 14,600 3,500 16,900 900 2,400

530,046 $1,275,546

($ 75,000) ( 51,000) ( 15,000) ( 423,202) ( 19,417)

( 583,619) $ 691,927

Note 1 - While the accounting gain on the building is calculated on the combined value of the land and building, separate income tax calculations are required for each property. The taxable capital gain on the building is calculated as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$960,000 ( 945,000) $15,000 1/2 $ 7,500

In addition to the taxable capital gain on the building, there will be a taxable capital gain on the land of $12,500 [(1/2)($225,000 - $200,000)]

Note 2 - There is a capital gain on the vacant land of $51,000 ($623,000 - $572,000). However, as part of the POD are only receivable after the end of 2022, a capital gains reserve can be claimed. The reserve will be the lesser of the following two amounts: • [($51,000)($573,000 ÷ $623,000)] = $46,907 • [($51,000)(20%)(4 - 0] = $40,800 Deducting the lesser amount results in a capital gain of $10,200 ($51,000 - $40,800), and a taxable capital gain of $5,100 [(1/2)($10,200)]. Note 3 - Maximum CCA and other related amounts are found in the tables which follow. Note that the new building was added to a separate Class in order to qualify for the enhanced CCA rate of 10%. This resulted in recapture on the disposition of the old building. Class 1 - Old Building January 1, 2022 UCC Balance Disposition - Lesser of: • POD = $960,000 • Capital Cost = $945,000 Negative ending UCC Balance Recapture January 1, 2023 UCC Balance

( 945,000) ($125,646) 125,646 Nil

Class 1 - New Building New Class 1 Addition AccII Adjustment Balance CCA [(10%)($1,747,500)] AccII Adjustment Reversal January 1, 2023 UCC Balance

$1,165,000 582,500 $1,747,500 ( 174,750) ( 582,500) $ 990,250

Class 8 January 1, 2022 UCC Balance Additions AccII Adjustment CCA Base CCA [(20%)($1,132,261)] AccII Adjustment Reversal January 1, 2023 UCC Balance

$ 985,261 98,000 49,000 $1,132,261 ( 226,452) ( 49,000) $ 856,809

$819,354

Class 10 January 1, 2022 UCC Balance Disposition - Lesser of: • POD = $77,000 • Capital Cost = $193,000 Positive Balance with no property remaining Terminal Loss January 1, 2023 UCC Balance

$96,417

( 77,000) $ 19,417 ( 19,417) Nil

Class 13 January 1, 2022 UCC Balance 2022 CCA: 2020 Expenditures ($180,000 ÷ 10 Years) 2021 Expenditures ($36,000 ÷ 9 Years) January 1, 2023 UCC Balance

$187,000 ( 18,000) ( 4,000) $165,000

Summary of CCA and UCC Results Class Class 1 - Old (Recapture = $125,646) Class 1 — New Class 8 Class 10 (Terminal Loss = $19,417) Class 13 ($18,000 + $4,000) Total

Maximum CCA Nil $174,750 226,452 Nil 22,000 $423,202

UCC Nil $990,250 856,809 Nil 165,000

Part B - 2022 Taxable Income MIL's 2022 taxable income would be calculated as follows: 2022 Net Income Taxable Dividends - ITA 112(1) Contributions to Registered Charities 2020 Net Capital Loss (Note 4) 2020 Non-Capital Loss (All) 2022 Taxable Income

$691,927 ( 37,000) ( 16,900) ( 25,100) ( 46,800) $566,127

Note 4 - MIL's 2022 net taxable capital gains are calculated as follows: Taxable Capital Gain on Building Taxable Capital Gain on Building Land Taxable Capital Gain on Vacant Land 2022 Net Taxable Capital Gains

$ 7,500 12,500 5,100 $25,100

While there is a 2020 net capital loss balance of $128,000, the amount that can be claimed is limited to the $25,100 in net taxable capital gains for the year. Part B - Loss Carryovers that can be applied to other taxation years The 2020 net capital loss balance is $102,900 ($128,000 - $25,100). The 2020 non-capital balance is nil after claiming the full remaining balance in 2022.

Part C - 2022 Federal Income Tax Payable MIL's 2022 Federal Income Tax Payable would be calculated as follows: Base Amount [(38%)($566,127)] Federal Abatement [(10%)(93%)($566,127)] SBD (Note 5) GRR (Note 6) Foreign Business Tax Credit (Given) 2022 Federal Income Tax Payable

$215,128 ( 52,650) ( 28,500) ( 54,097) ( 2,400) $ 77,481

Note 5 - The amount eligible for the SBD would be the least of the following amounts: Canadian Source Active Business Income (Given) Taxable Income Less: 4 Times the Foreign Business Tax Credit [(4)($2,400)] Adjusted Taxable Income

$613,168 $566,127 ( 9,600) $556,527

Annual Business Limit (Given)

$150,000

The least of these amounts is $150,000, resulting in a SBD of $28,500 [(19%)($150,000)]. Note 6 - The GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Full Rate Taxable Income Rate GRR $ 54,097

$566,127 ( 150,000) $416,127 13%

Type: ES Topic: Comprehensive corporate Part I income tax payable

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 13 Taxation of Corporate Investment Income 13.1 Online Exercises 1) The concept of integration is central to the Canadian system of corporate income taxation. Briefly explain the basic objective of integration. Answer: The basic objective of integration is to neutralize the effect of incorporating a source of income. That is, integration procedures attempt to ensure that, for a given income source, the after tax amount that will be received by an individual will be the same, whether the income is received directly or, alternatively, earned by a corporation. This would mean that the individual income taxes paid on income received directly would be equal to the combined corporate and individual income tax paid on income flowed through a corporation as a taxable dividend to the individual as a shareholder. Integration means that the income tax paid by an individual who earns a source of income directly equals the corporate income tax paid on that same income when earned by a corporation plus the additional income tax paid by the individual once all of the after-tax corporate income is paid to the individual as a taxable dividend. In a somewhat broader sense, full integration would imply that the timing of the income tax payments would be the same under the two alternatives. That is, integration should serve to prevent a corporation from being used to defer payment of part of the total income tax obligation. Type: ES Topic: Integration - general concepts

2) Explain, without using examples, how the dividend gross up and tax credit procedures assist in achieving the goal of integration of taxing CCPCs and their shareholders. Assume any dividends paid are non-eligible. Answer: The 15% gross up of dividends received is based on the assumption of a notional 13.04% income tax rate applied to the corporation. When this rate applies, the 15% gross up restores the taxable income of the individual to the pre-tax income earned by the corporation. After the individual shareholder's income tax is calculated, a dividend tax credit is claimed. At the federal level, this credit equals 9/13 of the gross up. In those cases where the provincial tax credit is equal to 4/13 of the gross up, the result is a combined credit that is equal to the gross up. As the 15% gross up reflects the corporate income tax paid at a 13.04% rate, this combined credit will eliminate the effect of corporate income tax, thereby achieving the basic goal of integration, assuring that the same amount of income tax will be paid whether the income is received directly or channeled through a corporation. Type: ES Topic: Integration - general concepts

3) What are the components of "aggregate investment income" as described in ITA 129(4)? Answer: As defined in ITA 129(4), aggregate investment income is made up of: • Net taxable capital gains for the year, reduced by any net capital loss deducted in the year. • Property income other than capital dividends and taxable dividends that are eligible for a taxable income deduction. • minus Property losses. Type: ES Topic: Corporate tax - aggregate investment income

4) What are the major differences between aggregate investment income as described in ITA 129(4), and income from property as described in subdivision b of the ITA. Answer: Aggregate investment income includes net taxable capital gains, reduced by any net capital losses deducted for the year. Property income does not include taxable capital gains. These items are covered in subdivision c of the Income Tax Act. Property income includes dividends from Canadian corporations regardless of whether the dividends entitle a corporation to a taxable income deduction. Aggregate investment income does not include taxable dividends that entitle the corporation to a taxable income deduction. Type: ES Topic: Corporate tax - aggregate investment income

5) In the absence of the Part I refundable tax, the total personal and corporate income taxes payable on investment income earned by, and flowed through, a CCPC could approach an unreasonably high 70%. While the Part I refundable tax reduces this combined rate to a more reasonable level, the same result could have been achieved by lowering the income tax rate applicable to the investment income of a CCPC. Why did the government not adopt this less complex alternative? Answer: When a corporation's income is distributed to its shareholders, the Part I refund lowers the effective corporate income tax rate to about 20%. However, until the income is distributed, the rate is generally over 50%, depending on the province or territory in which the corporation's income is taxed. As this rate is similar to that which is applicable on the direct receipt of investment income, it makes no economic sense to place investments in a corporation unless there is an intent to distribute most of the resulting income to shareholders. If, alternatively, the corporate income tax rate had been lowered to 20%, the corporation could be used to defer a significant portion of the personal income tax on investment income. While the total tax on the flow through of income to the individual would be at the appropriate rate, the portion that is to be paid by the individual shareholder would be deferred until taxable dividends were paid. The policy goal of using a refundable tax, as opposed to a lower corporate tax rate, is to prevent this deferral. Type: ES Topic: Integration - general concepts

6) What is the objective of the Additional Refundable Tax (ART)? Briefly explain your conclusion. Answer: The objective is to discourage the use of a corporation to shelter income from property. This additional tax is assessed on the aggregate investment income of a CCPC in order to raise the combined federal/provincial/territorial income tax rate on investment income of such companies to a level that is as high or higher than the combined federal/provincial/territorial income tax rate that would be paid by an individual in the highest income tax bracket on direct receipt of the income. When this is accomplished, the individual has no tax incentive to channel this type of income into a CCPC. In the absence of this additional income tax, the corporate income tax rate could be lower than the individual income tax rate, resulting in a deferral of income tax until such time as the income is distributed as taxable dividends. Type: ES Topic: Corporate tax - additional refundable tax (ART)

7) What is the objective of the Part IV Tax on certain types of taxable dividends received by private and subject companies? Briefly explain your conclusion. Answer: The problem is that inter-corporate taxable dividends are free of Part I tax because of the taxable income deduction of ITA 112(1). If the taxable dividends are portfolio dividends or dividends on which the payor corporation has received a dividend refund, the result will be a significant amount of tax deferral, relative to direct receipt of such dividends, through the use of a corporation. Imposing a Part IV tax on portfolio taxable dividends and taxable dividends received from a connected corporation, on which the payor received a refund (taxable dividends paid by a private corporation or a subject corporation out of investment income) corrects this imperfection in the integration system. By making the Part IV tax refundable, the goal of having the total corporate and personal income taxes approximate the income tax that would be imposed on an individual receiving the income directly is achieved. Type: ES Topic: Corporate tax - Part IV tax (basic rules)

8) With respect to Part IV tax, what is a "subject corporation"? How does the Part IV legislation classify such companies? Answer: A subject corporation is defined in ITA 186(3) as follows: Subject Corporation means a corporation (other than a private corporation) resident in Canada and controlled, whether because of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts). For purposes of Part IV tax, subject corporations are treated the same as private corporations, despite the fact that their shares are technically publicly traded. Type: ES Topic: Corporate tax - Part IV "Subject Corporation"

9) What is a connected corporation? Under what circumstances will Part IV tax apply to taxable dividends received from connected corporations? Answer: A connected corporation is either: • a controlled corporation, where control represents ownership of more than 50% of the voting shares by any combination of the other corporation and persons with whom it does not deal at arm's length, or • a corporation in which the other corporation owns more than 10% of the voting shares, and more than 10% of the FMV of all of the issued shares of the corporation. Taxable dividends from such corporations are subject to Part IV tax to the extent they are the basis for a dividend refund received by the dividend paying corporation. Type: ES Topic: Corporate tax - Part IV "Connected Corporation"

10) Described the types of taxable dividends to which Part IV tax applies. Answer: As described in your text, the circumstances are as follows: • A taxable dividend received from an unconnected company that is deductible in the calculation of the recipient corporation's taxable income. While the ITA refers to such dividends as "assessable dividends", it is a common practice to refer to such dividends as "portfolio dividends". • The taxable dividend is received from a connected company, and the company paying the dividend received a dividend refund as a consequence of making the dividend payment. Type: ES Topic: Corporate tax - Part IV "Assessable Dividends"

11) A corporation can apply non-capital or farm losses to reduce the amount of Part IV tax. Would you recommend applying these losses to reduce Part IV tax? Answer: In general, applying losses to reduce Part IV tax would not be advantageous. The reason being that, if this option is chosen, the corporation has effectively used a possible permanent reduction in future income taxes to acquire a reduction of Part IV tax that could otherwise ultimately be refunded. This would only make sense in situations where the losses were about to expire, or where the company did not expect to have sufficient taxable income in the carry forward period. With the non-capital loss carry forward period set at 20 years, this is unlikely to be a very useful strategy. Type: ES Topic: Corporate tax - Part IV loss carryovers ITA 186(1)(c) & (d)

12) The first component of the formula for determining the refundable portion of Part I tax, 30-2/3% of aggregate investment income, is reduced by the amount, if any, by which the foreign non-business income tax credit exceeds 8% of its foreign investment income for the year. What objective is achieved by subtracting this amount? Answer: The 30-2/3% rate that is applied to aggregate investment income is based on the notional assumption that such income is taxed at a combined federal/provincial rate of 50-2/3%. Providing a 302/3% refund reduces the effective rate on this income to 20%. Note that this was not changed to reflect the fact that the rate that is inherent in the gross up and tax credit procedures for non-eligible dividends has been reduced from 20% to 13.04%. The subtraction is based on the notional assumption that foreign non-business income is only taxed in Canada at a combined federal/provincial rate of 38-2/3 %. If the foreign tax credit is less than or equal to 8%, the result will reduce the rate on such income to 30-2/3%, the rate applicable to the refund. In these circumstances, no deduction is required. However, if the foreign tax credit exceeds 8%, the rate of Canadian tax paid on foreign non-business income falls below the refund rate of 30-2/3%. Given this, the formula requires that the excess of the foreign non-business tax credit over 8% of the foreign investment income be deducted. If this were not the case, the dividend refund could exceed the amount of Canadian income taxes. Type: ES Topic: Corporate tax - refundable Part I tax on investment income

13) For a CCPC earning investment income, there may be a dividend refund of income taxes paid when the company pays taxable dividends. How is the amount of the dividend refund determined? Answer: To the extent that some of the taxable dividends paid will be designated as eligible, the dividend refund will be the lesser of: • 38-1/3% of the eligible dividends paid; and • the balance in the Eligible RDTOH. If non-eligible dividends are paid, the refund on these dividends will consist of two components. Component 1 will be the lesser of: • 38-1/3% of the non-eligible dividends paid; and • the balance in the Non-Eligible RDTOH If 38-1/3% of the non-eligible dividends paid in the year exceeds the balance in the Non-Eligible RDTOH, there will be a component 2 to the refund. This component will be the lesser of: • the amount of the excess; and • any balance that remains in the Eligible RDTOH after subtracting the dividend refund on eligible dividends designated. Type: ES Topic: Corporate tax - dividend refund ITA 129

14) A CCPC can only designate dividends as eligible to the extent of the GRIP balance on the last day of the taxation year. Indicate the two most common sources of additions to the GRIP account. Answer: The two most common additions to the GRIP account balance of a CCPC would be: • 72% of the excess of taxable income over the sum of the amount of income that is eligible for the SBD plus the amount of AII where the AII is less than taxable income. • The full amount of eligible dividends received from other corporations. Type: ES Topic: GRIP & eligible dividends

15) What would be one of the most common additions to a public corporation's LRIP account balance? Answer: The most common addition would be non-eligible dividends received from a CCPC. The other possibility would be income retained by a CCPC before it became a public company. Type: ES Topic: LRIP & non-eligible dividends

16) Briefly describe the calculation of the Part III.1 tax on excessive eligible dividend designations (EEDD) for a CCPC. Answer: For a CCPC, the EEDD (Part III.1) tax is equal to 20% of the excess of the eligible dividends designated during the year, over the end-of-year balance in the CCPC's GRIP account. If the CRA concludes that the EEDD was a deliberate attempt to manipulate the CCPC's GRIP account, the rate goes to 30%. Part III.1 also includes a mechanism to reverse the 20% penalty tax. Type: ES Topic: Corporate tax - Part III.1 excessive eligible dividend designation (EEDD)

17) Briefly describe the calculation of the Part III.1 tax on excessive eligible dividend designations (EEDD) for a public company. Answer: For a public company, the EEDD (Part III.1) tax is equal to 20% of the lesser of the amount of the eligible dividends designated and the balance in the company's LRIP account at the time the eligible dividend was paid. If the CRA concludes that the EEDD was a deliberate attempt to manipulate the company's LRIP account, the rate goes to 30%. Part III.1 tax also includes a mechanism to reverse the 20% penalty tax. Type: ES Topic: Corporate tax - Part III.1 excessive eligible dividend designation (EEDD)

18) For taxable dividends received in a specific province, the after tax rates of return to individual investors are higher for eligible dividends received than for non-eligible dividends. Answer: TRUE Explanation: After tax rates of return are higher for eligible dividends because the underlying corporate income is subject to high corporate income tax rates which means that individual shareholders pay a smaller share of the integrated income tax. Type: TF Topic: Dividends - eligible & non-eligible

19) Taxable dividends paid by public companies will always be eligible dividends. Answer: FALSE Explanation: If public company has an LRIP balance, any dividend paid will be a non-eligible dividend. Type: TF Topic: Dividends - eligible & non-eligible

20) As defined in ITA 129(4), aggregate investment income (AII) is reduced by any net capital losses that are deducted for the year. Answer: TRUE Explanation: AII is reduced by any net capital losses that are deducted for the year. Type: TF Topic: Corporate tax - aggregate investment income

21) The objective of the ART is to discourage individuals from using a CCPC to defer income tax on investment income. Answer: TRUE Explanation: The objective of the ART is to discourage individuals from using a CCPC to defer income tax on investment income. Type: TF Topic: Corporate tax - additional refundable tax (ART)

22) Part IV tax is assessed on all taxable dividends received from connected corporations. Answer: FALSE Explanation: It is only assessed when the connected company has received a dividend refund as a result of paying the dividend. Type: TF Topic: Corporate tax - Part IV tax (basic rules)

23) An investee company can be a connected company, even if the investor company does not have legal control (more than half of the voting shares). Answer: TRUE Explanation: The definition of a connected company includes a corporation in which the other corporation owns more than 10% of the voting shares, and more than 10% of the FMV of all of the issued shares of the corporation. Type: TF Topic: Corporate tax - Part IV "Connected Corporation"

24) The refundable portion of a corporation's Part I income tax for a taxation year will be added to its Eligible RDTOH. Answer: FALSE Explanation: It will be added to the Non-Eligible RDTOH. Type: TF Topic: Corporate tax - eligible & non-eligible RDTOH

25) The total dividend refund for a taxation year cannot exceed the combined balance of the Eligible RDTOH and the Non-Eligible RDTOH. Answer: TRUE Explanation: The total dividend refund for a taxation year cannot exceed the combined balance of the Eligible RDTOH and the Non-Eligible RDTOH. Type: TF Topic: Corporate tax - eligible & non-eligible RDTOH

26) If a CCPC has a GRIP balance, it must designate any dividend that is paid as eligible until that balance is eliminated. Answer: FALSE Explanation: Even if the CCPC has a GRIP balance, the designation of a dividend as eligible is discretionary. There is no required designation. Type: TF Topic: Dividends - eligible & non-eligible

27) A CCPC's GRIP balance is reduced by taxable dividends that were designated as eligible in the preceding taxation year. Answer: TRUE Explanation: A CCPC's GRIP account balance is reduced by dividends that were designated as eligible in the preceding taxation year. Type: TF Topic: GRIP & eligible dividends

28) The major goal of integration is to ensure that, if an individual has a given source of income, that the individual will retain the same after tax amount of cash from that source, without regard to whether the income is earned without a corporation or the income is routed through a corporation prior to his ultimate receipt of the after tax amount as a taxable dividend. Answer: TRUE Type: TF Topic: Integration - general concepts

29) For integration to work properly for a CCPC whose income qualifies for the SBD, the combined federal/provincial/territorial corporate income tax rate must be equal to 13.04%, while the combined federal/provincial/territorial dividend tax credit must be equal to 9/13 of the gross up. Answer: FALSE Explanation: The combined federal/provincial/territorial dividend tax credit must be equal to 100% of the gross up. Type: TF Topic: Integration - general concepts

30) A corporation's dividend refund for a taxation year on eligible dividends will be the lesser of the balance in the Non-Eligible RDTOH account at the beginning of the year and 38-1/3% of the eligible dividends paid for the year. Answer: FALSE Explanation: It is the Eligible RDTOH balance at the end of the taxation year that is relevant. Type: TF Topic: Corporate tax - eligible & non-eligible RDTOH

31) A CCPC's GRIP account balance is increased by 72% of eligible dividends received during the taxation year. Answer: FALSE Explanation: GRIP is increased by 100% of eligible dividends received during the year. Type: TF Topic: GRIP & eligible dividends

32) Which of the following statements with respect to non-eligible dividends paid to individuals in 2022 is NOT correct? A) Taxable dividends will be equal to 115% of dividends received. B) Non-eligible dividends can be paid by both public corporations and CCPCs. C) The combined federal/provincial/territorial dividend tax credit will always be equal to the gross up. D) The federal dividend tax credit on such dividends is always equal to 9/13 of the gross up. Answer: C Explanation: C) The combined federal/provincial/territorial dividend tax credit will always be equal to the gross up. Type: MC Topic: Dividends - eligible & non-eligible

33) Which of the following statements with respect to eligible dividends paid to individuals in 2022 is NOT correct? A) The recipient individual shareholder must gross them up by 38%. B) They generate a federal tax credit equal to 6/11 of the gross up. C) They can only be designated as eligible dividends by public companies. D) They can be designated as eligible dividends by CCPCs with a positive GRIP account balance on the last day of the taxation year. Answer: C Explanation: C) They can only be designated as eligible dividends by public companies. Type: MC Topic: Dividends - eligible & non-eligible

34) Which of the following types of dividends paid to individuals would NOT be subject to a gross up and would not generate a dividend tax credit? A) A stock dividend that is taxable. B) A capital dividend. C) A deemed dividend that is taxable. D) A dividend in kind that is taxable. Answer: B Explanation: B) A capital dividend. Type: MC Topic: Dividends - general concepts

35) With respect to integration, which of the following statements is correct for 2022? A) For integration to be effective in situations where non-eligible dividends are paid, the combined federal/provincial/territorial corporate income tax rate must be equal to 27.54%. B) For integration to be effective in situations where non-eligible dividends are paid, the provincial/territorial individual income tax rate must be 14%. C) For integration to be effective in situations where eligible dividends are paid, the provincial/territorial dividend tax credit must be equal to 9/13 of the dividend gross up. D) For integration to be effective in situations where non-eligible dividends are paid, the combined federal/provincial/territorial corporate income tax rate must be equal to 13.04%. Answer: D Explanation: D) For integration to be effective in situations where non-eligible dividends are paid, the combined federal/provincial/territorial corporate tax rate must be equal to 13.04%. Type: MC Topic: Dividends - eligible & non-eligible

36) For integration to work perfectly, two conditions must be met. For 2022, these two conditions are: A) the combined federal/provincial/territorial corporate tax rate must equal 13.04% for eligible dividends and 27.54% for non-eligible dividends, and the combined federal/provincial/territorial dividend tax credits must equal the gross up. B) the federal/provincial/territorial income tax and dividend tax credit rates must be equal. C) the combined federal/provincial/territorial corporate income tax rate must equal 13.04% for noneligible dividends and 27.54% for eligible dividends, and the combined federal/provincial/territorial dividend tax credits must equal the gross up. D) both the corporate federal income tax payable and the federal dividend tax credit must equal the gross up. Answer: C Explanation: C) The combined corporate federal/provincial/territorial corporate income tax rates must equal 13.04% for non-eligible dividends and 27.54% for eligible dividends, and the combined federal/provincial/territorial dividend tax credits must equal the gross up. Type: MC Topic: Dividends - eligible & non-eligible

37) It is necessary for corporations to designate dividends that they pay as eligible dividends which are eligible for the enhanced gross up and dividend tax credit procedure because: A) some CCPCs have some portion of their income taxed at full rates while some non-CCPCs will pay taxable dividends out of income that has been taxed at lower income tax rates. B) most CCPCs have all of their income taxed at low rates, and some non-CCPCs have only income that is taxed at lower rates. C) all companies always have some portion of their income taxed at full rates. D) some non-CCPCs have income taxed at lower rates. Answer: A Explanation: A) some CCPCs have some portion of their income taxed at full rates while some nonCCPCs will pay taxable dividends out of income that has been taxed at lower income tax rates. Type: MC Topic: Dividends - eligible & non-eligible

38) Integration works when the combined federal/provincial/territorial corporate income tax rate is at a certain benchmark level for corporations paying eligible dividends and a different benchmark level for corporations paying non-eligible dividends. Applicable rates vary from province to province and territory to territory which affects the effectiveness of integration. If you assume that the combined federal/provincial/territorial dividend tax credit is equal to 100% of the gross up, which of the following statements is correct with respect to combined federal/provincial/territorial income tax rates and the effectiveness of integration? A) If the combined corporate income tax rate exceeds the benchmark rate, then the use of a corporation will result in lower income tax. B) If the combined corporate income tax rate is equal to the benchmark rate, then the use of a corporation will result in the same amount of income tax. C) If the combined corporate income tax rate is less than the benchmark rate, then the use of a corporation will result in additional income tax. D) The combined corporate income tax rate for corporations paying non-eligible dividends must be greater than the combined corporate tax rate for corporations paying eligible dividends for integration to work for all taxable dividends. Answer: B Explanation: B) If the combined corporate income tax rate is equal to the benchmark rate, then the use of a corporation will result in the same amount of income tax. Type: MC Topic: Integration - general concepts

39) Integration works when the combined federal/provincial /territorial dividend tax credit rate is at a certain benchmark level. Applicable dividend tax credit rates vary from province to province and territory to territory which affects the effectiveness of integration. If you assume that the combined federal/provincial/territorial corporate income tax rate is at the benchmark rate for the type of taxable dividend under consideration, which of the following statements is correct with respect to combined federal/provincial/territorial dividend tax credit rates and the use of a corporation? A) If the combined dividend tax credit rate is less than 100% of the gross up, then the use of a corporation will result in additional income tax. B) If the combined dividend tax credit rate is greater than 100% of the gross up, then the use of a corporation will result in additional income tax. C) The provincial/territorial dividend tax rate must be greater than the federal dividend tax rate for integration to work. D) The combined dividend tax rate on non-eligible dividends must be greater than the combined dividend tax rate on eligible dividends for integration to work for all taxable dividends. Answer: A Explanation: A) If the combined dividend tax credit rate is less than 100% of the gross up, then the use of a corporation will result in additional income tax. B) If the combined dividend tax credit rate is greater than 100%, then the use of a corporation will result in additional income tax. C) The provincial/territorial dividend tax credit rate must be greater than the federal dividend tax rate for integration to work. [Federal DTC > 50%, so this must be wrong] D) The combined dividend tax credit rate on non-eligible dividends must be greater than the combined dividend tax rate on eligible dividends for integration to work for all dividends. [DTC rate must equal to the gross up, so this must be wrong] Type: MC Topic: Integration - general concepts

40) As defined in ITA 129(4), aggregate investment income does NOT include: A) foreign source property income. B) net capital losses deducted in the taxation year. C) net taxable capital gains. D) Taxable dividends from taxable Canadian companies. Answer: D Explanation: D) Taxable dividends from taxable Canadian companies. Type: MC Topic: Corporate tax - aggregate investment income

41) During the 2022 taxation year, Makisha Fashions Inc has the following income: Taxable capital gains Allowable capital losses Taxable Dividends Foreign source property income

$45,000 42,000 25,000 3,000

What is the total aggregate investment income? A) $6,000 B) $31,000 C) $48,000 D) $73,000 Answer: A Explanation: A) $6,000 [$45,000 - $42,000 + $3,000] B) $31,000 [$45,000 - $42,000 + $25,000 + $3,000] C) $48,000 [$45,000 + $3,000] D) $73,000 [$45,000 + $25,000 + $3,000] Type: MC Topic: Corporate tax - aggregate investment income

42) A simple solution to the problem of high corporate income tax rates on investment income would be to apply a different, lower corporate income tax rate directly to this type of income. Instead, the Canadian tax system uses refundable income taxes to lower the effective income tax rate on investment income of CCPCs. Why? A) Lower income tax rates would create a situation where the payment of taxable dividends to individual shareholders would result in double taxation. B) Lower income tax rates would provide a significant deferral of income tax on investment income. C) Refundable income taxes encourage early filing of corporate income tax returns. D) Refundable income taxes provide a reason to retain funds in the corporation. Answer: B Explanation: B) Lower income tax rates would provide a significant deferral of income tax on investment income. Type: MC Topic: Integration - general concepts

43) With respect to the refundable Part I tax on investment income, which of the following statements is NOT correct? A) It is always equal to 30-2/3% of aggregate investment income. B) It is a designated portion of the regular Part I tax. C) It is only applicable to CCPCs. D) It only becomes refundable when taxable dividends are paid. Answer: A Explanation: A) It is always equal to 30-2/3% of aggregate investment income. This factor is only one component of the refundable Part I calculation. The refundable portion is equal to the least of three amounts. Type: MC Topic: Corporate tax - refundable Part I tax on investment income

44) In 2022, Norton Tools Ltd. has net taxable capital gains of $45,000, receives taxable dividends from taxable Canadian corporations of $34,000, and earns interest income of $21,000. Taxable Income for the year equals $280,000, of which $210,000 is eligible for the SBD. The Company's ART for 2022 is equal to: A) $ 7,467. B) $10,667. C) $ 7,040. D) $ 8,427. Answer: C Explanation: A) $ 7,467 [(10-2/3%)($280,000 - $210,000) B) $10,667 [(10-23%)($45,000 + $34,000 + $21,000)] C) $7,040 [(10-2/3%)($45,000 + $21,000)] D) $ 8,427 [(10-23%)($45,000 + $34,000)] Type: MC Topic: Corporate tax - additional refundable tax (ART)

45) In 2022, Makisha Fashions Inc has the following income: Taxable capital gains Allowable capital losses Taxable dividends from taxable Canadian corporations Foreign Source Property Income

$45,000 42,000 25,000 3,000

The company has taxable income of $495,000, of which $200,000 was eligible for the SBD. What is the ART for 2022? A) $ 640 B) $3,307 C) $5,120 D) $7,787 Answer: A Explanation: A) $640 [(10-2/3%)($45,000 - $42,000 + $3,000)] B) $3,307 [(10-2/3%)($45,000 - $42,000 + $25,000 + $3,000)] C) $5,120 [(10-2/3%)($45,000 + $3,000)] D) $7,787 [(10-2/3%)($45,000 + $25,000 + $3,000)] Type: MC Topic: Corporate tax - additional refundable tax (ART)

46) A Ltd. is a CCPC that operates a chain of fast-food restaurants. In its most recent taxation year, the Company reported the following: Active business income eligible for the SBD Taxable capital gains Foreign investment income Investment income earned in Canada Net Income

$200,000 Nil 55,000 45,000 $300,000

Taxable Income

$250,000

The Company paid no foreign income tax on its foreign investment income. A Ltd. is not associated with any other corporations. Which one of the following amounts represents the refundable portion of Part I tax? A) $13,800. B) $15,333. C) $30,667. D) $76,667. Answer: B Explanation: A) $13,800 [(30-2/3%)($45,000)] B) [($250,000 - $200,000)(30-2/3%)] = $15,333. The addition is limited by Taxable Income, less the amount eligible for the SBD [ITA 129(4)(a)(ii)]. C) $30,667 [(30-2/3%)($55,000 + $45,000)] D) $76,667 [(30-2/3%)($250,000)] Type: MC Topic: Corporate tax - refundable Part I tax on investment income

47) With respect to Part I refundable taxes, which of the following statements is correct? A) It is an additional tax which must be paid on aggregate investment income. B) It is always refundable at the rate of 38-1/3 % of taxable dividends paid. C) It is designed to prevent the deferral of income tax on investment income that is retained by a public company. D) It is designed to prevent the deferral of income tax on investment income that is retained by a CCPC. Answer: D Explanation: D) It is designed to prevent the deferral of income tax on investment income that is retained by a CCPC. Type: MC Topic: Corporate tax - refundable Part I tax on investment income

48) Part IV tax on taxable dividends received is required in order to: A) prevent income tax deferral in situations where there are multiple levels of corporations in a corporate group. B) avoid double taxation of taxable dividends paid to corporate shareholders. C) ensure proper integration on investment income at the corporate level. D) ensure that public companies pay out some taxable dividends in every year they are profitable. Answer: A Explanation: A) Prevent income tax deferral in situations where there are multiple levels of corporations in a corporate group. Type: MC Topic: Corporate tax - dividend refund ITA 129

49) A subject corporation for purposes of Part IV tax is defined as: A) a resident private corporation that is controlled by an individual or for the benefit of an individual. B) a resident public corporation that is controlled largely for the benefit of an individual or a related group of individuals. C) a resident public corporation that is controlled, through trusts, largely for the benefit of the trust. D) a non-resident private corporation that is controlled largely for the benefit of a resident individual or related group of individuals. Answer: B Explanation: B) A resident public corporation that is controlled largely for the benefit of an individual or a related group of individuals. Type: MC Topic: Corporate tax - Part IV "Subject Corporation"

50) Which of the following statements with respect to Part IV tax is NOT correct? A) All taxable dividends from subject companies will be assessed Part IV tax. B) All taxable dividends from portfolio investments will be assessed Part IV tax. C) Taxable dividends received from a connected company will be assessed Part IV tax if the paying company was entitled to a dividend refund. D) Part IV tax is assessed at a rate of 30-2/3%. Answer: D Explanation: D) Part IV tax is assessed at a rate of 30-2/3%. Type: MC Topic: Corporate tax - Part IV tax (basic rules)

51) Premier Investments Inc. (Premier) is a private corporation. Premier received $20,000 of taxable dividends from its investments in publicly traded Canadian shares during its 2022 taxation year ended December 31, 2022. Premier has loss carry forwards as follows: 2020 non-capital loss balance of $3,000, 2020 net capital loss balance of $5,000, and a 2020 farm loss balance of $7,000. All of these losses are deductible in Premier's 2022 taxation year but the company would prefer to reduce its Part IV liability. Assuming Premier has no other income, what is Premier's minimum 2022 Part IV Tax Payable? A) Nil. B) $1,917. C) $3,834. D) $7,667. Answer: C Explanation: C) The correct answer is as follows: Taxable Dividends Received Part IV Tax Rate Less: Losses Applied: 2020 Non-Capital Losses 2020 Farm Losses Subtotal Rate Minimum 2022 Part IV Tax

$20,000 38-1/3% ($ 3,000) ( 7,000) ($10,000) 38-1/3%

$7,667

( 3,833) $3,834

In general, reducing Part IV tax by applying non-capital and farm losses would only be advantageous if the losses were about to expire. Type: MC Topic: Corporate tax - Part IV loss carryovers ITA 186(1)(c) & (d)

52) Opus Limited is a CCPC. In its 2022 taxation year, the company received the following taxable dividends: Dividends on Portfolio Investments Dividends from Magnum Inc. [(100%)($55,000)] Dividends from Masterpiece Ltd. [(40%)($100,000)]

$ 35,000 55,000 40,000

Opus owns 100% of the shares of Magnum Inc. and 40% of the shares of Masterpiece Ltd. Masterpiece received a dividend refund of $10,000 on its dividend payment, while Magnum received a dividend refund of $15,000. Determine the amount of Part IV Tax payable by Opus Limited for the 2022 taxation year. A) $29,417. B) $32,417. C) $38,417. D) $49,833. Answer: B Explanation: A) $29,417 [(38-1/3%)($35,000) + $10,000 + (40%)($15,000)] B) $ 32,417 [(38-1/3%)($35,000) + [(100%)($15,000)] + (40%)($10,000)] C) $38,417 [(38-1/3%)($35,000) + $10,000 + $15,000] D) $49,833 [(38-1/3%)($35,000 + $55,000 + $40,000)] Type: MC Topic: Corporate tax - Part IV calculating the tax

53) CCPC Inc., a Canadian controlled private corporation, received a $10,000 taxable dividend from a non-connected public corporation, Payor Inc. Which of the following statements is correct? A) The dividends will be deductible by Payor Inc. from its Eligible RDTOH. B) The dividend will be subject to a tax rate of 38-1/3%. C) The dividend will be subject to Part I tax. D) The dividend will be subject to Part IV tax if Payor Inc. received a dividend refund. Answer: B Explanation: B) The dividend will be subject to a tax of 38-1/3%. Type: MC Topic: Corporate tax - Part IV tax (basic rules)

54) Mr. Patel is the sole owner of a holding company which owns 100% of the shares of an operating company that earns only active business income. Which of the following statements is correct? A) The holding company will pay Part IV tax on taxable dividends received from the operating company. B) Mr. Patel will receive taxable dividends from the holding company tax free. C) Mr. Patel will receive taxable dividends from the operating company tax free. D) The holding company will receive taxable dividends from the operating company tax free. Answer: D Explanation: C) Mr. Patel is not a shareholder of the operating company and could not receive dividends from that company. D) The holding company will receive dividends from the operating company tax free. Type: MC Topic: Corporate tax - the taxation of inter-corporate dividends

55) With respect to the Eligible RDTOH account, which of the following statements is correct? A) The balance is reduced by any refund resulting from eligible dividends paid during the year. B) The balance is increased by 38-1/3% of any portfolio eligible dividends received. C) The total dividend refund for the current taxation year cannot exceed the balance in this account at year end. D) The balance is increased by the amount of the refundable Part I tax for the year. Answer: B Explanation: B) The balance is increased by 38-1/3% of any portfolio eligible dividends received. Type: MC Topic: Corporate tax - eligible & non-eligible RDTOH

56) Schumann Inc. is a CCPC that has the following information for the current year: Canadian active business income Taxable dividend from a taxable Canadian corporation Aggregate investment income Taxable income Income eligible for the SBD Part I tax for the year

$140,000 15,000 60,000 200,000 140,000 21,900

The refundable portion of Part I tax for the year is equal to: A) $5,750. B) $18,400. C) $24,150. D) $21,900. Answer: B Explanation: A) $5,750 [($15,000)(38-1/3%)] B) $18,400 [($60,000)(30-2/3%)] C) $24,150 [($60,000)(30-2/3%) + ($15,000)(38-1/3%)] D) $ 21,900 [the amount of part 1 tax payable]

Type: MC Topic: Corporate tax - refundable Part I tax on investment income

57) Which of the following statements best describes the purpose of the dividend refund? A) The dividend refund allows corporations with a balance in their RDTOH accounts to reduce their Part I tax payable by paying taxable dividends. B) The dividend refund allows corporations with a balance in their capital dividend account to reduce their Part I tax payable by paying taxable dividends. C) The dividend refund reduces the effective income tax rate on dividend income earned by corporations. D) The dividend refund reduces the effective income tax rate on dividend income earned by shareholders. Answer: A Explanation: A) The dividend refund allows corporations with a balance in their RDTOH accounts to reduce their Part I income tax payable by paying taxable dividends. Type: MC Topic: Corporate tax - dividend refund ITA 129

58) With respect to GRIP and LRIP account balances, which of the following statements is NOT correct? A) A CCPC's GRIP account is reduced by the amount of eligible dividends designated in the preceding taxation year. B) A CCPC's GRIP account is increased by the amount of eligible dividends received during the current taxation year. C) A public company's LRIP account is increased by the amount of non-eligible dividends received in the taxation year. D) A CCPC's GRIP account is increased by 72% of the company's current year taxable income. Answer: D Explanation: D) A CCPC's GRIP account is increased by 72% of the company's current year taxable income. Taxable income is adjusted for certain amounts such as income eligible for the SBD and AII. Type: MC Topic: GRIP & LRIP - basic concepts

59) At the end of 2021, Gomez Inc., a CCPC, has a GRIP account balance of $53,400. In 2022, the Company has taxable income of $143,000. This includes aggregate investment income (AII) of $19,000. In addition, in 2022 the Company receives eligible dividends of $12,300. In calculating 2022 income tax, the Company has a SBD of $16,150. In 2021, the company paid taxable dividends of $42,000 with $13,700 of the dividends designated as eligible. Taxable dividends paid in 2022 total $51,000, with $18,400 of this amount being designated as eligible. What is the Company's GRIP account balance at the end of the 2022 taxation year? A) $80,080 B) $93,780 C) $67,780 D) $75,380 Answer: A Explanation: A) The required amount would be calculated as follows: Balance at end of 2021 Taxable Income Income Eligible For SBD ($16,150 ÷ 19%) Aggregate Investment Income Adjusted Taxable Income Rate Eligible Dividends Received in 2022 Eligible Dividends Designated in 2021 GRIP at end of 2022 B) $80,080 + $13,700 C) $80,080 - $12,300 D) $80,080 + $13,700 - $18,400

$53,400 $143,000 ( 85,000) ( 19,000) $ 39,000 72%

28,080 12,300 ( 13,700) $80,080

Type: MC Topic: GRIP = calculations & balance

60) With respect to GRIP and LRIP balances, which of the following statements is correct? A) The GRIP account is used to track balances that can be used by a CCPC as the basis for designating eligible dividends. B) The GRIP account is used to track balances that have not been subject to full corporate income tax rates. C) The LRIP account is used to track balances that can be used by any company as the basis for designating non-eligible dividends. D) The LRIP account is used to track balances that can be used by non-CCPCs as the basis for designating eligible dividends. Answer: A Explanation: A) The GRIP account is used to track balances that can be used by a CCPC as the basis for designating eligible dividends. Type: MC Topic: GRIP & LRIP - basic concepts

61) A non-CCPC has an LRIP balance of $78,000 at the end of its 2021 taxation year. In 2022, the company wishes to pay a taxable dividend of $250,000. In 2022, prior to the payment of the taxable dividend, the company receives eligible dividends of $35,000 and non-eligible dividends of $85,000. How much of the $250,000 taxable dividend must be paid as a non-eligible dividend before an eligible dividend can be designated? A) $ 78,000 B) $ 113,000 C) $ 163,000 D) $ 250,000 Answer: C Explanation: A) $78,000 [the opening balance in LRIP] B) $113,000 [$78,000 + $35,000] C) $163,000 [$78,000 + $85,000] D) $250,000 [the full amount of the dividend] Type: MC Topic: Designation of eligible dividends

62) Patrick Innes has a business that he estimates will generate annual income of $130,000. If he incorporates the business in 2022, all of the income would be eligible for the SBD and all taxable dividends paid would be non-eligible. In the province where he lives, such corporate income is subject to a combined federal/provincial income tax rate of 14%. Mr. Innes has other personal income that place him in a combined federal/provincial income tax bracket of 42%. In his province, the provincial dividend tax credit for non-eligible dividends is equal to 20% of the gross up. Would Mr. Innes save income tax if he was to incorporate the business income? Explain your result. Answer: If he incorporates, the corporation will pay income taxes of $18,200 [(14%)($130,000)], leaving $111,800 to be distributed as taxable dividends. Personal income tax on the taxable dividends would be calculated as follows: Taxable Dividends Gross Up [(15%)($111,800)] Grossed Up Dividends Tax Rate Tax Before Credit Dividend Tax Credit [(9/13 + 20%)($16,770)] Income Tax Payable on Taxable Dividends

$111,800 16,770 $128,570 42% $ 53,999 ( 14,964) $ 39,035

The net after tax retention would be $72,765 ($111,800 - $39,035). This compares to $75,400 [($130,000)(1 .42)] retained if the business is not incorporated which is $2,635 higher. The use of a corporation is not desirable in terms of after tax returns, especially if the costs associated with maintaining a corporation are considered. Type: ES Topic: After tax retention - incorporating a business and non-eligible dividends

63) Nashwa has a business that she estimates will generate annual income of $100,000. She is planning to incorporate this business in 2022, and if she does, all of the income will be eligible for the SBD and all taxable dividends paid will be non-eligible. In the province where she resides, such corporate business income is subject to a combined federal/provincial income tax rate of 15%. Nashwa is subject to a personal combined federal/provincial income tax rate of 43%. The provincial dividend tax credit rate for non-eligible dividends is equal to 29% of the gross up. Would Nashwa save any income tax if she were to incorporate the business? Explain your answer. Answer: If Nashwa incorporates, the corporation will pay income tax of $15,000 [(15%)($100,000)], leaving $85,000 available for paying taxable dividends. Individual income tax on these dividends would be calculated as follows: Taxable Dividends Gross Up [(15%)($85,000)] Taxable Dividends Rate Tax Before Credit Dividend Tax Credit [(9/13 + 29%)($12,750)] Income Tax Payable on Taxable Dividends Taxable Dividends Received Income Tax Payable After Tax Retention Retention w/o a corporation [($100,000)(1 - 43%)] Savings (Loss) with the use of a corporation

$85,000 12,750 $97,750 43% $42,033 ( 12,524) $29,509 $85,000 ( 29,509) $55,491 ( 57,000) ($ 1,509)

The after tax retention with the use of a corporation is $55,491, $1,509 lower than the retention if the business was not incorporated. The use of a corporation is not desirable in terms of after tax returns, especially if the costs associated with maintaining a corporation are considered. Type: ES Topic: After tax retention - incorporating a business and non-eligible dividends

64) Janice Huber has a business that she estimates will generate annual income of $75,000. Because she controls another corporation that fully utilizes $500,000 of its SBD the incorporation of a second corporation would be an associated corporation. Therefore if she incorporates the business, none of the income will be eligible for the SBD and any taxable dividends paid would be designated eligible. In the province where she lives, such corporate income is subject to a combined federal/provincial income tax rate of 28%. Ms. Huber has other personal income that place her in a combined federal/provincial income tax bracket of 46%. In the province where she resides, the provincial dividend tax credit for eligible dividends is equal to 32% of the gross up. Would Ms. Huber save any income tax if she were to incorporate the business? Explain your answer. Answer: If she incorporates, the corporation will pay income tax of $21,000 [(28%)($75,000)], leaving $54,000 to be distributed as taxable eligible dividends. Her individual income tax payable on the eligible dividends would be calculated as follows: Taxable Dividends Gross Up [(38%)($54,000)] Grossed Up Dividends Personal Tax Rate Income Tax Before Credit Dividend Tax Credit [(6/11 + 32%)($20,520)] Income Tax Payable on Taxable Dividends

$54,000 20,520 $74,520 46% $34,279 ( 17,759) $16,520

The net after tax retention would be $37,480 ($54,000 - $16,520). This compares to $40,500 [($75,000)(1 .46)] retained if the business is not incorporated. Clearly the use of a corporation is not desirable in this situation. Type: ES Topic: After tax retention - incorporating a business and eligible dividends

65) Florence has a business that she estimates will generate annual income of $100,000. She is planning to incorporate the business in 2022, and if she does, none of the income will be eligible for the SBD because she controls another corporation (an associated corporation) that fully utilizes the annual $500,000 small business limit. As a result, all taxable dividends paid will be designated eligible. In the province where she resides, such corporate income is subject to a combined federal/provincial income tax rate of 29%. Florence has other personal income that will result in any additional income being subject to income tax at a combined federal/provincial income tax rate of 43%. The provincial dividend tax credit rate on eligible dividends is equal to 29% of the gross up. Would Florence save any income tax by incorporating the business? Explain your result. Answer: By incorporating the business corporate income tax would be $29,000 [(29%)($100,000)], leaving $71,000 available to pay as eligible dividends. Personal income tax would be calculated as follows: Taxable Dividends Gross Up [(38%)($71,000)] Grossed Up Dividends Personal Tax Rate Tax Before Credit Dividend Tax Credit [(6/11 + 29%)($26,980)] Income Tax Payable on Taxable Dividends

$71,000 26,980 $97,980 43% $42,131 ( 22,541) $19,590

Taxable Dividends Income Tax Payable After Tax Retention Retention w/o a corporation [($100,000)(1 - 43%)] Savings (Loss) with the use of a corporation

$71,000 ( 19,590) $51,410 ( 57,000) ($ 5,590)

Type: ES Topic: After tax retention - incorporating a business and eligible dividends

66) Axco Inc. is a CCPC with a December 31 taxation year end. Axco is not associated with any other company. For the 2022 taxation year, its net income is $342,000. This is made up of active business income of $226,000, taxable dividends from taxable Canadian corporations of $31,000, taxable capital gains of $51,000 and interest income on long-term investments of $34,000. The Company has available a 2020 net capital loss balance of $32,000 and a 2020 non-capital loss balance of $29,000. The Company intends to deduct both of these losses in its 2022 taxation year. In 2021, Axco's Taxable Capital Employed in Canada (TCEC) was less than $10 million, and its Adjusted Aggregate Investment Income (AAII) was less than $50,000. Determine Axco's 2022 taxable income and its 2022 ART. Answer: Axco's Taxable Income would be calculated as follows: 2022 Net Income Taxable Dividends 2020 Net Capital Loss 2020 Non-Capital Loss 2022 Taxable Income

$342,000 ( 31,000) ( 32,000) ( 29,000) $250,000

Axco's amount eligible for the SBD of $226,000 is the least of active business income of $226,000, Taxable Income of $250,000, and the annual business limit of $500,000. Given these calculations, Axco's ART would be calculated as the lesser of: Aggregate Investment Income Taxable Capital Gains Net Capital Loss Deducted Interest Income Taxable Income Amount Eligible for SBD

$51,000 ( 32,000) 34,000 $250,000 ( 226,000)

$53,000 $24,000

The ART would be $2,560 [(10-2/3%)($24,000)]. Note that the Taxable Income limit is $29,000 ($53,000 - $24,000) less than the Aggregate Investment Income. This difference is the result of the deduction of the $29,000 2020 non-capital loss. Type: ES Topic: Corporate tax - additional refundable tax (ART)

67) Barnum Ltd. is a CCPC with a December 31 taxation year end. For the 2022 taxation year, the Company has net income of $436,000. This is made up of active business income of $256,000, taxable dividends from taxable Canadian corporations of $61,000, taxable capital gains of $85,000, and interest income on long-term investments of $34,000. The company will claim a 2020 non-capital loss balance of $163,000, and a 2020 net capital loss balance of $47,000. Barnum is associated with one other company and they have agreed to split the annual business limit on a 50/50 basis. In 2021, Barnum's Taxable Capital Employed in Canada (TCEC) was less than $10 million, and its Adjusted Aggregate Investment Income (AAII) was less than $50,000. The TCEC and AAII amounts include the impact of the associated company. Determine Barnum's 2022 taxable income and its 2022 ART. Answer: Barnum's 2022 taxable income would be calculated as follows: 2022 Net Income Taxable Dividends 2020 Net Capital Loss 2020 Non-Capital Loss 2022 Taxable Income

$436,000 ( 61,000) ( 47,000) ( 163,000) $165,000

Barnum's amount eligible for the SBD of $165,000 is the least of active business income of $256,000, taxable income of $165,000, and the annual business limit of $250,000 [(1/2)($500,000)]. Given these calculations, Barnum's ART is 10-2/3 % of the lesser of: Aggregate Investment Income Taxable Capital Gains 2020 Net Capital Loss Deducted Interest Income Taxable Income Amount Eligible for the SBD

$85,000 ( 47,000) 34,000 $165,000 ( 165,000)

Based on these calculations, the ART would be nil. Type: ES Topic: Corporate tax - additional refundable tax (ART)

$72,000 Nil

68) Mr. Marcus Fisher has investments that generate annual interest income of $94,000. Because of his employment income, he is in the top income tax bracket, with a combined federal/provincial income tax rate of 52% based on the province where he is resident. He is considering incorporating the investments on January 1, 2022, with a CCPC which will be subject to an income tax rate on investment income of 51%. The dividend tax credit in his province is equal to 30% of the gross up. Any dividends paid by the CCPC out of investment income will be non-eligible. Advise him as to whether there would be any income tax savings by incorporating the investments. Answer: If Mr. Fisher does not incorporate the investments, he will retain $45,120 [($94,000)(1 - .52)]. Alternatively, if the investments are incorporated, the income tax results would be as follows: Corporate Investment Income Corporate income tax at 51% Income Before Dividends Dividend Refund [($46,060 ÷ .61667) - $46,060] Non-eligible Dividends paid to Mr. Fisher

$94,000 ( 47,940) $46,060 28,632 $74,692

Non-Eligible Dividends Gross Up 15% Personal increase in income Personal Tax Rate Income Tax Payable before Dividend Tax Credit Dividend Tax Credit [(9/13 + 30%)($11,204)] Personal Income Tax with the use of a Corporation

$74,692 11,204 $85,896 52% $44,666 ( 11,118) $33,548

Non-Eligible Dividends Personal Tax Payable After Tax Cash Retained with the use of a Corporation

$74,692 ( 33,548) $41,144

The increase in the Non-Eligible RDTOH of $28,827 [(30-2/3%)($94,000)] would allow for a dividend refund of $28,632. With the corporate income tax rate at 51%, only 1% below the personal income tax rate of 52% there would only be limited income tax deferral on income left in the corporation. There would be $3,976 ($45,120 - $41,144) less after-tax cash with the use of a corporation. Type: ES Topic: After tax retention - incorporating investments and non-eligible dividends

69) Marion Fox has investments that generate annual interest income of $172,000. She also has annual employment income in excess of $250,000 which result in her being subject to personal income tax rates on the receipt of any additional income at a combined federal/territorial income tax rate of 53%. She is considering incorporating her interest earning investments to a newly incorporated CCPC on January 1, 2022. Marion resides in the North West Territories (NWT) where her would also reside. In the NWT, the combined corporate federal/territorial income tax rate on the investment income of CCPCs is 50%. All of the corporation's after tax income would be paid out as non-eligible dividends. The territorial dividend tax credit rate on non-eligible dividends is 35% of the gross up. Advise Marion as to whether there would be any income tax savings if she were to incorporate the investments.

Answer: If she chooses not to incorporate the investments the after tax retention would be as follows: Interest Received Personal Income Tax [(53%)($172,000)] After Tax Cash Retained without a Corporation

$172,000 ( 91,160) $ 80,840

The alternative results if the investments are incorporated would be as follows: Corporate Investment Income Corporate Tax at 50% After Tax Income Dividend Refund (Note) Non-Eligible Dividend paid to Ms. Fox

$172,000 ( 86,000) $ 86,000 52,747 $138,747

Note - Based on the amount of after tax income available, the maximum possible taxable dividend would be $53,459 [($86,000 ÷ .61667) - $86,000]. However, the refund is limited by the balance in the Non-Eligible RDTOH account. As this is a new corporation, there would be no opening balance in this account and the addition would be $52,747 [(30-2/3%)($172,000)]. Given this, the refund is limited to $52,747. Non-Eligible Dividends Gross Up 15% Taxable Dividends Personal Tax Rate Tax Payable before Dividend Tax Credit Dividend Tax Credit [(9/13 + 35%)($20,812)] Personal Income Tax with the use of a Corporation

$138,747 20,812 $159,559 53% $ 84,566 ( 21,693) $ 62,873

Non-Eligible Dividends $138,747 Personal Income Tax ( 62,873) After Tax Cash Retained with the use of a Corporation $ 75,874 With the high personal income tax rate in this example, the use of the corporation would result in some tax deferral: Income taxes w/o a corporation Income Taxes with the use of a Corporation Deferral

$91,160 ( 86,000) $ 5,160

Overall, the use of a corporation would reduce after tax cash as follows: After Tax Retention - w/o a Corporation After Tax Retention - with a Corporation Reduction in after tax retention

$80,840 ( 75,874) $ 4,966

Type: ES Topic: After tax retention - incorporating investments and non-eligible dividends

70) Overton Ltd. is a CCPC. In 2022, the Company received the following dividends: Taxable Dividends on Portfolio Investments Taxable Dividends from Saston Inc. [(100%)($62,300)] Taxable Dividends from Raston Inc. [(40%)($90,000)]

$21,300 62,300 36,000

Overton Ltd. owns 100%of the voting shares of Saston Inc. and 40% of the voting shares of Raston Inc. The FMV of the Raston Inc. shares equals 40% of the FMV of all Raston Inc. shares. As a result of paying the $90,000 dividend, Raston Inc. received a dividend refund of $25,000. Saston Inc. received no dividend refund for 2022. Determine the amount of Overton Ltd.'s Part IV tax as a result of receiving the taxable dividends. Answer: The 2022 Part IV tax would be calculated as follows: Tax on Portfolio Investments [(38-1/3%)($21,300)] Tax on Saston Inc. Dividends Tax on Raston Inc. Dividends [(40%)($25,000)] 2022 Part IV Tax

$ 8,165 Nil 10,000 $18,165

Type: ES Topic: Corporate tax - Part IV calculating the tax

71) Blackwood Inc. is a CCPC. It has two subsidiaries. Information related to these subsidiaries is as follows: Whitewood Ltd. - Blackwood owns 65% of Whitewood Ltd. In 2022, Whitewood paid taxable dividends of $100,000. Whitewood received a dividend refund for the 2022 taxation year of $20,000. Redwood Inc. - Blackwood owns 100% of Redwood Inc. In 2022, Redwood paid total taxable dividends of $72,000. Blackwood was not entitled to a dividend refund for 2022. In addition to the taxable dividends received from subsidiaries, Blackwood received $35,000 in dividends from portfolio investments. Determine Blackwood's 2022 Part IV Tax. Answer: The amount of 2022 Part IV Tax would be calculated as follows: Tax on Whitewood Ltd. Dividends [(65%)($20,000)] Tax on Redwood Inc. Dividends Tax on Portfolio Investments [(38-1/3%)($35,000)] 2022 Part IV Tax

$13,000 Nil 13,417 $26,417

Type: ES Topic: Corporate tax - Part IV calculating the tax

72) Simard Ltd., a CCPC, had a GRIP balance for its taxation year ending December 31, 2021 of $37,000. In 2022, the Company received eligible dividends of $17,000. In 2021 the company designated $23,000 of its taxable dividends paid as eligible. In 2022, Simard has taxable income of $476,000. This amount includes taxable capital gains of $14,000, interest income on long-term bonds of $7,000, and a 2019 net capital loss balance of $14,000 which it will deduct to the maximum extent possible in 2022. In determining its 2022 federal income tax payable, the Company has a SBD of $76,000. In 2022, Simard Ltd. pays taxable dividends of $25,000, with $18,000 of this amount being designated as eligible. Determine the Company's GRIP balance at the end of 2022. Answer: Since taxable income is greater than Aggregate Investment Income (AII), the 2022 ending GRIP account balance will be calculated as follows: GRIP Balance at end of 2021 Taxable Income Income Eligible for SBD ($76,000 ÷ 19%) Aggregate Investment Income ($14,000 + $7,000 - $14,000) Adjusted Taxable Income Rate Eligible Dividends Received in 2022 Eligible Dividends Designated in 2021 GRIP at end of 2022

$476,000 ( 400,000) ( 7,000) $ 69,000 72%

$37,000

49,680 17,000 ( 23,000) $80,680

The eligible dividends paid in 2022 will reduce the GRIP account balance in 2023. Type: ES Topic: GRIP = calculations & balance

73) Saxon Company is a CCPC that began carrying on business on January 1, 2020. The company uses a calendar-based taxation year. In 2021, the Company received eligible dividends of $45,000 and designated $40,000 of the dividends it paid as eligible. On December 31, 2021, the balance in the Company's GRIP account was $45,000. In 2022, Saxon's taxable income is $726,000 which includes $18,000 of interest income, taxable capital gains of $22,000, and the deduction of a 2019 net capital loss balance of $18,000. In addition the Company received eligible dividends of $36,000. In determining the 2022 federal income tax payable, the Company has a SBD of $66,500. In 2022, Saxon pays taxable dividends of $48,000, with $21,000 of this amount being designated as eligible. Determine the Company's GRIP balance at the end of 2022. Answer: Since taxable income is greater than Aggregate Investment Income (AII), the 2022 ending balance in GRIP will be calculated as follows: GRIP Balance at end of 2021 Taxable Income Income Eligible for the SBD ($66,500 ÷ 19%) Aggregate Investment Income ($18,000 + $22,000 - $18,000) Adjusted Taxable Income Rate Eligible Dividends Received in 2022 Eligible Dividends Designated in 2021 GRIP at end of 2022

$ 45,000 $726,000 ( 350,000) ( 22,000) $354,000 72%

254,880 36,000 ( 40,000) $295,880

The eligible dividends paid in 2022 will reduce the GRIP account in 2023. Type: ES Topic: GRIP = calculations & balance

74) Starfare Ltd. is a CCPC that earned the following amounts of property income and capital gains for its taxation year ending December 31, 2022: Rental Income Capital Gains Taxable Dividends from Portfolio Investments Interest income on Long-Term Investments Foreign Non-Business Income Net of 8% foreign income tax

$17,600 91,500 41,300 17,450 18,400

The Company's 2022 net income is $232,350. The Company deducts a 2018 net capital loss balance of $24,000. A $14,250 SBD and a foreign non-business tax credit of $1,600 served to reduce 2022 federal income tax payable. Assume that the Company's 2022 Part I tax has been correctly determined to be $37,133. Determine the refundable amount of Part I tax for the 2022 taxation year. Answer: The refundable portion of Starfare Ltd.'s Part I tax would be the least of the following three amounts: Rental Income Taxable Capital Gains [(1/2)($91,500)] Interest Income Foreign Non-Business Income 2018 Net Capital Loss Deducted Aggregate Investment Income - ITA 129(4) Rate Amount before Foreign Income Adjustment Less The excess of: Foreign Non-Business Tax Credit Over 8% of $20,000 ITA 129(4)(a)(i) Amount

$17,600 45,750 17,450 20,000 ( 24,000) $76,800 30-2/3% $23,552 ($1,600) 1,600

Nil $23,552

Taxable Income ($232,350 - $41,300 - $24,000) Less: Amount Eligible for the SBD ($14,250 ÷ 19%) [(100 ÷ 38-2/3)($1,600)] Foreign Non-Business Tax Credit Adjusted Taxable Income Rate ITA 129(4)(a)(ii) Amount

$167,050

ITA 129(4)(a)(iii) Amount - Part I Tax Payable

$37,133

( 75,000) ( 4,138) $ 87,912 30-2/3% $ 26,960

The least of these three amounts is $23,552, and this would be the refundable portion of Part I tax for 2022 which would be added to the company's non-eligible RDTOH. Type: ES Topic: Corporate tax - refundable Part I tax on investment income

75) Elm Inc. is a CCPC with a 2022 taxation year ending December 31, 2022. The Company has the following capital gains and property income: Interest income on Long Term Investments Taxable Capital Gains Taxable Dividends from Portfolio Investments Rental Income Foreign Non-Business Income (Before 10% Foreign income tax withheld)

$33,000 88,000 83,000 26,000 40,000

The Company's 2022 net income is $458,000. In calculating taxable income, the Company deducted a $45,000 net capital loss balance from 2019. In calculating Part I income tax, the Company claimed a SBD of $23,750 and a foreign non-business tax credit of $4,000. The Part I income tax for 2022 has been correctly determined to be $71,607. Determine the refundable amount of Part I tax for 2022. Answer: The refundable amount of Elm's Part I tax would be calculated as follows: Interest income on Long Term Investments Taxable Capital Gains Rental Income Foreign Non-Business Income 2019 Net Capital Loss Deducted Aggregate Investment Income Rate Amount before Foreign Income Adjustment Less The excess of: Foreign Non-Business Tax Credit Over 8% of $40,000 ITA 129(4)(a)(i) Amount

$33,000 88,000 26,000 40,000 ( 45,000) $142,000 30-2/3% $ 43,547 ($4,000) 3,200

( 800) $ 42,747

Taxable Income ($458,000 - $83,000 - $45,000) Amount Eligible for the SBD ($23,750 ÷ 19%) [(100 ÷ 38-2/3)($4,000)] Foreign Non-Business Tax Credit Adjusted Taxable Income Rate ITA 129(4)(a)(ii) Amount

$330,000 ( 125,000) ( 10,345) $194,655 30-2/3% $ 59,694

ITA 129(4)(a)(iii) Amount - Part I Income Tax Payable

$ 71,607

The least of the three amounts is $42,747, and this would be the refundable portion of Part I tax for 2022 that would be added to the company's non-eligible RDTOH. Type: ES Topic: Corporate tax - refundable Part I tax on investment income

76) Ho Ltd. is a CCPC with a December 31 taxation year end. On December 31, 2022 the balance in the Eligible RDTOH account is $80,500, the balance in the Non-Eligible RDTOH account is $57,500 and the balance in the GRIP account is $210,000. In 2022, there were no additions to either RDTOH account. In 2022, the company paid taxable dividends of $360,000 of which $120,000 were designated as eligible with the remaining $240,000 non-eligible. The company did have a capital dividend account (CDA) balance but did not make any capital dividend election. Determine the amount of the dividend refund on the payment of (1) the eligible dividends and (2) the non-eligible dividends. Answer: Dividend Refund on Eligible Dividends - The refund on eligible dividends would be $46,000, the lesser of: • $46,000 (38-1/3% of the $120,000 of eligible dividends paid in 2022) • $80,500 (the balance in the Eligible RDTOH on December 31, 2022) While the Exercise does not require this information, the corporation would start 2023 with a $90,000 ($210,000 - $120,000) balance in its GRIP. Dividend Refund on Non-Eligible Dividends - Component 1 of the refund on non-eligible dividends would be $57,500, the lesser of: • $92,000 (38-1/3% of the $240,000 of non-eligible dividends paid in 2022) • $57,500 (the balance in the Non-Eligible RDTOH on December 31, 2022) With respect to Component 2, 38-1/3% of the $240,000 of non-eligible dividends paid during 2022 exceeds the balance in the Non-Eligible RDTOH by $34,500 ($92,000 - $57,500). Given this, Component 2 would be equal to the lesser of: • the excess of $34,500; and • $34,500 ($80,500 - $46,000), the balance left in the Eligible RDTOH after the refund on eligible dividends paid. The total refund resulting from the payment of non-eligible dividends is $92,000 ($57,500 + $34,500). Note that $92,000 is equal to 38-1/3% of the $240,000 in non-eligible dividends paid. You should also be aware that the combined refund of $138,000 ($46,000 + $92,000) is equal to the combined balances ($80,500 + $57,500) in the two RDTOH accounts. Type: ES Topic: Corporate tax - dividend refund ITA 129

77) Assume the following with respect to the shareholder of a CCPC who is an individual. • The corporation's business income for the year is $80,000. • Any taxable dividends paid are designated non-eligible dividends. • The individual's marginal federal/provincial/territorial income tax rate is 34%. • The provincial/territorial dividend tax credit on non-eligible dividends is 20% of the gross up. • The combined federal/provincial/territorial corporate income tax rate on business income is 13%. Required: Indicate, using these assumptions, whether integration is working perfectly. If your answer is no, briefly explain why this is the case. Answer: The required calculations would be as follows: Corporate Income Tax Business Income Corporate Taxes (13%) Income Available for Taxable Dividends

$80,000 ( 10,400) $69,600

Personal Income Tax on Dividends Dividend Income Gross Up (15%) Taxable Dividends

$69,600 10,440 $80,040

Tax Payable before Dividend Tax Credit [(34%)($80,040)] Dividend Tax Credit [(9/13 + 20%)($10,440)] Individual Income Tax

$27,214 ( 9,316) $17,898

Total Income Tax (Individual + Corporate) Corporate Income Tax Individual Income Tax Total Income Tax

$10,400 17,898 $28,298

Total Individual Income Tax w/o a Corporation Business Income $80,000 Combined Federal/Provincial Income Tax 34% Individual Income Tax $27,200 The combined corporate and personal income taxes are $1,098 ($28,298 - $27,200) higher than the income taxes that would have been paid without the use of a corporation. This result reflects a corporate combined income tax rate of 13% which is just below the rate required for perfect integration of 13.04%. More than offsetting this is a low provincial dividend tax credit (perfect integration requires a 4/13 or 30.8% credit). Type: ES Topic: After tax retention - incorporating a business and non-eligible dividends

78) Medtech Inc. is a CCPC that uses a calendar-based taxation year. On January 1, 2022, the balance in the Company's Non-Eligible RDTOH is $17,445 and the balance in its Eligible RDTOH and GRIP accounts are both nil. Medtech's 2022 taxable income is $456,250. and its 2022 Part I tax payable is $82,506. The company has no foreign income in 2022 and no loss carryovers claimed in determining its taxable income. The Company's 2022 net income includes the following amounts of taxable capital gains and income from property: Taxable Capital Gains $43,730 Eligible Dividends from Canadian Public Companies 26,560 Rental Income from Residential Properties 14,760 Non-eligible dividends - Connected Company (See Note) 77,700 Note - The non-eligible dividends, were received from Medcare, another CCPC in which Medtech owns 42% of the voting shares. The voting shares of Medcare owned by Medtech represent 27% of the value of all of the corporation's shares. Medcare received a dividend refund of $20,386 for its 2022 taxation year. Medtech is associated with four other companies. The annual business limit for the SBD is shared equally by Medtech and these four other companies. The $100,000 allocation is significantly less than the Company's active business income in 2022. Medtech Inc. paid taxable dividends of $66,560 in 2022. It is the policy of the corporation to designate dividends as eligible only to the extent that they are entitled to a dividend refund. In 2021, Medtech and its associated companies had combined Adjusted Aggregate Investment Income (AAII) of $32,400 and the combined Taxable Capital Employed in Canada (TCEC) was $2,300,000. Required: A. Determine the refundable portion of Medtech's Part I Tax for 2022. B. Determine Medtech's 2022 Part IV Tax. C. Determine the December 31, 2022 balances in Medtech's Eligible and non-eligible RDTOH accounts. D. Determine Medtech's 2022 dividend refund, providing separate amounts for refunds on eligible dividends and non-eligible dividends.

Answer: Part A - Refundable Part I Tax The refundable portion of the 2022 Part I tax would be the least of the following amounts: Taxable Capital Gain Rental Income Aggregate Investment Income (AII) Rate ITA 129(4)(a)(i)

$43,730 14,760 $58,490 30-2/3% $17,937

Taxable Income Amount Eligible for the SBD (See Note) Total Rate ITA 129(4)(a)(ii)

$456,250 ( 100,000) $356,250 30-2/3% $109,250

ITA 129(4)(a)(iii) Part I Income Tax - Given

$ 82,506

Note - The problem states that Medtech's $100,000 share of the annual business limit is less than its active business income. In addition, it is less than the Company's taxable income. These facts establish that the amount eligible for the SBD is Medtech's share of the annual business limit. The refundable portion of Part I tax is equal to $17,937, which is the least of the three amounts. Part B - Part IV Tax The 2022 Part IV Tax for Medtech Inc. would be calculated as follows: Dividend Refund received by Medcare Medtech's percentage of share ownership Part IV Tax on Non-Eligible Medcare Dividends Part IV Tax on Eligible Portfolio Investment Dividends [(38-1/3%)($26,560)] 2022 Part IV Tax

$20,386 42% $ 8,562 10,181 $18,743

Part C - RDTOH Balances The December 31, 2022 balance in the Eligible RDTOH account would be as follows: Opening Balance Part IV Tax on Eligible Dividends Eligible RDTOH - December 31, 2022

$ Nil 10,181 $10,181

The December 31, 2022 balance in the Non-Eligible RDTOH would be as follows: Opening Part I Refundable Tax Part IV Tax on Non-Eligible Medcare Dividends Non-Eligible RDTOH - December 31, 2022

$17,445 17,937 8,562 $43,944

Part E - Dividend Refunds The maximum amount of taxable dividends that can be designated as eligible is limited by Medtech's GRIP account balance on December 31, 2022. We know that the initial 2022 balance was nil and that the $26,560 of eligible dividends received from Canadian public companies would be added. There is also the possibility that there would a further amount added as a result of some of the corporation's income not being eligible for the SBD. (This amount cannot be determined based on the information in the problem.) However, given Medtech's policy of designating dividends as eligible only when a dividend refund is available, a further addition to the GRIP account would not be relevant in this problem. This is because a dividend refund will only be available for the balance in the Eligible RDTOH, an amount of $10,181. Based on this, the eligible dividend designation will be for $26,560, the amount of the eligible dividends received. The refund on these dividends will be $10,181 [($26,560)(38-1/3%)]. The remaining $40,000 ($66,560 - $26,560) will be non-eligible. The refund on these non-eligible dividends would be $15,333, the lesser of: • $15,333 [(38-1/3%)($40,000)]; and • $43,944, the balance in the Non-Eligible RDTOH. The total dividend refund would be as follows: Dividend Refund on Eligible Dividends Dividend Refund on Non-Eligible Dividends Total Dividend Refund for 2022

Type: ES Topic: Corporate tax - Part I & Part IV with dividend refund

$10,181 15,333 $25,514

79) Epic Inc. is a CCPC with a calendar-based taxation year. The following information relates to the 2022 taxation year. 1. The Company had Canadian source active business income of $237,000. Of this total, it was determined that $126,000 qualified as M&P profits under ITR 5200. 2. The Company received $25,500 in foreign investment income. This was net of $4,500 foreign income tax withheld. 3. Net income for 2022 is $277,000. This is made up of the $237,000 in active business income, the $30,000 in foreign investment income, and $10,000 in taxable capital gains. 4. Because of a $50,000 2020 non-capital loss balance that was claimed taxable income is $227,000. 5. The Company shares the annual business limit for the SBD with two other companies. Epic's allocated share of the business limit is $200,000. 6. Assume that the foreign tax credit for foreign investment income is equal to the amount withheld. 7. For the 2021 taxation year, the combined Adjusted Aggregate Investment Income (AAII) of Epic and its associated companies is $44,250 and the combined Taxable Capital Employed in Canada TCEC is $2,440,000. Required: Calculate the Part I income tax payable for the 2022 taxation year. As the corporation operates in a territory that has a reduced income tax rate for M&P activity, a separate calculation of the federal M&P deduction is required. Show all of the calculations used to provide the required information, including those for which the result is nil.

Answer: The required calculation of 2022 Part I income tax would be as follows: Taxable Income (Given)

$227,000

Base Amount of Part I Tax [(38%)($227,000)] Federal Abatement [(10%)($227,000)] SBD (Note One) ART (Note Two) 2,880 M&P Deduction (Note Three) GRR (Note Four) Foreign Non-Business Income Tax Credit (Equal To Withholding) 2022 Part I Income Tax

$86,260 ( 22,700) ( 38,000) Nil Nil ( 4,500) $23,940

Note One - There is a circular calculation involved in the calculation of foreign tax credits, the SBD, and the ART. This adds considerable complexity to the calculation of federal income tax payable and, in most situations, the additional calculations do not influence the outcome (that would, in fact, be the case in this problem). To avoid these additional calculations, we have stated that the foreign tax credit is equal to the amount withheld. Given the preceding assumption with respect to the foreign tax credit, the SBD would be equal to 19% of the least of: 1. 2.

Active Business Income (Given) Taxable Income Deduct: [(100/28)($4,500)] Foreign Non-Business Tax Credit Allocated Annual Business Limit (Given)

$227,000

( 16,071)

$237,000

$210,929 $200,000

The least of the three amounts is $200,000, resulting in a SBD of $38,000 [(19%)($200,000)]. Note Two - The aggregate investment income (AII) is equal to the gross foreign investment income plus the taxable capital gain. The ART is 10-2/3% of the lesser of: 1. AII ($30,000 + $10,000) $40,000 2. Taxable Income $227,000 Deduct: Amount Eligible for the SBD ( 200,000) $27,000 The ART is $2,880 [(10-2/3%)($27,000)].

Note Three - The M&P deduction would be 13% of the lesser of: 1. Canadian M & P Profits (Given) $126,000 Deduct: Amount Eligible for the SBD ( 200,000) 2.

Taxable Income Deduct: Amount Eligible for the SBD AII (Note Two)

Nil

$227,000 ( 200,000) ( 40,000)

Given these calculations, the M&P deduction would be nil. Note Four - The GRR is nil, calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction AII (Note Two) Full Rate Taxable Income Rate GRR

$227,000 ( 200,000) Nil ( 40,000) Nil 13% Nil

Type: ES Topic: Corporate tax payable - simple with ART

Nil

80) Fracto Inc. is a CCPC that uses a calendar-based taxation year. For the 2022 taxation year the company's net income was made up of the following components: Active Business Income (Note 1) Taxable Dividends from Canadian Corporations: Wholly-Owned Subsidiary (Note 2) Portfolio Investments (All Eligible Dividends) Canadian Interest Income Taxable Capital Gains 2022 Net Income

$ 514,400 297,400 89,600 44,300 93,100 $1,038,800

Note 1 - As determined under ITR 5200, $326,000 of this total qualified as M&P profits. As these amounts are allocated to a territory which has a special rate for M&P profits, the company calculates the federal M&P deduction. Note 2 - The subsidiary was entitled to a dividend refund of $52,800 in 2022 as a result of paying these taxable dividends. None of the dividends were designated as eligible. Other Information Relevant to the 2022 taxation year: 1. Fracto Inc. is part of a group of associated companies. It has been agreed that Fracto Inc. will be allocated $100,000 of the group's annual business limit for purposes of determining the SBD. 2. At January 1, 2022, Fracto Inc. had an Eligible RDTOH account balance of $12,000 and a nil balance in its Non-Eligible RDTOH account. 3. At December 31, 2021, Fracto Inc. had a GRIP account balance of $126,700. 4. In the 2021 taxation year, Fracto and its associated corporations had Adjusted Aggregate Investment Income (AAII) of $47,650 and the combined Taxable Capital Employed In Canada (TCEC) was $4,652,000. 5. On July 1, 2022, Fracto Inc. paid taxable dividends to its shareholders in the amount of $132,400. It is the policy of the corporation to maximize the amount of dividends designated as eligible. 6. The Company has a 2020 net capital loss balance of $12,000 and a 2020 non-capital loss balance of $163,400. It plans to claim both of these loss carryovers for its 2022 taxation year. Required: For Fracto Inc.'s 2022 taxation year, calculate the following: A. Part I Income Tax. B. The refundable portion of Part I Tax. C. Part IV Tax. D. The balance in the GRIP account on December 31, 2022. E. The balances two RDTOH accounts on December 31, 2022. F. The dividend refund, if any, showing separately the amount related to eligible dividends and the amount related to non-eligible dividends. G. Total federal income tax payable (net of any dividend refund).

Answer: Part A - Part I Income Tax The required calculations to determine 2022 Part I income tax are as follows: 2022 Net Income Taxable Dividends ($297,400 + $89,600) - ITA 112(1) 2020 Net Capital Loss 2020 Non-Capital Loss 2022 Taxable Income

$1,038,800 ( 387,000) ( 12,000) ( 163,400) $ 476,400

Base Amount of Part I Tax [(38%)($476,400)] Federal Abatement [(10%)($476,400)] SBD (Note One) ART (Note Two) M&P Deduction (Note Three) GRR (Note Four) 2022 Part I Income Tax Payable

$181,032 ( 47,640) ( 19,000) 13,376 ( 29,380) ( 3,250) $ 95,138

Note One - The SBD is 19% of the least of the following three amounts: 1. Active Business Income $514,400 2. Taxable Income (no adjustments) $476,400 3. Allocated Annual Business Limit $100,000 The lowest of the three amounts is the Company's $100,000 share of the annual business limit. This results in a SBD of $19,000 [(19%)($100,000)]. Note Two - The aggregate investment income (AII) of $125,400 is calculated as follows: Taxable Capital Gains 2020 Net Capital Loss Deducted Canadian Interest Income 2022 AII

$ 93,100 ( 12,000) 44,300 $125,400

The ART is 10-2/3% of the lesser of: 1. AII 2. Taxable Income Deduct: Amount Eligible for the SBD

$476,400 ( 100,000)

The ART is $13,376 [(10-2/3%)($125,400)].

$125,400 $376,400

Note Three - The M&P deduction would be 13% of the lesser of: 1. Canadian M & P Profits (Given) $326,000 Deduct: Amount Eligible for the SBD ( 100,000) 2.

Taxable Income Deduct: Amount Eligible for the SBD AII (Note Two)

$226,000

$476,400 ( 100,000) ( 125,400)

$251,000

The M&P deduction would be equal to $29,380 [(13%)($226,000)]. Note Four - The GRR would be calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction AII (Note Two) Full Rate Taxable Income Rate GRR

$476,400 ( 100,000) ( 226,000) ( 125,400) $ 25,000 13% $ 3,250

Part B - Refundable Part I Tax The amount of refundable Part I tax is $38,456, the least of three amounts, calculated as follows: • Amount under ITA 129(4)(a)(i) [(30-2/3%)($125,400)] $ 38,456 • Amount under ITA 129(4)(a)(ii) [(30-2/3%)($476,400 - $100,000)] $115,429 • Amount under ITA 129(4)(a)(iii) Part I Tax Payable (Part A) $ 95,138 Part C - Part IV Tax The required calculation of the 2022 Part IV Tax is as follows: Part IV Tax on Eligible Dividends [($89,600)(38-1/3%)] Part IV Tax on Non-Eligible Dividends from Subsidiary (100%) 2022 Part IV Tax

$34,347 52,800 $87,147

Part D - GRIP Balance The December 31, 2022 GRIP balance would be calculated as follows: GRIP Balance at beginning of 2022 Taxable Income Income Eligible for the SBD Lesser of: • Taxable Income = $476,400 • AII = $125,400 Adjusted Taxable Income Rate Eligible Dividends Received in 2022 Eligible Dividends Designated in 2021 GRIP Balance - December 31, 2022

$476,400 ( 100,000)

( 125,400) $251,000 72%

$126,700

180,720 89,600 Nil $397,020

The eligible dividends paid in 2022 will reduce the GRIP account balance in 2023. Part E - RDTOH Balances December 31, 2022 RDTOH balances are as follows: Opening Balance Part IV Tax on Eligible Dividends [($89,600)(38-1/3%)] Eligible RDTOH - December 31, 2022

$12,000 34,347 $46,347

Opening Balance Part I Refundable Tax Part IV Tax on Non-Eligible Dividends from Subsidiary (100%) Non-Eligible RDTOH - December 31, 2022

$ Nil 38,456 52,800 $91,256

Part F - Dividend Refund Given the GRIP balance of $397,020, all of the $132,400 of taxable dividends paid by Fracto can be designated as eligible. With this designation, the dividend refund on eligible dividends would be the lesser of: • $46,347, the balance in the Eligible RDTOH; and • $50,753 [(38-1/3%)($132,400)]. As no non-eligible dividends were paid, this is the total refund for the year. You should note that this is less than the $50,753 that would have been available if the eligible dividend designation had been limited to the amount on which a dividend refund was available. Part G - Total 2022 Federal Income Tax Payable The required calculation to determine the 2022 federal income tax payable is as follows: Part I Tax (See Part A) Part IV Tax (See Part C) Dividend Refund (See Part F) 2022 Federal Income Tax Payable

$ 95,138 87,147 ( 46,347) $135,938

Type: ES Topic: Corporate tax payable - Part I & IV with refundable taxes & GRIP

81) Conrod Holdings Ltd. is a CCPC that uses a calendar-based taxation year end and that sells farm supplies. It owns 70% of all of the outstanding shares of Morsal Inc. On November 1, 2022, Morsal Inc. declared and paid a non-eligible dividend of $21,000, of which Conrod Holdings Ltd. received $14,700 (70%). As a result of paying the taxable dividend, Morsal Inc. was entitled to a dividend refund in the amount of $8,050. Other income that was reported by Conrod Holdings consisted of the following amounts: Taxable Capital Gain $4,600 Eligible Dividends from Imperial Oil Common Shares 500 Interest Income 450 The taxable capital gain was on the sale of land that was formerly used as a storage area for inventory. Improved inventory control procedures eliminated the need for the land. The interest income was earned on deposits of temporary cash balances set aside for the purchase of inventory. On January 1, 2022, Conrod had a Non-Eligible RDTOH account balance of $4,950. There was no balance in the Eligible RDTOH account. The GRIP account balance on December 31, 2021 was nil. At the end of 2021, the Company's RDTOH balance was $8,950. The 2021 dividend refund was $4,000. There was no December 31, 2021 balance in the corporation's GRIP account. The Company's taxable income for the 2022 taxation year is $44,000. There was no foreign income in 2022. Assume the 2022 Part I income tax was correctly calculated as $9,250. Because of its association with Morsal Inc., its share of the annual business limit on income eligible for the SBD is $10,000. As Conrod's active business income is greater than $10,000, the amount of income that is eligible for the SBD is $10,000. Conrod Holdings paid taxable dividends of $10,000 in 2022. The corporation's policy is to designate dividends as eligible only to the extent that the company is entitled to a dividend refund. For 2021, Conrod and Morsal had combined Adjusted Aggregate Investment Income (AAII) of $32,485. and Taxable Capital Employed In Canada (TCEC) of $6,426,000. Required: Show all of the calculations used to provide the required information, including those for which the result is nil. For the 2022 taxation year, calculate the following for Conrod Holdings: A. Refundable Part I Tax on investment income. B. Part IV Tax. C. The December 31, 2022 GRIP account balance. D. The balance in the Eligible and non-eligible RDTOH accounts on December 31, 2022. E. The dividend refund, showing separately refunds on eligible and non-eligible dividends.

Answer: Part A - Part I Refundable Tax As the interest income received relates to temporary balances resulting from the Company's normal business it would be characterized as active business income. The refundable portion of Part I tax on investment income is the least of the following amounts: Aggregate Investment Income (AII) Rate ITA 129(4)(a)(i)

$ 4,600 30-2/3% $ 1,411

Taxable Income Amount Eligible for the SBD (Given) Total Rate ITA 129(4)(a)(ii)

$44,000 ( 10,000) $34,000 30-2/3% $10,427

ITA 129(4)(a)(iii) Part I Income Tax - Given

$ 9,250

The refundable portion of Part I tax is therefore $1,411. Part B - Part IV Tax The 2022 Part IV Tax for Conrod Holdings Ltd. would be calculated as follows: Dividend refund to Morsal Inc. Conrod's Percentage of share ownership Part IV Tax on Morsal Inc. Non-Eligible Dividends Part IV Tax on Imperial Oil Eligible Dividends [(38-1/3%)($500)] 2022 Part IV Tax

$8,050 70% $5,635 192 $5,827

Part C - GRIP Balance The December 31, 2022 GRIP account balance would be determined as follows: GRIP Balance at December 31, 2021 Taxable Income Income Eligible for the SBD Lesser Of: • Taxable Income = $44,000 • AII = $4,600 Adjusted Taxable Income Rate Eligible Dividends Received in 2022 Eligible Dividends Designated in 2021 GRIP Balance - December 31, 2022

$ Nil $44,000 ( 10,000)

( 4,600) $29,400 72%

21,168 500 Nil $21,668

The eligible dividends paid during 2022 will reduce the GRIP account balance in 2023.

Part D - RDTOH Balances The required December 31, 2022 balances would be as follows: Opening Balance Part IV Tax on Eligible Dividends [(38-1/3%)($500)] Eligible RDTOH - December 31, 2022

$ Nil 192 $192

Opening Balance Part I Refundable Tax Part IV on Morsal Inc. Non-Eligible Dividends Non-Eligible RDTOH - December 31, 2022

$ 4,950 1,411 5,635 $11,996

Part E - Dividend Refund With a GRIP account balance of $21,668, all of the $10,000 in taxable dividends paid could be designated as eligible. However, any dividend refund is limited to the Eligible RDTOH of $192. This means that, under the corporation's policy, the eligible designation would be limited to $500 ($192 ÷ 38-1/3% with a $1 rounding error), the amount of the eligible dividends received. The remaining dividends of $9,500 ($10,000 - $500) would be non-eligible. Based on this the total dividend refund would be as follows: Eligible Dividend Refund [(38-1/3%)($500)] Non-Eligible Dividend Refund [(38-1/3%)($9,500)] Total 2022 Dividend Refund

Type: ES Topic: Corporate tax - Part I & Part IV with dividend refund

$ 192 3,642 $3,834

82) The following data is for Masterson Ltd., a CCPC, for the 2022 taxation year ending December 31, 2022: Canadian Source Active Business Income (Includes $99,000 of M&P Profits) Foreign Investment Income (Net of $1,200 foreign income tax) Net Income Taxable Income

$133,000 6,800 141,000 95,000

No loss carryovers were claimed for the 2022 taxation year. For 2021, the Adjusted Aggregate Investment Income (AAII) of Masterson was $17,150 and its Taxable Capital Employed In Canada (TCEC) was $3,350,000. There are no associated corporations. Assume that the foreign tax credit on foreign investment income is equal to the $1,200 in for income tax withheld. Required: Calculate the Part I income tax for the 2022 taxation year. Show all supporting calculations including those for which the result is nil. Because Masterson operates in a territory that has a special rate for M&P profits, a separate calculation of the M&P deduction is required. Answer: The required calculation of 2022 Part I Income Tax would be as follows: Taxable Income (Given)

$95,000

Base Amount of Part I Tax [(38%)($95,000)] Federal Abatement [(10%)($95,000)] SBD (Note One) ART (Note Two) Foreign Tax Credit on Non-Business Income (Equal to withholding) M&P Deduction (Note Three) GRR (Note Four) 2022 Part I Income Tax Payable

$36,100 ( 9,500) ( 17,236) 457 ( 1,200) Nil Nil $ 8,621

Note One - There is a circular calculation involved in the calculation of foreign tax credits, the SBD, and the ART. This adds considerable complexity to the calculation of Part I income tax payable and, in most situations, the additional calculations do not influence the outcome (that would, in fact, be the case in this problem). To avoid these additional calculations, we have stated that the foreign tax credit is equal to the foreign income taxes of $1,200. Given the preceding assumption with respect to the foreign tax credit, the SBD would be equal to 19% of the least of: 1. Active Business Income $133,000 2. Taxable Income $95,000 Deduct: [(100/28)($1,200)] Foreign Tax Credit Non-Business ( 4,286) $ 90,714 3. Annual Business Limit $500,000 The least of the three amounts is $90,714, resulting in a SBD of $17,236 [(19%)($90,714)].

Note Two - The aggregate investment income (AII) is equal to the pre-tax foreign investment income of $8,000. The ART is 10-2/3 % of the lesser of: 1. 2.

AII Taxable Income Deduct: Amount eligible for the SBD

$95,000 ( 90,714)

$8,000 $4,286

The ART is $457 [(10-2/3%)($4,286)]. Note Three - The M&P deduction is 13% percent of the lesser of: 1.

Canadian M & P Profits (Given) Deduct: Amount eligible for the SBD

$99,000 ( 90,714)

Taxable Income Deduct: Amount eligible for the SBD AII (Note Two)

$95,000 ( 90,714) ( 8,000)

Given these calculations, the M& P deduction is nil. Note Four - The GRR is nil, calculated as follows: Taxable Income Amount Eligible for the SBD Amount Eligible for the M&P Deduction AII (Note Two) Full Rate Taxable Income Rate GRR

$95,000 ( 90,714) Nil ( 8,000) Nil 13% Nil

Type: ES Topic: Corporate tax payable - simple Part I with SBD, ART, FTC, M&P & GRR

$8,286

Nil

83) Landor Ltd. is a CCPC with a calendar-based taxation year. The company's 2022 net income is $223,500 the component of which are as follows: Canadian Active Business Income (Note One) Taxable Capital Gains Foreign Business Income (Note Two) 2022 Net Income

$183,450 11,250 28,800 $223,500

Note One - This includes $146,700 of M&P profits, determined using the formula in the ITRs. As these amounts are allocated to a territory which has a special rate for M&P profits, the company is required to calculate the federal M&P deduction. Note Two - This amount is before foreign income tax of 10%. Other Information Relevant to the 2022 Taxation Year: 1. In 2022, Landor Ltd. declares and pays taxable dividends of $46,000. It is the policy of the corporation to only designate dividends as eligible to the extent that they generate a dividend refund. 2. It is estimated that 88% of Landor's wages and 92% of Landor's gross sales relate to permanent establishments situated in a Canadian province or territory. 3. Landor Ltd. is associated with one company. Landor's share of the annual business limit is $110,000. 4. On January 1, 2022, there was no balance in either of Landor's RDTOH accounts. On December 31, 2021 the Company's GRIP account balance was nil. 5. In 2021, the Adjusted Aggregate Investment Income (AAII) of Landor and its associated company is $27,350 and the combined Taxable Capital Employed In Canada (TCEC) is $950,000. 6. Landor has a 2019 net capital loss balance of $5,250 which it intends to claim in 2022 to the maximum extent possible. 7. Assume that the foreign tax credit on foreign business income is equal to the foreign income tax. Required: Show all of the calculations used to provide the required information, including those for which the result is nil. Calculate the following amounts for Landor: A. 2022 Part I Income Tax. B. 2022 refundable portion of Part I tax. C. 2022 Part IV Tax. D. GRIP account balance on December 31, 2022. E. Eligible and Non-eligible RDTOH balances on December 31, 2022. F. 2022 dividend refund, showing separately refunds related to eligible and non-eligible dividends.

Answer: Part A - 2022 Part I Income Tax Landor Ltd.'s 2022 Taxable Income would be calculated as follows: 2022 Net Income Less: 2019 Net Capital Loss 2022 Taxable Income

$223,500 ( 5,250) $218,250

Landor Ltd.'s 2022 Part I Income Tax would be calculated as follows: Base Amount of Part I Tax [(38%)($218,250)] Federal Abatement (Note One) SBD (Note Two) ART (Note Three) M&P Deduction (Note Four) GRR (Note Five) Foreign Tax Credit on Business Income [(10%)($28,800)] 2022 Part I Income Tax

$82,935 ( 19,643) ( 20,900) 640 ( 4,771) ( 8,522) ( 2,880) $26,859

Note One - The abatement is based on 90% [(88% + 92%) ÷ 2] of Landor's income being allocated to a province. This results in an amount of $19,643 [(90%)(10%)($218,250)]. Note Two - The SBD is 19% of the least of the following three amounts: 1. Canadian Active Business Income (Given) $183,450 2. Taxable Income $218,250 Deduct: [(4)($2,880)] Business FTC ( 11,520) $206,730 3. Allocated Annual Business Limit (Given) $110,000 The least of the amounts is the Company's $110,000 share of the annual business limit, resulting in a SBD of $20,900 [(19%)($110,000)]. Note Three - The Aggregate Investment Income (AII) of $6,000 is calculated as follows: Taxable Capital Gains Less: 2018 Net Capital Loss Deducted 2022 AII

$11,250 ( 5,250) $ 6,000

The ART is 10-2/3% of the lesser of: 1. AII 2. Taxable Income Deduct: Amount eligible for the SBD

$218,250 ( 110,000)

The ART is therefore $640 [(10-2/3%)($6,000)].

$ 6,000 $108,250

Note Four - The M&P deduction is 13% of the lesser of: 1. M & P Profits (Given) Deduct: Amount eligible for the SBD

$146,700 ( 110,000)

2. Taxable Income Deduct: Amount eligible for the SBD [(4)($2,880)] Foreign Business Tax Credit AII (Note Three)

$218,250 ( 110,000) ( 11,520) ( 6,000)

$36,700

$90,730

The least of the two amounts is $36,700, resulting in a M&P deduction of $4,771 [(13%)($36,700)]. Note Five - The GRR is calculated as follows: Taxable Income Amount eligible for the SBD Amount eligible for the M&P Deduction AII (Note Three) Full Rate Taxable Income Rate General Rate Reduction

$218,250 ( 110,000) ( 36,700) ( 6,000) $ 65,550 13% $ 8,522

Part B - 2022 Refundable Part I Tax The refundable portion of Part I tax would be the least of three amounts: AII (Note Three) Rate Amount under ITA 129(4)(a)(i)

$6,000 30-2/3% $1,840

Taxable Income Deduct: Amount Eligible for the SBD [(4)($2,880)] Foreign Business Tax Credit Balance Rate Amount under ITA 129(4)(a)(ii)

$218,250 ( 110,000) ( 11,520) $ 96,730 30-2/3% $ 29,664

Amount under ITA 129(4)(a)(iii) Part I Tax Payable

$26,859

The least of these three amounts would be $1,840. Part C - 2022 Part IV Tax Landor has no Part IV Tax in 2022. Part D - GRIP Balance As there would be no additions made to the account in 2022, the balance remains at nil on December 31, 2022.

Part E - RDTOH Balances The beginning balance in both RDTOH accounts was nil. As there were no additions to the Eligible RDTOH during 2022, the balance in this account would remain at nil. There was an addition of $1,840 of Part I refundable tax to the Non-Eligible RDTOH in 2022. This amount would be the balance on December 31, 2022 in this account. Part F - 2022 Dividend Refund As the GRIP balance is nil, none of the dividends paid can be designated as eligible. This means that all of the $46,000 in taxable dividends paid would be non-eligible. The dividend refund on these taxable dividends would be the lesser of: • $17,633, 38-1/3% of the $46,000 in non-eligible dividends paid; and • $1,840, the Non-Eligible RDTOH balance on December 31, 2022. Type: ES Topic: Corporate tax payable - simple Part I with SBD, ART, FTC, M&P & GRR

84) Gardner Distributing Company is a CCPC that uses a calendar-based taxation year. Gardner was incorporated ten years ago by Mr. Hugh Gardner, its sole shareholder to carry on a business of distributing specialty gardening products to Canadian retailers. The Company's accountant prepared the following Income Statement: Sales Cost of Goods Sold Gross Profit Operating Expenses: Selling and Administration Amortization Expense Charitable Donations Business Income Other Income and Losses: Eligible Dividends Received Loss on sale of a Truck Gain on sale of Investments Pre-Tax Accounting Income

$1,916,400 ( 940,000) $ 976,400 ($315,000) ( 47,000) ( 15,000)

$ 27,000 ( 19,000) 7,000

( 377,000) $ 599,400

15,000 $ 614,400

Other information: 1. The Company had depreciable property with the following UCC balances on January 1, 2022: UCC $726,000 472,000 22,000

Class 3 (5%) Class 8 (20%) Class 10 (30%)

The UCC balance in Class 10 reflects a single truck that was used for deliveries. It had a capital cost of $38,000 and a carrying value for accounting purposes of $29,000. It was sold in 2022 for $10,000, and replaced with a leased truck. The only other 2022 transaction involving depreciable property was the purchase of additional Class 8 property for $82,000. 2. On January 1, 2022, the Company had an Eligible RDTOH account balance of $14,000 and a NonEligible RDTOH account balance of nil. 3. On December 31, 2021, Gardner has a GRIP account balance of $132,500. In 2021, the Company designated $9,600 of taxable dividends that it paid as eligible. 4. In 2021, Gardner had Adjusted Aggregate Investment Income (AAII) of $24,680 and Taxable Capital Employed In Canada (TCEC) of $4,672,000. 5. In 2022, the Company paid $17,000 in taxable dividends to Mr. Gardner. It is the policy of the corporation to only designate dividends as eligible to the extent it will generate a dividend refund. 6. Investments with an ACB of $93,000 were sold in 2022 for $100,000. Required: Show all supporting calculations used to provide the information requested, including those for which the result is nil. Specifically determine the following for the company: A. The minimum 2022 Net Income and Taxable Income. B. The 2022 Part I Tax. C. The 2022 refundable portion of Part I income tax. D. 2022 Part IV Tax.

E. GRIP account balance on December 31, 2022. F. The Eligible and Non-Eligible RDTOH account balances on December 31, 2022. G. The 2022 eligible and non-eligible dividend refunds. H. The 2022 Federal Income Tax Payable. This should include any Part I IV Tax and net of any dividend refund. Answer: Part A - 2022 Net Income and Taxable Income The 2022 net income and taxable income would be determined as follows: Pre-Tax Accounting Income Reconciliation Adjustments: Amortization Expense Charitable Donations Accounting Loss on sale of Truck Taxable Capital Gain (Note One)

$614,400 $ 47,000 15,000 19,000 3,500

Reconciliation Deductions: Accounting Gain on Investment Sale CCA (Note Two) Terminal Loss (Note Three) 2022 Net Income Charitable Donations Eligible Dividends Received - ITA 112(1) 2022 Taxable Income

($ 7,000) ( 155,300) ( 12,000)

84,500 $698,900

( 174,300) $524,600 ( 15,000) ( 27,000) $482,600

Note One - The taxable capital gain on the investment would be calculated as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$100,000 ( 93,000) $ 7,000 1/2 $ 3,500

Note Two - The CCA can be calculated as follows: Class 3 Class 3 [(5%)($726,000)]

Opening Balance Additions AccII Adjustment Balance For CCA Rate CCA

$ 36,300 Class 8

$472,000 82,000 41,000 $595,000 20% $119,000

The total CCA for 2022 is $155,300 ($36,300 + $119,000). Note Three - The only remaining property in Class 10 was sold for $10,000. As this was $12,000 less than the UCC balance ($22,000 - $10,000), this amount is deductible as a terminal loss. Part B - 2022 Part I Income Tax The 2022 Part I income tax is determined as follows: Base Amount of Part I tax [(38%)($482,600)] Federal Abatement [(10%)($482,600)] SBD (Note Four) ART (Note Five) GRR (Note Six) 2022 Part I Income Tax

$183,388 ( 48,260) ( 91,694) Nil Nil $ 43,434

Note Four - The SBD would be equal to 19% of the least of: 1. Active Business Income ($524,600 - $3,500 - $27,000) 2. Taxable Income 3. Annual Business Limit

$494,100 $482,600 $500,000

The least of the three amounts is $482,600 and 19% of this amount is $91,694. Note Five - The aggregate investment income (AII) is equal to the taxable capital gain of $3,500. The ART is 10-2/3% of the lesser of: 1. 2.

AII Taxable Income Deduct: Amount eligible for the SBD

$ 3,500 $482,600 ( 482,600)

$ Nil

The lesser of these amounts is Nil and 10-2/3% of this amount is also Nil. Note Six - The GRR is calculated as follows: Taxable Income Amount eligible for the SBD AII (Note Five) Full Rate Taxable Income Rate GRR

$482,600 ( 482,600) ( 3,500) Nil 13% Nil

Part C - 2022 Refundable Part I Tax Using amounts calculated in Part B, the amount of 2022 refundable Part I tax is Nil, the least of three amounts, calculated as follows: • Amount under ITA 129(4)(a)(i) [(30-2/3%)($3,500)] $ 1,073 • Amount under ITA 129(4)(a)(ii) [(30-2/3%)($482,600 - $482,600)] Nil • Amount under ITA 129(4)(a)(iii) Part I Income Tax $43,434

Part D - 2022 Part IV Tax The 2022 Part IV tax would be payable on the eligible dividends received of $27,000. The amount is $10,350 [(38-1/3%)($27,000)]. Part E - GRIP Balance The December 31, 2022 GRIP account balance can be calculated as follows: GRIP Balance at December 31, 2021 Taxable Income Income eligible for the SBD Lesser of: • Taxable Income = $482,600 • AII = $3,500 Adjusted Taxable Income Rate Eligible Dividends Received in 2022 Eligible Dividends Designated in 2021 GRIP Balance - December 31, 2022

$482,600 ( 482,600)

( 3,500) Nil 72%

$132,500

Nil 27,000 ( 9,600) $149,900

The eligible dividends paid in 2022 will reduce the GRIP in 2023. Part F - RDTOH Balances The December 31, 2022 RDTOH balances would be as follows: Opening - Eligible RDTOH Part IV Tax on Eligible Dividends Received Eligible RDTOH - December 31, 2022

$14,000 10,350 $24,350

Opening Balance - Non-Eligible RDTOH Refundable Part I Tax on Investment Income Non-Eligible RDTOH - December 31, 2022

Nil Nil Nil

Part G - 2022 Dividend Refund With the GRIP account balance at $149,900, all of the $17,000 of taxable dividends paid can be designated as eligible. The dividend refund on the eligible dividends would be $6,517, the lesser of: • $6,517 [(38-1/3%)($17,000)]; and • $24,350, the balance in the Eligible RDTOH. As no non-eligible dividends were paid in 2022, there would be no further refund. Part H - 2022 Federal Income Tax Payable The minimum 2022 Federal Income Tax Payable can be calculated as follows: Part I Tax (Part B) Part IV Tax (Part D) Dividend Refund (Part G) 2022 Federal Income Tax Payable

Type: ES Topic: Corporate tax payable - with SBD, ART, GRR & GRIP

$43,434 10,350 ( 6,517) $47,267

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 14 Other Issues in Corporate Taxation 14.1 Online Exercises 1) Why does the government believe that it is necessary to have rules related to the AOC of a corporation that has accumulated losses. Answer: There are many companies that have accumulated losses that they have no hope of realizing. This situation is of concern to the government in that there are billions of dollars of such benefits available in the economy at any point in time. If access to these benefits was relatively trouble-free, the cost to the government in lost tax revenues could be enormous. As a consequence, the government has enacted legislation which significantly restricts the use of losses in situations where there has been an AOC. Type: ES Topic: Acquisition of control (AOC) - general concepts

2) How is an acquisition of control (AOC) defined? Describe a common event that would result in an AOC. Answer: Control requires ownership of shares that carry with them the ability or right to elect a majority of the members of the board of directors. An AOC occurs when some event results in a taxpayer (or group) who did not have control of the corporation acquires that control. A common event of this type would be a majority shareholder selling all of their shares to an unrelated person. Type: ES Topic: Acquisition of control (AOC) - general concepts

3) ITA 249(4) requires that, when there is an acquisition of control (AOC), the acquired corporation will have a deemed taxation year end on the day preceding the AOC. What is the objective of this requirement? Answer: As the use of losses will be restricted after the AOC, this rule prevents losses from being used prior to the normal end of the taxation year in which the AOC took place. In addition the AOC rules deem a taxation year end to measure the extent of unrealized losses prior to the AOC. It is these losses that are then subject to the restrictions imposed by the AOC rules. Type: ES Topic: Acquisition of control (AOC) - general concepts

4) Briefly describe the basic income tax consequences that result from an acquisition of control (AOC). Answer: The basic income tax consequences of an AOC are as follows: • There is a deemed taxation year end at the time the AOC occurs. • There are special rules requiring the recognition of unrealized losses on certain property by deeming dispositions at FMV at the deemed taxation year end. • With respect to non-capital losses, they can only be used in years subsequent to the AOC to offset income from the same or similar business. There are similar restrictions on the use of pre-AOC investment tax credits. In addition it is only the portion of a non-capital loss represented by a business loss that may be used in taxation years subsequent to an AOC. The part of a non-capital loss that relates to property losses or ABILs is treated identically to net capital losses. • With respect to net capital losses, they cannot be carried forward to years subsequent to the AOC. In addition, if there are capital gains in the three years before the deemed taxation year end, net capital losses from years subsequent to the deemed taxation year end cannot be carried back to those earlier taxation years. • Unused charitable deductions cannot be carried forward to years subsequent to an AOC. In addition, no deduction is available on a gift made subsequent to the AOC if the gifted property was acquired prior to the acquisition date in anticipation of the AOC. Type: ES Topic: Acquisition of control - basic rules

5) When control of a corporation is acquired, ITA 111(4)(e) permits the acquired corporation to elect to have a deemed disposition of any of its capital properties on which there is either unrealized recapture of CCA and/or unrealized capital gains. Under what circumstances would you advise a client to make this election? Briefly explain your conclusion. Answer: The ITA 111(4)(e) election is clearly desirable when there are: • charitable donation carryovers, • net capital losses; •allowable capital losses in the current year; or • allowable business investment losses in the current year. If these items are not used in the taxation year created by the deemed taxation year end, they cannot be claimed in subsequent taxation years. With respect to non-capital losses from previous or current years, the desirability of the election will depend on whether the company believes they can be used in future years against profits in the same business during the relevant carry forward period. Type: ES Topic: Acquisition of control - basic rules

6) Why are the associated corporation rules necessary? Answer: It is the intent of the government to limit the availability of the small business deduction (SBD) to an amount of active business income not exceeding $500,000. In the absence of special rules, the owner of a corporation with $1,000,000 in active business income could easily split that income among multiple controlled corporations and claim multiple SBDs. The associated company rules prevent this from happening by requiring that two or more corporations must share one $500,000 annual business limit. Type: ES Topic: Associated corporations - general concepts

7) What characteristics define "shares of a specified class" under the provisions governing associated corporations? What is a common designation for such shares? Answer: Such shares generally have the following characteristics: • An absence of voting rights. • A fixed dividend rate. • A specified redemption amount. Such share attributes are commonly found in preferred or preference shares. that are the economic equivalent to debt. Type: ES Topic: Associated corporations - shares of a "specified class"

8) How is "group" defined by the associated corporations legislation? Answer: ITA 256(1.2)(a) defines a group as simply two or more persons, each of whom owns shares in the corporation in question. This would include corporations, individuals, and trusts. There is no requirement that they be related or even know each other. This is in contrast to the meaning of a group which would require some connection between the members other than the simple ownership of shares. Type: ES Topic: Associated corporations - basic rules

9) There are multiple control concepts applied for purposes of the associated corporation rules. One of the deemed other control concepts relates to the ownership of shares. What is required in terms of share ownership to be considered to control a corporation? Answer: For purposes of applying the associated company rules, the extended share ownership control concept is defined as follows: Control - A corporation is deemed to be controlled by another corporation, a person, or a group of persons, if the corporation, person, or group of persons owns either: • shares (common and/or preferred) of capital stock with an FMV of more than 50% of all issued and outstanding shares of capital stock; or • common shares with a FMV of more than 50% of all issued and outstanding common shares. Type: ES Topic: Associated corporations - control

10) For purposes of applying the associated company rules, there is a deeming rule with respect to the holding of option rights to acquire shares. Briefly describe this rule. Answer: This deeming provision requires that rights to acquire shares be treated as though they were exercised for purposes of determining control for associated corporation purposes. Type: ES Topic: Associated corporations - basic rules

11) If the government wanted to provide additional tax benefits, how would they choose between using a general rate reduction (GRR) and, alternatively, one or more investment tax credits? Answer: Investment tax credits can limit their benefits to very specific types of activity or specific geographical regions of Canada. For example, an investment tax credit is available on purchases of qualified property in the Atlantic provinces. In contrast, GRRs are usually available to all corporate taxpayers in all parts of Canada, without regard to the type of property they acquire or the region of Canada in which property is acquired. Choosing between these two types of tax benefits would be based on whether the government wished to achieve a specific objective (e.g., assistance to business in the Atlantic provinces) or, alternatively, provide general tax relief to corporations. Type: ES Topic: Investment tax credits - general concepts

12) In general, investment tax credits require a taxpayer to exchange a given amount of tax deductions for the same amount of tax credits. Explain why this is favourable to the taxpayer. Answer: It is favourable because the deduction that is being given up has a value equal to the amount of the deduction multiplied by the taxpayer's income tax rate. For example, if a corporation with a tax rate of 25% gives up a $1,000 deduction, the cost is only $250 [($1,000)(25%)]. In contrast, the credit is a direct reduction in income tax payable. A $1,000 credit would be worth $1,000, regardless of the corporation's income tax rate. Type: ES Topic: Investment tax credits - general concepts

13) Indicate the types of taxpayers that are eligible for refundable investment tax credits. Answer: The following types of taxpayers are eligible for refundable investment tax credits: • an individual; • a "qualifying corporation", which is a CCPC throughout the year with taxable income in the previous taxation year of $500,000 or less before loss carry backs; or • a trust where each beneficiary is an individual or a qualifying corporation. Type: ES Topic: Investment tax credits - refundable ITCs (ITA 127.1)

14) When a business receives an investment tax credit as the result of the purchase of depreciable property, how does this affect the amount of CCA that can be claimed in the current and subsequent taxation years? Answer: Investment tax credits (ITC) are deducted from the capital cost of depreciable property in the taxation year following receipt. This means that there will no effect on CCA in the year the ITC is received. In subsequent years, the capital cost will be reduced by the amount of the credit, thereby reducing CCA in those subsequent taxation years. Type: ES Topic: Investment tax credits - basic rules

15) The Paid Up Capital (PUC) per shares will often be different than the ACB of the share. Briefly explain how such differences can occur. Answer: Per share PUC is based on the total amount of consideration received by a corporation for issuing its shares, divided by the total number of shares issued and outstanding on a class by class basis. Per share ACB, in contrast, is shareholder specific. It is based on the average amount paid for shares of a particular class of a corporation by that investor. If all of the shares of a corporation are issued to a single individual at a point in time, the PUC and ACB would be the same for all shares. While this might be the situation for a private company (e.g., a CCPC issues all of its shares to a single individual and this individual has retained these shares from the date of incorporation), it would be very unusual for a large public company. While the PUC for all shares of a particular class will be the same, each open market purchase will create a new and unique ACB for that individual's shares. It would be very rare for this new ACB to be equal to the PUC of those shares. Type: ES Topic: PUC (paid-up capital) & ACB (adjusted cost base)

16) What is the basic purpose of the capital dividend account (CDA)? Answer: It is the intent of the government to allow certain types of income to be received on a tax free basis by most taxpayers. While there are other types of income that fall into this category, the most important example of this type of income is the non-taxable one-half of capital gains. When such amounts are earned by a private corporation, a special mechanism is required to allow the corporation to distribute the funds that represent the tax free portion to its shareholders without losing that tax free status. The capital dividend account (CDA) is that mechanism. Eligible income amounts, such as one-half of capital gains and one-half of capital losses realized by the corporation, are added to or subtracted from the CDA. To the extent there is a balance in this account, the corporation can elect to distribute such amounts to shareholders as a tax free capital dividend. Type: ES Topic: Capital dividend account (CDA) - basic rules

17) What is a stock dividend? What are the income tax consequences for an individual receiving such dividends, as well as for the corporation declaring and paying the dividend? Answer: A stock dividend is a pro rata distribution of shares to existing shareholders of a corporation. For the corporation, this will generally involve an increase in the PUC of the company's shares to the extent of the FMV of the new shares issued. To the extent that the company has increased the PUC of its shares, such dividends will be treated as dividends to the recipients. For individuals, stock dividends will be subject to either the eligible or non-eligible dividend gross up and tax credit procedures. Stock dividends can also be elected as capital dividends. Type: ES Topic: Dividends - stock dividends

18) Corporations sometimes issue shares as payment on existing debt. In some cases, the value of the shares issued will exceed the reduction in the debt. Describe the income tax consequences that result from such a transaction. Answer: This type of transaction generates an increase in PUC that is larger than the related increase in net assets. Because PUC represents an amount that can be distributed to shareholders on a tax free basis, an economic advantage results from this type of transaction. This benefit is treated as a deemed dividend under ITA 84(1). As PUC amounts are averaged over all shares of a class, the deemed dividend is allocated to all of the company's shareholders of that class, not just to creditors or lenders receiving shares as settlement of debt. The ACB of all of the shares however is increased by the deemed dividend amount. Type: ES Topic: Dividends - ITA 84(1) deemed dividend

19) When there is a dissolution of a Canadian corporation, the shareholders will often receive a distribution with respect to the disposition of their shares typically by way of cancellation. What are the income tax consequences of receiving such a distribution? Answer: To the extent of the PUC of the shares, the distribution will be received tax free. However, the excess of the amount of the distribution over the PUC of the shares will be treated as a deemed dividend. This deemed dividend is further subdivided as follows: • To the extent that the corporation has a balance in its capital dividend account, part of the distribution will be considered a separate capital dividend, which will be received on a tax free basis under ITA 83(2). This treatment will only apply if an appropriate election is made. • To the extent that the company has a pre-1972 capital surplus on hand account, the balance will be deemed not to be a dividend. • Any remaining amount of the deemed dividend will be treated as a taxable dividend under ITA 84(2), subject to either the eligible or non-eligible dividend gross up and tax credit procedures. Type: ES Topic: Dividends - ITA 84(2) deemed dividend

20) A redemption of shares may result in an ITA 84(3) deemed dividend. As the redemption is also a disposition, there may also be a capital gain or capital loss. Explain the mechanics of a share redemption. Answer: There are two steps in the process, The first requires that the amount received (POD) be reduced by the PUC of the redeemed shares. The result is a deemed dividend. The second step requires that the POD be adjusted and reduced by the deemed dividend to obtain an adjusted or modified POD. That POD is then used to calculate a capital gain or capital loss by taking that POD and subtracting the ACB of the shares (and selling costs if any). This methodology ensures that the deemed dividend and either capital gain or capital loss do not result in a double count. Type: ES Topic: Dividends - ITA 84(3) deemed dividend on redemptions of shares

21) When there is an acquisition of control, any non-depreciable property with an ACB in excess of its FMV is deemed to have been disposed of at that FMV to recognize the unrealized loss. Answer: TRUE Type: TF Topic: Acquisition of control (AOC) - general concepts

22) When a deemed taxation year end is required as the result of an acquisition of control, this event will always be followed by a short taxation year. Answer: FALSE Explanation: The corporation is permitted to elect a new taxation year end after an acquisition of control. This could provide for a full 365 day taxation year. Type: TF Topic: Acquisition of control (AOC) - general concepts

23) If a corporation elects to have a deemed disposition of a non-depreciable capital property whose FMV is greater than its ACB prior to an acquisition of control, the elected amount can be any amount between the ACB and the FMV of that property. Answer: TRUE Type: TF Topic: Acquisition of control (AOC) - general concepts

24) Any net capital loss balances that remain after an acquisition of control cannot be used in taxation years subsequent to the acquisition of control. Answer: TRUE Explanation: Unused net capital losses cannot be used in taxation years subsequent to the deemed taxation year end that occurred as a result of the acquisition of control. Type: TF Topic: Acquisition of control (AOC) - general concepts

25) For purposes of determining associated corporations, a group is any two or more related persons who own shares in a corporation. Answer: FALSE Explanation: A group is any two or more persons who hold shares in a corporation. They do not have to be related. Type: TF Topic: Associated corporations - general concepts

26) For purposes of determining associated companies, a parent is deemed to own any of a corporation's shares that are owned by any of the individual's children who are under the age of 18. Answer: TRUE Type: TF Topic: Associated corporations - general concepts

27) When a business is entitled to an investment tax credit as a result of making a capital expenditure, the amount of the credit must be deducted from the UCC of the class in the taxation year in which the credit is received. Answer: FALSE Explanation: Credits related to capital expenditures will be deducted from the related UCC in the immediately following taxation year. Type: TF Topic: Investment tax credits - basic rules

28) Non-refundable investment tax credits that are not used during the current year can be carried back 3 years and forward for 20 years. Answer: TRUE Type: TF Topic: Investment tax credits - basic rules

29) An individual investor's PUC per share will generally be changed if the corporation issues additional shares of that class, despite the fact that the ACB will not change. Answer: TRUE Type: TF Topic: PUC (paid-up capital) & ACB (adjusted cost base)

30) A private corporation sells a depreciable property with a capital cost and ACB of $200,000 for $250,000. The UCC balance at the time was $1,200,000 and there were other properties in the Class. There will an addition to the capital dividend account of $50,000. Answer: FALSE Explanation: The addition would be $25,000 [(1/2)($250,000 - $200,000)]. Type: TF Topic: Capital dividend account (CDA) - calculating the CDA

31) Because no payments are made with cash or property, stock dividends do not increase the net income of shareholders. Answer: FALSE Explanation: To the extent that there is an increase in PUC as the result of the dividend, there is an increase in net income. This increase is treated as a dividend. Type: TF Topic: Dividends - stock dividends

32) While dividends in kind are treated as a taxable dividend to the recipient shareholders, they have no income tax consequences for the corporation declaring and paying the dividend. Answer: FALSE Explanation: The payment of the dividend with corporate property is considered a disposition of that property for POD equal to the FMV of the property. Type: TF Topic: Dividends in kind - ITA 52(2)

33) When a corporation redeems all or part of its outstanding shares, the difference between the proceeds of redemption and the PUC of the shares will be treated as a capital gain for income tax purposes. Answer: FALSE Explanation: Under ITA 84(3), the difference will be treated as a deemed dividend. Type: TF Topic: Dividends - ITA 84(3) deemed dividend on redemptions of shares

34) Capital dividends that have been declared using the ITA 83(2) election are not subject to the usual gross up and tax credit procedures. Answer: TRUE Type: TF Topic: Capital dividend account (CDA) - basic rules

35) Which of the following amounts items would NOT be lost if they existed prior to an acquisition of control? A) Charitable donations carryovers. B) Farm losses. C) The part of a non-capital loss represented by an Allowable business investment loss. D) Net capital losses. Answer: B Explanation: B) Farm losses. While they would not be lost, they could only be applied in future periods to the extent of farm income from the same or similar farming business. Type: MC Topic: Acquisition of control (AOC) - general concepts

36) Which of the following is NOT a consequence of an acquisition of control (AOC)? A) A deemed taxation year end. B) The complete inability to deduct existing non-capital losses subsequent to the AOC. C) The complete inability to deduct existing net capital losses subsequent to the AOC. D) A requirement to write down non-depreciable capital property to FMV to recognize unrealized losses. Answer: B Explanation: B) The inability to deduct non-capital losses subsequent to the AOC. Type: MC Topic: Acquisition of control (AOC) - general concepts

37) Which of the following statements with respect to an acquisition of control (AOC) is NOT correct? A) Prior to the deemed taxation year end, non-depreciable capital property will have to be written down to FMV to recognize accrued but unrealized losses. B) Net capital losses in taxation years after an AOC cannot be carried back to a taxation year prior to the AOC. C) Subsequent to the deemed taxation year end, non-capital losses from taxation years before the AOC can be deducted against any type of income. D) For to the deemed taxation year end, the acquired company can elect to have a deemed disposition of any of their capital properties with unrealized capital gains or recapture. Answer: C Explanation: C) Subsequent to the deemed taxation year end, non-capital losses from taxation years before the AOC can be deducted against any type of income. Type: MC Topic: Acquisition of control (AOC) - general concepts

38) Which of the following is NOT an implication of a deemed taxation year end on an acquisition of control (AOC) which creates a short taxation year? A) The corporate tax rate must be prorated for the shortened taxation year. B) CCA calculations must be based on a fraction of a year. C) The annual business limit must be prorated. D) The period during which time-limited losses can be used is shortened. Answer: A Explanation: A) The corporate tax rate must be prorated for the shortened taxation year. Type: MC Topic: Acquisition of control (AOC) - general concepts

39) Which of the following is NOT a restriction that applies to the use of non-capital losses after an acquisition of control (AOC)? A) The corporation must continue to carry on the loss business. B) There must be a reasonable expectation of profit in the loss business. C) The losses cannot be applied in any short taxation years that occur as a result of the AOC. D) The losses can only be applied against future income generated by the same or a similar business. Answer: C Explanation: C) The losses cannot be applied in any short taxation years that occur as a result of the AOC. Type: MC Topic: Acquisition of control (AOC) - general concepts

40) VanDeKamp Holdings operates two separate business — a catering business and a cookbook publishing business. During the taxation year that ended December 31, 2022, the company lost $300,000 from the catering business and earned a profit of $100,000 from the cookbook publishing business. The $200,000 non-capital loss could not be carried back, and as a result it was carried forward. On January 1, 2022, VanDeKamp Holdings is acquired by another company. During the 2022 taxation year, the catering business lost another $150,000 while the cookbook publishing business earned $350,000. What portion of the 2021 non-capital loss carry forward can be claimed in the 2022 taxation year? A) None. B) $100,000. C) $150,000. D) $200,000. Answer: A Explanation: A) None. Because the loss was generated from the operations of the catering business, which did not earn a profit in 2022. B) $100,000. [The amount of the loss that is deductible against the cookbook business income] C) $150,000. [The amount of the 2022 loss in the catering business] D) $200,000 [Loss = $200,000; Taxable income = $350,000 - $150,000 = $200,000] Type: MC Topic: Acquisition of control - calculations

41) Solis Enterprises Inc. operates two separate business — a fashion design business and an investment business. During the taxation year that ended December 31, 2022, the company lost $3 million from the fashion design business and earned a profit of $1 million from the investment business. The $2 million non-capital loss could not be carried back, and as a result it was carried forward. On January 1, 2022, Solis Enterprises Inc. is acquired by another company. During the 2022 taxation year, the fashion design business lost $1.5 million while the investment business earned $4 million. What is the minimum taxable income for 2022? A) Nil. B) $500,000. C) $2,500,000. D) $4,000,000. Answer: C Explanation: A) $0 B) $500,000 [$4 million - $1.5 million - $2 million C) $2,500,000 [$4 million - $1.5 million] None of the 2021 non-capital loss can be claimed in 2022 since it can only be applied against the profits of the loss business which was fashion design. D) $4,000,000 Type: MC Topic: Acquisition of control - calculations

42) Hagrid Inc. is subject to an acquisition of control (AOC) on January 1, 2023. The company has a business loss of $65,000 in its 2022 taxation year prior to the AOC, which cannot be carried back. On December 31, 2022, the company had two capital properties, land with an ACB of $150,000 and FMV of $65,000; and a depreciable property with a capital cost and ACB of $100,000, a UCC of $75,000 and a FMV of $200,000. Assuming Hagrid will continue in business and will return to profitability in 2023, what write downs and elections are available to Hagrid Inc. in order to optimize the amount of 2022 noncapital losses carried forward to the 2023 taxation year? A) Hagrid Inc. should elect to recognize the allowable capital loss of $42,500 on the land at the end of 2022. A capital gain on the depreciable property would be realized equal to $50,000 and there would be recapture of $25,000. B) Hagrid Inc. will be required to write the land down to its FMV and recognize the allowable capital loss of $42,500 at the end of 2022. A deemed disposition of the depreciable property should be elected at a amount of $185,000, resulting in recapture of $25,000 and a taxable capital gain of $42,500. C) Hagrid Inc. will be required to write the land down to its FMV and recognize the allowable capital loss of $42,500 at the end of 2022. No elections are available to the company. D) Hagrid Inc. should elect to recognize the allowable capital loss of $42,500 on the land at the end of 2022. A deemed disposition of the depreciable property should be elected at an amount of $100,000, resulting in recapture of $25,000. Answer: B Explanation: B) Hagrid Inc. will be required to write the land down to its FMV and recognize the allowable capital loss of $42,500 at the end of 2022. A deemed disposition of the depreciable property should be elected at a amount of $185,000, resulting in recapture of $25,000 and a taxable capital gain of $42,500. Type: MC Topic: Acquisition of control - calculations

43) When there is an acquisition of control (AOC) of a corporation, which of the following is correct? A) A capital loss arising prior to the AOC may be applied against capital gains realized by the business that incurred the capital loss on property owned prior to the AOC. B) Any capital losses that arise subsequent to the AOC will be lost. C) Non-capital losses arising prior to the AOC may, after the AOC, be applied against income earned by the loss business that incurred the loss as long as the loss has not expired and the loss business continues to be carried on has a reasonable expectation of making a profit. D) Non-capital losses and net capital losses arising prior to the AOC will be lost. Answer: C Explanation: C) Non-capital losses arising prior to the AOC may, after the AOC, be applied against income earned by the loss business that incurred the loss as long as the loss has not expired and the loss business continues to be carried on has a reasonable expectation of making a profit. Type: MC Topic: Acquisition of control - basic rules

44) John Dough owns 100% of the shares of Doughboy Ltd. His spouse, Kneada Dough, owns 100% of the shares of Yeast Ltd. and 100% of the shares of Flour Inc. Which of the following statements is correct? A) Doughboy and Yeast are associated. B) Flour and Yeast are associated. C) Doughboy and Flour are associated. D) Doughboy is associated with both Yeast and Flour. Answer: B Explanation: B) Flour and Yeast are associated. Type: MC Topic: Associated corporations - analysis (applying the rules)

45) Mr. Hanes owns 100% of the common shares of Jimbo Corp. and 40% of the common shares of Hughes Corp. Hughes Corp. owns 80% of the common shares of ARC Ltd. Mr. Hanes' daughter-in-law also owns 5% of the common shares of Hughes Corp., and 15% of the common shares of ARC Ltd. The remaining shares are held by unrelated persons. The following Companies are associated: A) Only Jimbo and Hughes are associated. B) Only Jimbo and ARC are associated C) Hughes and ARC are associated, and Jimbo and ARC are associated. D) Only Hughes and ARC are associated. E) None of Jimbo Corp., Hughes Corp., and ARC Ltd. are associated. Answer: C Explanation: C) Hughes and ARC are associated, and Jimbo and ARC are associated. Hughes and ARC are associated under ITA 256(1)(a). Hughes controls ARC. Jimbo and ARC - Mr. Hanes is deemed to own 32% [(40%)(80%)] of ARC and his daughter-in-law is deemed to own 4% [(5%)(80%)] of ARC by the look through rules in ITA 256(1.2)(d). When added to the 15% that the daughter-in-law owns outright, a related group owns 51% (32% + 4% + 15%) of ARC. The corporations are associated by ITA 256(1)(d) since Mr. Hanes controls Jimbo, a related group controls ARC, and Mr. Hanes is deemed to own greater than 25% of ARC. Type: MC Topic: Associated corporations - analysis (applying the rules)

46) In which of the following situations are A Ltd. and B Ltd. associated? A) Mrs. Jax owns 60% of A Ltd. and Mrs. Jax's niece owns 80% of B Ltd. Mrs. Jax's husband owns the other 40% of A Ltd. and 20% of B Ltd. B) Mr. B. owns 60% of A Ltd. and 20% of B Ltd. Mrs. B,Mr. B's spouse, owns the remaining 40% of A Ltd. The remaining 80% of B Ltd. is owned equally by Mr. D and Mrs. D, who are not related to Mr. B and Mrs. B. C) Amos Dans owns 35% of each of A Ltd. and B Ltd. Amos Dan's brother owns an additional 20% of A Ltd. and 30% of B Ltd. The remaining 45% of A Ltd. and 35% of B Ltd. are owned by XYZ Ltd. and JBC Ltd., respectively. XYZ Ltd. and JBC Ltd. are not associated corporations. D) Young Ltd. owns 55% of B Ltd. and 40% of A Ltd. Boyle Holdings Ltd. owns the remaining 45% of B Ltd., and Kula Holdings Ltd. owns the remaining 60% of A Ltd. Kula Holdings Ltd. and Boyle Holdings Ltd. are owned by L. Kula and A. Boyle, respectively, who are not related. Answer: C Explanation: C) A Ltd. and B Ltd. are associated under ITA 256(1)(b) as they are controlled by the same group (Amos and his brother). The fact that they are related is not relevant. Type: MC Topic: Associated corporations - analysis (applying the rules)

47) Simon Williams owns 100% of Wonder Technologies Inc. Peter Maximoff owns 100% of Speedy Delivery Service Ltd. Simon and Peter each own 50% of Scarlet Decorating Ltd. Simon is married to Peter's sister, Wanda. Assuming each of the three corporations is a CCPC and has at least $500,000 of active business income earned in Canada, what is the maximum combined corporate income on which the three corporations can claim the small business deduction? A) Nil. B) $ 500,000. C) $1,000,000. D) $1,500,000. Answer: C Explanation: C) Wonder and Speedy are associated in that they are both associated with Scarlet as a result of ITA 256(1)(d). They would normally share the $500,000 small business limit. However, since they are associated solely by virtue of their mutual association with the third corporation, the third corporation can elect not to be associated with them. With this election, the two corporations are eligible for the full $500,000 small business deduction, for a total of $1,000,000. As a consequence of making this election, Scarlet is deemed to have an annual business limit of nil. Type: MC Topic: Associated corporations - analysis (applying the rules)

48) Which of the following situations does NOT describe two associated corporations? A) K Corp. owns 51% of the shares of L Corp. The remainder of the shares are owned by a party unrelated to K Corp. B) Mr. and Mrs. G each own 50% of the shares of W Corp. Their adult children, Girl F and Boy F, each own 40% of V Corp. Mrs. G owns the remaining 20% of the V Corp. shares. C) D Corp. is wholly owned by Mrs. X. Mr. X, the spouse of Mrs. X, owns 65% of the shares of E Corp. Mrs. X owns the remaining 35% of the E Corp shares. D) Boy M, an adult, owns 100% of the shares of Z Corp. Boy M, his mother and his father each own 30% of the shares of Y Corp. The remaining shares of Y Corp. are owned by Boy M's girlfriend. Answer: B Explanation: B) Mr. and Mrs. G each own 50% of the shares of W Corp. Their adult children, Girl F and Boy F, each own 40% of V Corp. Mrs. G owns the remaining 20% of the shares. Type: MC Topic: Associated corporations - analysis (applying the rules)

49) Low Tech Inc. is a CCPC with 2022 SR&ED expenditures of $685,000. In 2021, the Company's Taxable Capital Employed in Canada (TCEC) was $7 million. Determine their total investment tax credit for 2022 and indicate the amount that would be refundable. A) The total credit would be $239,750. The refundable amount would be $239,750. B) The total credit would be $239,750. The refundable amount would be $102,750. C) The total credit would be $102,750. The refundable amount would be $102,750. D) The total credit would be $102,750. The refundable amount would be $41,100. Answer: A Explanation: A) The total credit would be $239,750 [($685,000)((35%)]. The refundable amount would be $239,750. Type: MC Topic: Investment tax credits - calculating the credits

50) Miracle Works Inc. is located in Newfoundland. The company hires 3 eligible apprentices, paying each of them $30,000 in the current taxation year. It also acquires $2,000,000 in qualified depreciable property. What are the income tax consequences of these transactions in the current year? A) The company will be entitled to investment tax credits of $206,000. CCA for the current year will be based on the addition of $2,000,000 to the CCA class of the qualified property. B) The company will be entitled to investment tax credits of $6,000. CCA for the current year will be based on the addition of $2,000,000 to the CCA class of the qualified property. C) The company will be entitled to investment tax credits of $206,000. CCA for the current year will be based on the addition of $1,800,000 to the CCA class of the qualified property. D) The company will be entitled to investment tax credits of $209,000. CCA for the current year will be based on the addition of $2,000,000 to the CCA class of the qualified property. Answer: A Explanation: A) The company will be entitled to investment tax credits of $206,000. ITC = [10%][(3)($20,000) + ($2,000,000)]. CCA will be based on additions to qualified property of $2,000,000. The ITC will reduce the UCC in the following taxation year. B) The company will receive investment tax credits of $6,000. CCA will be based on additions to qualified property of $2,000,000. [ITC = (3)($20,000)(10%)] C) The company will receive investment tax credits of $206,000. CCA will be based on additions t o qualified property of $1,800,000. IT C = [10%][(3)($20,000) + ($2,000,000)] [addition to CCA = $2,000,000 — ($2,000,000)(10%)] D) The company will receive investment tax credits of $209,000. CCA will be based on additions to qualified property of $2,000,000. [IT C = (3)($30,000)(10%) + ($2,000,000)(10%)] Type: MC Topic: Investment tax credits - calculating the credits

51) Mira Glow Ltd. is a CCPC. In 2021, the company had Taxable Capital Employed in Canada (TCEC) of $14,000,000 and in 2022 the TCEC is $15,000,000. What is the annual SR&ED expenditure limit for Mira Glow Ltd. for its 2022 taxation year? A) $ 3,000,000 B) $ 2,700,000 C) $ 1,950,000 D) $ 300,000 Answer: B Explanation: A) $3,000,000 × [($40,000,000 - Nil) ÷ $40,000,000] B) $3,000,000 × [($40,000,000 - $4,000,000) ÷ $40,000,000] C) $3,000,000 × [($40,000,000 - $14,000,000) ÷ $40,000,000] D) $3,000,000 × [($40,000,000 - $36,000,000) ÷ $40,000,000] Type: MC Topic: Investment tax credits - the expenditure limit (ITA 127(10.1) & (10.2))

52) Tardex Inc. has only one class of shares. At the end of its 2022 taxation year, the company had 30,000 shares outstanding. The shares had been sold in 3 blocks of 10,000 each. The first block was issued for $8 per share, the second at $9 per share, and the third at $11 per share. Mark Forest purchased 200 shares of the first block and an additional 300 shares of the second block. The total PUC of Mark's shares is equal to: A) $4,300. B) $4,665. C) $4,250. D) $5,500. Answer: B Explanation: A) $4,300 [(200)($8) + (300)($9)] B) $4,665 PUC Per Share = $9.33 {[(10,000)($8) + (10,000)($9) + (10,000)($11)] ÷ 30,000] Mark's PUC = $4,665 [(500)($9.33)] C) {[[(10,000)($8) + (10,000)($9)] ÷ 20,000] = $8.50; [($8.50)(500)] = $4,250 D) $5,500 [(500)($11)] Type: MC Topic: PUC (paid-up capital) - calculating PUC

53) Torin Inc. has 500,000 shares issued and outstanding. These shares were issued for $1,125,000. At a later point in time, Jane Dow acquired 1,000 of these shares at a total cost of $3,500. With respect to the share owned by Ms. Dow's, which of the following statements is NOT correct? A) The PUC of Ms. Dow's shares is $2,250. B) The ACB of Ms. Dow's shares is $3,500. C) If she were to sell the Torin shares for $4,000, she would have a taxable capital gain of $250. D) If she were to sell the Torin shares for $4,000, she would have a deemed dividend of $500. Answer: D Explanation: D) If she were to sell the Torin shares for $4,000, she would have a deemed dividend of $500. Type: MC Topic: PUC (paid-up capital) & ACB (adjusted cost base)

54) Which of the following items would NOT be added to the capital dividend account of a private company? A) Life insurance proceeds received. B) Taxable dividends received from other taxable Canadian corporations. C) Capital dividends received from other corporations. D) The non-taxable portion of capital gains. Answer: B Explanation: B) Taxable dividends received from other taxable Canadian corporations. Type: MC Topic: Capital dividend account (CDA) - basic rules

55) Gains Inc. had a balance in its capital dividend account (CDA) of $150,000 at January 1, 2022. During the 2022 taxation year, the company had taxable capital gains of $50,000, allowable capital losses of $30,000, received a capital dividend of $35,000 from a subsidiary, and paid eligible dividends of $45,000. On November 15, 2022, a capital dividend of $32,000 was paid, and the appropriate election was filed. What is the balance in the CDA at November 16, 2022? A) $128,000 B) $138,000 C) $173,000 D) $203,000 Answer: C Explanation: A) $128,000 [$150,000 + $50,000 - $30,000 + $35,000 - $32,000 - $45,000] B) $138,000 [$150,000 + $50,000 -$30,000 - $32,000] C) $173,000 [$150,000 + $50,000 - $30,000 + $35,000 - $32,000] D) $203,000 [$150,000 + $50,000 + $35,000 - $32,000] Type: MC Topic: Capital dividend account (CDA) - calculating the CDA

56) Which of the following is NOT a component of retained earnings for a CCPC from an income tax perspective? A) Post-1971 Undistributed Surplus B) Pre-1972 Capital Surplus on Hand C) Capital Dividend Account D) LRIP Answer: D Explanation: D) LRIP Type: MC Topic: PUC (paid-up capital) & ACB (adjusted cost base)

57) Which of the following statements with respect to stock dividends is correct? A) Stock dividends that are taxable dividends are not subject to the usual gross up and tax credit procedures. B) A stock dividend can never be designated as an eligible dividend. C) A dividend will be included in income to the extent that the corporation has increased its PUC as a result of the dividend. D) When an investor receives a stock dividend, it does not affect the ACB of the shares received. Answer: C Explanation: C) A dividend will be included in income to the extent that the corporation has increased its PUC as a result of the dividend. Type: MC Topic: Dividends - stock dividends

58) Vadel Inc., a Canadian public company, has 1,000,000 shares outstanding with a total PUC of $1,750,000. Mr. Vincent Dorval owns 5,000 of these shares with an ACB of $11,250. Vadel Inc. declares a 5% non-eligible stock dividend at a time when its shares are trading at $2.50 per share. Which of the following statements is correct? A) Mr. Dorval's net income will increase by $719 as a result of the dividend. B) After the dividend, the ACB of Mr. Dorval's shares will be $11,875. C) After the dividend, the PUC of Vadel's shares will be $1,875,000. D) All of the above. E) None of the above. Answer: D Explanation: D) All of the above. A = [(5%)(5,000)($2.50)(115%) = $718.75 Type: MC Topic: Dividends - stock dividends

59) With respect to dividends in kind, which of the following statements is correct? A) A dividend in kind that is a taxable dividend is not subject to the usual gross up and tax credit procedures. B) A dividend in kind will not affect the income of the corporation that pays the dividend. C) A dividend in kind can result in a capital gain for the corporation that pays the dividend. D) A dividend in kind can never be designated as an eligible dividend. Answer: C Explanation: C) A dividend in kind can result in a capital gain for the corporation that pays the dividend. Type: MC Topic: Dividends in kind - ITA 52(2)

60) Mark is the only shareholder of Sico Ltd., a CCPC with a GRIP account balance of nil. In 2022, Sico paid a taxable dividend in kind by distributing investments with a FMV of $72,000 and an ACB of $56,000. Which of the following statements properly reflects the income tax consequences of this transaction? A) Sico has income of $8,000 and Mark has income of $72,000. B) Sico has income of $8,000 and Mark has income of $82,800. C) Sico has income of nil and Mark has income of $72,000. D) Sico has income of $16,000 and Mark has income of $82,800. Answer: B Explanation: B) Sico has income of $8,000 and Mark has income of $82,800. Type: MC Topic: Dividends in kind - ITA 52(2)

61) Scranton Inc. is a CCPC with a nil GRIP balance. It has 100,000 shares outstanding, all of which were issued for $8.00 per share. Nellie Ward owns 10,000 of these shares which she acquired at a cost of $7.00 per share. In 2022, the company redeems Nellie's shares at a price of $10.00 per share. Which of the following amounts will be included in Nellie's 2022 net income as a result of the redemption? A) $25,000. B) $33,000. C) $30,000. D) $28,000. Answer: D Explanation: D) $28,000 ($23,000 + $5,000) Proceeds of Redemption [(10,000)($10.00)] PUC [(10,000)($8.00)] ITA 84(3) Deemed Dividend Gross Up [(15%)($20,000)] Taxable Dividend

$100,000 ( 80,000) $ 20,000 3,000 $ 23,000

POD [(10,000)($10.00)] Less: ITA 84(3) Deemed Dividend Modified POD ACB [(10,000)($7.00)] Capital Gain Inclusion Rate Taxable Capital Gain

$100,000 ( 20,000) $80,000 ( 70,000) $ 10,000 1/2 $ 5,000

Type: MC Topic: Dividends - ITA 84(3) deemed dividend on redemptions of shares

62) Which of the following transactions will NOT result in a deemed dividend? A) Paying off $500,000 in debt by issuing shares with a FMV of $525,000. B) Redeeming shares for $350,000. The PUC of the shares was $350,000 and the ACB $250,000. C) A liquidating dividend is paid to shareholders in the amount of $400,000. At this time, PUC is reduced by $300,000. D) A total of $1,000,000 was paid to shareholders as part of a winding-up. The PUC of the shares was $200,000 and there was no CDA balance. Answer: B Explanation: B) Redeeming shares for $350,000. The PUC of the shares was $350,000 and the ACB $250,000. There is no deemed dividend as the proceeds are equal to the PUC. Type: MC Topic: Dividends - deemed dividends general concepts

63) Aris Ltd. has 2,000,000 shares outstanding with a total PUC of $30,000,000. The Company is a CCPC and has no balance in its GRIP account. John Aris owns 10% of the shares. They were acquired at a total cost of $2,250,000. During the current year, John's shares were redeemed by the corporation for $3,500,000. Which of the following amounts must be included in John's income as a result of this redemption? A) $1,250,000 B) $ 950,000 C) $1,325,000 D) $ 875,000 Answer: B Explanation: B) $950,000 ($575,000 + $375,000). These amounts would be calculated as follows: Proceeds of Redemption PUC [(10%)($30,000,000)] ITA 84(3) Deemed Dividend Gross Up [(15%)($500,000)] Taxable Dividend

$3,500,000 ( 3,000,000) $ 500,000 75,000 $ 575,000

POD Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$3,500,000 ( 500,000) $3,000,000 ( 2,250,000) $ 750,000 1/2 $ 375,000

Type: MC Topic: Dividends - ITA 84(3) deemed dividend on redemptions of shares

64) Which of the following transactions that involve an increase in PUC will result in an ITA 84(1) deemed dividend? A) A stock dividend is declared that increases PUC in excess of the increase in net assets. B) The PUC of one class of shares is increased, and the PUC of another class is decreased by an equivalent amount. C) A corporation issues shares to a creditor in order to settle debt where the amount owing is less than the PUC of the newly issued shares. D) When consideration received for shares issued is equal to the amount added to PUC. Answer: C Explanation: C) A corporation issues shares to a creditor in order to settle debt where the amount owing is less than the PUC of the newly issued shares. Type: MC Topic: Dividends - ITA 84(1) deemed dividend

65) What are the income tax consequences associated with a corporation issuing shares to a creditor in order to retire a debt where the amount owing is less than the PUC of the shares issued to retire that debt? A) There will be a reduction in PUC and ACB for all the shares that were outstanding prior to the debt retirement transaction. B) There will be a deemed dividend which will be allocated to all shareholders including the new shareholder who accepted shares as full payment for the debt. The ACB of the shares will increase by the amount of the deemed dividend. C) There will be a deemed dividend allocated to the new shareholder who accepted shares as full payment for the debt. The ACB of the shares will increase by the amount of the deemed dividend. D) There will be a deemed dividend allocated to all shareholders including the new shareholder who accepted shares as full payment for the debt. The ACB of the shares will not be affected. Answer: B Explanation: B) There will be a deemed dividend which will be allocated to all shareholders including the new shareholder who accepted shares as full payment for the debt. The ACB of the shares will increase by the amount of the deemed dividend. Type: MC Topic: Dividends - ITA 84(1) deemed dividend

66) At the beginning of the current year, Brou Inc. sells all of its assets and pays its liabilities. Afterwards, the company has $350,000 in cash which is distributed to the sole shareholder, Mr. Daniel. Mr. Daniel purchased the shares from the former shareholder for $50,000. The PUC of the shares is $10,000. The CDA balance is $65,000, and the company makes all appropriate elections with respect to this balance. What is the amount of the deemed dividend to Mr. Daniel? A) $ 65,000. B) $ 275,000. C) $ 300,000. D) $ 340,000. Answer: D Explanation: A) $ 65,000. [ the amount of the capital dividend] B) $ 275,000. [$340,000 - $65,000] C) $ 300,000. [$350,000 - $50,000] D) $ 340,000. [$350,000 - $10,000] Type: MC Topic: Dividends - ITA 84(2) deemed dividend

67) At the beginning of the current year, Shahbaz Inc., a CCPC, has shares with a PUC of $4,000,000, and a CDA balance of $300,000. The company was incorporated by Mr. Sheikh, who made a $4,000,000 investment in the common shares. During the current year, the company has disposed of a major division, and it will distribute $1,000,000 to its sole shareholder, Mr. Sheikh. The company will reduce the PUC by $600,000 in order to minimize the income tax consequences to Mr. Sheikh. What is the ACB of Mr. Sheikh's shares after this transaction is completed? A) $3,000,000. B) $3,400,000. C) $3,600,000. D) $4,000,000. Answer: B Explanation: A) $3,000,000 [$4,000,000 - $1,000,000] B) $3,400,000. [Deemed dividend = $1,000,000 - $600,000 = $400,000. ACB will be reduced by $600,000 from $4,000,000 to $3,400,000] C) $3,600,000 [$4,000,000 - $400,000] D) $4,000,000 [ No change] Type: MC Topic: Dividends - ITA 84(2) deemed dividend

68) SSS Corp agrees to accept as full payment, a special class of common shares with a PUC of $100,000 from TTT Ltd. in exchange for a debt owing to SSS Corp in the amount of $90,000. SSS Corp will be the only shareholder of this special class of shares. What are the income tax consequences of this exchange? A) SSS Corp. will be deemed to have received a dividend of $10,000. B) Other shareholders of TTT Corp will be deemed to have received a dividend of $10,000. C) SSS Corp will have realized a capital gain of $10,000. D) There will be no immediate tax consequences. Answer: A Explanation: A) SSS Corp. will be deemed to have received a dividend of $10,000. Type: MC Topic: Dividends - ITA 84(1) deemed dividend

69) Lead Services Ltd. carries on two separate businesses, one of which sells drafting pencils, the other provides professional engineering services. In its first year of operations ending December 31, 2021, the engineering services business had a loss of $104,000, and the pencil business had income of $24,600, resulting in 2021 net and taxable income of nil and a 2021 non-capital loss of $79,400. For the taxation year ending December 31, 2022, the engineering services business had income of $21,250 and the pencil business had income of $133,400, resulting in a 2022 net income $154,650. The Company has no taxable income deductions other than the 2021 non-capital loss. Determine the minimum taxable income for each of the 2021 and 2022 taxation years, and any 2021 non-capital loss balance available assuming that there was no acquisition of control (AOC) in either taxation year. How would your answer be different if there was an AOC on January 1, 2022? Answer: For the 2021 taxation year, net and taxable income would be nil, without regard to whether there was an AOC. There would also be a 2021 non-capital loss of $79,400 ($104,000 - $24,600). No AOC - If there was no AOC, the entire $79,400 of the 2021 non-capital loss could be deducted in the 2022 taxation year. For the year ending December 31, 2022, taxable income would be: 2022 Net Income ($133,400 + $21,250) Less: 2021 Non-capital loss 2022 Taxable Income

$154,650 ( 79,400) $75,250

AOC - There would be a deemed taxation year end on December 31, 2021, the day before the AOC. However, as this matches the normal taxation year end, there would be no income tax consequences with respect to a short taxation year. In the 2022 taxation year, the 2021 non-capital loss could only be used to the extent of the profits in the loss business from engineering services. 2022 taxable income would be: 2022 Net Income Less: 2021 Non-capital loss (Limited to $21,250) 2022 Taxable Income

$154,650 ( 21,250) $133,400

This would leave a 2021 non-capital loss balance of $58,150 ($79,400 - $21,250). Type: ES Topic: Acquisition of control - calculations

70) Ambee Ltd. commenced business in 2021, and has two separate businesses. They are a mail order business selling organic food products, and an accounting services business. The income (loss) of the two businesses for the 2021 and 2022 taxation years are: Mail Order Business ($146,000) 56,000

2021 2022

Accounting Business $ 43,000 85,000

The Company has no taxable income deductions other than a 2021 non-capital loss. Determine the minimum taxable income for each of 2021 and 2022, and any non-capital loss carryover balance assuming that there was no AOC in either year. How would your answer change if there was an AOC on January 1, 2022? Answer: For the 2021 taxation year both net and taxable income are nil, without regard to whether there was an AOC. In 2021 there is a non-capital loss of $103,000 ($146,000 - $43,000). No AOC - If there was no AOC, the 2021 non-capital loss could be deducted in full. For the 2022 taxation year, taxable income would be: 2022 Net Income ($56,000 + $85,000) Less: 2021 Non-capital loss 2022 Taxable Income

$141,000 ( 103,000) $ 38,000

AOC - There would be a deemed taxation year end on December 31, 2021, the day before the AOC which coincides with the normal taxation year avoiding any implications in connection with a short taxation year. In the 2022 taxation year, the 2021 non-capital loss could only be used to the extent of the profits in the loss business that was the mail order business. Taxable Income would be: 2022 Net Income ($56,000 + $85,000) Less: 2021 Non-capital loss - Limited to income from the loss business 2022 Taxable Income

$141,000 ( 56,000) $ 85,000

This would leave a 2021 non-capital loss balance of $47,000 ($103,000 - $56,000). Type: ES Topic: Acquisition of control - calculations

71) Static Controls Inc. has a December 31 taxation year end. On May 1, 2022, all of the Company's shares are purchased by an unrelated person. For the period January 1, 2021 to April 30, 2022, the Company has a business loss of $91,000. On April 30, 2022, the Company has a 2019 net capital loss balance of $125,000. In addition, the Company has the following capital properties: Capital Property Non-Depreciable Depreciable

ACB & Capital Cost $610,000 375,000

UCC N/A $280,000

FMV $740,000 515,000

Advise the Company with respect to the most appropriate elections to be made prior to the AOC and explain your results. Answer: It would be preferable to elect to have a deemed disposition of the non-depreciable capital property at FMV of $740,000. This would result in a $65,000 taxable capital gain [(1/2)($740,000 $610,000)] on the deemed disposition. This will leave $60,000 ($125,000 - $65,000) of the 2019 net capital loss to absorb. This $60,000 could be eliminated by electing to have a deemed disposition of the depreciable property at an elected amount of $495,000. This election would result in a taxable capital gain of $60,000 [(1/2)($495,000 - $375,000)] fully utilizing the 2019 net capital loss which could not be applied to taxation years ending after the AOC. The election however would also result in the recognition of recapture of $95,000 ($375,000 (lesser of $495,000 deemed POD and capital cost of $375,000) - UCC of $280,000). As this is $4,000 ($95,000 $91,000) greater than the business loss, there would be some minimal taxable income and income tax payable. However, the ability to utilize the remaining $60,000 of the 2019 net capital loss would be worth the additional cost of income tax on the extra $4,000 of income. In addition, the election would increase future CCA claims. Type: ES Topic: Acquisition of control - calculations

72) During its taxation year ending December 31, 2022, all of the shares of Vick Ltd. are purchased by an unrelated person. The acquisition occurs on May 1, 2022 and, at that time, Vick has available a 2018 net capital loss balance of $175,000. Also at that time the company has the following capital properties:

Capital Property Non-Depreciable Depreciable

ACB & Capital Cost $754,000 490,000

UCC N/A $325,000

FMV $950,000 612,000

For the period January 1, 2022 to April 30, 2022, the company has a business loss of $143,000. This becomes a 2022 non-capital loss of $143,000. Advise the Company with respect to the most appropriate elections to be made prior to the AOC. Justify your answer with explanations. Answer: With a 2018 net capital loss balance of $175,000, it would clearly be desirable to elect to have a deemed disposition of the non-depreciable capital property at FMV. This will result in a taxable capital gain of $98,000 [(1/2)($950,000 - $754,000), and leave a 2018 net capital loss balance of $77,000 ($175,000 $98,000) to offset. If an election at FMV is also made with respect to the depreciable property, the result will be a taxable capital gain of $61,000 [(1/2)($612,000 - $490,000)], as well as recapture of $165,000. This would reduce the 2018 net capital loss balance to $16,000 ($77,000 - $61,000), and offset the $143,000 business loss for the short taxation year ending April 30, 2022. However, it would leave $22,000 ($165,000 - $143,000) in additional taxable income and require the payment of some income tax for the short taxation year. It is likely that, in most situations, management would conclude that the benefits of using a large portion of the 2018 net capital loss which cannot be applied to taxation years ending after an AOC would be worth the cost of the additional income taxes that would be payable on $22,000 of income. In addition, the election would increase future CCA claims since the depreciable property would be deemed to have been reacquired at its FMV with a slight downward adjustment for the capital gains element. Type: ES Topic: Acquisition of control - calculations

73) Anderson Inc., BDO Ltd., and Copper Inc., are three CCPCs. The voting common share ownership is as follows: Anderson Inc. - John Anderson owns 100% of the common shares. BDO Ltd. - John Anderson owns 30% of the common shares and his spouse, Wilma Anderson, owns 10% of the common shares. Basil Copper owns 35% of the common shares and his spouse, Holly Copper, owns 25% of the common shares. Holly Copper is John Anderson's sister. Copper Inc. - Basil Copper and Holly Copper each own 50% of the common shares. Indicate which of the Companies described are associated. Explain your conclusions. Answer: Anderson Inc. and BDO Ltd. - These Companies are associated under ITA 256(1)(d) as follows: • John Anderson controls Anderson Inc. • John Anderson is related to each member of the group that controls BDO Ltd. • John Anderson owns 25% or more of the shares of BDO Ltd. Copper Inc. and BDO Ltd. - These companies are associated under ITA 256(1)(e) as follows: • Each corporation is controlled by a related group (Copper Inc. by Mr. and Mrs. Copper, BDO Ltd. by Mr. and Mrs. Anderson and Mrs. Copper). • Each of the members of one of the related groups was related to all of the members of the other related group. • One person (Mrs. Copper) who is a member of both related groups owns at least 25% of the shares of each corporation. They are also associated under ITA 256(1)(b) as both Companies are controlled by the same group (Mr. and Mrs. Copper). Anderson Inc. and Copper Inc. - Provided they do not elect to not be associated, these Companies are associated under ITA 256(2) as they are both associated with a third corporation, BDO. Type: ES Topic: Associated corporations - analysis (applying the rules)

74) Sarah Kern owns 80% of the shares of Kern Ltd. and 5% of the shares of Lorne Inc. Kern Ltd. owns 30% of the shares of Lorne Inc. Sarah's 12 year old daughter owns 25% of the shares of Lorne Inc. There are no other shareholders who own shares in both Companies. Are Kern Ltd. and Lorne Inc. associated? Explain your conclusion. Answer: With 80% ownership, Sarah controls Kern Ltd. In addition, she also controls Lorne Inc. as per the following calculation: Direct Interest Indirect Income through Control of Kern Ltd. Deemed Interest (Daughter's Shares) Total Interest

5% 30% 25% 60%

As both Companies are controlled by the same person, Kern Ltd. and Lorne Inc. are associated under ITA 256(1)(b). Type: ES Topic: Associated corporations - analysis (applying the rules)

75) During the taxation year ending December 31, 2022, Dwanto Ltd. has current expenditures of $460,000 on which a 10% investment tax credit is available and incurs $675,000 of Class 10 property on which a 10% investment tax credit is available. Describe the 2022 and 2023 income tax consequences associated with these expenditures and claiming the related investment tax credits. Include in your solution the CCA for 2022 and 2023. Answer: With respect to the $460,000 in current expenditures, there will be a $46,000 [(10%)($460,000)] credit against 2022 income tax payable. This $46,000 credit will be added to income in 2023. With respect to the $675,000 in capital expenditures, there will be a 2022 credit against income tax payable of $67,500 [(10%)($675,000)]. The $67,500 credit will not influence the calculation of CCA for 2022 which will be $303,750 [(30%)(1.5)($675,000)]. In 2023, the $67,500 investment tax credit will be deducted from the January 1, 2023 UCC, resulting in a balance of $303,750 ($675,000 - $303,750 - $67,500). Given this, the CCA for 2022 is $91,125 [(30%)($303,750)]. Type: ES Topic: Investment tax credits - calculating the credits

76) During the taxation year ending December 31, 2022, Enco Ltd. incurs current expenditures of $722,000 on which a 10% investment tax credit is available and incurs capital expenditures of $942,000 on Class 8 property on which a 10% investment tax credit is also available. Describe the 2022 and 2023 income tax consequences associated with these expenditures and claiming the related investment tax credits. Include in your solution the Class 8 CCA for both 2022 and 2023. Answer: The $722,000 in current expenditures will generate an investment tax credit of $72,200 [(10%)($722,000)] to be deducted from the 2022 income tax payable. The $72,200 amount will be added to income in 2023. The $942,000 in capital expenditures will generate an investment tax credit of $94,200 [(10%)($942,000)]. This will not be deducted from the capital cost of the acquired property until 2023. Given this, 2022 CCA is $282,600 [(1.5)(20%)($942,000)]. In 2023, the $94,200 credit will be subtracted, leaving a UCC balance of $565,200 ($942,000- $282,600 $94,200) and, as a result, the 2023 CCA will be $113,040 [(20%)($565,200)]. Type: ES Topic: Investment tax credits - calculating the credits

77) During the taxation year ending December 31, 2022, Future Ventures has made a number of expenditures that qualify for investment tax credits. They are as follows: • $132,000 in Qualified Property in the Gaspe Peninsula. • $1,060,000 in current expenditures for Scientific Research and Experimental Development (SRED). The Company is a CCPC. In 2021, Future Ventures has taxable income of $161,000 and Taxable Capital Employed in Canada (TCEC) of $8,500,000. The Company has no income tax payable for its 2022 taxation year or in any of the three preceding taxation years. Determine the amount of the refund that Future Ventures will receive as a result of the investment tax credits and any available carry forwards. Include in your answer any other income tax consequences of these investment tax credits. Answer: As Future Ventures has TCEC of less than $10 million, the Company's annual expenditure is not reduced from the maximum amount of $3,000,000. Given the $3,000,000 annual expenditure limit for the 35% rate, the total amount of investment tax credits available can be calculated as follows: Qualified Property [(10%)($132,000)] SRED Current Expenditures [(35%)($1,060,000)] Total Available Credit Amount

$ 13,200 371,000 $384,200

The refund available would be as follows: Qualified Property [(40%)($13,200)] SRED Current Expenditures [(100%)($371,000)] Total Refund Available

$ 5,280 371,000 $376,280

The non-refunded investment tax credit of $7,920 ($384,200 - $376,280) can be carried forward 20 years to be applied against income tax payable. There was no income tax payable in the last three taxation years therefore the credits cannot be carried back. The cost of the qualified property will be reduced in the following year by the refundable investment tax credit of $5,280. The refundable investment tax credit on current expenditures of $371,000 will also be added to income in the following taxation year. Type: ES Topic: Investment tax credits - refundable ITCs (ITA 127.1)

78) During the taxation year ending December 31, 2022, Forward Ltd. makes the following expenditures that qualify for investment tax credits: • $1,450,000 in current expenditures for Scientific Research and Experimental Development (SRED). • $220,000 in expenditures for Qualified Property in the Atlantic Provinces. The Company is a CCPC with 2021 taxable income of $417,000 and Taxable Capital Employed in Canada (TCEC) of $6,200,000. The Company has no income tax payable for 2022 or in any of the three preceding taxation years. Determine the amount of the refund that Forward Ltd. will receive as a result of earning the investment tax credits and any available carry forwards. Include in your answer any other income tax consequences of these investment tax credits. Answer: As Forward Ltd. has TCEC of less than $10 million, the Company's annual expenditure limit is not reduced from the maximum of $3,000,000. Given the $3,000,000 annual expenditure limit for the 35% eligible rate, the total amount of investment tax credits available can be calculated as follows: Qualified Property [(10%)($220,000)] SR&ED Current Expenditures [(35%)($1,450,000)] Total Available Credit Amount

$ 22,000 507,500 $529,500

The refund available would be as follows: Qualified Property [(40%)($22,000)] SRED Current Expenditures [(100%)($507,500)] Total Refund Available

$ 8,800 507,500 $516,300

The non-refunded investment tax credit of $13,200 ($529,500 - $516,300) can be carried forward 20 years to be applied against income tax payable. There was no income tax payable in the last three taxation years therefore the credit amounts cannot be carried back. The cost of the qualified property will be reduced in the following taxation year by the refundable investment tax credit of $8,800. The refundable investment tax credit on current expenditures of $507,500 will also be added to income in the following taxation year. Type: ES Topic: Investment tax credits - refundable ITCs (ITA 127.1)

79) When it was first established, Lichter Inc. issued 123,000 shares at a price of $5.60 per share. Four years later, an additional 32,000 shares were issued for $8.62 per share. During the current year, a further 81,000 shares were issued for $10.15 per share. One of the investors in the Company purchased 1,350 shares of the first group of shares issued, and an additional 4,230 shares from the most recent issue. Determine the ACB and PUC of the investor's shares. Answer: The ACB of the shares would be determined as follows:

First Purchase Second Purchase Totals

Number of Shares 1,350 4,230 5,580

Cost/Share $ 5.60 $10.15

Total Cost $ 7,560 42,935 $50,495

PUC/Share $5.60 $8.62 $10.15

Total PUC $ 688,800 275,840 822,150 $1,786,790

The ACB per share would be $9.05 ($50,495 ÷ 5,580). The PUC would be calculated as follows:

First Issuance Second Issuance Third Issuance Total PUC of outstanding shares

Number of Shares 123,000 32,000 81,000 236,000

Number of Shares (From first table) PUC Per Share [$1,786,790 ÷ 236,000 Shares] PUC for Investor's Shares

Type: ES Topic: PUC (paid-up capital) & ACB (adjusted cost base)

5,580 $ 7.57 $42,241

80) Martex Inc. has 560,000 shares outstanding. Information on their issuance is as follows: Shares Issued 400,000 160,000 560,000

Date January, 2021 June, 2022 Totals

Issue Price $16.00 18.00

Total Proceeds $6,400,000 2,880,000 $9,280,000

Joan Fox acquired 10,000 shares of the 2021 issue and 5,000 shares of the 2022 issue. Determine the ACB and PUC of Joan's shares. Answer: The ACB of the shares would be determined as follows:

First Purchase Second Purchase Totals

Number of Shares 10,000 5,000 15,000

Cost/Share $16.00 $18.00

Total Cost $160,000 90,000 $250,000

PUC/Share $16.00 $18.00

Total PUC $6,400,000 2,880,000 $9,280,000

The ACB per share would be $16.67 ($250,000 ÷ 15,000). The PUC for the investor's shares would be calculated as follows:

2021 Issuance 2022 Issuance Total PUC of outstanding shares

Number of Shares 400,000 160,000 560,000

Number of Shares (From first table) PUC Per Share [$9,280,000 ÷ 560,000 Shares] PUC for Investor's Shares

Type: ES Topic: PUC (paid-up capital) & ACB (adjusted cost base)

15,000 $ 16.57 $248,550

81) The following transactions involve the Logic Corporation's capital dividend account (CDA): • In 2019, capital property with an ACB of $105,000 was sold for $129,000. • In 2020, capital property with an ACB of $91,000 was sold for $83,000. • In 2021 the Company received a capital dividend of $10,600. • In July 2022, goodwill was sold for $50,000. The goodwill had been internally developed and, as a result, its cost for income tax purposes and ACB were nil. On January 1, 2022, the Class 14.1 UCC balance was nil. • On October 31, 2022, the Company elected and paid a capital dividend of $13,750. Determine the CDA balance at December 31, 2022. Answer: The balance in the CDA as at December 31, 2022 would be as follows: 2019 Capital Gain [(1/2)($129,000 - $105,000)] 2020 Capital Loss [(1/2)($83,000 - $91,000)] 2021 Capital Dividend Received 2022 Capital Gain [(1/2)($50,000 - Nil)] 2022 Capital Dividend Paid Balance - December 31, 2022

Type: ES Topic: Capital dividend account (CDA) - calculating the CDA

$12,000 ( 4,000) 10,600 25,000 ( 13,750) $29,850

82) Export Ltd. is a CCPC with a December 31 taxation year end. The transactions which follow involve Export Ltd.'s capital dividend account (CDA). • In 2019, the Company received a capital dividend of $23,000. • In 2020, the Company sold capital property with an ACB of $156,000 for $199,000. • In 2021, the Company sold a non-depreciable capital property with an ACB of $120,000 for $102,000. • In 2022, the Company sold goodwill for $150,000. The goodwill had been internally developed and therefore had a cost for income tax purposes and an ACB of nil. On January 1, 2022, the Class 14.1 balance was nil. • In 2022, the Company elected and paid a capital dividend of $10,400. Determine the CDA balance at December 31, 2022. Answer: The December 31, 2022 CDA balance is: 2019 Capital Dividend Received 2020 Capital Gain [(1/2)($199,000 - $156,000)] 2021 Capital Loss [(1/2)($102,000 - $120,000)] 2022 Capital Gain [(1/2)($150,000 - Nil)] 2022 Capital Dividends Paid Balance - December 31, 2022

$ 23,000 21,500 ( 9,000) 75,000 ( 10,400) $100,100

Type: ES Topic: Capital dividend account (CDA) - calculating the CDA

83) On June 30, 2022, the Shareholders' Equity of Mondo Inc. is as follows: Common Shares (56,000 Shares Outstanding) Retained Earnings Total Shareholders' Equity

$ 672,000 726,000 $1,398,000

On this date, the Company declares a 10% stock dividend. This dividend is not elected as a capital dividend nor designated as an eligible dividend. At this time, the shares are trading at $27 per share. The Company increases its PUC by the FMV of the new shares issued. Jerry Folder owns 1,000 of the Mondo shares which he acquired several years ago at a cost of $17 per share. Determine the effect of the stock dividend on Jerry's 2022 net income, his 2022 federal income tax payable and the ACB of his shares. Answer: Jerry will receive 100 new shares [(10%)(1,000)] with a FMV of $2,700 [(100)($27)]. This $2,700 non-eligible dividend will be grossed up to a taxable amount of $3,105 [($2,700)(115%)]. As a result, his 2022 net income will increase by $3,105. The receipt of this dividend will generate a dividend tax credit of $280 [(9/13)(15%)($2,700)] which will reduce his 2022 federal income tax payable. Before the stock dividend, the ACB of Jerry's shares was $17,000 [(1,000)($17)]. The $2,700 dividend will be added to to the ACB, resulting in a new ACB of $19,700. When the 100 new shares are added to his 1,000 shares, the ACB per share will be $17.91 ($19,700 ÷ 1,100). Type: ES Topic: Dividends - stock dividends

84) Jason Bright owns 500 shares of Latec Inc. These were purchased several years ago at $15 per share, a total cost of $7,500. On June 30, 2022, the Shareholder's Equity accounts of Latec were as follows: Common Stock (100,000 Shares Outstanding) Retained Earnings Total Shareholders's Equity

$1,200,000 1,800,000 $3,000,000

On this date, Latec declares and pays a 5% non-eligible stock dividend. As the shares are trading at $18 per share, PUC increases by $90,000 [(5%)(100,000)($18)]. Determine the effect of this transaction on Jason's 2022 net income, 2022 federal income tax payable and the ACB of his shares. Answer: Jason will receive 25 [(5%)(500)] new shares with a FMV of $450 [(25)($18)]. This will be grossed up to a taxable amount of $518 [(115%)($450)]. This amount will be included in Jason's 2022 net income. In addition, he will have a dividend tax credit of $47 [(9/13)(15%)($450)] which will reduce his 2022 federal income tax payable. Before the stock dividend, Jason's shares had an ACB of $7,500 [(500)($15)]. The $450 dividend will be added to the ACB, resulting in a new ACB of $7,950. His total number of shares will be 525 (500 + 25), resulting in a per share ACB of $15.14 ($7,950 ÷ 525). Type: ES Topic: Dividends - stock dividends

85) Martine Cloutier owns 23% of the 400,000 outstanding shares of Boucher Inc. Boucher Inc. owns 45,000 shares of Montagne Inc. The Montagne Inc. shares were acquired at a cost of $33 per share and have a current FMV of $42 per share. On June 30, 2022, Boucher Inc. declares a non-eligible dividend involving the distribution of all of the Montagne Inc. shares on a pro rata basis to its existing shareholders. Determine the effect of the payment of this dividend on Boucher Inc.'s 2022 net income and Martine Cloutier's 2022 net income and 2022 federal income tax payable. Answer: For Boucher Inc., the results will be as follows: POD [(45,000)($42)] AACB [(45,000)($33)] Capital Gain Inclusion Rate 2022 Taxable Capital Gain to Boucher

$1,890,000 ( 1,485,000) $ 405,000 1/2 $ 202,500

The results for Martine Cloutier will be as follows: Dividend Received [(23%)(45,000)($42)] Gross Up [(15%)($434,700)] Taxable Dividend to Martine Cloutier

$434,700 65,205 $499,905

Dividend Tax Credit [(9/13)(15%)($434,700)]

$ 45,142

Type: ES Topic: Dividends in kind - ITA 52(2)

86) Topex Ltd. owns 62,000 shares of Boron Ltd. While the shares were purchased at a total cost of $372,000 ($6.00 per share), the shares are currently trading at $8.50 per share. Topex wishes to dispose of these shares and, to this end, they declare a non-eligible dividend on August 28, 2022 payable with a distribution of Boron Ltd. shares on a pro rata basis to the Topex shareholders. Determine the effect of paying this dividend on Topex's 2022 net income and the effect of receiving this dividend for an individual who owns 10% of the Topex Ltd. shares. Answer: For Topex Ltd, the results will be as follows: POD [(62,000)($8.50)] ACB Capital Gain Inclusion Rate 2022 Taxable Capital Gain to Topex

$527,000 ( 372,000) $155,000 1/2 $ 77,500

The results for a 10% shareholder will be as follows: Dividend Received [(10%)($527,000)] Gross Up [(15%)($52,700)] 2022 Taxable Dividend to 10% shareholder

$52,700 7,905 $60,605

Dividend Tax Credit [(9/13)(15%)($52,700)]

$ 5,473

Type: ES Topic: Dividends in kind - ITA 52(2)

87) At the beginning of the current year, Scott Inc. has 131,000 common shares outstanding. The shares were originally issued at $11.25 per share for total issuance of $1,473,750, with this amount being the PUC. During the current year, a creditor with a debt receivable of $505,000 from the Company's agrees to accept the issuance of 43,000 newly issued common shares of the Company as full payment of the debt. At the time of the settlement of the debt the shares are trading at $12.05 per share. Subsequent to the exchange, Mr. Scott, who had purchased 7,000 Scott Inc. shares at the time of their original issue, sells the shares for $14.36 per share. Describe the income tax consequence(s) to all of the shareholders of Scott Inc. as a result of the settlement of the debt for common shares. In addition, describe the income tax consequences to Mr. Scott resulting from the sale of his Scott Inc. shares. Answer: The settlement transaction will result in an ITA 84(1) deemed dividend for all common shareholders, calculated as follows: PUC of New Shares [(43,000)($12.05)] Increase in Net Assets ITA 84(1) Deemed Dividend

$518,150 ( 505,000) $ 13,150

This would be allocated to all 174,000 (131,000 + 43,000) shares outstanding, on the basis of $0.08 per share. This would be an eligible or non-eligible taxable dividend. The $0.08 per share dividend would be added to the ACB of all 174,000 shares. With the addition of $0.08, the revised ACB of Mr. Scott's shares would be $11.33 ($11.25 + $0.08) per share. The taxable capital gain on shares sale would be calculated as follows: POD [(7,000)($14.36)] ACB [(7,000)($11.33)] Capital Gain Inclusion Rate Taxable Capital Gain

$100,520 ( 79,310) $ 21,210 1/2 $ 10,605

Type: ES Topic: Dividends - ITA 84(1) deemed dividend

88) Zhao Inc. has 50,000 common shares outstanding which were issued for $450,000. On November 30, 2022, a creditor with a debt receivable from the company of $100,000 agrees to accept 10,000 newly issued common shares as full payment of the debt. At the time of this transaction, the shares are trading for $11.25 per share. Mr. Kai owns 1,000 shares in Zhao Inc, which he purchased from an existing shareholder for $10 each on January 15, 2022. What is the amount of the deemed dividend to Mr. Kai? Answer: The transaction will result in an ITA 84(1) deemed dividend as follows: PUC of New Shares [($11.25)(10,000)] Increase in Net Assets ITA 84(1) Deemed Dividend

$112,500 ( 100,000) $ 12,500

This will result in a deemed dividend per share of $0.208 ($12,500 ÷ 60,000). On Mr. Kai's 1,000 shares this will total $208.00. The ACB of his shares will be increased by the same amount. Type: ES Topic: Dividends - ITA 84(1) deemed dividend

89) At the time of its incorporation, Alleham Ltd. issued 176,000 common shares for $3,960,000 ($22.50 per share). All of the shares were issued to Mr. Izaak Alleham, the founder of the Company. Mr. Alleham continues to own all of the originally issued shares, except for 30,000 shares that he sold to his sister for $18.75 per share, which was the estimated FMV of the shares at that time. The company redeems all of the 30,000 shares owned by Mr. Alleham's sister at $24.35 per share. All of the dividends will be non-eligible dividends. Determine the income tax consequences of the redemption to Mr. Alleham's sister. Answer: The redemption transaction would have no income tax consequences for Mr. Alleham. For his sister, the income tax consequences are be as follows: Proceeds of Redemption [(30,000)($24.35)] PUC [(30,000)($22.50)] ITA 84(3) Deemed Dividend Gross Up of 15% Taxable Non-eligible Dividend

$730,500 ( 675,000) $ 55,500 8,325 $ 63,825

Proceeds of Redemption [(30,000)($24.35)] Less: ITA 84(3) Deemed Dividend Modified POD ACB [(30,000)($18.75)] Capital Gain (PUC - ACB) Inclusion Rate Taxable Capital Gain

$730,500 ( 55,500) $675,000 ( 562,500) $112,500 1/2 $ 56,250

Both the taxable dividend and the taxable capital gain would be included in Mr. Alleham's sister's net income and there will also be a dividend tax credit of $5,763 [(9/13)(15%)($55,500)] which will reduce her federal income tax payable for the year of the redemption. Type: ES Topic: Dividends - ITA 84(3) deemed dividend on redemptions of shares

90) Elton Inc. has 220,000 common shares outstanding. All of these shares were issued for $12 each, for a total of $2,640,000 which is also equal to the PUC of the shares. A shareholder, who acquired 15,000 shares at a price of $10 per share, has repeatedly voiced dissent with the direction of the company. As a result the company has agreed to sever the connection and has offered to redeem the shares at $12.50 each, an offer which has been accepted. Any dividends resulting from the redemption will be considered as non-eligible. Determine the income tax consequences of this redemption to the departing shareholder. Answer: The income tax consequences are as follows: Proceeds of Redemption [(15,000)($12.50)] PUC [(15,000)($12.00)] ITA 84(3) Deemed Dividend Gross Up of 15% Taxable Non-eligible Dividend

$187,500 ( 180,000) $ 7,500 1,125 $ 8,625

Proceeds of Redemption [(15,000)($12.50)] Less: ITA 84(3) Deemed Dividend Modified POD ACB [(15,000)($10.00)] Capital Gain (PUC - ACB) Inclusion Rate Taxable Capital Gain

$187,500 ( 7,500) $180,000 ( 150,000) $ 30,000 1/2 $ 15,000

Both the taxable dividend and the taxable capital gain would be included in the departing shareholder's net income for the year of the redemption. The non-eligible dividend would also qualify for a federal dividend tax credit of $779 [(9/13)(15%)($7,500)]. Type: ES Topic: Dividends - ITA 84(3) deemed dividend on redemptions of shares

91) Ms. Daniels owns all of the outstanding shares of Daniels Inc., a CCPC. The shares have a PUC of $390,000 and an ACB of $545,000. Because it has recently consolidated its operations, Daniels Inc. pays a liquidating dividend of $299,000, accompanied by a PUC reduction of $217,000. What are the income tax consequences of the distribution to Ms. Daniels? Answer: The portion of the distribution that represents the reduction in PUC is not required to be included in income and will therefore be treated as a tax free distribution. The income tax attributes of her shares however will be reduced by this tax free distribution and, as a result, the revised PUC will be $173,000 ($390,000 - $217,000) and the revised ACB $328,000 ($545,000 - $217,000). The $82,000 ($299,000 - $217,000) excess of the distribution over the PUC reduction will be an ITA 84(2) deemed dividend that will be eligible for either capital dividend treatment or be treated as a taxable dividend that is either eligible or non-eligible. Type: ES Topic: Dividends - ITA 84(2) deemed dividend

92) Martin Forbes owns all of the outstanding shares of Carson Ltd., a CCPC. These shares have a PUC of $225,000 and an ACB of $310,000. Having sold a large segment of the operations, Carson Ltd. pays a liquidating dividend of $112,000, accompanied by a PUC reduction of $84,000. What are the income tax consequences of the distribution to Mr. Forbes? Answer: The portion of the distribution that represents the reduction in PUC is not required to be included in income and will therefore be treated as a tax free distribution. The income tax attributes of his shares however will be reduced by this tax free distribution and, as a result, the revised PUC will be $141,000 ($225,000 - $84,000) and the revised ACB $226,000 ($310,000 - $84,000). The remaining $28,000 ($112,000 - $84,000) will be treated as a deemed dividend under ITA 84(2). The deemed dividend will be eligible for either capital dividend treatment or be treated as a taxable dividend that is either eligible or non-eligible. Type: ES Topic: Dividends - ITA 84(2) deemed dividend

93) Nicastro Ltd., a CCPC, with a December 31 taxation year end has been in business for many years and, until recently, it has been fairly profitable. All of its shares are owned by Luigi Nicastro. The Company has always manufactured and sold fresh pasta, largely to restaurants and stores in the local Italian community. All went well until the beginning of 2021 when a local Italian newspaper discovered that Mr. Nicastro's real name was Stanley Kowalski and that he had never been to Italy. Demand for his Company's products immediately fell off, resulting in a business loss in 2021 of $189,000 resulting in a 2021 non-capital loss of the same amount. In addition, in 2021, the company was forced to sell some business properties to meet its cash flow needs. This resulted in an allowable capital loss of $48,000 which resulted in a 2021 net capital loss of the same amount. While $114,000 of the 2021 non-capital loss could be carried back to previous taxation years, all of the 2021 net capital loss had to be carried forward since there were no net taxable capital gains in the three previous taxation years. In early 2022, he began looking for a buyer for his Nicastro Ltd. shares. After considerable searching, he found a buyer and, as of June 1, 2022, all of the Nicastro Ltd. shares were sold to Stella d'Oro Inc, an unrelated person. For the period January 1, 2022 through May 31, 2022, Nicastro Ltd.'s accountant determined that there was a business loss of $79,000. During this deemed short taxation year, the Company had rental income of $5,500. There was also a disposition of preferred share investments owned by the company that resulted in an allowable capital loss of $7,200. On May 31, 2022, Nicastro owned the following capital properties:

Capital Properties Investments In TD Common Shares Land Building Equipment

Cost & ACB $ 32,000 85,000 427,000 120,000

UCC N/A N/A $285,000 60,000

FMV $ 28,000 235,000 327,000 50,000

Required: A. Calculate Nicastro's net income and taxable income for the short taxation year ending May 31, 2022. Indicate the amount of any non-capital and net capital loss balances that would be available to apply to other taxation years, using the assumption that Nicastro makes all of the available elections using the maximum elected amounts. B. Provide the information required in Part A assuming that Nicastro makes only those election(s) required to offset any non-capital and net capital losses. C. Briefly discuss which course of action (Part A or B) would be more advantageous for Stella d'Oro Inc.

Answer: Part A - Non-Capital and Net Capital Losses - All Available Elections Required Adjustments The following adjustments would be required under the acquisition of control (AOC) rules: Investments in Common Shares - As the $28,000 FMV of the investments is below their $32,000 cost, there would be a deemed disposition to realize the loss which would be an allowable capital loss of $2,000 [(1/2)($32,000 - $28,000)]. Equipment - As the $50,000 FMV of the equipment is less than its $60,000 UCC, it would also be deemed to have been disposed of to trigger the unrealized terminal loss of $10,000 which is treated as deemed CCA. Elections - If all available elective dispositions were made, the results would be as follows: Land - The Land would be deemed to have been disposed of at FMV of $235,000, resulting in a taxable capital gain of $75,000 [(1/2)($235,000 - $85,000)]. Building - The Building would be deemed to have been disposed of for POD equal to its FMV of $327,000 resulting in recapture of $42,000 ($327,000 - $285,000). Business Income (Loss) - Based on the above analysis, the business income (loss) would be calculated as follows: Loss as originally determined ($79,000) Deemed loss on Equipment (Treated as CCA) ( 10,000) Recapture on Building (Elected) 42,000 Business Loss for the taxation year ending May 31, 2022 ($47,000) Net Income and Taxable Income - If all of the available elections were made, Nicastro Ltd.'s net income and taxable income for the taxation year ending May 31, 2022 would be calculated as follows: ITA 3(a) - Rental Income ITA 3(b) - Net Taxable Capital Gains: Taxable Capital Gain on Land Election Allowable Capital Loss on Preferred Shares Sold Allowable Capital Loss on Common Shares (Required) ITA 3(c) - Total ITA 3(d) - Business Loss Net Income - May 31, 2022 taxation year 2021 Net Capital Loss Taxable Income - May 31, 2022 taxation year

$ 5,500 $75,000 ( 7,200) ( 2,000)

65,800 $71,300 ( 47,000) $24,300 ( 48,000) Nil

2021 Net Capital Loss Balance - As the 2021 net capital loss balance was less than the net taxable capital gains, the full amount was deductible.

2021 & 2022 Non-Capital Loss Balances - With respect to the 2021 and 2022 non-capital losses the total non-capital losses would be calculated as follows: Business Loss for taxation year ending May 31, 2022 Add: 2021 Net Capital Loss Deducted Subtotal Income Under ITA 3(c) 2022 Non-Capital Loss for taxation year ending May 31, 2022 2021 Non-capital loss balance ($189,000 - $114,000) Total Non-Capital Losses

$47,000 48,000 $95,000 ( 71,300) $23,700 75,000 $98,700

Part B - Non-Capital and Net Capital Losses - Limited Elections The losses that could not be carried forward at the year end on May 31, 2021 consist of the 2021 net capital loss balance of $48,000 and the current year total allowable capital loss of $9,200 ($7,200 + $2,000) which would potentially become a 2022 net capital loss unless there were taxable capital gains to offset these amounts. To be able to use these net capital and allowable losses, a taxable capital gain of $57,200 ($48,000 + $9,200) would have to be created. This will require a capital gain of $114,400 [(2)($57,200)]. This can be achieved by electing a disposition amount for the land of $199,400 ($85,000 + $114,400). Business Income (Loss) - Based on the required adjustment, the business income (loss) would be calculated as follows: Loss as Originally Stated Deemed Loss on Equipment (Treated as deemed CCA) Business Loss for the taxation year ending May 31, 2022

($79,000) ( 10,000) ($89,000)

Net Income and Taxable Income for the taxation year ending May 31, 2022 - Under this alternative as well, none of the capital losses will be lost. 2022 net and taxable income would be: ITA 3(a) - Rental Income ITA 3(b) - Net Taxable Capital Gains: Taxable Capital Gain on Land Election Allowable Capital Loss on Preferred Shares Sold Allowable Capital Loss on deemed disposition of Common Shares (Required) ITA 3(c) - Total ITA 3(d) - Business Loss 2022 Net Income (Year ending May 31, 2022) 2021 Net Capital Loss 2022 Taxable Income (Year ending May 31, 2022)

$ 5,500 $57,200 ( 7,200) ( 2,000)

48,000 $53,500 ( 89,000) Nil ( 48,000) Nil

Non-Capital Loss Carry Forward - With respect to the 2021 non-capital loss and the total carry forward after May 31, 2022, this amount would be calculated as follows: Business Loss for taxation year ending May 31, 2022 Add: 2021 Net Capital Loss Deducted Subtotal Income under ITA 3(c) 2022 Non-Capital Loss (Year ending May 31, 2022) 2021 Non-Capital Loss ($189,000 - $114,000) Total Non-Capital Losses

$ 89,000 48,000 $137,000 ( 53,500) $ 83,500 75,000 $158,500

The difference in the non-capital loss carry forward between Part A and B is equal to $59,800 ($158,500 $98,700). This is the total of the recapture on the building of $42,000 plus the $17,800 ($75,000 - $57,200) larger taxable capital gain on the land in Part A. Part C - Advice on Course of Action If Stella d’Oro either does not intend to continue the same business in which the loss occurred, or does not expect to have sufficient profits in that business to absorb the non-capital losses within the relevant carry forward period, Nicastro should make all elections as per Part A. Alternatively, if Stella d’Oro expects to have sufficient profits in continuing the pasta business to absorb the losses, Nicastro should use the Part B approach that maximizes the non-capital loss balances. The reason for this is that the tax benefit of the non-capital losses will be realized as soon as profits are earned in the post-acquisition period. Type: ES Topic: Acquisition of control - calculations

94) Blackburn Inc., a CCPC that uses a December 31 taxation year, began carrying on the business of providing cleaning services to residential properties. All of the shares were owned by Aaron Blackburn and, in addition, he was actively involved in managing the business. Mr. Blackburn, whose previous career was as a professor of business strategy at a major Canadian university, showed little aptitude for actually running a business. In 2020, the business had a loss of $123,000 and a further loss of $87,000 in 2021. When the business began, Blackburn Inc. had purchased land on which the intention was to expand the business with a second location once the first location became successful. As success did not appear to be on the horizon, Blackburn Inc. sold the land in 2021 realizing a capital loss of $192,000 which became a 2021 net capital loss of $96,000. In early 2022, Mr. Blackburn decided to sell the company. White Enterprises, a large public company agreed to buy all of his shares and, on May 1, 2022, the shares were sold resulting in an acquisition of control (AOC) On the AOC there was a deemed taxation year end of April 30, 2022, Blackburn Inc. prepared an income statement for the deemed short taxation year of January 1, 2022 to April 30, 2022 (the 2022 taxation year). There was a business loss of $46,000 but no further capital losses for the 2022 taxation year. On April 30, 2022, the company owned the following capital property: Capital Properties Temporary Investments Accounts Receivable Land Building Equipment Vehicles (Class 10)

Cost & ACB $ 45,000 90,000 180,000 325,000 93,000 145,000

UCC N/A N/A N/A $300,000 60,000 110,000

FMV $ 12,000 76,000 262,000 380,000 45,000 132,000

Shortly after taking over Blackburn Inc., White Enterprises decided that some of the extra space in Blackburn's facilities could be used for manufacturing customized small kitchen appliances. Blackburn's income (loss) from the two separate businesses for the period May 1, 2022 to December 31, 2022 and the 2023 taxation year was as follows: Business Kitchen Appliances Cleaning Services

May 1 to Dec. 31, 2022 $146,000 ( 23,000)

2023 ($ 52,000) 263,000

Required: A. If Blackburn Inc. makes all possible elections to minimize the net capital and non-capital loss balances, determine the amount of the non-capital losses that will be carried forward after the AOC by White Enterprises, and the amount of the net capital loss balances that will no longer be available to apply to post-AOC taxation years. B. Indicate the maximum amount of the non-capital losses that can be used during the period May 1 through December 31, 2022, and the amount available to apply to the 2023 and subsequent taxation years. C. Indicate the maximum amount of the non-capital losses that can be claimed for the taxation year ending December 31, 2022, and the 2023 taxation year.

Answer: Part A - Non-Capital and Net Capital Losses Business Loss - The business loss for the taxation year ending April 30, 2022 would be as follows: Loss as per April 30, 2022 Income Statement Required Accounts Receivable Adjustment ($90,000 - $76,000) Building Election - Recaptured CCA ($325,000 - $300,000) Equipment - Deemed CCA ($60,000 - $45,000) Vehicles Election - Recaptured CCA ($132,000 - $110,000) Business Loss f the taxation year ending April 30, 2022

($46,000) ( 14,000) 25,000 ( 15,000) 22,000 ($28,000)

Net Income & Taxable Income - Net income and taxable income for the taxation year April 30, 2022, calculated as per the ITA 3 rules, would be as follows: ITA 3(a) - Income ITA 3(b) - Net Taxable Capital Gains (Losses): Elections under ITA 111(4)(e): Gain on Land [(1/2)($262,000 - $180,000)] $ 41,000 Gain on Building [(1/2)($380,000 - $325,000)] 2 7,500 Deemed Dispositions - ITA 111(4)(c) and (d) Loss on Temporary Investments [(1/2)($45,000 - $12,000)] ( 16,500) ITA 3(c) - Total ITA 3(d) - Business Loss Net Income for the taxation year ending April 30, 2022 2021 Net Capital Loss (Limited To Amount Included Under ITA 3(b)) Taxable Income - April 30, 2022

Nil

$ 52,000 $ 52,000 ( 28,000) $ 24,000 ( 52,000) Nil

2021 Net Capital Loss - The net capital loss balance that cannot be claimed in taxation years subsequent to the AOC are: 2021 Net Capital loss balance $96,000 Less: Amount claimed for taxation year ending April 30, 2021 ( 52,000) 2021 Net Capital Loss Balance $44,000 Non-Capital Losses - The non-capital losses available to taxation years ending after the AOC are as follows: Business Loss - Taxation year ending April 30, 2022 Add: 2021 Net Capital Loss Deducted Subtotal Income Under ITA 3(c) Non-Capital Loss - Taxation year ending April 30, 2022 2020 Non-Capital Loss Balance 2021 Non-Capital Loss Balance Non-Capital Losses post-AOC

$ 28,000 52,000 $ 80,000 ( 52,000) $ 28,000 123,000 87,000 $238,000

Part B - Non-Capital Loss Carry Forward to December 31, 2022 taxation year The net income for the taxation year ending December 31, 2022 will be $123,000 ($146,000 - $23,000). As none of this income was from the cleaning services business, none of the non-capital losses can be claimed. This will leave the non-capital losses available to the 2023 and subsequent taxation years unchanged at $238,000. Part C - Loss Carry Forward in 2023 2023 net income will be $211,000 ($263,000 - $52,000). As all of this income is from the cleaning services business, a taxable income deduction can be claimed for the non-capital losses in the amount of $211,000, resulting in 2023 taxable income of nil. This will leave a non-capital loss for the taxation year ending April 30, 2022 of $27,000 ($238,000 - $211,000).The 2020 and 2021 non-capital loss balances would be claimed in full and therefore nil. Note that ITA 111(3) requires that the oldest losses be applied first. Type: ES Topic: Acquisition of control - calculations

95) Each of the following is an independent Case involving the ownership of voting shares of CCPCs. All of the corporations have taxation years that end on December 31 and have only one class of shares. 1. Ms. Sarah Brandt owns 100% of the voting shares of SB Inc. Her common-law partner, Ms. Melissa Frank, owns 100% of the shares of MF Inc. 2. John Brody owns 65% of the shares of Heresy Inc. His spouse, Jessica Brody, owns 85% of the shares of Porter Inc. John and Jessica each own 35% of Lason Ltd. 3. Surcal Inc. owns 75% of the shares of Basik Inc. Basik Inc. owns 70% of the shares of Freon Ltd. 4. Martin Friedman owns 75% of the shares of Bloc Ltd. and 20% of the shares of Lorne Inc. Bloc Ltd. owns 25% of the shares of Lorne Inc. Martin's 12 year old son owns 25% of the share of Lorne Inc. There are no other shareholders who own shares in both companies. 5. Ms. Bright owns 75% of the shares of Aurora Ltd. and 20% of the shares of Bock Inc. Ms. Favreau owns 80% of the shares of Bock Inc. and 20% of the shares of Aurora Ltd. Ms. Bright and Ms. Favreau are not related. Required: For each of the preceding Cases, determine whether the corporations are associated. Support your conclusions with references to specific provisions of ITA 256. In order to assist you in answering this question, we have provided you with the content of ITA 256(1). ITA 256(1) Associated corporations – For the purposes of this Act, one corporation is associated with another in a taxation year if, at any time in the year, (a) one of the corporations controlled, directly or indirectly in any manner whatever, the other; (b) both of the corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons; (c) each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; (d) one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; or (e) each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more persons who were members of both related groups, either alone or together, owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof.

Answer: Case 1 The two Companies are not associated. While Sarah Brandt and Melissa Frank are related, they are not a group with respect to the two Companies. For association to apply in a case such as this, there would have to be cross-ownership of at least 25% of the shares of one of the two companies. That is, either Sarah Brandt would have to own 25% or more of MF Inc., or Melissa Frank would have to own 25% or more of SB Inc. Case 2 John Brody controls Heresy Inc., is related to each member of the group (himself and his spouse) that controls Lason Ltd., and has cross-ownership of Lason Ltd. in excess of 25%. This means that these two Companies are associated under ITA 256(1)(d). Jessica Brody controls Porter Inc., is related to each member of a group that controls Lason Ltd., and has the necessary cross-ownership of at least 25% of Lason Ltd. shares. This means that these two Companies are also associated under ITA 256(1)(d). As they are not controlled by the same individual or group, Heresy Inc. and Porter Inc. are not associated under ITA 256(1). However, as they are both associated with the same third corporation (Lason Ltd.), Heresy Inc. and Porter Inc. would be associated under ITA 256(2). Note that ITA 256(2) allows Heresy Inc. and Porter Inc. to avoid association, provided Lason Ltd. elects not to be associated with either Company. This will mean, however, that Lason Ltd. will have a business limit for the period of nil. Case 3 Surcal Inc. is associated with Basik Inc. under ITA 256(1)(a) as it has control of Basik. Surcal Inc. is associated with Freon Ltd. under ITA 256(1)(a) as it has indirect control by virtue of its control of Basik. Basik Inc. and Freon Ltd. are associated under ITA 256(1)(a) in that Basik Inc. has direct control of Freon Ltd. Basik Inc. and Freon are also associated under ITA 256(1)(b) in that they are both controlled by the same person (Surcal). Case 4 For the purposes of determining associated companies, Martin controls Bloc Ltd. which gives him control over that company's 25% interest in Lorne Inc. In addition, he is deemed to own the 25% interest in Lorne Inc. that is held by his minor child [ITA 256(1.3)]. This means his total interest is as follows: Direct Interest Indirect Interest Through Control of Bloc Ltd. Son's Shares (Deemed ownership) Total Interest

20% 25% 25% 70%

As this is a controlling interest, Martin has control of both Bloc Ltd. and Lorne Inc. Given this, the two companies are associated under ITA 256)(1)(b). Case 5 As a group, Ms. Bright and Ms. Favreau control both Aurora Ltd. and Bock Inc. As a consequence, these two Companies would be associated under ITA 256(1)(b). Type: ES Topic: Associated corporations - analysis (applying the rules)

96) The following situations are independent of each other. All of the corporations involved are CCPCs and have only one class of shares. A. Mr. Johnson, Mr. Kohn, and Mr. Langley are three unrelated individuals. • Mr. Johnson owns 50% of the shares of Astro Inc. and 25% of the shares of Borealis Ltd. • Mr. Kohn owns 50% of the shares of Borealis Ltd. • Mr. Langley owns 50% of the shares of Astro Inc. and 25% of the shares of Borealis Ltd. B. Ms. Martineau and Ms. Olson each own 50% of the shares of Kisler Inc. Ms. Martineau owns 70% of the shares of Pardo Ltd. Ms. Olson owns the remaining 30% of this Company's shares. Ms. Martineau and Ms. Olson are not related. C. Fiona and Jennifer Lane are sisters. Fiona owns 100% of the shares of FL Inc. and 31% of Lane Ltd. Her sister Jennifer owns 60% of the shares of JL Inc., with the remaining 40% of the shares held by her father. Jennifer also owns 39% of the shares of Lane Ltd. The remaining shares of Lane Ltd. are held by an unrelated party. D. Ms. Garland owns 90% of the shares of Garland Inc. She also owns 10% of the shares of Newton Ltd. Her 13 year old son Newton owns 10% of the shares of Newton Ltd. While the remaining shares of Newton Ltd. are owned by Newton's father, Mr. Isaac, Ms. Garland has options to acquire up to 40% of the Newton shares from him. Ms. Garland and Mr. Isaac have never been married or lived in a commonlaw relationship. They are, however, good friends. E. Mr. Barnes owns 70% of the shares of Noble Inc. and 24% of the shares of Borders Ltd. Noble Inc. owns 40% of the shares of Borders Ltd. Required: For each of the preceding situations, indicate whether the corporations are associated and explain your conclusion with reference to the ITA. In order to assist you in answering this question, we have provided you with the content of ITA 256(1). ITA 256(1) Associated corporations – For the purposes of this Act, one corporation is associated with another in a taxation year if, at any time in the year, (a) one of the corporations controlled, directly or indirectly in any manner whatever, the other; (b) both of the corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons; (c) each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; (d) one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; or (e) each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more persons who were members of both related groups, either alone or together, owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof.

Answer: Part A Mr. Johnson and Mr. Langley are a group that controls Astro Inc. However, they do not control Borealis Ltd., as Mr. Kohn (not a member of the group that controls Astro Inc.) owns 50% of the shares. Therefore, Astro Inc. and Borealis Ltd. are not associated. Part B While they are not related, Ms. Martineau and Ms. Olson constitute a group [ITA 256(1.2)(a)] with respect to both Kisler Inc. and Pardo Ltd. As both Kisler Inc. and Pardo Ltd. are controlled by the same group, the two Companies are associated under ITA 256(1)(b). Part C The Lane sisters are related. In addition, under ITA 256(1.5) a person who owns shares in two or more corporations shall be, as a shareholder of one of the corporations, deemed to be related to himself or herself as a shareholder of the other corporation(s). Given this, FL Inc. and Lane Ltd. are associated under ITA 256(1)(d). Fiona Lane controls FL Inc., is a member of a related group (Fiona and Jennifer Lane) that controls Lane Ltd., and Fiona owns more than 25% of the shares of Lane Ltd. In similar fashion, JL Inc. is associated with Lane Ltd. under ITA 256(1)(d). Jennifer Lane controls JL Inc., is a member of a related group (Fiona and Jennifer Lane) that controls Lane Ltd., and Jennifer owns more than 25% of the shares of Lane Ltd. Based on these associations, FL Inc. and JL Inc. are associated under ITA 256(2), as they are both associated with a third corporation, Lane Ltd. Part D For purposes of determining associated companies, Ms. Garland is deemed to own the 10% interest in Newton Ltd. that is held by her minor child [ITA 256(1.3)], as well as the 40% interest for which she holds options [ITA 256(1.4)]. When these interests are combined with her 10% direct interest in Newton Ltd., she would be considered to be in control of Newton Ltd. As she controls both Garland Inc. and Newton Ltd., these two Companies would be associated under ITA 256(1)(b). Part E With his 70% interest, Mr. Barnes controls Noble. This, in turn, gives him control over Noble's 40% interest in Borders. When combined with his direct interest of 24%, his total interest of 64% gives him control over Borders. As both companies are controlled by the same person, the two Companies are associated under ITA 256(1)(b). Type: ES Topic: Associated corporations - analysis (applying the rules)

97) The following three independent cases involve the expenditures associated with various types of investment tax credits. Case A In 2021, Carlton Ltd. employed 12 eligible apprentices. The total amount paid to these individuals is $230,000. Seven of the apprentices are paid $15,000 for the year, with the remaining five each being paid $25,000. In addition, on December 12, 2021, the Company acquires $1,500,000 in Class 10 property on which a 10% investment tax credit is available. Required: Describe the 2021 and 2022 income tax consequences associated with making these expenditures and claiming the related investment tax credits. Include in your solution the CCA for 2021 and 2022. Case B Since its date of incorporation, Lanson Ltd. has always qualified as a CCPC. For the taxation year ending December 31, 2021, it had taxable income of $652,000 and $714,000 in 2022. Its Taxable Capital Employed In Canada (TCEC) was $12,300,000 in 2021 and $13,100,000 in 2022. Required: Determine Lanson's SRED annual expenditure limit for the 2022 taxation year. Case C Martin Processes has been a CCPC since it was incorporated several years ago. In the taxation year ending December 31, 2021, it had taxable income of $32,000 and $12,000 in 2022. The Company has no federal income tax payable for the taxation year ending December 31, 2022, or for any of the three previous taxation years. Its TCEC is $11,100,000 in 2021 and $12,400,000 in 2022. In 2022, the Company incurred a number of expenditures that qualify for investment tax credits: • $110,000 for qualified property in the Atlantic Provinces. • $3,300,000 in current expenditures for SRED. Required: Determine the amount of the refund that Martin Processes will receive as a result of earning these investment tax credits and any available carry forwards. Include in your answer any other income tax consequences with respect to these investment tax credits.

Answer: Case A With respect to the $230,000 in apprentice salaries, the investment tax credit is available on an annual salary maximum of $20,000 per apprentice. As a result, there will be a $20,500 [(7)(10%)($15,000) + (5)(10%)($20,000 maximum)] credit against 2021 federal income tax payable. This $20,500 amount will be added to income in 2022. With respect to the $1,500,000 in capital expenditures, there will be a 2022 credit against federal income tax payable of $150,000 [(10%)($1,500,000)]. The $150,000 credit will not influence the calculation of CCA for 2021 which will be $675,000 [(30%)(1.5)($1,500,000)]. In 2022, the $150,000 credit will be deducted from the January 1, 2022 UCC, leaving a balance of $675,000 ($1,500,000 - $675,000 - $150,000). Given this, 2022 CCA will be $202,500 [(30%)($675,000)]. Case B Luxor's annual expenditure limit would be $2,827,500. This amount is calculated as follows: [$3,000,000][($40,000,000 — $2,300,000) ÷ $40,000,000] Case C Martin's annual expenditure limit would be $2,917,500, calculated as follows: [$3,000,000][($40,000,000 — $1,100,000) ÷ $40,000,000] As the eligible SRED current expenditures exceed this limit, some of the expenditures will only be eligible for the 15% rate: Total Current SRED Expenditures Annual Expenditure Limit (Eligible for the 35% Rate) Limited to a rate of 15%

$3,300,000 ( 2,917,500) $ 382,500

The total amount of investment tax credits available can be calculated as follows: Qualified Property [(10%)($110,000)] SRED Current Expenditures: At 35% Rate [(35%)($2,917,500)] At 15% Rate [(15%)($382,500)] Total Available Amount

$ 11,000 1,021,125 57,375 $1,089,500

Martin is a qualifying corporation. The refund available would be as follows:

Qualified Property SRED Current Expenditures SRED Current Expenditures Total Available

Rate 40% 100% 40%

ITC $ 11,000 1,021,125 57,375 $1,089,500

Refund $ 4,400 1,021,125 22,950 $1,048,475

The non-refunded investment tax credit of $41,025 ($1,089,500 - $1,048,475) can be carried forward 20 years to be applied against federal income tax payable. Since there was no federal income tax payable in the last three taxation years no amount can be carried back. The cost of the qualified property will be reduced in the following year by the refundable investment tax credit of $4,400. The $1,044,075 ($1,021,125 + $22,950) refundable tax credit on current SRED expenditures will be added to income in the 2023 taxation year. Type: ES Topic: Investment tax credits - calculating the credits

98) Braken Ltd. is a CCPC that was incorporated in 2011. Between the date of its corporation and December 31, 2022, it has had the following transactions that relate to the Company's capital dividend account (CDA). • In 2012, the Company sold a non-depreciable capital property with an ACB of $73,600 for $114,200. • In 2015, the Company received a capital dividend of $42,100. • In 2017, the Company paid a capital dividend of $23,100. The required election was made. • In 2018, the Company sold two parcels of land. The first parcel of land, which had an ACB of $123,400, was sold for $176,200 and the second with an ACB of $220,400, was sold for $198,600. • In 2019, the Company received life insurance proceeds, net of the adjusted cost basis of the policy, in the amount of $131,600. • Early in 2022, Braken purchased an unlimited life franchise at a cost of $180,000. While Braken intended to operate this franchise as part of its overall business, the Company received an unsolicited offer to purchase this franchise for $240,000. Braken accepted this offer and the franchise was sold on November 1, 2022. On January 1, 2022, the UCC balance for Class 14.1 was nil. • In 2022, the Company paid a capital dividend of $45,200. The required election was made. Required: Determine the balance in the Company's CDA as of December 31, 2022. Provide a separate calculation of the income inclusion resulting from the sale of the franchise. Answer: The December 31, 2022 CDA is calculated as follows: 2012 Capital Gain [(1/2)($114,200 - $73,600)] 2015 Capital Dividend Received 2017 Capital Dividend Paid 2018 Capital Gain [(1/2)($176,200 - $123,400)] 2018 Capital Loss [(1/2)($198,600 - $220,400)] 2019 Life Insurance Proceeds 2022 Capital Gain [(1/2)($240,000 - $180,000)] 2022 Capital Dividend Paid CDA Balance December 31, 2022

Type: ES Topic: Capital dividend account (CDA) - calculating the CDA

$ 20,300 42,100 ( 23,100) 26,400 ( 10,900) 131,600 30,000 ( 45,200) $171,200

99) Required: Indicate the income tax consequences to the relevant shareholders of the transaction(s) described in each of the following independent Cases that are the result of transactions with the corporation and not between shareholders except where there is a sale of effected shares following the corporate event. Income tax consequences include the increase or decrease in the individual shareholder's net income, any change in the ACB or PUC of any shares that are still owned after the various events described in each case, and any federal dividend tax credits that result from the transaction(s). Assume that any taxable dividends are non-eligible. Case One When Austen Inc. was first incorporated, it issued 233,000 shares at $18 per share. The following year, Jane Lessing acquired 20% of these shares at $21 per share from existing shareholders. The total cost of the 46,600 [(20%)(233,000)] shares was $978,600. During the current year, a creditor of the Company has agreed to accept 17,000 new Austen Inc. shares in settlement of an amount owing of $350,000. At this time, the FMV of the shares is $22 per share. Shortly after the debt settlement transaction, Jane Lessing sells her shares to an arm's length person for $24 per share. Case Two After liquidating all of its assets and paying off all of its liabilities, Eliot Ltd. is left with cash of $3,850,000. The $3,850,000 is distributed to the corporation's only shareholder, George Christie. He has owned the shares for more than 20 years. The PUC of the shares is $106,000 and the ACB $597,000. In addition the corporation has a CDA balance of $347,000 that will be utilized with respect to any distribution that results in a dividend (deemed or otherwise). Subsequent to the distribution, the company is dissolved and its shares cancelled. Case Three When Bronte Ltd. was incorporated several years ago, 250,000 common shares were issued at a price of $35 per share. As the original owner wished to retire, all of the shares were sold to Charlotte Austen for $32 per share. The following year, the Company redeemed 75,000 of the Bronte Ltd. shares for $37 each. Case Four Doris Eliot owns all of the outstanding shares of Lessing Inc. Lessing Inc. is a CCPC. The PUC of the shares is $343,000 and the ACB $451,000. During the current year Lessing Inc. is authorized to makes a return of capital and distributes $123,000 which was accompanied by a PUC reduction of $63,000.

Answer: Case One The debt settlement transaction will result in an ITA 84(1) deemed dividend, calculated as follows: PUC of New Shares [(17,000)($22)] Increase in Net Assets (Liability Eliminated) ITA 84(1) Deemed Dividend

$374,000 ( 350,000) $ 24,000

This deemed dividend would be allocated to the 250,000 (233,000 + 17,000) shares that are now outstanding on the basis of $0.096 ($24,000 ÷ 250,000) per share. For Jane, this would result in a deemed dividend of $4,474 [($0.096)(46,600)] of which $5,145 [(115%)($4,474) would be added to her income as a taxable non-eligible dividend. The deemed dividend is added to the ACB of Jane's shares resulting in a revised ACB of $21.096 per share ($21.00 + $0.096). The income tax consequences when Jane sells her her shares would be as follows: POD [(46,600)($24.00)] ACB [(46,600)($21.096)] Capital Gain Inclusion Rate Taxable Capital Gain

$1,118,400 ( 983,074) $ 135,326 1/2 $ 67,663

This will result in a total increase in her net income of $72,808 ($67,663 + $5,145) There will also be a federal dividend tax credit of $465 [(9/13)(15%)($4,474)] that will reduce her federal income tax payable. Case Two The analysis of the distribution would be as follows: Cash Distributed PUC ITA 84(2) Deemed Dividend ITA 83(2) Capital Dividend Net Taxable Eligible Dividend

$3,850,000 ( 106,000) $3,744,000 ( 347,000) $3,397,000

Cash Distributed Less: ITA 84(2) Deemed Dividend Adjusted POD ACB Capital Loss Inclusion Rate Allowable Capital Loss

$3,850,000 ( 3,744,000) $ 106,000 ( 597,000) ($ 491,000) 1/2 ($ 245,500)

The capital dividend would be distributed tax free. The $3,397,000 taxable non-eligible dividend would be grossed up to $3,906,550 [(115%)($3,397,000)]. It will also provide for a federal dividend tax credit of $352,765 [(9/13)(15%)($3,397,000)].

The allowable capital loss can be used in the current year, only to the extent of taxable capital gains realized in the current year. The stop loss rule will not deny the allowable capital loss since the corporation is being wound-up. Case Three The income tax consequences to Charlotte Austen resulting from the redemption of her shares would be as follows: Proceeds of Redemption [(75,000)($37)] PUC [(75,000)($35)] ITA 84(3) Deemed Dividend

$2,775,000 ( 2,625,000) $ 150,000

Proceeds of Redemption Less: ITA 84(3) Deemed Dividend Modified POD ACB [($32)(75,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$2,775,000 ( 150,000) $2,625,000 ( 2,400,000) $ 225,000 1/2 $ 112,500

The deemed dividend will be grossed up to $172,500 [(115%)($150,000)]. This will result in a total increase in net income of $285,000 ($172,500 + $112,500). The dividend will generate a federal credit of $15,577 [(9/13)(15%)($150,000)]. With respect to the shares still held by Charlotte Austen, they would have a PUC of $6,125,000 [($35)(250,000 - 75,000)] and the ACB would be $5,600,000 [($32)(250,000 - 75,000)]. Case Four To the extent of the $63,000 PUC reduction, the liquidating dividend will be treated as a tax free distribution to Ms. Eliot. However, there will be income tax consequences with respect to this distribution: • The PUC of Ms. Eliot's shares will be reduced to $280,000 ($343,000 - $63,000). • The ACB of Ms. Eliot's shares will be reduced to $388,000 ($451,000 - $63,000). The $60,000 ($123,000 - $63,000) excess of the distribution over the PUC reduction will be an ITA 84(4) deemed dividend. For purposes of determining net income, this amount will be grossed up to $69,000 [(115%)($60,000)]. It will generate a federal dividend tax credit of $6,231 [(9/13)(15%)($60,000)]. Type: ES Topic: Dividends - deemed dividends 4 cases ITA 84(1) to 84(4)

100) Required: Indicate the income tax consequences to the relevant shareholders of the transaction(s) described in each of the following independent Cases that are the result of transactions with the corporation and not between shareholders except where there is a sale of effected shares following the corporate event. Income tax consequences include the increase or decrease in the individual shareholder's net income, any change in the ACB and/or PUC of any shares that are owned by individual shareholders after the described transaction(s), and any federal dividend tax credits that result from the described transaction(s). Assume that any taxable dividends are non-eligible. Case 1 Marion Scope owns 100% of the outstanding shares of Scope Ltd, a CCPC. The PUC of the shares of the Company are $683,000 and Marion's ACB is $723,000. During the current year, a distribution of $223,000 was paid to Marion. This was accompanied by a PUC reduction of $162,000. Case 2 Jason Mark owns 15% of the outstanding voting shares of Mark Ltd. These shares were acquired when the Company was incorporated. At that time, 225,000 shares were issued for $15 each. One of the Company's creditors has agreed to accept 30,000 new Mark Ltd. shares as full payment for a debt owed by the company in the amount of $550,000. At that time the FMV of the Mark Ltd. shares is $20 each. Later that year Jason Mark sells all of his shares for $23 each. Case 3 After liquidating all of its assets and paying off all of its liabilities, a corporation is left with cash of $1,875,000. The $1,875,000 is distributed to the corporation's sole shareholder, Veronica Venus who has owned the shares for more than 10 years. The PUC of the shares is $125,000 and the ACB $364,000. The company has a CDA balance of $321,000 which it intends to use with respect to any distribution. Subsequent to the distribution, the company is dissolved and its shares. are cancelled Case 4 At incorporation, Lason Inc. issued 300,000 common shares for $32 each. The original shareholder later sold these shares to Lawrence Foster for $28 each. During the year subsequent to the sale, the Company redeemed 50,000 of these shares for $1,700,000.

Answer: Case 1 To the extent of the $162,000 PUC reduction, the liquidating dividend will be treated as a tax free distribution to Marion. However, there will be income tax consequences related to this distribution: • The PUC of Marion's shares will be reduced to $521,000 ($683,000 - $162,000). • The ACB of Marion's shares will be reduced to $561,000 ($723,000 - $162,000). The $61,000 ($223,000 - $162,000) excess of the distribution over the PUC reduction will be an ITA 84(4) deemed dividend. Since such a distribution does not result in a disposition of any shares there are no capital gains or capital losses. • Increase in net income = Grossed up Dividend [(115%)($61,000)] $70,150 • Federal Dividend Tax Credit [(9/13)(15%)($61,000)] $ 6,335 Case 2 This transaction will result in an ITA 84(1) deemed dividend for all shareholders, calculated as follows: PUC of New Shares [(30,000)($20)] Increase in Net Assets (Liability Eliminated) ITA 84(1) Deemed Dividend

$600,000 ( 550,000) $ 50,000

This would be allocated to all 255,000 (225,000 + 30,000) shares outstanding, on the basis of $0.196 per share ($50,000 ÷ 255,000). This amount will also be added to the ACB of the shares. Given that Jason acquired his 33,750 [(15%)(225,000)] shares for $15 per share, the income tax consequences of Jason owning and selling his shares would be as follows: Grossed up Dividend [(33,750)(115%)($0.196)]

$ 7,607

POD [(33,750)($23.00)] ACB [(33,750)($15.00 + $0.196)] Capital Gain Inclusion Rate Taxable Capital Gain (All Shares Sold)

$776,250 ( 512,865) $263,385 1/2 $131,693

• Increase in net income ($7,607 + $131,693) • Federal Dividend Tax Credit [(33,750)(9/13)(15%)($0.196)]

$139,300 $687

Case 3 The analysis of the distribution would be as follows: Cash Distributed PUC ITA 84(2) Deemed Dividend ITA 83(2) Capital Dividend Taxable Non-eligible Dividend

$1,875,000 ( 125,000) $1,750,000 ( 321,000) $1,429,000

Cash Distributed Less: ITA 84(2) Deemed Dividend Modified POD ACB Capital Loss Inclusion Rate Allowable Capital Loss

$1,875,000 ( 1,750,000) $ 125,000 ( 364,000) ($ 239,000) 1/2 ($ 119,500)

The capital dividend would be distributed tax free. The allowable capital loss can be used in the current year, only to the extent of taxable capital gains realized in the current year. The capital loss would not be denied by the stop loss rule of ITA 40(3.6) because the corporation was dissolved. • Increase in net income = Grossed up Dividend [(115%)($1,429,000)] $1,643,350 • Federal Dividend Tax Credit [(9/13)(15%)($1,429,000)] $148,396 Case 4 The income tax consequences to Lawrence Foster resulting from the redemption of his shares would be as follows: Proceeds of Redemption PUC [(50,000)($32)] ITA 84(3) Deemed Dividend

$1,700,000 ( 1,600,000) $ 100,000

Proceeds of Redemption Less: ITA 84(3) Deemed Dividend Modified POD ACB [(50,000/300,000)($8,400,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$1,700,000 ( 100,000) $1,600,000 ( 1,400,000) $ 200,000 1/2 $ 100,000

• Increase in net income [(115%)($100,000) + $100,000] • Federal Dividend Tax Credit [(9/13)(15%)($100,000)] • No effect on the per share ACB or PUC of the remaining shares.

$215,000 $10,385

With respect to the shares still owned, they would have a PUC of $8,000,000 [($32)(300,000 - 50,000)] and an ACB of $7,000,000 [($28)(300,000 - 50,000)]. Type: ES Topic: Dividends - deemed dividends 4 cases ITA 84(1) to 84(4)

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 15 Corporate Taxation and Management Decisions 15.1 Online Exercises 1) Frank Labelle carries on a business as a sole proprietor that produces just enough income to meet his personal consumption needs. He anticipates that the business income will exceed his consumption needs in the foreseeable future. Will he save income tax by incorporating? Will he defer income tax by incorporating? Explain your conclusions. Answer: The use of a corporation only provides significant income tax deferral in those cases where income can be left in the corporation and not paid out to the shareholders. As Frank requires all of the income of the business in order to provide for his personal consumption needs, the use of a corporation will not provide any deferral. However, as he anticipates that the business's income will exceed his personal consumption needs in the foreseeable future, there will be deferral on amounts of income that are left in the corporation in future years. It appears that Frank's business would be incorporated in a CCPC earning active business income (ABI). Provided this income does not exceed the amount eligible for the SBD, there may be a small reduction in some provinces or territories. However, this income tax savings is usually not large enough to justify the costs of establishing and maintaining a corporation. Type: ES Topic: Income tax savings & deferral - the decision to incorporate a business

2) Briefly describe the two basic types of tax benefits that can arise through the incorporation of a business. Answer: As described in the text, the two basic types of benefits are as follows: Tax Reduction - In some situations, the total income taxes that would be paid at the combined corporate and individual level will be less when the business is incorporated than would be the case if the individual had carried on the business as a sole proprietor. The likelihood of tax reduction is increased where the business activity is M&P particularly in those provinces and territories which offer enhanced M&P incentives. Tax Deferral - When a business is carried on by a corporation the corporation will pay income tax on profits and any after tax profits can then be distributed as taxable dividends to individual shareholders who are then subject to personal income tax. The combination of the corporate and personal income tax are meant to equate to the income taxes that would have been payable by an individual were the business to be carried on by that individual as a sole proprietor. This means that when a corporation is involved there are two levels of income tax - a general low income tax rate by the corporation and then an additional level of income tax once taxable dividend distributions of corporate after-tax earnings are made to individuals. If the an individual shareholder does not require all of the after-tax corporate income then funds can be left in the corporation, resulting in a postponement of the second level of personal income tax. If the rate at which the corporation is taxed is lower than the rate at which the individual would be taxed then there is tax deferral. Type: ES Topic: Income tax concepts - tax reduction & tax deferral

3) One of the advantages that is cited for the use of a corporation is limited liability. Explain this concept and indicate whether you believe that it is an advantage for a small private corporation with a single shareholder. Answer: Because a corporation is a separate legal entity, the shareholders' liabilities to creditors are limited to the amount invested in the corporation and any corporate property. That is, creditors of the corporation can look only to the assets of the corporation for satisfaction of their claims. However, for owner-managed corporations, obtaining significant amounts of financing will almost always require the owners to provide personal guarantees, making this advantage somewhat illusory for this type of company. Note, however, limited liability may still be important for a business that is exposed to significant product or environmental claims. Type: ES Topic: Corporate concepts - limited liability

4) Varying provincial income tax rates on corporations and varying provincial/territorial dividends tax credits for individuals can result in imperfections in the integration system. Briefly explain how these imperfections can influence the decision to incorporate a business. Answer: The goal of integration is to ensure that, when a corporation is used, the combined corporate and individual income will be the same as those paid by an individual receiving the same income directly. For eligible dividends, the enhanced gross up and dividend tax credit mechanism is based on the assumption of a combined federal/provincial/territorial corporate income tax rate of 27.54% and for noneligible dividends, the gross up and tax credit mechanism is based on the assumption of a combined federal/provincial/territorial corporate income tax rate of 13.04%. If the actual combined income tax rate exceeds these rates, it will discourage the use of a corporation whereas if the actual combined rate is less than these rates, use of a corporation becomes more attractive. The other assumption that is inherent in integration is that the combined federal/provincial/territorial dividend tax credit will be equal to the gross up. For eligible dividends, the federal credit is equal to 6/11 of the gross up. For the combined credit to equal the gross up, the provincial/territorial credit must be equal to 5/11 of the gross up. For non-eligible dividends, the federal credit is equal to 9/13 of the gross up. For the combined credit here to equal the gross up, the provincial/territorial credit must be equal to 4/13 of the gross up. If the provincial/territorial credit exceeds these amounts, the combined credit exceeds the notional corporate income tax and makes the use of a corporation more attractive. Alternatively, if the provincial/territorial credit is less than these amounts, the credit does not compensate for corporate income tax and this discourages the use of a corporation. Type: ES Topic: Integration - general concepts

5) Under what circumstances would income splitting become an effective tax planning strategy? Explain your conclusion. Answer: For income splitting to be an effective tax planning strategy, there must be significant differences in the income levels of individuals in a closely related group such as immediate family members. Income splitting is based on the idea that some amount of income will be shifted from individuals in a high income tax bracket to individuals in a low income tax bracket. This will create a savings based on the difference between the income tax rates applicable to the two individuals. A typical situation would be a parent in the 29% or 33% federal income tax bracket, with adult children with little or no income. Note, however, that income splitting does not work if the income transferred to the individual in the low income tax bracket is subject to the Tax On Split Income (TOSI) since the TOSI applies a 33% federal income tax rate effectively negating and income tax splitting advantages. Type: ES Topic: Income splitting (TOSI) - general concepts

6) An individual has started a new business. While the individual is confident that, in the long run, that the business will be very profitable, it is expected that the business will incur losses in the first 3 to 5 years. Would you advise this individual to carry on the business as a sole proprietorship or, alternatively, to incorporate the business? Answer: Until the business becomes profitable, it would be best to continue the business as a sole proprietorship. The major reason for this advice is that, if the individual carries on the business that the business losses can be applied against other income of the individual (e.g., investment income) to reduce personal income tax. In contrast, if the business is incorporated the losses will be locked within the corporation and only available to be used when the corporate business becomes profitable. This is why the general rule is to carry on a business as a sole proprietor during years in which losses are anticipated and to only incorporate when the business becomes profitable to take advantage of income tax rates that are lower for corporations than they are for individuals. Type: ES Topic: Income tax savings & deferral - the decision to incorporate a business

7) Provinces and territories have sometimes declared a tax holiday (i.e., a period in which no provincial or territorial income tax will be payable) for new CCPCs that commence a business within the province or territory. The objective in granting this tax free period is to encourage economic growth and employment. Describe the impact of such tax holidays on the type of compensation that will be used for the ownermanager of the business. Explain your conclusion. Answer: The effect of a provincial/territorial income tax holiday for a CCPC is to reduce the overall corporate income tax rate on the first $500,000 of active business income to 9% (38% - 10% - 19% + 0%). This is 4.04% below the 13.04% rate that is assumed in perfecting integration and, as a consequence, the tax deduction associated with salary payments would be less significant. Without considering other factors, the presence of a provincial/territorial income tax holiday would favour the use of dividend payments to the owner-manager over the use of salary compensation. Type: ES Topic: Corporate concepts - provincial tax holidays

8) Indicate the conditions that are necessary for integration to work for income earned by a public company. Answer: For integration to work for a public company, the combined federal/provincial/territorial income tax rate on corporations must be 27.54%. In addition, the provincial/territorial dividend tax credit for eligible dividends must be equal to 5/11 of the dividend gross up. Type: ES Topic: Integration - general concepts

9) What is "bonusing down"? What is the advantage that results from the use of this tax planning technique? Answer: Bonusing down is a tax planning technique that involves paying deductible salary to ownermanagers in order to reduce a CCPC's active business income to the amount that is eligible for the SBD. The advantage of bonusing down is that the personal income taxes paid on the salary will sometimes be less than the corporate income tax on income in excess of the SBD, combined with the income taxes paid by the owner-manager when the after tax income is distributed as taxable dividends. Type: ES Topic: Trusts - income tax planning

10) Ms. Copeland has invested in the common shares of a number of large Canadian public companies, all of which pay eligible dividends. She has no intention of selling the shares in the foreseeable future. She has asked your advice as to whether there would be either tax deferral or tax savings if she incorporated these investments to a private company. She would be the only shareholder of this new company. Ms. Copeland has sufficient other income that she is in the 29% federal income tax bracket. She lives in a province where her marginal income tax rate is 12% and the provincial dividend tax credit on both eligible and non-eligible dividends is equal to 25% of the dividend gross up. Answer: If Ms. Copeland receives the taxable dividends directly, the effective income tax rate will be 26.4% {[(Dividends)(138%)(29% + 12%)] - [(Dividends)(38%)(6/11 + 25%)]}. Given that her investments are in large public companies, if she incorporates, the dividends would be subject to Part IV tax at a rate of 38-1/3%. This means that there is no tax deferral through the use of a corporation in this situation. With respect to income tax savings, the 38-1/3% Part IV tax is refunded and the full amount of taxable dividends received by the corporation could be paid out to Ms. Copeland. The income tax that she would pay would be exactly the same as if she had received the taxable dividends directly. This means that there would be no income tax savings through the use of a corporation in this situation. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

11) For an individual in the maximum income tax bracket, incorporating sources of income such as a business or investments can result in tax deferral. Depending on corporate income tax rates, this may or may not be beneficial to the individual. Explain this statement. Answer: When a source of income is incorporated, there are two levels of income tax. Income taxes are imposed on the corporation on the income and again by the individual shareholder when after tax corporate income is distributed as taxable dividends. If the individual does not require all of the income for personal needs and can leave some part of the income in the corporation, the second level of personal income tax can be delayed/deferred. However, whether or not this will be beneficial depends on the combined federal/provincial/territorial income tax rate of the corporation. If this combined corporate income tax rate is less than the rate that would have applied to the individual had the source of income not been incorporated, the deferral will be beneficial. If the combined rate is higher, there will be no deferral. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

12) For a CCPC paying eligible dividends, perfect integration occurs which the combined federal/provincial/territorial corporate income tax rate is 27.54% and the combined federal/provincial/territorial dividend tax credit is equal to the dividend gross up. Briefly explain how rates that differ from these affect the outcome of incorporating sources of income. Answer: With respect to combined federal/provincial/territorial corporate income tax rates, rates that are higher than 27.54% make the use of a corporation less desirable, while rates that are less than 27.54% make incorporation more desirable. With respect to the combined federal/provincial/territorial dividend tax credit, a credit that is larger than the dividend gross up will make incorporation more desirable, while a credit that is smaller than the dividend gross up will make the use of a corporation less desirable. Type: ES Topic: Integration - eligible dividends

13) In 2022 a single individual with no income can receive $31,450 in non-eligible dividends without incurring any income tax liability. In contrast, such an individual would start paying income tax in 2022 after receiving only $14,398 in interest income. Explain this difference in treatment of the two types of income. Answer: For each dollar of non-eligible dividends received, the individual must add a gross up of $0.15 to net income and taxable income. For individuals in the lowest federal income income tax bracket, the federal income tax on this amount will be $0.1725 [($1.15)(15%)]. However, there will be a federal credit against this tax payable equal to 9/13 of the gross up, or $0.1038 [(9/13)($0.15)]. This means that, as long as an individual is in the lowest federal income tax bracket, the increase in income tax associated with one dollar of non-eligible dividends received can be calculated as follows: Federal Income Tax on Grossed up Dividend Federal Dividend Tax Credit Increase in Federal Income Tax

$.1725 ( .1038) $.0687

As compared to an increase in federal income tax of $0.15 for each one dollar increase in interest income, there is only a $0.0687 increase in federal income tax for each one dollar increase in taxable dividends received. This means that dividend income uses up an individual's available tax credits at a much slower rate than other types of income. For example, while one dollar of interest income will use up one dollar [($1.00)($.15 ÷ $.15)] of an individual's personal tax credit base of $14,398, one dollar of non-eligible dividends received will use up only $0.458 of this base [($1.00)($.0687 ÷ $.15)]. This means that, in comparison with other types of income, a much larger amount of dividends can be received before an individual's tax credits are absorbed and income tax will have to be paid. Conceptually the reasoning is that when an individual earns interest income it is only that individual that is paying the income tax. However when an individual receives eligible or non-eligible dividends the underlying corporate income tax on the income that funds the dividends has already been charged therefore it is only the next level or personal income tax that is required to be paid by the individual which justifies a lower amount of income tax. Type: ES Topic: Integration - general concepts

14) Jessica Simsung has 2 children over the age of 20. While Ms. Simsung has several million dollars invested in shares of public companies that earn a substantial rate of return through taxable dividends, her children have no income of their own. Ms. Simsung has employment income which places her in the maximum income tax bracket. Describe briefly how Ms. Simsung could use a corporation to split income with her children. Answer: Ms. Simsung could incorporate a new corporation and incorporate her investments which essentially means she would sell the investments to her own corporation. The corporation would pay for the investments with a combination of interest bearing debt at the prescribed interest rate, along with preferred voting shares. Her children could then purchase non-voting shares with the right to receive the income from the investments. Depending on the amount of such income, the income could be received on a tax free basis. Alternatively, if Ms. Simsung continues to own the investments personally, this income would be taxed at her maximum income tax rate. Note, however, that this strategy does not work if her children will be subject to the Tax on Split Income (TOSI). Type: ES Topic: Income splitting (TOSI) - general concepts

15) In making management compensation decisions, how does the owner-manager environment differ from that of a publicly traded company? Answer: Unlike the situation with publicly traded companies, the owner-manager is subject to few constraints on the use of corporate property. In effect, the individual would be in a position to personally benefit from the use of the corporation and to personally benefit others such as family members without review by internal and external auditors or concern about the financial effects on unrelated shareholders. This allows the owner-manager much more flexibility in designing a compensation package. Type: ES Topic: Corporate concepts - owner-manager corporations vs public corporations

16) One of your friends, who is the sole shareholder of a private corporation, has decided that it would be a good idea to have the company pay for a swimming pool at his personal residence. He has concluded that this would be better than paying himself sufficient salary to construct the pool with his own funds. Do you agree? Explain your conclusion. Answer: This would not be a good idea. To begin, the FMV of the pool would be included in your friend's income as a shareholder benefit under ITA 15(1). The amount included in the shareholder's income would not be deductible to the company. The friend would be better off either paying sufficient salary to finance the pool (while he would pay income tax on the additional salary, the amount paid would be deductible to the company) or, alternatively, paying sufficient dividends to finance the pool (while the dividends could not be deducted by the corporation, they would be taxed more favourably than the taxable benefit resulting from the construction of the pool). A better option would be for the friend to borrow the necessary funds on an interest-free basis from the corporation resulting in little income tax consequences. Type: ES Topic: Shareholder benefits - ITA 15(1)

17) The general rule for shareholder loans is that they must be included in the shareholder's income when received. Indicate two exceptions to this general rule that are available to all shareholders, without regard to whether they are employees as well as shareholders. Answer: The two required exceptions can be selected from the following: • The general rule does not apply when the loan is in the ordinary course of the corporation's business. • The general rule does not apply when the loan is repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose. Type: ES Topic: Shareholder loans - ITA 15(2)

18) If the owner-manager of a private corporation borrows funds from the corporation to assist in purchasing a home, one of the conditions to avoid having to include the loan principal in income requires that the loan be received in an employment capacity, rather than in a shareholder capacity. Explain why this may be difficult to justify. Answer: In order to make a convincing case that the loan was received by the owner-manager in an employment capacity, the same type of loan must be extended to all employees with similar duties and responsibilities. If the loan is particularly large, or on particularly favourable terms, the owner-manager may not be able to justify a loan in an employment capacity. In addition, in some cases the business may not have other senior employees or any other employees at all. This could make it difficult to argue an employee capacity based loan. The CRA, in cases where a private corporation has few employees with which to make a comparison, looks to what is standard or accepted practice within a given industry in deciding whether a loan is received in an employment capacity. Type: ES Topic: Shareholder loans - ITA 15(2)

19) John Brothers is a shareholder and employee of Brothers Ltd. Brothers Ltd. provides John with an interest free loan to assist him in purchasing a home after being moved to a new work location. Explain why John would prefer to have any loan benefit taxed as as an employee benefit, rather than as a shareholder benefit. Answer: There are two advantages to having an employee benefit, rather than a shareholder benefit: • The principal amount does not have to be included in John's income when the loan is made as long as all of the conditions for the exception apply. Such loans received in a shareholder capacity would not qualify for the housing loan exception. • If the loan is an employee loan, for the first five years of the loan, the benefit calculation rate will go no higher than the prescribed interest rate that was in effect when the loan was made. In other words employment capacity loans have a five year locked in rate to determine the annual interest benefit. Type: ES Topic: Shareholder loans - ITA 15(2)

20) Provide two examples of forms of employee compensation that can either reduce or defer income tax to a corporation and its shareholders. For each example, explain how the reduction or deferral occurs. Answer: • Registered Pension Plans (RPP) - Within prescribed limits, a corporation can deduct contributions to an RPP in the year of the contribution. These contributions are not included in the income of the employee as compensation until received as a pension benefit which typically occurs when the individual reaches retirement age, resulting in an effective tax deferral arrangement. • Deferred Profit Sharing Plans (DPSP) - In a fashion similar to an RPP, amounts that are contributed to a DPSP are deductible to the corporation but are deferred until benefits are received from the plans by employees years later. • Private Health Services Plans (PHSP) - The premiums paid by the corporation for such benefits as dental plans can be deducted in full by the corporation and are not considered taxable employee benefits. This can generate a significant income tax savings. • Stock Options - Stock options provide employees with an incentive to improve the performance. In addition, taxation of any benefits resulting from the options is deferred until the option are exercised or sold. (For a full discussion of the deferral of stock option benefits, see Chapter 3.) Further, the amount of the employment benefit is, in general, only 50% of the actual benefit. Type: ES Topic: Employee compensation - tax reduction & tax deferral

21) List and describe three factors, other than tax reduction and tax deferral, that should be considered by an owner-manager when choosing between salary and taxable dividends. Answer: The required three factors could be chosen from the following: • Corporate Income Tax - Salary is deductible and taxable dividends are not. • The added costs of CPP, EI, and payroll taxes discourage the use of salary. • Taxable dividends do not provide an addition to earned income for RRSP purposes. • Taxable dividends do not provide an addition to earned Income for child care expense purposes. • Taxable dividends reduce a CNIL balance and increase the amount of available capital gains deduction. • Salary can provide CPP and Canada Employment tax credits. Type: ES Topic: Employee compensation - salary vs dividends

22) Even in situations where provincial/territorial tax and dividend tax credit rates favour the use of taxable dividends, owner-managers may retain more after tax income if they receive some part of their compensation in the form of salary. Explain this statement. Answer: As taxable dividends use up available tax credits at a much slower rate than is the case with salary, the payment of all compensation in the form of taxable dividends may result in unused personal tax credits for the current taxation year. As most of these credits are non-refundable, if they are not used during the current year they will be lost. Given this, it may be beneficial to pay a combination of salary and taxable dividends that is sufficient to use up all of the individual's non-refundable personal tax credits. Type: ES Topic: Employee compensation - salary vs dividends

23) An advantage of incorporating a business is the ability to use business losses to reduce income tax on an individual's other income. Answer: FALSE Explanation: Corporate losses belong to the corporation and cannot be used against any of an individual shareholder's other income. Type: TF Topic: Income tax savings & deferral - the decision to incorporate a business

24) The use of a corporation can facilitate splitting income with other members of an individual's family. Answer: TRUE Type: TF Topic: Income splitting (TOSI) - general concepts

25) For eligible dividends, perfect integration requires that the provincial/territorial dividend tax credit be equal to 5/11 of the dividend gross. If the provincial/territorial credit is larger than this, the use of a corporation will be less attractive. Answer: FALSE Explanation: The higher credit makes using a corporation more attractive because an excessive credit over-compensates for corporate income tax paid. Type: TF Topic: Integration - eligible dividends

26) "Bonusing Down" is a procedure that owner-managers use to defer income tax on the salary amounts that they receive from their corporation. Answer: FALSE Explanation: It is a procedure that is used to avoid having amounts of active business income in excess of amounts eligible for the SBD taxed at high corporate income tax rates. Type: TF Topic: Trusts - income tax planning

27) Individuals with no income can receive a substantial amount of taxable dividends on a tax free basis. This is because taxable dividend income uses up an individual's tax credits at a lower rate than is the case with other income. Answer: TRUE Type: TF Topic: Integration - general concepts

28) An owner-manager of a construction company would like to have a swimming pool installed at the individual's home. It doesn't really matter whether the individual has the corporation install the pool or, alternatively pay sufficient salary so that the individual can pay for the pool on their own. Answer: FALSE Explanation: If the corporation pays for the pool, there will be a taxable benefit equal to the FMV of the pool. While the income tax on the shareholder benefit are likely to be similar to those that would have been paid on an equivalent amount of salary, the main difference is that the corporation would be able to deduct the salary but cannot deduct any amount that relates to the shareholder benefit. Type: TF Topic: Shareholder benefits - ITA 15(1)

29) Jo Beth Williams is employed by the Royal Bank and also owns a few shares of the bank. The bank has extended her a $25,000 interest free loan that she can use for any purpose she chooses. Because she is a shareholder, she will have to include the $25,000 principal of the loan in her net income. Answer: FALSE Explanation: Shareholder loans do not have to be included in net income if the corporation (the Bank) makes loans in the ordinary course of its business as the Royal Bank does. Type: TF Topic: Shareholder loans - ITA 15(2)

30) A shareholder loan with repayment terms that is for the purposes of purchasing a home does not have to be included in the shareholder's net income, provided the loan was received in an employment capacity. Answer: TRUE Type: TF Topic: Shareholder loans - ITA 15(2)

31) Any form of compensation that is deductible to a corporation in a taxation year prior to the year in which it is required to be included in the income of a shareholder/employee results in tax deferral. Answer: TRUE Type: TF Topic: Income tax concepts - tax reduction & tax deferral

32) If an owner-manager wishes to make contributions to an RRSP, the individual will prefer taxable dividends over salary compensation. Answer: FALSE Explanation: Salary increases earned income base for purposes of making RRSP contributions. Taxable dividends do not increase earned income. Type: TF Topic: Employee compensation - salary vs dividends

33) All other things being equal, higher provincial/territorial income tax rates on corporations favour the use of a corporation to earn business income. Answer: FALSE Explanation: Higher provincial/territorial corporate income tax rates discourage the incorporation of sources of income. Type: TF Topic: Income tax savings & deferral - general concepts

34) In cases where a corporation is subject to a low income tax rate (e.g., a combined federal/provincial/territorial rate of 11%), charitable donations have less value to a corporation than they do to an individual. Answer: TRUE Explanation: As charitable donations are a taxable income deduction to a corporation, they would have a value of $0.11 on the dollar to a corporation that is subject to a small business income tax rate of 11%. In contrast, donations made by individuals create a federal credit against income tax payable of $0.15, $0.29 or $0.33 on the dollar, all of which are higher than the combined rate of $0.11. There would be additional credits at the provincial/territorial level for individuals. Type: TF Topic: Charitable donations - corporate vs individual contributions

35) Income splitting refers to tax planning designed to spread an individual's income over several taxation years. Answer: FALSE Explanation: Income splitting refers to planning designed to shift income between family members with the objective of reducing the effective income tax rate for the family as a whole. Type: TF Topic: Income tax planning - income splitting

36) All other things being equal, a low provincial/territorial dividend tax credit favours the use of taxable dividends to compensate the owner/manager of a CCPC. Answer: FALSE Explanation: A low provincial/territorial dividend tax credit means that the individual shareholder is being ender-compensated for the underlying corporate income tax which favours the use of salary. Type: TF Topic: Integration - general concepts

37) If the owner/manager of a CCPC has a large Cumulative Net Investment Loss (CNIL) balance, taxable dividends should be paid rather than salary. Answer: TRUE Explanation: Taxable dividends reduce the CNIL balance and, as a result, increase the available capital gains deduction. Type: TF Topic: Employee compensation - salary vs dividends

38) Any resident Canadian individual over the age of 17 can, in 2022, receive $31,450 in non-eligible dividends from a CCPC without paying any federal income tax regardless of other income. Answer: FALSE Explanation: Only individuals with no income can receive this amount of dividends tax free. Type: TF Topic: Integration - non-eligible dividends

39) Which of the following statements about the use of a corporation is NOT correct? A) The use of a corporation is more desirable in a province or territory with a high dividend tax credit. B) The use of a corporation will always result in deferral of income tax on income retained by a corporation. C) The use of a corporation is less desirable in a province or territory with a low dividend tax credit. D) The use of a corporation is more desirable in a province or territory that has high income tax rates on individuals. Answer: B Explanation: B) The use of a corporation will always result in deferral of tax on income that is retained by a corporation. For some types of corporate income, the corporate income tax rate may be higher than the income tax that would have applied to an individual. Type: MC Topic: Corporate concepts - the decision to incorporate

40) Which of the following is NOT a possible advantage of incorporating a business? A) The ability to defer income tax on income retained by the corporation. B) The ability to use corporate business losses to reduce income tax on the employment income of the individual. C) Limiting personal liability to the amount paid to the corporation for its' shares. D) The ability to use the capital gains deduction. Answer: B Explanation: B) The ability to use corporate business losses to reduce income tax on the employment income of the individual. Type: MC Topic: Corporate concepts - the decision to incorporate

41) Individual taxpayers decide to incorporate for many reasons. In which of the following situations would there be an advantage to the incorporation of a business? A) The individual has significant personal losses and is looking for a way to utilize them. B) The individual has significant personal property and investment income, and does not need all of the cash from the business in order to pay day to day living expenses. C) The individual has significant personal property and investment income, and needs all of the cash from the business in order to pay day to day living expenses. D) The individual makes significant charitable donations each year and wants to use a corporation to maximize the tax savings from these donations. Answer: B Explanation: B) The individual has significant personal property and investment income, and does not need all of the cash from the business in order to pay day to day living expenses. Type: MC Topic: Corporate concepts - the decision to incorporate

42) The use of a corporation is most likely to result in an overall reduction in total income tax by an individual and a corporation if: A) the corporation is a public company earning manufacturing income. B) the corporation is a CCPC earning taxable dividends. C) the corporation is a CCPC earning other investment income. D) the corporation is a CCPC earning active business income. Answer: D Explanation: D) The corporation is a CCPC earning active business income. Type: MC Topic: Corporate concepts - the decision to incorporate

43) There are several benefits to incorporating a business. Which of the following statements about such benefits is correct? A) Investment income under $500,000 is eligible for a lower income tax rate; taxable dividend payments may be deferred until after a shareholder has retired; and the capital gains deduction may be available if conditions are met. B) Active business income under $500,000 is eligible for a lower income tax rate; taxable benefits may be provided to the shareholder if they are an employee; and taxable dividend payments may be deferred until after a shareholder has retired. C) The capital gains deduction may be available if conditions are met; a tax deferral is available if the shareholder requires the corporation's profits for personal use in the year; and taxable dividend payments may be deferred until after a shareholder has retired. D) Taxable dividend payments may be deferred until after a shareholder has retired; The capital gains deduction may be available if conditions are met; and active business income under $500,000 is eligible for a lower income tax rate. Answer: D Explanation: D) Taxable dividend payments may be deferred until after a shareholder has retired; The capital gains deduction may be available if conditions are met; and active business income under $500,000 is eligible for a lower income tax rate. Type: MC Topic: Corporate concepts - the decision to incorporate

44) Joan Barskey purchased 4,500 shares in Barskey Inc., a corporation that is controlled by her family. The cost of these shares was $900,000. In addition, she has personally guaranteed a bank loan for Barskey Inc. in the amount of $250,000. If Barskey Inc. goes bankrupt, which of the following statements is correct? A) Joan's financial risk is limited to $1,150,000. B) Joan's financial risk is limited to $900,000. C) Joan's financial risk is limited to $250,000. D) Joan's financial risk is unlimited. Answer: A Explanation: A) Joan's financial risk is limited to $1,150,000 which is the amount she would potentially lose. Type: MC Topic: Corporate concepts - limited liability

45) Mr. Dawson is considering incorporating a company and incorporating some of his income earning property to take advantage of the possibility of some income tax savings and deferral possibilities. Which of the following situations would provide the largest income tax savings for Mr. Dawson? A) Incorporating a CCPC earning only Active Business Income (ABI) eligible for the SBD. B) Incorporating a CCPC earning a 50/50 combination of ABI eligible for the SBD and investment income. C) Incorporating a CCPC earning only investment income. D) Incorporating a CCPC earning only taxable dividend income. Answer: A Explanation: A) Incorporating a CCPC earning only Active Business Income (ABI) eligible for the SBD. Type: MC Topic: Corporate concepts - the decision to incorporate

46) GMR Inc is a CCPC owned 100% by Ms. Rothstein. For the current year, the company accountant is predicting that taxable income will exceed $500,000. The accountant has suggested that Ms. Rothstein should consider having the company pay her additional salary to ensure the taxable income of the CCPC will be less than $500,000. Why? A) Because only income eligible for the SBD benefits from a modest tax deferral and significant tax savings. B) Because the CRA will never challenge the reasonableness of remuneration to a shareholder, and the accountant must feel that Ms. Rothstein deserves a bonus this year. C) Because if the income over $500,000 remains in the company it will not benefit from the SBD, and therefore after tax retention on this excess income in the company will be lower than it would be on paying a salary to Ms. Rothstein. D) Because the case for "bonusing down" has gotten stronger in the past few years, and it is therefore more important than ever to take advantage of this possibility to save income tax. Answer: C Explanation: C) Because if the income over $500,000 remains in the company it will not benefit from the SBD, and therefore after tax retention on this excess income in the company will be lower than it would be on paying a salary to Ms. Rothstein. Type: MC Topic: Trusts - income tax planning

47) John is thinking about incorporating his charter boat business. Which of the following describes an advantage that could be associated with incorporating the business as compared to carrying it on as a sole proprietor? A) John could use any future business losses to offset his employment income and reduce his personal income tax. B) John could protect himself from being held personally liable if a client sustained injuries by falling overboard. C) John could hire his brother to pilot the boat on days when he is not available. His brother's salary would be deductible in calculating the corporation's income. D) John will not pay CPP on any salary paid to him by the corporation if he owns more than 40% of the voting shares. Answer: B Explanation: B) John could protect himself from being held personally liable if a client sustained injuries by falling overboard. D) The 40% exception applies to EI premiums and not to CPP. Type: MC Topic: Corporate concepts - the decision to incorporate

48) An individual's only income is from taxable dividends from shares of public companies. The individual is considering incorporating the public company shares. If the individual was to do so, which of the following statements is correct? A) There would be a reduction in the individual's total income tax. B) There would always be deferral of income tax as long as the taxable dividend income was retained in the corporation. C) All of the federal corporate income tax paid on the taxable dividends would be refunded when all of the dividends received by the corporation are paid out to the individual shareholder. D) The individual taxes on the taxable dividends would be lower after they have passed through the corporation. Answer: C Explanation: C) All of the federal corporate income tax paid on the taxable dividends would be refunded when all of the dividends received by the corporation are paid out to the individual shareholder. Type: MC Topic: Income tax savings & deferral - the decision to incorporate investments

49) With respect to the incorporation of a business earning less than $500,000 of ABI, which of the following statements is correct? A) Incorporation will always result in an overall reduction in income tax because it combines the SBD with the dividend tax credit. B) Incorporation will result in an overall reduction in income tax because corporations are able to deduct many items that cannot be deducted by an unincorporated business. C) Incorporation will result in a deferral of income tax to the extent profits are retained in the corporation. D) Incorporation will be beneficial because it will always limit the shareholders' obligations to creditors. Answer: C Explanation: C) Incorporation will result in a deferral of income tax to the extent profits are retained in the corporation. Type: MC Topic: Income tax savings & deferral - the decision to incorporate a business

50) An individual carries on a retail business as a sole proprietor. The business earns $150,000 annually, all of which is needed by the individual for personal living expenses. The individual is considering incorporating the business. Which of the following statements is correct? A) There may be a small income tax advantage associated with incorporation. B) The application of the SBD will result in a significant reduction in overall income tax. C) The application of the SBD will result in a significant deferral of income tax payments. D) The application of the gross up and tax credit procedures for taxable dividends will result in a significant reduction in overall income tax. Answer: A Explanation: A) There may be a small income tax advantage associated with incorporation. C is incorrect as the individual needs all of the earnings so there is no deferral. Type: MC Topic: Income tax savings & deferral - the decision to incorporate a business

51) Joan Farnun has annual employment income of $100,000. This employment income is sufficient to cover her personal living expenses. In addition, she carries on a consulting business as a sole proprietor which earns $50,000 annually. She is considering incorporating the consulting business. With respect to the incorporation, which of the following statements is correct? A) There will be an overall income tax savings because of the SBD. B) There will be an overall income tax savings because of the dividend tax credit. C) There will be tax deferral because of the SBD. D) There will be no tax deferral because of the integration provisions in the Income Tax Act. Answer: C Explanation: C) There will be income tax deferral because of the SBD. Type: MC Topic: Income tax savings & deferral - the decision to incorporate a business

52) Which of the following factors is NOT significant in contributing to imperfections in the integration system for corporate income tax? A) Varying provincial/territorial rates for the dividend tax credit. B) Varying provincial/territorial rates for corporate income tax on CCPCs. C) Differing federal dividend tax credit rates for eligible and non-eligible dividends. D) Varying provincial/territorial rates for corporate income tax on public companies. Answer: C Explanation: C) Differing federal dividend tax credit rates for eligible and non-eligible dividends. Type: MC Topic: Integration - general concepts

53) The use of a corporation to provide tax deferral is most successful when: A) the combined federal/provincial/territorial income tax rate on corporations is greater than the combined federal/provincial/territorial income tax rate on individuals. B) the combined federal/provincial/territorial income tax rate on corporations is less than the combined federal/provincial/territorial income tax rate on individuals. C) the combined federal/provincial/territorial income tax rate on corporations is equal to the combined federal/provincial/territorial income tax rate on individuals. D) the combined federal/provincial/territorial dividend tax credit rates add up to 100% of the dividend gross up. Answer: B Explanation: B) The combined federal/provincial/territorial income tax rate on corporations is less than the combined federal/provincial/territorial income tax rate on individuals. Type: MC Topic: Integration - general concepts

54) Which of the following factors is NOT relevant in determining whether a corporation can be used to reduce income tax? A) The combined federal/provincial/territorial income tax rate on corporations. B) The combined federal/provincial/territorial dividend tax credit. C) The combined federal/provincial/territorial income tax rate on individuals. D) All of the above factors are relevant in determining whether a corporation can be used to reduce overall income tax. Answer: C Explanation: C) The combined federal/provincial/territorial income tax rate on individuals. Type: MC Topic: Integration - general concepts

55) Which of the following statements with respect to the ability of an individual to receive a large amount of taxable dividends without paying any income tax is correct? A) Any individual can receive a significant amount of eligible dividends without the payment of income tax on the amounts received. B) For an individual in the lowest income tax bracket, the dividend tax credit will be larger than the income tax on the grossed up dividends. C) To be received on a tax free basis, taxable dividends must be designated as eligible. D) For individuals in the lowest income tax bracket, taxable dividends always use up tax credits at a slower rate than other types of income. Answer: D Explanation: D) For individuals in the lowest income tax bracket, dividends always use up tax credits at a slower rate than other types of income. Type: MC Topic: Integration - general concepts

56) While of the following statement about income splitting is NOT correct? A) For income splitting to be a useful tax planning tool, the related individuals must be in different income tax brackets. B) Income splitting can only be accomplished by using a corporation. C) Income splitting may be accomplished by giving shares in an owner-managed corporation to adult children who are in a low income tax bracket. D) Income splitting can be accomplished by selling shares in an owner-managed corporation to the owner-manager's spouse. Answer: B Explanation: B) Income splitting can only be accomplished by using a corporation. Type: MC Topic: Income tax planning - income splitting

57) The general rule is that loans made to shareholders must be included in the shareholder's income in the calendar year that the loan is received. There are, however, a number of exceptions to this rule. Which of the following is NOT an exception to the general rule? A) A loan to an owner-manager to assist in the purchase of a principal residence. The loan does not have a specific repayment date. B) An interest free loan to an employee/shareholder of a bank. C) A loan to an owner-manager to acquire an automobile that will be used in the individual's employment duties. The company has no other employees. D) A loan extended to an owner manager that must be repaid within two years. The company has a December 31 taxation year end and the loan is made on January 1 of the current year. Answer: A Explanation: A) A loan to an owner-manager to assist in the purchase of a principal residence. The loan does not have a specific repayment date. Type: MC Topic: Shareholder loans - ITA 15(2)

Use the following information to answer the questions below. A corporation loans a shareholder $30,000 on April 1, 2022, interest free. The shareholder is not an employee of the corporation. The taxation year end of the corporation is October 31. Assume the prescribed rate is 2% for all years under consideration. 58) The shareholder purchases investments with the $30,000. The loan is to be repaid on December 31, 2025. The increase in 2022 net income of the shareholder due to the loan and the investment of the proceeds is: A) $450. B) $600. C) $30,000. D) $30,450. E) $30,600. F) Nil. Answer: C Explanation: C) The amount of the loan of $30,000 must be added to the shareholder's income as the loan is not going to be paid by October 31, 2023. No imputed interest benefit will be added to income since the loan is included in income. Type: MC Topic: Shareholder loans - ITA 15(2)

59) The shareholder purchases investments with the $30,000. The loan is to be repaid on April 1, 2023. The increase in 2022 net income of the shareholder as a result of the loan and the use to purchase investments is: A) $450. B) $600. C) $30,000. D) $30,450. E) $30,600. F) Nil. Answer: F Explanation: F) The imputed interest of $450 [(9/12)(2%)($30,000)] will be added to income. However, as the proceeds of the loan were used to earn income, the imputed interest is deductible under ITA 20(1)(c) through ITA 80.5. The net effect on net income is nil. Type: MC Topic: Shareholder loans - ITA 15(2)

60) A shareholder sells their home and purchases another, larger house, in the same neighbourhood, using the $30,000. The loan is to be repaid in full on December 31, 2025. The increase in 2022 net income of the shareholder as a result of the loan and its use is: A) $450. B) $600. C) $30,000. D) $30,450. E) $30,600. F) Nil. Answer: C Explanation: C) The amount of the loan of $30,000 must be added to the shareholder's income as the loan is not going to be paid by October 31, 2023 and there are no other exceptions that would exclude the loan from being included in income. No imputed interest will be added to income since the loan principal is included in income. Since the shareholder is not an employee, there is no exception for a housing loan. Type: MC Topic: Shareholder loans - ITA 15(2)

61) Albert Jay is an employee and 15% shareholder of Rick's Welding Shop Ltd. (Rick's). During the 2022 calendar year, Albert Jay was having cash flow problems. Rick's made a loan to Albert Jay of $5,000 on May 1, 2022 to help him out. Rick's also gave Albert Jay's son, Jake, a loan of $2,000 on September 30, 2022 to help him meet expenses while at college. Rick's has said that Albert Jay and Jake can repay the loans whenever they can afford it. The loans remain outstanding as at January 31, 2024. Rick's year end for accounting and taxation purposes is December 31. How much, and in which taxation year, is Albert Jay required to include in his net income as a result of the above transactions? A) $5,000 - 2022. B) $5,000 - 2023. C) $7,000 - 2022. D) $7,000 - 2023. E) None of the above. Answer: A Explanation: A) $5,000 in 2022. ITA 15(2) requires the principal amount of the loan to be included in the income of the recipient of the loan. In this case, Albert Jay will add $5,000 in 2022 and his son would include $2,000 in income for 2022, as the loans were still outstanding on January 31, 2024. Had the loans been repaid by December 31, 2023 they would not have been included in net income although an interest benefit would have been required to be included in income for each year in which the loan was outstanding. Type: MC Topic: Shareholder loans - ITA 15(2)

62) Jacquie is the sole shareholder of Holdings Ltd., which has a January 31 taxation year end. On January 1, 2022, Jacquie borrowed $10,000 interest-free from Holdings Ltd. She used $8,000 of this amount to acquire shares of Arrow Inc. and the remaining $2,000 for personal purposes. Arrow Inc. is a small CCPC that manufactures cross-bows. In March 2022, Arrow Inc. paid a non-eligible dividend of $1,100 to Jacquie. Jacquie repaid the $10,000 loan to Holdings Ltd. in full on June 30, 2022. Assume that these were her only transactions with Holdings Ltd. and the prescribed interest rate was 4% for the first quarter of 2022 and 3% for the second quarter of 2022. Which one of the following represents the effect on Jacquie's 2022 net income as a result of these transactions? A) $1,100.00. B) $1,265.00. C) $1,299.68. D) $1,438.42. Answer: C Explanation: C) Jacquie's 2022 net income effect is: Grossed up Non-Eligible Dividend [($1,100)(115%)] ITA 80.4 Interest Benefit [($10,000)(4%)(90/365)] $98.63 [($10,000)(3%)(91/365)] 74.79 ITA 20(1)(c) Interest Deduction [($10,000 - $2,000)(4%)(90/365)] ($78.90) [($10,000 - $2,000)(3%)(91/365)] ( 59.84) Total Type: MC Topic: Shareholder loans - ITA 15(2)

$1,265.00

173.42

( 138.74) $1,299.68

63) Paul is one of six shareholders, but not an employee, of a CCPC that manufactures doors. The corporation has a large amount of cash on hand and the other shareholders have agreed that the corporation can lend Paul the $200,000 for a few years. To avoid having the principal included in his income, the loan must meet which of the following conditions? A) Interest must be charged using the prescribed interest rate. B) It must be used for the purchase of the company's shares. C) It must be repaid within one year from the end of the taxation year of the corporation in which it was made. D) It must have a specific repayment date. Answer: C Explanation: C) It must be repaid within one year from the end of the taxation year of the corporation in which it was made. Type: MC Topic: Shareholder loans - ITA 15(2)

64) Martin Locks owns 100% of the shares of Locks Inc., a corporation with a December 31 taxation year end. Martin is also an employee of the corporation. In January 2022, the corporation loans Martin $350,000 in order to assist him in acquiring a new home. The loan is interest free and will be paid in full on January 1, 2024. While small loans are made to other employees of the Company, a loan of this size is only available to Martin. Assume that the prescribed interest rate is 4% throughout 2022 and 5% throughout 2023. Which of the following statements is correct? A) Martin will have to include $350,000 in his income for 2022. B) Martin will have to include $14,000 in his income in both 2022 and 2023. C) Martin will have to include $14,000 in his income for 2022 and $17,500 in his income for 2023. D) Martin will have to include $350,000 in income for 2022 only if the loan is not repaid by December 30, 2023. Answer: A Explanation: A) Martin will have to include $350,000 in his income for 2022. Type: MC Topic: Shareholder loans - ITA 15(2)

65) ITA 15(1) deals with situations where a corporation has provided a benefit to a shareholder. Which of the following transactions/events would NOT result in a ITA 15(1) shareholder benefit? A) The corporation provides an interest free loan to the shareholder to assist in the purchase of a home suitable for entertaining business clients. An interest benefit is calculated. B) The shareholder purchases a corporate owned vehicle for 50% of its FMV. C) The shareholder takes a two week, $12,000 vacation paid for by the corporation. During the vacation, the shareholder attends a 1 day session on tax issues related to the corporation's business. D) The corporation purchases life insurance on the life of the shareholder in order to ensure that the company has the necessary funds to deal with a sudden, unexpected death of the shareholder. The company is the beneficiary of the policy. Answer: D Explanation: D) The corporation purchases life insurance on the life of the shareholder in order to ensure that the company has the necessary funds to deal with a sudden, unexpected death of the shareholder. The company is the beneficiary of the policy. Type: MC Topic: Shareholder benefits - ITA 15(1)

66) Which of the following types of owner-manager compensation is the least likely to provide either tax deferral or tax savings? A) Contributions to an RPP. B) Contributions to a group disability plan C) Granting options to acquire shares in the company. D) Salary. Answer: D Explanation: D) Salary. Type: MC Topic: Employee compensation - tax reduction & tax deferral

67) An owner-manager can generally choose whether to receive compensation in the form of taxable dividends or, salary. All other things being equal which of the following would encourage the use of taxable dividends? A) A desire to make contributions to an RRSP. B) A low provincial/territorial dividend tax credit. C) A desire to eliminate a large CNIL balance. D) A high provincial/territorial corporate income tax rate. Answer: C Explanation: C) A desire to eliminate a large CNIL balance. Type: MC Topic: Employee compensation - salary vs dividends

68) Joan Barts owns all of the outstanding shares of Barts Ltd., a CCPC that is carrying on an active business. She would prefer to receive salary instead of taxable dividends if: A) the corporation has a large RDTOH balance. B) the corporation is located in a province or territory with a low corporate income tax rate. C) the corporation has taxable income in excess of $500,000. D) the corporation is located in a province or territory with a high dividend tax credit. Answer: C Explanation: C) The corporation has taxable income in excess of $500,000. Type: MC Topic: Employee compensation - salary vs dividends

69) Larry Watts, a Canadian resident, owns 49% of the shares of Zatch Ltd., a Canadian corporation. Laura Marsh, who is a resident of England, owns the remaining 51%. For the current year, the corporation has $150,000 in income, all of which will be paid out as either salary or eligible dividends. Because of other income, Larry is in the 29% federal income tax bracket and an 18% provincial income tax bracket. On both eligible and non-eligible dividends, the provincial dividend tax credit is equal to 30% of the gross up. Zatch Ltd. pays income tax at a combined federal/provincial rate of 31%. With respect to Larry's choice between receiving his share of the after tax corporate income in the form of salary or taxable dividends, which of the following statements is correct? A) It does not matter whether he receives salary or dividends as he would retain the same after tax amount with either alternative. B) He should take the salary because he will have more left after tax. C) He should take taxable dividends because he will have more left after tax. D) In order to fully use his personal tax credits, he should receive a combination of salary and taxable dividends. Answer: B Explanation: B) He should take the salary because he will have more left after tax. Since the Company is not a CCPC because it is controlled by a non-resident, it is not eligible for the SBD. The fact that the company will pay taxable dividends that are eligible for the enhanced gross up and tax credit procedures will not compensate Larry for corporate income taxes paid at a 31% rate (the rate assumed for the enhanced credit is 27.54%). Note that only non-eligible dividends should be paid to the non-resident since they are only subject to Part XIII tax on Canadian dividends. Type: MC Topic: Employee compensation - salary vs dividends

70) Sharon Hartly is the owner-manager of a CCPC from which she receives an annual salary of $70,000. In 2022, after deducting her salary, the CCPC will have additional income of $150,000. Sharon would like to take additional funds of $40,000 out of the corporation. Which of the following statements is correct? A) The best solution is to take the funds out as salary as this will increase her pensionable earnings for CPP purposes. B) The best solution is to take the funds out as a taxable dividend as this will have the lowest income tax cost. C) The best solution is to take the funds out as salary because this will reduce her CNIL balance for purposes of the capital gains deduction. D) The best solution is to take the funds out as salary so that she can maximize her contribution to her RRSP. Answer: D Explanation: D) The best solution is to take the funds out as salary so that she can maximize her contribution to her RRSP. Type: MC Topic: Employee compensation - salary vs dividends

71) Stephen Lee carries on a business as a sole proprietor and anticipates active business income (ABI) of $98,000 for the taxation year ending December 31, 2022. Mr. Lee also has employment income in excess of $800,000 with additional amounts subject to a provincial income tax rate of 16%. The provincial dividend tax credit is equal to 4/13 of the dividend gross up for non-eligible dividends. The provincial corporate income tax rate is 3% on income eligible for the SBD and 15% on other income. Mr. Lee has asked your advice as to whether he should incorporate the business. Advise him with respect to any tax deferral that will be available on income retained by the corporation and on any income tax savings that will be available if all of the after-tax income is distributed as taxable dividends. Answer: Mr. Lee's combined income tax rate on income earned by his business is 49% (33% + 16%). If he does incorporate, all of the $98,000 will be eligible for the SBD. This means that it will be subject to an income tax rate of 12% (38% - 10% - 19% + 3%). Mr. Lee's personal income tax rate on non-eligible dividend income is 41.4% [(115%)(49%) - (9/13 + 4/13)(15%)]. Using these rates, the relevant calculations are as follows:

Business Income Income Tax Rate Income Tax Business Income Income Tax Maximum Non-Eligible Dividend Personal Income Tax on Dividends [(41.4%)($86,240)] Income Retained by Mr. Lee

With a Corporation $98,000 12% $11,760

Without a Corporation $98,000 49% $48,020

$98,000 ( 11,760) $86,240 ( 35,703) $50,537

$98,000 ( 48,020) N/A N/A $49,980

There is clearly a significant amount of tax deferral with respect to income retained by the corporation. Income tax on the business income without incorporating the business is $48,020, far higher than the $11,760 that would be paid by the corporation were the business incorporated. After tax retention with the use of a corporation would be $50,537. This is $557 more than the $49,980 that would be retained without a corporation. You should advise your client that, in addition to providing the possibility of tax deferral, using a corporation will also have a modest overall income tax savings. Type: ES Topic: Income tax savings & deferral - the decision to incorporate a business

72) Wanda Ho has annual employment income in excess of $300,000. Because of this, any additional income that she receives will be subject to a combined federal/provincial income tax rate of 51%. Several years ago, she began to carry on a business as a sole proprietor. She anticipates business income of $142,000 for the 2022 taxation year. In her province of residence: • the corporate income tax rate is 2.5% on income eligible for the SBD and 13% on other corporate income • the dividend tax credit is 20% of the dividend gross up for non-eligible dividends and 30% for eligible dividends Ms. Ho has asked your advice as to whether she should incorporate the business. Advise her with respect to any tax deferral that will be available on income retained by the corporation and on any tax savings that will be available if all of the after-tax income is distributed as taxable dividends. Answer: Ms. Ho's personal income tax rate on income earned by her business is 51%. If she chooses to incorporate, all of the income earned by the corporation will be eligible for the SBD and will be subject to an income tax rate of 11.5% (38% - 10% - 19% +2.5%). Ms. Ho's income tax rate on non-eligible dividend is 45.3% [(115%)(51%) - (9/13 + 20%)(15%)]. Using these income tax rates, the relevant calculations are as follows:

Business Income Income Tax Rate Income Tax Business Income Income Tax Maximum Non-Eligible Dividend Personal Income Tax on Dividends [(45.3%)($125,670)] Income Retained by Ms. Ho

With a Corporation $142,000 11.5% $ 16,330

Without a Corporation $142,000 51% $ 72,420

$142,000 ( 16,330) $125,670 ( 56,929) $ 68,741

$142,000 ( 72,420) N/A N/A $ 69,580

If Ms. Ho's continues to carry on the business as a sole proprietor, income tax on the business profits of $142,000 will be $72,420, which is more than four times the amount of income tax that would be paid by the corporation were the business incorporated. Therefore the income tax deferral is significant. However, there is an ultimate tax cost if the after-tax income is distributed by the corporation as taxable dividends. The tax cost is $839, $69,580 without the corporation, compared to $68,741 with the corporation. Type: ES Topic: Income tax savings & deferral - the decision to incorporate a business

73) Ms. Shauna MacDonald has investments that she anticipates will earn interest income of $143,000 for the 2022 taxation year. She has annual employment income in excess of $300,000 with additional amounts subject to a provincial income tax rate of 18%. In her province of residence: • the corporate income tax rate is 3% on income eligible for the SBD and 14% on other corporate income • the dividend tax credit is 25% of the dividend gross up for non-eligible dividends Ms. MacDonald has asked your advice as to whether she should incorporate her investments to a corporation in which she would own all of the shares. Advise her with respect to any tax deferral that could be available on after-tax income retained by the corporation and on any income tax savings that could be available if all of the after-tax income were distributed as taxable dividends.

Answer: Ms. MacDonald's combined personal income tax rate on the interest income is 51% (33% + 18%). If she incorporates, the interest income she will not be eligible for the SBD or the GRR and it will be subject to the ART. This means that, if the investments are incorporated, the interest will be subject to a corporate income tax rate of 52-2/3% (38% - 10% + 10-2/3% + 14%). Ms. MacDonald's personal income tax rate on non-eligible dividends is 44.5% [(115%)(51%) - (9/13 + 25%)(15%)]. Using these income tax rates, a comparison of the income retained with and without the use of a corporation is as follows: With a Without a Corporation Corporation Interest Income $143,000 $143,000 Income Tax Rate 52-2/3% 51% Income Tax $ 75,313 $ 72,930 Interest Income Income Tax Corporate Income before Dividend Refund Maximum Dividend Refund (See Note) Maximum Taxable Dividend Payable Personal Income Tax on Dividends [(44.5%)($109,762)] Income Retained by Ms. MacDonald

$143,000 ( 75,313) $ 67,687 42,075 $109,762 ( 48,844) $ 60,918

Non-Eligible RDTOH Balance [(30-2/3%)($143,000)]

$43,853

$143,000 ( 72,930) N/A

$ 70,070

Note - The refund is the lesser of 38-1/3% of taxable dividends paid and the balance in the Non-Eligible RDTOH account. The after tax funds would support a dividend of $109,762 ($67,687 ÷ .61667), including a potential dividend refund o f $42,075 [(38-1/3%)($109,762)]. The refund would be the lesser amount of $42,075. As the corporate income tax rate is higher than the personal income tax rate of 51%, the corporation does not provide any tax deferral. In this case, incorporation requires prepayment of additional tax. Using a corporation, she would be left with $60,918 in after tax funds as compared to $70,070 without the use of a corporation. The tax cost of incorporation is $9,152 ($70,070 - $60,918). Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

74) Victor Vice is a very conservative investor who only invests in fixed income securities. He anticipates that he will have interest income of $210,000 for the 2022 taxation year. As he has annual employment income in excess of $400,000, any additional income is subject to a combined federal/territorial income tax rate of 51%. In his territory of residence: • the corporate income tax rate is 3% on income eligible for the SBD and 13% on other corporate income • the dividend tax credit is 30% of the dividend gross up for non-eligible dividends Mr. Vice has asked your advice as to whether he should incorporate the interest bearing investments in which he would own all of the shares. Advise him with respect to any income tax deferral that could be available on income retained by the corporation and on any income tax savings that could be available if all of the after-tax income of the corporation is distributed as taxable dividends. Answer: Victor's personal income tax rates are 51% on interest income and 43.8% [(115%)(51%) - (9/13 + 30%)(15%)] on non-eligible dividends. The corporate income tax rate on investment income will be 512/3% (38% - 10% + 10-2/3% + 13%). Using these income tax rates, a comparison of the income retained with and without the use of a corporation is as follows: With a Without a Corporation Corporation Interest Income $210,000 $210,000 Income Tax Rate 51-2/3% 51% Income Tax $108,500 $107,100 Interest Income Income Tax Corporate Income before Dividend Refund Maximum Dividend Refund (See Note) Maximum Taxable Dividend Payable Personal Income Tax on Dividends [(43.8%)($164,595)] Income Retained by Mr. Vice

$210,000 ( 108,500) $101,500 63,095 $164,595 ( 72,093) $ 92,502

Non-Eligible RDTOH Balance [(30-2/3%)($210,000)]

$64,400

$210,000 ( 107,100) N/A

$102,900

Note - The dividend refund is the lesser of 38-1/3% of dividends paid and the balance in the Non-Eligible RDTOH account ($64,400). The available cash would support a taxable dividend of $164,595 ($101,500 ÷ .61667), resulting in a potential dividend refund of $63,095 [(38-1/3%)($164,595)]. The lesser of the two amounts is $63,095. As the corporate rate of 51-2/3% is higher than Victor's personal income tax rate of 51%, the use of a corporation provides no tax deferral. There is also no tax savings once the corporation distributes all after-tax cash as taxable dividends given that the use of a corporation has a tax cost of $10,398 ($102,900 - $92,502). Clearly, incorporating the investments would not be cost effective. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

75) One of your clients has asked your advice on whether she should incorporate her investments. The corporation will be a CCPC and she anticipates that the investments will generate the following amounts of income for the 2022 taxation year: Non-Eligible Dividends on Portfolio Investments Non-Eligible Dividends from 100% Owned Subsidiary (A Dividend Refund of $20,000 will be received) Interest Income

$39,000 75,000 36,500

Your client has annual business income in excess of $250,000. She needs all of the investment income to purchase art for her cherished collection. Your client is subject to a provincial income tax rate of 18% on any additional income. In her province of residence: • the corporate income tax rate is 2.5% on income eligible for the SBD and 12% on other corporate income • the dividend tax credit is 25% of the dividend gross up for non-eligible dividends Provide the requested advice, including an explanation of your conclusions. Answer: If the income is earned personally (without the use of a corporation), the total income tax payable will be: Non-Eligible Dividends Received ($39,000 + $75,000) Gross Up at 15% Taxable Dividends Interest Income Taxable Income Personal Income Tax Rate (33% + 18%) Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 25%)($17,100)] Personal Income Tax

$114,000 17,100 $131,100 36,500 $167,600 51% $ 85,476 ( 16,113) $ 69,363

The after tax retention can be calculated as follows: Cash Received ($39,000 + $75,000 + $36,500) Income Tax Payable (See Calculation) After Tax Retention - Without a corporation

$150,500 ( 69,363) $ 81,137

Incorporating the Investments The corporate income tax rate on investment income will be 50-2/3% (38% - 10% + 10-2/3% + 12%). If the investments are incorporated, corporate income taxes will be as follows: Part IV Tax on Non-Eligible Dividends Received [(38-1/3%)($39,000) + $20,000] Tax on Interest Income [($36,500)(50-2/3%)] Corporate Income Tax Payable before Dividend Refund

$34,950 18,493 $53,443

As this corporate income tax payable is less than the $69,363 that would be paid personally without the use of a corporation, the use of a corporation would provide tax deferral. However, as the client needs all of the income produced by these investments, the use of a corporation to defer taxes is not relevant. As this would be a new corporation, it would have no RDTOH balances at the beginning of the year. The Non-Eligible RDTOH balance prior to the dividend refund would be calculated as follows: Part IV Tax on Non-Eligible Dividends Received Part I Addition [(30-2/3%)($36,500)] Non-Eligible RDTOH Balance

$34,950 11,193 $46,143

The dividend refund would be the lesser of 38-1/3% of taxable dividends paid and the balance in the Non-Eligible RDTOH account ($46,143). The cash available after corporate income taxes is $97,057 ($150,500 - $53,443). This would support a taxable dividend of $157,390 ($97,057 ÷ .61667), with a potential dividend refund of $60,333 [(38-1/3%)($157,390)]. However, as the Non-Eligible RDTOH balance is less than this, the refund would be $46,143. After Tax Corporate Cash Dividend Refund (Non-Eligible RDTOH Balance) Non-Eligible Dividends Received Gross Up at 15% Taxable Dividends Personal Income Tax Rate Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 25%)($21,480)] Personal Income Tax

$ 97,057 46,143 $143,200 21,480 $164,680 51% $ 83,987 ( 20,241) $ 63,746

After tax retention with the use of a corporation would be $79,454 ($143,200 - $63,746). This is $1,683 less than the $81,137 that would be retained if the investments were not incorporated. You should advise your client that using a corporation would result in an overall tax cost, making it inadvisable to incorporate the investments. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

76) Maximilian Maximus has annual employment income in excess of $300,000. This means that any additional income will be taxed at a combined federal/provincial income tax rate of 51%. For the 2022 taxation year, in addition to his employment income, Max has the following amounts of investment income: Interest Income Non-Eligible Dividends - Portfolio Investments Non-Eligible Dividends from a 100% owned CCPC (The CCPC receives a Dividend Refund of $23,000)

$ 71,000 102,000 96,000

Max requires all of the income that is produced by these investments. In his province of residence: • the corporate income tax rate is 2.5% on income eligible for the SBD and 12% on other corporate income • the dividend tax credit is 4/13 of the dividend gross up for non-eligible dividends Max has asked your advice as to whether there would be any tax savings or tax deferral were he to incorporate the investment. Provide the requested advice, including an explanation of your conclusions. Answer: Personally retaining the investments If the investments are not incorporated, the total personal income tax will be: Non-Eligible Dividends Received ($102,000 + $96,000) Gross Up at 15% Taxable Dividends Interest Income Taxable Income Personal Income Tax Rate Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 4/13)($29,700)] Personal Income Tax

$198,000 29,700 $227,700 71,000 $298,700 51% $152,337 ( 29,700) $122,637

The after tax retention can be calculated as follows: Cash Received ($71,000 + $102,000 + $96,000) Income Tax After Tax Retention - Without the use of a corporation

$269,000 ( 122,637) $146,363

Incorporating the Investments The corporate income tax rate on investment income is 50-2/3% (38% - 10% + 10-2/3% + 12%). If the investments are incorporated, corporate income taxes will be as follows: Part IV Tax on Non-Eligible Dividends Received [(38-1/3%)($102,000) + $23,000] Tax on Interest Income [($71,000)(50-2/3%)] Corporate Income Tax before Dividend Refund

$62,100 35,973 $98,073

As this income tax is smaller than the $122,637 that would be paid personally on the investment income, the use of a corporation provides for tax deferral. However, as the individual needs all of the investment income, the use of a corporation to defer income tax is not relevant. As this would be a new corporation, it would have no RDTOH balances at the beginning of the year. The Non-Eligible RDTOH balance prior to the dividend refund would be calculated as follows: Part IV Tax on Non-Eligible Dividends Received Part I Addition [(30-2/3%)($71,000)] Non-Eligible RDTOH Balance

$62,100 21,773 $83,873

The dividend refund is the lesser of the balance in the Non-Eligible RDTOH account ($83,873) and 381/3% of taxable dividends paid. The available cash of $170,927 ($269,000 - $98,073) would support a taxable dividend of $277,177 ($170,927 ÷ .61667), including a potential dividend refund of $106,251 [(381/3%)($277,177)]. However, this amount is larger than the Non-Eligible RDTOH balance and, given this, the refund is limited to $83,873. Personal income tax on the taxable dividend would be calculated as follows: After Tax Corporate Cash Dividend Refund (Non-Eligible RDTOH Balance) Non-Eligible Dividends Received Gross Up at 15% Taxable Dividends Personal Income Tax Rate Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 4/13)($38,220)] Personal Income Tax

$170,927 83,873 $254,800 38,220 $293,020 51% $149,440 ( 38,220) $111,220

After tax retention with the use of a corporation would be $143,580 ($254,800 - $111,220). This is $2,783 ($146,363 - $143,580) less than the amount that Max would have been retained without the use of a corporation. You should advise Max that incorporating his investments has a tax cost. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

77) Sandra Peterson has asked your advice on whether she should incorporate her investments to a new CCPC in which she will be the sole shareholder. She anticipates that the FMV of the investments are likely to increase by the end of 2022 by $142,000 resulting in capital gains of that same amount. No other investment income will be earned with respect to the investments. Sandra plans to will sell the investments at the end of the year to provide needed funds to purchase a condo. Capital gains on the investments would not qualify for the capital gains deduction. The corporation will be subject to a provincial income tax rate of 3% on income eligible for the SBD and 16% on all other corporate income including capital gains. Sandra has annual employment income in excess of $250,000 and, as a result, any additional income will be subject to a provincial income tax rate of 18%. The provincial dividend tax credit is equal to 4/13 of the dividend gross up for non-eligible dividends. Provide the requested advice, including an explanation of your conclusions.

Answer: Personally retaining the Investments - Ms. Peterson's personal income tax rate is 51% (33% + 18%). Based on this, the after tax amount retained with respect to the investments can be calculated as follows: Capital Gain Inclusion Rate Taxable Capital Gain Rate Personal Income Tax

$142,000 1/2 $ 71,000 51% $ 36,210

Cash from Capital Gain Personal Income Tax After Tax Retention - Without the use of a corporation

$142,000 ( 36,210) $105,790

Incorporating the investments - The corporation's income tax rate on investment income would be 542/3% (38% - 10% + 10-2/3% + 16%). Based on this, the maximum after-tax corporate distribution that can be made to Ms. Peterson would be calculated as follows: Capital Gain Inclusion Rate Taxable Capital Gain Corporate Income Tax at 54-2/3% Available for Non-Eligible Dividend Dividend Refund (See Note) Non-Eligible Dividend Received

$142,000 1/2 $ 71,000 ( 38,813) $ 32,187 20,008 $ 52,195

Non-Eligible RDTOH Balance [(30-2/3%)($71,000)]

$ 21,774

Note - The dividend refund is the lesser of the balance in the Non-Eligible RDTOH account of $21,774 and 38-1/3% of taxable dividends paid. The available cash of $32,187 would support a taxable dividend of $52,195 ($32,187 ÷ .61667), which includes a dividend refund of $20,008 [(38-1/3%)($52,195)]. The lesser of the two amounts is $20,008. Ms. Peterson's income tax rate on non-eligible dividend income is 43.7% [(115%)(51%) - (9/13 + 4/13)(15%)]. Based on this, the after tax retention when a corporation is used would be as follows: Tax Free Capital Dividend Received [(1/2)($142,000)] Non-Eligible Dividend Received Income Tax on Non-Eligible Dividend [(43.7%)($52,195)] After Tax Retention - With the use of a Corporation

$ 71,000 52,195 ( 22,809) $100,386

As this is less than the after tax cash retained of $105,790 without the use of a corporation, the use of a corporation is not advisable. Note that, as the client needs all of the income produced by these investments, the use of a corporation to defer taxes is not relevant. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments (with capital gains)

78) On January 1, 2022, Saul Barkin owns shares with an ACB of $420,000. While these shares do not pay taxable dividends, he expects that, by the end of 2022, their FMV will increase to $640,000. At that point he expects to sell the shares in order to purchase a sailboat. None of these investments are eligible for the capital gains deduction. Saul has annual employment income in excess of $250,000 and, as a result, any additional income will be taxed at a combined federal/territorial income tax rate of 52%. He would like your advice on whether there would be any income tax advantages to incorporating the investment in these shares. In his territory of residence: • the corporate income tax rate is 2.5% on income eligible for the SBD and 14% on other corporate income including capital gains • the dividend tax credit is 25% of the dividend gross up for non-eligible dividends Provide the requested advice, including an explanation of your conclusions. Answer: Personally retaining the Investments - Based on his personal income tax rate of 52%, the amount of after-tax income would be as follows: Capital Gain (POD $640,000 - ACB $420,000) Inclusion Rate Taxable Capital Gain Income Tax Rate Personal Income Tax

$220,000 1/2 $110,000 52% $ 57,200

Cash from Capital Gain Personal Income Tax After Tax Retention - Without the use of a Corporation

$220,000 ( 57,200) $162,800

Incorporating the Investments - The corporation's income tax rate on investment income would be 522/3% (38% - 10% + 10-2/3% + 14%). Based on this, the maximum after-tax distribution that can be made to Mr. Barkin would be calculated as follows: Capital Gain (POD $640,000 - ACB $420,000) Inclusion Rate Taxable Capital Gain Corporate Income Tax at 52-2/3% Available for Non-Eligible Dividend Dividend Refund (See Note) Non-Eligible Dividend

$220,000 1/2 $110,000 ( 57,933) $ 52,067 32,366 $ 84,433

Non-Eligible RDTOH Balance [(30-2/3%)($110,000)]

$ 33,733

Note - The dividend refund is the lesser of the balance in the Non-Eligible RDTOH account of $33,733 and 38-1/3% of the taxable dividends paid. The available cash of $52,067 would support a taxable dividend of $84,433 ($52,067 ÷ .61667), including a dividend refund of $32,366 [(38-1/3%)($84,433)]. The lesser of the two amounts is $32,366. Mr. Barkin's income tax rate on non-eligible dividend income is 45.7% [(115%)(52%) - (9/13 + 25%) (15%)]. Based on this, the after tax retention when a corporation is used would be as follows: Tax Free Capital Dividend [(1/2)($220,000)] Non-Eligible Dividend Income Tax on Non-Eligible Dividend [(45.7%)($84,433)] After Tax Retention - With a Corporation

$110,000 84,433 ( 38,586) $155,847

As the corporate income taxes of $57,933 are higher than the $57,200 that would be paid without the use of a corporation, the use of a corporation does not provide any tax deferral. With respect to tax savings, the $155,847 of after tax cash retained with the use of a corporation is less than the $162,800 that was retained when the capital gain was realized personally. There is, in fact, a tax cost of $6,953 ($162,800 - $155,847) associated with incorporating the share investments. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments (with capital gains)

79) Ms. Janice Thiessen is an employee of Thiessen Ltd., a large company in which her spouse owns 60% of the outstanding shares. Ms. Thiessen owns the remaining 40% of the shares. Thiessen Ltd. has a December 31 taxation year end. It is the policy of the Company to provide an interest free loan of up to $25,000 to any employee who wishes to purchase a new home. They do not provide loans for home furnishings to employees. On April 1 of the current year, Ms. Thiessen receives a $25,000 interest free loan from the Company to purchase a new home. On the same day, she receives an additional $15,000 interest free loan to purchase furnishings for the home. Both loans are to be repaid in four annual instalments to be made on March 31 of each year. Assume the prescribed interest rate for the current year is 2%. What are the current year income tax implications to Ms. Thiessen of receiving these loans? Answer: The $25,000 loan is the same as any other employee loan and is exempt from inclusion in income under ITA 15(2). However, it is an interest free loan and will result in a current year taxable benefit for Ms. Thiessen of $375 [($25,000)(2% - Nil)(9/12)]. Because Ms. Thiessen received the loan in her capacity as an employee, the benefit can be calculated under ITA 80.4(1). This means that for the first five years of the loan, the benefit calculation will use a rate no higher than the prescribed interest rate of 2% that was in effect when the loan was received. The $15,000 loan is unavailable to other employees and will be subject to the general rule under ITA 15(2) as Ms. Thiessen is a specified employee. However, there is an exception for the one-quarter of the loan that will be repaid prior to the end of the following taxation year of the corporation. This means that, while three-quarters of the loan, or $11,250, will have to be included in income in the current year, the remaining one-quarter, or $3,750 is not required to be included in income. However, this latter amount will attract a current year taxable benefit of $56.25 [($3,750)(2% - Nil)(9/12)]. This means the total income for the current year is $11,681.25 ($375 + $11,250 + $56.25). Type: ES Topic: Shareholder loans - ITA 15(2)

80) Jonathan Baxter owns all of the shares of Baxter Ltd. The Company has a December 31 taxation year end. He also works full time as an employee in the company business. It is the policy of the Company to provide every employee an interest free loan of up to $30,000 to acquire an automobile that will be used in their employment duties. The loan must be repaid in full 3 years from the day the loan was received. On January 1, 2022, Jonathan borrows $30,000 on an interest free basis. The funds are used to purchase an automobile to be used in his employment duties. In addition, on July 1, 2022, he borrows $250,000 on an interest free basis in order to assist in the purchase of a new and larger residence. The Company does not provide home purchase loans to its other employees. The loan will be repaid in full on July 1, 2025. Assume that the prescribed interest rate for all of 2022 is 2%. What are the income tax implications of these loans to Mr. Baxter for the 2022 taxation year? Answer: As the $30,000 vehicle loan is available to all employees, it will not be included in Mr. Baxter's 2022 income. However, as the loan is interest free, there will be a taxable benefit of $600 [($30,000)(2% Nil)(12/12)]. Some portion of this taxable benefit may be deductible to the extent of the percentage use of the automobile in the year towards employment use. With respect to the housing loan, such loans are not available to all employees and, because none of the loan will be repaid prior to the Company's second taxation year end, all of the$250,000 will be included in Mr. Baxter's income for 2022. Because all of the loan has been included in Mr. Baxter's income there will be no taxable interest benefit related to the housing loan. Type: ES Topic: Shareholder loans - ITA 15(2)

81) Cloister Inc. is a CCPC with a December 31 taxation year end. For the 2022 taxation year, Cloister Inc. has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $197,000. All of its income has always been from an active business. The cash balance of the Company, prior to any payments on the current year's income tax, is also equal to this same amount. Its only shareholder, Ms. Sally Cloister, has no income other than the taxable dividends or salary paid by the corporation and has combined personal tax credits of $3,375 for 2022. In her province of residence, assume: • The corporate income tax rate is 3% on income eligible for the SBD.and 14% on other corporate income. • Personal provincial income tax on the first $155,625 is $16,000 with a 12% rate on additional amounts. • The dividend tax credit is 4/13 of the dividend gross up for non-eligible dividends. Determine the amount of after tax cash that Ms. Cloister will retain if the maximum salary is paid by the corporation out of the available cash of $197,000. Ignore CPP contributions and the Canada employment tax credit. Answer: If the full $197,000 is paid out as salary, it will be deductible and will reduce the Company's taxable income to nil. This means that there would be no corporate income tax. This salary payment will result in Ms. Cloister having taxable income of $197,000. Given this, her 2022 income tax will be calculated as follows: Combined Tax on first $155,625 ($32,181 + $16,000) Combined Tax on remaining $41,375 ($197,000 - $155,625) at 41% (29% + 12%) Combined Income Tax before Credits Personal Tax Credits (Given) 2022 Personal Income Tax

$ 48,181 16,964 $65,145 ( 3,375) $61,770

Ms. Cloister's after tax retention would be $135,230 ($197,000 - $61,770), ignoring CPP contributions and the Canada employment credit. Type: ES Topic: Employee compensation - salary

82) Lisgar Ltd. is a CCPC with a December 31 taxation year end. For the 2022 taxation year, it has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $325,000. All of this income is from an active business. Its available cash balance is also $325,000. Harry Lisgar is the only shareholder of Lisgar Ltd. His only income is either salary or taxable dividends from Lisgar Ltd and he has 2022 personal tax credits of $4,550. In his province of residence, assume: • The corporate income tax rate is 3% on income eligible for the SBD and 13% on other corporate income. • Personal provincial income tax on the first $221,708 is $27,000. The rate on additional amounts is 18%. • The dividend tax credit is 25% of the dividend gross up for non-eligible dividends. Determine the amount of after tax cash that Mr. Lisgar will retain if the maximum salary is paid by the corporation out of the available cash of $325,000. Ignore CPP contributions and the Canada employment tax credit. Answer: If all of the income is paid out as deductible salary, the Company will pay no income tax as its taxable income would be nil. The salary payment will result in Mr. Lisgar having net income and taxable Income of $325,000. The income tax on this amount is as follows: Combined Tax on first $221,708 ($51,345 + $27,000) Combined Tax on remaining $103,292 ($325,000 - $221,708) at 51% (33% + 18%) Combined Income Tax before Credits Personal Tax Credits (Given) 2022 Personal Income Tax

$ 78,345 52,679 $131,024 ( 4,550) $126,474

Based on these calculations, Mr. Lisgar will have after tax retention of $198,526 ($325,000 - $126,474). This result ignores CPP contributions, as well as the Canada employment tax credit. Type: ES Topic: Employee compensation - salary

83) Cloister Inc. is a CCPC with a December 31 taxation year end. For the 2022 taxation year, Cloister Inc. has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $197,000. All of its income has always been from an active business. The cash balance of the Company, prior to any payments on the current year's taxes, is also $197,000. Its only shareholder, Ms. Sally Cloister, has no income other than the taxable dividends or salary paid by the corporation and has combined 2022 personal income tax credits of $3,375. In her province of residence, assume: • The corporate income tax rate is 3% on income eligible for the SBD and 14% on other corporate income. • Personal provincial income tax on the first $155,625 is $16,000. The rate on additional amounts is 12%. • The dividend tax credit is 4/13 of the dividend gross up for non-eligible dividends. Determine the amount of after tax cash that Ms. Cloister will retain if the maximum taxable dividend is paid by the corporation out of the available cash of $197,000. Answer: As taxable dividends are not deductible for income tax purposes, corporate income tax will have to be paid prior to the payment of any taxable dividends. All of the $197,000 would be eligible for the SBD and the income tax rate would be 12% (38% - 10% - 19% + 3%). Given this, the maximum taxable dividend that could be paid would be calculated as follows: Corporate taxable income Corporate Income Tax at 12% Funds Available for Taxable Dividends

$197,000 ( 23,640) $173,360

Personal income tax on this taxable dividend would be calculated as follows: Non-Eligible Dividends Gross Up at 15% Taxable Dividends

$173,360 26,004 $199,364

Combined Tax on first $155,625 ($32,181 + $16,000) Combined Tax on remaining $43,739 ($199,364 - $155,625) at 41% (29% + 12%) Combined Income Tax before Credits Personal Tax Credits (Given) Dividend Tax Credit [(9/13 + 4/13)($26,004)] 2022 Personal Income Tax

$ 48,181 17,933 $ 66,114 ( 3,375) ( 26,004) $ 36,735

The after tax retention would be equal to $136,625 ($173,360 - $36,735). Type: ES Topic: Employee compensation - taxable dividends

84) Lisgar Ltd. is a CCPC with a December 31 taxation year end. For the 2022 taxation year, it has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $325,000. All of this income is from an active business. Its available cash balance is also equal to $325,000. Harry Lisgar is the only shareholder of Lisgar Ltd. His only income is either salary or taxable dividends from Lisgar Ltd and he has tax credits of $4,550. In his territory of residence, assume: • The corporate income tax rate is 3% on income eligible for the SBD and 13% on other corporate income. • Personal territorial income tax on the first $221,708 is $27,000. The rate on additional income is 18%. • The dividend tax credit is 25% of the dividend gross up for non-eligible dividends. Determine the amount of after tax cash that Mr. Lisgar will retain if the maximum taxable dividend is paid by the corporation out of the available cash of $325,000. Answer: As taxable dividends paid are not deductible for income tax purposes, corporate income tax will have to be paid prior to the payment of any taxable dividends. All of the income would be eligible for the SBD and Lisgar's corporate income tax rate is 12% (38% - 10% - 19% + 3%). Given this, the maximum taxable dividend that could be paid is calculated as follows: Corporate Taxable Income Corporate Income Tax at 12% Funds Available for Taxable Dividends

$325,000 ( 39,000) $286,000

Mr. Lisgar's personal income tax on this income would be calculated as follows: Non-Eligible Dividends Gross Up at 15% Taxable Dividends

$286,000 42,900 $328,900

Combined Tax on first $221,708 ($51,345 + $27,000) Combined Tax on remaining $107,192 ($328,900 - $221,708) at 51% (33% + 18%) Combined Income Tax before Credits Personal Tax Credits (Given) Dividend Tax Credit [(9/13 + 25%)($42,900)] 2022 Personal Income Tax

$ 78,345 54,668 $133,013 ( 4,550) ( 40,425) $ 88,038

The after tax retention would be $197,962 ($286,000 - $88,038). Type: ES Topic: Employee compensation - taxable dividends

85) For the taxation year ending December 31, 2022, Ramsden Inc. has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $23,600. The Company's cash balance, prior to the payment of any income taxes for the year is $17,300. The Company's taxable income is subject to a combined federal/provincial income tax rate of 15%. There is no payroll tax in this province. Ms. Ramsden, the Company's president and sole shareholder has no other income. She has combined federal/provincial personal tax credits of $4,120 and lives in a province that has a personal income tax rate on the first $50,197 of taxable income of 11%. The provincial dividend tax credit is 30% of the gross up for non-eligible dividends. Ms. Ramsden would like to remove all of the cash from the corporation and has asked you to determine whether it would be better to take it out in the form of all non-eligible dividends or all salary. Ignore the required CPP contributions and the Canada employment tax credit. Answer: Salary Alternative - As the available cash is less than taxable income, some corporate income tax will have to be paid since there is insufficient cash to pay a salary equivalent to taxable income. To determine the maximum salary that can be paid (X), it is necessary to solve the following equation: X = $17,300 - [($23,600 - X)(15%)] X = $16,188 Corporate income tax of $1,112 [(15%)($23,600 - $16,188)] would have to be paid. The total cash outflow equals the cash available of $17,300 ($16,188 + $1,112). Given this salary, Ms. Ramsden would be subject to the following personal income tax: Income Tax before Credits [(15% + 11%)($16,188)] Available Tax Credits (Given) Personal Income Tax on Salary

$4,209 ( 4,120) $ 89

Given the preceding, Ms. Ramsden's after tax retention on salary would be $16,099 ($16,188 - $89). Taxable Dividend Alternative - As taxable dividends paid are not deductible, corporate income tax would have to be paid on the full $23,600. These taxes would be $3,540 [(15%)($23,600)], leaving an amount available for taxable dividends of $13,760 ($17,300 - $3,540). As no individual income tax would be payable on this amount of taxable dividends, the full $13,760 would be retained. Given these calculations, it is clear that the preferred approach is to pay the maximum salary. Type: ES Topic: Employee compensation - salary vs dividends

86) For the taxation year ending December 31, 2022, Daly Inc. has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $34,500. The Company's cash balance, prior to the payment of any salary or dividends is $35,200. For the taxation year ending December 31, 2021, Daly Inc. had net income and taxable income of $12,700. The Company is subject to a combined federal/provincial income tax rate of 11.5% on all of its taxable income for 2021 and 2022. Bryan Daly, the sole shareholder of Daly Inc., has annual employment income of over $250,000, and because of this, any additional income will be taxed at a combined federal/provincial income tax rate of 51%. The provincial dividend tax credit is equal to 20% of the gross up for non-eligible dividends. Mr. Daly has indicated that he would like to remove all of the $35,200 in cash from his Company and has asked you to determine whether it would be better to take it out in the form of all non-eligible dividends or all salary. Answer: Salary Alternative - If all of the $35,200 in cash is removed as salary, no corporate income tax will be required. In fact, the removal of this amount of cash as salary will create a loss of $700 ($35,200 $34,500) for the Company which can be carried back to 2021 to claim a refund of $81 [(11.5%)($700)]. If Bryan receives the $35,200 as salary, his after tax retention can be calculated as follows: Salary Received Income Tax [(51%)($35,200)] After Tax Amount Retained - Salary

$35,200 ( 17,952) $17,248

Taxable Dividend Alternative - If all of the $35,200 is paid out as taxable dividends, there would be corporate income tax on the $34,500 of taxable income. The amount available as a taxable dividend would be calculated as follows: Available Cash Income Tax [(11.5%)($34,500)] Funds Available for Taxable Dividends

$35,200 ( 3,968) $31,232

Bryan's income tax rate on non-eligible dividends would be 45.3% [(115%)(51%) - (9/13 + 20%)(15%)]. Given this, his after tax retention of the taxable dividend income would be calculated as follows: Non-Eligible Dividends Income Tax on Taxable Dividends [(45.3%)($31,232)] After Tax Retention - Taxable Dividends

$31,232 ( 14,148) $17,084

The taxable dividend alternative provides after tax retention of $17,084. As this is $164 ($17,248 - $17,084) less than the amount retained with the salary alternative, the salary alternative is preferable. The $81 tax refund to the corporation due to the salary would reinforce this conclusion. Type: ES Topic: Employee compensation - salary vs dividends

87) For the year ending December 31, 2022, Hughes Ltd. has taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $175,000. The Company's cash balance is over $300,000. It is subject to a combined federal/provincial income tax rate of 11.5%. Mr. Hughes, the Company's only shareholder, has employment income of over $250,000 and, under normal circumstances, does not make withdrawals from the corporation. However, he needs an additional $17,000 in cash. Mr. Hughes lives in a province where the provincial income tax rate is 18% and the provincial dividend tax credit is equal to 23% of the dividend gross up for non-eligible dividends. He has asked your advice as to whether the payment of salary or, alternatively, the payment of non-eligible dividends, would have the lower income tax cost. Provide the requested advice. Answer: Required Salary - Mr. Hughes' combined income tax rate on additional salary is 51% (33% + 18%). In order to have $17,000 in after tax funds, he would have to receive salary of $34,694 [$17,000 ÷ (1 - .51)]. Income Tax Cost of Salary - The income tax cost of paying salary can be calculated as follows: Income Tax on Receipt of Salary [(51%)($34,694)] Income Tax Savings to Corporation [(11.5%)($34,694)] Income Tax Cost of Salary

$17,694 ( 3,990) $13,704

Required Taxable Dividend - Mr. Hughes' income tax rate on non-eligible dividends is 44.8% [(115%)(51%) - (9/13 + 23%)(15%)]. In order to have $17,000 in after tax funds, he would have to receive taxable dividends of $30,797 [$17,000 ÷ (1 - .448)]. Income Tax Cost of Taxable Dividend - As the taxable dividend payment would not be deductible to the corporation, its payment would not change corporate income tax. This means that the income tax cost would be the $13,797 [(44.8%)($30,797)] in personal income tax that Mr. Hughes would pay on the taxable dividend. Conclusion - As the income tax cost of the salary alternative is $3,897 ($17,694 - $13,797) higher, taxable dividends should be paid. Type: ES Topic: Employee compensation - salary vs dividends

88) Miriam Foster has annual employment income in excess of $300,000. This means that any additional income that she receives will be subject to a combined federal/territorial income tax rate of 51%. Because of some very bad real estate investments, she finds that, in addition to her employment income, she needs an additional $50,000 in cash during the coming year. She is the sole shareholder of Foster Enterprises, a CCPC. It is expected that, for the taxation year ending December 31, 2022, Foster Enterprises will have taxable income, before consideration of taxable dividends or salary paid to its sole shareholder, of $225,000 which is subject to income tax at a combined federal/territorial income tax rate of 12%. While Ms. Foster does not normally remove funds from the Company, it has sufficient cash reserves to pay any amount of required salary or taxable dividends. Ms. Foster has asked your advice as to whether it would be more tax efficient to receive the additional $50,000 as non-eligible dividends or as salary. In her territory of residence, the territorial dividend tax credit is equal to 4/13 of the gross up on non-eligible dividends. Provide the requested advice. Answer: Required Salary - Miriam's combined income tax rate is 51% on any additional salary. Given this, in order to retain $50,000, she will need salary of $102,041 [$50,000 ÷ (1 - 51%)]. The income tax cost of paying salary can be calculated as follows: Income Tax on Salary [(51%)($102,041)] Income Tax Savings to Corporation [(12%)($102,041)] Income Tax Cost of Salary Alternative

$52,041 ( 12,245) $39,796

Required Taxable Dividend - Miriam's tax rate on non-eligible dividends is 43.7% [(115%)(51%) - (9/13 + 4/13)(15%)]. In order to have $50,000 in after tax funds, she would have to receive taxable dividends of $88,810 [$50,000 ÷ (1 - 0.437)]. Income Tax Cost of Taxable Dividend - As the taxable dividend payment would not be deductible to the corporation, its payment would not change corporate income tax. This means that the income tax cost would be the $38,810 [(43.7%)($88,810)] in personal income tax that Miriam would pay on the taxable dividend. Conclusion - As the income tax cost associated with the payment of salary is $986 higher ($39,796 $38,810), the taxable dividend alternative would have the lower income tax cost. Type: ES Topic: Employee compensation - salary vs dividends

89) Ms. Griet Naidu has $175,000 in cash that she does not currently require for personal expenses. As she has annual employment income in excess of $180,000, her marginal federal income tax rate is 29% with a provincial income tax rate of 16%. The provincial dividend tax credit for non-eligible dividends is 30% of the gross up. In her province of residence, the combined federal/provincial income tax rate on investment income earned by a CCPC is 50-2/3%. This includes the ART at 10-2/3%. Ms. Naidu would like to invest her $175,000 for the year ending December 31, 2022 in an investment that will pay annual interest of 3%. Her only investment income for the year will be the $5,250 of interest income that would be paid on this investment. Required: Prepare calculations that will compare the after tax retention of income that will accrue to Ms. Naidu for 2022 if: A. The investment is owned by her personally. B. The investment is incorporated in a company in which she is the sole shareholder, and which pays out all available after-tax income as taxable dividends.

Answer: Part A - Investment owned Personally Ms. Naidu's marginal income tax rate is 45% (29% + 16%). If Ms. Naidu invests the $175,000 personally the after tax return can be calculated as follows: Interest Income

$5,250

Interest Income Income Tax at 45% After Tax Retention

$5,250 ( 2,363) $2,887

Part B - Incorporating the Investment As investment income is involved, there will be no addition to the corporation's GRIP account. This means that any taxable dividends paid will be non-eligible. The refundable portion of Part I tax will be added to the Non-Eligible RDTOH. The after tax return would be as follows: Interest Income Corporate Income Tax at 50-2/3% Corporate Income before Dividend Refund Maximum Dividend Refund (See Note) Maximum Non-Eligible Dividend Gross Up at 15% Taxable Dividend Personal Income Tax Rate Personal Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 30%)($630)] Personal Income Tax

$5,250 ( 2,660) $2,590 1,610 $4,200 630 $4,830 45% $2,174 ( 625) $1,549

Taxable Dividends Personal Income Tax After Tax Retention

$4,200 ( 1,549) $2,651

Note - The available cash would support a taxable dividend of $4,200 ($2,590 ÷ .61667), including a dividend refund of $1,610 [(38-1/3%)($4,200)]. As this is equal to the $1,610 [(30-2/3%)($5,250)] balance in the Non-Eligible RDTOH, this amount of taxable dividends can be paid. The difference between the two alternatives is $236 ($2,887 - $2,651) in favour of direct personal investment (not using a corporation). Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

90) As an employee of a public company, Carol Henderson has an annual salary of $175,000. After years of purchasing losing tickets, Carol wins $600,000 in the provincial lottery. As her employment income is more than adequate for her current needs, she plans to invest all of these winnings in an investment in 2022 that will pay annual interest of 4%. The following information is applicable to the province in which Carol is a resident: • The maximum income tax rate for individuals is 14%. • The provincial dividend tax credit on non-eligible dividends is 24% of the gross up. • The provincial income tax rate on the investment income of CCPCs is 13%. Other than the interest earned on her investment, Carol has no other source of investment income. Required: Prepare calculations that will compare the after tax retention of interest income that will accrue to Carol for the 2022 taxation year assuming that she purchased the investment on January 1, 2022 and if: A. The investment is personally owned by her. B. The investment is incorporated to a CCPC in which she is the sole shareholder, and which pays out all after-tax income as taxable dividends.

Answer: Part A - Investment owned Personally Carol's marginal income tax rate is 43% (29% + 14%). If she invests the $600,000 personally, the after tax return can be calculated as follows: Interest Income [(4%)($600,000)] Personal Income Tax [(43%)($24,000)] After Tax Retention

$24,000 ( 10,320) $13,680

Part B - Incorporating the Investment The combined federal/provincial income tax rate on the investment income of the corporation is 51-2/3% (28% + 13% + 10-2/3%). As investment income is involved, there would be no addition to the corporation's GRIP meaning that any taxable dividends paid will be non-eligible. The refundable portion of Part I tax will be added to the Non-Eligible RDTOH. Carol's after tax return would be calculated as follows: Interest Income Corporate Income Tax at 51-2/3% Corporate Income before Dividend Refund Maximum Dividend Refund (See Note) Maximum Non-Eligible Dividend Gross Up at 15% Taxable Dividend Personal Income Tax Rate Personal Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 24%)($2,822)] Personal Income Tax

$24,000 ( 12,400) $11,600 7,210 $18,810 2,822 $21,632 43% $ 9,302 ( 2,631) $ 6,671

Taxable Dividends Personal Income Tax After Tax Retention - With the use of a Corporation

$18,810 ( 6,671) $12,139

Note - The available cash would support a taxable dividend of $18,810 ($11,600 ÷ .61667), including a dividend refund of $7,210 [(38-1/3%)($18,810)]. As this is less than the $7,360 [(30-2/3%)($24,000)] balance in the Non-Eligible RDTOH account, this amount of taxable dividends can be paid. There is additional refundable tax of $150 ($7,360 - $7,210) that is available, but only on the payment of additional taxable dividends. The difference between the two alternatives is $1,541 ($13,680 - $12,139) in favour of direct personal investment (not using a corporation). Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments

91) As an employee of a public company, Carol Henderson has an annual salary of $175,000. After years of purchasing losing tickets, Carol wins $600,000 in the provincial lottery. As her employment income is more than adequate for her current needs, she plans to invest all of these winnings in preferred shares in the 2022 taxation year. The shares pay annual eligible dividends of 5%. The following information is applicable to the province in which Carol is a resident: • The maximum income tax rate for individuals is 14%. • The provincial dividend tax credit on eligible dividends is 24% of the gross up. • The provincial income tax rate on the investment income of CCPCs is 13%. Other than the preferred share dividends, Carol has no other source of investment income. Required: Prepare calculations that will compare the after tax retention of income that will accrue to Carol in 2022 if: A. The investment is personally owned. B. The investment is incorporated in a CCPC in which she is the sole shareholder, and which pays out all after-tax income as eligible dividends.

Answer: Part A - Share Investment owned Personally Carol's marginal income tax rate is 43% (29% + 14%). If she invests the $600,000 personally the after tax return can be calculated as follows: Eligible Dividends Received [($600,000)(5%)] 38% Gross Up Taxable Dividend Personal Income Tax Rate Personal Income Tax before Dividend Tax Credit Dividend Tax Credit [(6/11 + 24%)($11,400)] Personal Income Tax

$30,000 11,400 $41,400 43% $17,802 ( 8,954) $ 8,848

Taxable Dividends Personal Income Tax After Tax Retention - Personal ownership

$30,000 ( 8,848) $21,152

Part B - Share Investment Incorporated If Carol invests the $600,000 through her CCPC, the eligible dividends received would be classified as portfolio dividends, subject to Part IV tax at 38-1/3%. There would also be an addition to the corporation's GRIP account of $30,000 (notice that eligible dividends are not multiplied by 72% for the GRIP addition). The after tax retention on the flow through the corporation would be as follows: Eligible Dividends Part IV Tax at 38-1/3% (Portfolio Dividends) Earnings Retained by the Corporation Dividend Refund when Dividends Paid Eligible Dividends paid (See Note)

$30,000 ( 11,500) $18,500 11,500 $30,000

Note - The available cash would support a taxable dividend of $30,000 ($18,500 ÷ .61667), including a dividend refund of $11,500 [(38-1/3%)($30,000)]. This refund is available as the balance in the Eligible RDTOH account is also $11,500 [(38-1/3%)($30,000)]. As the taxable dividend payment is equal to the GRIP balance, the full amount of $30,000 can be designated as eligible. At this point, the corporation has paid no net amount of tax and will be paying exactly the same amount of eligible dividends that it received. This will result in Carol paying exactly the same amount of income tax that she would have paid had the share investment not been incorporated. With the use of a corporation, the after tax retention would be identical to the after tax retention resulting from direct receipt of the dividends. There would also be no tax deferral since the Part IV tax of $11,500 exceeded the personal income tax of $8,848 that would have been payable had the share investments not been incorporated. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments (dividend income)

92) Ryan Taylor lives in a province with a combined federal and provincial corporate income tax rate on the investment income of CCPCs of 52-2/3%. This rate includes the ART of 10-2/3%. The provincial dividend tax credit is equal to 35% of the dividend gross up on eligible dividends and 25% of the gross up on non-eligible dividends. Provincial income tax on individuals are $13,500 on the first $155,625 of taxable income, and 12% on any additional amounts of taxable income. Ryan owns the following investments, and anticipates the following Canadian income and capital gains for 2022.

FMV at 31/12/2021 $100,000 400,000 50,000 50,000

ABC Company Bonds XYZ Canada Company Shares Ace Technology Shares Safe Bank of Canada Shares Totals

$600,000

Type of Income Interest Dividends Capital Gains Dividends Capital Gains N/A

Expected Income for 2022 $11,000 20,000 10,000 4,000 3,500 $48,500

Ryan only invests in the shares and debt of large, publicly traded companies. He does not own more than fraction of the shares or debt in any of these corporations. All of the taxable dividends received will be designated as eligible by the paying corporation. In 2022, in addition to the above investment income, Ryan expects to earn $110,000 in employment income. He has combined federal/provincial personal tax credits of $4,141. The total ACB of his investments is $450,000. Ryan asks you whether it is financially beneficial to continue to own the investments personally or whether it would be preferable to incorporate the investments. Ryan's lifestyle requires him to use all available income. As a consequence, he would like you to assume that, if the investments are incorporated that the corporation will pay out all available after-tax funds as capital or taxable dividends. Required: Provide an appropriate analysis for Ryan Taylor. Answer: Investments Owned Personally If Ryan continues to own the investments personally, his total taxable income will be as follows: Employment Income Interest Income Eligible Dividends ($20,000 + $4,000) Gross Up on Eligible Dividends [($24,000)(38%)] Taxable Capital Gains [(1/2)($10,000 + $3,500)] 2022 Net Income and Taxable Income

$110,000 11,000 24,000 9,120 6,750 $160,870

The income tax on this income would be calculated as follows: Tax Payable on first $155,625 ($32,181 + $13,500) Tax Payable on remaining $5,245 ($160,870 - $155,625) at 41% (29% + 12%) Income Tax before Credits Personal Tax Credits (Given) Dividend Tax Credit [(6/11 + 35%)($9,120)] 2022 Personal Income Tax

$45,681 2,150 $47,831 ( 4,141) ( 8,167) $35,523

Ryan would retain cash of $122,977 ($110,000 + $11,000 + $24,000 + $13,500 - $35,523). Investments Incorporated (Owned by a Corporation) If all of the investments are incorporated, the taxable income of the corporation would be as follows: Interest Income Eligible Dividends ($20,000 + $4,000) Taxable Capital Gains [(1/2)($10,000 + $3,500)] 2022 Net Income Less: Taxable Dividends - ITA 112(1) 2022 Taxable Income

$11,000 24,000 6,750 $41,750 ( 24,000) $17,750

With the subtraction of the eligible dividends received, taxable income would be equal to aggregate investment income (AII), resulting in no addition to the Company's GRIP. However, there would be an addition to its GRIP equal to $24,000, 100% of the eligible dividends received. The company's income tax would be calculated as follows: Part I Tax [(52-2/3%)($17,750)] Part IV Tax [(38-1/3%)($20,000 + $4,000)] 2022 Corporate Income Taxes

$ 9,348 9,200 $18,548

The refundable portion of the Part I Tax Payable would be the least of the following amounts: • $5,443 = 30-2/3% of AII [(30-2/3%)($11,000 + $6,750)] • $5,443 = 30-2/3% of Taxable Income [(30-2/3%)($17,750)] • $9,348 = Part I Tax The balances in the two RDTOH accounts would be as follows: Non-Eligible RDTOH (Part I Refundable Tax)

$5,443

Eligible RDTOH (Part IV Tax Payable)

$9,200

The amount of cash available to the corporation for paying taxable dividends to Ryan would be calculated as follows: Investment Income Received ($11,000 + $24,000 + $13,500) Corporate Income Taxes Cash Available Tax Free Capital Dividend Cash Available for Taxable Dividend Dividend Refund (See Note) Taxable Dividend Eligible Dividend (GRIP Balance) Non-Eligible Dividend

$48,500 ( 18,548) $29,952 ( 6,750) $23,202 14,423 $37,625 ( 24,000) $13,625

Note - The available cash would support a taxable dividend of $37,625 ($23,202 ÷ .61667), including a dividend refund of $14,423 [(38-1/3%)($37,625)]. As this is less than the $14,643 ($5,443 + $9,200) balance in the combined RDTOH accounts, this amount of dividends can be paid. The eligible portion of the dividend is limited to the $24,000 balance in the corporation's GRIP account. As 38-1/3% of this amount is $9,200, the refund will reduce the Eligible RDTOH to nil. The remaining $13,625 ($37,625 - $24,000) will be non-eligible and will result in $5,223 [(38-1/3%)($13,625)] being removed from the Non-Eligible RDTOH, leaving a balance of $220 ($5,443 - $5,223). The after tax results with the use of a corporation would be as follows: Employment Income Eligible Dividend Gross Up on Eligible Dividend at 38% Non-Eligible Dividend Gross Up on Non-Eligible Dividends at 15% 2022 Taxable Income

$110,000 24,000 9,120 13,625 2,044 $158,789

Income Tax on first $155,625 ($32,181 + $13,500) Income Tax on remaining $3,164 ($158,789 - $155,625) at 41% (29% + 12%) Income Tax before Tax Credits Personal Tax Credits (Given) Eligible Dividend Tax Credit [(6/11 + 35%)($9,120)] Non-Eligible Dividend Tax Credit [(9/13 + 25%)($2,044)] 2022 Personal Income Tax

$45,681 1,297 $46,978 ( 4,141) ( 8,167) ( 1,926) $32,744

Ryan’s after tax retention would be as follows: Employment Income Capital Dividend Taxable Dividends ($24,000 + $13,625) Total receipts Personal Income Tax After Tax Cash Retention - With the use of a Corporation

$110,000 6,750 37,625 $154,375 ( 32,744) $121,631

Conclusion In terms of after tax amounts of cash retained, the use of a corporation results in $121,631 of cash retained, while owning the investments personally results in $122,977 of cash retained. This $1,346 difference would clearly make holding the investments personally the preferable alternative, particularly when the additional costs of incorporation are taken into consideration. Type: ES Topic: Income tax savings & deferral - the decision to incorporate investments (with capital gains)

93) All of the shares of Dez Inc. are owned by Ms. Hannah Fernandez. Dez Inc. is a CCPC with a taxation year that ends on December 31. In addition to being the sole shareholder of Dez Inc., Hannah is employed by the company and works full time in its business. Dez Inc. has established generous benefit policies in order to retain its employees. All of its employees who have more than 12 months of service are entitled to interest free loans as follows: • The Company will provide a loan of up to $200,000 to assist an employee in acquiring a residence. The principal amount of the loan must be repaid in full at the end of five years. • The Company will provide a loan of up to $25,000 to assist an employee in acquiring an automobile that will be used to carry out their employment duties. These loans must be repaid in full within three years. During the taxation year ending December 31, 2022, Hannah received the following loans: 1. On February 28, Hannah borrows $200,000 interest free in order to purchase a new residence. The loan will be repaid in two annual instalments of $100,000, beginning on March 1, 2023. 2. On May 1, Hannah borrows $185,000 to acquire a foreign sports car. She will use it for personal purposes only. The loan bears interest at an annual rate of 1% and will be repaid on May 1, 2027. 3. On July 1, Hannah borrows $40,000 to cover corrective back surgery in a U.S. hospital. The procedure will significantly relieve her back pain and is not available in Canada. The loan is interest free and will be repaid on June 30, 2023. 4. On August 1, Hannah borrows $100,000 in order to acquire furniture for her new residence. The loan is interest free and will be repaid on August 1, 2024. 5. On October 1, Hannah borrows $18,000 from her company to finance a much needed week at a luxurious resort in British Columbia. Since she has already borrowed a significant amount of funds, she decides the loan will bear interest at 3%. It will be repaid in full on September 1, 2023. All repayments and interest payments are made as scheduled. In all of the years under consideration, assume the relevant prescribed interest rate on shareholder/employee loans is 2%. Required: A. What are the income tax consequences to Hannah of receiving the loans. Briefly explain your conclusions for each loan for the taxation years that the loans are outstanding. Base any interest calculations on the number of months (rather than days) the loans are outstanding. B. Identify any income tax planning issues that are relevant to these loans.

Answer: Part A - Income Tax Consequences Loan 1 - Housing Loan As such loans are available to all employees, Hannah can claim that she has received the loan in her capacity as an employee. This means that the $200,000 principal does not have to be included in her net income for 2022. However, as the loan is interest free, there will be a taxable benefit included in her net income as follows: 2022 [($200,000)(2%)(10/12)] $3,333.33 2023 [($200,000)(2%)(2/12) + ($200,000 - $100,000)(2%)(10/12)] $2,333.33 2024 [($200,000 - $100,000)(2%)(2/12)] $333.33 Loan 2 - Sports Car Loan While the term of the loan is consistent with the loans being given to other employees, the principal amount is far in excess of anything being provided to other employees. Given this, it is clear that the loan is being extended to Hannah in a shareholder capacity and not as an employee. This means that the $185,000 principal amount would have to be included in her 2022 net income. When the loan is repaid in 2027, the $185,000 can be deducted from her income in that year. As the principal amount is included in her income, there will be no taxable benefit for imputed interest associated with the loan. Loan 3 - Loan for Medical Expenses As the loan is repaid prior to December 31, 2023 (before the following taxation year of the corporation), the principal amount does not have to be included in Hannah's net income for 2022 However, as it is interest free, there will be a taxable benefit for imputed interest as follows: 2022 [(2%)($40,000)(6/12)] $400 2023 [(2%)($40,000)(6/12)] $400 Although the loan is being used to pay for medical expenses that will qualify for the medical expense tax credit, interest, or imputed interest on loans to fund medical expenses is not an allowable medical expense. Loan 4 - Furniture Loan As this loan is not repaid by December 31, 2023 (the end of the following taxation year of the company), it has to be included in Hannah's 2022 net income. In 2024, the year it is repaid, the $100,000 can be deducted in determining net income for that year. As the principal amount is included in her income, there will be no taxable benefit for imputed interest associated with the loan.

Loan 5 - Vacation Loan This loan is repaid by December 31, 2023 and as a consequence, the principal amount is not included in Hannah's 2022 net income. As the interest rate of 3% on the loan is higher than the prescribed rate of 2%, there will be no imputed interest benefit. Part B - Tax Planning Issues Housing Loan There are no issues here in that the loan is structured to be consistent with other loans to employees. This allows Hannah to receive a home loan on an interest free basis and, because she has received it as a result of her employee status, she does not have to include the principal in her income. Sports Car Loan As the loan must be included in her income, it is not good tax planning for Hannah to pay any interest. The interest income will be subject to corporate income tax. As the car is used only for personal purposes, she cannot deduct any of the interest paid. If she paid no interest on the loan, her income tax situation would not be changed and the corporation would pay less income tax since there would be no interest income. Loan for Medical Expenses The fact that the loan was interest free resulted in Hannah having a taxable benefit. If she had paid interest at the prescribed rate, the benefit could have been reduced or eliminated. However, the corporation would be subject to income tax on the interest income and she cannot deduct or claim the interest as a medical expense. In other words there is no symmetrical treatment to neutralize the income tax cost. Whether making the loan on an interest free basis represents good tax planning depends on whether the corporation's income tax rate on investment income is higher than the income tax rate applicable to Hannah. It is also possible that the interest income to the company could be considered active business income if the funds used to make loans are temporary excess cash connected to the business. This position would likely be tenable for short term loans but not for long term loans. Furniture Loan As the principal of the loan must be included in income, the income tax planning question is whether it would have been more appropriate to simply pay an equivalent amount of salary to Hannah. The advantage of the loan is that it can be repaid and deducted in future years. In contrast, salary cannot generally be returned to the corporation, but it is deductible to the corporation as salary. Given that the principal of the loan is included in Hannah's income, making the loan interest free is the appropriate choice. It would rarely be advisable for a corporation to charge interest on employee or shareholder loans.

Vacation Loan It was clearly not appropriate to pay interest at a rate higher than the prescribed interest rate. The extra one percent did not reduce Hannah's imputed interest benefit as it would be nil with a 2% interest rate. In addition, the interest income will be included in the corporation's income with no offsetting interest deduction to Hannah. There is also the question of whether any interest should have been paid on the loan. Making it interest free would create a taxable benefit for Hannah. However, it would eliminate the need to pay corporate income tax on the interest income received. As discussed under the comments on the medical expense loan, the answer to this question depends on the relative income tax rates for Hannah versus the income tax rate to the corporation. Type: ES Topic: Shareholder loans - ITA 15(2)

94) Marian Copps owns 100% of the outstanding shares of Copp's Copper Ltd., a CCPC that specializes in producing copper artifacts for various religious organizations. Ms. Copps is employed by the company and is the top salesperson. The Company has an October 31 taxation year end. It is known for its generous treatment of its employees. This includes the extension of low-interest loans to all employees with more than 2 years of service with the Company. More specifically, the Company will: • Provide a loan of up to $150,000 to assist an employee in acquiring a home. When granted, such loans charge interest of 1% and must be repaid in full at the end of five years. • Provide a loan of up to $30,000 to assist an employee in acquiring an automobile that will be used in their employment duties. As with the home purchase loans, these loans also charge interest of 1% and must be repaid in full at the end of five years. In 2022 Ms. Copps received the following loans: 1. On January 31, Ms. Copps borrows $150,000 in order to purchase a home. The loan will be repaid in two annual instalments of $75,000, beginning on February 1, 2023. 2. On March 1, Ms. Copps borrows $349,000 to acquire a new Ferrari F12. She will use it to cut down the driving time to and from her cottage. The loan charges interest of 1% and will be repaid in full on March 1, 2027. 3. On June 1, Ms. Copps borrows $35,000 to cover the costs of a surgery not covered by medicare. The loan is interest free and will be repaid in full on May 31, 2023. 4. On July 1, Ms. Copps borrows $100,000 in order to stock the wine cellar of her new residence. The loan is interest free and will be repaid in full on July 1, 2024. 5. On November 1, Ms. Copps borrows $25,000 from her company to finance a much needed week at a luxurious health spa. Since she has already borrowed a significant amount of funds, she decides the loan will charge 3% interest. It will be repaid in full October 1, 2024. All repayments are made as scheduled. In all of the years under consideration, assume the relevant prescribed interest rate on employee/shareholder loans is 2%. Required: A. What are the income tax consequences to Ms. Copps of receiving these loans. Briefly explain your conclusions for each loan for the taxation years the loans are outstanding. Base any interest calculations on the number of months the loans are outstanding instead of the number of days. B. Identify any tax planning points that may be relevant to these loans.

Answer: Part A - Income Tax Consequences Housing Loan As such loans are available to all employees, Ms. Copps can argue that she has received the loan in an employment capacity. This means that the $150,000 principal does not have to be included in her income for 2022. However, as the interest rate on the loan is below the prescribed rate, there will be a taxable benefit. The interest benefit for 2022 is $1,375 [($150,000)(2% - 1%)(11/12)]. For 2023, the amount is $812.50 [($150,000)(2% - 1%)(1/12) + ($150,000 - $75,000)(2% - 1%)(11/12)]. For 2024, the amount is $62.50 [($150,000 - $75,000)(2% - 1%)(1/12)]. Luxury Car Loan While the term of the loan and the applicable interest rate are consistent with the loans being given to other employees, the principal amount is far in excess of anything being provided to other employees. Given this, it is clear that the loan is being extended to Ms. Copps in a shareholder capacity and not an employee capacity. This means that the $349,000 principal amount would have to be included in her income for 2022. When the loan is repaid in 2027, the $349,000 repayment can be deducted from her income for that year (2027). As the principal amount is included in her income, there will be no taxable benefit for imputed interest. Medical Expense Loan As the loan is repaid prior to October 31, 2023 (the following taxation year end of the company), the principal amount does not have to be included in Ms. Copps' income for 2022. However, as it is interest free, there will be a taxable interest benefit. For 2022, the amount will be $408 [(2%)($35,000)(7/12)]. For 2023, the benefit will be $292 [(2%)($35,000)(5/12)]. Wine Purchase Loan As this loan is not repaid by October 31, 2023 (the following taxation year of the company), it has to be included in Ms. Copps' income for 2022. In 2024, the year it is repaid, the $100,000 can be claimed as a deduction in that year (ITA 20(1)(j)). As the principal amount is included in her income, there will be no taxable interest benefit. Vacation Loan This loan is repaid by the end of the following taxation year of the company and therefore the principal amount does not have to be included in Ms. Copps' 2022 income. As the interest rate of 3% is higher than the prescribed interest rate of 2%, there will be no interest benefit.

Part B - Income Tax Planning Issues Housing Loan There are no issues here in that the loan is structured in a manner that is consistent with loans to employees. This allows Ms. Copps to receive a home loan at a very favourable rate and, because she has received it as a result of her employee status, she does not have to include the principal in her income. Luxury Car Loan As the loan must be included in her income, it is not good tax planning for Ms. Copps to pay any interest. The interest income will be subject to corporate income tax, likely at the unfavourable investment income rates which frequently exceed 50%. As the car is used only for personal purposes, she cannot deduct any of the interest paid. If she had paid no interest on the loan, her tax situation would not have changed and the corporation would pay less income tax since there would have been no interest income. Medical Expense Loan The fact that no interest is paid on the loan results in a taxable benefit for Ms. Copps. If she had paid interest, the benefit would be reduced. However, the corporation would be subject to income tax on the interest income. Whether making the loan on an interest free basis represents good tax planning depends on whether the corporation's income tax rate is higher than the rate applicable to Ms. Copps. Wine Purchase Loan As the principal of the loan must be included in income, the tax planning question is whether it would have been more appropriate to simply pay an equivalent amount of salary to Ms. Copps. The advantage of the loan is that it can be repaid and deducted in future years. Given that the principal of the loan is included in Ms. Copp's income, making the loan interest free is the appropriate choice. Vacation Loan It was clearly not appropriate to charge interest at a rate in excess of the prescribed interest rate. The extra one percent did not reduce Mr. Copps' imputed interest benefit. In addition, it will be subject toe corporate income tax. There is also the question of whether any interest should have been paid on the loan. Making it interest free would create a taxable benefit for Ms. Copps. However, it would eliminate the need to pay corporate income tax on the interest income. As discussed under the comments on the medical expense loan, the answer depends on the relative income tax rates for Ms. Copps as compared to the income tax rates on investment income to the corporation. Type: ES Topic: Shareholder loans - ITA 15(2)

95) Jeannette Gutierrez is the sole shareholder of Gutierrez Inc., a CCPC. All of its income qualifies for the SBD and, in the province where it carries on its business, the combined federal/provincial income tax rate on such income is 12%. Jeannette's income places her in the 33% federal income tax bracket on any additional income. Her marginal income tax rate on additional income at the provincial level is 19%, resulting in a combined rate of 52%. The dividend tax credit in her province for non-eligible dividends is 29% of the dividend gross up. For the taxation year ending December 31, 2022, Jeannette expects Gutierrez Inc. to have $249,000 in net income. This is after a deduction of $232,000 in salary to her. Jeannette needs an additional $25,000 in cash in order to pay for renovations to her principal residence. Gutierrez Inc. has sufficient cash to pay either additional salary or additional taxable dividends in order to provide the necessary funds. The Company has no balance in its GRIP account. Required: Determine the amount that would be required in the way of salary and in the way of taxable dividends, in order to provide Jeannette with the required after tax cash of $25,000. Which alternative would have the lowest income tax cost to Jeannette and the corporation?

Answer: Required Salary Given her personal income tax rate of 52%, a salary of $52,083 [($25,000, (1 - .52)] would be required to provide Jeannette with an additional $25,000 in after tax cash. Tax Cost of Salary Alternative The net income tax cost of this alternative would be calculated as follows: Personal Income Tax on Salary [(52%)($52,083)] Income Tax Savings to the Corporation [(12%)($52,083)] Income Tax Cost of Salary Alternative

$27,083 ( 6,250) $20,833

Required Taxable Dividend Jeannette's income tax rate on non-eligible dividends would be calculated as follows: {[(115%)(52%)] - [(9/13 + 29%)(15%)]} = 45.07% This gives after tax retention of dividend income in the amount of 54.93% (1 - .4507). This means a taxable dividend of $45,512 ($25,000, .5493) will be required to provide an additional $25,000 of after tax cash. Income Tax Cost of Taxable Dividend Alternative The personal income tax on the taxable dividend would be calculated as follows: Non-Eligible Dividends Received Gross Up at 15% Additional Income Income Tax Rate Income Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 29%)($6,827)] Personal Income Tax on Taxable Dividend Alternative

$45,512 6,827 $52,339 52% $27,216 ( 6,706) $20,510

Subtracting the income tax of $20,510 from the actual dividends received of $45,512 gives the required $25,002 in after tax cash (the extra $2 is a rounding error). As the taxable dividend payment would not be deductible to the corporation, its payment would not change corporate income tax. This means that the only income tax cost would be the $20,510 in personal income tax that Jeanette would pay on the taxable dividends. Conclusion The salary alternative has an income tax cost which is $323 ($20,833 - $20,510) higher than the income tax cost of paying taxable dividends. The taxable dividend alternative would have the lower income tax cost. Since Jeanette has already received a salary of $232,000, CPP contributions and the Canada employment credit are not relevant to this analysis as they would have already been accounted for and would not affect the conclusion. Type: ES Topic: Employee compensation - salary vs. dividends (required amount)

96) Waylon Salas is the only shareholder of Wasal Inc., a CCPC. For the taxation year ending December 31, 2022, the Company has taxable income, before any consideration of salary to Waylon or the payment of taxable dividends, of $135,000. All of the taxable income qualifies for the SBD. Despite its taxable income of $135,000, repayment of a large loan has left Wasal Inc. with only $54,000 in cash that can be used to pay income tax, salaries, or dividends. Waylon's only income is either taxable dividends or salary from Wasal Inc. For 2022, he has personal tax credits of $5,200 (combined federal and provincial). Relevant information with respect to his current province of residence is as follows: • The income tax rate for individuals on the first $50,197 of taxable income is 8%. • The provincial dividend tax credit is equal to 32% of the gross up on non-eligible dividends. • All of the company's activities are confined to a province in which the applicable corporate income tax rate is 3% on income eligible for the SBD. The province does not charge any payroll taxes. Required: Ignore the required CPP contributions and the Canada employment tax credit when answering Parts A to D. A. Determine the after tax amount of cash that Waylon will retain if all of the company's cash is used to pay income tax and salary. B. Determine the after tax amount of cash that Waylon will retain if the Company pays the maximum possible taxable dividend. C. Can Waylon improve his after tax cash retention by using a combination of salary and taxable dividends? Explain your conclusion. D. If your answer to Part C is yes, determine the combination of salary and/or taxable dividends that will produce the maximum after tax cash retention for Waylon. Calculate the amount of this after tax cash retention. E. Briefly describe any other factors that Waylon should consider in deciding whether to receive taxable dividends or salary. Answer: Part A - Income Tax and Salary The combined federal/provincial income tax rate for Wasal Inc. is 12% (38% - 10% - 19% + 3%). As the corporation's taxable income exceeds the amount of cash available, the maximum amount of salary that can be paid (X) must be determined using the following simple equation: X = $54,000 - [(12%)($135,000 - X)] Solving this equation for X results in maximum salary of $42,955. This can be verified by the following calculation: Corporate Income before Salary Maximum Salary Corporate Taxable Income Corporate Income Tax Rate Corporate Income Tax

$135,000 ( 42,955) $ 92,045 12% $ 11,045

Payment of this amount of income tax will leave $42,955 ($54,000 - $11,045) available for the payment of salary.

With this amount of salary, Waylon would have the following amount of after tax cash: Salary Payment Income Tax before Credits [(15% + 8%)($42,955)] Personal Tax Credits (Given) After Tax Cash Retained (All Salary)

($9,880) 5,200

$42,955 ( 4,680) $38,275

Part B - All Taxable Dividends As taxable dividend payments are not deductible to the Company, income tax of $16,200 [(12%)($135,000)] will have to be paid. This leaves a maximum of $37,800 ($54,000 - $16,200) to be used for the payment of non-eligible dividends. When this is paid, the after tax retention by Waylon will be as follows: Non-Eligible Dividends Gross Up [(15%)($37,800)] Taxable Dividends Personal Income Tax Rate (15% + 8%) Income Tax before Tax Credits Personal Tax Credits (Given) Dividend Tax Credit [(9/13 + 32%)($5,670)] Income Tax ($942 in unused credits)

$37,800 5,670 $43,470 23% $ 9,998 ( 5,200) ( 5,740) Nil

As there is no income tax payable, Waylon will retain all of the $37,800 in taxable dividends. Part C - Possible Improvement While the income tax for Waylon is nil in Part B, subtracting personal and dividend tax credits from the tax balance gives a negative figure of $942. This means that the all taxable dividend approach leaves unused personal tax credits. While not conclusive, this suggests that there may be a better solution than either all salary or all taxable dividends. Part D - Salary/Dividend Combination To examine the possibility of an optimum solution using both salary and taxable dividends, consider the result that occurs when $1,000 in salary is paid in lieu of some taxable dividends. Because the deductible salary payment would reduce corporate income tax, taxable dividends would only have to be decreased by $880 [($1,000)(1 - 0.12)]. The income tax effects of this are calculated as follows: Increase in Salary $1,000.00 Decrease in Dividend [($1,000)(1 - .12)] ( 880.00) Decrease in Dividend Gross Up [(15%)($880.00)] ( 132.00) Decrease in Waylon’s Taxable Income ($ 12.00) Personal Income Tax Rate 23% Decrease in Income Tax Payable before Dividend Tax Credit ($ 2.76) Decrease in Dividend Tax Credit [(9/13 + 32%)($132.00)] 133.62 Increase in Personal Income Tax $ 130.86 The rate on a $1,000 increase in salary is 13.086% ($130.86 ÷ $1,000). Applying this rate to the unused credits of $942 (see Part C), gives a required increase in salary of $7,199 ($942 ÷ 0.13086).

Payment of this amount of salary would result in corporate income tax as follows: Corporate Income before Salary Salary Corporate Taxable Income Corporate Income Tax Rate Corporate Income Tax

$135,000 ( 7,199) $127,801 12% $ 15,336

Based on available cash of $54,000, the amount of taxable dividend that could be paid is as follows: Cash Available Corporate Income Tax Salary Payment Available for Taxable Dividends

$54,000 ( 15,336) ( 7,199) $31,465

After tax retention to Waylon would be as follows: Non-Eligible Dividends Received Gross Up [(15%)($31,465)] Taxable Dividends Salary Waylon’s Taxable Income Personal Tax Rate (15% + 6%) Income Tax before Tax Credits Personal Tax Credits (Given) Dividend Tax Credit [(9/13 + 32%)($4,720)] Income Tax

$31,465 4,720 $36,185 7,199 $43,384 23% $ 9,978 ( 5,200) ( 4,778) Nil

Amounts Received ($31,465 + $7,199) Personal Income Tax After Tax Cash Retained (Salary and Taxable Dividends)

$38,664 Nil $38,664

The comparative results for the three alternatives are as follows: All Salary $38,275 All Dividends $37,800 Salary/Dividend Combination $38,664 The combination of salary and taxable dividends will produce the maximum after tax cash retention for Waylon. It is a $389 ($38,664 - $38,275) improvement over the all salary alternative and an $864 ($38,664 $37,800) improvement over the all dividend alternative.

Part E - Other Factors Other factors that might be considered include: • The Canada employment tax credit was ignored in the calculations as it is not a credit against provincial or territorial income tax. However, it would allow the first $1,287 of salary to be received tax free. • If the effect of CPP was considered, both Waylon and Wasal Inc. would pay CPP contributions if salary was paid. Paying CPP contributions would allow him to receive CPP payments in the future, but would require both a personal and a corporate cash outflow at the present time. • If Wasal Inc. has benefits for employees, such as a private health services plan (PHSP), this could make being an employee (by taking salary) more advantageous. • Taxable dividends are not earned income for RRSP or child care expense purposes. • If Waylon has a CNIL balance, taxable dividend payments would reduce the account increasing the amount of the available capital gains deduction. • Waylon should consider declaring a bonus (a form of salary) to be paid after the end of the calendar year if he does not require the cash immediately. This would defer the personal income tax without affecting corporate income tax as long as the bonus was paid within 180 days of the taxation year of the corporation. • Though not relevant in this problem, some provinces and territories have payroll taxes. Type: ES Topic: Employee compensation - salary vs dividends (optimum mix)

97) Ms. Barbra Stickle is the only shareholder of Stickle Ltd., a CCPC. The Company has a December 31 taxation year end and, at December 31, 2022, Ms. Stickle determines that the taxable income of the Company for the year will be $24,200. The Company has this amount available in cash, prior to the payment of income tax, taxable dividends, or salary. All of the Company's income qualifies as active business income and any taxable dividends that it pays will be non-eligible. The Company's activities are confined to a province in which the corporate income tax rate is 3% on income eligible for the SBD. The province does not levy a payroll tax. Ms. Stickle has no other income. In her income tax bracket, the combined federal/provincial income tax rate for individuals is 25%. For non-eligible dividends, the provincial dividend tax credit has been set at 30% of the dividend gross up. Ms. Stickle has combined personal tax credits for the 2022 taxation year of $3,423. Required: A. Determine the after tax amount of cash that Ms. Stickle will retain if all of the Company's income is paid to her in the form of salary. Ignore CPP contributions and the Canada employment tax credit. B. Determine the after tax amount of cash that Ms. Stickle will retain if the Company pays the maximum possible taxable dividend. C. Can Ms. Stickle improve her after tax cash retention by using a combination of salary and taxable dividends? Explain your conclusion. D. Determine the combination of salary and/or taxable dividends that will produce the maximum after tax cash retention for Ms. Stickle. Calculate the amount of this after tax cash retention. E. Briefly describe any other factors that Ms. Stickle should consider in deciding whether to receive taxable dividends or salary.

Answer: Part A - All Salary As salary payments can be deducted by the corporation, the entire $24,200 can be paid as salary. Given this deduction, no income tax required of the Company for 2022. With a salary payment of $24,200, Ms. Stickle's after tax cash balance would be as follows: Salary Payment Income Tax before Credits [(25%)($24,200)] Personal Tax Credits (Given) After Tax Cash Retained (All Salary)

($6,050) 3,423

$24,200 ( 2,627) $21,573

Part B - All Taxable Dividends The income tax rate for Stickle Ltd. would be 12% (38% - 10% - 19% + 3%). As taxable dividend payments are not deductible to the Company, income taxes of $2,904 [(12%)($24,200)] will have to be paid, leaving a maximum of $21,296 to be used for the payment of taxable dividends. When this is paid, the after tax retention by Ms. Stickle will be as follows: Non-Eligible Dividends Gross Up [(15%)($21,296)] Taxable Dividends Personal Income Tax Rate Income Tax before Credits Personal Tax Credits (Given) Dividend Tax Credit [(9/13 + 30%)($3,194)] Income Tax Payable ($469 in unused credits)

$21,296 3,194 $24,490 25% $ 6,123 ( 3,423) ( 3,169) Nil

Taxable Dividends Income Tax After Tax Cash Retained (All Taxable Dividends)

$21,296 Nil $21,296

Part C - Possible Improvement While Ms. Stickle's income tax is nil in Part B, subtracting personal and dividend tax credits results in $469 of unused tax credits. While not conclusive, this suggests that there may be a better solution than either all salary or all taxable dividends.

Part D - Salary/Taxable Dividend Combination To examine the possibility of an optimum solution using both salary and taxable dividends, consider the result that occurs when $1,000 in salary is paid in lieu of some taxable dividends. Because the deductible salary payment would reduce corporate income tax, taxable dividends would only have to be decreased by $880 [($1,000)(1 - 0.12)]. The income tax effects of this can be calculated as follows: Increase in Salary Decrease in Taxable Dividend [($1,000)(1 - .12)] Decrease in Dividend Gross Up [(15%)($880.00)] Decrease in Ms. Stickle’s Taxable Income Personal Income Tax Rate Decrease in Income Tax before Dividend Tax Credit Decrease in Dividend Tax Credit [(9/13+ 30%)($132.00)] Increase in Personal Income Tax

$1,000.00 ( 880.00) ( 132.00) ($ 12.00) 25% ($ 3.00) 130.98 $ 127.98

The rate on a $1,000 increase in salary is 12.798% ($127.98 ÷ $1,000). Applying this rate to the unused credits of $469 (see Part C), gives a required increase in salary of $3,665 ($469 ÷ 0.12798) Based on this payment of salary, corporate income tax and funds available for payment of taxable dividends would be calculated as follows: Pre-Salary Corporate Income Salary Corporate Taxable Income Corporate Income Tax [(12%)($20,535)] Available for Taxable Dividends

$24,200 ( 3,665) $20,535 ( 2,464) $18,071

After tax retention to Barbra would be as follows: Non-Eligible Dividends Received Gross Up [(15%)($18,071)] Taxable Dividends Salary Ms. Stickle’s Taxable Income Personal Income Tax Rate Income Tax before Credits Personal Tax Credits (Given) Dividend Tax Credit [(9/13 + 30%)($2,711)] Income Tax Payable ($2 rounding difference)

$18,071 2,711 $20,782 3,665 $24,447 25% $ 6,111 ( 3,423) ( 2,690) Nil

Amounts Received ($3,665 + $18,071) Personal Income Tax After Tax Cash Retained (Salary and Taxable Dividends)

$21,736 Nil $21,736

The comparative results for the three alternatives are as follows: All Salary All Dividends Salary/Dividend Combination

$21,573 $21,296 $21,736

The combination of salary and taxable dividends will produce the maximum after tax cash retention for Ms. Stickle. It is a $163 ($21,736 - $21,573) improvement over the all salary alternative and a $440 ($21,736 - $21,296) improvement over the all dividend alternative. Part E - Other Factors Other factors that might be considered include: • The Canada employment tax credit was ignored in the calculations as it is not a credit against provincial or territorial income tax. However, it would allow the first $1,287 of salary to be received with a nil federal income tax cost. • If the effect of CPP was considered, both Ms. Stickle and Stickle Ltd. would pay CPP contributions if salary was paid. Paying CPP contributions would allow her to receive CPP payments in the future, but would require both a personal and a corporate cash outflow at the present time. • If Stickle Ltd. has benefits for employees, such as a private health services plan (PHSP), this could make being an employee (by taking salary) more advantageous. • Taxable dividends are not earned income for RRSP and child care expense purposes. • If she has a CNIL balance, dividend payments will reduce the account balance and increase the available amount of the capital gains deduction. • Ms. Stickle should consider declaring a bonus (a form of salary) to be paid after the end of the calendar year if she does not require the cash immediately. This would defer the personal income tax without affecting corporate income tax as long as the bonus was paid within 180 days of December 31 (by day 179). • Though not relevant in this problem, some provinces and territories have payroll taxes which could be incurred. Type: ES Topic: Employee compensation - salary vs dividends (optimum mix)

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 16 Rollovers under Section 85 16.1 Online Exercises 1) In the absence of ITA 85(1), income tax concepts would make it difficult to incorporate a business. Briefly explain the reason for this statement. Answer: The owner of a business carried on as a sole proprietorship will usually have various business properties with value including goodwill. The incorporation process requires selling the business property to the corporation. The ITA requires that FMV be used meaning that all business properties would be sold at FMV resulting in potential capital gains, recapture etc that would result in an income tax liability. When incorporating a business the corporation must also pay the FMV price however the corporation are often newly incorporated with little cash meaning that the corporation often pays for the business properties by issuing promissory notes and issuing shares. The result is that the individual seller has no additional cash to pay the income tax liability. These factors would discourage the incorporation of a business were it not for rollover provisions such as ITA 85(1). Type: ES Topic: Rollovers (ITA 85) - general concepts

2) Identify who can participate as a transferor in an ITA 85 rollover transaction and the reason for the transfer. Answer: • An individual who wishes to incorporate a business carried on as a sole proprietor. • A member of a partnership who wishes to incorporate their interest in the partnership. • A corporation that wishes to transfer property to another corporation. • A trust that wishes to transfer property to a corporation. • A partnership that wishes to incorporate a business carried on by the partnership. Type: ES Topic: Rollovers (ITA 85) - the basic rules

3) ITA 85 allows the rollover of many types of property to a corporation at specified elected amounts, a process that can lead to a deferral of income tax that avoids any immediate tax as a result of qualifying property transfers from certain persons and partnerships to a corporation. There are, however, certain types of property that are ineligible for this rollover treatment. Identify the types of property that do not qualify for rollover treatment and explain the reasons for their exclusion. Answer: Eligible property is defined under ITA 85(1.1) as including depreciable and non-depreciable capital property, resource property, and inventories other than real property inventory. Some of the principal exclusions are: • inventories of real property (e.g. real estate such as land and buildings); and • real property owned by a non-resident (unless used in a business carried on in Canada). The justification for these exclusions is the recognition that profits on inventories are fully included in income and that the disposition of certain property by non-residents may also lead to amounts that are fully included in income. The rules of ITA 85 could be used in a manner that would permit persons owning these type of properties to convert the appreciation in value to capital gains that are either only 50% required to be included in income in the case of Canadian residents or may be entirely exempt from Canadian income as a result of an income tax treaty in the case of non-residents. The property exclusions are designed to prevent that result. Type: ES Topic: Rollovers (ITA 85) - eligible property (ITA 85(1.1))

4) When a business is incorporated it is important that all of the business properties transferred to a corporation are listed in the election form. Why is this the case? Answer: The importance of ensuring that all business properties transferred to a corporation are listed is to take advantage of the rollover. If property are unintentionally left off the election the disposition of that property will not benefit from the rollover and will instead be considered to have been disposed of at FMV. This can result in income or capital gains that will result in an income tax liability. The most common example of this is goodwill. Type: ES Topic: Rollovers (ITA 85) - general concepts

5) When ITA 85(1) is being used, careful consideration must be given to the elected amount. Briefly explain the importance of the elected amount. Answer: The elected amount is a key concept in the rollover that ensures that a disposition to a corporation can occur with no or minimal income tax implications. Specifically the elected amount establishes three important objectives. • The elected amount becomes the POD of property disposed of by a person or partnership to the corporation. • The elected amount is used to establish the cost of consideration received by the transferor on the disposition of property to the corporation. • The elected amount represents the cost of property acquired by the corporation from the transferor. Type: ES Topic: Rollovers (ITA 85) - the basic rules

6) What is boot? What is its significance in the application of ITA 85(1)? Answer: Boot is a word with a legal meaning that generally refers to NSC received by the transferor as payment by the corporation for the purchase of property. NSC most often means debt issued by the corporation or debt of the transferor assumed by the corporation. The significance of "boot" is that the elected amount cannot be set at an amount that is less that the FMV of the boot. If the boot falls between the tax cost and FMV of property then the FMV of the boot will reset the acceptable range. Type: ES Topic: Rollovers (ITA 85) - the basic rules

7) In determining the elected amount to be chosen when using an ITA 85 rollover, there are general rules that set the range of amounts that apply to all eligible property. Briefly describe these rules. Answer: The general rule is that when transferring a specific eligible property that the elected amount can not exceed the FMV of that property or be set at an amount below its tax cost which varies for each type of property. These rules are designed to prevent the creation of artificial gains or losses. In addition the range of acceptable elected amounts may change depending on the FMV of NSC received. Type: ES Topic: Rollovers (ITA 85) - the basic rules

8) When an individual incorporates a business using the ITA 85 rollover, it is often suggested that the accounts receivable not be included in the rollover election. What is that the case? Answer: When accounts receivable are sold, any loss will be treated as a capital loss given that accounts receivables are non-depreciable capital property. This means that only one-half of the loss is actually deductible and restricted to a deduction only if there are taxable capital gains to apply the loss against. ITA 22 provides an alternative to ITA 85 where accounts receivables have declined in value. ITA 22 allows any loss to be fully deductible and allows the corporate purchaser to treat the accounts receivables as if they originated with that corporation. This allows the corporation to claim doubtful debt and bad debt reserves which would not otherwise be permitted with respect to purchased receivables. The ITA 22 elective treatment must be jointly elected by the transferor and the transferee corporation. Accounts receivables that have utilized the ITA 22 election are not permitted to use ITA 85. Type: ES Topic: Rollovers - accounts receivables & ITA 22 vs ITA 85

9) When an individual sells non-depreciable capital property to an affiliated person, any resulting capital loss is disallowed to that individual. Give three examples of affiliated persons. Answer: Affiliated persons are defined in the text as follows: A. An individual is affiliated to another individual only if that individual is a spouse or common-law partner. B. A corporation is affiliated with: 1. a person who controls the corporation; 2. each member of an affiliated group of persons who controls the corporation; and 3. the spouse or common-law partner of a person listed in (1) or (2). C. Two corporations are affiliated if: 1. each corporation is controlled by a person, and the person by whom one corporation is controlled is affiliated with the person by whom the other corporation is controlled; 2. one corporation is controlled by a person, the other corporation is controlled by a group of persons, and each member of that group is affiliated with that person; or 3. each corporation is controlled by a group of persons, and each member of each group is affiliated with at least one member of the other group. The required three examples can be selected from any example presented in this definition. Type: ES Topic: Affiliated persons - ITA 251.1

10) Why is there a special ITA 85 rule for depreciable property that considers property of the same class to be deemed disposed on in a specific order? Answer: When a business is incorporated all of the property is generally sold at the same time under one contract of purchase and sale. This means that when determining the elected amounts for depreciable property which use UCC as one of the factors a disposition of all property of a class at the same moment in time could result in recapture which could be avoided if there was an option to sell each depreciable property of a class in a specific order. ITA 85(1)(e.1) provides the individual who is incorporating a business with that opportunity. Type: ES Topic: Rollovers (ITA 85) - ordering of depreciable property (ITA 85(1)(e.1))

11) When eligible property is sold to a corporation using ITA 85, the transferor/seller can be paid with consideration that consists of a combination of common shares, preferred shares, and NSC. Briefly explain how the elected amount is applied to determine the cost of this consideration. Answer: The elected amount is applied in a specific order as a result of ITA 85(1)(f) and (g). The elected amount is first applied to any NSC in an amount equal to its FMV. If any part of the elected amount remains after the allocation to NSC, it would then be allocated to any preferred shares up to their FMV. If any elected amount remains after these first two allocations than the remaining amount is allocated to any common share consideration. Type: ES Topic: Rollovers (ITA 85) - allocating the elected amount (ITA 85(1)(f) & (g))

12) When a depreciable property is sold to a corporation using the rollover of ITA 85, the elected amount will usually be the UCC of the property. In these circumstances, the corporation is required to retain the capital cost of the property, with the difference between the capital cost and the UCC elected amount being treated as deemed CCA. What is the reason for this rule? Answer: If the transferor had simply sold the property for an amount in excess of the UCC but less than the capital cost, the difference between the UCC and the capital cost would be fully taxable recapture. If the corporate transferee was allowed to treat the transferor's UCC as its capital cost, in a later sale of the property, this difference would be treated as a capital gain, only one-half of which is required to be included in income. The requirement that the transferee retain the transferor's capital cost ensures that the potential recapture to the transferee is retained by the corporate purchaser. Type: ES Topic: Rollovers (ITA 85) - depreciable property (ITA 85(5)) recapture preservation

13) When a taxpayer sells depreciable property using the rollover of ITA 85, the elected amount may exceed the property's capital cost resulting in a capital gain. In such a case, how will the corporate transferee's capital cost for CCA purposes be determined? Answer: The capital cost for CCA purposes will be equal to the transferor's capital cost, plus one-half of any capital gain recognized by the transferor as a result of the transfer. ITA 13(7)(e). This rule however only applies if the seller and the corporation are non-arm`s length at the time of the disposition. Type: ES Topic: Rollovers (ITA 85) - depreciable property (ITA 13(7)(e)) capital cost limitation

14) In general, when there has been a disposition of eligible property using the rollover of ITA 85, a PUC reduction is frequently required. Explain briefly how the amount of this PUC reduction is determined. Answer: The PUC reduction is calculated by subtracting any excess of the elected amount over the FMV of NSC from the increase in legal stated capital that resulted from the issuance of shares by the corporation. The objective is that the PUC of the share consideration make up the difference between the elected amount and the FMV of NSC. Type: ES Topic: Rollovers (ITA 85) - PUC and the PUC reduction (ITA 85(2.1))

15) If more than one class of shares have been issued as share consideration as part of the ITA 85 rollover, how is the PUC allocated to the multiple classes of shares? Answer: The total PUC reduction is divided among the multiple classes of shares on the basis of their relative FMV which is almost always based upon their relative legal capital. The resulting amounts are then subtracted from the legal capital of each class of shares to determine the PUC for each class of shares. Type: ES Topic: Rollovers (ITA 85) - PUC and the PUC reduction (ITA 85(2.1))

16) An individual wishes to incorporate a business using ITA 85. The individual wants to structure the transaction in such a way as to maximize the amount of cash that can be withdrawn while avoiding any income tax liability with respect to the incorporation of that business. How should the transaction be structured to achieve that objective? Answer: To achieve the desired objectives the eligible property of the business should be transferred using an elected amount equal to the tax cost of each eligible property to avoid any income tax liability on the incorporation of that business. In addition NSC should be taken that equals the combined elected amounts for all eligible property. This means that that tax cost and PUC of any share consideration will be nil. In a typical transaction with a newly incorporated company there will likely be no cash available and the company will issue a promissory note which can be paid off over time without any income tax implications to the corporation or the individual transferor. Type: ES Topic: Rollovers (ITA 85) - tax planning considerations

17) One of the most useful types of tax planning available to individuals with significant income is income splitting with family members. In implementing an income splitting arrangement, one of the most useful planning techniques is to have an individual sell property to a corporation on a rollover basis under ITA 85. However, if such a transfer is not carefully structured, any income splitting objectives may not be achieved. What precautions must be taken in the restructuring to ensure that there are no income tax implications as a result of the incorporation of eligible property? Answer: An individual who participates in a rollover under ITA 85 where family members may be involved in the corporation must ensure that there are no shifts of value from the eligible property transfers that indirectly increase the FMV of shareholdings of family members and that the individual does not take back consideration that is less than the FMV of eligible property sold to the corporation. This means that the individual transferor must ensure that the FMV of the eligible property transferred to the corporation is equal to the FMV of consideration received from the corporation as payment for that eligible property. Abiding by this general rule should prevent any issues when allowing family members to become shareholders for minimal amounts. If there are concerns about the FMV of eligible property this can be remedied with a proper and genuine price adjustment clause (PAC). It is also important that family members use their own money to acquire shares of the family corporation. Type: ES Topic: Rollovers (ITA 85) - tax planning considerations

18) Mr. Lawson, who is a resident of the United States, owns a number of rental properties in various cities throughout Canada. Having reached 65 years of age, he would like to see these properties eventually transferred to his children. However, he does not have sufficient cash to pay the income taxes that would arise if the rental properties were gifted to the children because gifts are treated as dispositions at FMV. He is somewhat aware of the provisions of ITA 85 and is considering transferring the properties to a U.S. corporation in which his children would be the shareholders. Advise Mr. Lawson as to the soundness of this plan. Answer: Mr. Lawson's plan would not be an effective method of avoiding a disposition at FMV and therefore incurring a Canadian income tax liability. There are two reasons for this. First, in order to use the rollover of ITA 85, the property must be disposed of to a taxable Canadian corporation, rather than a non-resident corporation. However, if he were to incorporate a corporation in Canada, Mr. Lawson would have to deal with his second problem. This is the fact that ITA 85 does not apply to real property owned by a non-resident. In short, Mr. Lawson cannot use ITA 85 in his circumstances. Type: ES Topic: Rollovers (ITA 85) - tax planning considerations

19) ITA 85 contemplates a gifting transaction that results in the shift of value to a related person from the transferor. Explain how this can occur and the income tax consequences to both the transferor and the related person who benefits from the gift. Answer: A gift or shift of value occurs when the FMV of eligible property transferred to a corporation exceeds the value of the consideration paid by the corporation for that eligible property. In other words the result is that additional value has been left in the corporation. The gift occurs when that additional value increases the value of shares of that corporation owned by the related person. The tax consequence of a gift to the transferor would be that the amount of the gift would be added to the elected amount, resulting in additional income that is usually a capital gain which is equal to the gift amount. The related person would experience and increase in the FMV of their shares without any corresponding increase in the ACB of their shares. This would mean that on a subsequent sale of the related person's shares there would be a capital gain equivalent to the gift amount that would have been included in the income of the transferor. In effect the same amount would have been subject to income tax twice - once by the transferor and a second time by the related person. Type: ES Topic: Rollovers (ITA 85) - the gifting rule (ITA 85(1)(e.2))

20) A Section 85 rollover can result in an ITA 15(1) shareholder benefit to the transferor. Explain how this benefit can occur. Answer: An ITA 15(1) shareholder benefit will arise in a transaction with a corporation in which the individual is a shareholder if the value of consideration received by the individual as payment from the corporation exceeds the value of the property sold to that same corporation. This issue can be resolved in advance of the transaction through the proper use of a price adjustment clause (PAC). Type: ES Topic: Rollovers (ITA 85) - shareholder benefit ITA 15(1)

21) What is the purpose of the dividend stripping anti-avoidance rule of ITA 84.1? Answer: The purpose of ITA 84.1 is to prevent an individual from removing corporate surplus in the form of a capital gain rather than as a taxable dividend. As a rule capital gains are subject to lower rates of income tax than are taxable dividends encouraging this type of planning however if the capital gain also qualifies for the capital gains deduction then the income tax savings are considerable. The planning involves multiple transactions that include a non-arm's length sale of shares that often leave the original controlling shareholders position unchanged once the transactions have been completed. The mechanics of ITA 84.1 restrict what can be received as NSC on the non-arm's length share sale. If these limits are exceeded then all or a part of the capital gain that arose would be effectively converted to a deemed dividend. Type: ES Topic: Dividend stripping - ITA 84.1

22) What is the purpose of ITA 55(2), the capital gains stripping rules? Answer: The capital gains stripping rules are anti-avoidance rules designed to prevent a corporation from structuring transactions in a way that results in a sale of corporate property (typically shares of other corporations) without realizing a capital gain. Instead the transactions involve the capital gain being replaced by inter-corporate taxable dividends that are tax free under Part I because of the corporate taxable income deduction in ITA 112(1). ITA 55(2) applies numerous exceptions to narrow the focus to abusive transactions. Type: ES Topic: Capital gains stripping - ITA 55(2)

23) The taxpayer who is the seller/transferor in an ITA 85(1) rollover must generally receive at least a one share of the transferee corporation. Answer: TRUE Type: TF Topic: Rollovers (ITA 85) - the basic rules

24) The elected amount in an ITA 85(1) rollover can never be less than the FMV of NSC received. Answer: TRUE Type: TF Topic: Rollovers (ITA 85) - the basic rules

25) ITA 85(1) can only be used to incorporate a business. Answer: FALSE Explanation: ITA 85(1) can be used for many purposes and is not restricted to the incorporation of a business. Type: TF Topic: Rollovers (ITA 85) - the basic rules

26) For purposes of ITA 85(1), eligible property includes real property owned by a non-resident person that is used in the year in a business carried on by that non-resident person in Canada. Answer: TRUE Type: TF Topic: Rollovers (ITA 85) - the basic rules

27) In an ITA 85(1) rollover, consideration paid by the corporation to the seller/transferor can only include debt and common shares. Answer: FALSE Explanation: Consideration can also include NSC other than debt, as well as preferred shares. Type: TF Topic: Rollovers (ITA 85) - the basic rules

28) In a Section 85(1) rollover, the elected amount serves as POD of the property to the seller/transferor, the tax cost property to the corporation and the base for the tax cost of consideration paid by the corporation to the transferor. Answer: TRUE Type: TF Topic: Rollovers (ITA 85) - the basic rules

29) In the context of ITA 85(1) rollovers, the term "boot" refers to any consideration received by the transferor other than common shares. Answer: FALSE Explanation: The term refers only to NSC and this would exclude both preferred and common shares. Type: TF Topic: Rollovers (ITA 85) - the basic rules

30) The elected amount in an ITA 85(1) rollover can never be more than the FMV of the NSC. Answer: FALSE Explanation: The elected amount can never be more than the FMV of the eligible property sold to the corporation. Type: TF Topic: Rollovers (ITA 85) - the basic rules

31) For an individual, the only individuals that are "affiliated persons" are spouses or common-law partners. Answer: TRUE Type: TF Topic: Affiliated persons - ITA 251.1

32) When depreciable property is transferred in an ITA 85(1) rollover in a non-arm's length transaction, the seller/transferor may elect an amount in excess of the capital cost of the property as long as the amount does not exceed the FMV of the property. For the transferee corporation, the elected amount will be its capital cost for CCA purposes. Answer: FALSE Explanation: The capital cost for CCA purposes will be the transferor's capital cost, plus one-half of any capital gain that results from the transfer if the transaction is between non-arm's length persons. Type: TF Topic: Rollovers (ITA 85) - depreciable property (ITA 13(7)(e)) capital cost limitation

33) In an ITA 85(1) rollover, any required PUC reduction will be allocated first to preferred shares, with any remaining balance allocated to common shares. Answer: FALSE Explanation: Any required PUC reduction will be allocated to preferred and common shares using a pro-rata allocation based on their relative FMV. Type: TF Topic: Rollovers (ITA 85) - PUC and the PUC reduction (ITA 85(2.1))

34) If eligible property that is depreciable property is sold/transferred in an ITA 85 rollover in a non-arm's length transaction at an elected amount that results in a capital gain to the transferor, the cost to the transferee corporation for CCA purposes will be the transferor's cost, plus one-half of the excess of the elected amount over the transferor's capital cost. Answer: TRUE Type: TF Topic: Rollovers (ITA 85) - depreciable property (ITA 13(7)(e)) capital cost limitation

35) Which of the following properties CANNOT be sold/transferred to a corporation under the provisions of ITA 85(1)? A) Real property owned by a non-resident person and used in the year in a business carried on by that person in Canada. B) Canadian Resource Property. C) Non-Depreciable Capital Property owned by residents. D) Prepayments. Answer: D Explanation: D) Prepayments. Prepayments or prepaid expenses are not property for income tax purposes. Type: MC Topic: Rollovers (ITA 85) - eligible property (ITA 85(1.1))

36) Which of the following would NOT be considered part of the boot received by a transferor in an ITA 85(1) rollover? A) Bonds issued by the new corporation. B) Redeemable preferred shares of the new corporation. C) The assumption of transferor debt by the new corporation. D) A non-interest bearing promissory note issued by the new corporation. Answer: B Explanation: B) Redeemable preferred shares. This would be share consideration and not NSC. Type: MC Topic: Rollovers (ITA 85) - the basic rules

37) Which of the following statements fully describes a transferor or transferee under the provisions of ITA 85(1) and (2)? A) A transferee must be a corporation or trust. B) A transferee must be a taxable Canadian corporation. C) A transferor must be an individual or a corporation. D) Only individuals are permitted to be transferors under ITA 85(1). Answer: B Explanation: B) A transferee must be a taxable Canadian corporation. Type: MC Topic: Rollovers (ITA 85) - the basic rules

38) There is only one requirement specified in ITA 85(1) with respect to the consideration that the corporation must give the transferor in exchange for property transferred to the corporation. What is it? A) The consideration given to the transferor must include shares of the corporation. B) The consideration given to the transferor must include cash equal to the tax value of the property transferred to the corporation. C) The consideration given to the transferor must include cash equal to the FMV of the property transferred to the corporation. D) The consideration given to the transferor can only include cash and shares of the corporation. Answer: A Explanation: A) The consideration given to the transferor must include shares of the corporation. Type: MC Topic: Rollovers (ITA 85) - the basic rules

39) Which of the following would be considered part of the boot received by a transferor in an ITA 85(1) rollover? A) Common shares of the transferee. B) Redeemable preferred shares of the transferee. C) Non-redeemable preferred shares of the transferee. D) The assumption of transferor debt by the transferee. Answer: D Explanation: D) The assumption of transferor debt by the transferee. Type: MC Topic: Rollovers (ITA 85) - the basic rules

40) Which of the following scenarios would be most appropriate for an ITA 85 rollover? A) A shareholder of a corporation wishes to sell/transfer eligible property with a FMV of $150,000 and a tax cost of $100,000 to a corporation. B) A shareholder of a corporation wishes to sell/transfer eligible property with a FMV of $100,000 and a tax cost of $150,000 to a corporation. C) An individual shareholder of a corporation wishes to purchase eligible property with a FMV of $150,000 and a tax cost of $100,000 from a corporation. D) An individual shareholder of a corporation wishes to purchase eligible property with a FMV of $100,000 and a tax cost of $150,000 from a corporation. Answer: A Explanation: A) A shareholder of a corporation wishes to transfer eligible property with a FMV of $150,000 and a cost of $100,000 to a corporation. B) There are no benefits from using ITA 85 for property with accrued unrealized losses. C) ITA 85 requires a sale of property to a corporation not the reverse. D) ITA 85 requires a sale of property to a corporation not the reverse. Type: MC Topic: Rollovers (ITA 85) - the basic rules

41) Myron Cohen owns a retail store that he is currently operating as a sole proprietorship. In incorporating the business properties to a corporation under the provisions of ITA 85(1), the elected amount for the depreciable property will exceed the UCC but is less than the capital cost. This will result in: A) a capital gain. B) a terminal loss. C) recapture of CCA. D) a capital loss and recapture of CCA. Answer: C Explanation: C) Recapture of CCA. D) Can never have a capital loss on depreciable property. Type: MC Topic: Rollovers (ITA 85) - determining the elected amount

42) Mary Battle sells/transfers a depreciable property with a FMV of $100,000, a capital cost of $85,000, and a UCC of $47,500 to Battle Ltd. In consideration she receives cash of $60,000 and shares with a FMV of $40,000, for a total consideration value of $100,000. Using the ITA 85(1) rollover for the transfer, she elects an amount of $90,000. Which of the following statements is correct? A) Mary will have to report a capital gain of $5,000 and no recapture of CCA. B) Because she is using ITA 85, she does not have to report any income. C) Mary will only have to report recapture of CCA of $37,500. D) Mary will have to report a capital gain of $5,000 and recapture of CCA of $37,500. Answer: D Explanation: D) Mary will have to report a capital gain of $5,000 and recapture of $37,500. Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

43) ITA 85(1) sets out rules for establishing acceptable election amounts. Which of the following statements accurately describes the maximum elected amount or ceiling? A) The FMV of the share consideration given to the transferee. B) The FMV of the NSC given to the transferee. C) The FMV of the eligible property sold/transferred to the corporation. D) The FMV of the share and non-share consideration given to the transferee. Answer: C Explanation: C) The FMV of the eligible property sold/transferred to the corporation. Type: MC Topic: Rollovers (ITA 85) - determining the elected amount

44) In incorporating a business, accounts receivable can be sold using either ITA 22 or ITA 85(1), but not both. One advantage of using ITA 22 is: A) the seller will be able to deduct a capital loss. B) the corporation will be able to deduct a doubtful debt reserve after the sale. C) the seller will not have to add back to income any previously deducted doubtful debt reserve. D) the seller will have a capital loss that may be considered superficial. Answer: B Explanation: B) The corporation will be able to deduct a doubtful debt reserve after the sale. Type: MC Topic: Rollovers - accounts receivables & ITA 22 vs ITA 85

45) Eric Lehnserr owns 100% of Magnus Products Ltd. The shares were originally issued in 1993 for $20,000. In 1997, they were acquired by Eric's father for $25,000. In 2013, Eric's father died and left the shares to Eric. At that time, they were deemed to have been disposed of for $100,000. On the terminal return for Eric's father, a capital gain of $75,000 was reported, and tax was paid on the taxable capital gain of $37,500. Eric wishes to sell the shares, now valued at $250,000, to a wholly-owned holding corporation, electing under ITA 85(1). Magnus Products Ltd. has never paid dividends of any kind. Which one of the following amounts represents the minimum possible elected amount under ITA 85(1), ignoring the impact of consideration received? A) $20,000. B) $25,000. C) $100,000. D) $250,000. Answer: C Explanation: C) $100,000. This represents the ACB of the shares to Eric which was established when he inherited the shares from his father. Type: MC Topic: Rollovers (ITA 85) - determining the elected amount

46) Noor Ali sells shares in Ali Manufacturing Inc. to Ali Holdings Ltd., a corporation which she controls. The shares have an ACB of $35,000 and a FMV of $5,000. Noor elects to transfer the shares under ITA 85(1) at an elected amount of $5,000. The $30,000 capital loss on this transfer: A) will be disallowed but available to the corporation when the corporation is subject to an acquisition of control or is wound up. B) will be disallowed and added to the ACB of the shares to Ali Holdings Ltd. C) will be deductible to Noor Ali since the transferor is an individual. D) will be deductible to the corporation since the seller is an individual. Answer: B Explanation: B) will be disallowed and added to the ACB of the shares to Ali Holdings Ltd. Type: MC Topic: Rollovers (ITA 85) - superficial losses

47) Ali Manufacturing Inc. owns shares in Ali Holdings Inc, which it will sell to Family Holdings Ltd., an affiliated person, using ITA 85(1). The shares have an ACB of $35,000 and a FMV of $5,000, and an elected amount of $5,000 is used. The $30,000 capital loss on the sale: A) will be disallowed but available to the transferor if Family Holdings Ltd. is subsequently subject to an acquisition of control, is wound up under ITA 88(2) or the shares are sold to a non-affiliated person. B) will be disallowed with no opportunity to deduct the loss in the future. C) will be added to the ACB of the shares owned by Family Holdings Ltd. D) will be carried forward as a net capital loss to Family Holdings Ltd. Answer: A Explanation: A) will be disallowed but available to the transferor if Family Holdings Ltd. is subsequently subject to an acquisition of control, is wound up under ITA 88(2) or the shares are sold to a non-affiliated person. Type: MC Topic: Rollovers (ITA 85) - superficial losses

48) Mayumi Tajima sells/transfers a depreciable property to a CCPC in which she is the only shareholder. The property has a capital cost of $100,000 and a UCC of $64,000. Mayumi will elect an amount equal to the FMV of the property of $150,000. This transfer will result in: A) a taxable capital gain of $43,000 with the capital cost of the property to the corporation being $150,000. B) a taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the property to the corporation will be $100,000. C) a taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the property to the corporation will be $150,000. D) a taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the property to the corporation will be $125,000. Answer: D Explanation: D) a taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the property to the corporation will be $125,000. Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

49) Meng Zheng wishes to sell/transfer machinery to a corporation using ITA 85(1). This machinery is currently used to earn business income. It has a capital cost of $250,000, a UCC balance of $58,000 and a FMV of $50,000. Which of the following statements is correct? A) ITA 85(1) does not apply. The terminal loss will be denied permanently if the property is sold/transferred to the corporation. B) This proposed transfer can be completed using ITA 85(1). As an alternative, the property could be transferred to the corporation by selling it at FMV, in which case the terminal loss will be deductible in the year of transfer. C) ITA 85(1) does not apply. The POD are deemed to be the UCC amount, thereby disallowing the terminal loss. The terminal loss amount will be treated by the seller as separate depreciable property eligible for CCA in future years. D) This proposed transfer can be completed using ITA 85(1). The terminal loss will be deductible to the transferor as long as the corporation continues to use the machinery to earn income. Answer: C Explanation: C) ITA 85(1) does not apply. The POD are deemed to be the UCC amount, thereby disallowing the terminal loss. The terminal loss amount will be treated by the seller as separate depreciable property eligible for CCA in future years. Type: MC Topic: Rollovers (ITA 85) - superficial losses

50) Bridget sold land to her wholly owned corporation using ITA 85(1). The land had an ACB of $150,000 and a FMV of $250,000 at the time of the sale. The property was mortgaged for $50,000. As consideration for the sale, Bridget received cash of $200,000 and preferred shares with legal capital of $10,000. The corporation assumed the mortgage. Which one of the following is the elected transfer price (first) and the ACB of the preferred shares (second) as a result of ITA 85(1)? A) $250,000 and Nil B) $250,000 and $240,000 C) $260,000 and $50,000 D) $150,000 and Nil Answer: A Explanation: A) Elected amount = $200,000 + $50,000 = $250,000 of NSC ACB = $250,000 - $200,000 - $50,000 = Nil Note: that there is excess consideration in this case since the total FMV of consideration of $260,000 exceeds the FMV of the property transferred of $250,000. The $10,000 excess would be treated as a shareholder benefit under ITA 15(1) which would result in an ACB adjustment of $10,000 to the shares under ITA 52(1). ITA 84(1) would not apply since it requires an increase in PUC. ITA 85(2.1) reduces the PUC by $10,000 to nil. Type: MC Topic: Rollovers (ITA 85) - determining the elected amount

51) Using the provisions of ITA 85(1), Marion sold land that is capital property to a corporation in which she owned all of the shares. The ACB of the land was $150,000 and it had a FMV of $225,000. In order to utilize a $25,000 capital loss, she chose an elected amount of $175,000. What is the ACB of the land to the corporation? A) $175,000. B) $150,000. C) $225,000. D) $162,500 Answer: A Explanation: A) $175,000. Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

52) Under the provisions of ITA 85(1), Jason sold land that is capital property to a corporation in which he owned all of the shares. The ACB of the land was $120,000 and the FMV was $390,000. The elected amount was $120,000. As consideration, Jason received a promissory note for $60,000, preferred shares with a FMV of $210,000, and common shares with a FMV of $120,000. Which one of the following is the ACB of the preferred shares (first) and the ACB of the common shares (second)? A) Nil and $60,000. B) $60,000 and Nil. C) $38,181 and $21,819. D) $210,000 and $120,000. Answer: B Explanation: B) $60,000 and Nil. Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

53) Under the provisions of ITA 85(1), Marx Stanislawski sells a depreciable property to a corporation in which he is the sole shareholder. The FMV of the property is $500,000, its capital cost of $320,000 and the UCC is $180,000. Marx elects an amount of $180,000. As consideration, he receives cash of $140,000, and common shares with a legal capital of $360,000. What is the required PUC reduction for the common shares? A) $320,000. B) $220,000. C) $180,000. D) $40,000. Answer: A Explanation: A) $320,000 [$360,000 - ($180,000 - $140,000)]. Type: MC Topic: Rollovers (ITA 85) - PUC and the PUC reduction (ITA 85(2.1))

54) Harold Warren incorporated Warren Enterprises Ltd. at the beginning of the current year. In addition to a $100,000 cash contribution for common shares, Harold contributed property with an ACB of $100,000 and a FMV of $150,000. In return, he receives 25,000 common shares in the new corporation. If he elects the minimum amount the ACB of all of his common shares will be: A) $100,000. B) $150,000. C) $200,000. D) $250,000. Answer: C Explanation: C) $200,000 ($100,000 + $100,000). Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

55) Barry Hicks owns a building with a capital cost of $200,000, a UCC balance of $150,000, and a FMV of $600,000. This property is sold/transferred to a corporation using the provisions of ITA 85(1). The corporation assumes the $50,000 mortgage on the building. In return for the building, Barry receives a promissory note for $40,000 and preferred shares with a FMV of $510,000. If Barry elects the minimum amount the ACB of the preferred shares is: A) nil. B) $60,000. C) $110,000. D) $600,000. Answer: B Explanation: B) $60,000 ($150,000 - $40,000 - $50,000). Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

56) Daniel Kwok incorporates his business by selling the business properties to a corporation. The total elected amounts for all properties is $678,000. The FMV of the business properties is $1,250,000. Daniel receives the following consideration: Cash Preferred shares of the new corporation with a FMV Common shares of the new corporation with a FMV

$150,000 500,000 600,000

How will the elected amount be allocated between: the NSC and the preferred and common shares issued? A) $150,000; $0; $528,000 B) $150,000; $500,000; $28,000 C) $150,000; $528,000; $0 D) $150,000; $264,000; $264,000 Answer: B Explanation: B) $150,000; $500,000; $28,000 Type: MC Topic: Rollovers (ITA 85) - allocating the elected amount (ITA 85(1)(f) & (g))

57) Jason sold land that is capital property to a corporation in which he owned all of the shares using the provisions of ITA 85(1). The ACB of the land was $60,000 and it had a FMV of $120,000 at the time of the sale. In order to utilize a capital loss, Jason elected a transfer price of $105,000. What is the ACB of the land to the corporation? Jason received $120,000 in share consideration. A) $60,000 B) $82,500 C) $105,000 D) $120,000 Answer: C Explanation: C) $105,000 Type: MC Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

58) Mary Hanson owns 1,000 shares of Hanson Operations that have an ACB and PUC of $20,000. Their current FMV is $200,000. Electing under ITA 85(1) in a manner that will maximize tax deferral, the shares are sold to Hanson Holdings Inc., in return for $8,000 in cash and 250 Hanson Holdings shares with a FMV of $192,000. The PUC of the Hanson Holdings shares will be: A) $12,000. B) $20,000. C) $192,000. D) $200,000. Answer: A Explanation: A) $12,000. The PUC reduction will be $180,000 [$192,000 - ($20,000 - $8,000)]. This leaves a PUC of $12,000 ($192,000 - $180,000). Type: MC Topic: Rollovers (ITA 85) - PUC and the PUC reduction (ITA 85(2.1))

59) Mr. Fingula sells property to a corporation all of the shares of which are owned by his daughter. In which of the following situations do the gifting rules apply? A) The property is sold to the corporation at an elected amount that is equal to the FMV of the property and the consideration. B) The property has a FMV that exceeds the greater of the FMV of the consideration received and the elected amount. C) The property has a FMV that is less than the greater of the FMV of the consideration received and the elected amount. D) The property is sold to the corporation at an elected amount that is less than the FMV of the property and Mr. Fingula receives total consideration equal to that FMV. Answer: B Explanation: B) The property has a FMV that exceeds the greater of the FMV of the consideration received and the elected amount. Type: MC Topic: Rollovers (ITA 85) - the gifting rule (ITA 85(1)(e.2))

60) Ms. Bimo sells a non-depreciable capital property to a corporation in which all of the common shares are owned by her son. The property has a FMV of $150,000 and an ACB of $35,000. Ms. Bimo chooses an elected amount of $35,000 and the corporation issues her a promissory note in the amount of $35,000 and preferred shares with a FMV of $100,000. The ITA 85(1)(e.2) excess amount (i.e. indirect gift) is: A) $15,000. B) $115,000. C) $100,000. D) $35,000. Answer: A Explanation: A) $15,000 [$150,000 - $135,000] B) $115,000 [150,000 — 35,000] C) $100,000 [the FMV of the preferred shares] D) $35,000 [ the amount of the promissory note] Type: MC Topic: Rollovers (ITA 85) - the gifting rule (ITA 85(1)(e.2))

61) Bruno owns 75% of the common shares of a corporation. His adult daughter owns the remaining 25%. During the current year, Bruno sells shares from his investment portfolio that had an ACB of $55,000 to the corporation. These shares had a FMV of $85,000 at the time of the sale and Bruno chose an elected amount of $55,000 under the provisions of ITA 85(1). As consideration for the sale, he received a promissory note for $55,000 and preferred shares with a FMV of $20,000. Which one of the following is the minimum elected amount (first) and the ACB of the preferred shares (second)? A) $55,000 and $20,000 B) $55,000 and $30,000 C) $65,000 and $20,000 D) $65,000 and Nil Answer: D Explanation: D) Elected amount = $55,000 + [$85,000 - ($55,000 + $20,000) gift] = $65,000 ACB = $55,000 - $55,000 = Nil The gift does not affect the ACB of share consideration. Type: MC Topic: Rollovers (ITA 85) - the gifting rule (ITA 85(1)(e.2))

62) The use of ITA 85(1) to sell property to a corporation would result in a benefit to a shareholder under ITA 15(1) in a situation where: A) the FMV of the property sold is less than the FMV of the total consideration received. B) a capital gain is triggered on the transfer resulting in taxable income to the transferor. C) the elected amount is received entirely in the form of NSC. D) the FMV of the property sold is greater than the FMV of the consideration received. Answer: A Explanation: A) The FMV of the property sold is less than the FMV of the total consideration received. Type: MC Topic: Rollovers (ITA 85) - shareholder benefit ITA 15(1)

63) Which of the following statements involving ITA 85 rollovers with excess consideration is correct? A) Only one-half of the shareholder benefit under ITA 15(1) will be added to income. B) The amount of the shareholder benefit under ITA 15(1) will be added to the ACB of the consideration received by the transferor. C) The amount of the shareholder benefit under ITA 15(1) will always be added to the ACB of the share consideration received by the transferor. D) The amount of the shareholder benefit under ITA 15(1) will be added to the PUC of the consideration received by the transferor. Answer: B Explanation: B) The amount of the ITA 15(1) benefit will be added to the ACB of the consideration received by the transferor. Type: MC Topic: Rollovers (ITA 85) - shareholder benefit ITA 15(1)

64) Which of the following conditions is NOT required for ITA 84.1 (dividend stripping) to apply? A) The shares that are disposed of must have been held as capital property. B) The corporation, the shares of which are sold, must be associated with the purchaser corporation immediately after the disposition of the shares. C) The share disposition must be made to a corporation with which the taxpayer does not deal at arm's length. D) The taxpayer who disposes of the shares must be a Canadian resident other than a corporation. Answer: B Explanation: B) The corporation, the shares of which are sold, must be associated with the purchaser corporation immediately after the disposition of the shares. Type: MC Topic: Dividend stripping - ITA 84.1

65) Jean Hill, a Canadian resident, sells all of the shares she owns in Hill Inc. to a new company, Jean Ltd. The Hill Inc. shares have an ACB and PUC of $100,000, and a FMV of $1,000,000. The transfer is made under the provisions of ITA 85(1) at an elected amount of $850,000. Ms. Hill receives cash of $850,000 and retractable preferred shares with a FMV of $150,000. What are the immediate income tax consequences to Ms. Hill, as a result of the disposition of shares? A) A capital gain of $900,000. B) An ITA 84.1(1) deemed dividend of $750,000 and no capital gain. C) An ITA 84.1(1) deemed dividend of $750,000, plus a capital gain of $150,000. D) A capital gain of $750,000. Answer: B Explanation: B) An ITA 84.1(1) deemed dividend of $750,000. The PUC reduction will be $150,000, leaving the shares with a PUC of nil. Given this, the deemed dividend totals $750,000 ($150,000 + $850,000 - $100,000 - $150,000). Type: MC Topic: Dividend stripping - ITA 84.1

66) Which of the following conditions is NOT required for ITA 55(2) (capital gains stripping) to apply? A) There is a disposition of shares by a corporation to an arm's length person. B) The corporation that has disposed of the shares has received taxable dividends that are deductible under ITA 112(1) as part of a series of transactions which includes the taxable dividend. C) One of the purposes of the dividend received by the corporation was to significantly reduce a capital gain on the disposition of shares. D) The corporation selling the shares must be a resident private corporation. Answer: D Explanation: D) The corporation selling the shares must be a resident private corporation. Type: MC Topic: Capital gains stripping - ITA 55(2)

67) Parent Co. owns 100% of the shares of Son Co. The Son Co. shares have a FMV of $950,000, and an ACB of $75,000. Son Co. has safe income of $60,000. In order to complete a sale of Son Co. to Unrelated Co., an arm's length corporation, Son Co. borrows $875,000 from a bank, and uses the funds to pay a taxable dividend to Parent Co of the same amount. As a result, the FMV of the Son Co. shares drops to $75,000. At this point, the shares are sold to Unrelated Co. for $75,000. Under these circumstances, the income tax consequences to Parent Co. are: A) a taxable capital gain of $437,500 and no dividends. B) Taxable dividend of $875,000 and no capital gains. C) a taxable capital gain of $437,500 and a taxable dividend of $875,000. D) a taxable capital gain of $ 407,500 and a taxable dividend of $60,000. Answer: D Explanation: A) A taxable capital gain of $437,500 [ (1/2)($950,000 - $75,000)] B) Dividend income of $875,000 [the actual amount paid as a taxable dividend] C) A taxable capital gain of $437,500 [(1/2)($950,000 - $75,000)] and a taxable dividend of $875,000 [the actual amount paid as a dividend] D) A taxable capital gain of $ 407,500 and a taxable dividend of $60,000 TCG = (1/2)($950,000 - $75,000 $60,000) = $407,500] and [safe income amount of $60,000] Type: MC Topic: Capital gains stripping - ITA 55(2)

68) Natasha Pulski's carries on a business as a sole proprietor. The business has inventory with a FMV of $47,000 and a tax cost of $55,000. In addition, it has land that is capital property with a FMV of $275,000 and an ACB of $83,000. She intends to sell the land and inventory to a new corporation, taking back $47,000 in cash for the inventories and $122,000 in cash for the land. If she uses ITA 85(1), what is the possible range of amounts that can be elected for the two properties? If, in each case, she elects the lowest amount, what are the income tax consequences for Ms. Pulski? Answer: Inventories - The $47,000 FMV is the only possible elected amount. The sale would result in a loss of $8,000 ($55,000 - $47,000), an amount that would be fully deductible. Some nominal share consideration would have to be received. Technically cash should be $46,999 and shares for $1 to avoid difficulties. Land - The minimum elected amount would be the NSC of $122,000 and the maximum would be the FMV of $275,000. Electing the minimum amount would result in a taxable capital gain of $19,500 [($122,000 - $83,000)(1/2)]. Some nominal share consideration would also have to be received. Type: ES Topic: Rollovers (ITA 85) - determining the elected amount

69) Natalie Bushkin carries on a business as a sole proprietor. The business has land that is capital property with a FMV of $322,000 and an ACB of $147,000. In addition, the business has inventory with a FMV of $23,000 and a tax cost of $25,000. She intends to sell the land and inventory to a new corporation, taking back $160,000 in cash for the land and $23,000 in cash for the inventory. If she uses ITA 85(1) for the sale, what is the possible range of amounts that can be elected for the two properties? If, in each case, she elects the lowest possible amount, what are the income tax consequences for Natalie? Answer: Land - The acceptable range would be between the NSC of $160,000 and the FMV of $322,000. Electing the minimum amount of $160,000 would result in a taxable capital gain of $6,500 [(1/2)($160,000 $147,000)]. Inventories - The $23,000 amount is the only possible elected amount. Electing this amount would result in a loss of $2,000 ($23,000 - $25,000). Since each property disposition requires that share consideration be received the NSC should be $22,999 and the share consideration $1 to avoid any difficulties with the election. Type: ES Topic: Rollovers (ITA 85) - determining the elected amount

70) Ms. Helen Nasser has two depreciable properties - a Class 1 building and Class 8 equipment. The properties are to be sold to a corporation using ITA 85(1). Relevant information on the two properties are as follows: Class 1 $390,000 134,000 191,000 246,000

FMV of the Property UCC of Class (Last property in Class) Capital Cost FMV of NSC

Class 8 $15,000 10,000 27,000 11,000

What is the possible range of amounts that can be elected for the two properties? If, in each case, she elects the lowest possible amount, what are the income tax consequences for Ms. Nasser? Answer: Class 1 Property - The range would be from $246,000 (the FMV of the NSC) to a maximum of $390,000 (FMV). Election of $246,000 would result in recapture of $57,000 ($191,000 - $134,000) and a taxable capital gain of $27,500 [($246,000 - $191,000)(1/2)]. Class 8 Property - The range for the Class 8 property would be from $11,000 (the FMV of the NSC) to a maximum of $15,000 (FMV). Electing the minimum amount of $11,000 would result in recapture of $1,000 ($11,000 - $10,000). Type: ES Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

71) Joan Barkin carries on a business as a sole proprietor. She plans to sell the depreciable properties of her business to a corporation in which she will be the sole shareholder. Relevant information on the properties are as follows: Class 1 $263,000 122,000 201,000 100,000

FMV of the Property UCC of Class (Last property in Class) Capital Cost FMV of NSC

Class 8 $46,000 52,000 81,000 46,000

Joan would like to defer as much income tax as possible on the sale. What is the minimum elected amount she can choose for each property? Justify your answers. If she elects the minimum amount, what are the income tax consequences for Joan in each case? Answer: Class 1 Property - The maximum elected amount would be the FMV of $263,000 and the minimum amount would be the $122,000 UCC. The UCC should be chosen as the elected amount, as there will be no income tax consequences. Note, however, an additional $22,000 ($122,000 - $100,000) in NSC could have been received without resulting in any income tax consequences. Class 8 Property - With respect to the Class 8 property, the FMV is less than the UCC. In this case, ITA 13(21.2) prevents the application of ITA 85(1) and, if the property is sold to the corporation, the POD are deemed to be the UCC amount of $52,000. There will be no income tax consequences associated with the transfer and the corporation will retain the transferor's original capital cost of $81,000. While a terminal loss could have been recognized if the property had been sold to an arm's length person, it would have been disallowed in this case because Joan's corporation is an affiliated person. Type: ES Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

72) Using ITA 85(1), Tom Leung sold non-depreciable capital property to a corporation using an elected amount of $86,800. The property has a capital cost and ACB of $86,800 and a FMV of $246,400. As consideration, he receives a promissory note for $71,400, preferred shares with a FMV of $74,200, and common shares with a FMV of $100,800. Indicate the ACB of the consideration received by Mr. Leung. Answer: The ACB amounts would be calculated as follows: Elected Amount ACB of Promissory Note (FMV) Excess Elected Amount ACB of Preferred Shares* ACB of Common Shares (Residual)

$86,800 ( 71,400) $15,400 ( 15,400) Nil

*Remainder available as it is less than the FMV of $74,200.

Type: ES Topic: Rollovers (ITA 85) - allocating the elected amount (ITA 85(1)(f) & (g))

73) Karl Young owns a non-depreciable capital property with an ACB of $220,000 and a FMV of $460,000. He intends to sell the property to a corporation using the provisions of ITA 85(1), using an elected amount of $220,000. As consideration he will receive a promissory note for $110,000, preferred shares with a FMV of $90,000, and common shares with a FMV of $260,000. Indicate the ACB of the consideration received by Karl. Answer: The ACB would be calculated as follows: Elected Amount ACB of Promissory Note (FMV) Excess Elected Amount ACB of Preferred Shares (FMV) ACB of Common Shares (Residual)

$220,000 ( 110,000) $110,000 ( 90,000) $ 20,000

Type: ES Topic: Rollovers (ITA 85) - allocating the elected amount (ITA 85(1)(f) & (g))

74) Using ITA 85(1), Ms. Robyn Tunney sells non-depreciable capital property to a corporation at an elected amount of $91,200. The property has an ACB of $91,200 and a FMV of $187,200. As consideration, she receives a promissory note for $66,400, preferred shares with a FMV and legal capital of $77,600, and common shares with a FMV and legal capital of $43,200. Indicate the ACB of all consideration received and the PUC of the preferred and common shares that were issued as consideration to her. Answer: The ACB would be calculated as follows: Elected Amount ACB of Promissory Note (FMV) Excess Elected Amount ACB of Preferred Shares* ACB of Common Shares (Residual)

$91,200 ( 66,400) $24,800 ( 24,800) Nil

*Remainder available as it is less than the FMV of $77,600. The total PUC reduction would be calculated as follows: Increase in Legal Capital ($77,600 + $43,200) Less the excess of: Elected Amount Over the FMV of NSC PUC Reduction

$120,800 ($91,200) 66,400

( 24,800) $ 96,000

Note that this reduction is equal to the deferred gain on the election of $96,000 ($187,200 - $91,200). The PUC reduction would be allocated on the basis of relative FMV as follows: Preferred Shares [($96,000)($77,600 ÷ $120,800)] Common Shares [($96,000)($43,200 ÷ $120,800)] Total PUC Reduction

$61,669 34,331 $96,000

Subsequent to applying this reduction, the remaining PUC of the two classes of shares would be as follows:

Legal Capital PUC Reduction (From Preceding) Total PUC

Preferred Shares $77,600 ( 61,669) $15,931

Common Shares $43,200 ( 34,331) $ 8,869

Note that the sum of these two amounts totals $24,800 ($15,931 + $8,869), the total ACB of the preferred and common shares, as well as the difference between the elected amount of $91,200 and the FMV of the NSC of $66,400. Type: ES Topic: Rollovers (ITA 85) - allocating the elected amount & PUC/PUC reduction

75) Christine Rue sells a non-depreciable capital property to a corporation, using the provisions of ITA 85(1). The property has a FMV of $342,000 and an ACB of $111,000. She uses an elected amount of $111,000. As consideration she receives: • Cash of $21,000. • Preferred shares with a FMV of $50,000. • Common shares with a FMV of $271,000. Indicate the ACB and the PUC of the preferred shares and common shares that were issued to Christine. Answer: The ACB amounts would be calculated as follows: Elected Amount FMV of Non-share consideration (Cash) Excess Elected Amount ACB of Preferred Shares (FMV) ACB of Common Shares (Residual)

$111,000 ( 21,000) $ 90,000 ( 50,000) $ 40,000

The total PUC reduction would be calculated as follows: Increase in Legal Capital ($50,000 + $271,000) Less The excess of: Elected Amount Over the FMV of NSC PUC Reduction

$321,000 ($111,000) 21,000

( 90,000) $231,000

Note that this reduction is equal to the deferred gain on the election of $231,000 ($342,000 - $111,000). The PUC reduction would be allocated on the basis of relative FMVs as follows: Preferred Shares [($231,000)($50,000 ÷ $321,000)] Common Shares [($231,000)($271,000 ÷ $321,000)] Total PUC Reduction

$ 35,981 195,019 $231,000

Subsequent to applying this reduction, the remaining PUC of the two classes of shares would be as follows:

Legal Capital PUC Reduction (From Preceding) Total PUC

Preferred Shares $50,000 ( 35,981) $14,019

Common Shares $271,000 ( 195,019) $ 75,981

Note that the sum of these two amounts equals $90,000 ($14,019 + $75,981), the total ACB of the preferred and common shares, as well as the difference between the elected amount of $111,000 and the FMV of the NSC of $21,000. Type: ES Topic: Rollovers (ITA 85) - allocating the elected amount & PUC/PUC reduction

76) Jack Wild owns a depreciable property with a capital cost and ACB of $120,000 and a FMV of $180,000. It is the only property in its CCA class and the UCC balance for the class is $98,000. He uses ITA 85(1) to set the amounts for income tax purposes and sells this property to a new corporation at an elected amount of $160,000. In return for the property, he receives a promissory note for $160,000, in addition to common shares with a FMV of $20,000. What are the income tax implications of this transaction for both Jack Wild and the corporation? Include in your answer the ACB and PUC of the shares. Answer: The income tax consequences to Mr. Wild and the corporation can be described as follows: • Mr. Wild will have a taxable capital gain of $20,000 [(1/2)($160,000 - $120,000)]. • Mr. Wild will have recapture of CCA of $22,000 ($120,000 - $98,000). • The shares issued as consideration will have an ACB of nil (elected amount of $160,000, less the FMV of NSC of $160,000). The PUC of the shares would also be nil (legal capital of $20,000, less a PUC reduction of $20,000). • The corporation will have a depreciable property with an ACB of $160,000 and a deemed capital cost for CCA and recapture purposes, of $140,000 [$120,000 + (1/2)($160,000 - $120,000)]. The corporation will retain the capital cost of $180,000 and be deemed to have claimed CCA of $40,000. Type: ES Topic: Rollovers (ITA 85) - elected amount (income tax consequences)

77) Darlene Saunders has carried on a business as a sole proprietor for over 10 years. The business has been very successful and has now reached a point where it is producing more income than she requires for her personal needs. Given this, she would like to incorporate the business to a new corporation, using the provisions of ITA 85(1). On January 5, 2022, the sale date, the tangible property of the business have total tax costs of $375,000. The combined FMV is $1,190,000. In addition, because of the success of the business, it is estimated that the business has goodwill the FMV of which is $320,000. At the transaction date, business liabilities are $115,000. The elected amount for the transfer will equal the tax costs of $375,000. The corporation will assume the $115,000 in business liabilities. In addition, Darlene will receive: • A promissory note of $85,000. • Preferred shares with a FMV of $100,000. • Common shares with a FMV of $1,210,000. Any taxable dividends paid by the corporation will be non-eligible. Required: Determine the following: 1. The ACB of each type of consideration received by Darlene. 2. The PUC of each class of shares issued as consideration by the new corporation. 3. The income tax consequences to Darlene if the new preferred shares are redeemed at their FMV. Answer: Part 1 - The ACB of the consideration received will total the elected amount of $375,000. It will be allocated as follows: Elected Amount FMV of NSC ($115,000 + $85,000) Excess Elected Amount ACB of Preferred Shares (FMV) ACB of Common Shares (Residual)

$375,000 ( 200,000) $175,000 ( 100,000) $ 75,000

Part 2 - The PUC of the shares issued must be reduced as follows: Increase in Legal Capital ($100,000 + $1,210,000) Less The excess of: Elected Amount Over The FMV of NSC PUC Reduction

$1,310,000 ($375,000) 200,000

( 175,000) $1,135,000

This PUC reduction would be split between the preferred shares and the common shares on the basis of their relative FMVs: Preferred Shares [($100,000/$1,310,000)($1,135,000)] Common Shares [($1,210,000/$1,310,000)($1,135,000)] Total PUC Reduction

$ 86,641 1,048,359 $1,135,000

Subsequent to applying this reduction, the remaining PUC of the two classes of shares would be as follows: Preferred Shares $100,000 ( 86,641) $ 13,359

Legal Capital PUC Reduction (From Preceding) Total PUC

Common Shares $1,210,000 ( 1,048,359) $ 161,641

Part 3 - The income tax consequences of the preferred share redemption would be as follows: Proceeds of Redemption PUC ITA 84(3) Deemed Dividend (Non-Eligible)

$100,000 ( 13,359) $ 86,641

Proceeds of Redemption Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Loss Inclusion Rate Allowable Capital Loss

$100,000 ( 86,641) $ 13,359 ( 100,000) ($ 86,641) 1/2 ($ 43,321)

The grossed up non-eligible dividend of $99,637 [(115%)($86,641)] would qualify for a federal dividend tax credit of $8,997 [(9/13)(15%)($86,641)]. The allowable capital loss is disallowed (ITA 40(3.6)) and would be added to the ACB of the remaining shares (e.g. the common shares). Type: ES Topic: Rollovers (ITA 85) - comprehensive problem

78) Samuel Rosen incorporates a new corporation, arranging to have all of its common shares issued to his adult daughter for cash of $500. Mr. Rosen then sells, using ITA 85(1), non-depreciable capital property with an ACB of $67,500 and a FMV of $87,750. The transfer is made at an elected amount of $67,500. As consideration for this property, the corporation gives Mr. Rosen a promissory note for $67,500 and preferred shares with a FMV and a legal capital of $20,250. A CRA reassesses on the basis that the actual FMV of the property transferred is $100,000. Mr. Rosen reluctantly accepts the reassessment. There is no price adjustment clause (PAC) in the purchase and sale agreement. After the reassessment, Mr. Rosen and his daughter sell their shares for their FMV. Describe the income tax consequences of these transactions for both Mr. Rosen and his daughter. How would these income tax consequences differ if Mr. Rosen had simply sold the non-depreciable capital property for its post-reassessment FMV of $100,000?

Answer: As Mr. Rosen sold property with a post-reassessment FMV of $100,000 and received consideration with a FMV of $87,750 ($67,500 + $20,250), he has made a gift to his daughter of $12,250 ($100,000 - $87,750). The income tax consequences for Mr. Rosen and his daughter are as follows: Deemed Elected Amount = Deemed POD ($67,500 + $12,250) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$79,750 ( 67,500) $12,250 1/2 $ 6,125

Elected Amount (Original) FMV of NSC ACB of Preferred Shares

$67,500 ( 67,500) Nil

The required PUC reduction and resulting PUC would be calculated as follows: Increase in Legal Capital Less excess of: Revised Elected Amount Over FMV of NSC PUC Reduction

$20,250 ($79,750) 67,500

PUC of Preferred Shares ($20,250 - $8,000)

( 12,250) $ 8,000 $12,250

The FMV of the common shares is $12,750 ($100,000 + $500 - $67,500 - $20,250). The sale of the shares for their FMV would result in the following: Preferred $20,250 Nil $20,250 1/2 $10,125

POD (FMV) ACB Capital Gain Inclusion Rate Taxable Capital Gain

Common $12,750 ( 500) $12,250 1/2 $ 6,125

If the property had simply been sold for its $100,000 post-reassessment FMV, there would have been a $16,250 [(1/2)($100,000 - $67,500)] taxable capital gain. With the effect of ITA 85(1) there is a $6,125 taxable capital gain, along with a $10,125 taxable capital gain on the sale of the preferred shares. This is the same $16,250 amount that would have occurred on the direct sale of the non-depreciable capital property. Unfortunately, because the common shares have increased in value by the amount of the gift with no corresponding increase in the ACB, there is an additional $6,125 taxable capital gain (one-half the amount of the gift) on the sale of the daughter's common shares. Type: ES Topic: Rollovers (ITA 85) - the gifting rule (ITA 85(1)(e.2))

79) Derek Blunt wishes to sell non-depreciable capital property to a corporation that is owned by his adult daughter. The corporation is a newly incorporate company in which $100 in cash was invested for common shares. Derek's daughter owns all of the common shares of this new corporation. At the time of the sale to the corporation, the non-depreciable capital property has an ACB of $250,000 and an estimated FMV of $400,000. The sale is made at an elected amount of $250,000, with Derek receiving a promissory note for $250,000 and preferred shares with a legal capital and FMV of $150,000. The CRA reassessed on the basis that the actual FMV was $475,000. Mr. Blunt reluctantly accepts this value and does not object to the reassessment. There is no price adjustment clause (PAC) included in the purchase and sale agreement. After the reassessment, Derek and his daughter both sell their shares in the new corporation for the FMV. Describe the income tax consequences of these transactions for both Mr. Blunt and his daughter. How would these income tax consequences differ if Mr. Blunt had simply sold the non-depreciable capital property for its post-reassessment FMV of $475,000?

Answer: As Mr. Blunt sold property with a post-reassessment FMV of $475,000 and received consideration with a FMV of $400,000 ($150,000 + $250,000), he has indirectly made a gift to his daughter of $75,000 ($475,000 - $400,000). The income tax consequences to Mr. Blunt and his daughter are: Revised Elected Amount = Revised POD ($250,000 + $75,000) ACB Capital Gain Inclusion Rate Taxable Capital Gain

$325,000 ( 250,000) $ 75,000 1/2 $ 37,500

Elected Amount (Original) FMV of NSC ACB of Preferred Shares

$250,000 ( 250,000) Nil

The required PUC reduction and resulting PUC would be calculated as follows: Increase in Legal Capital Less excess of: Revised Elected Amount Over FMV of NSC PUC Reduction

$150,000 ($325,000) 250,000

PUC of Preferred Shares ($150,000 - $75,000)

( 75,000) $ 75,000 $75,000

The FMV of the common shares is $75,100 ($475,000 + $100 - $250,000 - $150,000). The sale of the shares for their FMV would result in the following: Preferred $150,000 Nil $150,000 1/2 $ 75,000

POD (FMV) ACB Capital Gain Inclusion Rate Taxable Capital Gain

Common $75,100 ( 100) $75,000 1/2 $37,500

If the property had simply been sold for its post-reassessment FMV of $475,000, there would have been a $112,500 [(1/2)($475,000 - $250,000)] taxable capital gain. With the effect of ITA 85(1) there is a $37,500 taxable capital gain on the disposition, along with a $75,000 taxable capital gain on the sale of the preferred shares. This is the same $112,500 amount that would have occurred on the direct sale of the non-depreciable capital property. Unfortunately, because the common shares have increased in value by the amount of the gift with no corresponding increase in the ACB, there is an additional $37,500 taxable capital gain (one-half the amount of the gift) on the sale of the daughter's common shares. Type: ES Topic: Rollovers (ITA 85) - the gifting rule (ITA 85(1)(e.2))

80) In 2021, Mrs. Jeanne Keanings uses ITA 85(1) to set the tax amounts on the sale of non-depreciable capital property to a CCPC in which she is the sole shareholder. The ACB of the property is $136,000 and she believes that it has a FMV of $283,000. In consideration for this property, Mrs. Keanings receives a promissory note for $283,000 and preferred shares with a nominal value. In 2022 Jeanne is reassessed by the CRA on the basis that the FMV of the transferred property was only $224,000. She accepts the reassessment without objection. There is no price adjustment clause (PAC) in the purchase and sale agreement. Describe the income tax consequences of the transfer and the reassessment. Indicate the ACB of the consideration, and the ACB and PUC of the preferred shares after the reassessment. Answer: On the original sale in 2021, Jeanne would have recognized a taxable capital gain of $73,500 [(1/2)($283,000 - $136,000)]. Based on the original estimate of the FMV of the property sold, there was no mismatch in value that would have led to a ITA 15(1) shareholder benefit. With the value of the property reassessed at $224,000, there is excess consideration and an ITA 15(1) shareholder benefit. FMV of Consideration Reassessed FMV of Property ITA 15(1) Shareholder Benefit

$283,000 ( 224,000) $ 59,000

With the FMV of the property reassessed to $224,000 the elected amount cannot exceed that amount. This would result in a revised capital gain, calculated as follows: Revised elected amount ACB Capital Gain Inclusion Rate Capital Gain After Reassessment

$224,000 ( 136,000) $ 88,000 1/2 $ 44,000

As a result of the reassessment, income for 2021 is increased by $29,500 as shown in the following table: Shareholder Benefit Taxable Capital Gain after Reassessment Reversal of Reported Taxable Capital Gain Total Addition to Net Income

$59,000 44,000 ( 73,500) $29,500

The ITA 15(1) benefit of $59,000 would be added to the ACB of the NSC, resulting in the following revision: Revised Elected Amount Add: ITA 15(1) Shareholder Benefit ACB of NSC

$224,000 59,000 $283,000

Both the ACB and the PUC of the preferred shares would be nil. Type: ES Topic: Rollovers (ITA 85) - shareholder benefit ITA 15(1)

81) In 2021, Martha Stuart sells a non-depreciable capital property to a CCPC in which she is the sole shareholder using the provisions of ITA 85(1). The ACB of the property is $270,000 and it has an estimated FMV of $550,000. In return for this property, Ms. Stuart receives a promissory note for $550,000 and preferred shares with a nominal value. In 2022, Martha is reassessed by the CRA on the basis that the FMV of the transferred property was only $415,000. She accepts the reassessment without objection. There is no price adjustment clause (PAC) written into the purchase and sale agreement. Describe the income tax consequences of the sale and the reassessment. Indicate the ACB of the consideration, and the ACB and PUC of the preferred shares after the reassessment. Answer: On the original sale in 2021, Martha would have recognized a taxable capital gain of $140,000 [(1/2)($550,000 - $270,000)]. Based on the original estimate of the FMV of the property sold, there would not have been any ITA 15(1) shareholder benefit. When the FMV of the property is reassessed at $415,000, there is excess consideration and an ITA 15(1) benefit. FMV of Consideration Reassessed FMV of Property ITA 15(1) Shareholder Benefit

$550,000 ( 415,000) $135,000

With the FMV of the property reassessed to $415,000, there would be a revised capital gain as follows: Revised Elected Amount ACB Capital Gain Inclusion Rate Taxable Capital Gain after Reassessment

$415,000 ( 270,000) $145,000 1/2 $ 72,500

As a result of the reassessment, 2021 Net Income will be increased by $67,500 as shown in the following table: Shareholder Benefit Revised Taxable Capital Gain after Reassessment Reversal of Reported Taxable Capital Gain Total Revision to 2021 Net Income

$135,000 72,500 ( 140,000) $ 67,500

The ITA 15(1) benefit of $135,000 would be added to the ACB of the promissory note, resulting in the following ACB: Elected Amount Add: ITA 15(1) Shareholder Benefit ACB of the promissory note

$415,000 135,000 $550,000

Both the ACb and PUC of the preferred shares would be nil. Type: ES Topic: Rollovers (ITA 85) - shareholder benefit ITA 15(1)

82) Mr. Marshal Stack owns 100% of the outstanding shares of Stack Ltd., a corporation whose shares qualify for the capital gains deduction. The shares have a PUC and an ACB of $132,000 and a FMV of $699,000. The Company has no balance in its GRIP account. On January 31, 2022, Mr. Stack uses ITA 85(1) to sell these shares to Stack's Investments Ltd., at an elected amount of $699,000. As consideration, he receives a promissory note for $390,000 and preferred shares with a FMV and a legal capital of $309,000. Mr. Stack owns all of the shares of Stack's Investments Ltd. and has made no previous use of the capital gains deduction. What are the income tax consequences of this transaction to Mr. Stack? Include in your answer the ACB and the PUC of the newly issued preferred shares. Answer: Mr. Stack (an individual) has sold shares of a corporation to a second corporation, a corporation in which he does not deal at arm's length, and the two corporations are connected subsequent to the sale. As a consequence, ITA 84.1 applies. Given this, the income tax consequences of this transaction to Mr. Stack are as follows: Increase in Legal Capital Less Excess, if any, of: Greater of PUC and ACB of shares sold Over the FMV of NSC PUC Reduction

$309,000 ($132,000) 390,000

PUC of New Shares ($309,000 - $309,000)

Nil $309,000 Nil

Increase in Legal Capital FMV of NSC Total Less The sum of: Greater of PUC and ACB of shares sold PUC Reduction ITA 84.1 Deemed Dividend (Non-Eligible)

$309,000 390,000 $699,000 ($132,000) ( 309,000)

( 441,000) $258,000

Elected POD for Subject Shares Less: ITA 84.1 Deemed Dividend Modified POD ACB of Subject Shares Capital Gain Inclusion Rate Taxable Capital Gain

$699,000 ( 258,000) $441,000 ( 132,000) $309,000 1/2 $154,500

ACB of New Shares ($699,000 - $390,000)

$309,000

The grossed up non-eligible dividend of $296,700[(115%)($258,000)] would qualify for a federal dividend tax credit of $26,792 [(9/13)(15%)($258,000)]. In addition, there would be a taxable capital gain of $154,500 that would be eligible for the capital gains deduction. If Mr. Stack claims the deduction, he may need to pay alternative minimum tax (AMT). Type: ES Topic: Dividend stripping - ITA 84.1

83) Foral Inc., a Canadian public company, owns 80% of the outstanding shares of Matlin Ltd. Matlin Ltd. is also a Canadian public company. The shares of Matlin Ltd. have an ACB of $125,000 and a FMV of $940,000. The safe income of Matlin Ltd. is $285,000. Foral Inc. wishes to dispose of these shares, and Sored Company, an arm's length corporation, is interested in purchasing them. In order to accomplish this goal, the Matlin Ltd. shares are transferred to Sored, using the provisions of ITA 85(1), at an elected amount of $125,000. As consideration for the transferred shares, Foral Inc. receives redeemable voting preferred shares issued by the Sored Company that have a FMV of $940,000. The ACB and PUC of these shares are equal to the elected amount of $125,000. Foral Inc. redeems these shares immediately. Describe the income tax consequences to Foral Inc. of the redemption. Answer: In the absence of ITA 55(2), the results for Foral would be as follows: Proceeds Of Redemption Less: PUC of Preferred Shares ITA 84(3) Deemed Dividend

$940,000 ( 125,000) $815,000

POD Less: ITA 84(3) Dividend Modified POD ACB Capital Gain

$940,000 ( 815,000) $125,000 ( 125,000) Nil

As the ITA 84(3) dividend is deductible under ITA 112(1) the Company would have succeeded in disposing of the Martin shares without income tax consequences even though shares were sold at FMV to an arm's length person. However, as the redemption was in conjunction with a disposition to an arm's length purchaser, ITA 55(2) alters this result. ITA 55(2) would deem $587,000 ($815,000, less $228,000, 80% of the Safe Income of $285,000) of the ITA 84(3) dividend to not be a dividend ITA 55(2) would then deem the $587,000 to be POD. The result for Foral would be a capital gain determined as follows: Modified POD Add: Deemed POD Total POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$125,000 587,000 $712,000 ( 125,000) $587,000 1/2 $293,500

There would be a tax free taxable dividend equal to the Safe Income of $228,000 [(80%)($285,000)] and a taxable capital gain of $293,500. Type: ES Topic: Capital gains stripping - ITA 55(2)

84) Several years ago, Ms. Fox acquired a small apartment building for $950,000 ($225,000 for the land and $725,000 for the building). The property has a current FMV $1,200,000 ($300,000 is attributable to the land and $900,000 to the building). Ms. Fox would like to incorporate the property using ITA 85(1) to minimize the income tax implications. At the beginning of the current year, the building had a UCC of $582,000. The elected amount chosen is $807,000 ($225,000 for the land + $582,000 for the building). The consideration paid by the corporation to Ms. Fox for the property is 12,000 common shares. Shortly after the rollover is completed, Ms. Fox sells all of the common shares she received to to Mr. Hound, an arm's length person, for POD of $1,200,000. Required: A. Describe the income tax consequences for Ms. Fox of using ITA 85(1) and selling the common shares. B. How do these results compare with the income tax consequences of simply selling the building directly to Mr. Hound for $1,200,000?

Answer: Part A - Sale using ITA 85(1) As the $807,000 elected amount was equal to the tax costs of the property, there would be no income tax consequences associated with the rollover. The income tax consequences of selling the common shares would be calculated as follows: Total Elected Amount FMV of NSC ACB - Common Shares (Residual)

$ 807,000 Nil $ 807,000

POD ACB - Common Stock Capital Gain Inclusion Rate Taxable Capital Gain

$1,200,000 ( 807,000) $ 393,000 1/2 $ 196,500

Part B - Direct Sale (No ITA 85(1) Rollover) The income tax consequences of selling the property directly would be as follows: Land $300,000 ( 225,000) $ 75,000 1/2 $ 37,500

POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

Building $900,000 ( 725,000) $175,000 1/2 $ 87,500

Based on these calculations, the overall tax effect of the direct sale would be as follows: Taxable Capital Gain on Land Taxable Capital Gain on Building Recapture on Building ($725,000 - $582,000) Total additional income

$ 37,500 87,500 143,000 $268,000

The reason for the difference lies in the type of income that the two approaches produce. The total amount of income, before consideration of preferential treatment, that you would expect on this transaction is $393,000 ($1,200,000 - $807,000). When ITA 85(1) is used, this full amount is received as a capital gain, resulting in an income inclusion of $196,500. In contrast, with the direct sale, only $250,000 ($75,000 + $175,000) of the total income is received as a capital gain, with the remaining $143,000 ($393,000 - $250,000) being received as fully taxable recapture. The result is a higher amount included in income under the direct sale alternative. Type: ES Topic: Rollovers (ITA 85) - comprehensive problem (direct sale vs indirect sale with use of ITA 85(1))

85) The following three independent cases involve sale/transfer of property to a corporation using ITA 85(1). Case One - Land with a cost of $423,000 and a FMV of $647,000 is sold to a corporation in exchange for $47,000 in NSC and $600,000 in preferred shares (FMV and legal capital). Case Two - Inventories with a FMV of $87,400 and a cost of $63,200 are sold in exchange for $70,000 in NSC and $17,400 in common shares (FMV and legal capital). Case Three - Depreciable property with a FMV of $124,000, an ACB and capital cost of $115,000, and a UCC of $52,992, is sold for NSC of $100,000, preferred shares with a FMV and legal capital of $10,000, and common shares with a FMV and a legal capital of $14,000. Required: For each of the three Cases provide the following information: A. The minimum and maximum elected amount under the provisions of ITA 85.(1) B. Assuming the minimum elected amount is chosen, the amount of capital gain or business income to be included in the income of the seller. C. Again assuming that the minimum elected amount is chosen, determine the ACB and PUC of the preferred share and common share consideration. Your answer should include the determination of any shareholder benefit under ITA 15(1) or deemed dividend under ITA 84(1) that will arise on the sale, or explain why there is no shareholder benefit or deemed dividends. Answer: Case One - Land A. The acceptable range of elected amounts is between the ACB of $423,000 and the FMV of $647,000. B. Using the minimum elected amount of $423,000 would result in no additional income. C. The ACB of the preferred shares would be calculated as follows: Elected Amount FMV of NSC ACB - Preferred Shares

$423,000 ( 47,000) $376,000

The PUC reduction would be calculated as follows: Increase in Legal Capital Less The excess, if any, of: Elected Amount Over FMV of NSC PUC Reduction

$600,000 ($423,000) 47,000

( 376,000) $224,000

This would leave the PUC of the preferred shares at $376,000 ($600,000 - $224,000). There are no deemed dividends under ITA 84(1) or shareholder benefits under ITA 15(1) since the FMV of the property sold equals the FMV of the consideration received.

Case Two - Inventories A. The range of values would be between the $70,000 in FMV of NSC and the FMV of $87,400. B. Using the minimum $70,000 elected amount would result in business income of $6,800 ($70,000 $63,200). C. The ACB of the common shares would be calculated as follows: Elected Amount Less: FMV of NSC ACB - Common Shares

$70,000 ( 70,000) Nil

The PUC reduction would be calculated as follows: Increase in Legal Capital Less the excess, if any, of: Elected Amount Over the FMV of NSC PUC Reduction

$17,400 ($70,000) 70,000

( Nil) $17,400

This would leave the PUC of the common shares at nil ($17,400 - $17,400). There are no deemed dividends under ITA 84(1) or shareholder benefits under ITA 15(1) since the FMV of the property sold equals the FMV of the consideration received. Case Three - Depreciable Property A. The range would be between the FMV of the NSC of $100,000 and the FMV of $124,000. B. Using the $100,000 elected amount would result in business income (recapture) of $47,008 ($100,000 $52,992). C. The ACB of the preferred shares and common shares would be calculated as follows: Elected Amount Less: FMV of NSC ACB - Preferred Shares and Common Shares

$100,000 ( 100,000) Nil

The PUC reduction on the preferred and common shares would be calculated as follows: Increase in Legal Capital ($10,000 + $14,000) Less the excess, if any, of: Elected Amount Over the FMV of NSC PUC Reduction

$24,000 ($100,000) 100,000

( Nil) $24,000

The PUC of both the preferred and common shares would be nil ($24,000 - $24,000). There are no deemed dividends under ITA 84(1) or shareholder benefits under ITA 15(1) since the FMV of the property sold equals the FMV of the consideration received. Type: ES Topic: Rollovers (ITA 85) - short cases [determining the elected amount & tax consequences]

86) Janice Tabor has a depreciable property that she wishes to sell to a new corporation using ITA 85(1). The property has an ACB and capital cost of $450,000, a UCC of $225,000, and a FMV of $675,000. The transfer will take place at an elected amount of $400,000. Ms. Tabor is considering the following alternative forms of consideration:

Promissory Note Preferred Shares Common Shares Total

One $150,000 150,000 375,000 $675,000

Alternative Two $375,000 300,000 Nil $675,000

Three $300,000 Nil 375,000 $675,000

All of the amounts in the preceding table are shown at their respective FMVs. Required: A. For each of the three alternatives, determine the ACB of the consideration received. B. For each of the three alternatives, determine the legal capital and PUC of the share consideration.

Answer: Part A - ACB of Consideration The ACB of the consideration, under the three alternatives, would be calculated as follows:

Elected Amount Less: FMV of NSC Available for Share Consideration Less: ACB - Preferred Stock ACB - Common Stock (Residual) The ACB of the NSC is equal to its FMV.

Alternative Two $400,000 ( 375,000) $ 25,000 ( 25,000) N/A

Three $400,000 ( 300,000) $100,000 N/A $100,000

Alternative Two $300,000 Nil $300,000

Three Nil $375,000 $375,000

One

Alternative Two

Three

$525,000 ($400,000) 150,000 ( $250,000) $275,000

$300,000 ($400,000) 375,000 ($ 25,000) $275,000

$375,000 ($400,000) 300,000 ($100,000) $275,000

One $400,000 ( 150,000) $250,000 ( 150,000) $100,000

Part B - Legal Capital and PUC The legal capital for the two classes of shares would be as follows:

Preferred Shares Common Shares Total Legal Capital

One $150,000 375,000 $525,000

The required PUC reduction would be calculated as follows:

Increase in Legal Capital - All Shares (A) Elected Amount FMV of NSC Elected Amount, Less NSC (B) Required PUC Reduction (A - B)

Alternative One - In Alternative One, the PUC reduction would have to be split between the two classes of shares on the basis of their relative FMVs. The relevant calculation would be as follows: Preferred Shares: [($275,000)($150,000 ÷ $525,000)] = $78,571 Common Shares: [($275,000)($375,000 ÷ $525,000)] = $196,429 This would leave PUC of $71,429 ($150,000 - $78,571) for the preferred shares, and PUC of $178,571 ($375,000 - $196,429) for the common shares. Alternative Two - In Alternative Two, the entire PUC reduction of $275,000 would be allocated to the preferred shares, leaving PUC of $25,000 ($300,000 - $275,000). Alternative Three - In Alternative Three, the entire PUC reduction of $275,000 would be allocated to the common stock, leaving PUC of $100,000 ($375,000 - $275,000). Type: ES Topic: Rollovers (ITA 85) - PUC and the PUC reduction (ITA 85(2.1))

87) Paul Kwan owns a rental property that he purchased years ago for $780,000. Of this total, $280,000 was for the land and $500,000 for the building. An appraiser has estimated that the current FMV of the land is $425,000 and the current FMV of the building is $775,000. The current UCC of the building is $391,000. Mr. Kwan wishes to use ITA 85(1) when he sells this property to a new corporation, Kwan Ltd. in which he will be the sole shareholder. Case A - Mr. Kwan elects to sell the property at an elected amount of $280,000 for the land and $391,000 for the building. In return, he receives shares in the new corporation with a FMV and legal capital of $1,200,000 ($425,000 + $775,000). Case B - Mr. Kwan elects to sell the property at an elected amount of $425,000 for the land and $391,000 for the building. The consideration consists of shares in the new corporation with a FMV and legal capital of $1,200,000. Case C - Mr. Kwan elects to sell the property at an elected amount of $425,000 for the land and $391,000 for the building. The consideration consists of a promissory note for $816,000 and shares in the new corporation with a FMV and legal capital of $384,000. Required: For each of the preceding three independent cases, determine: • The immediate income tax consequences of the sale. • The tax costs of the land and building to the corporation. • The ACB of the share consideration. • The PUC of the share consideration.

Answer: Case A Immediate Income Tax Consequences - As the elected amounts for the land and building equal their respective tax costs, there are no immediate income tax consequences resulting from the sale. Tax Cost of the Land and Building - The tax cost of the land (ACB) would be the elected amount of $280,000. The tax cost of the building (UCC) would be the elected amount of $391,000. Note, however, the new corporation would retain the old capital cost of $500,000, with the $109,000 difference being treated as deemed CCA. ACB of Shares - The ACB of the shares issued by the corporation would be calculated as follows: Elected Amount ($280,000 + $391,000) Less: FMV of NSC ACB of Shares

$671,000 Nil $671,000

PUC Of Shares - The required PUC reduction and resulting PUC would be calculated as follows: Legal Capital of Shares Less Excess, if any, of: Elected Amount Over FMV of NSC PUC Reduction

$1,200,000 ($671,000) Nil

PUC of Shares ($1,200,000 - $529,000)

( 671,000) $ 529,000 $ 671,000

Case B Immediate Income Tax Consequences - As the elected amount for the land of $425,000 exceeds the $280,000 ACB of the land, there is a taxable capital gain of $72,500 [(1/2)($425,000 - $280,000)]. As the elected amount of the building is equal to its tax cost, there are no immediate income tax consequences for the disposition of the building. Tax Cost of the Land and Building - The tax cost of the land (ACB) would be the elected amount of $425,000. The tax cost of the building (UCC) would be the elected amount of $391,000. Once again, the new corporation would retain the old capital cost of $500,000, with the $109,000 difference being treated as deemed CCA. ACB of Shares - The ACB of the shares issued by the corporation would be calculated as follows: Elected Amount ($425,000 + $391,000) Less: FMV of NSC ACB of Shares

$816,000 Nil $816,000

PUC of Shares - The required PUC reduction and resulting PUC would be calculated as follows: Legal Capital of Shares Less Excess, if any, of: Elected Amount Over FMV of NSC PUC Reduction

$1,200,000 ($816,000) Nil

PUC of Shares ($1,200,000 - $384,000)

( 816,000) $ 384,000 $ 816,000

Case C Immediate Income Tax Consequences - As the elected amount for the land of $425,000 exceeds the $280,000 ACB of the land, there is a taxable capital gain of $72,500 [(1/2)($425,000 - $280,000)]. As the elected amount of the building is equal to its tax cost, there are no immediate income tax consequences with respect to the disposition of the building. Tax Costs of the Land and Building - The tax cost of the land (ACB) would be the elected amount of $425,000. The tax cost of the building (UCC) would be the elected amount of $391,000. Note, however, that the new corporation would retain the old capital cost of $500,000, with the $109,000 difference being treated as deemed CCA. ACB of Shares - The ACB of the shares issued by the corporation would be calculated as follows: Elected Amount ($425,000 + $391,000) Less: FMV of NSC ACB of Shares

$816,000 ( 816,000) Nil

PUC of Shares - The required PUC reduction and resulting PUC would be calculated as follows: Legal Capital of Shares Less Excess, if any, of: Elected Amount Over the FMV of NSC PUC Reduction

$384,000 ($816,000) 816,000

PUC of Shares ($384,000 - $384,000)

Type: ES Topic: Rollovers (ITA 85) - comprehensive 3 cases with depreciable property

Nil $384,000 Nil

88) During the current year, Mr. Thomas Nelson sold a depreciable property to a new corporation in which he is the sole shareholder. The taxation year of the corporation is December 31. The depreciable property was the only remaining property in its CCA class. It had been purchased several years ago for $225,000. Because of increasing difficulty in purchasing this type of property, it's FMV os now $316,000. At the time of the sale, the balance in the UCC class was $189,600. In order to offset a $40,000 capital loss on a sale of investments in the current year, Mr. Nelson elects an amount of $265,000 ($225,000 + $40,000). As consideration, Mr. Nelson receives a promissory note for $150,000, preferred shares with a FMV of $50,000, and common shares with a FMV of $116,000. Required: Describe the income tax implications resulting from this transaction. Your answer should include both current income tax implications, and the determination of tax attributes (ACB, Capital cost, PUC etc) that will have future tax implications. Answer: Income as a result of the sale/transfer This transaction will affect Mr. Nelson's current year income as follows: UCC for Class Dispositions - Lesser of: • Capital Cost = $225,000 • POD (Elected Amount) = $265,000 Negative Balance Recapture UCC

$189,600

( 225,000) ($ 35,400) 35,400 Nil

POD (Elected Amount) ACB Capital Gain Inclusion Rate Taxable Capital Gain Allowable Capital Loss on Investments [(1/2)($40,000)] Net Taxable Capital Gain

$265,000 ( 225,000) $ 40,000 1/2 $20,000 ( 20,000) Nil

Mr. Nelson will have business income of $35,400, the recapture of CCA. The $20,000 taxable capital gain will be completely offset by the $20,000 allowable capital loss on the sale of investments, resulting in no addition to current year net income. ACB of Consideration The ACB of the consideration received by Mr. Nelson would be as follows: Elected Amount ACB of NSC Available for Share Consideration ACB of Preferred Shares ACB of The Common Shares (Residual)

$265,000 ( 150,000) $115,000 ( 50,000) $ 65,000

Capital Cost of Transferred Depreciable Property The capital cost, for CCA and recapture purposes, would be calculated as follows: Capital Cost to Transferor POD $265,000 ACB ( 225,000) Excess $ 40,000 Fraction 1/2 Capital Cost to Corporation for CCA Purposes (ITA 13(7)(e))

$225,000

20,000 $245,000

The ACB of the property for capital gains purposes is the elected amount of $265,000. Paid Up Capital (PUC) The total PUC for the two classes of shares would be calculated as follows: Increase in Legal Capital ($50,000 + $116,000) Less Excess of: Elected Amount Over the FMV of NSC PUC Reduction

$166,000 ($265,000) 150,000

( 115,000) $ 51,000

The PUC reduction would be allocated on the basis of relative FMVs as follows: Preferred Shares [($51,000)($50,000 ÷ $166,000)] Common Shares [($51,000)($116,000 ÷ $166,000)] Total PUC Reduction

$15,361 35,639 $51,000

Subsequent to applying this reduction, the remaining PUC of the two classes of shares would be as follows: Preferred Shares $50,000 ( 15,361) $ 34,639

Legal Capital PUC Reduction (From Preceding) Total PUC

Common Shares $116,000 ( 35,639) $ 80,361

Note that the total PUC of $115,000 ($34,639 + $80,361) is equal to the total ACB of $115,000 ($50,000 + $65,000). Type: ES Topic: Rollovers (ITA 85) - comprehensive problem

89) Several years ago, Ms. Katrina Bond acquired a business location that included land and a building for a total of $950,000. At the time, it was estimated that the FMV of the land was $220,000 and the FMV of the building was $730,000. Ms. Bond carried on the business for several years as a sole proprietor and, during this period, CCA was claimed on the building. As there were years in which she experienced losses, she did not always claim the maximum amount of CCA. Ms. Bond has agreed to take your advice and incorporate the business. She will use ITA 85(1) to sell the land and building to the new corporation in January of 2022. At the time of the sale, the building had a UCC of $625,000. Other relevant amounts were as follows:

Property Land Building Total

Tax Cost $220,000 625,000 $845,000

FMV $ 510,000 980,000 $1,490,000

Elected Amount $220,000 730,000 $950,000

There is a $400,000 mortgage on the property that will be assumed by the new corporation. In addition, the new corporation will issue a $500,000 promissory note to Ms. Bond. The remaining consideration will be in the form of common shares with a FMV and legal capital of $590,000. The new corporation does not have a balance in its GRIP account in any of the taxation years under consideration. Required: A. What are the income tax consequences of making this sale at an elected amount of $950,000? Your answer should include amounts to be included in Ms. Bond's income as a result of the sale, as well as the corporation's tax costs for the land and building. B. Compute the ACB of the consideration that Ms. Bond has received from the corporation. C. Compute the PUC of the common share consideration. D. What amounts would be included in Ms. Bond's 2022 net income if, in 2022, she sells the common shares for $650,000? E. What amounts would be included in Ms. Bond's 2022 net income if, in 2022, the corporation redeems the common share consideration for $650,000?

Answer: Part A - Income Tax Consequences of Sale With respect to the land, the $220,000 elected amount will be both the POD to Ms. Bond and the ACB to the corporation. As the elected amount is equal to Ms. Bond's ACB, there will be no income tax consequences resulting from the sale of the land. The elected amount and POD for the building is its original cost, an amount that is in excess of its UCC. This will result in Ms. Bond having to include recapture of $105,000 ($730,000 - $625,000) in her 2022 income. However, with the elected amount at Ms. Bond's original cost for the building, both the capital cost and the UCC will be equal to the elected amount of $730,000. Part B - ACB of Consideration The ACB of all consideration received by Ms. Bond will be the total elected amount of $950,000. It will be allocated as follow: Elected Amount FMV of NSC ($400,000 Assumed Debt + $500,000 Promissory Note) ACB of Common Shares

$950,000 ( 900,000) $ 50,000

Part C - PUC of the Share Consideration The calculation of PUC would be as follows: Increase in Legal Capital (FMV) Less Excess of: Elected Amount Over the FMV of NSC PUC Reduction

$590,000 ($950,000) 900,000

( 50,000) $540,000

The PUC of the common shares would be reduced to $50,000 ($590,000 - $540,000). Part D - Sale of Common Shares The increase in 2022 net income from a sale of the shares received as consideration for $650,000 would be as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$650,000 ( 50,000) $600,000 1/2 $300,000

Part E - Tax Consequences of Redemption The income tax consequences of a redemption of the shares issued as consideration for $650,000 would be as follows: Proceeds of Redemption Less: PUC ITA 84(3) Deemed Dividend (Non-Eligible)

$650,000 ( 50,000) $600,000

There would be no capital gain on this redemption as shown in the following calculation: Redemption Proceeds Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain

$650,000 ( 600,000) $ 50,000 ( 50,000) Nil

The amount to be included in 2022 would be $690,000, the $600,000 deemed non-eligible dividend grossed up by 15%. There would also be a federal dividend tax credit of $62,308 [(9/13)(15%)($600,000)]. Type: ES Topic: Rollovers (ITA 85) - comprehensive problem

90) Griffeth Enterprises is the registered name of a business carried on as a sole proprietorship by Sol Griffeth. As Mr. Griffeth has outstanding management skills, the business has grown rapidly. Since he no longer needs all of the income that is generated by the business, he would like to incorporate the business to a new corporation in which he will be the sole shareholder. The new corporation would be named Griffeth Ltd. and would have a December 31 taxation year end. On January 1, 2022, the tax attributes (ACB, UCC etc) and FMV of the assets and liabilities reported by the accountants for Griffeth Enterprises are as follows: Tax Cost $ 168,000 58,000 310,000 71,000 275,000 210,000 579,000 Nil $1,671,000 ( 104,000) $1,567,000

Accounts Receivable Temporary Investments Inventory Furniture and Fixtures Machinery (Capital Cost = $302,000) Land Building (Capital Cost = $656,000) Goodwill Total Liabilities Net Business Assets (Owner's Equity)

FMV $ 161,000 49,000 326,000 87,000 384,000 432,000 713,000 275,000 $2,427,000 ( 104,000) $2,323,000

The sale of the Griffeth Enterprises' business properties to Griffeth Ltd. will take place on January 1, 2022, and the provisions of ITA 85(1) will be used to minimize any income tax implications of the incorporation of the business. Griffeth Ltd. will assume the liabilities of Griffeth Enterprises and, in addition, will issue $1,120,000 of a promissory note to Mr. Griffeth. With respect to share consideration, the new Company will issue preferred shares with a FMV of $300,000 and common shares with a FMV of $903,000. All of the shares issued by Griffeth Ltd. as part of this rollover will be issued to Mr. Griffeth. Griffeth Ltd. does not have a balance in its GRIP account for any of the taxation years under consideration. Required: A. Determine whether the Accounts Receivable and Temporary Investments should be sold using the provisions of ITA 85(1). Explain your conclusion and, if you recommend that ITA 85(1) should not be used, indicate the appropriate alternative treatment. B. Without regard to your conclusions in Part A, assume that all of the business properties are sold to the new corporation using the provisions of ITA 85(1). Indicate the minimum elected amounts for each property. C. Assume the sale of all of the properties of the business is made using the provisions of ITA 85(1), and that Mr. Griffeth will elect the amount that you have determined in Part B. Determine the ACB of the consideration received by Mr. Griffeth. In addition, determine the PUC of the share consideration. D. Indicate the income tax consequences to Mr. Griffeth if the preferred shares and common shares received as consideration were: 1. immediately sold for their FMVs; or alternatively 2. immediately redeemed by the new corporation at their FMV.

Answer: Part A - Accounts Receivables and Temporary Investments If the Accounts Receivable are sold using ITA 85(1), no election can be made under ITA 22. As a result, the $7,000 ($168,000 - $161,000) loss will be a capital loss, which will be disallowed under ITA 40(2)(g) because the transfer is to a corporation controlled by the seller (an affiliated person). The appropriate treatment would be to exclude the Accounts Receivable from the ITA 85(1) election. This would permit the use of the ITA 22 election that would allow the $7,000 loss to be treated as a fully deductible loss. As ITA 22 is a joint election, the corporation would have to include the $7,000 in income, but could then deduct actual doubtful debt reserves and bad debts as they occur. If the ITA 22 election is not made, the tax cost of the accounts receivables to the corporation will be their FMV. If a different amount is collected, the result will be either a capital gain or a capital loss. With respect to the Temporary Investments, ITA 40(2)(g) would deny the $9,000 ($58,000 - $49,000) capital loss on a transfer to a controlled corporation (an affiliated person), without regard to whether the sale is made using ITA 85(1). This means that there is no point in selling these investments to the corporation. Mr. Griffeth could continue to own the investments personally or, alternatively, sell them to an arm's length person. The allowable capital loss on such a sale would be immediately deductible, provided that Mr. Griffeth has available sufficient taxable capital gains. If he does not, he might wish to structure the ITA 85(1) rollover in such a fashion that $9,000 in capital gains are realized on the rollover through an elected amount that triggers the required capital gains. Part B - Minimum Elected Amounts The minimum elected amounts would be as follows: Accounts Receivable Temporary Investments Inventories Furniture and Fixtures Machinery Land Building Goodwill Total Elected Amounts

$ 161,000 49,000 310,000 71,000 275,000 210,000 579,000 1 $1,655,001

Part C - ACB of Consideration The ACB of the NSC would be its FMV which, in the case of debt, would be FMV of $1,224,000 ($1,120,000 promissory note, plus $104,000 in assumed debt). Given this, the ACB of the share consideration would be as follows: Total Elected Amount Less: FMV of NSC Available for Share Consideration Less: ACB of Preferred Shares (FMV) ACB of Common Shares (Residual)

$1,655,001 ( 1,224,000) $ 431,001 ( 300,000) $ 131,001

(The following paragraph is not required.) As Mr. Griffeth will control the new corporation, the capital losses of $7,000 on Accounts Receivable and $9,000 on Temporary Investments will be disallowed under ITA 40(2)(g). The disallowed losses will be added to the tax cost of the those properties to Griffeth Ltd.. This means the Accounts Receivable will have an ACB of $168,000 and the Temporary Investments will have an ACB of $58,000. Any bad debts on the Accounts Receivable will be treated as capital losses. Part C - PUC of the Preferred Shares and Common Shares The PUC calculation would begin with the legal capital of the shares. These were $300,000 for the preferred shares and $903,000 for the common shares. ITA 85(2.1) would require a PUC reduction in this total as follows: Total Increase in Legal Capital of Shares ($300,000 + $903,000) Less Excess of: Total Elected Amounts Over the FMV of the NSC PUC Reduction

$1,203,000 ($1,655,001) 1,224,000

( 431,001) $ 771,999

The PUC reduction would be allocated on the basis of relative FMVs as follows: Preferred Shares [($771,999)($300,000 ÷ $1,203,000)] Common Shares [($771,999)($903,000 ÷ $1,203,000)] Total PUC Reduction

$192,518 579,481 $771,999

Subsequent to applying this reduction, the remaining PUC of the two classes of shares would be as follows:

Legal Capital Less: PUC Reduction PUC

Preferred Shares $300,000 ( 192,518) $107,482

Common Shares $903,000 ( 579,481) $323,519

The total PUC of $431,001 ($107,481 + $323,519) is equal to the difference between the elected amounts of $1,655,001 and the FMV of the NSC of $1,224,000. It is also equal to the total ACB of the two classes of shares ($300,000 + $131,001). Part D(1) - Income Tax Consequences of a Share Sale The income tax consequences for Mr. Griffeth on the sale of the preferred and common shares would be as follows: Preferred Shares $300,000 ( 300,000) Nil N/A Nil

POD ACB (Part C) Capital Gain Inclusion Rate Taxable Capital Gain

Common Shares $903,000 ( 131,001) $771,999 1/2 $386,000

Part D(2) - Income Tax Consequences of Share Redemptions The income tax consequences for Mr. Griffeth on the redemption of the preferred shares and common shares would be as follows:

Proceeds of Redemption Less: PUC (Part C) ITA 84(3) Deemed Dividend (Non-Eligible)

Preferred Shares $300,000 ( 107,482) $192,518

Common Shares $903,000 ( 323,519) $579,481

Redemption Proceeds Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain (Loss)

$300,000 ( 192,518) $107,482 ( 300,000) ($192,518)

$903,000 ( 579,481) $323,519 ( 131,001) $192,518

Mr. Griffeth would have a deemed non-eligible dividend of $771,999 ($192,518 + $579,481). This is also the amount of the gain that was deferred through the use of ITA 85(1) ($2,427,000 - $1,655,001). The grossed up non-eligible dividend of $887,799 [(115%)($771,999)] would qualify for a federal dividend tax credit of $80,169 [(9/13)(15%)($771,999)]. There is a net capital gain of nil ($192,518 - $192,518). Type: ES Topic: Rollovers (ITA 85) - comprehensive problem

91) Karla Manson purchased a commercial property consisting of land and a building 2 years ago for $920,000. At the purchase date, it was estimated that the FMV of the land on which the building was situated was $175,000 and the building $745,000. The purchase was financed with a mortgage of $420,000. She had intended to begin business operations immediately. However, health problems required her to defer beginning operations for over a year. Since she expects the business to be profitable immediately, she decides to sell the land and building to a new corporation in which she will be the sole shareholder. The sale will take place on January 1, 2022 and, at that time, relevant facts about the property are as follows: Land $300,000 175,000 N/A N/A

FMV ACB UCC* Mortgage Balance

Building $1,100,000 745,000 690,000 375,000

*As the building was used periodically to earn income, Ms. Manson has claimed CCA. Ms. Manson will choose an elected amount for the land of $300,000 and $700,000 for the building. The corporation will assume the $375,000 mortgage on the building and, in addition, will issue a promissory note to Ms. Manson for $625,000. The corporation will also issue common shares to Ms. Manson with a FMV of $400,000 and legal capital of $400,000. The new corporation does not have a balance in its GRIP account in any of the taxation years under consideration. Required: A. What are the income tax consequences of making this sale at the elected amount of $1,000,000? Your answer should identify amounts to be included in Ms. Manson's income as a result of the sale, as well as the corporation's tax costs of the properties. B. Determined the ACB of the consideration received from the corporation. C. Calculate the PUC of the common share consideration. D. What amounts would be included in Ms.Manson's income if, in 2022, she sells her common shares for $400,000? E. What amounts would be included in Ms.Manson's income if, in 2022, the corporation redeems her common shares for $400,000?

Answer: Part A - Income Tax Consequences of the Sale With respect to the land, the $300,000 elected value will be both the POD to Ms. Manson and the ACB to the corporation. As the elected amount exceeds the ACB there is a taxable capital gain of $62,500 [(1/2)($300,000 - $175,000)]. The elected amount and POD for the building is $700,000, an amount that is less than its capital cost of $745,000, but more than its UCC of $690,000. This will result in Ms.Manson having to include recapture of $10,000 ($700,000 - $690,000) in her income. The corporation's ACB is $700,000. However, the corporation will retain the original capital cost of $745,000 for recapture purposes and will be deemed to have claimed CCA of $45,000. Part B - ACB of the Consideration The ACB of all consideration received by Ms. Manson will be the total elected amount of $1,000,000 ($300,000 + $700,000). It will be allocated as follow: Total Elected Amount Less: FMV of NSC ($375,000 Assumed Mortgage + $625,000 New Debt) ACB of Common Shares Part C - PUC of the Share Consideration The calculation of PUC would be as follows: Increase in Legal Capital (FMV) Less excess of: Elected Amount Over the FMV of NSC PUC Reduction

$1,000,000 ( 1,000,000) Nil

$400,000 ($1,000,000) 1,000,000

Nil $400,000

The PUC of the common shares would be reduced to Nil ($400,000 - $400,000). Part D - Sale of Common Shares The increase in income from a sale of the shares for $400,000 would be as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$400,000 Nil $400,000 1/2 $200,000

As taxable income consequences are not required, the effect of the capital gains deduction was not considered.

Part E - Income Tax Consequences of Redemption The income tax consequences of a redemption for $400,000 would be as follows: Proceeds of Redemption Less: PUC ITA 84(3) Deemed Dividend (Non-Eligible)

$400,000 Nil $400,000

There would be no capital gain on this redemption as shown in the following calculation: Proceeds of Redemption Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain

$400,000 ( 400,000) Nil Nil Nil

The amount to be included in 2022 net income would be the grossed up amount of $460,000 [(115%)($400,000)]. There would also be a federal dividend tax credit of $41,538 [(9/13)(15%)($400,000)]. Type: ES Topic: Rollovers (ITA 85) - comprehensive problem

92) For the last six years, Ms. Sarah Delmor has carried on the business (called Delmor Industries) as a sole proprietor. The business has been very successful and, as a consequence, has experienced rapid growth. Given this situation, Ms. Delmor has concluded that in order to enhance her ability to raise additional capital, the business should be incorporated to a new corporation, Delmor Inc. in which she will be the sole shareholder. On July 1, 2022, the tax costs (ACB, Capital cost or UCC) and FMV of the properties and liabilities of the business as reported by the accountants are as follows: Tax Cost $ 120,000 42,000 220,000 53,000 197,000 150,000 416,000 Nil $1,198,000 ( 72,000) $1,126,000

Accounts Receivable Temporary Investments Inventories Depreciable Property - CCA Class 8 (Note One) Machinery (Note Two) Land Building (Note Three) Goodwill Total Liabilities Net (Owner's Equity)

FMV $ 112,000 37,000 231,000 61,500 273,000 311,000 523,500 200,000 $1,749,000 ( 72,000) $1,677,000

Note One - There are two properties in Class 8. Property A has a capital cost of $27,000 and a FMV of $32,500. Property B has a capital cost of $33,000 and a FMV of $29,000. Note Two - The capital cost of the Machinery is $212,500. Note Three - The capital cost of the Building is $472,000. The sale of the Delmor Industries' properties to Delmor Inc. will take place on July 1, 2022, and an election will be filed under ITA 85(1). Delmor Inc. will assume the liabilities of Delmor Industries and, in addition, will issue $800,000 in new debt (a promissory note) to Ms. Delmor. With respect to share consideration, the new Company will issue preferred shares with a FMV of $200,000 and common stock with a FMV of $677,000. Any shares issued by Delmor Inc. as part of this rollover will be issued to Ms. Delmor. Delmor Inc. does not have a balance in its GRIP account in any of the taxation years under consideration. Required: A. Determine whether the Accounts Receivable and Temporary Investments should be sold using the provisions of ITA 85(1). Explain your conclusion and, if you recommend that ITA 85(1) should not be used, indicate the appropriate alternative treatment. B. Without regard to your conclusions in Part A, assume that all of the properties are sold to the new corporation using the provisions of ITA 85(1). Indicate the minimum amounts that can be elected for each property. Explain how the election would apply to Property A and B in Class 8. C. Assume the sale of the business properties to Delmor Inc. is going to be made using the provisions of ITA 85(1). Ms. Delmor will elect the minimum amounts determined in Part B, and sell all of the properties of Delmor Industries (whether or not appropriate). Determine the ACB of the consideration received by Ms. Delmor. In addition, determine the PUC of the preferred share and common share consideration. D. Determine the income tax consequences to Ms. Delmor if the preferred share and common share consideration were immediately redeemed by the new corporation at FMV.

Answer: Part A - Accounts Receivables and Temporary Investments If the accounts receivable are sold using ITA 85(1), no election can be made under ITA 22. As a result, the $8,000 ($120,000 - $112,000) loss on the receivables will be a capital loss, which will be disallowed under ITA 40(2)(g) because the sale is to a corporation controlled by the transferor (an affiliated person). The appropriate treatment would be to exclude the Accounts Receivable from the ITA 85(1) election. This would permit the use of the ITA 22 election that would allow the $8,000 loss to be treated as a fully deductible business amount. As ITA 22 is a joint election, the corporation would have to include the same $8,000 in income, but could then deduct actual doubtful debt reserves and bad debts as they occur with respect to the purchased receivables. With respect to the temporary investments, ITA 40(2)(g) would also deny the $5,000 ($42,000 - $37,000) capital loss on a sale to a controlled corporation, without regard to whether the sale is made under the provisions of ITA 85(1) because of the affiliated person connection. This means that there is no point in selling the investments to the corporation. Ms. Delmor could continue to personally own the investments or, alternatively, sell them to a non-affiliated person. The allowable capital loss on such a sale would be immediately deductible, provided that Ms. Delmor has available sufficient taxable capital gains. Another option is to structure the ITA 85(1) rollover to include an elevated elected amount to generate additional capital gains to offset the capital losses. Part B - Minimum Elected Amounts The minimum elected amounts would be as follows: Accounts Receivable Temporary Investments Inventory Class 8 Depreciable Property (See Note) Machinery Land Building Goodwill Total Elected Amounts

$ 112,000 37,000 220,000 53,000 197,000 150,000 416,000 1 $1,185,001

Note - The minimum elected amount for depreciable property, under ITA 85(1)(e), is the least of the UCC for the class, the cost of the individual property, and the FMV of the individual property. For the two Class 8 properties, these amounts would be as follows: Property A (Least of $53,000, $27,000, and $32,500) Property B (Least of $53,000, $33,000, and $29,000) Total

$27,000 29,000 $56,000

If this amount is used, the result will be recapture of $3,000 ($56,000 - $53,000). However, ITA 85(1)(e.1) allows the properties to be sold one at a time in order to avoid this result. Therefore, if Property A is sold first, the UCC balance will be $26,000 ($53,000 - $27,000). This means that when Property B is sold, the least amount will be the UCC of $26,000 and, when this is subtracted, the UCC balance will be nil and there will be no recapture.

Part C - ACB of the Consideration The ACB of the NSC would be its FMV which, in the case of debt, would be $872,000 ($800,000 in new debt, plus $72,000 of old debt assumed). Given this, the allocations to the share consideration would be as follows: Total Elected Amount Less: FMV of NSC Available for Share Consideration ACB of Preferred Shares (FMV Maximum) ACB of Common Shares (Residual)

$1,185,001 ( 872,000) $ 313,001 ( 200,000) $ 113,001

(The following paragraph is not required.) As Ms. Delmor will control the new corporation, the capital losses of $8,000 on Accounts Receivable and $5,000 on Temporary Investments will be disallowed under ITA 40(2)(g). The disallowed losses will be added to the tax cost of those properties to the corporation. This means the Accounts Receivable will have a tax cost of $120,000 and the Temporary Investments will have a tax cost of $42,000 for Delmor Inc. Any bad debt losses on the Accounts Receivable will be capital losses. Part C - PUC of the Preferred Shares and Common Shares The PUC calculation begins with the legal capital. These were $200,000 for the preferred shares and $677,000 for the common shares. ITA 85(2.1) would require a PUC reduction as follows: Total Increase in Legal Capital ($200,000 + $677,000) Less Excess of: Total Elected Amount Over the FMV of NSC PUC Reduction

$877,000 ($1,185,001) 872,000

( 313,001) $563,999

The PUC reduction would be allocated on the basis of relative FMVs as follows: Preferred Shares [($563,999)($200,000 ÷ $877,000)] Common Shares [($563,999)($677,000 ÷ $877,000)] Total PUC Reduction

$128,620 435,379 $563,999

Subsequent to applying this reduction, the remaining PUC of the two classes of shares would be:

Initial PUC (Legal Capital) Less: PUC Reduction (From Preceding) PUC

Preferred Shares $200,000 ( 128,620) $ 71,380

Common Shares $677,000 ( 435,379) $241,621

The PUC of $313,001 ($71,380 + $241,621) is equal to the difference between the elected amount of $1,185,001 and the NSC of $872,000. It is also equal to the ACB of the two classes of shares ($200,000 + $113,001).

Part D - Income Tax Consequences of Redemption The income tax consequences for Ms. Delmor on the redemption of the preferred common shares would be as follows:

Redemption Proceeds Less: PUC (Part C) ITA 84(3) Deemed Dividend (Non-Eligible)

Preferred Shares $200,000 ( 71,380) $128,620

Common Shares $677,000 ( 241,621) $435,379

Redemption Proceeds Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain (Loss)

$200,000 ( 128,620) $ 71,380 ( 200,000) ($128,620)

$677,000 ( 435,379) $241,621 ( 113,001) $128,620

Ms. Delmor would have a deemed non-eligible dividend of $563,999 ($128,620 + $435,379). This is also the amount of the gain that was deferred through the use of the rollover ($1,749,000 - $1,185,001). The grossed up non-eligible dividend of $648,599 [(115%)($563,999)] would qualify for a federal dividend tax credit of $58,569 [(9/13)(15%)($563,999)]. There is a net capital gain of nil ($128,620 - $128,620). Type: ES Topic: Rollovers (ITA 85) - comprehensive problem

93) Ms. Bess Chadwick carries on a business as a sole proprietor. The business has been extremely successful and is now worth several million dollars. While she is only 32 years old, she would like to retire. She has developed a taste for luxury travel and would like to spend the next two years pursuing that interest before settling down to a life of leisure in Canada. Her common-law partner for the last four years has been Biff Banner. Bess would like to sell the business and its future growth of the business to Biff. In order to implement the decision to sell the business to Biff, she has arranged for Biff to incorporate a new corporation and by investing $5,000 in its newly issued common shares. At the time of incorporation, the cash investment of $5,000 is the only corporate property and Biff owns the only common shares. The new corporation is named Bannerr Executive Services and Supplies (BESS) and will have a December 31 taxation year end. On January 1, 2022, Ms. Chadwick will sell most of the business properties to BESS. On that date, the tax costs (UCC, capital cost and ACB) and estimated FMVs are as follows: Tax Cost $1,200,000 3,650,000 1,870,000 3,100,000 $9,820,000 ( 850,000) $8,970,000

Inventory Depreciable Properties - CCA Class 8 (Note One) Land Building (Note Two) Total Liabilities Net (Owner's Equity)

FMV $ 1,250,000 3,850,000 2,600,000 4,800,000 $12,500,000 ( 850,000) $11,650,000

Note One - The capital cost of the properties in Class 8 on January 1, 2022 is $4,100,000. Note Two - The capital cost of the Building is $3,600,000. The Accounts Receivable of the business will be sold using ITA 22 rather than ITA 85(1). Also, a business valuation has indicated that Ms. Chadwick's business does not have any goodwill. Ms. Chadwick will sell the business properties at an elected amount of $9,820,000. The new corporation will assume all of the $850,000 of business liabilities and issue a promissory note to Ms. Chadwick in the amount of $7,150,000. She will also receive redeemable preferred shares with a FMV and legal capital of $4,500,000. On review, the CRA issues a reassessment in August, 2022 which increases the FMV of the land to $3,100,000, an increase of $500,000. Ms. Chadwick does not plan to appeal this reassessment as she had been pressed for time and had decided on the $2,600,000 value without any professional consultation. There is no price adjustment clause (PAC) written into the purchase and sale agreement. Required: Ignore the capital gains deduction in your solution. A. Taking into consideration the reassessment, determine the income tax consequences to Ms. Chadwick that result from the sale of her business properties to BESS. Your answer should include amounts to be included in Ms. Chadwick's income as a result of the sale, as well as the ACB and PUC of her preferred shares.

B. Determine the income tax consequence to Ms. Chadwick if BESS subsequently redeems her preferred shares for $4,500,000. C. In early December of 2022 Biff sells his BESS shares to a non-affiliated person for $550,000. Determine the income tax consequences of the share for Biff. Answer: Part A As the FMV of the consideration received by Ms. Chadwick was less than the reassessed FMV of the properties sold, the result would be that she has indirectly made a gift to a related person, Biff. given that the value of his common shares would have increased by the gift amount. ITA 85(1)(e.2) requires that any gift amount be added to the elected amount with the total being used as the deemed POD without any increase in the ACB of any share consideration received. The amount of the gift and the income tax consequences of the sale to Ms. Chadwick would be calculated as follows: FMV of Properties Sold ($12,500,000 + $500,000) Less The greater of: • FMV of Consideration Received = $12,500,000 ($850,000 + $1,150,000 + $6,000,000 + $4,500,000) • Elected Amount = $9,820,000 Gift Amount

$13,000,000

( 12,500,000) $ 500,000

Based on the reassessment, the $500,000 will be added to the cost of the land resulting in a taxable capital gain calculated as follows: Revised Elected Amount = Revised POD ($9,820,000 + $500,000) Tax Costs of Properties sold Capital Gain Inclusion Rate Taxable Capital Gain

$10,320,000 ( 9,820,000) $ 500,000 1/2 $ 250,000

The ACB of the preferred shares received by Ms. Chadwick would be calculated as follows: Elected Amount (Original) FMV of NSC ($850,000 + $1,150,000 + $6,000,000) ACB of Preferred Shares

$9,820,000 ( 8,000,000) $1,820,000

The required PUC reduction and resulting PUC for the preferred shares received by Ms. Chadwick would be calculated as follows: Increase in Legal Capital Excess, If any of: Revised Elected Amount ($9,820,000 + $500,000) Over FMV of NSC PUC Reduction

$4,500,000

($10,320,000) 8,000,000

( 2,320,000) $2,180,000

PUC of Preferred Shares ($4,500,000 - $2,180,000)

$2,320,000

Part B The income tax consequences to Ms. Chadwick of a share redemption would be as follows: Proceeds of Redemption Less: PUC of Shares ITA 84(3) Deemed Dividend

$4,500,000 ( 2,320,000) $2,180,000

This deemed dividend would be grossed up to $2,507,000 [(115%)($2,180,000)] and will generate a federal dividend tax credit of $226,385 [(9/13)(15%)($2,180,000)]. In addition to the ITA 84(3) deemed dividend, there will also be a taxable capital gain calculated as follows: POD Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$4,500,000 ( 2,180,000) $2,320,000 ( 1,820,000) $ 500,000 1/2 $ 250,000

Part C If Biff Bangor sells his shares for $550,000, the income tax consequences would be as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$550,000 ( 5,000) $545,000 1/2 $272,500

Economic Analysis (Not Required) If Ms. Chadwick had simply sold her business properties for their reassessed FMV, she would have had a combination of business income and capital gains totalling $3,180,000 ($13,000,000 - $9,820,000). Using ITA 85(1), the result has the same $3,180,000 ($500,000 capital gain on the sale, plus the deemed dividend of $2,180,000 resulting from the redemption, plus the $500,000 capital gain also resulting from the redemption). While the composition of the income is different, the overall result is the same. However, there is an impact on Biff. The $500,000 gift increased the FMV of his shares with no corresponding increase in the ACB of the shares. In effect, this has become a component of the $545,000 capital gain. The result is that this same amount has been included in the income of both Bess and Biff. This result could have been avoided by a properly structured with the addition of a Price Adjustment Clause (PAC). Type: ES Topic: Rollovers (ITA 85) - comprehensive problem with gifting

94) In 2021, Mr. Mark Graber sells non-depreciable capital property to an existing corporation in which he is the sole shareholder. The sale is made using the rollover provisions of ITA 85(1). The corporation has a December 31 taxation year end. The property has an ACB of $342,000 and Mr. Graber believes that it has a FMV of $560,000. Reflecting this view, he takes back a promissory note with a FMV of $560,000 and one preferred share with a nominal value. He reports a taxable capital gain of $109,000 [(1/2)($560,000 - $342,000)] in his 2021 income tax return. In 2022, the CRA reassesses on the basis that the FMV of the property was only $475,000 at the time of the sale. Mr. Graber accepts this reassessed value and does not file an objection. There was no price adjustment clause (PAC) written into the purchase and sale agreement. Required: A. Determine the income tax consequences to Mr. Graber that will result from the sale of the property to the corporation in 2021 and the subsequent reassessment in 2022. B. Indicate the tax cost of the consideration received subsequent to the reassessment.

Answer: Part A The original amount used in the sale resulted in a taxable capital gain of $109,000. The reassessment value of $475,000 identifies a situation in which there is excess consideration. In other words he took too much from the corporation on the disposition of the non-depreciable capital property, resulting in the following ITA 15(1) benefit: FMV of Consideration Received Less: FMV of Property Given Up ITA 15(1) Shareholder Benefit

$560,000 ( 475,000) $ 85,000

With the value of the transferred property reassessed at $475,000, the elected amount cannot exceed this amount. Based on this, there would be a revised taxable capital gain on the transfer, calculated as follows: Revised Elected Amount ACB Revised Capital Gain Inclusion Rate Revised Taxable Capital Gain

$475,000 ( 342,000) $133,000 1/2 $ 66,500

The net effect of the reassessment would be calculated as follows: Revised Taxable Capital Gain Shareholder Benefit Reversal of Initial Taxable Capital Gain Change in 2021 Net Income

$ 66,500 85,000 ( 109,000) $ 42,500

Part B Because a $85,000 benefit will be included in Mr. Graber's income as a result of a property acquisition, ITA 52(1) requires that this amount be added to the ACB of the consideration. Given this, the ACB of the consideration (e.g. the promissory note) would be as follows: Revised Elected Amount Add: ITA 15(1) Shareholder Benefit ACB of Consideration (Promissory Note)

Type: ES Topic: Rollovers (ITA 85) - shareholder benefit ITA 15(1)

$475,000 85,000 $560,000

95) Mr. Doug Johnston is the sole shareholder of Johnston Home Furnishings, a CCPC involved in the sale of retail products for the home. He has managed the business of the Company for the last 20 years, in most years earning satisfactory profits. As of December 31, 2022, relevant information as to the FMV of the Company and therefore the FMV of his shares are as follows: Initial Investment (PUC) FMV - December 31, 2021

$ 478,000 $3,985,000

Mr. Johnston is nearing retirement and wishes to gradually wind down the corporate business. In preparation for retirement, he has enrolled in a variety of courses at a local college. One of these courses, Taxation 405, has introduced him to the concept of selling property to a corporation using a rollover under ITA 85(1). In reviewing this provision, it has occurred to him that, by selling the shares of Johnston Home Furnishings to a new company, he could avoid income tax on the appreciation in the value of his shares of $3,507,000 - the difference between his initial investment of $478,000 and the current FMV of $3,985,000. In 2022 his available capital gains deduction is $500,000. In view of his analysis of the situation, he has plans to sell all of the shares of Johnston Home Furnishings to a new company, Johnston Investments in January of 2022. The sale/transfer will be made using the provisions of ITA 85(1) and an elected amount of $978,000 will be chosen. In return for the shares of Johnston Home Furnishings, Mr. Johnston will receive a promissory note for $978,000 and 10 common shares of the new company. These shares have a legal capital and a retraction value of $3,007,000. The promissory note will be due in one year and Mr. Johnston anticipates that, as a result of dividends received from Johnston Home Furnishings, Johnston Investments will have sufficient cash to pay the entire amount at that time. Neither of the Companies have a GRIP balance in any of the taxation years under consideration. Required: A. In the absence of ITA 84.1, determine the income tax consequences of the sale of the shares of Johnston Home Furnishings to Johnston Investments. B. Determine whether ITA 84.1 would apply. Assuming that ITA 84.1 does apply, calculate the deemed dividend that would arise on the sale. In addition, indicate the net economic effect that would result from this transfer combined with a redemption of the Johnston Investments shares at their FMV of $3,007,000 ($3,985,000 - $978,000).

Answer: Part A - Absence of ITA 84.1 Without ITA 84.1, Mr. Johnston could sell the shares in Johnston Home Furnishings (JHF, hereafter) on a rollover basis to Johnston Investments (JI, hereafter) at the elected amount of $978,000, receiving NSC for this full amount. This would result in a capital gain of $500,000 ($978,000 - $478,000), all of which could be offset by the capital gains deduction. In the absence of ITA 84.1, there would be no income tax consequences as a result of the sale of the shares. Part B - Application of ITA 84.1 Mr. Johnston is a Canadian resident and JHF is a corporation resident in Canada. In addition, Mr. Johnston does not deal at arm's length with JI (the purchaser corporation), and JI is, immediately after the sale of the JHF shares, connected with JHF therefore ITA 84.1 applies. This means that there will be a PUC reduction of the JI shares, calculated under ITA 84.1(1)(a) as follows: Increase in Legal Capital of JI Less the Excess, if any, of: Greater of PUC and ACB of JHF Shares Over the FMV of NSC ITA 84.1 PUC Reduction

$3,007,000 $ 478,000 ( 978,000)

Nil $3,007,000

PUC After Reduction ($3,007,000 - $3,007,000)

Nil

There would also be a deemed dividend, calculated under ITA 84.1(1)(b) as follows: Increase in Legal Capital of JI Add: FMV of NSC Total Less: PUC of JHF Shares PUC Reduction ITA 84.1(1)(b) Deemed Dividend (Non-Eligible)

$3,007,000 978,000 $3,985,000 ($ 478,000) ( 3,007,000)

( 3,485,000) $ 500,000

The ACB of the JI shares would be calculated as follows: Elected Amount Less: FMV of NSC ACB - JI Common Shares

$978,000 ( 978,000) Nil

As shown in the following calculation, there would be no capital gain or loss on the disposition of JHF shares: Elected Amount Less: ITA 84.1 Deemed Dividend Modified POD ACB Capital Gain

$978,000 ( 500,000) $ 478,000 ( 478,000) Nil

If the JI shares were later redeemed at their FMV of $3,007,000 ($3,985,000 - $978,000), the results would be as follows: Redemption Proceeds Less: PUC ITA 84(3) Deemed Dividend (Non-Eligible)

$3,007,000 Nil $3,007,000

Redemption Proceeds Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Gain

$3,007,000 ( 3,007,000) Nil Nil Nil

The overall economic effect of all of these transactions would be as follows: ITA 84.1(1)(b) Deemed Dividend ITA 84(3) Deemed Dividend Total Deemed Dividends

$ 500,000 3,007,000 $3,507,000

The deemed non-eligible dividends would result in taxable dividends of $4,033,050 [(115%)($3,507,000)], which would qualify for a federal dividend tax credit of $364,188 [(9/13)(15%)($3,507,000)]. (The following paragraphs are not required.) If Mr. Johnston had simply sold the original JHF shares for their FMV to a person other than a non-arm's length corporation, the sale would have resulted in a capital gain of $3,507,000 ($3,985,000 - $478,000). However, the application of ITA 84.1 on the rollover to JI and the subsequent redemption of the share consideration has resulted in this full amount being characterized as a deemed dividend. The effective substitution of a dividend for a capital gain eliminates the ability to use the capital gains deduction which remains available for another day. Type: ES Topic: Dividend stripping - ITA 84.1 comprehensive problem

96) Shipley Inc. is a CCPC that is an investment holding corporation that has owned 100% of the outstanding shares of Shapley Ltd. a CCPC that is an subsidiary company that carries on an extensive business. The ACB and PUC of the Shapely shares owned by Shipley are both $895,000. The FMV its shares in the subsidiary is $2,450,000. The subsidiary has $462,000 in safe income that is attributable to the shares owned by Shipley Shipley does no balance in either of its RDTOH accounts and neither company has a positive GRIP account balance. Required: Indicate the income tax consequences to Shipley Inc. in both of the following independent situations: A. Shapley Ltd. obtains a bank loan in the amount of $1,555,000 and uses all of this amount to pay a taxable dividend to Shipley Inc. Subsequent to the payment of the taxable dividend, Shipley Inc. sells the Shapley shares to Ms. Arden, an arm's length person, for $895,000. B. Using ITA 85(1), Shipley sells the Shapley shares to Arden Ltd., an arm's length corporation. The elected amount is $895,000. As consideration, Shipley receives Arden Ltd. preferred shares with an ACB and PUC of $895,000 and a redemption value of $2,450,000. Immediately after the sale, Arden Ltd. redeems the preferred shares for $2,450,000.

Answer: Part A In the absence of ITA 55(2), the entire $1,555,000 taxable dividend would be deducted in the determination of Shipley's taxable income. However, as a taxable inter-corporate dividend has been paid in conjunction with a disposition of property to an arm's length person, ITA 55(2) applies. As a result, the following calculation is required for the dividend received by Shipley: Dividends Received from Shapley Dividend Attributable to Safe Income Amount Deemed by ITA 55(2) not to be a Dividend and by ITA 55(2) to be a Capital Gain Inclusion Rate Taxable Capital Gain

$1,555,000 ( 462,000) $1,093,000 1/2 $ 546,500

As shown, $462,000 of the funds would be received by Shipley as a taxable dividend from safe income and could be claimed as a taxable income deduction under ITA 112,(1) resulting in no Part I tax cost. However, the remainder would be converted to a taxable capital gain of $546,500. We would add that this also results in an increase of the same amount to the company's capital dividend account (CDA). Part B In the absence of ITA 55(2), the results for Shipley would be as follows: Proceeds of Redemption PUC of Preferred Shares ITA 84(3) Deemed Dividend

$2,450,000 ( 895,000) $1,555,000

Proceeds of Redemption Less: ITA 84(3) Dividend Modified POD ACB Capital Gain

$2,450,000 ( 1,555,000) $ 895,000 ( 895,000) Nil

As the ITA 84(3) taxable dividend can be claimed as a taxable income deduction, the Company would have succeeded in disposing of the Shapley shares without income tax consequence.

However, as the redemption was in conjunction with a disposition of corporate property to an arm's length purchaser, ITA 55(2) applies to deem $1,093,000 ($1,555,000, less the safe income of $462,000) of the ITA 84(3) dividend not to be a dividend. ITA 55(2)(b) would then deem the $1,093,000 to be POD. The result would be a capital gain determined as follows: Modified POD Plus: Deemed POD (ITA 55(2)) POD ACB Capital Gain Inclusion Rate Taxable Capital Gain

$ 895,000 1,093,000 $1,988,000 ( 895,000) $1,093,000 1/2 $ 546,500

The overall result would be the same as in Part A. That is, that $462,000 of the taxable dividend distribution is free of Part I tax and the remainder is characterized as a capital gain. There would also be an addition to the company's CDA of $546,500. Type: ES Topic: Capital gains stripping - ITA 55(2)

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 17 Other Corporate Rollovers and Sale of a Corporate Business 17.1 Online Exercises 1) Describe, in general terms, the type of situation in which ITA 85.1, Share For Share Exchange, is used. What is the major tax advantage of using this rollover provision? Answer: The usual situation in which ITA 85.1 is applied involves a shareholder of a Canadian corporation (Corporation A) who wishes to sell shares, on an arm's length basis, to another Canadian corporation (Corporation B). ITA 85.1 allows the shareholder to exchange shares in Corporation A for shares of Corporation B, with the transaction taking place at the ACB of the Corporation A shares. That is, the POD for the Corporation A shares will be their ACB, and this will also be the cost of the shares to the purchasing company. The major tax advantage is the fact that any gain on the Corporation A shares is deferred until such time as the Corporation B shares are sold. Type: ES Topic: Rollovers (ITA 85.1) - basic rules & concepts

2) Briefly describe the general rules applicable to the vendor in a ITA 85.1 share for share exchange. Answer: The basic rules are that the vendor is deemed to have (1) disposed of the exchanged shares for POD equal to their ACB, and (2) acquired the shares of the purchaser at a cost to the vendor equal to the ACB to the vendor of the exchanged shares immediately before the exchange. In other words the tax attributes (ACB and PUC) of the shares acquired become the tax attributes of the shares sold. Type: ES Topic: Rollovers (ITA 85.1) - basic rules & concepts

3) There are several conditions that are required for an ITA 85.1 rollover to apply. List three of these conditions. Answer: The required three can be chosen from the following: • The vendor's shares must be capital property. • The vendor and purchaser must be dealing with each other at arm's length. • The vendor, or persons with whom the vendor does not deal at arm's length, cannot control the purchaser corporation immediately after the exchange. Likewise, they cannot own shares having a FMV in excess of 50% of the total FMV of the purchasing corporation's outstanding shares. • The vendor and purchaser cannot have filed an election under ITA 85 with respect to the exchanged shares. • The vendor must not have received any consideration, other than shares of the purchaser, in return for the shares given up in the exchange. In other words no NSC. Type: ES Topic: Rollovers (ITA 85.1) - basic rules & concepts

4) The provisions of ITA 85.1, share for share exchange, apply automatically unless the vendor opts out. How does the vendor opt out? Answer: The vendor opts out by reporting the share exchange as a disposition at FMV in their income tax return which would result in the reporting of a capital gain or capital loss. Note that, unlike ITA 85(1), the only amount that can be used in opting out is the FMV of the exchanged shares. Type: ES Topic: Rollovers (ITA 85.1) - basic rules & concepts

5) Jerome Barris is 85 years old and, while his spouse is deceased, he has three adult children, ages 45, 50, and 52. He owns all of the outstanding common shares of Barris Ltd., a CCPC. These shares have a PUC and ACB of $50,000, and a current FMV of $3 million. He would like to retain control of Barris Ltd. However, given his advanced age, he would like to ensure that any future growth in the value of the Company accrues to the benefit of his three adult children. Briefly explain how ITA 86 could be used to accomplish the desired objective. Answer: Under ITA 86, Mr. Barris could exchange his common shares in Barris Ltd. for some combination of NSC and redeemable preferred shares, with a total FMV equal to the $3 million FMV of the common shares. As long as the NSC does not exceed the $50,000 PUC and ACB of the common shares, there would be no immediate income tax consequences to Mr. Barris. As the FMV of any preferred share consideration together with any NSC represent 100% of the value of Barris Ltd., common shares could be sold to the children for a nominal amount of consideration. In order for Mr. Barris to retain control, the preferred shares should be voting. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

6) Several conditions must be met in order for the provisions of ITA 86 to apply. List two of the conditions. Answer: The required two conditions can be selected from the following: • The shares to be exchanged must be capital property to the owner. They cannot be part of an inventory of securities that is being held for trading purposes. • The transaction must result in an exchange of all of the outstanding shares of a particular class that are owned by the particular person. • The share exchange must be integral to a reorganization of the capital of the corporation. • The transferor must receive shares of the capital stock of the corporation. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

7) When preferred shares are issued in an ITA 86 reorganization, it is important that their FMV be sustainable to ensure that the participating shareholder remains able to recover the full amount of their pre-reorganization value. List three preferred share attributes considered essential to maintaining the value of these preferred shares. Answer: The required three share attributes provisions include the following: • The preferred shares must be redeemable at the option of the shareholder. • The preferred shares should be entitled to a dividend at a reasonable rate. • The corporation must guarantee that dividends will not be paid on any other class of shares, if the payment would result in the corporation being unable to redeem the preferred shares at their specified redemption price. • The preferred shares must become cumulative if the FMV of the net assets of the corporation falls below the redemption amount of the preferred shares, or if the corporation is unable to redeem the shares on a call for redemption. • The preferred shares should have preference on liquidation of the corporation. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

8) When new shares are issued in an ITA 86 reorganization, how is their ACB determined? Answer: The ACB of the new shares issued in an ITA 86(1) reorganization would be equal to the ACB of the old shares less any NSC. However, if a gift is involved, ITA 86(2) would apply and in that case, the ACB of the new shares will be equal to the ACB of the old shares, reduced by the sum of any NSC plus the gift amount. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

9) When new shares are issued in an ITA 86 reorganization, how is the PUC determined? Answer: The paid up capital (PUC) of new shares issued in a reorganization of capital to which ITA 86 applies would be equal to their legal capital, less a PUC reduction. This reduction calculation would start with the legal capital of the new shares. From this total, the formula requires the subtraction of any excess of the PUC of the old shares over any NSC received. If the NSC exceeds the old PUC, the reduction will be equal to the legal capital, resulting in a PUC of nil. This is the same result even if the gifting rule applies. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

10) In a reorganization of capital under ITA 86, it is necessary to calculate both a proceeds of redemption and a POD. How do these two calculations differ if there is no gift involved? Answer: The proceeds of redemption are equal to the sum of any NSC received, plus the reduced PUC of the new shares issued. The POD are equal to the sum of any NSC received, plus the ACB of the new shares issued to redeem the old shares. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

11) Briefly describe the calculation of the PUC of new shares issued in a reorganization of capital under ITA 86(1). Answer: The initial PUC is equal to the legal capital of the new shares issued. However, this amount is subject to a PUC reduction equal to the legal capital of the new shares, reduced by the excess, if any, of the PUC of the old shares over the NSC. This reduction is then subtracted from the legal capital to arrive at a final amount for the PUC of the new shares. In those cases where the NSC equals or exceeds the PUC of the old shares, the PUC reduction is equal to the legal capital of the new shares, resulting in PUC of nil. Type: ES Topic: Rollovers (ITA 86) - basic rules & concepts

12) ITA 86(2) has special rules that must be applied when a ITA 86 reorganization involves a gift to a related person. What condition create a gift? Answer: The basic condition for a gift is that the FMV of the old shares exceeds the sum of the FMV of the new shares and the FMV of any NSC received. In addition, a related person must be in a position to economically benefit from this difference. This would generally require that the related person own common shares in the reorganized corporation. Type: ES Topic: Rollovers (ITA 86) - the gifting rule (ITA 86(2)

13) When a reorganization of capital involves a gift to a related person, the provisions of ITA 86(2) modify the general ITA 86(1) rules. Briefly describe the main changes that result from these modifications. Answer: The modifications can be described as follows: • Under ITA 86(2)(e), the cost to the taxpayer of the new shares will be equal to the cost of the old shares, less the sum of the NSC and the gift amount. This compares to a cost for the new shares under ITA 86(1)(b) equal to the cost of the old shares, less any NSC. • Under ITA 86(2)(c), the POD for capital gains purposes on the old shares will be equal to the lesser of (1) the NSC plus the gift, and (2) the FMV of the old shares. This compares to the POD under ITA 86(1)(c), which is equal to the cost of the new shares, plus any NSC. • Under ITA 86(2)(d), any capital loss resulting from the disposition of the old shares will be deemed to be nil. There is no such restriction under ITA 86(1). Type: ES Topic: Rollovers (ITA 86) - the gifting rule (ITA 86(2)

14) Estate freezes can be carried out using either ITA 85(1) or ITA 86. What are the major advantages of using ITA 86(1) over using ITA 85(1)? Answer: • An ITA 86 share reorganization is generally simpler to implement than a rollover under ITA 85(1). • The use of ITA 86(1) does not require an election to be filed with the CRA. Type: ES Topic: Rollovers - ITA 85(1) vs ITA 86

15) List two conditions that are necessary for the amalgamation rollover of ITA 87 to apply. Answer: The required two conditions can be selected from the following: • All of the predecessor corporations must be taxable Canadian corporations. • All shareholders of the predecessor corporations must receive shares of the amalgamated corporation due to the amalgamation. • All of the property and liabilities of the predecessor corporations, other than intercompany accounts, must become property and liabilities of the amalgamated corporation. • The transfer cannot simply be a normal purchase of property, or involve the distribution of property on the winding-up of a corporation. The amalgamation must be undertaken within the relevant Canadian corporate law. Type: ES Topic: Rollovers (ITA 87) - basic rules & concepts

16) What is the income tax position of the shareholders of a company that has been amalgamated with another company under ITA 87, Amalgamations. Answer: The shareholders of the predecessor corporations are deemed to have received POD equal to the ACB of their shares. In addition, they are deemed to have acquired the shares of the amalgamated company at the same amount. In effect the tax attributes of the predecessor corporation shares become the tax attributes of the amalgamated corporation shares. Type: ES Topic: Rollovers (ITA 87) - basic rules & concepts

17) Subsections 88(1) and 88(2) cover two different types of transactions. Describe these two types of transactions. Answer: ITA 88(1) deals with the wind-up of a subsidiary in which the parent company owns 90% or more of each class of shares issued by the subsidiary. It is a rollover provision that allows the subsidiary property to be distributed to the parent, essentially at tax costs. ITA 88(2) deals with all other corporate wind ups meaning that those occuring on a taxable basis. ITA 88(2) is not a rollover. Type: ES Topic: Rollovers (ITA 88(1)) - basic rules & concepts

18) Both ITA 87, Amalgamations, and ITA 88(1), Wind-Up of a 90% owned subsidiary, provide for a bump-up in the tax cost of certain property. Describe the two basic limitations on the amount of this bump-up. Answer: The limits on the bump are described in the text as follows: • The basic amount of the bump-up is found in ITA 88(1)(d)(i) and (i.1). This amount is the excess of the ACB of the subsidiary shares held by the parent, over the sum of: • the net tax values (NTV) of the subsidiary at the time of the winding-up; and • any dividends paid by the subsidiary to the parent since the time of the acquisition of control (including capital dividends). • ITA 88(1)(d)(ii) further limits the amount of the bump that can be applied to the excess of the FMV of the subsidiary's non-depreciable capital property over their tax costs measured using FMV determined at the time the parent last acquired control of the subsidiary. Type: ES Topic: Rollovers (ITA 87(11) & 88(1)) - the bump

19) If a parent company wishes to incorporate the property of a majority owned subsidiary into its operations, this income tax goal of avoiding income tax can be accomplished either through an amalgamation, using ITA 87, or through the winding-up or a dissolution using ITA 88(1). Briefly describe the different income tax consequences from choosing one or the other of these alternative income tax rollovers. Answer: ITA 88(1), applies when a parent corporation owns 90% or more of each class of the subsidiary's shares. Where the ACB of the subsidiary shares exceeds the net tax value of the subsidiary the opportunity exists to increase the tax cost (bump) of certain subsidiary property to retain the lost tax cost of the subsidiary shares that are cancelled once the subsidiary is dissolved. This same bump opportunity is also available under ITA 87, but only in those cases where the parent owns 100% of the subsidiary's shares. This means that the only real difference with respect to the availability of this "bump" is that its applicability is more limited under ITA 87, since it can only be used when share ownership is 100%. A second difference between these two provisions involves the use of loss carryovers. In the case of an ITA 87 amalgamation, loss carryovers can be used immediately after the amalgamation transaction takes place. In the case of an ITA 88(1) wind-up, subsidiary loss carryovers will not become available until the first taxation year of the parent that begins after the date that the wind-up period commences. A third difference is that, in an amalgamation, CCA can be claimed in the last year of the predecessor corporations and the first year of the amalgamated corporation. In the case of a wind-up under ITA 88(1), the subsidiary will not be able to claim CCA in the year of the wind-up. A final difference is that, in an amalgamation, both predecessor companies have a deemed year end. In the ITA 88(1) wind-up, the parent company does not have a deemed year end. Type: ES Topic: Rollovers - wind-ups (ITA 88(1) vs amalgamations (ITA 87(11))

20) When a corporation is wound up or dissolved and ITA 88(2) applies, properties will be sold and liabilities will be settled. When the resulting proceeds are distributed to shareholders, the distribution will usually be made up of several different components. Briefly indicate the components that can be included in this type of distribution. Answer: The components may consist of the following amounts: • PUC. • Capital dividends. • Taxable dividends, including any balance in the Eligible and Non-Eligible RDTOH accounts. • POD for the shares. Type: ES Topic: Winding up a Canadian corporation - ITA 84(2) & 88(2)

21) Companies sometimes issue bonds that can be converted, at the discretion of the holder, into common shares of the company. In general, conversion will only occur if the FMV of the common shares available upon conversion exceed the FMV of the bonds. What are the income tax consequences to the holder of such bonds when they exercise their option to convert? Answer: The conversion transaction involves a disposition of a debt, along with the acquisition of shares. The POD for the debt would be the FMV of the shares received on the conversion and, in the absence of a special rollover rule, the result would be a capital gain. However, relief is found in the rollover rule of ITA 51(1). ITA 51(1)(c), deems such exchanges not to be a disposition. Given that there is no disposition, no capital gain or capital loss will occur. ITA 51(1)(d) deems the cost of the acquired shares to be equal to the cost of the debt given up. These provisions, in effect, permit a rollover of the two different types of investments. In effect the tax cost of the bond becomes the tax cost of the shares. Type: ES Topic: Rollovers (ITA 51) - basic rules & concepts

22) When a taxpayer receives a payment for signing a restrictive covenant, the general rule is that the full amount must be included in the taxpayer's income when it is received or receivable. The proposed legislation on this subject provides for three exceptions to this general rule. Briefly describe these exceptions. Answer: The three exceptions are as follows: • In cases where the payment relates employment, the receipt will be treated by the recipient as employment income. • When certain types of intangible capital property is being sold and the payor and the recipient jointly elect in prescribed form, the payment can be treated by the recipient as a disposition of a Class 14.1 property. • In a situation where a restrictive covenant is sold in conjunction with an eligible interest such shares of a corporation, the amount received can be added to the POD resulting in capital gain treatment. Type: ES Topic: Restrictive covenants (ITA 56.4) - basic rules & concepts

23) When business properties of a CCPC are sold, the following will usually be involved in the sale: • Accounts Receivable • Inventory • Depreciable Property excluding Goodwill • Goodwill Briefly describe the income tax implications resulting from the sale of each of the preceding types of property. Answer: Accounts Receivable - In general terms, the sale of accounts receivable is treated as a capital transaction. This means that losses are capital in nature and treated as a capital loss. However, any doubtful debt reserve from the previous year must be brought into income in the current year. There is a joint election available under ITA 22 that will allow the seller to fully deduct any losses, provided the purchaser agrees to include the same amount in their business income. Inventory - Gains and losses on the sale of inventories are either fully included in income or fully deductible against business income. Depreciable Property - The sale of depreciable property is somewhat more complex than other types of property. They can be outlined as follows: 1. If the sale proceeds (POD) exceed the ACB (e.g. capital cost), the excess will be treated as a capital gain. In addition, the difference between the UCC and the capital cost will be included in income as recapture. 2. If the proceeds are less than the balance in the UCC of the class and there are no other properties in the class on the last day of the taxation year, the deficiency will be fully deductible as a terminal loss. 3. If the proceeds are less than the capital cost but more than the UCC balance, the excess will also be treated as recapture. Goodwill - If there is goodwill some amount of the consideration received for the purchase of a business will generally be allocated to goodwill. This allocated amount will treated as POD for a Class 14.1 property to the seller and, the lesser of this amount and the capital cost of the goodwill, if any, will be subtracted from any Class 14.1 balance. As the capital cost of goodwill will most commonly be nil, the result will be that the entire POD will be treated as a capital gain. The purchaser of the business will add the allocated cost of the goodwill to Class 14.1 where it will be subject to CCA on a 5% declining balance basis. The AccII applies to this Class. Type: ES Topic: Purchase and sale of a business

24) In general, the purchaser of a corporate business would prefer to purchase the business assets (properties) rather than the shares of the corporation. Provide three reasons for this preference. Answer: The three reasons can be selected from the following: • The purchaser acquires a completely new, and usually higher, set of tax costs for assets purchased based in their individual FMV. This will result in higher CCA claims and/or lower gains on future dispositions. • Goodwill can be recognized when assets are acquired. The CCA deductions related to Class 14.1 are not available if shares are acquired because there is no purchase and sale of a business. • If shares are acquired, generally all of the assets must also be acquired unless certain assets are removed prior to the purchase and sale which influences the share purchase price. • If shares are acquired, the purchaser may become responsible for any future income tax reassessments that relate to taxation years prior to the purchase and sale. While this exposure could occur because the corporation continues to carry on the business. Purchase and sale agreements often contain indemnity and other similar clauses to protect the purchaser from any contingencies. • If shares are acquired, the purchaser may become responsible for potential non-tax liabilities related to product or environmental liabilities. However, this is another issue that is normally dealt with in the purchase and sale agreement. Type: ES Topic: Purchase and sale of a business

25) In an ITA 85.1 share-for-share exchange, the vendor must not receive any NSC. Answer: TRUE Type: TF Topic: Rollovers (ITA 85.1) - basic rules & concepts

26) ITA 85.1 was designed to be used in situations where a public company acquires a widely held corporation with a large number of shareholders as part of a takeover. Answer: TRUE Type: TF Topic: Rollovers (ITA 85.1) - basic rules & concepts

27) In a share for share exchange under ITA 85.1, the selling shareholder cannot control the purchasing company subsequent to the rollover transaction. Answer: TRUE Type: TF Topic: Rollovers (ITA 85.1) - basic rules & concepts

28) In an ITA 86(1) exchange of shares in a reorganization, the transferor cannot receive any NSC. Answer: FALSE Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

29) When used in an ITA 86(1) exchange of shares in a reorganization, preferred shares cannot have voting rights. Answer: FALSE Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

30) In an ITA 86 exchange of shares in a capital reorganization, if the transaction involves a gift to a related person, the POD for capital gains purposes on the old shares will be equal to the lesser of: • the NSC, plus the gift and • the FMV of the old shares. Answer: FALSE Explanation: The two items listed would be the proceeds of redemption. To arrive at the POD, any deemed dividend would be subtracted. Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

31) The most common application of the ITA 86 exchange of shares in a reorganization is to incorporate a business. Answer: FALSE Explanation: Such a transfer cannot be made under ITA 86(1). Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

32) In an ITA 86 exchange of shares in a reorganization, the transferor must transfer all of the shares of all classes owned in the transferee corporation. Answer: FALSE Explanation: The only requirement is that he transfer all of the shares owned of a particular class. Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

33) In an ITA 86 exchange of shares in a reorganization, if the transferor received NSC in excess of the PUC of the old shares, the PUC of the new shares issued will be reduced to nil. Answer: TRUE Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

34) In an ITA 86 exchange of shares in a reorganization, if the transferor receives shares with a FMV that is greater than the FMV of the shares given up, it may be considered a gift to a related person. Answer: FALSE Explanation: Such gifts may occur when the FMV of the shares received is less than the FMV of the shares given up. Type: TF Topic: Rollovers (ITA 86) - basic rules & concepts

35) In an ITA 87 amalgamation, losses carried forward from the amalgamating companies cannot be used by the amalgamated company until the first taxation year beginning after the beginning of the amalgamation process. Answer: FALSE Explanation: They can be used immediately. Type: TF Topic: Rollovers (ITA 87) - basic rules & concepts

36) When a 90% owned subsidiary is wound up under the provisions of ITA 88(1), the subsidiary will not be able to claim CCA in its final taxation year. Answer: TRUE Type: TF Topic: Rollovers (ITA 88(1)) - basic rules & concepts

37) If a parent company controls a subsidiary, its properties can always be distributed to the parent on a tax free basis using either an ITA 87 amalgamation or ITA 88(1). Answer: FALSE Explanation: ITA 88(1) can only be used when there is 90% or greater ownership of each class of shares of the subsidiary. ITA 87 does not require any percentage for a parent/subsidiary amalgamation however access to the bump requires that the parent own 100% of the shares of the subsidiary. Type: TF Topic: Rollovers - wind-ups (ITA 88(1) vs amalgamations (ITA 87(11))

38) If, when a corporation is wound up under the provisions of ITA 88(2), the distribution of property to the shareholders exceeds the PUC of the shares being cancelled, the excess will be treated as a capital gain, one-half of which will be included in the shareholder's income. Answer: FALSE Explanation: The excess will be treated as an ITA 84(2) deemed dividend. Type: TF Topic: Dividends - ITA 84(2) deemed dividend

39) If an investor uses a conversion feature to exchange his debt securities for shares in the same company, there is a rollover which can prevent the transaction from being treated as a disposition at FMV and therefore avoiding any immediate income tax. Answer: TRUE Type: TF Topic: Rollovers (ITA 51) - basic rules & concepts

40) Which of the following statements about ITA 85.1 is NOT correct? A) This provision is commonly used in business combination transactions. B) The vendor and the purchaser must be dealing with each other at arm's length. C) The vendor can receive a combination of shares and NSC in return for the exchanged shares without any special restructuring. D) The vendor will be deemed to have disposed of any shares for POD equal to their ACB. Answer: C Explanation: C) The vendor can receive a combination of shares and NSC in return for the exchanged shares without any special restructuring. Type: MC Topic: Rollovers (ITA 85.1) - basic rules & concepts

41) An individual owns 100% of the shares of a CCPC and wishes to exchange these shares for shares of a large public company without incurring an income tax liability. Which rollover provision would be the easiest to use for this purpose? A) ITA 85(1) - Transfer of property to a corporation. B) ITA 87 - Amalgamation. C) ITA 85.1 - Share for share exchange. D) ITA 51 - Convertible property. Answer: C Explanation: C) ITA 85.1 - Share for share exchange. Type: MC Topic: Rollovers - general rules & concepts

42) Which of the following is NOT an advantage that to using ITA 85.1 in a situation where a diverse group of shareholders will exchange their shares in one company for shares in a purchasing corporation? A) There is no need for each shareholder to file an election, the provisions of ITA 85.1 apply automatically B) Individual vendors may choose to defer the gain from the transaction in their income. C) The vendor can receive cash equal to an amount of the PUC of the shares tax-free. D) Individual vendors may choose to include the gain or loss from the transaction in their income. Answer: C Explanation: C) The vendor can receive cash equal to an amount of the PUC of the shares tax-free. Type: MC Topic: Rollovers (ITA 85.1) - basic rules & concepts

43) Ms. Takase is the sole shareholder of Takase Ltd. She owns 2,500 shares with a PUC and ACB of $400,000, and a FMV of $1,000,000. Giant Holdings Ltd. acquires these shares in return for 10,000 of its common shares, which are currently trading for $100 per share. The rollover rules of ITA 85.1 apply. The results of the transaction will be: A) Ms. Takase will report a capital gain of $600,000 as a result of her deemed disposition. The ACB of her new shares in Giant Holdings Ltd. will be nil. B) Ms. Takase will be deemed to have disposed of her Takase Ltd. shares for an amount equal to their ACB. There will be no capital gain. C) The shares of Giant Holdings Ltd. that Ms. Takase acquires will have a deemed ACB of $1,000,000, the greater of the FMV and the PUC of the Takase Ltd. shares. There will be no capital gain. D) The shares of Giant Holdings Ltd. that Ms. Takase acquires will have a deemed PUC of $1,000,000. She will report a capital gain on the disposition of $600,000. Answer: B Explanation: B) Ms. Takase will be deemed to have disposed of her Takase Ltd. shares for an amount equal to their ACB. There will be no capital gain. Type: MC Topic: Rollovers (ITA 85.1) - basic rules & concepts

44) Tiffany owns shares in the public corporation, Zoom Inc. She has received an offer from the public corporation Mooz Inc. to exchange all of her shares in Zoom Inc for shares in Mooz. The ACB of her shares is $28,000, the PUC $10,000 and the FMV $39,000. She would receive shares of Mooz Inc. with a FMV of $39,000 and a legal capital of $39,000. What is the ACB of the Mooz Inc. shares received by Tiffany under the provisions of ITA 85.1? A) $10,000 B) $28,000 C) $33,500 D) $39,000 Answer: B Explanation: B) $28,000, her ACB for the Zoom shares. Type: MC Topic: Rollovers (ITA 85.1) - basic rules & concepts

45) Jerome Owen owns 70% of the common shares of Nexto Ltd. Jerome's shares have an ACB of $1,050,000. The Nexto common shares have a total PUC of $2,300,000 and a total FMV of $2,500,000. Using the provisions of ITA 86, Jerome exchanged his shares for cash of $1,050,000 and preferred shares with a legal capital and FMV of $700,000. What is the PUC of Jerome's preferred shares? A) Nil. B) $560,000. C) $140,000. D) $700,000 Answer: B Explanation: B) $560,000. The calculation of this amount would be as follows: Increase in Legal Capital PUC - Old Shares [(70%)($2,300,000)] Less: FMV of NSC PUC Reduction

($1,610,000) 1,050,000

$700,000 ( 560,000) $140,000

This will leave a PUC of $560,000 ($700,000 - $140,000)

Type: MC Topic: Rollovers (ITA 86) - calculating the tax attributes of new shares

46) Several conditions are required in order that the provisions of ITA 86 apply. Which one of the following conditions is NOT required? A) All of the outstanding shares of the particular class must be exchanged. B) The transferor of the original shares must receive shares of the reorganized corporation as consideration for the shares exchanged. C) The new shares that will be issued must be authorized by the corporation's articles of incorporation (currently, or through an amendment prior to the reorganization). D) The original shares must be capital property. Answer: A Explanation: A) All of the outstanding shares of the particular class must be exchanged. This is not required. The only requirement is that all of the shares of that class that are held by the transferor must be exchanged. Type: MC Topic: Rollovers (ITA 86) - basic rules & concepts

47) When preferred shares are issued in an ITA 86 reorganization, it is important that they have characteristics that serve to lock in their FMV. Which of the following would NOT be useful in establishing the FMV of preferred shares? A) A fixed dividend rate. B) A priority claim to net assets in the event of the dissolution of the company. C) A provision which requires redemption at a specified amount at the discretion of the shareholder subject to liquidity concerns under corporate law. D) Voting rights. Answer: D Explanation: D) Voting rights. Type: MC Topic: Rollovers (ITA 86) - calculating the tax attributes of new shares

48) With respect to an exchange of shares in an ITA 86 reorganization, which of the following statements is NOT correct? A) The cost of the new shares will be equal to the cost of the old shares, reduced by the FMV of NSC received. B) The PUC of the new shares will be equal to their legal capital. C) The proceeds of redemption will be equal to the PUC of the new shares, plus the FMV of any NSC received. D) The POD will be equal to the cost of the new shares, plus the FMV of any NSC received. Answer: B Explanation: B) The PUC of the new shares will be equal to their legal capital. Type: MC Topic: Rollovers (ITA 86) - basic rules & concepts

49) John Smurt owns 80% of the common shares of Smurt Ltd. John's shares have an ACB of $600,000. The Smurt common shares have a total PUC of $1,000,000, and a total FMV of $2,500,000. Using the provisions of ITA 86, John exchanged all of his shares for cash of $600,000 and preferred shares with a legal capital and FMV of $1,400,000. What is the ACB of John's preferred shares? A) Nil. B) $250,000. C) $1,400,000. D) $650,000. Answer: A Explanation: A) Nil. The ACB of the new preferred shares would be equal to the $600,000 ACB of the old shares, less the $600,000 in FMV NSC received. Type: MC Topic: Rollovers (ITA 86) - calculating the tax attributes of new shares

50) Jeri Nardwal owns 80% of the common shares of Nardwal Ltd. Her son owns the other 20%. Her common shares have an ACB and PUC of $960,000. The FMV of her shares is $4,800,000. She exchanges these shares for $500,000 in cash and preferred shares with a legal capital and FMV of $3,840,000. What is the ACB of the preferred shares? A) $460,000. B) $3,840,000. C) Nil. D) $960,000. Answer: C Explanation: C) The ACB will be nil, the ACB of the old shares, less the sum of the FMV of NSC and the gift ($960,000 - $500,000 - $460,000). Type: MC Topic: Rollovers (ITA 86) - calculating the tax attributes of new shares

51) Mamma Mia is the sole shareholder of iPasta. She would like her son to eventually takeover the company so she can retire. If she chooses to use ITA 86, which of the following statements is correct? A) Mamma Mia could restructure the ownership of her company, which would result in no immediate income tax consequence for herself, with future growth accruing to her son. B) Mamma Mia could restructure the ownership of her company, which would result in an immediate income tax consequence for herself, with future growth accruing to her son. C) Mamma Mia could restructure the ownership of her company, which would result in an immediate income tax consequence for her son, with future growth accruing to her son. D) Mamma Mia could restructure the ownership of her company, but her son must purchase her common shares at their FMV to have future growth accruing to him. Answer: A Explanation: A) Mamma Mia could restructure the ownership of her company, which would result in no immediate income tax consequence for herself, with future growth accruing to her son. Type: MC Topic: Rollovers (ITA 86) - basic rules & concepts

52) Mr. Couture would like to transfer ownership of his corporation to his son who has started to work in the business. His son will not have the funds to purchase all of the shares for at least 5 years. Which of the following will permit Mr. Couture to transfer the future growth of the company to his son without any immediate income tax consequences for himself? A) A sale of his shares to his son with payment in 5 years B) A reorganization of share capital C) An amalgamation D) A wind-up Answer: B Explanation: B) A reorganization of share capital Type: MC Topic: Rollovers - general rules & concepts

53) With respect to the application of ITA 87 to amalgamations, which of the following statements is correct? A) Any capital dividend account balances of the two predecessor companies cannot be carried forward. B) There is no "bump-up" of the property tax costs of the two predecessor companies. C) Losses of the two predecessor companies cannot be used until the first taxation year of the amalgamated company that begins after the date of the amalgamation. D) The depreciable capital property of the predecessor companies will be carried forward to the amalgamated company at their UCC balances while retaining capital costs. Answer: D Explanation: D) The depreciable capital property of the predecessor companies will be carried forward to the amalgamated company at their UCC balances while retaining capital costs. Type: MC Topic: Rollovers (ITA 87) - basic rules & concepts

54) Which of the following statements related to ITA 87 amalgamations is correct? A) An amalgamation cannot increase the total amount of income eligible for the manufacturing and processing deduction. B) By bringing together a profitable and an unprofitable company, an amalgamation can result in a faster write off of depreciable property through CCA deduction. C) An acquisition of control can be effected through an amalgamation which would enable prior year net capital losses of both predecessor companies to be claimed by the amalgamated company. D) After an amalgamation, the losses of one of the predecessor companies cannot be used against the taxable income of the other predecessor company. Answer: B Explanation: B) By bringing together a profitable and an unprofitable company, an amalgamation can result in a faster write off of depreciable property through CCA deduction. D) This is incorrect since the predecessor corporations effectively come to an end for income tax purposes when the amalgamation takes place. This is why the amalgamated company is referred to as the "new" company. Type: MC Topic: Rollovers (ITA 87) - basic rules & concepts

55) Which of the following statements is NOT correct with respect to the bump available in some ITA 87 amalgamations and wind-up transactions under ITA 88(1)? A) The bump is available in a vertical amalgamation when the parent company owns 100% of the subsidiary and in a wind up when the parent company owns 90% or more of the shares of each class of the subsidiary. B) The bump is only available in a wind up when the parent company owns 100% of the shares of the subsidiary. C) In a wind up, the bump is only available on non-depreciable capital property of the subsidiary. D) In a vertical amalgamation, the bump up is only available on the non-depreciable capital property of the subsidiary. Answer: B Explanation: B) The bump is only available in a wind up when the parent company owns 100% of the shares of the subsidiary. Type: MC Topic: Rollovers (ITA 87(11) & 88(1)) - the bump

56) Which of the following is NOT one of the conditions necessary for the ITA 87(1) (amalgamation) rollover to apply? A) All the predecessor corporations must be CCPCs. B) All shareholders of the predecessor corporations must receive shares of the amalgamated corporation as a result of the amalgamation. C) All of the property and liabilities of the predecessor corporations, other than intercompany amounts, must become property and liabilities of the amalgamated corporation. D) The transfer must be an amalgamation approved by corporate law. Answer: A Explanation: A) All the predecessor corporations must be CCPCs. Type: MC Topic: Rollovers (ITA 87) - basic rules & concepts

57) Which of the following tax accounts will NOT flow through from a predecessor company to the amalgamated company as a result of an amalgamation under ITA 87? A) Eligible RDTOH of a public company. B) GRIP when the amalgamated company is a CCPC. C) Non-capital losses. D) Net capital losses. Answer: A Explanation: A) Eligible RDTOH of a public company. Public companies cannot have any RDTOH. Type: MC Topic: Rollovers (ITA 87) - basic rules & concepts

58) Shareholders of predecessor corporations are deemed to have disposed of their shares for proceeds equal to the ACB of their shares as long as certain conditions are met. Which of the following is NOT one of the necessary conditions? A) The shareholders must not receive any consideration other than shares of the amalgamated company. B) The original shares must be capital property of the shareholders. C) The shareholders must receive NSC that is equal to the ACB of their shares. D) The amalgamation must not result in a gift to a related person. Answer: C Explanation: C) The shareholders must receive NSC that is equal to the ACB of their shares. Type: MC Topic: Rollovers (ITA 87) - basic rules & concepts

59) In a situation where a parent corporation combines with a subsidiary corporation, which of the following statements is correct? A) If the parent owns 90% or more of any class of capital stock of the subsidiary, it is possible to combine the companies on a rollover basis using either ITA 87 or ITA 88(1). B) If the parent owns 90% or more of any class of capital stock of the subsidiary, it will be able to take advantage of the bump in certain subsidiary property, regardless of whether the combination is by way of a subsidiary dissolution or an amalgamation. C) If the parent owns 90% or more of the shares of each class of capital stock of the subsidiary, it will be able to take advantage of the bump in certain subsidiary property, regardless of whether the combination is by way of a subsidiary dissolution or an amalgamation. D) If the parent owns 90% or more of the shares of each class of capital stock of the subsidiary, it is possible to combine the companies using either ITA 87(1) or ITA 88(1). Answer: D Explanation: D) If the parent owns more than 90% of the shares of each class of capital stock of the subsidiary, it will be possible to combine the companies using either ITA 87 or ITA 88(1). Some of the ITA 87 benefits however such as certain losses and the bump would only apply if ITA 87(11) applies in a wholly owned subsidiary situation. Type: MC Topic: Rollovers - ITA 87 vs ITA 88(1)

60) Two unrelated companies (both with December 31 taxation year ends), one of which has both noncapital and net capital losses, are amalgamated on January 1, 2022 to form Parent Inc which also uses a December 31 taxation year end. After the amalgamation, the shareholders of the predecessor company with losses own 10% of Parent Inc. and the shareholders of the other predecessor own 90%. During the taxation year ended December 31, 2022, Parent Inc. has net income which includes a taxable capital gain. Parent Inc. continues to carry on the businesses of both predecessor corporations on a profitable basis. Which of the following statements best describes the situation of Parent Inc. with respect to the ability to claim the net and non-capital losses of the predecessor? A) All losses carried forward from the predecessor companies will be deductible to Parent Inc. as soon as the amalgamation is complete. B) Parent Inc. will not be able to claim any of the losses against its taxable income. C) Parent Inc. will be able to utilize the non-capital loss against profits from the same business in which the loss was incurred beginning with the 2022 taxation year. The net capital losses cannot be utilized by Parent Inc. since those losses are restricted by an the acquisition of control of the loss predecessor. D) Parent Inc. will be able to utilize the non-capital loss against profits from the same business in which the loss was incurred beginning in the 2023 taxation year. The net capital losses cannot be utilized by Parent Inc. Answer: C Explanation: C) Parent Inc. will be able to utilize the non-capital loss against profits from the same business in which the loss was incurred beginning with the 2022 taxation year. The net capital loss cannot be utilized by Parent Inc. This is because the predecessor with the net and non-capital losses was deemed to have been subject to an acquisition of control. Type: MC Topic: Rollovers (ITA 87) - basic rules & concepts

61) With respect to the application of ITA 88(1), winding up of a 90% owned subsidiary, which of the following statements is NOT correct? A) A bump in the cost of non-depreciable capital property may be available. B) Both the subsidiary and the parent will have a deemed taxation year end. C) Subsidiary losses will become available to the parent company in its first taxation year which begins after the commencement of the wind-up. D) The tax costs of subsidiary property distributed to the parent on the winding-up will become the tax costs of that property to the parent company. Answer: B Explanation: B) Both the subsidiary and the parent will have a deemed taxation year end. Type: MC Topic: Rollovers (ITA 88(1)) - basic rules & concepts

62) With respect to the application of ITA 88(1), winding up of a 90% owned subsidiary, which of the following statements is NOT correct? A) The GRIP balance will flow through to the parent company if both the subsidiary and the parent were CCPC's before the wind-up. B) LRIP balances will only flow through to the parent if the subsidiary was a CCPC. C) The subsidiary is deemed to have disposed of its property to the parent at cost amount, which is an amount that represents the various tax costs of property. D) The subsidiary can not claim CCA in the year of the wind-up, but the parent is able to claim CCA on subsidiary property in the wind-up year. Answer: B Explanation: B) LRIP balances will only flow through to the parent if the subsidiary was a CCPC. Type: MC Topic: Rollovers (ITA 88(1)) - basic rules & concepts

63) Okanagan Limited has a November 30 taxation year end, while its 95% owned subsidiary Valley Limited has a March 31 taxation year end. Valley Limited is wound up using the rollover provisions of ITA 88(1) on September 15, 2022. At that time, Valley Limited has a 2022 non-capital loss of $150,000 for the period from April 1 to September 15, 2022. The earliest taxation year in which Okanagan Limited can make use of this $150,000 non-capital loss is the taxation year ending: A) September 15, 2022. B) November 30, 2023. C) November 30, 2024. D) March 31, 2023. Answer: B Explanation: B) November 30, 2023. Type: MC Topic: Rollovers (ITA 88(1)) - basic rules & concepts

64) What is the purpose of the bump in the tax cost of the property of a subsidiary distributed to the parent that is sometimes available in a vertical amalgamation or wind up of a 90% owned subsidiary? A) The bump gives full recognition to the fact that the cost of acquiring a subsidiary usually exceeds the underlying tax costs of the subsidiary's properties. B) The bump gives partial recognition to the fact that the cost of acquiring a subsidiary usually exceeds the underlying tax costs of the subsidiary's properties. C) The bump gives partial recognition to the fact that the cost of acquiring a subsidiary always exceeds the total underlying tax costs of the subsidiary's properties. D) The bump gives full recognition to the fact that the cost of acquiring a subsidiary exceeds the total underlying tax costs of the subsidiary's properties. Answer: B Explanation: B) The bump gives partial recognition to the fact that the cost of acquiring a subsidiary usually exceeds the underlying tax costs of the subsidiary's properties. Type: MC Topic: Rollovers (ITA 87(11) & 88(1)) - the bump

65) Danton is the only shareholder of a corporation that has liquidated all of its properties. After paying all of its liabilities, there is $450,000 in cash available for distribution on the winding up and dissolution of the company. The common shares have a PUC of $45,000 and an ACB of $80,000 and there is a balance in the company's CDA of $51,000. There is no balance in the company's GRIP account. The distribution to Danton is: A) a capital dividend of $51,000, along with a taxable non-eligible dividend of $354,000. B) a capital dividend of $51,000, along with a taxable eligible dividend of $354,000. C) return of capital of $45,000, along with a taxable non-eligible dividend of $405,000. D) a capital dividend of $51,000, along with a taxable non-eligible dividend of $405,000. Answer: A Explanation: A) Deemed dividend on winding-up of $405,000 ($450,000 - $45,000). This is made up of a capital dividend of $51,000 and a taxable non-eligible dividend of $354,000. B) B uses eligible instead of non- eligible. Type: MC Topic: Winding up a Canadian corporation - ITA 84(2) & 88(2)

66) Jasmine Lee owns all of the shares of Tee Ltd. The ACB of her shares is $50,000. Because of declining sales, she has decided to wind up the Company. The rules of ITA 88(2) will apply. Once all corporate properties have been sold and all corporate taxes paid, there is $2,000,000 available for a final distribution. The balances in the various tax accounts and PUC of Tee Ltd. are as follows: PUC Eligible RDTOH Non-Eligible RDTOH CDA

$ 100,000 Nil Nil 400,000

If Jasmine properly files all elections that would minimize the income tax consequences of the distribution, of the following statements, which one is correct? A) Jasmine will receive dividends subject to tax of $1,500,000 (before any gross up), as well as a taxable capital gain of $25,000, when she receives the $2,000,000 distribution. B) Jasmine will have a taxable capital gain of $975,000 when she receives the $2,000,000 distribution. C) As a rollover provision is being used, there will be no current tax consequences when she receives the $2,000,000 distribution. D) Jasmine will receive dividends subject to tax of $1,500,000 (before any gross up), as well as a taxable capital gain of $225,000, when she receives the $2,000,000 distribution. Answer: A Explanation: A) Jasmine will receive dividends subject to tax of $1,500,000 ($2,000,000 - PUC $100,000 CDA $400,000), as well as a taxable capital gain of $25,000 [($2,000,000 - $1,900,000 - $50,000)(1/2)], when she receives the $2,000,000 distribution. Type: MC Topic: Winding up a Canadian corporation - ITA 84(2) & 88(2)

67) Ku Jung owns all of the shares of Jay Ltd. The ACB of the shares is $5,000. He has decided to retire, and has wound up the Company. The rules of ITA 88(2) apply. After the properties have been sold and all corporate taxes paid, there is $700,000 available for a final distribution. The balances in the various tax accounts and PUC of Jay Ltd. are as follows: PUC Eligible RDTOH Non-Eligible RDTOH GRIP Account CDA

$ 1,000 Nil 20,000 30,000 100,000

If Mr. Jung properly files all elections that would minimize the income tax consequences of the distribution, what is the maximum amount he could receive tax free? A) $1,000 B) $5,000 C) $100,000 D) $101,000 Answer: D Explanation: A) $1,000 [PUC] B) $5,000 [ACB] C) $100,000 [CDA] D) $101,000 [PUC ($1,000) + CDA ($100,000)] Type: MC Topic: Winding up a Canadian corporation - ITA 84(2) & 88(2)

68) Ariella Buxo owns convertible bonds of Lion Holdings Inc. Ariella acquired these bonds for $100,000. The bonds are convertible into 1,000 common shares of Lion Holdings Inc. At the time of her purchase of the bonds, the common shares were trading at $95 per share. The bonds are converted when the common shares are trading at $125 per share. The conversion of the bond is eligible for rollover treatment under ITA 51 and will result in: A) a capital gain of $25,000. B) no capital gain. C) a deemed dividend of $25,000. D) a capital gain of $30,000. Answer: B Explanation: A) A capital gain of $25,000. [(1,000)($125-$100)] B) No capital gain. C) A deemed dividend of $25,000. [(1,000)($125-$100)] D) A capital gain of $30,000. [(1,000)($125-$95)] Type: MC Topic: Rollovers (ITA 51) - basic rules & concepts

69) Which of the following is one of the conditions required for ITA 51 to apply? A) The exchange must be part of a reorganization of capital. B) The exchange must involve NSC. C) The exchange must involve an exchange of convertible debt for common shares or preferred shares. D) The exchange must not involve any NSC. Answer: D Explanation: C) ITA 51 also applies to a share for share exchange meaning that convertible debt is not a necessity. D) The exchange must not involve any NSC. Type: MC Topic: Rollovers (ITA 51) - basic rules & concepts

70) Indicate which of the following would be considered an advantage of purchasing assets rather than shares in the purchase of a business. A) The availability of the capital gains deduction. B) The ability to carry forward non-capital losses of the business after the acquisition. C) The ability to recognize goodwill. D) The ability to avoid land transfer tax. Answer: C Explanation: C) The ability to recognize goodwill. Type: MC Topic: Purchase and sale of a business

71) Nancy recently received an offer for the shares of her corporation, Eager Beaver Consultants Ltd. Nancy's shares have an ACB of $600,000. The shares of the Company do not qualify for the capital gains deduction. Although Nancy would like to sell her shares and retire, she will only sell her shares if her after tax retention from the sale totals at least $2 million. Assuming that Nancy's combined federal and provincial marginal income tax rate is 50%, what is the minimum price Nancy should accept for her shares? A) $2,466,667. B) $4,600,000. C) $2,840,000. D) $3,400,000. Answer: A Explanation: A) Nancy will realize a capital gain of $1,866,667, resulting in a taxable capital gain of $933,334. She will pay $466,667 in taxes, leaving her with $2,000,000. The supporting calculation is: X - [(X - $600,000)(1/2)(50%)] = $2,000,000 X - (0.25X - $150,000) = $2,000,000 0.75X + $150,000 = $2,000,000 0.75X = $1,850,000 X = $2,466,667 Type: MC Topic: Purchase and sale of a business

72) During the current year, all of the property of Linden Enterprises, a CCPC, were sold. Among the property was goodwill with a FMV of $425,000. As the goodwill was internally generated, its capital cost was nil. Which of the following statements is correct? A) Linden will include active business income of $425,000 in its income, with no addition to the capital dividend account. B) Linden will include a taxable capital gain of $212,500 in its income, and there will be a $212,500 addition to the capital dividend account. C) Linden will include active business income of $212,500 in its income, and there will be a $212,500 addition to the capital dividend account. D) Linden will include active business income of $425,000 in its income, and there will be a $212,500 addition to the capital dividend account. Answer: B Explanation: B) Linden will include a taxable capital gain of $212,500 in its income, and there will be a $212,500 addition to the capital dividend account. Type: MC Topic: Purchase and sale of a business

73) Yamaguchi Inc purchases all the property of Ito Inc. after months of negotiation. The FMV of all of the properties purchased exceed their tax costs. Which of the following will NOT be a result of this transaction? A) Yamaguchi will obtain a higher tax cost for the properties purchased resulting in higher future CCA claims. B) Goodwill can be recognized and as a result, Yamaguchi will be able to claim future CCA (Class 14.1). C) Yamaguchi will be held liable for any future income tax reassessments of Ito Inc. D) Any non-capital losses of Ito Inc. cannot be utilized by Yamaguchi Inc. Answer: C Explanation: C) Yamaguchi will be held liable for future income tax reassessments of Ito Inc. Type: MC Topic: Purchase and sale of a business

74) Mr. Germotte has two offers to purchase his wholly owned corporation, one for all of the property and another for all of the shares. In considering the offer to purchase all of the property, which of the following is correct? A) The sale of corporate property will avoid a wind-up. B) Mr. Germotte can take advantage of the capital gains deduction if the shares of the corporation qualify. C) Mr. Germotte may be subject to income taxes on business income and capital gains. D) The corporation may be subject to income taxes on business income and capital gains. Answer: D Explanation: D) The corporation may be subject to income taxes on business income and capital gains. Type: MC Topic: Purchase and sale of a business

75) Mr. Morgan Forbes is the sole shareholder of Forbes Ltd., a CCPC the shares of which do not qualify for the capital gains deduction. The corporation was incorporated several years ago by Mr. Forbes with an investment of $540,000 which is currently valued (FMV) at $2,640,000. The shares of his Company are acquired by a large publicly traded company, Megopolis Ltd., through the issuance of 75,000 new Megopolis shares. At the time of this business combination, the Megopolis Ltd. shares are trading at $36 per share. Indicate the income tax consequences of this transaction to both Mr. Forbes and Megopolis Ltd. Answer: The transaction involves a share for share exchange that meets the conditions of ITA 85.1. Unless Mr. Forbes opts out of this rollover provision in his income tax return, by reporting any capital gain or capital loss as if the shares were sold at FMV, the income tax consequences of this transaction for him would be as follows: • Mr. Forbes would be deemed to have disposed of his Forbes Ltd. shares for POD equal to the ACB of $540,000. As a consequence, there would be no capital gain or capital loss on the disposition. • Mr. Forbes would be deemed to have acquired his Megopolis Ltd. shares at a cost equal to the ACB of the Forbes Ltd. shares, or $540,000. • The ACB of the Forbes Ltd. shares that have been acquired by Megopolis Ltd. would be deemed to be the lesser of their FMV of $2,640,000 and their PUC of $540,000. In this case, the $540,000 PUC amount is the lower amount. • The PUC of the Megopolis Ltd. shares that have been issued to Mr. Forbes would be $540,000, the PUC of the Forbes Ltd. shares that were given up. Type: ES Topic: Rollovers (ITA 85.1) - basic rules & concepts

76) Farnum Ltd. is a CCPC that was incorporated by Freddy Farnum with an original investment of $400,000 for the shares. The shares of Farnum Ltd. do not qualify for the capital gains deduction. In 2021, Freddy sold all of the shares to John Gage for $700,000. In early, 2022, John is approached by a large public company, Gross Enterprises, that offers him 200,000 of their shares in return for all of John's shares. The offer is accepted by John and, at this time, the shares of Gross Enterprises are trading at $6 per share. Indicate the income tax consequences of this transaction to both John and Gross Enterprises. Answer: This transaction involves a share for share exchange that meets the conditions of ITA 85.1. Unless Mr. Gage opts out of this rollover provision in his income tax return by reporting any capital gain or capital loss as if the shares were sold at FMV, the income tax consequences of this transaction would be as follows: • Mr. Gage would be deemed to have disposed of his Farnum Ltd. shares at their ACB of $700,000. • Mr. Gage would be deemed to have acquired his Gross Enterprises shares at a cost equal to the $700,000 ACB of the Farnum Ltd. shares. • The ACB of the Farnum Ltd. shares that have been acquired by Gross Enterprises would be deemed to be the lesser of their FMV of $1,200,000 and their PUC of $400,000. In this case, the $400,000 PUC is the lower amount. • The PUC of the Gross Enterprises shares that have been issued to Mr. Gage would be $400,000, the PUC of the Farnum Ltd. shares that were given up. Type: ES Topic: Rollovers (ITA 85.1) - basic rules & concepts

77) Ms. Laura Cooper is the sole shareholder of Cooper Inc, a CCPC. The ACB and PUC of the common shares are $1,375,000 and the FMV $2,950,000. At this time, Cooper Inc. has no balance in its GRIP account. Ms. Cooper exchanges all of her Cooper Inc. shares for cash of $1,375,000 and preferred shares of the company that are redeemable for $1,575,000. Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations. Answer: The required PUC reduction on the retractable preferred shares would be calculated as follows: Increase in Legal Capital Less The Excess, if any, of: PUC of Common Shares Over the FMV of NSC PUC Reduction

$1,575,000 ($1,375,000) 1,375,000

Nil $1,575,000

This means that the redeemable preferred shares would have a PUC of nil ($1,575,000 - $1,575,000). The ACB of the redeemable preferred shares would be calculated as follows: ACB of Common Shares Less: FMV of NSC ACB of redeemable Preferred Shares

$1,375,000 ( 1,375,000) Nil

Because Laura took back cash equal to the PUC and ACB, there would be no ITA 84(3) deemed dividend and no capital gain or loss. These calculations would be as follows: PUC of New Shares Plus FMV of NSC Proceeds of Redemption under ITA 84(5)(d) PUC of Old Shares ITA 84(3) Deemed Dividend

Nil $1,375,000 $1,375,000 ( 1,375,000) Nil

ACB of New Shares Plus FMV of NSC POD under ITA 86(1)(c) Less: ITA 84(3) Deemed Dividend Modified POD ACB of Old Shares Capital Gain (Loss)

Nil $1,375,000 $1,375,000 Nil $1,375,000 ( 1,375,000) Nil

Type: ES Topic: Rollovers (ITA 86) - comprehensive problem

78) Sundance Ltd. is a CCPC. All of its issued common shares have always been owned by Rob Red. The FMV of the shares is $900,000 and the PUC and ACB are both $200,000. The Company has no balance in its GRIP account. At this time, Mr. Red exchanges all of his Sundance common shares for cash of $200,000 and preferred shares that are redeemable for $700,000. Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations. Answer: The required PUC reduction on the redeemable preferred shares would be calculated as follows: Increase in Legal Capital Less the Excess, if any, of: PUC of Common Shares Over the FMV of NSC PUC Reduction

$700,000 ($200,000) 200,000

Nil $700,000

This means that the redeemable preferred shares would have a PUC of nil ($700,000 - $700,000). The ACB of the redeemable preferred shares would be calculated as follows: ACB of Common Shares Less: FMV of NSC ACb of Redeemable Preferred Shares

$200,000 ( 200,000) Nil

Because Mr. Red took back cash equal to his PUC and ACB, there would be no ITA 84(3) deemed dividend and no capital gain or capital loss. These calculations would be as follows: PUC of New Shares Plus FMV of NSC Proceeds of Redemption under ITA 84(5)(d) PUC of Old Shares ITA 84(3) Deemed Dividend

Nil $200,000 $200,000 ( 200,000) Nil

ACB of New Shares Plus FMV of NSC POD under ITA 86(1)(c) Less: ITA 84(3) Deemed Dividend Modified POD ACB of Old Shares Capital Gain (Loss)

Nil $200,000 $200,000 Nil $200,000 ( 200,000) Nil

Type: ES Topic: Rollovers (ITA 86) - comprehensive problem

79) Ms. Samantha Shields is the sole shareholder of Shields Ltd, a CCPC. The tax attributes of its issued common shares are - FMV $920,000; ACB $500,000; and PUC $400,000. The balance in its GRIP account is nil. Ms. Shields exchanges all of her Shields Ltd. common shares for cash of $480,000 and preferred shares that are redeemable for $440,000. Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations. Answer: The required PUC reduction on the redeemable preferred shares would be calculated as follows: Increase in Legal Capital Less the Excess, if any, of: PUC of Common Shares Over the FMV of NSC PUC Reduction

$440,000 ($400,000) 480,000

Nil $440,000

This means that the redeemable preferred shares would have a PUC of nil ($440,000 - $440,000). The ACB of the redeemable preferred shares would be calculated as follows: ACB of Common Shares Less: FMV of NSC ACB of Redeemable Preferred Shares

$500,000 ( 480,000) $ 20,000

Because the NSC was greater than the PUC of the old shares, the resulting ITA 84(3) deemed dividend and the capital loss would be calculated as follows: PUC of New Shares Plus FMV of NSC Proceeds of Redemption under ITA 84(5)(d) PUC of Old Shares ITA 84(3) Deemed Dividend (Non-Eligible)

Nil $480,000 $480,000 ( 400,000) $ 80,000

ACB of New Shares Plus FMV of NSC POD under ITA 86(1)(c) Less: ITA 84(3) Deemed Dividend Modified POD ACB of Old Shares Capital Loss Inclusion Rate Allowable Capital Loss

$ 20,000 480,000 $500,000 ( 80,000) $420,000 ( 500,000) ($ 80,000) 1/2 ($ 40,000)

Type: ES Topic: Rollovers (ITA 86) - comprehensive problem

80) Mr. Hal Brook is the sole shareholder of HB Ltd., a CCPC. The tax attributes of the shares are a FMV of $1,450,000, an ACB of $400,000, and a PUC of $700,000. The Company has no balance in its GRIP account. At this time, Mr. Brook exchanges all of his HB Ltd. common shares for cash of $700,000 and HB Ltd. preferred shares that are redeemable for $750,000. Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations. Answer: The required PUC reduction on the redeemable preferred shares would be calculated as follows: Increase in Legal Capital Less the Excess, if any, of: PUC of Common Shares Over the FMV of NSC PUC Reduction

$750,000 ($700,000) 700,000

Nil $750,000

This means that the redeemable preferred shares would have a PUC of nil ($750,000 - $750,000). The ACB of the redeemable preferred shares would be calculated as follows: ACB of Common Shares Less: FMV of NSC ACB of Redeemable Preferred Shares

$400,000 ( 700,000) Nil

While there is no ITA 84(3) deemed dividend in this problem, there is a taxable capital gain. because the NSC exceeded the ACB of the exchanged (old) shares. The relevant calculations are as follows: PUC of New Shares Plus FMV of NSC Proceeds of Redemption under ITA 84(5)(d) PUC of Old Shares ITA 84(3) Deemed Dividend (Non-Eligible)

Nil $700,000 $700,000 ( 700,000) Nil

ACB of New Shares Plus FMV of NSC POD under ITA 86(1)(c) Less: ITA 84(3) Deemed Dividend Modified POD ACB of Old Shares Capital Gain Inclusion Rate Taxable Capital Gain

$ Nil 700,000 $700,000 Nil $700,000 ( 400,000) $300,000 1/2 $150,000

Type: ES Topic: Rollovers (ITA 86) - comprehensive problem

81) Mr. Jean Doyen owns 80% of the common shares of Jondon Inc. His shares have an ACB of $420,000. The remaining common shares are owned by his 19 year old son and his shares have an ACB of $105,000. The corporation is a CCPC and its shares have a total FMV of $3,360,000 and PUC of $525,000. In 2022, Mr. Doyen exchanged all of his Jondon Inc. common shares for cash of $630,000 and preferred shares that are redeemable for $1,680,000. At this time, Jondon Inc. has no balance in its GRIP account. Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations.

Answer: Mr. Doyen gave up shares with a FMV of $2,688,000 [(80%)($3,360,000)] in return for consideration of $2,310,000 ($630,000 + $1,680,000). As his son owns the remaining common shares, there is a gift to the son of $378,000 ($2,688,000 - $2,310,000). This means that ITA 86(2) is applicable. The PUC reduction on the new shares would be calculated as follows: Increase in Legal Capital Less the Excess of: PUC of Common Shares [(80%)($525,000)] Over the FMV of NSC PUC Reduction

$1,680,000 ($420,000) 630,000

Nil $1,680,000

This means that the redeemable preferred shares would have a PUC of nil ($1,680,000 - $1,680,000). Under ITA 86(2)(e), the ACB of the redeemable preferred shares would be calculated as follows: ACB of Mr. Doyen's Common Shares Deduct: FMV of NSC Gift ACB of Preferred Shares

$ 420,000 ($630,000) ( 378,000)

(1,008,000) Nil

The calculation of the deemed dividend and capital gain would be as follows: PUC of New Shares Plus FMV of NSC Proceeds of Redemption under ITA 84(5)(d) PUC of Old Shares ITA 84(3) Deemed Dividend (Non-Eligible)

Nil $630,000 $630,000 ( 420,000) $210,000

POD under ITA 86(2)(c) - Lesser of: • FMV of Shares Given Up [(80%)($3,360,000)] = $2,688,000 • FMV of NSC + Gift ($630,000 + $378,000) = $1,008,000 Less ITA 84(3) Deemed Dividend Modified POD ACB of Old Shares Capital Gain Inclusion Rate Taxable Capital Gain

$1,008,000 ( 210,000) $ 798,000 ( 420,000) $ 378,000 1/2 $189,000

The taxable non-eligible dividend would be $241,500 [(115%)($210,000)]. The taxable dividend would qualify for a federal dividend tax credit of $21,808 [(9/13)(15%)($210,000)]. Type: ES Topic: Rollovers (ITA 86) - comprehensive problem with gift

82) Margaret Hutch owns 60% of the common shares of MH Inc., a CCPC. Her shares have an ACB of $300,000. Her common-law partner, Jane Evans, owns the remaining 40% and her shares have an ACB of $200,000. The FMV of the common shares are $2,300,000 and the PUC is $500,000. In 2022, Ms. Hutch exchanges all of her MH Inc. shares for cash of $350,000 and redeemable preferred shares of $830,000. MH Inc. does not have a balance in its GRIP account. Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations.

Answer: Ms. Hutch gave up shares with a FMV of $1,380,000 [(60%)($2,300,000)] in return for consideration of $1,180,000 ($350,000 + $830,000). As her common-law partner, Jane, holds the remaining common shares, there is a gift to Jane of $200,000 ($1,380,000 - $1,180,000). This means that ITA 86(2) is applicable. The PUC reduction on the new shares would be calculated as follows: Increase in Legal Capital Less the Excess of: PUC of Common Shares [(60%)($500,000)] Over the FMV of NSC PUC Reduction

$830,000 ($300,000) 350,000

Nil $830,000

This means that the redeemable preferred shares would have a PUC of nil ($830,000 - $830,000). Under ITA 86(2)(e), the ACB of the redeemable preferred shares would be calculated as follows: ACB of Ms. Hutch's Common Shares Deduct: FMV of NSC Plus Gift ACBV of Preferred Shares

$300,000 ($350,000) ( 200,000)

( 550,000) Nil

Nil $350,000 $350,000 ( 300,000) $ 50,000

POD under ITA 86(2)(c) - Lesser of: • FMV of Shares Given Up [(60%)($2,300,000)] = $1,380,000 • FMV of NSC Plus the Gift Amount ($350,000 + $200,000) = $550,000 Less ITA 84(3) Deemed Dividend Modified POD ACB of Old Shares Capital Gain Inclusion Rate Taxable Capital Gain

$550,000 ( 50,000) $500,000 ( 300,000) $200,000 1/2 $100,000

The taxable non-eligible dividend would be $57,500 [(115%)($50,000)]. The taxable dividend would qualify for a federal dividend tax credit of $5,192 [(9/13)(15%)($50,000)]. Type: ES Topic: Rollovers (ITA 86) - comprehensive problem with gift

83) During its taxation year ending December 31, 2021, Loser Inc. has a non-capital loss of $74,400 and an net capital loss of $120,000. Neither loss can be carried back. On January 1, 2022 the Company is amalgamated with Winner Ltd., a company that also has a December 31 taxation year end. ITA 87 applies to the amalgamation. The amalgamated company is named Combo Inc. and it elects to use a December 31 taxation year end. The terms of the amalgamation give 16,000 Combo Inc. shares to the Loser Inc. shareholders, and 120,000 Combo Inc. shares to the Winner Ltd. shareholders. During the taxation year ending December 31, 2022, Combo Inc. has net income of $960,000, including over $240,000 in taxable capital gains. Will Combo Inc. be able to deduct the net capital and non-capital losses inherited from Loser Inc. in its 2022 taxation year? Explain your conclusion. Answer: As Winner Ltd. has a clear majority of the shares in Combo Inc., there would be a deemed acquisition of control of Loser prior to the amalgamation (ITA 256(7)(b)). The non-capital loss carry forward of Loser Inc. is available to the amalgamated company to the extent that the loss business is carried on for profit. The non-capital loss however is only deductible to the amalgamated corporation to the extent of profits from that loss business and any other similar business. The net capital loss however cannot be claimed by the amalgamated corporation. Type: ES Topic: Rollovers (ITA 87) - comprehensive problem

84) For the taxation year ending December 31, 2021, Hub Ltd. has a net capital loss of $115,000, as well as a non-capital loss of $85,000. Neither of these losses can be carried back. The Company has no loss carry forwards from taxation years prior to 2021. On January 1, 2022 Hub Ltd. is amalgamated with Core Inc. The amalgamation complies with ITA 87. The amalgamated Company is named Hubcore Ltd. and, because Core is much larger than Hub, its shareholders receive the majority of voting shares in the amalgamated company. Hubcore will have a December 31 taxation year end. During the year ending December 31, 2022 Hubcore has $200,000 of net income. This total is made up $85,000 in taxable capital gains and $115,000 of business income. Of the $115,000 in net business income, $52,000 relates to the business of Hub. Will Hubcore Ltd. be able to claim the net capital or non-capital losses inherited from Hub Ltd. for its 2022 taxation year? Explain your conclusion. Answer: As the shareholders of Core own a majority of the shares in Hubcore, there has been an acquisition of control of Hub immediately prior to the amalgamation. This means that Hub's net capital loss cannot be claimed by Hubcore. However, to the extent that Hubcore has profits from the business of Hub, the non-capital loss carry forward can be claimed. This means that $52,000 of the $85,000 non-capital loss carry forward could be deducted by Hubcore, leaving a non-capital loss balance of $33,000 ($85,000 $52,000). Type: ES Topic: Rollovers (ITA 87) - comprehensive problem

85) On January 1, 2018, Chipper Ltd. acquired 100% of the outstanding shares of Intell Inc. at a cost of $1,800,000. At that time, the FMV of Intell's is $1,275,000 with land representing $405,000 of that value. On December 31, 2022, Intell Inc. is wound up and its properties distributed to its parent. ITA 88(1) applies to the wind-up. Intell Inc. has paid no dividends since its acquisition by Chipper Ltd. On December 31, 2022, the condensed Balance Sheet of Intell Inc. is as follows: Cash Land - At Cost (Purchased in 2014) Depreciable Property - At UCC (Purchased in 2014) Total

$180,000 210,000 360,000 $750,000

Liabilities Shareholders' Equity Total Equities

$112,500 637,500 $750,000

Determine the tax costs of the property distributed to Chipper Ltd. by Intell Inc.'s on the wind-up. Answer: Under ITA 88(1), a limited bump in the cost of non-depreciable capital property is available. The basic limit would be calculated as follows: ACB of Intell Inc. Shares Net Tax Value of Intell Inc At Winding-Up ($750,000 - $112,500) Dividends paid by Intell Since Acquisition Excess (Maximum Bump)

$1,800,000 ( 637,500) Nil $1,162,500

However, this basic amount cannot exceed the difference between the FMV of the non-depreciable capital property at the time of the share acquisition and their tax cost at that time. This amount would be $195,000 ($405,000 - $210,000). The bump in the cost of the land is limited to that amount, resulting in the following tax cost for the Intell's property acquired by Chipper on the wind-up: Cash Land ($210,000 + $195,000) Depreciable Property - At UCC Total Assets

$180,000 405,000 360,000 $945,000

Type: ES Topic: Rollovers (ITA 88(1)) - comprehensive problem

86) Kelowna Corporation acquires 100% of the shares of Columbia Inc. on October 31, 2015 for $2,750,000. At that time, Columbia Inc. owned one non-depreciable capital property, a piece of vacant land with an ACB of $400,000 and a FMV of $750,000. Since November 1, 2015, Columbia Inc. has paid dividends of $300,000 to Kelowna Corporation. On October 31, 2022 the net tax value (NTV) of Columbia Inc. is $2,200,000 and the company is wound up. ITA 88(1) applies to the wind-up. What will be the tax cost of the land after the wind-up? Answer: Under ITA 88(1), a limited bump in the cost of non-depreciable capital property is available. The basic limit would be calculated as follows: ACB of Columbia Inc. shares Net Tax Values (NTV) of Columbia Inc. Dividends paid by Columbia Inc. Since Acquisition Excess (Maximum Bump)

$2,750,000 ( 2,200,000) ( 300,000) $ 250,000

The other limit is the excess of the FMV of the non-depreciable capital property at the time of acquisition in 2015 and their tax cost at that time. This amount would be $350,000 ($750,000 - $400,000). The bump would be $250,000, the lesser of these amounts. The ACB of the land to Kelowna us therefore $650,000 ($400,000 + $250,000). Type: ES Topic: Rollovers (ITA 88(1)) - comprehensive problem

87) Nanaimo Corporation acquires 100% of the shares of Island Inc. on December 31, 2015 for $2,750,000. At that time, Island Inc. owned one non-depreciable capital property, a piece of vacant land with an ACB of $200,000 and a FMV of $350,000. Since January 1, 2015, Island Inc. has paid dividends totaling $300,000 to Nanaimo Corporation. On December 31, 2022 when the net tax value (NTV) of Island Inc. is $2,200,000. Island is wound up into Nanaimo. The wind-up qualifies for ITA 88(1) treatment. Nanaimo Corporation then sells the vacant land that was owned by Island Inc. for $1,600,000. What taxable capital gain will Nanaimo report as a result of that sale? Answer: Under ITA 88(1), a limited bump-up in the cost of non-depreciable capital property is available. The basic limit would be calculated as follows: ACB of Island Inc. shares NTV at Winding-Up Dividends paid by Island Inc. since acquisition Excess (Maximum Bump)

$2,750,000 ( 2,200,000) ( 300,000) $ 250,000

However, this excess amount cannot exceed the difference between the FMV of non-depreciable capital property at the time of the share acquisition in 2015 and their tax cost at that time. This amount would be $150,000 ($350,000 - $200,000). As a result, the ACB of the land would be equal to its original cost to Island Inc. of $200,000 plus a bump of $150,000. The taxable capital gain is [(1/2)($1,600,000 - $350,000)] = $625,000. Type: ES Topic: Rollovers (ITA 88(1)) - comprehensive problem

88) Sundown Inc. is a CCPC. After disposing of all of its properties and paying all of its liabilities, including income tax payable, Sundown Inc. is left with cash of $2,854,500. The ACB and PUC of the Company's shares are both $290,400. After the sale of all of its properties, the Company has a NonEligible RDTOH account balance of $155,100, a CDA balance of $85,800 and a GRIP balance of nil. Determine the income tax consequences to the shareholders of Sundown Inc. if, in 2022, the Company makes the maximum cash distribution to its shareholders on the winding-up of the corporation. Assume that appropriate elections will be made to minimize any income tax to the shareholders. You are not required to calculate income tax payable for the shareholders. Answer: Given the size of the proceeds, the balance in the Non-Eligible RDTOH account will clearly be less than 38-1/3% of taxable dividends. Given this, the required calculations are as follows: Available Cash Dividend Refund (Non-Eligible RDTOH Balance) Total Distribution PUC ITA 84(2) Deemed Dividend Capital Dividend (Election Required) Non-Eligible Dividend

$2,854,500 155,100 $3,009,600 ( 290,400) $2,719,200 ( 85,800) $2,633,400

The taxable dividend is $3,028,410 [(115%)($2,633,400)] and the related federal dividend tax credit is $273,468 [(9/13)(15%)($2,633,400)]. As a disposition of shares has occurred, we must also determine whether there is a capital gain or capital loss. The calculations are as follows: Total Distribution Less: ITA 84(2) Deemed Dividend Modified POD ACB of Shares Capital Gain or Capital Loss

Type: ES Topic: Winding up a Canadian corporation - ITA 84(2) & 88(2)

$3,009,600 ( 2,719,200) $ 290,400 ( 290,400) Nil

89) Ku Jung owns all of the shares of Jay Ltd, a CCPC. The ACB of his shares is $1,000. He has decided to retire, and to dissolve the Company. The rules of ITA 88(2) will apply) After all corporate property has been sold and all liabilities including corporate taxes paid, there is $700,000 available for distribution. The balances in the tax accounts of Jay Ltd. including the PUC are as follows: PUC Combined RDTOH Balances GRIP Account Capital Dividend Account (CDA)

$ 1,000 20,000 30,000 100,000

What are the income tax consequences if, in 2022, the final payment is made to Mr. Jung? Assume that all elections are made to minimize any income tax consequences. Answer: Given the size of the proceeds, the combined balances in the RDTOH accounts will clearly be less than 38-1/3% of the taxable dividends to be paid. Given this, the required calculations are as follows: Available Cash Dividend Refund (Combined RDTOH Balances) Total Distribution PUC ITA 84(2) Deemed Dividend Capital Dividend Taxable Dividend Less: Eligible Dividend designation (GRIP Balance) Non-Eligible Dividend

$700,000 20,000 $720,000 ( 1,000) $719,000 ( 100,000) $619,000 ( 30,000) $589,000

The eligible dividend would be grossed up to a taxable amount of $41,400 [(138%)($30,000)]. The related federal dividend tax credit would be $6,218 [($30,000(38%)(6/11)]. The non-eligible dividend would be grossed up to a taxable amount of $677,350 [(115%) ($589,000)]. The related federal dividend tax credit would be $61,165 [(9/13)(15%)($589,000)]. As a disposition of shares has occurred, we must also determine whether there is a capital gain or capital loss. The calculations are as follows: Total Distribution Less: ITA 84(2) Deemed Dividend Modified POD ACB of Shares Capital Gain or Capital Loss

Type: ES Topic: Winding up a Canadian corporation - ITA 84(2) & 88(2)

$720,000 ( 719,000) $ 1,000 ( 1,000) Nil

90) In 2016, John Shipley began to carry on a business as a sole proprietor that specialized in high end linens for both bedrooms and dining rooms. As he needed all of the income from the business in order to cover his living expenses, he did not want to incorporate the business right away As a result of several celebrity endorsements the business became extremely profitable and, by 2018, it was earning much more income than he needed to maintain his current standard of living. Given this, he decided to incorporate the business. His accountant advised him that he could avoid any immediate income tax implications of incorporating the business by using the income tax rollover of ITA 85(1) to sell all of the business properties to a newly incorporated company in which he would be the sole shareholder. To facilitate this, on January 1, 2019, the following amounts were determined with respect to the business. Tax costs of all business properties FMV of all business properties

$1,234,000 $2,132,000

On that date, the business properties are sold to the new corporation, Sheets Inc., at a combined elected amount of $1,234,000. As consideration, John received a promissory note for $600,000, redeemable preferred shares with a FMV of $634,000, and 10,000 common shares with a FMV of $898,000. No other shares are issued at this time. Over the next few years, the business continued to expand and prosper and, on January 1, 2022, he receives an offer from Linens Ltd., a large public company, for all of the common shares. Under terms of this offer, John will give up all of the common shares of Sheets Inc. in return for a separate class of shares issued by the Linens Ltd. These shares have a FMV of $1,300,000. In addition, subsequent to the exchange transaction, John's preferred shares will be redeemed for $634,000. Sheets Inc. does not have a GRIP balance or an RDTOH balance at this time. John and the controlling shareholders of Linen Ltd. deal with each other at arm's length. While John has been very successful with his business, his stock portfolio performance has been abysmal and he has a 2020 net capital loss of $300,000. As a consequence, he has joined Investor's Anonymous, subscribing to their 10 step program to kick the stock market habit. If he manages to stick to the program, he will be unable to generate capital gains to use the loss carryover through stock market transactions. Required: A. Advise John with respect to the income tax consequences that would arise for him from the redemption of his preferred shares and the acceptance of the offer from the public company for the exchange of shares. Your answer should consider both the application of ITA 85.1 and opting out of this provision. B. Indicate the ACB of the Sheets Inc. to Linens Ltd. C. Advise John as to the alternative approaches that could be used to utilize his 2020 net capital loss in conjunction with the share exchange.

Answer: Note To Instructor - To answer this problem, a basic understanding of ITA 85(1) is required which is covered in Chapter 16. Part A - ITA 85.1 Applies In order to determine the income tax consequences of the ITA 85.1 transaction, we must evaluate the results of the ITA 85(1) transaction to determine the tax attributes of the shares. The ACB of the shares issued as part of the ITA 85(1) rollover would be calculated as follows: Elected amount FMV of NSC Available for Shares ACB of the Preferred Shares (Limited to FMV) ACB of Common Shares

$1,234,000 ( 600,000) $ 634,000 ( 634,000) Nil

There would also be a PUC reduction, calculated as follows: Increase in Legal Capital ($634,000 + $898,000) Less: the Excess of Total Elected Amount Over FMV of NSC PUC Reduction

$1,532,000 $1,234,000 ( 600,000)

( 634,000) $ 898,000

The PUC of the shares, after the allocation of the $898,000 PUC reduction, would be as follows: PUC of Preferred Shares = [$634,000 - ($634,000 ÷ $1,532,000)($898,000)] = $262,373 PUC of Common Shares = [$898,000 - ($898,000 ÷ $1,532,000)($898,000)] = $371,627 Note that the total PUC of the preferred and common shares is equal $634,000 ($262,373 + $371,627), the same amount as the total ACB of the preferred and common shares. Based on these calculations, the income tax consequences of the redemption of the preferred shares would be as follows: Proceeds of Redemption PUC of Preferred Shares ITA 84(3) Deemed Dividend

$634,000 ( 262,373) $371,627

Proceeds of Redemption Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Loss Inclusion rate Allowable Capital Loss

$634,000 ( 371,627) $262,373 ( 634,000) ($371,627) 1/2 ($185,814)

The non-eligible dividend would be grossed up to $427,371 [(115%)($371,627)], and would create a federal dividend tax credit of $38,592 [(9/13)(15%)($371,627)]. Using these amounts for the common shares of Sheets Inc., if John does not opt out of ITA 85.1, the Income tax consequences would be as follows: • John would be deemed to have disposed of his Sheets Inc. common shares for POD equal to the ACB of nil. Given this, there would be no capital gain or capital loss on the disposition. • John would be deemed to have acquired the shares of Linens Ltd. at a cost equal to nil, the ACB of his Sheets Inc. common shares. • The PUC of the Linens Ltd. shares that have been issued to John would be $371,627, the PUC of the Sheets Inc. common shares that were given up. Part A - Opting out of ITA 85.1 The total FMV of the Sheets Inc. common shares is $1,300,000. In order to opt out of ITA 85.1, John will have to include a taxable capital gain of $650,000 [(1/2)($1,300,000 - Nil)] in his 2022 income tax return. This has the advantage of absorbing his $185,814 current allowable capital loss on his preferred shares, as well as his $300,000 2020 net capital loss. However, it will result in his being required to pay income tax on the remaining $164,186 ($650,000 - $185,814 - $300,000). Because all of his shares are involved in the exchange, he has no choice as to the amount of the gain to be recognized unless he wishes to structure the exchanges as to allocate the proceeds effectively creating two exchanges - one that is tax free and the second taxable to create sufficient capital gains to offset his existing 2020 net capital loss and 2022 allowable capital losses. This latter approach is discussed in Part C. Part B - ACB for Linens Ltd. The ACB of the Sheets Inc. common shares to Linens Ltd. would be $371,627, the lesser of their $1,300,000 FMV and their PUC of $371,627. Part C - Alternative Solutions Given the allowable capital loss resulting from the preferred share redemption and his 2020 net capital loss carry forward, John would like to have a taxable capital gain of $485,814 ($185,814 + $300,000) in order to utilize these losses. There are two possible alternatives that would generate this gain. Alternative One - John could use ITA 85(1) to exchange the shares at an elected amount of $971,628. This would result in the required taxable capital gain of $485,814 [(1/2)($971,628 - Nil)]. Note that this would leave the ACB of the acquired Linens Ltd. shares at the elected amount of $971,628. This compares to nil if ITA 85.1 is used. Alternative Two - Each of the common shares of Sheets Inc. has a FMV of $130 ($1,300,000 ÷ 10,000) and an ACB of nil. This means that each share of Sheets Inc. sold to Linens Ltd. would generate a taxable capital gain of $65 [(1/2)($130)] per share. In order to generate a total taxable capital gain of $485,810, John could simply sell 7,474 ($485,814 ÷ $65) of the shares to Linen Ltd. without using a rollover provision. This would result in a taxable capital gain of $485,810 [($65)(7,474)], slightly more than the amount required to absorb both the current allowable capital loss and the 2020 net capital loss. The remaining 2,526 (10,000 - 7,474) common shares of Sheets Inc. could then be exchanged for Linen Ltd. shares on a tax free basis under either ITA 85(1) or ITA 85.1. Type: ES Topic: Rollovers (ITA 85.1) - comprehensive problem [ITA 85.1 share exchange after ITA 85(1) rollover]

91) Mimi Farrow is the founder and sole shareholder of Farrow Ltd, a CCPC. Her initial and only investment was $600,000 in return for all 6,000 of the Company's authorized common shares when the company was incorporated. This amount represents both the PUC and the ACB of these shares. The Company has a December 31 taxation year end and has enjoyed a high level of profits since its first year of operations. On August 1, 2022, the condensed Balance Sheet of the business is as follows: Farrow Ltd. Balance Sheet As at August 1, 2022 Tangible Assets (Tax Costs)

$11,625,000

Bank Loan Common Shares (No Par - 6,000 Shares) Retained Earnings Total Debt and Shareholders' Equity

$ 1,112,000 600,000 9,913,000 $11,625,000

An independent appraiser has indicated that the FMV of the tangible assets of the business are equal to their tax costs. In addition to tangible assets, the appraiser indicates that the business has $1,500,000 of goodwill. Ms. Farrow has contacted you with respect to transferring future growth in Farrow Ltd. to her 23 year old son, Woody. However, for at least a few years, she would like to retain control of the operations of the business. Woody is prepared to invest $5,000 in the corporation. She has heard that there is a method where she would be able to exchange her shares in a capital reorganization that would allow her to transfer future growth in Farrow Ltd. to Woody without any immediate income tax consequences. She has asked for your advice in this matter. Required: Advise Ms. Farrow. Include in your solution the August 1, 2022 Balance Sheet after your proposed share transactions. Answer: The FMV of the business is $12,013,000, which is composed of tangible assets of $11,625,000, plus goodwill of $1,500,000, less the bank loan balance of $1,112,000. The method that Ms. Farrow referred to is provided for under ITA 86(1). In order to implement this rollover and achieve Ms. Farrow's goals, Woody should invest $5,000 in exchange for new common shares in Farrow Ltd as part of the capital reorganization. Ms. Farrow can exchange, on a rollover basis, her existing common shares for new preferred shares with a redemption value of $12,013,000. In order for Ms. Farrow to retain control of Farrow Ltd., the preferred shares should be voting shares or she should acquire sufficient common shares together with her son as part of the capital reorganization.

Under ITA 86(1), this exchange would have no immediate income tax consequences. After the exchange, the ACB and PUC of the new preferred shares would be calculated as follows: ACB of Shares Given Up Less: FMV of NSC ACB of Preferred Shares

$600,000 Nil $600,000

Legal Capital - Preferred Shares Less Excess, if any, of: PUC - Shares Given Up Over FMV of NSC Required PUC Reduction

$12,013,000 ($600,000) Nil

( 600,000) $11,413,000

PUC - Preferred Shares ($12,013,000 - $11,413,000)

$600,000

Ms. Farrow's preferred shares will not participate in the future growth of the Farrow Ltd. This means that all of the future growth in this company will accrue to the common shares which are all owned by her son Woody. Subsequent to these transactions, the August 1, 2022 Balance Sheet would be as follows: Farrow Ltd. Shareholders' Equity As at August 1, 2022 Tangible Assets at tax costs ($11,625,000 + $5,000)

$11,630,000

Bank Loan Preferred Shares (PUC) Common Shares (PUC) Retained Earnings Total

$ 1,112,000 600,000 5,000 9,913,000 $11,630,000

Note that Ms. Farrow's potential capital gain of $11,413,000 ($12,013,000 - $600,000) has not disappeared. If her preferred shares are sold for the FMV of $12,013,000, with the ACB of the shares being $600,000, there would be a capital gain of $11,413,000. Alternatively, if the preferred shares are redeemed, their PUC is $600,000, which would result in an ITA 84(3) deemed dividend of $11,413,000 (there would be no capital gain or capital loss). The planning described above will simply defer the potential gain until the new preferred shares are sold or redeemed. Type: ES Topic: Rollovers (ITA 86) - comprehensive problem

92) Marian Soft began to carry on a software business as a sole proprietor in 2011. The business, registered as Home Software, was carried on successfully for a number of years, becoming sufficiently profitable that Marian no longer needed all of the income that was being earned by the business. Given this, she was advised that she could defer a significant amount of income tax by incorporating the business and that she could avoid any immediate income tax as a result of using ITA 85(1). On January 1, 2017, the tax costs of all business properties total $1,373,000 and their FMV is $1,650,000. On this date the business properties are sold to a new corporation, Home Software Inc., at an elected amount of $1,373,000. As consideration, Marian receives a promissory note for $1,000,000 and common shares with a FMV of $650,000. The new Company will have a December 31 taxation year end. The business continues to operate very successfully and, on January 1, 2022, the business properties have a total tax cost of $5,263,000 and a FMV of $6,406,000. In recent years, Marian's adult son Jeff has been actively involved in running the corporate business. This fact, along with the desire to retire from the business in a few years, has led Marian decide to transfer the future growth of the business to Jeff. After consultation with her tax adviser, she is going to exchange all of her common shares in Home Software Inc. for $906,000 in cash and redeemable preferred shares with a FMV of $5,500,000. Subsequent to this exchange, her son Jeff will invest $10,000 for new common shares in Home Software Inc. The company will amend its share structure so as to allow the authorization and issuance of a new class of preferred shares. The GRIP and RDTOH account balances are all nil at January 1, 2022. Required: A. Determine the income tax consequences for Marian that will result from the exchange of shares. As part of your answer, you should indicate both the ACB and PUC of the newly issued preferred shares. B. Determine the income tax consequences for Marian if her preferred shares were redeemed on February 1, 2022 for $5,500,000.

Answer: Part A The incorporation of the Business The ACB of the common shares issued on January 1, 2017 would be calculated as follows: Elected Amount Less: FMV of NSC ACB of Common Shares

$1,373,000 ( 1,000,000) $ 373,000

The PUC of these shares would be calculated as follows: Legal Capital Excess, if any, of Total Elected Amount Over FMV of NSC PUC Reduction

$650,000 ($1,373,000) 1,000,000

PUC Of Common Shares ($650,000 - $277,000)

( 373,000) $277,000 $373,000

Part A Share-For-Share Exchange The ACB of the preferred shares would be calculated as follows: ACB of Shares Given Up Less: FMV of NSC ACB of Preferred Shares

$373,000 ( 906,000) Nil

The PUC of the preferred shares would be calculated as follows: Legal Capital Excess, if any, of PUC of Shares Given Up Over FMV of NSC PUC Reduction

$5,500,000 ($373,000) 906,000

PUC of Preferred Shares ($5,500,000 - $5,500,000)

Nil $5,500,000 Nil

The ITA 84(3) deemed dividend would be calculated as follows: PUC of Preferred Shares FMV of NSC Proceeds of Redemption PUC of Shares Given Up ITA 84(3) Deemed Dividend (Non-Eligible)

$ Nil 906,000 $906,000 ( 373,000) $533,000

As a result of the share-for-share exchange, the amount to be included in Marian's income would be the grossed up dividend of $612,950 [(115%)($533,000)]. In addition, there would be a federal dividend tax credit of $55,350 [9/13)(15%)($533,000)].

The exchange would not result in a capital gain as shown in the following calculation: ACB of Preferred Shares FMV of NSC POD Less: ITA 84(3) Deemed Dividend (Non-Eligible) Modified POD ACB Capital Gain

$ Nil 906,000 $906,000 ( 533,000) $373,000 ( 373,000) Nil

Part B The results of having Home Software Inc. redeem her preferred shares would be as follows: Proceeds of Redemption PUC ITA 84(3) Deemed Dividend (Non-Eligible)

$5,500,000 Nil $5,500,000

As a result of the redemption, the amount to be included in Marian's income would be the grossed up dividend of $6,325,000 [(115%)($5,500,000)]. In addition, there would be a federal dividend tax credit of $571,154 [(9/13)(15%)($5,500,000)]. As was the case with the share-for-share exchange, where will be no capital gain on the redemption: POD Less: ITA 84(3) Deemed Dividend (Non-Eligible) Modified POD ACB Capital Gain

$5,500,000 ( 5,500,000) Nil Nil Nil

Type: ES Topic: Rollovers (ITA 86) - comprehensive problem [ITA 85(1) and ITA 86(1)]

93) Nome Industries was incorporate in 2014 with the issuance of 15,000 common shares for $60 per share in cash to Gnancy Gnome. No additional shares have been issued since the incorporation. In 2016, Derek Blume and his son, James acquired all of the shares at a price of $85 per share from Ms. Gnome. Derek acquired 12,000 of the shares, while James acquired the remaining 3,000. On January 1, 2022, the FMV of the Nome shares is $1,500,000 ($100 per share). The shares do not qualify for the capital gains deduction. The GRIP and RDTOH account balances are nil for all taxation years under consideration. In 2022 Derek decides to freeze the value of his shares at their January 1, 2022 FMV and to pass on future corporate growth to his son James. To accomplish this, he intends to exchange his 12,000 common shares for cash of $200,000 and 8,000 preferred shares with a legal capital and a redemption value of $800,000. Subsequent to this transaction, his son James will own all of the outstanding common shares of Nome Industries. Required: A. Describe the immediate income tax consequences of this transaction to Derek Blume, including the following: • the amount of any gift; • the PUC of the preferred shares; • the ACB of the preferred shares; • the amount of any deemed dividends arising on the exchange; and • any capital gain or capital loss resulting from the exchange of the common shares. B. Describe the income tax consequences of this transaction to James. C. Describe the income tax consequences of this transaction to Derek Blume, if the new preferred shares in Nome Ltd. were redeemed at their FMV of $800,000 in 2022.

Answer: Part A Gift - Derek owns 80 % (12,000 ÷ 15,000) of the Nome Industries shares. His gift to James would be calculated as follows: FMV of Old Common Shares [(80%)($1,500,000)] FMV of Consideration: NSC Preferred Shares (FMV) Gift

$1,200,000 ($200,000) ( 800,000)

( 1,000,000) $ 200,000

It is fair to assume that this amount is a gift to James, as he is the only common shareholder in Nome Ltd after the exchange. PUC of new Preferred Shares - The PUC reduction required under ITA 86(2.1) would be calculated as follows: Legal Capital of New Shares Less the Excess, if any, of: PUC of Old Shares [(12,000)($60)] Over FMV of NSC PUC Reduction

$800,000 ($720,000) 200,000

PUC of Preferred Shares ($800,000 - $280,000)

( 520,000) $280,000 $520,000

ACB of New Preferred Shares - This amount would be calculated as follows: ACB of Old Shares [(12,000)($85)] Deduct: FMV of NSC Gift ACB of New Preferred Shares

$1,020,000 ($200,000) ( 200,000)

( 400,000) $ 620,000

ITA 84(3) Dividend - For the purposes of determining any ITA 84(3) deemed dividend on the redemption of the old shares, the proceeds of redemption would be as follows: PUC of New Preferred Shares FMV of NSC Proceeds of Redemption

$520,000 200,000 $720,000

As shown in the following calculation, there would be no ITA 84(3) dividend: Proceeds of Redemption PUC of Old Shares ITA 84(3) Dividend

$720,000 ( 720,000) Nil

Capital Gain or Capital Loss - For the purposes of determining any capital gain or Capital loss on the redemption of the common shares, the POD is the lesser of the $1,200,000 FMV of the common shares and the following amount: FMV of NSC Gift POD

$200,000 200,000 $400,000

As shown in the following calculation, there would be a capital loss: POD Less: ITA 84(3) Deemed Dividend Modified POD ACB Capital Loss

$ 400,000 Nil $ 400,000 ( 1,020,000) ($ 620,000)

This capital loss would be disallowed by ITA 86(2)(d), resulting in no immediate income tax consequences for Derek Blume. Part B This transaction will not alter the total FMV of the Company. However, the FMV of the common shares will increase by the $200,000 amount of the gift. There will be no corresponding increase in the ACB of these shares and, as a consequence, this amount will be included in James' income when he sells the common shares or they are redeemed. As a result this $200,000 amount is effectively included in income twice. Part C If Derek's preferred shares were redeemed at their FMV of $800,000, the income tax consequences would be as follows: Redemption Proceeds PUC ITA 84(3) Deemed Dividend (Non-Eligible)

$800,000 ( 520,000) $280,000

The gross up amount of the dividend will be $322,000 [(115%)($280,000)]. It will generate a federal dividend tax credit of $29,077 [(9/13)(15%)($280,000)]. Redemption Proceeds Less: ITA 84(3) Deemed Dividend (Non-Eligible) Modified POD ACB Capital Loss

$800,000 ( 280,000) $520,000 ( 620,000) ($100,000)

If Derek had simply sold his shares, there would have been a capital gain of $180,000 ($1,200,000 $1,020,000). The net result of this redemption is the same $180,000 ($280,000 in dividends - $100,000 capital loss). However, as noted in Part B, his son James will be paying income tax on an additional $200,000 of capital gains because of the increased FMV of his shares as a result of the gift.

A further problem is the form of the income. On the straight sale of shares, the $180,000 would have been a capital gain, only one-half of which would be taxable. The inappropriate use of ITA 86 has resulted in a $280,000 dividend which will be subject to higher income tax rates, offset by a $100,000 capital loss which is only one-half deductible. Although capital losses can generally be deducted only to the extent of available capital gains. These results could have been avoided by adding a price adjustment clause to the underlying agreements. Type: ES Topic: Rollovers (ITA 86) - comprehensive problem with gift

94) Espana Ltd. was incorporated with an initial investment of $465,000 in cash. In return for this investment, Ms. Portia Cruz received common shares with a legal capital and PUC of $465,000. In 2017, Mr. Jose Martinez acquired all of Ms. Cruz's shares in return for a payment of $1,340,000. As there was no additional investment in Espana Ltd. subsequent to its incorporation, Mr. Martinez became the sole shareholder of the Company at this point in time. Under Mr. Martinez's direction, the Company continued to prosper, with the FMV of the shares on December 1, 2022 estimated to be $3,500,000. As he is nearly 70 years of age, Mr. Martinez would like to freeze the value of his shares of Espana Ltd. To accomplish this, on December 1, 2022, he sells 25% of his shares to his 42 year old daughter for cash of $875,000 [(25%)($3,500,000)]. In addition he exchanges the remaining 75% of the common shares for cash of $625,000, plus redeemable preferred shares with a FMV and legal capital of $2,000,000. The shares of Espana Ltd. do not qualify for the capital gains deduction. The Company has a nil balance in its GRIP and RDTOH accounts for all taxation years under consideration. Required: Determine the following: A. The amount of the gift to a related person, if any, resulting from the exchange of shares. B. The PUC of the newly issued preferred shares. C. The ACB of the newly issued preferred shares. D. The POD and POR (Proceeds of Redemption ITA 84(5)(d)) that Mr. Martinez received when he exchanged the old common shares of Espana Ltd. for new preferred shares. E. The immediate income tax consequences for Mr. Martinez resulting from the sale of shares to his daughter and the exchange of shares. F. The income tax consequences for Mr. Martinez if the new Espana Ltd. preferred shares are immediately redeemed for their FMV. Answer: Part A - Gift The FMV of the common shares exchanged was $2,625,000 [(75%)($3,500,000)]. As this amount is equal to the $2,625,000 ($2,000,000 + $625,000) total of cash and preferred shares received, there is no gift to a related person. Part B - PUC of Preferred Shares Since Mr. Martinez purchased the shares directly from Ms. Cruz, the PUC of the common shares remains at $465,000. The PUC of the preferred shares would be calculated as follows: Increase in Legal Capital Less the Excess, if any, of: PUC of Common Shares [(75%)($465,000)] Over the FMV of NSC PUC Reduction

$2,000,000

($348,750) 625,000

PUC of Preferred Shares ($2,000,000 - $2,000,000)

Nil $2,000,000 Nil

Part C - ACB of Preferred Shares The ACB of the preferred shares would be calculated as follows: ACB of Common Shares [(75%)($1,340,000)] Less: FMV of NSC ACB of Preferred Shares

$1,005,000 ( 625,000) $ 380,000

Part D - Proceeds of Redemption and POD for Common Shares The Proceeds of Redemption would be calculated as follows: FMV of NSC PUC of Preferred Shares Proceeds of Redemption [ITA 84(5)(d)]

$625,000 Nil $625,000

The POD would be calculated as follows: ACB of Preferred Shares FMV of NSC POD [ITA 86(1)(c)]

$ 380,000 625,000 $1,005,000

Part E - Income Tax Consequences of Sale and Share Exchange The sale of shares to his daughter would result in a taxable capital gain calculated as follows: POD ACB [(25%)($1,340,000)] Capital Gain Inclusion Rate Taxable Capital Gain

$875,000 ( 335,000) $540,000 1/2 $270,000

The exchange of shares would have income tax consequences as follows: Proceeds of Redemption PUC of Common Shares [(75%)($465,000)] ITA 84(3) Deemed Dividend (Non-Eligible)

$625,000 ( 348,750) $276,250

POD Less: ITA 84(3) Deemed Dividend Modified POD ACB of Common Shares [(75%)($1,340,000)] Capital Loss Inclusion Rate Allowable Capital Loss

$1,005,000 ( 276,250) $ 728,750 ( 1,005,000) ($ 276,250) 1/2 ($ 138,125)

The overall income tax consequences of the sale to his daughter and the share exchange would be as follows: Taxable Dividend [($276,250)(115%)] Net Taxable Capital Gain ($270,000 - $138,125) Additional Income

$317,688 131,875 $449,563

The deemed non-eligible dividend would qualify for a federal dividend tax credit of $28,688 [(9/13)(15%)($276,250)]. Part F - Income Tax Consequences of Preferred Share Redemption The income tax consequences of the immediate redemption of the preferred shares is: Proceeds of Redemption Less: PUC of Preferred Shares ITA 84(3) Deemed Dividend (Non-Eligible)

$2,000,000 Nil $2,000,000

POD Less: ITA 84(3) Deemed Dividend (Non-Eligible) Modified POD ACB of Preferred Shares Capital Loss Inclusion Rate Allowable Capital Loss

$2,000,000 ( 2,000,000) Nil ( 380,000) ($ 380,000) 1/2 ($ 190,000)

The deemed non-eligible dividend would be grossed up to $2,300,000 [(115%)($2,000,000)]. It would qualify for a federal dividend tax credit of $207,692 [(9/13)(15%)($2,000,000)] Assuming Mr. Martinez has no other taxable capital gains in the year, there is a 2022 net capital loss of $58,125 ($270,000 - $138,125 - $190,000). Type: ES Topic: Rollovers (ITA 86) - comprehensive problem with gift

95) Due to his advanced age, Gordon Korngold, the only shareholder of Korngold Ltd., has decided to retire. As the Company activities are largely based on Gordon's effort, he intends to sell the business properties of the company, followed by a wind-up and distribution of the resulting cash. Korngold Ltd. is a CCPC with a December 31 taxation year end. In contemplation of this liquidation, a Balance Sheet has been prepared based on the income tax values of its properties and liabilities as at January 1, 2022. This Balance Sheet, after all closing entries, is as follows: Korngold Ltd. Balance Sheet As at January 1, 2022 Inventory (Net Realizable Value and Tax Cost) Eligible RDTOH Non-Eligible RDTOH Land - ACB Building - UCC Total

$ 48,650 Nil 32,345 942,450 723,640 $1,747,085

Liabilities PUC Capital Dividend Account (CDA) Other Retained Income Total

$ 313,260 625,000 326,470 482,355 $1,747,085

Other Information: 1. The current FMV of the Land is $2,600,000. 2. The Building had a capital cost of $1,160,000. Its FMV on January 1, 2022 is $1,846,000. 3. The ACB and PUC of the common shares are both $625,000. 4. On January 1, 2022, the Company has a nil GRIP account balance. 5. All of the properties are sold on January 1, 2022 for their FMV. The corporation's liabilities are paid in full on this date. The after tax proceeds from the sale are distributed to shareholders on December 31, 2022. 6. The provincial income tax rate for the corporation on income that qualifies for the SBD is 3% and is 14% on all other income. 7. No dividends (taxable or capital) have been paid in the previous two taxation years. Required: A. Calculate the amount that will be available for distribution to Mr. Korngold on the liquidation. B. Determine the components of the distribution to Mr. Korngold, and the amount of taxable capital gains that will be realized as a result of the winding-up of Korngold Ltd. Assume that appropriate elections or designations will be made to minimize any income tax.

Answer: Part A - Funds Available for Distribution The taxable capital gains and active business income (recapture) to the corporation are calculated as follows: Taxable Active Business Property Capital Gains Income Inventory Nil Nil Taxable Capital Gains: On Land [(1/2)($2,600,000 - $942,450)] $ 828,775 Nil On Building [(1/2)($1,846,000 - $1,160,000)] 343,000 Recapture on Building ($1,160,000 - $723,640) $436,360 Totals $1,171,775 $436,360 As the active business income is less than the $500,000 annual business limit, there will be no addition to the GRIP account. Taxable Income will be $1,608,135 ($1,171,775 + $436,360). Income tax payable will be calculated as follows: Federal Tax on Investment Income [(28% + 10-2/3%)($1,171,775)] Federal Tax on Business Income [(9%)($436,360)] Federal Part I Tax Provincial Tax on Investment Income [(14%)($1,171,775)] Provincial Tax on Business Income [(3%)($436,360)] Total Corporate Income Tax

$453,086 39,272 $492,358 164,049 13,091 $669,498

There was no balance in the Eligible RDTOH at the beginning of the year and no additions during the year, resulting in a nil balance at the end of the year. The end of year balance in the Non-Eligible RDTOH would be calculated as follows: Beginning Non-Eligible RDTOH Addition - The least of: • [(30-2/3%)($1,171,775)] = $359,344 • [(30-2/3%)($1,608,135 - $436,360)] = $359,344 • Part I Tax Payable = $492,358 Ending Non-Eligible RDTOH

$ 32,345

359,344 $391,689

The amount available for distribution to Mr. Korngold, after the payment of the liabilities and corporate income tax can be calculated as follows: FMVs: Inventory Land Building Gross Sale Proceeds Liabilities Corporate Income Tax Dividend Refund (Note) Funds Available for Distribution

$ 48,650 2,600,000 1,846,000 $4,494,650 ( 313,260) ( 669,498) 391,689 $3,903,581

Note - The dividend refund is equal to the balance in the Non-Eligible RDTOH account. As will be shown in a subsequent calculation, the taxable dividends paid on the winding-up will be well in excess of the amount required to maximize the dividend refund. With respect to the CDA, the final balance is calculated as follows: Opening CDA Balance Disposition of Land Disposition of Building Ending CDA Balance

$ 326,470 828,775 343,000 $1,498,245

Part B - Components of Distribution Assuming a capital dividend election has been made the taxable dividend component of the total distribution to Mr. Korngold can be calculated as follows: Distribution to Mr. Korngold PUC ITA 84(2) Deemed Dividend Capital Dividend (CDA Balance) Deemed Dividend (Non-Eligible)

$3,903,581 ( 625,000) $3,278,581 ( 1,498,245) $1,780,336

As Korngold has no GRIP balance, all of the taxable dividend will be non-eligible. The taxable amount will be $2,047,386 [(115%)($1,780,336)]. This dividend will qualify for a federal dividend tax credit of $184,881 [(9/13)(15%)($1,780,336)].

Part B - Capital Gain With respect to capital gains, ITA 54 requires that the POD for purposes of determining any capital gain on the disposition of shares is reduced by any amount of a deemed dividend under ITA 84(2). Given the preceding calculation, the capital gain to Mr. Korngold would be determined as follows: Actual Distribution To Mr. Korngold Less: ITA 84(2) Deemed Dividend Modified POD ACB Capital Gain

$3,903,581 ( 3,278,581) $ 625,000 ( 625,000) Nil

Type: ES Topic: Winding-up a Canadian corporation (ITA 88(2)) - comprehensive problem

96) Pellerin Fabrication Ltd. is a CCPC with a December 31 taxation year end. All of the shares of the corporation are owned by Mr. Denis Pellerin, the incorporator of the corporation. On December 31, 2021, the Balance Sheet of the Company, prepared in accordance with ASPE, is as follows: Cash Accounts Receivable Inventory (Lower of Cost and Market) Land (Cost) Building (Cost) Accumulated Amortization Total Assets

$ 50,000 215,000 375,000 132,000 850,000 ( 263,000) $1,359,000

Liabilities Common Shares Retained Earnings Total Equities

$ 373,000 600,000 386,000 $1,359,000

Mr. Pellerin wishes to retire and has agreed to sell all of the non-cash assets of the business, including goodwill, at FMV on January 31, 2022. The buyer will assume all of the liabilities of the corporation and will pay the purchase price in cash. The relevant FMVs and the resulting purchase prices are as follows: Accounts Receivable Inventory Land Building Goodwill Liabilities Purchase Price

$195,000 375,000 193,875 550,000 56,250 ( 386,125) $984,000

Other Information: 1. With respect to the sale of the Accounts Receivable, a joint election is filed under ITA 22. 2. The UCC of the Class 1 building is $492,000. 3. As at January 31, 2022, the corporation has a balance in its Non-Eligible RDTOH of $31,000. No dividends (taxable or capital) were paid during the previous taxation year ending December 31, 2021. There is no balance in the Eligible RDTOH on this date. 4. As at January 1, 2022, the capital dividend account (CDA) has a balance of $63,000 and there is a nil balance in the GRIP account. 5. The PUC and ACB of the common shares are both $600,000. 6. The corporation is subject to a provincial income tax rate of 3% on income eligible for the SBD and 13% on other income. 7. In 2022, Mr. Pellerin will have other income in excess of $300,000. This means his marginal federal income tax rate is 33% and the provincial income tax rate is 16%. The provincial dividend tax credit for non-eligible dividends is equal to 4/13 of the gross up. 8. Shares of Pellerin Fabrication Ltd. do not qualify for the capital gains deduction. Required: A. Calculate the after-tax corporate income that will be available for distribution to Mr. Pellerin after the sale of the business.

B. Calculate the amount that will be available to Mr. Pellerin, after personal income taxes are paid, on the distribution of the funds resulting from the winding-up and dissolution of Pellerin Fabrication Ltd. Assume that all elections and designations are made to minimize any income tax. Answer: Part A - After Tax Funds to the Corporation Taxable Income and Income Tax Payable Taxable income and income tax payable resulting from the sale of the non-cash assets can be calculated as follows:

Accounts Receivable ($195,000 - $215,000) Land [(1/2)($193,875 - $132,000)] Recapture on Building ($550,000 - $492,000) Goodwill [($56,250 - Nil)(1/2)] Totals

Active Business Income ($20,000) Nil 58,000 Nil $38,000

Taxable Capital Gains Nil $30,938 Nil 28,125 $59,063

Total taxable income would be $97,063 ($38,000 + $59,063). The corporate income tax payable on this amount would be calculated as follows: Federal Tax on: Business Income [(38% - 10% - 9%)($38,000)] Investment Income [(38% - 10% + 10-2/3%)($59,063)] Part I Income Tax Payable Provincial Tax on Business Income [(3%)($38,000)] Provincial Tax on Investment Income [(13%)($59,063)] Total Corporate Income Tax Payable

$ 3,420 22,838 $26,258 1,140 7,678 $35,076

Note: The small business limit is $41,096 [(30 ÷ 365 days)($500,000)] which is below the active business income of $38,000. Capital Dividend Account (CDA) The balance in the CDA is calculated as follows: Opening CDA Balance Addition from Sale of Land Addition from Sale of Goodwill Closing CDA Balance

$ 63,000 30,938 28,125 $122,063

Non-Eligible RDTOH Balance There is no addition to the Eligible RDTOH and therefore the balance remains nil at the time of the sale. With respect to the Non-Eligible RDTOH, the closing balance in that account would be calculated as follows: Opening Non-Eligible RDTOH Add: Least of: • 30-2/3% of Investment Income [(30-2/3%)($59,063)] = $18,113 • 30-2/3% of Taxable Income, Less Amount Eligible for the SBD [(30-2/3%)($97,063 - $38,000)] = $18,113 • Part I Tax = $26,258 Closing Non-Eligible RDTOH

$31,000

18,113 $49,113

Funds Available for Distribution to Shareholder Given the preceding calculation, the after tax funds available for distribution would be calculated as follows: Purchase Price, Plus Cash ($984,000 + $50,000) Corporate Income Tax Balance Before Dividend Refund Dividend Refund (Non-Eligible RDTOH Balance) After Tax Distribution

$1,034,000 ( 35,076) $ 998,924 49,113 $1,048,037

The dividend refund is equal to the balance in the Non-Eligible RDTOH account. As will be shown in a subsequent calculation, the taxable dividends paid on the winding-up will be well in excess of the amount required to maximize the dividend refund. Part B - After Tax Retention by Mr. Pellerin Taxable Dividend Assuming a capital dividend election has been filed, the taxable dividend component of the distribution can be analyzed as follows: Total Distribution PUC ITA 84(2) Deemed Dividend Capital Dividend (CDA Balance) Deemed Dividend (Non-Eligible)

$1,048,037 ( 600,000) $ 448,037 ( 122,063) $ 325,974

For capital gains purposes, the cancellation of the shares that occurred as part of the winding-up would not have any income tax effect. This is demonstrated by the following calculation: Proceeds of Redemption Less: ITA 84(2) Deemed Dividend Modified POD ACB Capital Gain

$1,048,037 ( 448,037) $ 600,000 ( 600,000) Nil

Personal Income Tax Payable The PUC amount, as well as the capital dividend, would be received by Mr. Pellerin on a tax free basis. Income tax payable on the deemed non-eligible dividend would be calculated as follows: Deemed Dividend Gross Up of 15% Taxable Dividend Personal Income Tax Rate (33% + 16%) Tax before Dividend Tax Credit Dividend Tax Credit [(9/13 + 4/13)($48,896)] Personal Income Tax Payable

$325,974 48,896 $374,870 49% $183,686 ( 48,896) $134,790

After Tax Retention Given the preceding calculations, the after tax cash available to Mr. Pellerin would be calculated as follows: Total Distribution Personal Income Tax Payable After Tax Cash Retained

Type: ES Topic: Purchase and sale of a business - comprehensive problem

$1,048,037 ( 134,790) $ 913,247

97) Paulo Titano is the only shareholder of Titano Ltd., a CCPC. The Company was incorporated several years ago, with an investment in common shares of $168,000. No additional shares have been issued since that time. The Company has always had a taxation year which ends on December 31. As he is now over 65 years of age and eager to see the world while he can still fully enjoy the experience, Paulo is planning to sell his corporation. He is considering two offers that he has received: Asset Purchase - A potential purchaser has indicated that she would buy all of the corporate properties, including goodwill, at FMV. This investor would assume all of the liabilities of the corporation and has agreed to file an ITA 22 election with respect to the sale of the accounts receivable. If the assets are sold, it is Paulo's intention to wind up the corporation immediately thereafter. Share Purchase - A different potential purchaser has offered a cash payment of $2,700,000 in return for all of the shares of the Company. In order to evaluate these alternatives, the following statement of information about the Company's assets has been prepared: Titano Ltd. Statement of Assets As at December 31, 2022

Cash Accounts Receivable Inventory Land Building (UCC) (Note One) Equipment (UCC) (Note Two) Goodwill Totals

Accounting Value $ 37,600 312,500 623,400 326,000 427,300 326,500 Nil $2,053,300

Tax Cost $ 37,600 312,500 623,400 326,000 396,400 285,400 Nil $1,981,300

FMV $ 37,600 278,900 676,250 403,000 1,265,000 297,600 624,000 $3,582,350

Note One - Paulo constructed the Building on the Land for a total capital cost of $983,200. Note Two - The Equipment had a capital cost of $623,500. At the same time that this Statement of Assets was prepared, a similar Statement of Equities was drawn up. This latter statement contained the following accounting amounts and tax costs:

Current Liabilities Loan from Shareholder Future Income Tax Liability Common Shares Capital Dividend Account (CDA) Other Retained Income Retained Earnings Totals

Accounting Amounts $ 426,250 186,400 363,200 168,000 N/A N/A 909,450 $2,053,300

Tax Costs $ 426,250 186,400 N/A 168,000 94,550 1,106,100 N/A $1,981,300

In addition to the information included in the preceding statements, the following information about the Company is available: • The Company has a 2019 non-capital loss balance of $62,000. • The Company has a 2019 net capital loss balance of $86,350. • On January 1, 2022, the Company has no balance in either of its RDTOH accounts or in its GRIP account. • Titano Ltd. is subject to a provincial income tax rate of 2% on income that qualifies for the SBD and 13% on all other income. • The shares of Titano Ltd. are not eligible for the capital gains deduction. Paulo lives in a province where the provincial dividend tax credit on eligible dividends is 32% of the gross up, and on non-eligible dividends is equal to 25% of the gross up. As he has other income totaling more than $350,000, he is in the maximum federal income tax bracket of 33% and the maximum provincial income tax bracket of 16%. Required: Determine which of the two offers Paulo should accept. Ignore the possibility that Paulo might be subject to the alternative minimum tax (AMT). Assume that all appropriate elections or designations will be made to minimize income tax. Answer: Sale of Assets - December 31, 2022 This calculation requires two steps. First, we must determine the after tax proceeds that will be available to the corporation after the sale of the assets. Then, a second stage analysis is required to determine the amount that will be retained by Paulo after he pays all of the income taxes that are due on the proceeds that are distributed to him. Assume that the business broke even in 2022 with respect to its normal business operations. Calculation of Corporate Income on the Sale of the Assets

Asset Accounts Receivable (Note 1) Inventory ($676,250 - $623,400) Land [(1/2)($403,000 - $326,000)] Building: ($983,200 - $396,400) [(1/2)($1,265,000 - $983,200)] Recapture on Equipment ($297,600 - $285,400) Goodwill [(1/2)($624,000)] Total Income

Active Business Income (Loss) ($ 33,600) 52,850

Taxable Capital Gains

$ 38,500

586,800 12,200 $618,250

140,900 312,000 $491,400

Note 1 - The loss on the Accounts Receivable is a business loss because of the ITA 22 election. The amount of the loss is the tax cost of $312,500, less the FMV of $278,900. The purchaser will be required to include this same amount in income.

Taxable Income and Income Tax Payable Based on the preceding analysis, Titano Ltd. would have Taxable Income calculated as follows: Net Income ($618,250 + $491,400) 2019 Non-Capital Loss 2019 Net Capital Loss Taxable Income

$1,109,650 ( 62,000) ( 86,350) $ 961,300

Basic Federal Tax [(38%)($961,300)] Federal Abatement [(10%)($961,300)] SBD (Note 2) ART (Note 3) GRR [(13%)($961,300 - $500,000 - $405,050)] Part I Income Tax Provincial Income Tax: [(2%)($500,000)] [(13%)($961,300 - $500,000)] Total Corporate Income Tax

$365,294 ( 96,130) ( 95,000) 43,205 ( 7,313) $210,056 10,000 59,969 $280,025

Note 2 - The small business deduction (SBD) is equal to 19% of the least of: • Active Business Income $618,250 • Taxable Income $961,300 • Annual Business Limit $500,000 The SBD is equal to $95,000 [(19%)($500,000)]. Note 3 - Aggregate Investment Income (AII) is calculated as follows: Taxable Capital Gains Less: 2019 Net Capital Loss Deducted AII

$491,400 ( 86,350) $405,050

ART is equal to 10-2/3% of the lesser of: • AII = $405,050 • Taxable income less the amount eligible for the SBD = $461,300 ($961,300 - $500,000) ART is equal to $43,205 [(10-2/3%)($405,050)]. GRIP Balance The GRIP balance can be calculated as follows: Taxable Income Amount eligible for the SBD AII Subtotal Rate GRIP Balance

$961,300 ( 500,000) ( 405,050) $ 56,250 72% $ 40,500

RDTOH Balance There are no balances in either RDTOH on January 1, 2022. The only addition to either balance in 2022 would would be the refundable portion of Part I tax. This amount would be the least of: • 30-2/3% of AII [(30-2/3%)($405,050)] • 30-2/3% of Taxable Income, Less the amount eligible for the SBD [(30-2/3%)($961,300 - $500,000)] • Part I Tax

$124,215 $141,465 $210,056

The least of these amounts is $124,215 and it would added to the Non-Eligible RDTOH, leaving a closing balance in that account of $124,215. Funds Available for Distribution The funds available for distribution would be calculated as follows: Total FMV of Assets (From Statement) Current Liabilities Assumed Loan from Shareholder Assumed Total Sale Proceeds Corporate Income Tax Dividend Refund (Note 4) Funds Available for Distribution

$3,582,350 ( 426,250) ( 186,400) $2,969,700 ( 280,025) 124,215 $2,813,890

Note 4 - Technically, the dividend refund is the lesser of the $124,215 balance in the Non-Eligible RDTOH account and 38-1/3% of taxable dividends paid. However, given the size of the distribution in this example, it is clear that $124,215 will be the lower amount. Capital Dividend Account (CDA) The CDA balance is calculated as follows: Opening CDA Balance Non-Taxable One-Half of Capital Gains (From Table Calculating Corporate Income on Asset Dispositions) Closing CDA Balance

$ 94,550

491,400 $585,950

Taxable Dividends resulting from Distribution Assuming a capital dividend election has been filed for the maximum capital dividend and the maximum eligible dividend, the taxable dividend component of the total distribution to Paulo can be calculated as follows: Funds available for Distribution PUC ITA 84(2) Deemed Dividend ITA 83(2) Capital Dividend (CDA Balance) Deemed Taxable Dividend Eligible Dividend (Designated) Non-Eligible Dividend (Remainder)

$2,813,890 ( 168,000) $2,645,890 ( 585,950) $2,059,940 ( 40,500) $2,019,440

As shown in the following calculation, Paulo will not have a capital gain on the disposition of his shares: Amount Distributed Less: ITA 84(2) Deemed Dividend Modified POD ACB Capital Gain

$2,813,890 ( 2,645,890) $ 168,000 ( 168,000) Nil

Personal Income Tax As there is no capital gain and the capital dividend is received tax free, the personal income tax payable on the dividend subject to tax would be calculated as follows: Eligible Dividends Gross Up 38% Non-Eligible Dividends Gross Up 15% Taxable Amount of Dividends Combined Income Tax Rate (33% + 16%) Income Tax Payable before Dividend Tax Credit Dividend Tax Credits: Eligible Dividends [(6/11 + 32%)($15,390)] Non-Eligible Dividends [(9/13 + 25%)($302,916)] Personal Income Tax

$ 40,500 15,390 2,019,440 302,916 $2,378,246 49% $1,165,341 ( 13,319) ( 285,440) $ 866,582

Sale of Shares This relatively simple calculation is as follows: POD ACB Capital Gain Inclusion Rate Taxable Capital Gain Income Tax Rate (33% + 16%) Personal Income Tax

$2,700,000 ( 168,000) $2,532,000 1/2 $1,266,000 49% $ 620,340

Conclusion The after tax proceeds from the two alternative dispositions can be calculated as follows:

Proceeds Personal Income Tax After Tax Retention

Sale of Shares $2,700,000 ( 620,340) $2,079,660

Sale of Assets $2,813,890 ( 866,582) $1,947,308

The conclusion is very clear. The cash retained from the sale of shares is $132,352 ($2,079,660 - $1,947,308) greater than the cash retained from selling the assets and distributing the net proceeds. In addition, if Paulo could convert his Titano Ltd. shares to shares that qualify for the capital gains deduction, this result would be even more favourable to the sale of shares. The full $2,813,890 could be left in the business for further operations as an investment company as Paulo travels the world. However, given the current rate of income tax on the investment income of a corporation, it is not likely that this would be an attractive alternative. Type: ES Topic: Purchase and sale of a business - comprehensive problem

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 18 Partnerships 18.1 Online Exercises 1) Under the provisions of the ITA, only individuals, corporations, and trusts are considered to be taxable entities and are required to file income tax returns. Given this, explain how the business income, capital gains, and property income of a partnership will be taxed. Answer: There is a deeming rule applicable to partnerships that requires that it calculate business income, property income, and capital gains as if it was a person resident in Canada. Once these income and gain amounts are determined, they are allocated to the members of the partnership as per the terms of a partnership agreement or to be shared equally in the absence of an agreement. As the partners are taxable entities (e.g., individuals, corporations, or trusts) the allocated amounts will be included in their net income. Type: ES Topic: Partnerships - general rules & concepts

2) Briefly describe the three basic elements that are required for a partnership to exist. Answer: The three elements are: 1. There must be two or more persons. 2. These persons must be carrying on a business in common. 3. The business must be carried on with a view to making a profit. Type: ES Topic: Partnerships - meaning of a partnership

3) Mr. Johns, Mr. Klien, and Ms. Langley are all Chartered Professional Accountants (CPAs) who trained in large national firms. However, for the last few years they have each carried on a business as a sole proprietor in their respective small private practices. They are currently discussing the possibility of forming a partnership to combine their practices. List four major points to be considered in the formation of a partnership and in drawing up a partnership agreement. Answer: The points that could be listed here include: • the initial and ongoing partner contributions and ownership percentage of each partner, • the responsibilities of each partner and the division of work between the partners, • how income and drawings will be allocated and the basis for how much compensation is to be paid, • signing authority on the partnership bank accounts and required approval for purchases, • procedures for bringing in new partners, and • procedures to deal with the withdrawal, or the sale of the partnership business. Type: ES Topic: Partnerships - general rules & concepts

4) The degree to which partners have responsibility for partnership debts depends on the type of partnership. In terms of this responsibility, briefly describe the three types of partnerships that are discussed in your text. Answer: The descriptions of the three basic types of partnerships are as follows: General Partnership - In a general partnership, all partners have unlimited liability for partnership debts. Limited Partnership - A limited partnership has at least one general partner who has unlimited liability for the debts of the partnership. Other partners, referred to as limited partners, are only responsible to the extent of their actual and promised contributions to the partnership. Limited Liability Partnership - Members of limited liability partnerships have unlimited liability for most types of partnership debt. There is, however, an important exception. Members of limited liability partnerships are not personally liable for obligations arising from the wrongful or negligent action of: • their professional partners; or • the employees, agents or representatives of the partnership who are conducting partnership business. Type: ES Topic: Partnerships - three types of partnerships

5) Describe three factors that have been used to distinguish joint venture arrangements from partnership arrangements. Answer: Factors that could be listed here include: • co-venturers contractually do not have the power to bind other co-venturers; • co-venturers retain ownership of property contributed to the undertaking; • co-venturers are not jointly and severally liable for debt of the undertaking; • co-venturers share gross revenues, not profits; and • while partnerships may be formed for the same purpose as a joint venture, they are usually of longer duration and involve more than a single undertaking. Type: ES Topic: Partnerships vs joint ventures

6) What is the basic difference between how the ITA applies to partnerships vs joint ventures? Answer: The basic difference is that, if an arrangement is considered to be a joint venture rather than a partnership, there will be no separate calculation of income at the entity level (e.g. partnership or joint venture). Each participant in the joint venture will determine their own income as it relates to that participation. In contrast, a partnership must determine its income as if it were a separate person. Once this is complete then an allocation of that partnership income can be made amongst the partners. Type: ES Topic: Partnerships vs joint ventures

7) What are the rules for determining the fiscal period that a partnership uses to determine its income? Answer: The general rules are as follows: • If any member of the partnership is an individual or a professional corporation, the partnership must use December 31 fiscal period. • Otherwise, any fiscal period can be used as long as it does not end more than 12 months after it begins. There is an exception to the calendar year requirement that allows the use of a non-calendar fiscal period in situations where all of the partnership members are individuals and an election is filed prior to the end of the partnership's first fiscal period. Type: ES Topic: Partnerships - general rules & concepts

8) CCA can only be claimed on depreciable property that is owned by a taxpayer. As a partnership is not a person and therefore not a taxpayer it would appear that it cannot own property however partnership law recognizes that a partnership can own property contributed to it or purchased with partnership property. In contrast members of a partnership are legally considered to own an interest in partnership property. Does this mean that both a partnership and its members can claim CCA? Answer: There are rules in the Income Tax Regulations and in ITA 96(1) that ensure that members of a partnership cannot claim CCA and that any CCA claims are to be made by the partnership following the basic rule that considers it to be a person but only for the purpose of calculating income to be allocated to its members. Type: ES Topic: Partnerships - general rules & concepts

9) The various types of income earned in a partnership retain their character when allocated to the partners. Explain this statement. Answer: Partnership income may include business income, property income (interest, dividends, rents), and/or capital gains. These amounts will be allocated to the partners as the same types of income. For example: • When partnership dividend income is allocated to partners who are individuals, the allocated amounts will be subject to the usual gross up and tax credit procedures as if the individual partner received the dividend directly. • When partnership capital gains are allocated to partners, only one-half of the allocated amount is a taxable capital gain. Type: ES Topic: Partnerships - general rules & concepts

10) In determining the business income of a partnership, how are salaries to the partners treated? Answer: Partnership law does not permit a partnership to pay salaries to partners. As a result the CRA does not permit any claims for salary expenses to partners. Since such amounts are permitted as a deduction for accounting purposes a reconciliation adjustment is required when converting accounting income to income for ITA purposes. Any amounts paid to a partner as a quasi-salary is considered a priority allocation of business profits to that specific partner. Type: ES Topic: Partnerships - salary & other payments to partners

11) In reconciling accounting income to income for ITA purposes, is there a need to make an adjustment for drawings by partners? Answer: Whether a reconciliation adjustment is required depends on how drawings were treated for accounting purposes If drawings were deducted in determining accounting income then the drawings will have to be added back when reconciling to income for ITA purposes. If drawings have not been deducted then no adjustment is required. Type: ES Topic: Partnerships - reconciling accounting & income for ITA purposes

12) Partnerships sometimes make donations to registered charities. How are partnership donations treated for income tax purposes? Answer: Charitable donations are allocated to the partners often in the same manner as the allocation of income or loss. In that sense individual partners will be able to claim a personal tax credit whereas corporate members would be able to claim a taxable income deduction. In terms of accounting based adjustments since accounting rules allow donations to be expensed an adjustment to reverse that effect would be required in the reconciliation process. Type: ES Topic: Partnerships - general rules & concepts

13) An individual member of a partnership, because of income tax losses on certain investments, would like to maximize partnership income. To this end, the individual has asked that no CCA be deducted from the individual's share of the partnership income. Can the other partners agree to this request? Answer: The income tax rules concerning depreciable property restrict the claiming of CCA to the partnership as if the partnership were the owner of the property. This means that the partnership business income is determined applying the regular rules of the ITA that establishes the business income net of all expenses. It is this net amount that is then allocated to partners. As as result the request of the individual partner would not be allowed. Type: ES Topic: Partnerships - general rules & concepts

14) Describe the treatment of capital gains in the conversion of accounting income to business income for income tax purposes of a partnership. Answer: Accounting net income will include gains on the sale of capital property as calculated under ASPE or IFRS (GAAP) as the difference between the sales price and the carrying value for accounting purposes. The accounting gain is unique to accounting and must be reversed in the reconciliation process by deducting the gain. The taxable capital gain would then be added in the reconciliation process. Type: ES Topic: Partnerships - reconciling accounting & income for ITA purposes

15) If the partnership agreement does not specify how business profits will be shared, how will the profit allocation be determined? Answer: In the absence of a provision in the partnership agreement, partnership law will require that business profits or losses be shared equally. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

16) An individual wishes to become a member of an existing partnership. What are this individual's alternatives for acquiring an interest? Answer: There are two ways the interest can be acquired: • The interest can be acquired directly by purchasing part or all of the interest from a current partner or partners. • The interest can be acquired directly from the partnership by contributing property (including cash) to the partnership. The consideration for the interest in the partnership would be the difference between the FMV of the consideration given to the partnership minus the FMV of any partnership property given to the incoming partner. Type: ES Topic: Partnerships - becoming a partner

17) In determining the ACB of a partnership interest, briefly describe the treatment of each of the following: • capital contributions, • a partner's share of partnership business income, and • partner drawings. Answer: The treatment of each of the items is as follows: Capital Contributions - Capital contributions are added to the ACB of the partnership interest at the time the contribution is made. Partner's Share of Partnership Business Income - Each partner's share of partnership business income is added to the partner's ACB on the first day of the fiscal period following the fiscal period in which the income was earned. Partner's Drawings - Partner's drawings are subtracted from the ACB of the partnership interest at the time the drawings are made. Type: ES Topic: Partnerships - the ACB of a partnership interest

18) Describe the treatment of partnership capital gains in the determination of a partner's income and the impact on the ACB of the partnership interest. Answer: One-half of a partner's share of the partnership's capital gains will be included in the income of the partner based on the fiscal period of the allocation. The partner's share of the partnership's capital gains (i.e. 100%) will be added to the ACB of the partnership interest on the first day of the following fiscal period. Type: ES Topic: Partnerships - the ACB of a partnership interest

19) Describe the treatment of partnership taxable dividends in the determination of an individual partner's income and the impact on the ACB of the partnership interest. Answer: The partner's share of the partnership dividends will be included in income based on the fiscal period of the partnership in which the dividends are received. Partners who are individuals will gross up the allocated taxable dividend and are entitled to a dividend credit against income tax payable in the same manner as if the taxable dividends had been received directly. The partner's share of the partnership dividends will be added to the ACB of the partnership interest on the first day of the following fiscal period of the partnership. This amount will not include the gross up. Type: ES Topic: Partnerships - the ACB of a partnership interest

20) Adjustments to the ACB of a partnership interest can sometimes result in a "negative" ACB. What are the income tax consequences of this to the affected partner? Answer: The negative amount will be treated as a capital gain to the partner the moment it occurs. An ACB adjustment follows immediately to restore the ACB to nil. This treatment does not apply to every partner however but is generally restricted to most limited partners and to inactive general partners. Type: ES Topic: Partnerships - negative ACB

21) What is a limited partnership? Your answer should include the meaning of a "limited partner". Answer: A limited partnership is one that has at least one limited partner and one general partner. As defined in most provincial or territorial partnership legislation, a limited partner is one whose liability for the debts of a partnership is limited to the amount of the persons' contribution (actual and promised) to the partnership. This limited liability limitation however can be lost if the partner participates in the management of the partnership. A partner whose liability is limited under partnership law is considered a limited partner for income tax purposes. Type: ES Topic: Partnerships - limited partnerships & limited partners

22) What is the objective of the "at-risk" rules that apply to limited partnerships? Answer: The at-risk rules are designed to ensure that a limited partner does not receive tax deductions or tax credits that exceed the amount that the limited partner has "at risk". In very simplified terms, the "at risk" amount is the amount of the partner's actual investment, not including amounts owed to the limited partnership or amounts that are designed to reduce the partner's risk (e.g., a guarantee to refund part or all of the amount invested). Type: ES Topic: Partnerships - the at-risk rules

23) What is a "Canadian Partnership" and what is its relevance for Canadian income tax purposes? Answer: A Canadian partnership is defined in ITA 102(1) as follows: "Canadian partnership" means a partnership all of the members of which were, at any time in respect of which the expression is relevant, resident in Canada. Many partnership rollover rules only apply if the partnership qualifies as a Canadian partnership. Type: ES Topic: Partnerships - "Canadian Partnerships" ITA 102(1)

24) Briefly describe the tax planning steps required to incorporate a partnership on a rollover basis. Answer: The incorporation of a partnership requires the use of two rollovers. The first (under ITA 85(2)), allows eligible partnership property to be transferred to a taxable Canadian corporation using the rules of ITA 85(1), for either shares or a combination of shares and other consideration. The transfer can take place at elected amounts equal to the tax cost of partnership property as long as the elective ranges are within what is permissible under ITA 85(1). At this point, the partnership continues to exist with the same partners and the partnership owns shares in the corporation. Technically the business of the partnership would have been incorporated at this stage. The second rollover (under ITA 85(3)) involves the winding up and dissolution of the partnership which distributes the property it owns (e.g. the shares of the corporation) to the partners in return for their partnership interests. At the end of the planning the former partners become shareholders of a corporation which continues the former partnership business and other partnership activity. Type: ES Topic: Partnerships - incorporating a partnership (ITA 85(2) & (3))

25) A partnership is not a taxable entity, either for income tax purposes or for GST/HST purposes. Answer: FALSE Explanation: While partnerships are not taxable entities for income tax purposes, they are taxable entities for GST/HST purposes. Type: TF Topic: Partnerships - general rules & concepts

26) From the point of view of determining an individual's income tax payable, it does not matter whether the individual is a partner or a joint venturer. Answer: FALSE Explanation: Participants in joint ventures may have a significantly different income tax payable than would be the case if they were considered to be partners. Type: TF Topic: Partnerships vs joint ventures

27) If all of the members of a partnership are individuals, the partnership can use a non-calendar fiscal period. Answer: TRUE Type: TF Topic: Partnerships - general rules & concepts

28) When dividends received by a partnership are allocated to individual partners, these partners will gross up the amount received and be eligible for a dividend tax credit. Answer: TRUE Type: TF Topic: Partnerships - allocation of income, loss, capital gains & other amounts

29) If a partnership pays interest to partners on their capital contributions, the payments can be deducted in determining the business income of the partnership. Answer: FALSE Explanation: Interest on capital contributions cannot be deducted. They are generally considered a method to allocate business profits. Type: TF Topic: Partnerships - salary & other payments to partners

30) If a partnership sells depreciable property used in a business and there is recapture, this amount will be included in the business income that is allocated to the partners. Answer: TRUE Type: TF Topic: Partnerships - allocation of income, loss, capital gains & other amounts

31) Partnership income that is allocated to partners will retain its income nature (e.g., the partnership's capital gains will be passed to the partners as capital gains). Answer: TRUE Type: TF Topic: Partnerships - allocation of income, loss, capital gains & other amounts

32) In computing a partnership's business income, salaries paid to the partners can only be deducted if they are reasonable. Answer: FALSE Explanation: Salaries paid to partners are never deductible. They are generally considered a method of allocating business profits. Type: TF Topic: Partnerships - salary & other payments to partners

33) In computing a partnership's business income, the amount that can be claimed as CCA follows the very same rules that apply to taxpayers that are individuals, trusts and corporations. Answer: TRUE Type: TF Topic: Partnerships - general rules & concepts

34) In computing a partnership's business income, charitable donations made by the partnership should be deducted as a business expense. Answer: FALSE Explanation: Charitable donations are allocated to the partners on the basis of the partnership agreement. Donations are not a business expense. Type: TF Topic: Partnerships - general rules & concepts

35) Only one-half of any partnership capital gains that are allocated to partners will be added to the ACB of a partnership interest. Answer: FALSE Explanation: While only one-half of allocated capital gains will be included in a partner's income, 100% of the capital gains are added to the ACB of a partnership interest. Type: TF Topic: Partnerships - the ACB of a partnership interest

36) In determining the at-risk amount for a partner, positive amounts of partnership income allocations for the year are added to the opening balance of the partner's ACB. Answer: TRUE Type: TF Topic: Partnerships - the at-risk rules

37) When a capital property is transferred from an existing Canadian partnership to a new Canadian partnership, any capital gain or recapture from the disposition will be considered income of the existing partnership. Answer: FALSE Explanation: A rollover treatment is available where all of the property of a Canadian partnership that has ceased to exist is transferred to a new Canadian partnership. A further condition is that all of the members of the new partnership must have been members of the old partnership (ITA 98(6)). Type: TF Topic: Partnerships - rollover to a new partnership (ITA 98(6))

38) Which of the following statements is correct with respect to partnerships? A) At least one of the partners must be an individual. B) Limited partners cannot participate in the management of the partnership. C) Partnerships are not required to have a profit motive. D) The use of a partnership will allow the partners to pay higher salaries to family members. Answer: B Explanation: B) Limited partners cannot participate in the management of the company. Type: MC Topic: Partnerships - general rules & concepts

39) Which of the following is NOT a basic feature required to create a partnership? A) One of the partners must be an individual. B) There must be two or more persons involved. C) The persons must be carrying on a business in common. D) The business must be carried on with a profit motive. Answer: A Explanation: A) One of the partners must be an individual. Type: MC Topic: Partnerships - meaning of a partnership

40) Which of the following statements about limited partners is NOT correct? A) They are entitled to share equally in profits and losses, unless there is an agreement to the contrary. B) They are jointly and severally liable for partnership debt and wrongful acts of other partners. C) They are not responsible for the wrongful acts of other partners, except to the extent of their actual and promised contributions to the partnership. D) Property that they contribute to the partnership is considered partnership property. Answer: B Explanation: B) Partners are jointly and severally liable for partnership debt and wrongful acts of other partners. Type: MC Topic: Partnerships - limited partnerships & limited partners

41) What advantage is offered by a general partnership, as compared to a corporation, as a form of carrying on a business? A) Partners may be able to reduce their personal income tax if the business has losses. B) Higher salaries can be paid to family members and claimed as an expense. C) Creditors cannot seize a partner's personal property to cover partnership debt. D) Partners will be able to defer income taxes on income that is left within the partnership and not distributed. Answer: A Explanation: A) Partners may be able to reduce their personal income taxes if the business has losses. Type: MC Topic: Partnerships - general rules & concepts

42) Jesse and Harold decide to form a partnership. They believe that this arrangement will have the following advantages: 1. They may be able to reduce their personal income taxes during the start-up years when there are losses. 2. They may be able to split income with family members who are employed by the business. 3. They may be able to realize a tax deferral on their business income. 4. They will have limited personal liability for the debts of the business. All of these statements are correct except: A) 1 and 3. B) 2 only. C) 3 and 4. D) 1 and 2. Answer: C Explanation: C) 3 and 4.

Type: MC Topic: Partnerships - general rules & concepts

43) Which of the following statements regarding partnerships and joint ventures is correct? A) Joint ventures are taxable entities for both income tax and GST/HST purposes. B) Both partners and joint venturers have the ability to contractually bind other partners and joint venturers. C) For both partnerships and joint ventures, all participants must claim the same CCA amount. D) Partners share the profit of the partnership and joint venturers share the gross revenues of the joint venture. Answer: D Explanation: D) While partners share the profit of the partnership, joint venturers share the gross revenues of the joint venture. Type: MC Topic: Partnerships vs joint ventures

44) The distinguishing factor that makes an arrangement a co-ownership as opposed to a partnership would be: A) when profits or losses are accounted for separately for each participant. B) when profits or losses are split equally. C) when participants do not have the power to bind other participants. D) when gross revenue is shared, rather than profits. Answer: A Explanation: A) when profits or losses are accounted for separately for each participant. Type: MC Topic: Partnerships vs co-ownership arrangements

45) A joint venture might be recognized because it would demonstrate one of the following factors. A) The joint venture will own all property that co-venturers have contributed to the venture. B) Co-venturers are jointly and severally liable for activities of the undertaking. C) Co-venturers share profits not gross revenues. D) Co-venturers do not have the power to bind other co-venturers contractually. Answer: D Explanation: D) Co-venturers do not have the power to bind other co-venturers contractually. Type: MC Topic: Partnerships vs joint ventures

46) A group of unrelated insurance companies combine forces to underwrite a very high-risk insurance policy. What is the general nature of the type of arrangement? A) A partnership. B) A co-ownership. C) A joint venture. D) A syndicate. Answer: D Explanation: D) A syndicate. Type: MC Topic: Partnerships - general rules & concepts

47) Martin Aggerwal has a 30% interest in a partnership. During the current year, the partnership realized capital gains of $42,000, received non-eligible dividends of $15,000, and made charitable donations of $6,000. Martin has made no charitable donations personally. He has no income that will be subject to the 33% federal income tax rate. Which of the following statements is correct? A) Martin will have taxable capital gains of $6,300, a federal dividend tax credit of $467, and a charitable donations tax credit of $494. B) Martin will have taxable capital gains of $12,600, a federal dividend tax credit of $467, and a charitable donations tax credit of $522. C) Martin will have capital gains of $6,300, a federal dividend tax credit of $933, and a charitable donations tax credit of $494. D) Martin will have taxable capital gains of $6,300, a federal dividend tax credit of $467, and a charitable donations tax credit of $522. Answer: A Explanation: A) Martin will be allocated charitable donations of $1,800 [(30%)($6,000)]. He will have the following amounts as a result of his 30% partnership interest: • taxable capital gains of [(30%)(1/2)($42,000)] $6,300 • a federal dividend tax credit of [(30%)(9/13)(15%)($15,000)] $ 467 • a charitable donations tax credit of [(15%)($200) + (29%)($1,800 - $200)] $ 494 Type: MC Topic: Partnerships - allocation of income, loss, capital gains & other amounts

48) The Bartlo Partnership has accounting income for the fiscal period ending December 31, 2022 of $490,000. As per the partnership agreement, this amount has been determined under ASPE. The agreement also calls for each of the two partners to have an equal share in the income. The following amounts are included in the calculation of this accounting income: • Non-eligible dividends received of $32,000 • Gains on the sale of shares of $96,000 • Charitable donations of $12,000 • Amortization on equipment of $49,000 (equal to CCA) The two partners will each have 2022 income allocated from the partnership of: A) $227,000. B) $229,400. C) $223,400. D) $245,000. Answer: B Explanation: A) $227,000 = [50%][($490,000 - (50%)($96,000) + $12,000] B) $229,400 {[50%][$490,000 + (15%)($32,000) - (1/2)($96,000) + $12,000]}. C) $223,400 = [50%][($490,000 + (15%)($32,000) - (50%)($96,000) D) $245,000 [(50%)($490,000) Type: MC Topic: Partnerships - allocation of income, loss, capital gains & other amounts

49) The Keisha Partnership has determined that business income for the 2022 fiscal period was $130,000. Ms. Kerry holds a 50% interest in the partnership. Her drawings from the partnership in 2022 totalled $45,000. In addition, Ms. Kerry has made the following business related expenditures personally: meals and entertainment of $5,000; business related automobile costs of $3,500; charitable donations of $3,000. What will her business income be for the 2022 taxation year? A) $45,000 B) $56,000 C) $59,000 D) $65,000 Answer: C Explanation: A) $45,000 [drawings] B) $56,000 [(50%)($130,000) — (50%)($5,000) - $3,500 - $3,000)] C) $59,000 [(50%)($130,000) — (50%)($5,000) - $3,500)] D) $65,000 [ (50%)($130,000)] Type: MC Topic: Partnerships - allocation of income, loss, capital gains & other amounts

50) Mr. Poulet is a partner in a partnership with a December 31 fiscal period. Mr. Poulet's share of the partnership allocations for 2022 are as follows: • business income of $120,000 • charitable donations of $1,500 • partnership draws totalling $100,000 Mr. Poulet's partnership interest had an ACB on January 1, 2022 of $222,000. What is the ACB on January 1, 2023? A) $120,500 B) $240,500 C) $242,000 D) $243,500 Answer: B Explanation: A) $222,000 - $1,500 - $100,000 = $120,500 B) $222,000 + $120,000 - $1,500 - $100,000 = $240,500 C) $222,000 + $120,000 - $100,000 = $242,000 D) $222,000 + $120,000 + $1,500 - $100,000 = $243,500 Type: MC Topic: Partnerships - the ACB of a partnership interest

51) Which one of the following statements related to partnerships is NOT correct? A) Dividends received by a partnership are not grossed up by the partnership in the calculation of partnership income. B) Charitable donations made by a partnership are not deductible by the partnership. C) Business losses of a partnership cannot be allocated to the partners for them to deduct against other income. D) Salaries to partners are not deductible by the partnership in the computation of partnership income. Answer: C Explanation: C) Business losses of a partnership cannot be allocated to the partners for them to deduct against other income. Type: MC Topic: Partnerships - allocation of income, loss, capital gains & other amounts

52) Christine would like to calculate the ACB of her partnership interest. She should include all of the following adjustment in the calculation except for her share of the: A) capital gains which the partnership realized during the year. B) charitable donations made during the year by the partnership. C) business loss of the partnership for the year. D) dividend gross up on dividends received by the partnership in the year. Answer: D Explanation: D) dividend gross up on dividends received by the partnership in the year. Type: MC Topic: Partnerships - the ACB of a partnership interest

53) Joe Conners is a member of a partnership with a December 31 fiscal period. Joe's share of the 2022 partnership allocations are as follows: • Business Loss of $25,000. • Charitable Donations of $1,000. Joe withdrew $10,000 from the partnership in 2022. Joe's ACB at January 1, 2022 was $59,000. What is the ACB of Joe's partnership interest on January 1, 2023? A) $23,000. B) $24,000. C) $25,000. D) $33,000. Answer: A Explanation: A) The ACB of Joe's partnership interest is $23,000, calculated as follows: Opening ACB Drawings Share of Business Loss Share of Charitable Donations ACB - January 1, 2023

$59,000 ( 10,000) ( 25,000) ( 1,000) $23,000

Type: MC Topic: Partnerships - the ACB of a partnership interest

54) Ms. Sarah McLean has a 50% interest in a partnership that was acquired on January 1, 2022 at a cost of $40,000. The partnership's business income for income tax purposes for the fiscal period ending December 31, 2022 was $50,000, an amount that included a CCA deduction of $36,000. The 2022 business income did not include taxable capital gains of $10,000 realized by the partnership. In 2022, Ms. McLean withdrew $15,000 from the partnership. The ACB of Ms. McLean's partnership interest at January 1, 2023 is: A) $55,000. B) $88,000. C) $50,000. D) $60,000. Answer: D Explanation: D) The ACB of Sarah's partnership interest is $60,000, calculated as follows: Opening ACB Drawings Share of Business Income - No CCA Adjustment [(50%)($50,000)] Share of Capital Gains [(50%)(2)($10,000)] ACB - January 1, 2023

$40,000 ( 15,000) 25,000 10,000 $60,000

Type: MC Topic: Partnerships - the ACB of a partnership interest

55) Femi and Fola are sisters who are partners in the Double F Partnership, each with a 50% interest. They wish to bring their brother, Faraji into the partnership on January 1, 2022, with a 20% interest. Faraji will pay $15,000 to each of his sisters in order to purchase 20% of each of their 50% interests. On January 1, 2022, Femi and Fola each have partner capital accounts with a balance of $50,000, which is equal to their ACB. Which of the following statements describes the income tax consequences to Femi and Fola of admitting their brother to the partnership? A) Each sister will have a taxable capital gain of $2,500. B) Each sister will have their partner capital account balance and ACB reduced to $35,000. C) Each sister will have a taxable capital gain of $7,500. D) There will be no income tax consequences to the two sisters. Answer: A Explanation: A) Each sister will have a taxable capital gain of $2,500. [1/2][POD $15,000 — ACB (20%)($50,000)] Type: MC Topic: Partnerships - the sale of a partnership interest

56) Jabari becomes a 40% interest partner in an accounting partnership on January 1, 2022. During the fiscal period ended December 31, 2022, the partnership business earns income of $200,000 for accounting purposes. In arriving at this income, the bookkeeper deducted meals and entertainment costs of $20,000, and a charitable donation of $5,000. Jabari withdraws $50,000 from the partnership in 2022. As of January 1, 2023, the ACB of his partnership interest will have increased by: A) $30,000. B) $38,000. C) $34,000. D) $24,000. Answer: C Explanation: A) $30,000. [($200,000)(40%) - $50,000] B) $36,000. [($215,000 + $5,000)(40%) - $50,000] C) $34,000. [($215,000 - $5,000)(40%) - $50,000] Business income of the partnership for income tax purposes is $215,000 {[$200,000 + (1/2)($20,000) + $5,000]}. Jabari's 40% share of the income is reduced by his share of the charitable donation and 100% of his withdrawals. [(40%)($215,000) - $50,000 - (40%)($5,000)] = $34,000 D) $24,000. {[$200,000 - (1/2)($20,000) - $5,000][40%] - $50,000} Type: MC Topic: Partnerships - the ACB of a partnership interest

57) Kasinda is a partner in Twins Partnership. At January 1, 2022, the ACB of her 25% partnership interest is $35,000. In 2022, she withdraws $85,000 from the partnership. In 2022, the partnership has business income for income tax purposes of $400,000. What is the ACB of her partnership interest on December 31, 2022, and what income tax consequences will result from the transactions during the year? A) The ACB of her partnership interest on December 31, 2022 is nil. Because Kasinda has withdrawn more than her ACB from the partnership, she will report a taxable capital gain of $25,000. She will also include $100,000 of business income for 2022. B) The ACB of her partnership interest on December 31, 2022 is $50,000. Kasinda will include partnership business income of $100,000 for 2022. C) The ACB of her partnership interest on December 31, 2022 is nil. Kasinda will also include business income of $100,000 for 2022. D) The ACB of her partnership interest on December 31, 2022 is negative $50,000. Because Kasinda has withdrawn more than her ACB from the partnership, she will have to include partnership business income of $50,000 in 2022. Answer: C Explanation: A) She will include a taxable capital gain of $25,000 and business income of $100,000 [ $25,000 = (1/2)($85,000 - $35,000); $100,000 = (25%)($400,000)] B) The ACB is $50,000. Kasinda will include partnership business income of $100,000. [ $50,000 = ((1/2)($85,000 - $35,000) + $ 100,000) ; $100,000 = (25%)($400,000)] C) The ACB is nil. Kasinda will include partnership business income of $100,000. [$100,000 = (25%)($400,000)] D) The ACB is negative $50,000. Because Kasinda has withdrawn more than her ACB from the partnership, she will include partnership business income of $50,000. [($50,000) = ($85,000 - $35,000); $50,000 = (25%)($400,000) - $50,000] Type: MC Topic: Partnerships - allocations & the ACB of the partnership interest

58) Red Bush and Green Tree are equal partners in Arbor Partnership. Each partner has contributed capital of $60,000 to the partnership and this is also the current ACB and FMV of their partnership interests. Blue Grass will join the partnership as an equal partner. Which of the following statements is correct? A) Blue Grass will pay $20,000 directly to each of the original partners and the ACB of the partnership interest of Red Bush and Green Tree will decrease by $20,000 each. B) Blue Grass will pay $30,000 directly to each of the original partners and the ACB of the partnership interest of Red Bush and Green Tree will decrease by $30,000 each. C) Blue Grass will pay $40,000 directly to the partnership and the ACB of the partnership interest of Red Bush and Green Tree will increase by $20,000 each. D) Blue Grass will pay $40,000 directly to the partnership and the ACB of the partnership interest of Red Bush and Green Tree will decrease by $20,000 each. Answer: A Explanation: A) If Blue Grass pays $20,000 directly to each of the original partners, the ACB of the partnership interest of both Red Bush and Green Tree would decrease by $20,000 each. Each partner is selling one third of their $60,000 interest. This will reduce their ACB by $20,000 [(1/3)($60,000)]. This is considered a partial disposition or property (ITA 43). Type: MC Topic: Partnerships - becoming a partner

59) Which one of the following items does NOT affect the calculation of the ACB of a partnership interest? A) The non-allowable portion of a capital loss on the sale of partnership property. B) Dividends received by the partnership. C) Interest on funds borrowed by a partner to make a capital contribution. D) A charitable donation made by the partnership. Answer: C Explanation: C) Interest on funds borrowed by a partner to make a capital contribution. Type: MC Topic: Partnerships - the ACB of a partnership interest

60) On January 1, 2022, Barry Score acquires a 25% interest in a limited partnership for $200,000. Barry pays an immediate deposit of $50,000 with the balance owing due in 2024. For the fiscal period ending December 31, 2022, the partnership determines that it has a $40,000 capital gain and a $100,000 business loss. What is Barry's at-risk amount? A) $30,000. B) $200,000. C) $60,000. D) $55,000. Answer: C Explanation: A) $30,000 [$200,000 + (25%)(50%)($40,000) - (25%)($100,000) - ($200,000 - $50,000)] B) $200,000 C) $60,000 [$200,000 + (25%)($40,000) - ($200,000 - $50,000)] D) $55,000 [$200,000 + (25%)(50%)($40,000) - ($200,000 - $150,000)] Type: MC Topic: Partnerships - the at-risk amount (ARA)

61) Which of the following partners is NOT a limited partner? A) Mayumi, a partner in an engineering firm, entitled to 50% of the profits and responsible for 50% of losses. B) Guan, a partner in an accounting firm with a guarantee that his partnership interest will be purchased by the other partners for a guaranteed minimum price of $150,000. C) Ekatarina, a partner in a law firm who is only responsible for the first $50,000 of partnership losses. D) Danyal, a partner in a construction company, who is reimbursed for any partnership losses by one of the other partners. Answer: A Explanation: A) Mayumi, a partner in an engineering firm, entitled to 50% of the profits and responsible for 50% of losses. This is the only choice where the partner does not have some type of special guarantee from the partnership that limits their financial risk. Type: MC Topic: Partnerships - limited partnerships & limited partners

62) Which of the following statements best reflects the tax policy objective of the at-risk rules? A) The objective of the rules is to encourage investment in high-risk ventures. B) The objective of the rules is to prevent taxpayers from receiving tax deductions or tax credits in excess of the amount that they are in a position to lose on their investment. C) The objective of the rules is to protect investors from the losses they can incur on their investments in high risk partnerships. D) The objective of the rules is to discourage investment in high-risk ventures. Answer: B Explanation: B) The objective of the rules is to prevent taxpayers from receiving tax deductions or tax credits in excess of the amount that they are in a position to lose on their investment. Type: MC Topic: Partnerships - the at-risk amount (ARA)

63) Arnold is a partner in the Polar Partnership. He has some vacant land that is capital property that is situated in a perfect location for a building the partnership wants to construct. He sells the land to the partnership for $155,000 in cash. The land cost him $95,000 and has a FMV of $140,000. What is the effect on the ACB of his partnership interest? A) An increase of $155,000. B) A decrease of $15,000. C) An increase of $15,000. D) A decrease of $60,000. Answer: B Explanation: B) A decrease of $15,000 ($155,000 - $140,000). Type: MC Topic: Partnerships - sale of property from a partner to a partnership (ITA 97(1))

64) Aba has just become a partner of the Thursday Partnership. She has a pick up truck which she previously used in her own gardening business and which would be useful to the partnership. She uses the pick-up truck as a capital contribution. The truck cost her $45,000, has a UCC of $28,000 and a FMV of $35,000. The other partner can only contribute cash of $30,000, so the partnership pays Aba $5,000 in cash to keep the initial contributions equal. What are the income tax consequences of this transaction? A) Aba will have disposed of the truck for $35,000 resulting in recapture. • The ACB of her partnership interest will be $35,000. • The partnership will have acquired the truck for $35,000. B) Aba will have disposed of the truck for $30,000 resulting in recapture. • The ACB of her partnership interest will be $30,000. • The partnership will have acquired the truck for $30,000. C) Aba will have disposed of the truck for $35,000 resulting in recapture. • The ACB of her partnership interest will be $30,000. • The partnership will have acquired the truck for $35,000. D) Aba will have disposed of the truck for $30,000 resulting in recapture. • The ACB of her partnership interest will be $35,000. • The partnership will have acquired the truck for $30,000. Answer: C Explanation: C) Aba will have disposed of the truck for $35,000 resulting in recapture of $7,000. The ACB of her partnership interest will be $30,000. The partnership will have acquired the truck for $35,000. ITA 97(1) deems this FMV result. The $5,000 paid in cash is effectively treated as drawings which reduces the ACB of her partnership interest to $30,000. Type: MC Topic: Partnerships - sale of property from a partner to a partnership (ITA 97(1))

65) Aissa has just become a partner of the Gratitude Partnership. She has some vacant land that is capital property and that is in a perfect location for a building the partnership wants to construct. As her initial capital contribution, she sells the land to the partnership. The land cost her $45,000 and has a FMV of $95,000. No consideration is received other than an interest in the partnership. What are the income tax consequences of this transaction? A) Aissa will have disposed of the land for its original cost of $45,000. • The ACB of her partnership interest will be $45,000. • The partnership will have acquired the land for $45,000. B) Aissa will have disposed of the land for $95,000 resulting in a taxable capital gain of $25,000. • The ACB of her partnership interest will be $95,000. • The partnership will have acquired the land for $95,000. C) Aissa will have disposed of the land for $95,000 resulting in a taxable capital gain of $25,000. • The ACB of her partnership interest will be $70,000. • The partnership will have acquired the land for $70,000. D) Aissa will have disposed of the land for $45,000. • The ACB of her partnership interest will be $95,000. • The partnership will be considered to have acquired the land for $95,000. Answer: B Explanation: B) Aissa will have disposed of the land for $95,000 resulting in a taxable capital gain of $25,000. The ACB of her partnership interest will be $95,000. The partnership will have acquired the land for $95,000. Type: MC Topic: Partnerships - sale of property from a partner to a partnership (ITA 97(1))

66) The Happy Endings Partnership distributes land that is partnership capital property to Chata, a partner with a 35% interest in the partnership. Chata makes no payment to the partnership. The partners share of income and capital gains is equal to the percentage interest in the partnership. The ACB of the land is $62,000 and the FMV $88,000. What will the net effect of the distribution on the ACB of Chata's partnership interest? A) A decrease of $62,000. B) A decrease of $78,900. C) A decrease of $83,450. D) A decrease of $88,000. Answer: B Explanation: A) A decrease of $62,000. [($88,000-$62,000)-$88,000] B) A decrease of $78,900. [(35%)($88,000-$62,000)-$88,000] C) A decrease of $83,450. [(35%)(1/2)($88,000-$62,000)-$88,000] D) A decrease of $88,000. [the FMV of the land] Type: MC Topic: Partnerships - sale of property from a partnership to a partner (ITA 98(2))

67) Which of the following property can be sold by a partner to a Canadian partnership under ITA 85(2), but cannot be sold to a taxable Canadian corporation under ITA 85(1)? A) Inventory of goods for resale. B) Vacant land.that is capital property. C) Real property inventory. D) Non-depreciable capital property which has declined in value since being purchased. Answer: C Explanation: C) Real property inventory. Type: MC Topic: Partnerships - incorporating a partnership (ITA 85(2) & (3))

68) During the fiscal period ending December 31, 2022, WIN Partnership has business income of $80,000, capital gains of $23,000, and receives eligible dividends of $8,500. Sally Winters has a 40% interest in partnership income and capital gains. In 2022, Sally withdraws $25,000 from the partnership. Determine the income tax consequences for Ms. Winters for the 2022 taxation year. Answer: The following amounts would be added to Ms. Winter's 2022 net income: Business Income [(40%)($80,000)] Taxable Capital Gains [(40%)(1/2)($23,000)] Eligible Dividends [(40%)($8,500)] Gross Up [(38%)($3,400)] Total Partnership Income

$32,000 4,600 3,400 1,292 $41,292

In addition Ms. Winters would be eligible for a federal dividend tax credit of $705 [(6/11)($1,292)]. The fact that she withdrew $25,000 during the year has no consequences with respect to income or capital gains but will result in a reduction in the ACB of her partnership interest. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

69) James Bonner is one of four brothers who have formed a partnership. They each have a 25% interest in the partnership. During the fiscal period ending December 31, 2022, the partnership has the following income and capital gains: Business Income Capital Gains Eligible Dividends

$140,000 18,000 41,000

In 2022, James withdraws $15,000 in cash from the partnership. Determine the income tax consequences for James for the 2022 taxation year. Answer: The following amounts would be added to Mr. Bonner's 2022 net income: Business Income [(25%)($140,000)] Taxable Capital Gains [(25%)(1/2)($18,000)] Eligible Dividends [(25%)($41,000)] Gross Up [(38%)($10,250)] Total Partnership Income

$35,000 2,250 10,250 3,895 $51,395

In addition Mr. Bonner would be eligible for a federal dividend tax credit of $2,125 [(6/11)($3,895)]. The fact that he withdrew $15,000 during the year has no consequences with respect to income or capital gains but will result in a reduction in the ACB of his partnership interest. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

70) The ID Partnership has two partners. Partner I, who is actively managing the partnership and receives an annual salary of $42,000 as a result. Because Partner D has contributed most of the capital for the business, an interest allocation of $17,000 is made to recognize the capital contributions. The partnership agreement calls for the remaining profits, and all other allocations, to be split 55% to I and 45% to D. The salary and interest amounts are deducted in the determination of accounting income and withdrawn by the partners during the course of the year. During the fiscal period ending December 31, 2022, the partnership's accounting income is $312,000. Other relevant information is as follows: • The accountant deducted amortization of $41,000. Maximum CCA is $63,000. • Accounting income includes a deduction for charitable donations of $4,200. • Accounting income includes a gain on the sale of land of $31,000. Determine the amounts of business income for income tax purposes that will be allocated to Partner I and Partner D for the 2022 taxation year. Answer: The ID Partnership's Business Income would be calculated as follows: Accounting Income Add: Salary to I Interest to D Amortization Expense Donations

$312,000 $42,000 17,000 41,000 4,200

Deduct: Maximum CCA Accounting Gain on sale of Land 2022 Business Income Priority Allocations for Salaries and Interest ($42,000 + $17,000) Residual to be allocated 55:45

($63,000) ( 31,000)

104,200 $416,200

( 94,000) $322,200 ( 59,000) $263,200

The allocation of the 2022 business income for each partner would be as follows: Partner I $ 42,000 N/A

Priority allocation for Salary Priority allocation for Interest Allocation of Residual [(55%)($263,200)] [(45%)($263,200)] 2022 Business Income Allocation

144,760 $186,760

Partner D N/A $17,000

118,440 $135,440

While not required, you might note that a taxable capital gain of $15,500 [(1/2)($31,000)], as well as the charitable donations of $4,200, would be allocated to the partners on a 55:45 basis.

Type: ES Topic: Partnerships - comprehensive problem business income allocation (includes reconciliation from accounting)

71) The Keisha Partnership has income for accounting purposes for the fiscal period ended December 31, 2022 of $625,000. The two partners have an equal share in this income. The following amounts have been included in the calculation of accounting income: Meals and Entertainment Expenses Loss on sale of Investments Golf Club Dues for Partners Accounting Amortization

$32,000 48,000 25,000 62,000

You have correctly calculated CCA of $47,000 and a terminal loss of $31,000. How much business income should be allocated to each partner for income tax purposes? Answer: The Keisha Partnership's 2022 Business Income would be calculated as follows: Accounting Income Additions Non-Deductible Meals and Entertainment [(50%)($32,000)] Loss on sale of Investments Golf Club Dues Amortization Expense Deductions CCA Terminal Loss 2022 Business Income

$625,000

$16,000 48,000 25,000 62,000 ($47,000) ( 31,000)

151,000

( 78,000) $698,000

Each partner would be allocated $349,000 [(50%)($698,000)]. While not required, you might note that the capital loss will be allocated to the partners on a 50:50 basis. However, they can deduct it only to the extent that they have net taxable capital gains for 2022.

Type: ES Topic: Partnerships - comprehensive problem business income allocation (includes reconciliation from accounting)

72) The MP Partnership has two partners who share all types of income on an equal basis. Partners M and P are both individuals. The Partnership's accounting income for the fiscal period ending December 31, 2022 is $78,000. No salaries or interest payments to partners have been included in this calculation. However, the $78,000 includes $6,500 in eligible dividends, as well as a $16,000 gain on the sale of unused land that is capital property. Amortization Expense deducted is equal to maximum CCA. Determine the amounts that will be included in the 2022 net income of Partner M and Partner P. Answer: The MP Partnership's 2022 Business Income would be calculated as follows: Accounting Income Amortization Expense = CCA Eligible Dividends Accounting Gain on sale of Land 2022 Business Income

$78,000 Nil ( 6,500) ( 16,000) $55,500

The addition to 2022 net income for each of the two partners would be calculated as follows: Partner M $27,750 3,250 1,235 4,000 $36,235

Business Income [(50%)($55,500)] Eligible Dividends [(50%)($6,500)] Gross Up [(38%)($3,250)] Taxable Capital Gain [(50%)(1/2)($16,000)] Total addition to 2022 Net Income

Partner P $27,750 3,250 1,235 4,000 $36,235

While not required, you might note that each partner would be eligible for a federal dividend tax credit of $674 [(6/11)($1,235)]. Type: ES Topic: Partnerships - comprehensive problem business income allocation (includes reconciliation from accounting)

73) For the taxation fiscal period ending December 31, 2022, the Barton Partnership has accounting income of $242,000. In determining this amount, no deductions were made for either partner salaries or interest on partner capital contributions. However, the accounting income does include $14,000 in eligible dividends received and a capital gain on the sale of investments of $52,000. The partnership has two partners, Sam Barton and Sherri Barton. All income is allocated on the basis of 40% to Sam and 60% to Sherri. Determine the amounts that will be included in the 2022 net income of both partners. Answer: The Barton Partnership's 2022 Business Income would be calculated as follows: Accounting Income Eligible Dividends Accounting Gain on sale of Investments 2022 Business Income

$242,000 ( 14,000) ( 52,000) $176,000

The addition to 2022 net income for each of the two partners would be calculated as follows: Sam (40%) $70,400 5,600

Business Income = $176,000 Eligible Dividends = $14,000 Gross Up [(38%)($5,600)] [(38%)($8,400)] Taxable Capital Gain = $26,000 [(1/2)($52,000)] 2022 Addition to Net Income

2,128

10,400 $88,528

Sherri (60%) $105,600 8,400

3,192 15,600 $132,792

While this is not required, you might note that each partner would be eligible for a federal dividend tax credit equal to 6/11 of their respective gross ups.

Type: ES Topic: Partnerships - comprehensive problem business income allocation (includes reconciliation from accounting)

74) For the fiscal period ending December 31, 2022, the PU Partnership has correctly calculated its business income for income tax purposes to be $213,000. The partnership agreement calls for all allocations to Partner P and Partner U to be on a 40:60 basis. Partner P and U are both individuals and neither has income that is subject to the 33% federal income tax rate. In reconciling accounting income to business income for income tax purposes, the partnership's accountant added back $4,200 in charitable donations and $900 in contributions to a registered political party. In addition, $2,700 in eligible dividends received were deducted. The partners have made no personal charitable donations or political contributions. Determine the amount of any income tax credits that will be allocated to Partner P and Partner U for the 2022 taxation year. Answer: The allocation of the amounts would be as follows: Partner P (40%) $1,680 360 1,080

Charitable Donations = $4,200 Political Contributions = $900 Dividends = $2,700

Partner U (60%) $2,520 540 1,620

Using these allocations, the tax credits for the two individual partners would be as follows: Partner P Charitable Donations [(15%)($200) + (29%)($1,680 - $200)] Political Contributions [(3/4)($360)] Dividends [(6/11)(38%)($1,080)] John's Tax Credits

$459 270 224 $953

Partner U Charitable Donations [(15%)($200) + (29%)($2,520 - $200)] Political Contributions [(3/4)($400) + (1/2)($140)] Dividends [(6/11)(38%)($1,620)] Partner U's Tax Credits

$ 703 370 336 $1,409

These amounts reduce the 2022 federal income tax payable of each of the two partners. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

75) The Coop Partnership has two members, John and Jill Walther, who share all income on a 60:40 basis. Neither partner has income that is subject to the 33% federal income tax rate. During the partnership fiscal period ending December 31, 2022, accounting income has been computed as $346,000. This accounting income includes the following amounts: Charitable Donations Contributions to a Registered Political Party Eligible Dividends

$4,500 600 14,000

The partners have made no personal charitable donations or political contributions. Determine the amount of any tax credits that will be allocated to John and Jill Walther for 2022. Answer: The allocation of the amount would be as follows: John (60%) $2,700 360 8,400

Charitable Donations = $4,500 Political Contributions = $600 Dividends = $14,000

Jill (40%) $1,800 240 5,600

Using these allocations, the tax credits for the two individual partners would be as follows: John Charitable Donations [(15%)($200) + (29%)($2,700 - $200)] Political Contributions [(3/4)($360)] Dividends [(6/11)(38%)($8,400)] John's Tax Credits

$ 755 270 1,741 $2,766

Jill Charitable Donations [(15%)($200) + (29%)($1,800 - $200)] Political Contributions [(3/4)($240)] Dividends [(6/11)(38%)($5,600)] Jill's Tax Credits

$ 494 180 1,161 $1,835

These amounts reduce the 2022 federal income tax payable of each of the two partners. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

76) Natasha and Felicia are equal partners in the Natty Partnership. On April 30, 2022, Natasha and Felicia's partnership capital account balances are $148,800 each which is the same as the ACB of their partnership interests. Kyra is admitted as an equal partner on April 30, 2022, and pays $124,000 to each of Natasha and Felicia. Calculate the income tax consequences of the partner admission for Natasha and Felicia and determine the partner capital account balances and ACB of the partnership interest for each partner after the admission of Kyra. Answer: Natasha and Felicia will each have a disposition of one-third of their partnership interests for $124,000. As the ACB of the part of the interest sold is $49,600 [(1/3)($148,800)], Natasha and Felicia will each have a $37,200 [(1/2)($124,000 - $49,600)] taxable capital gain. The capital account balances and the ACBs after Kyra's admission will be:

Opening Capital Accounts Adjustment for Kyra's Admission Ending Capital Accounts (Accounting Values) ACB of Partnership Interest

Type: ES Topic: Partnerships - becoming a partner

Natasha $148,800 ( 49,600)

Felicia $148,800 ( 49,600)

Kyra Nil $ 99,200

$ 99,200

$248,000

77) Jerry and Joan are equal partners in the JJ Partnership. On January 1, 2022, the balance in each of their partner capital accounts is $210,000. This is also the ACB of their partnership interests. On this date, John is admitted as an equal partner, paying $130,000 to each of Jerry and Joan. Calculate the income tax consequences of the partner admission for Jerry and Joan. In addition, determine the partner capital account balances and ACB of each partner's partnership interest after the admission of John. Answer: Jerry and Joan will each have a partial disposition of one-third of their partnership interests for $130,000. As the ACB of the part interest sold is $70,000 [(1/3)($210,000)], they will each have a taxable capital gain of $30,000 [(1/2)($130,000 - $70,000)]. The partners capital account balances and the ACBs after John's admission would be as follows:

Opening Capital Accounts Adjustment for John's Admission Ending Capital Accounts (Accounting Amounts) ACB of Partnership Interest

Type: ES Topic: Partnerships - becoming a partner

Jerry $210,000 ( 70,000)

Joan $210,000 ( 70,000)

John Nil $140,000

$140,000

$260,000

78) On January 1, 2022, Rachel and Roberta form the Racherta Partnership. The partnership agreement provides Roberta with a 40% share of profits and losses. Roberta initially contributes $52,500 and makes a further contribution of $30,240 on May 15, 2022. She withdraws $16,800 on August 31, 2022. The Racherta Partnership has the following income and capital gains for the fiscal period ending December 31, 2022: Capital Gain on sale of Shares Eligible Dividends from Canadian Corporations Business Income

$ 48,720 13,020 196,140

Determine the ACB of Roberta's partnership interest on December 31, 2022, and on January 1, 2023. In addition, determine the amount that would be included in Roberta's 2022 net income as a consequence of her interest in the Racherta Partnership. Answer: The ACB of Roberta's partnership interest on December 31, 2022 and January 1, 2023 would be determined as follows: Original Capital Contribution Additional Contribution Drawings ACB - December 31, 2022 Adjustment for 2022 Income & Capital Gains [(40%)($48,720 + $13,020 + $196,140)] ACB - January 1, 2023

$ 52,500 30,240 ( 16,800) $ 65,940 103,152 $169,092

Roberta's addition to her 2022 net income would be as follows: Taxable Capital Gain [(1/2)($48,720)] Dividends Received Gross Up on Eligible Dividends [(38%)($13,020)] Business Income Subtotal Roberta's % Share Addition to 2022 Net Income

$ 24,360 13,020 4,948 196,140 $238,468 40% $ 95,387

Note that this is not the same $103,152 that was added to the ACB of Roberta's partnership interest to reflect her share of 2022 partnership income. Type: ES Topic: Partnerships - the ACB of a partnership interest

79) The XL Partnership is formed on January 1, 2022. Xena is entitled to 60% of the Partnership income, while Larry is entitled to 40%. Xena's original investment is $125,000. Later in 2022, she makes a further contribution of $75,000. Also in 2022, she withdraws $40,000 in anticipation of partnership business profits. During the taxation fiscal period ending December 31, 2022, the XL Partnership has the following income & capital gains: Business Income Eligible Dividends Capital Gain on the sale of shares

$435,000 26,000 31,000

Determine the ACB of Xena's partnership interest on December 31, 2022, and on January 1, 2023. In addition, determine the amount that would be included in Xena's 2022 net income as a consequence of her interest in the XL Partnership. Answer: The ACB of Xena's partnership interest on December 31, 2022 and January 1, 2023 would be determined as follows: Original Capital Contribution Additional Contribution Drawings ACB - December 31, 2022 Adjustment for 2022 Income [(60%)($435,000 + $26,000 + $31,000)] ACB - January 1, 2023

$125,000 75,000 ( 40,000) $160,000 295,200 $455,200

Xena's 2022 addition to net income would be as follows: Business Income Taxable Capital Gain [(1/2)($31,000)] Dividends Received Gross Up on Eligible Dividends [(38%)($26,000)] Subtotal Xena's Share of Partnership Income and Gains Addition to 2022 Net Income

$435,000 15,500 26,000 9,880 $486,380 60% $291,828

Note that this is not the same $295,200 that was added to the ACB of Xena's partnership interest to reflect her share of 2022 partnership income. Type: ES Topic: Partnerships - the ACB of a partnership interest

80) In 2022, Blake Robson purchases an interest in a real estate limited partnership for $235,000. The price is paid with $62,000 in cash and a loan provided by the partnership of $173,000. The loan is payable in six years. The general partner has agreed to purchase Blake's interest at any time, returning his $62,000 payment and assuming full responsibility for the loan, without regard to the current value of the interest. For 2022, the limited partnership has allocated losses of $81,400 to Blake. How much of this loss can Blake claim for the 2022 taxation year? What is the amount of his 2022 limited partnership loss if any? Answer: The required calculations are as follows: ACB of Partnership Interest Share of Partnership Income for 2022 Subtotal Amounts owed to the partnership Other amounts intended to reduce investment risk (General Partner Guarantee) At-Risk Amount - December 31, 2022

($173,000)

( 62,000)

$235,000 Nil $235,000

( 235,000) Nil

As the at-risk amount is nil, none of the allocated loss can be deducted in 2022. The 2022 limited partnership loss is therefore equal to the allocated loss of $81,400. Type: ES Topic: Partnerships - limited partnership losses

81) Early in 2022, Bobby Joe Hyder purchased an interest in a limited partnership for $450,000. Of this amount $250,000 is paid in cash, with the remainder payable to the partnership on January 1, 2025. If Bobby Joe transfers his interest to the general partner prior to January 1, 2025, the general partner will pay him $100,000 and assume full responsibility for the balance owing on January 1, 2025. For 2022, the limited partnership has allocated business losses of $132,000 to Bobby Joe. How much of this loss is Bobby Joe entitled to claim as a deduction for 2022? What is the amount of his 2022 limited partnership loss, if any? Answer: The required calculations are as follows: ACB of Partnership Interest Share of Partnership Income for 2022 Subtotal Amounts owed to the Partnership Other amounts intended to reduce investment risk (General Partner Guarantee) At-Risk Amount - December 31, 2022

$450,000 Nil $450,000 ($200,000)

( 100,000)

( 300,000) $150,000

As the at-risk amount is $150,000, all of the $132,000 loss can be deducted in 2022. As a result there is no limited partnership loss for 2022. Type: ES Topic: Partnerships - limited partnership losses

82) Martha Stuart is one of four partners in the Homemaker Partnership (HP). During the current year, Martha contributes land that is capital property to the partnership. Martha purchased the land for $59,400 and, at the time of the disposition to the partnership, it is valued at $180,000. Martha does not use a rollover provision to make the transfer. Describe the income tax consequences to Martha and HP in the following three situations: A. No consideration is received from HP. B. Martha receives $45,000 in cash from HP on the transfer. C. Martha receives $201,600 in cash from HP on the transfer. Answer: Part A - Martha is considered to have disposed of the land for $180,000, resulting in a $60,300 [(1/2)($180,000 - $59,400)] taxable capital gain. She is also considered to have made a capital contribution of $180,000 that will be added to the ACB of her partnership interest. HP will be considered to have acquired the land for $180,000. Part B - Martha will have the same $60,300 taxable capital gain as in Part A and HP will be considered to have acquired the land for $180,000. The capital contribution and the addition to the ACB of the partnership interest is $135,000. This is the difference between the FMV of the land HP of $180,000 and the $45,000 in other consideration received by Martha on the disposition of the property. Part C - Martha will have the same $60,300 taxable capital gain as in Part A and HP will be considered to have acquired the land for $180,000. No capital contribution is made. As Martha withdrew $21,600 ($201,600 - $180,000) more from HP than the FMV of the land and the excess will be considered a withdrawal. The ACB of her partnership interest will be reduced by $21,600. Type: ES Topic: Partnerships - sale of property from a partner to a partnership (ITA 97(1))

83) Ethan Allen is one of three partners in the Colonial Partnership (CP). In 2022, Ethan transfers land that is capital property to the partnership. The partners agree that the land has a FMV of $220,000. Ethan's ACB for the land is $100,000. Describe the income tax consequences to Ethan and CP in the following three situations: A. No consideration is received from CP. B. Ethan receives $60,000 in cash from CP on the transfer. C. Ethan receives $250,000 in cash from CP on the transfer. Answer: Part A - Ethan is considered to have disposed of the land for its FMV of $220,000, resulting in a taxable capital gain of $60,000 [(1/2)($220,000 - $100,000). This capital contribution will increase the ACB of Ethan's partnership interest by $220,000. The ACB of the land to CP will be $220,000. Part B - Ethan is considered to have disposed of the land for its FMV of $220,000, resulting in a taxable capital gain of $60,000 [(1/2)($220,000 - $100,000)]. However, as he has received $60,000 in cash, the ACB of his partnership interest will only be increased by $160,000 ($220,000 - $60,000). The ACB of the land to CP will be $220,000. Part C - Once again, Ethan will have a taxable capital gain of $60,000 and CP will have acquired the land for $220,000. However, as Ethan has received an amount in excess of the FMV of the land, there will be no increase in the ACB of his partnership interest. The ACB of the partnership interest will be reduced by the $30,000 ($250,000 - $220,000) excess of the cash payment over the FMV of the land. In effect, this $30,000 will be treated as drawings. Type: ES Topic: Partnerships - sale of property from a partner to a partnership (ITA 97(1))

84) Lamar is one of 10 equal partners in the Trident Partnership. During its fiscal period ending December 31, 2022, Trident distributes debenture bonds that were held for investment purposes to each of the partners. These bonds have an ACB of $567,750 and, at the time of transfer, they have a FMV of $611,750. Lamar receives 10% of these bonds. At the time of the transfer, the ACB of Lamar's partnership interest is $75,800. What are the income tax consequences to Trident and Lamar with respect to this distribution? Your answer should include the ACB of Lamar's partnership interest on both December 31, 2022 and January 1, 2023. Answer: ITA 98(2) deems Trident to have disposed of the debenture bonds for their FMV of $611,750, resulting in a $44,000 ($611,750 - $567,750) capital gain. One-tenth of the capital gain, or $4,400, will be allocated to Lamar. One-half of this amount, or $2,200, will be a taxable capital gain that Lamar will have to include in his 2022 income. Lamar will also be considered to have acquired his share of the debenture bonds for $61,175. The ACB of his partnership interest on December 31, 2022 and on January 1, 2023 is calculated as follows: Partnership ACB Prior to the Distribution Drawings [(10%)($611,750)] ACB - December 31, 2022 Allocated Capital Gain [(10%)(($611,750 - $567,750)] ACB - January 1, 2023

$75,800 ( 61,175) $14,625 4,400 $19,025

Type: ES Topic: Partnerships - sale of property from a partnership to a partner (ITA 98(2))

85) Patricia Flood holds a 25% interest in the Markham Partnership. The Partnership owns investments with an ACB of $250,000 and a FMV of $475,000. During the fiscal period of the partnership ending December 31, 2022, the Partnership will distribute these investments to the partners in proportion to their interests. Patricia receives 25% of the investments and, at the time that they are received, the ACB of her partnership interest is $180,000. What are the income tax consequences to Patricia and Markham with respect to this distribution? Your answer should include the ACB of Patricia's partnership interest on December 31, 2022 and January 1, 2023. Answer: The distribution will be treated as a disposition of the investments at their FMV of $475,000. This means that the Partnership will have a capital gain of $225,000 ($475,000 - $250,000). Of this amount, $56,250 [(25%)($225,000)] will be allocated to Patricia. She will have a taxable capital gain of $28,125 [(1/2)($56,250)] which will be included in her 2022 income. The ACB of the investments received will be $118,750 [(25%)($475,000)]. The ACB of her partnership interest on December 31, 2022 and on January 1, 2023 is calculated as follows: Partnership ACB prior to the Distribution Drawings [(25%)($475,000)] ACB - December 31, 2022 Allocated Capital Gain [(25%)(($475,000 - $250,000)] ACB - January 1, 2023

$180,000 ( 118,750) $ 61,250 56,250 $117,500

Type: ES Topic: Partnerships - sale of property from a partnership to a partner (ITA 98(2))

86) Sol Marinara is one of four equal partners in the MSG Partnership. During the current year, Sol transfers land that is capital property to the partnership as a capital contribution. He had acquired the land several years ago for $146,000. At the time of the contribution to the partnership, the FMV is $472,000. He would like to use any available rollover provision in order to minimize income tax. Assuming the appropriate rollover provision is used, what are the income tax consequences of this contribution? Answer: ITA 97(2) provides the necessary rollover that allows the rollover provisions of ITA 85(1) to be used where a partner disposes of property to a partnership. Without ITA 97(2), ITA 85(1) would not apply since it requires that dispositions of eligible property be made to a taxable Canadian corporation. Using the partnership modified version of ITA 85(1), the property would be disposed of at the $146,000 ACB of the land. Given this, the transfer would not result in any current income for Sol. The cost of the land to the partnership would be the $146,000 elected amount for the transfer. This same amount would be added to the ACB of Sol's partnership interest. Type: ES Topic: Partnerships - rollover of property from a partner to a partnership (ITA 97(2))

87) Sarah Bright owns land that is capital property that was purchased several years earlier at a cost of $250,000. It currently has a FMV of $600,000. She would like to contribute the land to a partnership in which she is one of 6 equal partners. In making the transfer, she would like to use any available rollover provision that would minimize the income tax of the disposition. Assuming the appropriate rollover provision is used, what are the income tax consequences? Answer: ITA 97(2) provides the necessary rollover that allows the rollover provisions of ITA 85(1) to be used where a partner disposes of property to a partnership. Without ITA 97(2), ITA 85(1) would not apply since it requires that dispositions of eligible property be made to a taxable Canadian corporation. Using the partnership modified version of ITA 85(1), the property would be transferred at the $250,000 ACB of the land. The cost of the land to the partnership would be the $250,000 ITA 85(1) elected amount for the transfer. This same amount would be added to the ACB of Sarah's partnership interest. Type: ES Topic: Partnerships - rollover of property from a partner to a partnership (ITA 97(2))

88) Barry and Lance Booker are brothers who live in the same New Brunswick community. Barry is an accountant who specializes in advising small businesses. Lance has held various jobs in restaurants over the last few years. However, he is currently between jobs. As a result of information he has accumulated while working with his accounting clients, Barry has started a new business involving catering services. To this end, he has acquired a building, furniture, and equipment. He has also registered the business and opened up a bank account under his own name. Barry spends a few hours each day managing the business. As he is aware of Lance's financial difficulties, he has decided to treat his brother as a partner in this business, sharing profits on a 50:50 basis when filing their annual income tax returns. There is no formal partnership agreement. Required: In the following two independent Cases, determine whether a partnership exists. A. Lance's involvement with the business consists of helping Barry pick out furniture and equipment and occasionally taking messages when Barry is out of town. It appears that the business will be consistently profitable. B. Lance does all the accounting, payroll and invoicing for the business. He also does most of the ordering and is responsible for paying for the suppliers. While it is unlikely that the business will be profitable in its first year of operation, Barry expects the business to be profitable in subsequent years. Answer: Basis For Conclusion The following three partnership questions must all be answered yes for a partnership to exist: 1. Is there a business? 2. Is the business carried on for profit? 3. Is the business carried on in common by two or more persons? Case A With respect to the first question, it is clear that a business exists in this Case. With respect to the second question, the business is being carried on for profit. With respect to the third question, it does not seem that Lance will be making any real contribution to the management of the business. Further, Barry does not hold himself out as a partner or the business as a partnership, as the bank accounts and the business registration are in Barry's name only. Given these factors, we would conclude that the business is not "carried on in common by two or more persons". Therefore, a partnership does not exist in this Case. Case B With respect to the first question, it is clear that a business exists in this Case. With respect to the second question, the business is being carried on for profit. With respect to the third question, Lance appears to be carrying out employment-like functions and does not seem to be involved in the management of the business. This would suggest that the business is not being "carried on in common". Given this, the most likely conclusion would be that partnership does not exist. Type: ES Topic: Partnerships - comprehensive problem: the existence of a partnership

89) Mark and George Cooper are brothers with extensive experience in practicing law. Until recently, they have each worked for separate firms in Regina, Saskatchewan. After years of urging from their mother, they have concluded that they could significantly improve their incomes and the quality of their client base if they work together in a partnership arrangement. As a result, as of January 1, 2022, they begin practicing law as the Cooper & Cooper Partnership. Mark will be entitled to a salary of $60,000 per year, while George's salary will be $40,000. In addition, George will receive interest at 5% on his average capital balance for the year. The salary and interest amounts are withdrawn by the partners during the course of the year. Subsequent to the priority allocations for salaries and interest, any residual business income will be allocated 65% to Mark and 35% to George in 2022. Capital Gains - As George has contributed the majority of the partnership initial capital, he will be entitled to all capital gains that are realized by the partnership. Dividends - Any dividends received by the partnership will be split equally between the two partners. For the partnership fiscal period ending December 31, 2022, the accounting income is as follows: Cooper & Cooper Partnership Income Statement Fiscal Period Ending December 31, 2022 Revenues Expenses: Salaries to Staff Office Rent Office Supplies Amortization Expense (Note 1) Business Meals & Entertainment Charitable Donations (Note 2) Interest on George's Capital Contribution Salary to Mark Salary to George Accounting Business Income Other Income: Gains on sales of Investments (Note 3) Eligible Dividends 2022 Accounting Net Income

$862,465 ($123,656) ( 63,964) ( 8,434) ( 26,360) ( 16,432) ( 3,850) ( 4,780) ( 60,000) ( 40,000)

$ 16,848 9,432

( 347,476) $514,989

26,280 $541,269

Note 1 - Accounting amortization is based on ASPE. The brothers intend to claim the maximum allowable CCA of $32,164. Note 2 - The charitable donations will be allocated equally to each brother. Neither brother made any other charitable donations in 2022. Note 3 - The accounting gains on sales of investments are equal to the capital gains.

Required: A. Calculate the amounts of income from the partnership that would be included for 2022 for each brother. B. Indicate the amount of any federal personal tax credits that each of the two brothers would be entitled to as a result of allocations made by the partnership at December 31, 2022. Ignore CPP, GST/HST & PST considerations. Answer: Part A - Income Inclusion The calculation of the partnership's business income for income tax purposes is as follows: Business Income for accounting purposes (From Statement) Additions: Amortization Expense Business Meals & Entertainment [(1/2)($16,432)] Charitable Donations Interest on George's Capital Contribution Salaries to Partners ($60,000 + $40,000) Subtotal Deductions: Maximum CCA Business Income for ITA purposes Priority Allocations for Salary & Interest ($4,780 + $100,000) Residual t be allocated 65:35

$514,989 26,360 8,216 3,850 4,780 100,000

143,206 $658,195 ( 32,164) $626,031 ( 104,780) $521,251

Additional partnership income allocations would be as follows: Taxable Capital Gains [(1/2)($16,848)]

$8,424

Eligible Dividends Received Gross Up [(38%)($9,432)] Grossed Up Eligible Dividends

9,432 3,584 $13,016

The total 2022 addition to the income of each brother is as follows:

Business Income Priority Claim - Salaries Priority Claim — Interest Mark [(65%)($521,251)] George [(35%)($521,251)] Taxable Capital Gains [(100%)($8,424)] Grossed Up Eligible Dividends [(50%)($13,016)] 2022 Net Income

Mark

George

$ 60,000

$ 40,000 4,780

338,813

6,508 $405,321

182,438 8,424 6,508 $242,150

Part B - Tax Credits Charitable Donations Each of the brothers would be allocated $1,925 [(50%)($3,850)] of the charitable donations. The donation would provide a federal tax credit of $599 [(15%)($200) + (33%)($1,925 - $200)]. Dividends Each of the brothers will be allocated one-half of the eligible dividends. Given this, they will each have a federal dividend tax credit of $977 [(1/2)(38%)($9,432)(6/11)]. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

90) Sam and Allen Foster are both Chartered Professional Accountants (CPAs). Since acquiring their professional designations, they have both worked for a large CPA firm. However, at the beginning of 2022, they decided to leave the firm and form a two person partnership specializing in tax and accounting for owner-managed private corporations. The agreement for the new partnership calls for business income to be shared equally. In addition, charitable contributions will also be allocated equally. However, as Allen has contributed most of the capital for the new partnership, he will receive 80% of any capital gains or dividends received by the partnership. For the partnership fiscal period ending December 31, 2022, the accounting results are as follows: Sam And Allen Foster Partnership Income Statement Fiscal Period Ending December 31, 2022 Revenues Expenses: Employee Salaries Office Rent Office Supplies Amortization Business Meals & Entertainment Charitable Donations Salary to Sam Salary to Allen 2022 Accounting Business Income Other Income: Capital Gains Eligible Dividends 2022 Accounting Net Income

$965,000 ($114,000) ( 82,000) ( 30,000) ( 32,000) ( 14,000) ( 13,000) ( 150,000) ( 150,000)

$ 8,000 16,000

( 585,000) $380,000

24,000 $404,000

Other Information: 1. The partnership will claim the maximum CCA which is $41,000. 2. Neither of the brothers has any other income outside of the partnership in 2022. 3. The only charitable donations of the brothers in 2022 is from the partnership. Required: Ignore CPP, GST/HST & PST considerations. A. Calculate the amounts of partnership income and capital gains that would be included in the 2022 net income of each brother. B. Indicate the amount of any federal personal tax credits that would be available to the two brothers as a result of the partnership.

Answer: Part A - Income Inclusion The calculation of the partnership's Business Income for income tax purposes is as follows: Accounting Business Income (From Statement) Additions: Amortization Business Meals & Entertainment [(1/2)($14,000)] Charitable Donations Salaries to Partners [(2)($150,000)]

$380,000 $ 32,000 7,000 13,000 300,000

Deductions: Maximum CCA 2022 Business Income

352,000 $732,000 ( 41,000) $691,000

Additional partnership income would be as follows: Taxable Capital Gains [(1/2)($8,000)] Eligible Dividends Received Gross Up [(38%)($16,000)] Total other Partnership Income

$ 4,000 16,000 6,080 $26,080

The 2022 Net Income for each brother is:

Sam $345,500

Business Income [(50%)($691,000)] Other Partnership Income Sam [(20%)($26,080)] Allen [(80%)($26,080)] 2022 Net Income

5,216 $350,716

Allen $345,500

20,864 $366,364

Part B - Tax Credits Charitable Donations Each of the brothers would be allocated $6,500 [(50%)($13,000)] of the charitable donations. This would provide a federal tax credit of $2,109 [(15%)($200) + (33%)($6,500 - $200)]. Dividends As Sam was allocated only 20% of the dividends, his federal dividend tax credit will be $663 [(20%)(6/11)($6,080)]. Allen's credit will be $2,653 [(80%)(6/11)($6,080)].

Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

91) Two lawyers, who had practiced individually for a number of years, decided to form a partnership. The partnership began on January 1, 2022, with each individual contributing $50,000 in cash. There were no further capital contributions in 2022. In 2022, they each receive a salary of $87,000, as well as interest on their beginning of the year capital balances at an annual rate of 5%. The interest amounts were withdrawn by the partners during the fiscal period ending December 31, 2022. There were no other drawings during 2022. Any of the partnership's business income that remains after the allocation of salaries and interest to the two partners will be shared on a 50:50 basis. For the fiscal period ending December 31, 2022, their bookkeeper has prepared the following financial statements. No amortization was deducted in preparing the statements. Amigos Unlimited Balance Sheet As At December 31, 2022 Cash Accounts Receivable Furniture & Fixtures Computer Hardware (Cost) Computer Applications Software (Cost) Total Assets

$ 32,278 327,787 41,300 12,400 9,600 $423,365

Accounts Payable Initial Partner Capital Income for the period Total Equities

$ 77,850 100,000 245,515 $423,365

Amigos Unlimited Income Statement For the Fiscal Period Ending December 31, 2022 Total Revenues $516,390 Meals & Entertainment ($ 16,432) Office Supplies ( 8,973) Partners' Salaries ( 174,000) Interest on Capital Contributions ( 5,000) Rent ( 38,000) Administrative Assistant's Salary ( 28,470) Total Expenses ($270,875) 2022 Accounting Net Income $245,515 Required: A. The lawyers have come to you to determine the minimum amount that they must include in their 2022 income tax returns as partnership business income. B. They would also like to know if there are any partner expenses that they may be able to deduct for 2022. C. Compute the ACB of each partner's partnership interest at December 31, 2022 and January 1, 2023. Your answers should ignore CPP, GST/HST & PST considerations.

Answer: Part A - Business Income from the Partnership Business Income from the partnership is as follows: Accounting Income Additions: Partners' Salaries Interest on Capital Contributions Meals & Entertainment [(50%)($16,432)]

$245,515 $174,000 5,000 8,216

Deductions: CCA: Class 8 [(150%)(20%)($41,300)] Class 50 [(150%)(55%)($12,400)] Class 12 [(1/2)(100%)($9,600)] 2022 Business Income Priority Allocation for Salaries & Interest ($174,000 + $5,000) Residual to be allocated 50:50

( 12,390) ( 10,230) ( 4,800)

187,216 $432,731

( 27,420) $405,311 ( 179,000) $226,311

While the partnership agreement refers to salaries and interest, these amounts will be treated as business income in the respective income tax returns of the partners. The amount that would be included in each partner's 2022 individual income tax return would be calculated as follows: Salary Interest [(1/2)($5,000)] Share of residual Partnership Income [(1/2)($226,311)] 2022 Business Income for each partner

$ 87,000 2,500 113,156 $202,656

Part B - Deductible Expenses incurred Personally The partners may also be able to deduct the following expenses, if they have incurred them personally: • Any interest expense related to financing their capital contribution of $50,000 each. • The business portion of any automobile expenses. • Any promotion expenses, subject to the 50% limitation on meals and entertainment. • Expenses for an office in the home (to a maximum of business income before the deduction), if the work space is used exclusively for business purposes and it is used on a regular and continuous basis for meeting clients. These expenses are discussed in Chapter 6. Part C - ACB of Partnership Interest The ACB of each partnership interest is as follows: Capital Contribution Drawings ($87,000 + $2,500) Negative ACB - December 31, 2022 Allocation of Partnership Income for 2022 ACB - January 1, 2023

$ 50,000 ( 89,500) ($ 39,500) 202,656 $163,156

The ITA allows general active partners to carry forward a negative ACB, without any income tax consequences. This deferral continues to apply until such time as there is a disposition of the partnership interest at which time the negative component is recognized as an increase in capital gains. Type: ES Topic: Partnerships - allocation of income, loss, capital gains & other amounts

92) Jason and Joey Blake are brothers who are both lawyers. While they have worked independently for several years, on January 1, 2022, they decided to form a partnership. On January 1, 2022, they each make a capital contribution of $350,000 in cash. Because Jason's experience is in a more lucrative area of law, he is to receive 60% of all partnership income, with Joey receiving 40%. Capital gains realized by the partnership, dividends received by the partnership and charitable donations will all be shared equally. In 2022, Jason withdrew $130,000, while Joey withdrew $102,000. The partnership's 2022 Income Statement, prepared in accordance with ASPE, is as follows: Income Statement Joey and Jason Blake Partnership Fiscal Period Ending December 31, 2022 Revenues Operating Expenses: Rent Amortization Expense (Note 1) General Office Expenses Meals & Entertainment Charitable Donations Office Salaries Accounting Business Income Other Income: Gain on sale of Investments (Note 2) Eligible Dividends 2022 Accounting Net Income

$823,000 ($95,000) ( 22,000) ( 42,000) ( 16,000) ( 12,000) ( 46,000)

$26,000 22,000

( 233,000) $590,000

48,000 $638,000

Note 1 - Maximum 2022 CCA to be claimed is $35,000. Note 2 - The gain resulted from the sale of temporary investments. The investments had an ACB of $57,000 and were sold for $83,000. In 2022, Jason's only income was from the partnership. Other than tax credits related to partnership allocations, Jason's only tax credit was his BPA. On January 1, 2023, Jason sells his interest in the partnership to an arm's length individual for $643,000. Required: Calculate Jason's federal income tax payable for the 2022 taxation year. In addition, determine the taxable capital gain or allowable capital loss that would result from Jason's sale of his partnership interest. Ignore any CPP implications.

Answer: Jason's Federal Income Tax Payable The 2022 Business Income (for ITA purposes) would be calculated as follows: Accounting Business Income Additions: Amortization Expense 50% of Meals & Entertainment Charitable Donations Deductions: CCA 2022 Business Income

$590,000 $22,000 8,000 12,000

42,000 ($35,000) $597,000

Jason's 2022 net income, taxable income and share of charitable donations is as follows:

Partnership Business Income Taxable Capital Gain [(1/2)($26,000)] Eligible Dividends 38% Gross Up on Dividends 2022 Net Income & Taxable Income Charitable Donations

Partnership $597,000 13,000 22,000 Received

Share 60% 50% 50% N/A

Taxable Income $358,200 6,500 11,000 4,180 $379,880

$12,000

50%

$6,000

Based on the preceding calculation, Jason's 2022 federal income tax payable would be calculated as follows: Tax on the first $221,708 Tax on additional $158,172 ($379,880 - $221,708) at 33% Tax Payable Before Credits Basic Personal Credit [(15%)($12,719)] Dividend Tax Credit [(6/11)($4,180)] Charitable Donations Credit (See Note) 2022 Federal Income Tax Payable

$51,345 52,197 $103,542 ( 1,908) ( 2,280) ( 1,944) $97,410

Note - The charitable donations tax credit would be calculated as follows: [(15%)(A)] + [(33%)(B)] + [(29%)(C)], where A = $200 B = The Lesser of: • $6,000 - $200 = $5,800 • $379,880 - $221,708 = $158,172 C = Nil [$6,000 - ($200 + $5,800)] The charitable donation credit would be equal to $1,944, calculated as: [(15%)($200) + (33%)($5,800)].

Taxable Capital Gain from Sale of Partnership Interest The ACB of Jason's partnership interest on January 1, 2023 would be calculated as follows:

Capital Contribution 2022 Drawings December 31, 2022 2022 Partnership Business Income 2022 Capital Gain 2022 Partnership Dividends Received 2022 Charitable Donations January 1, 2023 ACB

Partnership N/A N/A

$597,000 26,000 22,000 ( 12,000)

60% 50% 50% 50%

ACB $350,000 ( 130,000) $220,000 358,200 13,000 11,000 ( 6,000) $596,200

Given this calculation, the taxable capital gain on Jason's sale of the partnership interest would be calculated as follows: POD Less: ACB Capital Gain Inclusion Rate 2023 Taxable Capital Gain

$643,000 ( 596,200) $ 46,800 1/2 $ 23,400

Type: ES Topic: Partnerships - comprehensive problem: partnership allocations, ACB & the sale of a partnership interest

93) Moe, Larry, and Curly formed a partnership on January 1, 2020. The partnership is formed to provide a variety of entertainment services to a broad range of clients. Each partner makes an initial capital contribution of $180,000. The partners agree to use a December 31 fiscal period for the partnership. The partnership agreement contains the following provisions with respect to the allocation of income and capital gains to individual partners: 1. Both business income and charitable contributions will be shared equally by the three partners. 2. Any capital gains realized by the partnership will allocated on a 50:50 basis to Curly and Larry. 3. All of the eligible dividends received by the partnership will be allocated to Moe. During the period January 1, 2020 through December 31, 2022, the partnership was very successful. The following information related to that three year period: • The partnership has total business income of $209,114. • Other amounts were as follows: • The partnership received eligible dividends totaling $4,221. • The partnership realized a $16,534 capital gain. • The partnership made charitable donations of $7,260 in 2022. No donations were made in any other fiscal periods. • Withdrawals from the partnership were as follows: • Moe - $101,000 • Curly - $208,000 • Larry - $48,000. • Additional capital was required to expand the operations of the office and, as a consequence, each partner contributed an additional $70,000 in cash. Near the end of 2022, after a number of heated arguments with Moe and Curly regarding the types of clients the partnership was servicing, Larry decides to withdraw from the partnership effective January 1, 2023. After some negotiations, each of the other partners agreed to pay him $150,000 in cash for one-half of his interest in the partnership, a total of $300,000. The payments are made on February 1, 2023. The partnership has business income of $18,500 for the month of January, 2023. Larry incurred legal and accounting fees of $1,500 in with respect to the disposition of his partnership interest. Required: A. Calculate the ACB of Larry's partnership interest as of January 1, 2023. B. Determine the amount of Larry's capital gain or capital loss on the disposition of his partnership interest. Explain the income tax consequences of any other amounts related to the partnership in 2023. C. Indicate how the ACB of each partner's interest will be affected by the withdrawal of Larry from the partnership.

Answer: Part A - ACB The ACB of Larry's partnership interest would be calculated as follows: Initial Capital Contribution Additional Capital Contribution Total Capital Contribution Drawings Business Income [(1/3)($209,114)] Capital Gains to Curly & Larry [(50%)($16,534)] (Note) Dividends to Moe Charitable Donations [(1/3)($7,260)] ACB - January 1, 2022

$180,000 70,000 $250,000 ( 48,000) 69,705 8,267 N/A ( 2,420) $277,552

Note - Only the taxable one-half of the capital gain is included in a partner's income however the full capital gain is added to the ACB of the partnership interest. Given this, the full amount of Larry's share of realized capital gains is added to the ACB of his partnership interest. Part B - Taxable Capital Gain on Disposition Given the preceding calculation, the capital gain on the disposition of the partnership interest can be calculated as follows: POD ACB: From Preceding Calculation Legal & Accounting Fees Capital Gain Inclusion Rate Taxable Capital Gain

$300,000 ($277,552) ( 1,500)

( 279,052) $ 20,948 1/2 $ 10,474

This amount would be included in Larry's income for 2023. He would not include any partnership income for January 2023 as he was not allocated any of this income. Part C - Effect on other Partners The fact that each partner paid $150,000 to Larry in return for one-half of his interest means that both Moe and Curly would have a $150,000 increase in the ACB of their partnership interests. Type: ES Topic: Partnerships - comprehensive problem: ACB of partnership interest and withdrawal of a partner

94) On January 1, 2022, Bob Billions acquires a 12% limited partner interest in the Who-Do-You-Trust Partnership. The total cost of the interest is $65,000, with $5,000 being paid in cash. A $60,000 interest-free promissory note is signed for the balance. The note is to be paid in 6 payments of $10,000 each. Payments are due on December 1 of each year, commencing in 2022. As part of the agreement, the general partner is obligated to purchase Bob's interest on December 31, 2027 for $5,000 more than its FMV at that time. Bob's share of all of the income, losses, capital gains and capital losses of the Who-Do-You-Trust Partnership is 12%. For the fiscal period ending December 31, 2022, the Partnership had the following income, loss and capital gains: Business Loss Interest Income Eligible Dividends Capital Gains

($510,000) 63,000 31,000 53,000

Required: Calculate the following amounts for Bob's investment in the Who-Do-You-Trust Partnership for 2022: • The at-risk amount (ARA) on December 31, 2022. • The limited partnership income or loss. • The deductible loss for 2022. • The 2022 limited partnership loss (LPL) if any. • The ACB on December 31, 2022 and January 1, 2023. • The ARA on January 1, 2023.

Answer: Note - We would remind you that in calculating the ACB of the partnership interest, a partner's share of either income, loss or a capital gain or capital loss is not adjusted to the ACB until the first day of the next fiscal period of the partnership. At-Risk Amount (ARA) - December 31, 2022 ACB - December 31, 2022 Add: Share of Partnership Income for 2022 [(12%)($63,000 + $31,000 + $53,000)] Subtotal Amounts owed to the Partnership ($65,000 - $5,000 - $10,000) Other Amounts that reduce risk ARA - December 31, 2022

$65,000 17,640 $82,640 ($50,000) ( 5,000)

( 55,000) $27,640

As the agreement effectively guarantees a value of no less than $5,000, even if the FMV of the partnership interest is nil, this amount is not at risk and reduces the ARA. 2022 Limited Partnership Loss Share of 2022 Partnership Business Loss [(12%)($510,000)] ARA - December 31, 2022 2022 LPL

($61,200) 27,640 ($33,560)

Deductible Loss for the Year Share of 2022 Partnership Business Loss [(12%)($510,000)] 2022 LPL Deductible Loss for 2022

($61,200) 33,560 ($27,640)

2022 Limited Partnership Loss There is a 2022 LPL of $33,560. ACB The share of partnership income that is added to the ARA in the year is the amount that will be added to the ACB at the beginning of the partnership's next fiscal period. It does not include the dividend gross up and it is not reduced by the non-taxable half of the capital gain. ACB - December 31, 2022 Share of 2022 Partnership Income [(12%)($63,000 + $31,000 + $53,000)] Loss Deducted for 2022 ACB - January 1, 2023

$65,000 17,640 ( 27,640) $55,000

ARA - January 1, 2023 As of January 1, 2023, the ARA would be nil ($27,640 - $27,640).

Type: ES Topic: Partnerships - limited partnerships comprehensive problem: ACB, ARA & limited partnership loss

95) On January 1, 2022, Jerry Adverse purchases a 25% limited partnership interest in income, losses and capital gains and capital losses of the Precipice Enterprises Partnership for $200,000. Of this total, $120,000 is paid immediately, with the remaining $80,000 due on January 1, 2023. The partnership uses a December 31 fiscal period. The general partner of the Precipice Enterprises Partnership has agreed to buy back Jerry's interest for $100,000, without regard to its FMV on the buy back date. However, the agreement expires on January 1, 2024. For the fiscal period ending December 31, 2022, the Precipice Enterprises Partnership has a business loss of $1,200,000 and a capital gain of $80,000. For the fiscal period ending December 31, 2023, the Precipice Enterprises Partnership has a further business loss of $225,000. There are no other sources of income or capital gains for that fiscal period. Jerry does not ask the general partner to buy back his interest during the fiscal period ending December 31, 2023. As a consequence, the agreement expires on January 1, 2024. In 2024, the Precipice Enterprises Partnership has business income of $50,000. Jerry has sufficient other income to absorb any deductible losses allocated from the partnership. Required: For each of 2022, 2023 and 2024, calculate the following amounts related to Jerry's interest in the Precipice Enterprises Partnership: • The ACB at the end of each year. • The at-risk amount (ARA). • The limited partnership income (loss) for the year. • The deductible income (loss) for the year. • The limited partnership loss (LPL) for the year if any.

Answer:

2022 Results The required amounts would be calculated as follows: ACB of Partnership Interest - January 1, 2022 Add: Share of 2022 Partnership Income (Not Loss) [(25%)(100%)($80,000 Capital Gain)] Subtotal Amounts owed to the Partnership Other Amounts that reduce risk ARA - December 31, 2022

$200,000 20,000 $220,000 ( 80,000) ( 100,000) $ 40,000

Share of 2022 Loss [(25%)($1,200,000)] ARA - December 31, 2022 2022 LPL

($300,000) 40,000 ($260,000)

Share of 2022 Loss [(25%)($1,200,000) 2022 LPL 2022 Deductible Loss

($300,000) 260,000 ($ 40,000)

There is a 2022 LPL of $260,000 ($300,000 - $40,000). 2023 Results ACB of Partnership Interest - December 31, 2022 2022 Capital Gain Loss Deducted for 2022 ACB of Partnership Interest - January 1, 2023 Add: Share of 2023 Partnership Income (Not Loss) Subtotal Amounts owed to the Partnership Other Amounts that reduce risk ARA - December 31, 2023

$200,000 20,000 ( 40,000) $180,000 Nil $180,000 Nil ( 100,000) $ 80,000

Share of 2023 Loss [(25%)($225,000)] 2022 LPL ARA - December 31, 2023 2022 LPL

($ 56,250) ( 260,000) 80,000 ($236,250)

Share of 2023 Loss [(25%)($225,000)] 2022 LPL deducted Deductible Loss for 2023

($ 56,250) ( 23,750) ($ 80,000)

This will leave a 2022 LPL balance of $236,250.

2024 Results ACB of Partnership Interest - December 31, 2023 Loss Deducted for 2023 ACB of Partnership Interest - January 1, 2024 Add: Share of 2024 Partnership Income [(25%)($50,000)] Subtotal Amounts owed Partnership Other Amounts that reduce risk ARA - December 31, 2024

$180,000 ( 80,000) $100,000 12,500 $112,500 Nil Nil $112,500

2022 LPL balance ARA - December 31, 2024 2022 LPL Balance

($236,250) 112,500 ($123,750)

2022 Initial LPL Balance Deductible 2022 Limited Partnership Loss in 2024 2022 LPL Balance

($236,250) 112,500 ($123,750)

Economic Analysis - The following calculations will serve to explain the results that have been calculated in the preceding table: 2022 Business Loss [(25%)($1,200,000)] 2023 Business Loss [(25%)($225,000)] Total Losses for 2022 to and including 2024 2022 Investment (Initial) 2022 Capital Gain [(25%)($80,000)] 2023 Investment (Balance) 2024 Business Income [(25%)($50,000)] 2022 Limited Partnership Loss Balance

($300,000) ( 56,250) ($356,250) 120,000 20,000 80,000 12,500 ($123,750)

Type: ES Topic: Partnerships - limited partnerships comprehensive problem: ACB, ARA & limited partnership loss

96) Note To Instructor - As some of the issues in this problem are not covered directly in the text, this question should not be used on an examination unless Assignment Problem Eighteen-9 has been covered in your classes. A number of years ago, Jack Howard, Bud Jones, and Dwight Delaney established the Howard, Jones, and Delaney Partnership. At the time the partnership was formed, each of the partners invested $600,000 in cash. The partnership agreement calls for all income and losses to be shared equally. The partnership fiscal period is December 31. On January 1 of the current year, the ACB of the partnership interests for the three partners are as follows: Jack Howard Bud Jones Dwight Delaney Total

$1,173,000 930,000 756,000 $2,859,000

The total net tax cost of all of the property of the partnership is also equal to the $2,859,000 ACB of the partnership interests. On January 2 of the current year, all of the property of the partnership is transferred to a corporation under the rollover of ITA 85(2). The elected amounts are equal to the tax costs of the individual properties. It has been determined that the FMV of the partnership is $3,900,00. Based on this, the corporation provides the following consideration to the partnership: Cash Preferred Shares (FMV) Common Shares (FMV) Total Consideration

$1,200,000 900,000 1,800,000 $3,900,000

The partnership will be liquidated within 60 days of the ITA 85(2) rollover and property received from the corporation by the partnership will be distributed to the three partners in accordance with ITA 85(3). Under the terms of the partnership agreement, the partners receive the following amounts:

Cash Preferred Shares Common Shares Total

Howard $ 620,000 300,000 600,000 $1,520,000

Jones $ 377,000 300,000 600,000 $1,277,000

Delaney $ 203,000 300,000 600,000 $1,103,000

Total $1,200,000 900,000 1,800,000 $3,900,000

Required: A. Determine the ACB of the consideration received by each of the partners as a result of the incorporation and dissolution of the partnership as a result of ITA 85(2) and ITA 85(3). B. Calculate the capital gain with respect to the partnership interest for each partner resulting from the distribution of the partnership property to the partners on the dissolution of the partnership.

Answer: Part A - ACB of Consideration Cash - The ACB of the cash would be the dollar amount. These amounts would be $620,000 for Howard, $377,000 for Jones, and $203,000 for Delaney. ACB of Preferred Shares - With respect to the preferred shares ITA 85(3)(e) sets the ACB as lesser of: • Their FMV, which would be $300,000 for each of the three partners. • The ACB of their partnership interests, reduced by the amount of NSC received. This latter amount would be calculated as follows for the three partners:

ACB Cash Received Balance

Howard $1,173,000 ( 620,000) $ 553,000

Jones $930,000 ( 377,000) $553,000

Delaney $756,000 ( 203,000) $553,000

For all three partners, the lower amount is the FMV of $300,000, therefore this would be the ACB of the preferred shares. ACB of Common Shares - Under ITA 85(3)(f), the ACB of the common shares would be the ACB of the partnership interest, less the tax cost of the NSC received and the ACB of the preferred shares. These amounts would be calculated as follows:

ACB - Partnership Interest Cash Received ACB - Preferred Shares ACB of Common Shares

Howard $1,173,000 ( 620,000) ( 300,000) $ 253,000

Jones $930,000 ( 377,000) ( 300,000) $253,000

Delaney $756,000 ( 203,000) ( 300,000) $253,000

Part B - Capital Gain or Loss The POD of each of the partnership interests is equal to the FMV of NSC plus the ACB of any share consideration. The result is that there are no capital gains to any of the three partners as shown in the following table. If the FMV of the NSC had exceeded the ACB of the partnership interests there would have been a capital gain to the extent of the excess.

POD: Cash Preferred Shares Common Shares Total Proceeds ACB Capital Gain (Loss)

Howard

Jones

Delaney

$ 620,000 300,000 253,000 $1,173,000 ( 1,173,000) Nil

$377,000 300,000 253,000 $930,000 ( 930,000) Nil

$203,000 300,000 253,000 $756,000 ( 756,000) Nil

From an economic point of view the gain is still present. We have deferred recording it for tax purposes by placing a value on the common shares of $759,000 [(3)($253,000)]. This is $1,041,000 below their current FMV of $1,800,000. Note that $1,041,000 is also the difference between the $3,900,000 FMV of the total consideration given and the $2,859,000 value for the total ACB of the partnership interests. Type: ES Topic: Partnerships - comprehensive problem: incorporating a partnership (ITA 85(2) & (3))

97) Sarah and Shelly Duval are sisters and professional accountants. While both sisters had worked in large firms for several years, on January 1, 2021 they decided to leave their former employers and form a partnership. At this time, they each made a capital contribution of $235,000 in cash. Their partnership agreement calls for them to share all profits/losses, capital gains, capital losses and any other amounts that would qualify for tax credits equally. During the partnership fiscal period ending December 31, 2021, the partnership had income of $225,000, all of which was business income. The partnership made no charitable donations in 2021. In 2021 Sarah withdrew $85,000 and Shelly withdrew $72,000. The partnership's 2022 Income Statement, prepared in accordance with ASPE, is as follows: Income Statement Sarah And Shelly Duval Partnership Fiscal Period Ending December 31, 2022 Revenues Business Expenses: Rent Amortization Expense (Note 1) Office Salaries General Office Expenses Meals & Entertainment Charitable Donations Business Income Other Income: Gain on Sale of Investments (Note 2) Non-Eligible Dividends 2022 Business Income

$565,000 ($37,000) ( 9,000) ( 47,000) ( 14,000) ( 11,000) ( 23,000)

$ 6,000 13,000

( 141,000) $424,000

19,000 $443,000

Note 1 - Maximum 2022 CCA is $14,000. Note 2 - The gain resulted from the sale of temporary investments. The investments had an ACB of $41,000 and were sold for $47,000. Other Information 1. In 2022, Sarah withdrew $205,000 while Shelly withdrew $187,000. 3. In 2022, Shelly's only income was from the partnership. Assume that other than credits related to partnership allocations, Shelly's only tax credit is her BPA. 4. On January 1, 2023, Shelly sells her interest in the partnership to an arm's length individual for $435,000. Required: Calculate Shelly's 2022 federal income tax payable. In addition, determine the taxable capital gain or allowable capital loss that would result from Shelly's sale of her partnership interest. Ignore all CPP implications.

Answer: Shelly's 2022 Federal Income Tax Payable The Business Income of the partnership would be calculated as follows: Business Income for Accounting purposes Additions: Amortization Expense 50% Meals & Entertainment Charitable Donations Deductions: CCA 2022 Business Income (for ITA purposes(

$424,000 $ 9,000 5,500 23,000

37,500 (14,000) $447,500

Shelly's income and share of charitable donations would be calculated as follows:

Partnership Business Income Taxable Capital Gain [(1/2)($6,000)] Non-eligible Dividends Income 15% Gross Up on Dividends Total Allocations of Income Charitable Donations

Partnership $447,500 3,000 13,000 N/A

Share 1/2 1/2 1/2

Taxable Income $223,750 1,500 6,500 975 $232,725

$23,000

1/2

$11,500

Based on the preceding calculation, Shelly's 2022 federal income tax payable would: Tax on the first $221,708 Tax an additional $11,017 ($232,725 - $221,708) at 33% Income Tax Payable before Credits BPA [(15%)($12,719)] Dividend Tax Credit [(9/13)($975)] Charitable Donations Credit (See Note 1) 2022 Federal Income Tax Payable

$51,345 3,636 $54,981 ( 1,908) ( 675) ( 3,748) $48,650

Note 1 - The charitable donations tax credit would be calculated as follows: [(15%)(A)] + [(33%)(B)] + [(29%)(C)], where A = $200 B = The Lesser of: • $11,500 - $200 = $11,300 • $232,725 - $221,708 =$11,017 C = $283 [$11,500 - ($200 + $11,017)] The charitable donation credit would be equal to $3,748, calculated as [(15%)($200) + (33%)($11,017) + (29%)($283)].

Taxable Capital Gain from Sale of Partnership Interest The ACB of Shelly's partnership interest on January 1, 2023 would be calculated as follows:

Capital Contribution 2021 Partnership Business Income 2021 Drawings 2022 Drawings December 31, 2022 2022 Partnership Business Income 2022 Capital Gain 2022 Dividends Received 2022 Charitable Donations ACB - January 1, 2023

Partnership N/A $225,000 N/A N/A

$447,500 6,000 13,000 ( 23,000)

1/2 1/2 1/2 1/2

1/2

ACB $235,000 112,500 ( 72,000) ( 187,000) $ 88,500 223,750 3,000 6,500 ( 11,500) $310,250

Given this calculation, the taxable capital gain on Shelly's sale of the partnership interest would be calculated as follows: POD Less: ACB Capital Gain Inclusion Rate 2023 Taxable Capital Gain

$435,000 ( 310,250) $124,750 1/2 $ 62,375

Type: ES Topic: Partnerships - comprehensive problem: partnership allocations, ACB & the sale of a partnership interest

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 19 Trusts and Estate Planning 19.1 Online Exercises 1) The three types of persons who are associated with a trust are usually described as the settlor, the trustee, and the beneficiary. Briefly describe the role of these persons with respect to the trust. Answer: The roles of these persons can be described as follows: • The settlor is the person who contributes property to the trust. • The trustee is the person who takes legal title to the contributed property and administers and manages the trust as set out by the terms of the trust agreement. This would normally include the selection of investments as well as implementing other provisions of the trust agreement (e.g., distributions to beneficiaries). • A beneficiary is a person who is entitled to receive distributions of income or capital of the trust as a result of a beneficial interest in the trust property. Type: ES Topic: Trusts - definition & characteristics

2) The text notes that it is, in general, difficult to revoke or vary a trust. What is the importance of this characteristic? Answer: This characteristic is of particular importance in the case of deceased individuals. Property distributions made in a deceased person's will can be challenged by a disgruntled beneficiary. A surviving spouse can redirect assets after they have been bequeathed. The use of a trust makes challenges or variances for the deceased's wishes much more difficult. Type: ES Topic: Trusts - definition & characteristics

3) Briefly compare the income tax perspective on trusts with the legal perspective. Answer: From a legal perspective, a trust is not a separate legal entity. However, for income tax purposes, the ITA treats a trust as an individual. This means that a trust will have a net income and taxable income as well as federal income tax payable in a manner somewhat similar to that of an individual (e.g. human being). This also means that a trust may be required to file an annual income tax return. Type: ES Topic: Trusts - basic rules & general concepts

4) Legally, the estate of a deceased individual is not the same as a trust. Given this, why does the ITA use the terms estate and trust as though they had the same meaning? Answer: When an individual dies and bequeaths their property through a will, immediate distribution of all of this property may not be possible. During the period between an individual's death and the time that the property is distributed to beneficiaries, it is possible that some income will be earned with respect to the estate property administered by the executor. The deceased individual's income to the date of death will be included in their final income tax return. However, the income earned by the estate during the period that it is administered by the executor cannot be allocated to either the deceased person or to beneficiaries directly. To solve this problem, the ITA requires that the income of the estate be included in a trust return (T3). As the rules for filing a return for an "estate" are the same as those for a trust, the ITA treats these two terms as the same. Type: ES Topic: Trusts - basic rules & general concepts

5) In order for a trust to legally exist, certain conditions must be met that are referred to as the three certainties. What are these three certainties? Answer: The three certainties are: 1. there must be an intent on the part of the settlor to create a trust; 2. the property that is the subject of the trust must be identifiable and the ownership must be transferred to the trust (the trustee(; and 3. the identity of the beneficiary or beneficiaries of the trust must be known with certainty. Type: ES Topic: Trusts - definition & characteristics

6) Briefly describe two non-tax reasons for using a trust. Answer: There are several other possibilities but the main reasons are as follows: Administration of Property - A trust can be used to provide for administration of property by someone other than the beneficiary. Protection from Creditors - A trust can be used to protect property from the claims of creditors. Privacy - Property that is in a trust when an individual dies, or placed in a testamentary trust as the result of the individual's death, are not subject to probate, a process where the details can be accessed by the public. Avoiding Changes in Beneficiaries - As trusts are difficult to change, placing property in a trust ensures that they will ultimately be given to the intended beneficiaries. Type: ES Topic: Trusts - definition & characteristics

7) What is a "personal trust"? Answer: As defined in the ITA, a personal trust is either a testamentary trust or, alternatively, an inter vivos trust in which no beneficial interest was acquired by paying consideration to either the trust or the settlor of the trust. Type: ES Topic: Trusts - definition & characteristics

8) Describe the basic model that is used for the taxation of trusts. Your answer should include the income tax effects for settlors, the trust itself, and the beneficiaries. Answer: The basic model treats the various participants as follows: Settlor - The transfer of property by the settlor to the trust is, in general, considered to be a disposition. Possible income tax consequences include capital gains, capital losses, recapture, and terminal losses. There are rollovers available for certain types of trusts such as alter ego trusts and spousal or commonlaw partner trusts. If a rollover is unavailable the disposition is considered to have taken place at FMV resulting in potential income tax consequences to the settlor. Trust - Income that is earned by the trust is, in general, subject to federal income tax at the maximum 33%. The major exception to this general rules is a Graduated Rate Estate (GRE). GREs can use the same graduated income tax rates that apply to individuals. To the extent that this income is paid or payable to beneficiaries, it will be included in their income and not that of the GRE. Beneficiaries - The beneficiaries are, in general, required to include in their personal income any trust income that is paid or payable to them in the year. Capital property distributions to beneficiaries on the other hand are generally subject to tax free rollovers avoiding income tax to both the trust and beneficiaries. Type: ES Topic: Trusts - basic rules & general concepts

9) What is the difference between an inter vivos trust and a testamentary trust? Explain briefly how income tax payable is determined for these two types of trusts. Answer: The term testamentary trust refers to a trust that arises upon, and as a consequence of, the death of an individual. In contrast, an inter vivos trust refers to any personal trust other than a testamentary trust. Stated alternatively, an inter vivos (Latin for "among the living") trust is a trust created during the lifetime of the settlor. For inter vivos trusts and most testamentary trusts, the federal income tax payable on the income of the trust that is not distributed or allocated to beneficiaries is subject to a federal income tax rate of 33%. However, estate property that has not been fully distributed or allocated to beneficiaries can be designated as a Graduated Rate Estate (GRE). Such GREs will calculate federal income tax payable using the schedule of graduated income tax rates used by individuals (15%, 20.5% etc). GRE status may continue for up to 36 months after the death of the individual whose property forms the estate. Type: ES Topic: Trusts - basic rules & general concepts

10) What is a qualifying spousal trust? What is the major income tax advantage associated with a trust being classified as a qualifying spousal trust? Briefly describe two non-income tax reasons for using a qualifying spousal trust. Answer: For a trust to be classified as a qualifying spousal trust, the following conditions must be met: • The transferor's spouse is entitled to receive all of the income of the trust arising before the spouse or common-law partner's death. • No person other than the spouse may receive or benefit from any of the income or capital of the trust, prior to the death of the spouse or common-law partner. The major income tax advantage of a spousal trust over other types of trusts is the fact that property can be transferred to this type of trust on a rollover basis without any immediate income tax implications to the settlor or trust. The two significant non-income tax reasons for using a qualifying spousal trust are: • The trust can provide for the appropriate management of the transferred property, particularly when the properties are used in an active business. • The trust can ensure that the properties are distributed in the manner desired by the settlor. While qualification requires that the transferred property must "vest indefeasibly" with the spouse or commonlaw partner, the trust document can specify who the property should be distributed to after the spouse or common-law partner dies. This could ensure, for example, that the properties are ultimately distributed only to the settlor's children if the spouse or common-law partner has remarried or entered into a common-law partnership. Type: ES Topic: Trusts - qualifying spousal or common-law partner trusts

11) What conditions must be satisfied in order for a trust to qualify as an alter ego trust? Briefly describe the income tax and non-income tax reasons for using an alter ego trust. Answer: The following conditions must be met in order to establish an alter ego trust: • The settlor must be 65 years of age or over. • The settlor is entitled to receive all of the income of the trust that arises during the settlor's lifetime. • No person other than the settlor can receive or make use of the capital or income of the trust during the settlor's lifetime. The major income tax advantage of these arrangements is that property can be transferred into such trusts on a rollover basis. An additional feature is the possibility of establishing the residence of the trust in a low tax rate province or territory, thereby minimizing the income taxes that will arise at the time of death. With respect to the non-income tax advantage of such arrangements, the basic feature is that the property in the trust will not be part of the settlor's estate at the time of death. This means that these properties will not have to go through the probate process, a process that can be both costly and time consuming. Type: ES Topic: Trusts - alter-ego trusts

12) In order to avoid probate fees, an Ontario resident is planning to transfer all of of their capital property to a joint spousal trust. These capital properties have appreciated significantly with the result that a disposition at FMV would result in considerable capital gains. The individual is aware that a rollover is available and is also aware that the rollover option can be elected out of in favour of a disposition at FMV. Why might an individual choose dispositions at FMV? Answer: There are two major reasons why an individual might elect out of the rollover provision that is available on transfers to a joint spousal trust. The first is that the individual may have net capital or noncapital loss balances or anticipates capital losses that could be used to offset any capital gains on the property transferred to the trust. The second is that the transferred property may include property that qualifies for the capital gains deduction. If this is the case, that deduction could be used to offset all or part of the capital gains that arises on the transfer. Type: ES Topic: Trusts - basic rules & general concepts

13) What are the income tax consequences associated with a transfer of trust property to a capital beneficiary? Answer: In general, ITA 107(2) provides a rollover of trust property to a capital beneficiary. That is, the proceeds to the trust are deemed to be the trust's tax cost (i.e., ACB or UCC), and these same amounts become the tax costs of the property to the recipient capital beneficiary. The major exceptions to this rollover are as follows: • Transfers from a qualifying spousal or qualifying common-law partner trust to anyone other than a spouse or common-law partner. • Transfers from an alter ego trust to anyone other than the individual who settled the trust. • Transfers from a joint spousal or joint common-law partner trust to anyone other than the settlor or the spouse or common-law partner. In the case of these exceptions, the transfer/disposition will take place at FMV resulting in potential income or gains to the trust. Type: ES Topic: Trusts - capital property distributions (ITA 107(2))

14) Briefly describe the 21 year deemed disposition rule. Your answer should include the objective of this rule. Answer: This rule requires that there be a deemed disposition and reacquisition of trust capital property every 21 years. The disposition is deemed to be at FMV, resulting in the recognition of any accrued gains on trust property. Like corporations, trusts have an unlimited life. In the absence of this rule, capital gains could accrue for an unlimited period of time inside the trust even though the trust has outlived the settlor and beneficiaries of the trust. The tax policy with respect to individuals is that a final accounting of accrued gains on the death of an individual should take place except where the property remains within a family which is generally restricted to spouses and common-law partners. This rule is designed to limit the accrual period. Type: ES Topic: Trusts - the 21 year rule (ITA 104(4))

15) The preferred beneficiary election allows amounts to be included in the income of a beneficiary even though the amounts is not paid or payable to that beneficiary. What is the objective of this election? Answer: The preferred beneficiary election is only available if: • the beneficiary is eligible to claim the disability tax credit; regardless of age or • the beneficiary is 18 years of age or older, is claimed by another individual as a dependant because of a mental or physical impairment, and does not have income that exceeds the BPA ($14,398 for 2022). As such individuals usually have very little income, the objective of this provision is to allow the relevant amounts to be subject to low income tax rates, while not actually transferring the funds to an individual who might not be able to use them in an appropriate manner (e.g., a mentally infirm child). The election is designed to protect the financial future of certain individuals. Type: ES Topic: Trusts - preferred beneficiary election

16) A trust will normally deduct all amounts that are paid or payable to a beneficiary. However, under ITA 104(13.1), a trust can designate certain amounts that have been paid or are payable as "not having been paid or payable in the year". This will result in the trust having to include these amounts in its own income. Why would a trust make such a designation? Answer: Use of Trust Losses - A trust cannot allocate losses to beneficiaries. This means that the only way that an unused losses can be used is through a carry over to another year with sufficient taxable income. Many trusts however are required to distribute all income each year meaning that any trust losses would never be used. A solution to this problem is for the trust to designate sufficient income as having not been paid payable to absorb the loss carryovers. This can satisfy the legal requirement to distribute the income, while simultaneously creating sufficient income within the trust to utilize the loss which ultimately saves income tax. Type: ES Topic: Trusts - amounts deemed not paid (ITA 104(13.1))

17) What is the difference between a discretionary and a non-discretionary trust? Answer: A discretionary trust is one in which the trustees are given the power to decide the amounts that will be distributed to each of the beneficiaries, usually on an annual basis. In contrast, a nondiscretionary trust is one in which the amounts and timing of distributions to income and capital beneficiaries are specified in the trust agreement. Type: ES Topic: Trusts - basic rules & general concepts

18) Describe the income tax treatment when a trust realizes capital gains. Answer: If the trust distributes all of the capital gain to a beneficiary, there will be no income tax consequences to the trust. The beneficiary will include one-half of the capital gain in income as a taxable capital gain. If the trust does not distribute the gain, one-half will be included in the income of the trust as a taxable capital gain and the remaining one-half becomes part of the trust's capital. As part of the capital balance, this one-half of the gain can be distributed on a tax free basis to beneficiaries. Type: ES Topic: Trusts - basic rules & general concepts

19) A testamentary trust has been designated as a graduated rate estate (GRE). In accordance with the decedent's will, the surviving spouse and the adult son each receive 40% of the GRE's income and the remaining 20% of the GRE's income is retained by the GRE. Briefly describe the income tax consequences of the income earned and retained by the GRE, and the income distributed by the GRE to the surviving spouse and son. Answer: The income paid to the surviving spouse and son will be included in their income in the year paid and will be deductible to the trust from its income. For the first 36 months after the death, the income of the GRE will be subject to the same graduated income tax rates that apply to individuals rather than the maximum rate of 33% that generally applies to most other trusts. There is no income attribution to deceased individuals. Type: ES Topic: Trusts - graduated rate estates (GRE)

20) What are the income tax consequences for the settlor if the CRA concludes that a trust is a reversionary trust? Answer: If a trust is considered to be reversionary, any income or loss generated by property that the settlor has transferred to the trust will be attributed to that person, rather than to the intended beneficiaries. This would include capital gains or capital losses resulting from a disposition of the property. Type: ES Topic: Trusts - attribution to settlor (reversionary trust rule ITA 75(2))

21) What is a family trust? What is the usual objective of such trusts? Answer: While the expression is not defined in the ITA, the term is commonly used to refer to a personal trust that has been established during one's lifetime with members of the settlor's family as beneficiaries. The usual objective of such trusts is income splitting. Type: ES Topic: Trusts - family trusts

22) List and describe three non-income tax considerations that are involved in estate planning. Answer: The required three can be selected from the following that were described in the textbook: Intent of the Testator - The foremost goal of estate planning is to ensure that the wishes of the testator (a person who has died and left a will) are carried out. This will involve ensuring that the properties left by the testator are distributed at the appropriate times and to the specified beneficiaries. Preparation of a Final Will - The major document in the estate planning process is the final will. It should be carefully prepared to provide detailed instructions for the disposition of property, investment decisions to be made, and the extent to which trusts will be used. Preparation of a Living Will - Equally important to the preparation of a final will, a living will provides detailed instructions regarding investments and other personal decisions in the event of physical or mental incapacity at any point in a person's lifetime. Ensuring Liquidity - A plan should be established to provide for liquidity at the time of death. Simplicity - While the disposition of a large estate will rarely be simple, effective estate planning should ensure that the plan can be understood by the testator and all beneficiaries of legal age. Avoidance of Family Disputes - If equitable treatment of beneficiaries is a goal of the testator, efforts should be made to ensure that all beneficiaries believe that they have been treated in an equitable manner. Expediting The Transition - The procedures required in the settlement of an estate should be designed to expedite the process. Type: ES Topic: Trusts - estate planning

23) An estate freeze can be carried out by simply gifting property directly to the intended beneficiaries. What are the disadvantages of this approach? Answer: The two major disadvantages are as follows: • The gifting provisions of ITA 69(1) require that gifts be treated as a disposition at FMV resulting in immediate income tax consequences to the settlor. • If the property relates to an ongoing business, the individual making the gift will lose control of the property. Type: ES Topic: Trusts - estate freeze

24) The beneficiaries of a trust have legal title to trust property. Answer: FALSE Explanation: The trustee(s) possess legal title to trust property. Beneficiaries only have a beneficial interest. Type: TF Topic: Trusts - definition & characteristics

25) If a period of time passes between the time of an individual's death and the distribution of the individual's properties, income may be earned with respect to these properties. If this is the case, the administrator of the individual's estate will have to file a T3 trust income tax return. Answer: TRUE Type: TF Topic: Trusts - basic rules & general concepts

26) To establish a trust, a lawyer must prepare, in writing, a formal trust agreement. Answer: FALSE Explanation: While it is generally advisable to have a trust agreement in writing, verbal agreements can be used to establish a trust. Type: TF Topic: Trusts - definition & characteristics

27) A trust can be used to protect some of an individual's properties from the claims of creditors. Answer: TRUE Type: TF Topic: Trusts - definition & characteristics

28) A spousal or common-law partner trust can either be an inter vivos trust or a testamentary trust. Answer: TRUE Type: TF Topic: Trusts - basic rules & general concepts

29) As long as he or she is the only beneficiary, any individual can transfer property to an Alter Ego trust. Answer: FALSE Explanation: Only individuals who are 65 or older can establish an Alter Ego trust. Type: TF Topic: Trusts - alter-ego trusts

30) Any transfer of property by a settlor to a trust will be treated as a disposition at FMV. Answer: FALSE Explanation: There are several rollovers that can be used to transfer property at tax costs (e.g., transfers to a spousal trust). Type: TF Topic: Trusts - basic rules & general concepts

31) While there are exceptions, transfers of trust property to beneficiaries can generally be made without income tax consequences to either the trust or the beneficiary. Answer: TRUE Explanation: Such transfers are usually made at the trust's tax cost. An exception would be a transfer of property from an Alter Ego trust to someone other than the settlor. Type: TF Topic: Trusts - capital property distributions (ITA 107(2))

32) An inter vivos trust can designate amounts to be deemed not paid or payable when they are, in fact, paid or payable to beneficiaries. One reason for doing this would be to have the income taxed at a lower income tax rate in the trust. Answer: FALSE Explanation: All of the income of an inter vivos trust is taxed at the maximum federal rate of 33%. Type: TF Topic: Trusts - amounts deemed not paid (ITA 104(13.1))

33) If a trust receives eligible dividends and does not distribute them or allocate them to a beneficiary, the trust will be eligible for the usual dividend tax credit on such dividends. Answer: TRUE Type: TF Topic: Trusts - basic rules & general concepts

34) The three essential characteristics of a trust are certainty of: • the identity of the property to be contributed to the trust; • an intent on the part of the settlor to create a trust; and • the basis for allocating the trust income to the beneficiaries. Answer: FALSE Explanation: While the identity of the beneficiaries is an essential characteristic, their respective income allocations are not. Type: TF Topic: Trusts - definition & characteristics

35) Income that is flowed through a trust generally retains its tax characteristics (e.g., a dividend earned by the trust can be allocated to a beneficiary as a dividend). Answer: TRUE Explanation: While there are exceptions this is the general rule. Type: TF Topic: Trusts - basic rules & general concepts

36) The federal income tax payable of an inter vivos trust will be calculated using the same schedule of graduated income tax rates that apply to individuals. Answer: FALSE Explanation: Inter vivos trusts are subject to a federal income tax rate of 33%. Type: TF Topic: Trusts - basic rules & general concepts

37) If non-depreciable capital property is transferred to a qualifying spousal trust, there will be no capital gain or capital loss on the transfer, any income earned on the property will be attributed back to the settlor, but capital gains or capital losses on a subsequent disposition of the property by the trust will not be attributed back to the settlor. Answer: FALSE Explanation: Income, loss, capital gains and capital losses will be attributed back to the spouse who is the settlor. Type: TF Topic: Trusts - qualifying spousal or common-law partner trusts

38) Which of the following statements with respect to inter vivos trusts is NOT correct? A) These trusts must use the calendar year as their taxation year. B) Any trust income not allocated to beneficiaries will be subject to the maximum federal income tax rate of 33%. C) If all of the trust's income is paid or payable to beneficiaries, the trust will not have any income tax payable. D) Trust income is not subject to the income attribution rules. Answer: D Explanation: D) Trust income is not subject to the income attribution rules. Type: MC Topic: Trusts - basic rules & general concepts

39) Which of the following is NOT required for the successful establishment of a trust? A) The settlor must clearly intend to create a trust. B) The individual beneficiaries must be named. C) The property to be held in the trust must be known with certainty. D) There must be an actual transfer of property ownership to the trust. Answer: B Explanation: B) The individual beneficiaries must be named. Naming individual beneficiaries is not necessary as long as the beneficiaries are members of an identifiable group (e.g., the settlor's children). Type: MC Topic: Trusts - definition & characteristics

40) With respect to the role of a trustee, which of the following statements is correct? A) The trustee can also be the settlor of the trust, but not one of the beneficiaries. B) The trustee will have legal title to the trust property. C) All of the benefits of the trust will accrue to the trustee. D) The trustee cannot enter into contracts on behalf of the trust. Answer: B Explanation: B) The trustee will hold formal legal title to the trust property. Type: MC Topic: Trusts - definition & characteristics

41) A graduated rate estate (GRE) is a testamentary trust that has been designated as such in its first income tax return. Which of the following statements is correct with respect to GREs? A) Its taxation year must be the calendar year. B) The income tax return is due 90 days after the trust's taxation year end. C) All of the trust income will be subject to the highest federal income tax rate of 33%. D) The trust will not be eligible for a dividend tax credit on taxable dividends included in the income of the trust that are not allocated to beneficiaries. Answer: B Explanation: B) The trust income tax return is due 90 days after the trust's taxation year end. Type: MC Topic: Trusts - graduated rate estates (GRE)

42) Which of the following types of trusts allows for a rollover for property contributed to the trust? 1. Inter Vivos spousal trusts. 2. Testamentary spousal trusts. 3. Family Trusts 4. Alter ego trusts. A) 1, 2 and 4. B) 2 and 4. C) 1 and 2. D) 1, 2, 3, and 4. Answer: A Explanation: A) 1, 2 and 4

Type: MC Topic: Trusts - types & classification of trusts

43) Which of the following statements is NOT correct? A) A trust can be used to administer property for beneficiaries with limited property management experience. B) A trust can be used to ensure that properties are ultimately distributed to the intended beneficiaries. C) A trust can be used to avoid the income attribution rules that would apply to a spouse or common-law partner. D) A trust can be used to protect property from creditors. Answer: C Explanation: C) A trust can be used to avoid the income attribution rules that would apply to a spouse or common-law partner. In general, it is not possible to avoid the income attribution rules by transferring property to a trust in favour of a spouse or common-law partner. Type: MC Topic: Trusts - definition & characteristics

44) Which of the following trusts could be either a testamentary or an inter-vivos trust? A) An alter ego trust created by an individual who is 65 years of age. B) A spousal trust created to benefit a spouse. C) A family trust established by a parent while alive to benefit their children. D) A joint spousal trust created for the benefit of an individual and their spouse. Answer: B Explanation: B) A spousal trust created to benefit a spouse. Type: MC Topic: Trusts - types & classification of trusts

45) When an individual dies, there is a deemed disposition of certain types of property. This would include property held by one type of trust for which the deceased individual was a settlor. That type of trust is: A) a discretionary trust. B) a testamentary trust. C) a joint spousal or common-law partner trust. D) an alter ego trust. Answer: D Explanation: D) An alter ego trust. Type: MC Topic: Trusts - types & classification of trusts

46) Which one of the following statements with respect to a qualifying spousal trust is NOT correct? A) The transferor's spouse must be entitled to receive all of the income of the trust arising before the spouse's death. B) The settlor must be 65 years of age or older. C) No person other than the spouse may receive or benefit from any of the income or capital of the trust, prior to the death of the spouse. D) A spousal trust can be a non-discretionary trust. Answer: B Explanation: B) The settlor must be 65 years of age or older. There is no age requirement for the settlor. Type: MC Topic: Trusts - qualifying spousal or common-law partner trusts

47) Which one of the following statements with respect to an alter ego trust is correct? A) An alter ego trust can be either an inter vivos trust or a testamentary trust. B) For the settlor, the POD for property transferred to the trust will be equal to the FMV of the properties at the time of transfer. C) Any resident individual can settle an alter ego trust. D) When properties are transferred out of an alter ego trust to anyone other than the settlor, the POD to the trust will be the FMV of the properties transferred. Answer: D Explanation: D) When properties are transferred out of an alter ego trust to anyone other than the settlor, the POD to the trust will be the FMV of the properties transferred. Type: MC Topic: Trusts - alter-ego trusts

48) On July 1, 2022, Martin Long transfers shares with a FMV of $300,000 to a newly established inter vivos trust. His 35 year old son, Shorty Long, is the only beneficiary. Martin's ACB for these shares was $170,000. In 2022, the trust receives eligible dividends on the shares of $21,000. All of these dividends are distributed to Shorty. What are the income tax consequences of these transactions to Martin, the trust and Shorty? A) The trust will include dividend income of $21,000 and will claim the dividend tax credit. There will be no income tax consequences for Martin or Shorty. B) The trust will have no income. Shorty will include dividend income of $21,000 which must be grossed up and will claim the dividend tax credit. There will be no income tax consequences for Martin. C) Martin will include a taxable capital gain of $65,000 [(1/2)($300,000 - $170,000)] in his 2022 net income. The trust will have no income. Shorty will include dividends received of $21,000 which must be grossed up and will claim the dividend tax credit. D) Martin will include a taxable capital gain of $65,000 [(1/2)($300,000 - $170,000)] in his 2022 net income. The trust will include dividend income of $21,000 which must be grossed up and will claim the dividend tax credit. There will be no income tax consequences for Shorty. Answer: C Explanation: C) Martin will include a taxable capital gain of $65,000 [(1/2)($300,000 - $170,000)] in his 2022 net income. The trust will have no income. Shorty will include dividends received of $21,000 which must be grossed up and will claim the dividend tax credit. Type: MC Topic: Trusts - taxation of trusts

49) Anika is planning to create a testamentary trust. She has not yet decided if the beneficiaries will be only her common-law partner Belinda, only their 14 year old blind daughter Elena, or both Belinda and Elena equally. The non-depreciable capital property she will transfer to the trust has an ACB of $45,000 and a FMV of $75,000. In order to defer the taxation of the capital gain on the transferred property until it is sold by the beneficiary(ies), which alternative should Anika use? A) Anika should transfer the property to a trust to benefit only their daughter, Elena. B) Anika should transfer the property to a common-law partner trust. C) Anika should transfer the property to a trust with both Elena and Belinda as beneficiaries. D) Anika cannot defer the taxation of the capital gain with the use of a trust. Answer: B Explanation: B) Anika should transfer the property to a common-law partner trust. Type: MC Topic: Trusts - types & classification of trusts

50) In 2021, Diego transferred non-depreciable capital property with an ACB of $400,000 and a FMV of $750,000 to an alter ego trust. In his will, Diego bequeaths all his property to his son. At his death in 2022, when the trust transfers the property to his son, the FMV of the property has increased to $800,000. Diego uses any rollovers that are available to minimize the income tax consequences. What are the income tax consequences of the two transfers? A) In 2021, a rollover would allow Diego to transfer his property to the trust without any income tax consequences. In 2022, when the trust transfers the property to his son, the trust will include a taxable capital gain of $200,000 [(1/2)($800,000 - $400,000)] in income. B) In 2021, there will be no rollover available, and Diego will include a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2022, when the trust transfers the property to his son, there will be a rollover available, and the trust will not report any income or capital gains. C) There will be no rollover available for either transaction. In 2021, Diego will include a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2022, when the property is transferred to his son, the trust will include a taxable capital gain in income of $25,000 [(1/2)($800,000 - $750,000)]. D) Rollovers will be available to defer income tax on both transactions. Answer: A Explanation: A) In 2021, a rollover would allow Diego to transfer his property to the trust without any income tax consequences. In 2022, when the trust transfers the property to his son, the trust will include a taxable capital gain of $200,000 [(1/2)($800,000 - $400,000)] in income. Type: MC Topic: Trusts - alter-ego trusts

51) In 2021, Emilio, who is 82 years old, transfers property with an ACB of $400,000 and a FMV of $750,000 to an inter vivos family trust to benefit his 3 adult children. In 2022, he becomes seriously disappointed with his two sons, and decides to have the trust transfer the trust property to his daughter. Subsequent to the distribution, the trust is terminated. At the time of the trust's distribution to the daughter, the FMV of the property has increased to $800,000. For both transactions, Emilio uses any rollovers that are available to minimize any income tax consequences. What are the income tax consequences of the two transfers? A) In 2021, a rollover would allow Emilio to transfer his property to the trust tax free. In 2022, when the trust transfers the property to his daughter, the trust will include a taxable capital gain of $200,000 [(1/2)($800,000 - $400,000)] in income. B) In 2021, there will be no rollover available, and Emilio will include a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2022, when the trust transfers the property to his daughter, there will be a rollover available, and the trust will not report any income. C) There will not be a rollover available for either transaction. In 2021, Emilio will include a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2022, when the property is transferred to his daughter, the trust will include a taxable capital gain in income of $25,000 [(1/2)($800,000 - $750,000)]. D) Rollovers will be available to defer income tax on both transactions. Answer: B Explanation: B) In 2021, there will be no rollover available, and Emilio will include a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2022, when the trust transfers the property to his daughter, there will be a rollover available, and the trust will not report any income. Type: MC Topic: Trusts - family trusts

52) Which of the following amounts can be allocated to beneficiaries of a trust? A) Losses incurred on the disposition of trust capital property. B) Capital gains resulting from the disposition of trust capital property. C) Recapture of CCA on the disposition of trust depreciable property. D) Items A, B, and C. E) Items B and C. Answer: E Explanation: E) Items B and C. Type: MC Topic: Trusts - the taxation of trusts

53) Which of the following amounts will NOT affect the net income of a trust? A) Income as a result of a preferred beneficiary election. B) Amounts paid or payable to a beneficiary of the trust. C) The difference between the FMV and the tax cost of property transferred to a resident capital beneficiary. D) Income retained for beneficiary under 21 years of age. Answer: C Explanation: C) The difference between the FMV and the tax cost of property transferred to a resident capital beneficiary. While there are some exceptions to this, such transfers occur on a rollover basis and therefore do not effect the net income of a trust or beneficiary. Type: MC Topic: Trusts - net income & taxable income

54) Upon his death three years ago, Mr. Allen's will provided for the creation of a trust. The will required that any income distributed by the trust be allocated 50% to his spouse, and 12.5% to each of his four children. In 2022, the trust had the following income and expense: Eligible Dividends Interest Income Canadian Sources Interest Expense on money borrowed to purchase shares

$20,000 10,000 1,000

In 2022, the beneficiaries and the trustees jointly agreed that all income received by the trust, except for $5,000 of the interest income, would be paid to the beneficiaries. What is the taxable income attributable to Mrs. Allen for the year from the trust? A) $12,000. B) $12,500. C) $15,800. D) $15,000. E) $13,800. Answer: C Explanation: C) $15,800. This would be calculated as follows: Dividends Received Gross-Up on Dividends [($20,000)(38%)] Interest Income ($10,000 - $5,000) Interest Expense Net Income & Taxable Income - Trust Mrs. Allen's Percentage Taxable Income - Mrs. Allen

$20,000 7,600 5,000 ( 1,000) $31,600 50% $15,800

Type: MC Topic: Trusts - net income & taxable income

55) Upon his death three years ago, Mr. Tajima's will provided for the creation of a trust with his four children as beneficiaries. In 2022, the trust's income consisted of interest received from Canadian sources of $20,000. In 2022, the trustees jointly agreed that all income received by the trust, except for the following two amounts would be paid to the beneficiaries. Interest income retained by the trust Share of interest allocated to a 5 year old beneficiary that will be paid when he turns 18

$8,000 $3,000

In addition, the trust designated the income share of one beneficiary not to be paid, even though the beneficiary received the payment. The amount was $5,000. What is the 2022 net income of the trust? A) $11,000. B) $13,000. C) $16,000. D) $20,000. Answer: B Explanation: A) $11,000. [$8,000 + $3,000] B) $13,000. [$8,000 + $5,000] C) $16,000 [$8,000 + $3,000 + $5,000] D) $20,000 Type: MC Topic: Trusts - net income & taxable income

56) Which of the following statements is correct with respect to the preferred beneficiary election? A) This election is available for beneficiaries that are eligible for the disability tax credit, or who are eligible to be claimed by another individual for either the infirm dependant over 17 credit or the caregiver credit. B) A trust cannot deduct amounts that are paid or payable to a preferred beneficiary. C) A trust can deduct amounts allocated to, but not distributed to, a preferred beneficiary. D) The preferred beneficiary election is used when the trust wants to allocate 100% of its income to a particular beneficiary for one year. Answer: C Explanation: C) A trust can deduct amounts allocated to, but not distributed to, a preferred beneficiary. Type: MC Topic: Trusts - preferred beneficiary election

57) An inter vivos trust received $50,000 in eligible dividends. In addition, it received interest income of $12,000 in the current year. The trust incurred accounting fees of $2,000 which were deducted by the trust. The trust has one beneficiary who is 23 years old and has no other income or capital gains. During the current year, all of the dividends were distributed to the beneficiary and none of the interest. What is the net income of the beneficiary? A) $69,000. B) $67,000. C) $81,000. D) $50,000. Answer: A Explanation: A) $69,000 [(138%)($50,000)] B) $67,000 = $69,000 - $2,000 fee C) $81,000 = [(138%)($50,000) + $12,000] D) $50,000 ( no GU) Type: MC Topic: Trusts - income allocations to beneficiaries

58) The Weir family trust is an inter vivos trust with one beneficiary. The beneficiary is 25 year old Marcus Weir, the son of the settlor. In 2022, the trust had the following income: Eligible dividends from publicly traded Canadian corporations Non-eligible dividends from a family owned CCPC Capital gain from a sale of shares

$ 50,000 200,000 30,000

The non-eligible dividends and capital gain are distributed to Marcus. By how much will Marcus' 2022 net income increase as a result of this distribution? Ignore the possibility that the income received by Marcus could be subject to the TOSI. A) $245,000. B) $291,000. C) $215,000. D) $265,000. Answer: A Explanation: A) $245,000. This would be calculated as follows: Non-eligible dividends received Gross-up on non-eligible dividends [($200,000)(15%)] Taxable capital gain [(1/2)($30,000)] Income Increase B) $291,000 [(138%)($200,000) + $15,000] C) $215,000 (No gross up) D) $265,000 ($200,000 + $50,000 + $15,000 TCG)

$200,000 30,000 15,000 $245,000

Type: MC Topic: Trusts - income allocations to beneficiaries

59) The Strike family trust is an inter vivos trust with one beneficiary, Maria Strike, the 25 year old daughter of the settlor, Gregor Strike. The trust receives interest income of $150,000 in 2022. The trust makes a charitable donation of $15,000 and distributes $105,000 to Maria. Maria has no income other than what she receives from the trust, and is eligible only for the BPA. Determine the trust's 2022 federal income tax payable. Ignore the possibility that the income received by Maria could be subject to the TOSI. A) $14,850. B) $9,900. C) $1,836. D) $9,936. Answer: D Explanation: A) [(33%)($150,000 - $105,000)] = $14,850 B) [(33%)($150,000 - $15,000 - $105,000)] = $9,900 C) [(15%)($150,000 - $105,000) ) - $4,914] = $1,836 D) Charitable donation tax credit = [(15%)($200) + (33%)($14,800)] = $4,914 Trust TP = [(33%)($150,000 - $105,000) - $4,914 = $9,936 Type: MC Topic: Trusts - income tax payable of personal trusts

60) On the death of Martin Meryk, the shares in Meryk Limited, a CCPC, became part of his estate which was designated as a graduated rate estate (GRE). In 2022, the GRE receives non-eligible dividend income from Meryk Limited in the amount of $200,000. Martin's will requires that one-half of the dividends be distributed to his spouse, Marta. Marta has no income other than what she receives from the trust. Which of the following statements is correct? A) The federal income tax payable is the same for Marta and the GRE. B) The net income for Marta and the GRE are the same. C) The federal dividend tax credit is available to Marta, but not to the GRE. D) The income retained in the GRE is taxed at a federal income tax rate of 33%. Answer: B Explanation: B) The net income for Marta and the GRE are the same. Type: MC Topic: Trusts - net income & taxable income

61) Saddam Holt transfers capital properties to a trust in favour of his spouse, Lena Holt. She is the only income and capital beneficiary of the trust. Which of the following statements with respect to this trust is NOT correct? A) Trust income that is not paid or payable to a beneficiary will be subject to the maximum federal income tax rate of 33%. B) Any property income that is not paid or payable to a beneficiary will be attributed back to Mr. Holt. C) Any capital gains of the trust will not be attributed to Mr. Holt. D) Any income that is paid or payable to Mrs. Holt will be attributed to Mr. Holt. Answer: C Explanation: C) Any capital gains of the trust will not be attributed to Mr. Holt. Only capital gains designated to Mrs. Holt by the trust will be subject to attribution. Type: MC Topic: Trusts - attribution of income & capital gains

62) On January 1 of the current year, Mandeep Gill contributed investments with an ACB of $95,000 and a FMV of $250,000 to a family trust for no consideration. One-half of the income of the trust is allocated to his 12 year old son, and the other half to his spouse. The trust earns $7,000 in interest income during the year. What will the income tax consequences of these transactions be to Mandeep? A) Mandeep will have a taxable capital gain of $77,500 and will have attributed interest income of $7,000. B) Mandeep will not have a taxable capital gain on the contribution, but the interest income of $7,000 will be attributed to him. C) Mandeep will have a taxable capital gain of $77,500. No interest income will be attributed to him. D) Mandeep will have a taxable capital gain of $77,500 and the interest income allocated to Mrs. Gill of $3,500 will be attributed to him. Answer: A Explanation: A) Mandeep will have a taxable capital gain of $77,500 and will have attributed interest income of $7,000. Type: MC Topic: Trusts - attribution of income & capital gains

63) The Burton family trust was created when Mr. Burton transferred publicly traded shares with an ACB of $300,000 and a FMV of $750,000 to the trust. The beneficiaries are Mr. Burton's two sons, Tim and Jerry Burton, both of whom are over 30 years old. They have equal shares in the income and capital of the trust. At a later point in time, when the value of the shares has increased to $2,100,000, Tim purchases Jerry's capital interest in the trust for $1,050,000 [(1/2)($2,100,000)]. The income tax consequences of this transaction to Tim and Jerry are as follows: A) Tim has acquired a capital interest in the trust with an ACB of $1,050,000. Jerry will include a taxable capital gain of $525,000 in his income. B) Tim has acquired a capital interest in the trust with an ACB of nil. Jerry will include a taxable capital gain of $525,000 in his income. C) Tim has acquired a capital interest in the trust with an ACB of $1,050,000. Jerry will include a taxable capital gain of $150,000 in his income. D) Tim has acquired a capital interest in the trust with an ACB of $1,050,000. Jerry will include a taxable capital gain of $337,500 in his income. Answer: D Explanation: A) Tim has acquired a capital interest in the trust with an ACB of $1,050,000. Jerry will include a taxable capital gain of $525,000 in his income. [(1/2)($1,050,000 - $0) Incorrectly uses ACB = $0] B) Tim has acquired a capital interest in the trust with an ACB of nil. Jerry will include a taxable capital gain of $525,000. [(1/2)($1,050,000 - $0) in his income. Incorrectly uses ACB = $0 for both]. C) Tim has acquired a capital interest in the trust with an ACB of $1,050,000. Jerry will include a taxable capital gain of $150,000 in his income. [(1/2)($1,050,000 - $750,000) Incorrectly uses ACB = $750,000]. D) Tim has acquired a capital interest in the trust with an ACB of $1,050,000. Jerry will include a taxable capital gain of $337,500 in income {[1/2][$1,050,000 - (50%)($750,000)]}. Type: MC Topic: Trusts - purchase or sale of an interest in a trust

64) The Ali family trust was established when Mrs. Ali transferred publicly traded shares with an ACB of $100,000 and a FMV of $250,000 to the trust. The beneficiaries are Mrs. Ali's 30 year old twin daughters, Aida and Fatima. They benefit equally from the income and the capital of the trust. In the current year, Aida purchased Fatima's capital interest from her for its FMV of $350,000 [(1/2)($700,000)]. The income tax consequences of this transaction to Aida and Fatima are: A) Aida has acquired a capital interest in the trust with an ACB of $350,000. Fatima will include a taxable capital gain of $112,500 in her income. B) Aida has acquired a capital interest in the trust with an ACB of $350,000. Fatima will include a taxable capital gain of $175,000 in her income. C) Aida has acquired a capital interest in the trust with an ACB of nil. Fatima will include a taxable capital gain of $175,000 in her income. D) Aida has acquired a capital interest in the trust with an ACB of $350,000. Fatima will include a taxable capital gain of $50,000 in her income. Answer: A Explanation: A) Aida has acquired a capital interest in the trust, and her ACB will be $350,000. Fatima will include a taxable capital gain of $112,500 in her income. {[1/2][$350,000 — (50%)($250,000)]} B) Aida has acquired a capital interest in the trust with an ACB of $350,000. Fatima will include a taxable capital gain of $175,000 in her income. [(1/2)($350,000 - $0) Incorrectly uses ACB = $0] C) Aida has acquired a capital interest in the trust with an ACB of nil. Fatima will include a taxable capital gain of $175,000 in her income. [(1/2)($350,000 - $0) Incorrectly uses ACB = $0] D) Aida has acquired a capital interest in the trust with an ACB of $350,000. Fatima will include a taxable capital gain of $50,000 in her income. [(1/2)($350,000 - $250,000) Incorrectly uses ACB = $250,000] Type: MC Topic: Trusts - purchase or sale of an interest in a trust

65) Monique Flaharty has accumulated investment that earn annual interest of $45,000. Her other income exceed $250,000 per year. Her 35 year old daughter Deborah has no income of her own. Her only tax credit is the BPA. Determine the amount of federal income tax that could be saved by transferring the interest earning investments to a trust with Deborah as the income beneficiary. The trust will be required to distribute all of its income each year. A) $8,100. B) $10,260. C) $4,590. D) $12,690. Answer: B Explanation: A) $ 8,100 [(33%)($45,000) — (15%)($45,000)] B) $10,260 [(33%)($45,000) — (15%)($45,000 - $14,398)] C) $ 4,590 [(15%)($45,000 - $14,398)] D) $12,690 [(33%)($45,000) — (15%)($14,398)] Type: MC Topic: Trusts - income tax planning

66) Ferran Ginton has operated a very successful bakery for 30 years, and has accumulated investment that earn annual interest income of $40,000. His other income places him in the top income tax bracket for personal income tax purposes. He has a son, Habib who is 22 years old and currently has no income. Habib's only personal tax credit is the BPA. Determine the amount of federal income tax that could be saved by transferring the interest earning investments to a trust with Habib as the income beneficiary, assuming that the trust will be required to distribute all of its income each year. A) $7,200. B) $9,360. C) $3,840. D) $11,040. Answer: B Explanation: A) $7,200 [(33%)($40,000) — (15%)($40,000)] B) $9,360 [(33%)($40,000) — (15%)($40,000 - $14,398)] C) $ 3,840 [(15%)($40,000 - $14,398)] D) $11,040 [(33%)($40,000) — (15%)($14,398)] Type: MC Topic: Trusts - income tax planning

67) Which of the following is NOT a valid reason for using an alter ego trust? A) An alter ego trust removes property from the estate of the settlor, and this property will not be subject to probate on the death of the settlor. B) The trust could be established in a low income tax rate province resulting in a income tax savings on the death or emigration of the settlor. C) The trust will be subject to lower income tax rates, and can be used to split income with the settlor. D) If all property has been transferred to an alter ego trust prior to the death of the settlor, the settlor does not need to leave a will, which could be easily challenged. It is not as easy to challenge the validity of a trust. Answer: C Explanation: C) The trust will be subject to lower income tax rates, and can be used to split income with the settlor. Type: MC Topic: Trusts - alter-ego trusts

68) An estate freeze can be accomplished using various means. With respect to the various alternatives, which of the following statements is correct? A) Implementing an estate freeze through the use of gifts does not involve any immediate income tax consequences. B) The use of the rollover of ITA 85(1) to implement the estate freeze can avoid immediate income tax consequences. C) Implementing an estate freeze with the use of an inter vivos trust can avoid immediate income tax consequences. D) An advantage of using gifts to implement an estate freeze is that the freezor can retain control of the property. Answer: B Explanation: B) The use of the rollover of ITA 85(1) to implement the estate freeze can avoid immediate income tax consequences. Type: MC Topic: Trusts - estate freeze

69) What is the objective of an estate freeze? A) To freeze certain family members out of participation in a large estate. B) To allow future appreciation in property to appreciate for the benefit of specific related persons. C) To delay the transfer of income generating private company shares to minor children to avoid the tax on split income (TOSI). D) To allow a wealthy taxpayer to transfer valuable property to the next generation without income tax consequences. Answer: B Explanation: B) To allow future appreciation in property to appreciate for the benefit of specific related persons. Type: MC Topic: Trusts - estate freeze

70) An estate freeze can be accomplished by various techniques. Which of the following techniques will NOT involve immediate income tax consequences at the time of the freeze? A) A gift to an individual's children of capital property with accrued gains. B) A transfer of capital property with accrued gains to a corporation using ITA 85. C) A transfer of capital property with accrued gains to a trust with the transferor's children as beneficiaries. D) A transfer of capital property with accrued gains to a holding company in which the individual's children are the majority shareholders. Answer: B Explanation: B) A transfer of capital property with accrued gains to a corporation using ITA 85. Type: MC Topic: Trusts - estate freeze

71) In each of the following Cases, an individual is attempting to establish a trust. For each of these Cases, indicate whether the attempt has been successful. Explain your conclusion. Case A - Martin Falk has signed an agreement that specifies the property that he will transfer to a trustee at the end of the current year. The income from the trust will be distributed to his friend of several years, Lola Lamour. Case B - Martha Stuart transfers property to a trustee, specifying that the income from the property should be distributed to prison inmates in Ontario. Case C - Joan Morgan sends a cheque to her son, indicating that the money should be used for the education of her grandchildren. Answer: Case A - While Martin has signed the agreement, it does not appear that the property has been transferred. This means that no trust has been created. Case B - "Prison inmates in Ontario" cannot be considered to be an identifiable class. As a consequence, there is no certainty as to beneficiaries and no trust would be created by her transfer. Case C - While Ms. Morgan has transferred property, it is not clear that her intention was to create a trust. No trust would be created by this transfer. Type: ES Topic: Trusts - definition & characteristics

72) On January 1, 2022, Jerry Fallen transfers publicly traded bonds with a FMV of $570,000 to a newly established inter vivos trust for which his 22 year old son, James, is the only beneficiary. The ACB of the bonds to Jerry was $520,000. In 2022, the bonds earn interest income of $32,000, all of which is distributed to James. On January 1, 2023, the bonds are distributed to James in satisfaction of his capital interest in the trust. At this time, the FMV of the bonds has increased to $615,000. James sells all of the bonds for $615,000 on January 3, 2023. Indicate the income tax consequences for Jerry, James, and the trust, in each of 2022 and 2023. Answer: With respect to Jerry's transfer of bonds to the trust, the transaction would be deemed to take place at FMV. This would result in a taxable capital gain to Jerry of $25,000 [(1/2)($570,000 - $520,000)]. There would be no income tax consequences to James or the trust as a result of the transfer. As the trust distributed all of its income during the year, none of the interest would be included in the income of the trust. All of the interest would be included in James' income and, because he is an adult, there would be no income attribution to Jerry. Under ITA 107(2), the transfer from the trust to James on January 1, 2023 would take place at the trust's tax cost of $570,000. There would be no income tax consequences for Jerry, James, or the trust as a result of this transfer. However, as James' ACB is $570,000, the sale at FMV of $615,000 would result in a taxable capital gain to him of $22,500 [(1/2)($615,000 - $570,000)]. Type: ES Topic: Trusts - the taxation of trusts

73) At the beginning of 2022, Martha Stuart transfers investments to a trust that has her 15 year old daughter Jane as the only beneficiary. The investments have an ACB of $350,000 and a FMV of $500,000. In 2022, the investments pay eligible dividends of $50,000, all of which are distributed to Jane. At the beginning of 2023, all of the investments are transferred to Jane in satisfaction of her capital interest. At this time their FMV is $550,000. Jane immediately sells the investments for this amount. Indicate the income tax consequences for Martha, Jane, and the trust, for 2022 and 2023. Answer: When Martha transfers the investments to the trust in 2022, she will recognize a taxable capital gain of $75,000 [(1/2)($500,000 - $350,000)]. With respect to the eligible dividends, as Jane is under 18 years of age, they will be attributed back to Martha. This will result in an income inclusion of $69,000 [($50,000)(138%)] and will provide Martha with a federal dividend tax credit of $10,364 [(6/11)(38%)($50,000)]. The investments will be transferred to Jane at an ACB of $500,000. This means that, when she sells them, she will include a taxable capital gain of $25,000 [(1/2)($550,000 - $500,000)] in her income. Note that there is no income attribution of capital gains. Type: ES Topic: Trusts - the taxation of trusts

74) Larry died in 2022 and bequeathed a portfolio of investments to a qualifying common-law partner trust created in his will. Larry is survived by his common-law partner, David who is to receive the investments from the trust three years after Larry's death if they have not been sold. The portfolio, which had an ACB of $420,000, was valued at $723,000 on the date of his death. Determine the income tax consequences of the transfer, including the ACB of the investments in the trust to David if it is transferred. Answer: As there is a rollover available on transfers to a qualifying common-law partner trust, the accrued $303,000 gain ($723,000 - $420,000) will not be recognized until his common-law partner or the common-law partner trust eventually disposes of the investment portfolio. The common-law partner trust acquires the portfolio at an ACB of $420,000, which will be David's ACB if the trust distributed the investment portfolio to him. Type: ES Topic: Trusts - the taxation of trusts

75) Lara Jensen was living with her common-law partner Portia at the time of her death in 2022. Lara's will established that investments were to be transferred to a qualifying common-law partner trust. The investments had an ACB of $675,000 and a FMV of $850,000 at the time of transfer. The investments are to be transferred to Portia five years from the date of Lara's death. What are the income tax consequences to Lara of the transfer made at the time of her death? What would be the income tax consequences to Portia if, after she receives the investments from the trust, she sells them for $950,000? Answer: As a rollover is available on transfers to a qualifying common-law partner trust, there would be no income tax consequences for Lara at the time of the transfer to the trust. However, the ACB of the investments in the trust would be $675,000, Lara's ACB. The investments would be distributed from the trust to Portia at the same $675,000 amount. This means that when she sells the investments for $950,000, she will have a taxable capital gain of $137,500 [(1/2)($950,000 - $675,000)]. Type: ES Topic: Trusts - the taxation of trusts

76) An individual has non-depreciable capital property with a cost of $2,100 and a FMV of $2,500. Seven Scenarios are presented for the transfer of this property by the settlor to a trust. For each Scenario, indicate the income tax consequences to the settlor at the time of transfer, as well as the ACB of the property to the trust. Scenario 1: Transfer to an inter vivos trust with an adult child beneficiary. Scenario 2: Transfer to a testamentary qualifying spousal trust. Scenario 3: Transfer to a joint common-law partner trust. Scenario 4: Transfer to an inter vivos qualifying spousal trust. Scenario 5: Transfer to an inter vivos trust for a beneficiary that is a minor child. Scenario 6: Transfer to a testamentary trust for a beneficiary that was a friend. Scenario 7: Transfer to an alter ego trust. Answer: In those cases where a taxable capital gain will be recognized at transfer, the amount of the taxable capital gain will be $200 [(1/2)($2,500 - $2,100)].

Scenario 1. Inter vivos trust for adult child 2. Testamentary spousal trust 3. Joint common-law partner trust 4. Inter vivos qualifying spousal trust 5. Inter vivos trust for minor child 6. Testamentary trust for friend 7. Alter ego trust

Type: ES Topic: Trusts - attribution of income & capital gains

Taxable Capital Gain (Settlor) $200 Nil Nil Nil 200 200 Nil

ACB (Trust) $2,500 2,100 2,100 2,100 2,500 2,500 2,100

77) Ian Home has a non-depreciable capital property that he purchased several years ago for $20,000. It has a current FMV of $30,000. The following Six Scenarios are proposed for the transfer of this property by Ian to a trust. For each Scenario, indicate the income tax consequences to Ian at the time of the transfer, as well as the ACB of the property to the trust. Scenario 1: Transfer to a joint spousal trust. Scenario 2: Transfer to an inter vivos trust for a beneficiary that is a business partner. Scenario 3: Transfer to a testamentary trust for a 22 year old son who is the only beneficiary. Scenario 4: Transfer to a testamentary qualifying spousal trust. Scenario 5: Transfer to an alter ego trust. Scenario 6: Transfer to an inter vivos trust for a minor child who is the only beneficiary. Answer: In those cases where a taxable capital gain will be recognized at transfer, the amount of the gain will be $5,000 [(1/2)($30,000 - $20,000)].

Scenario 1. Joint spousal trust 2. Inter vivos trust for business partner 3. Testamentary trust for 22 year old son 4. Testamentary qualifying spousal trust 5. Alter ego trust 6. Inter vivos trust for a minor child

Type: ES Topic: Trusts - attribution of income & capital gains

Taxable Capital Gain (Settlor) Nil $5,000 5,000 Nil Nil 5,000

ACB (Trust) $20,000 30,000 30,000 20,000 20,000 30,000

78) Five years ago, a depreciable property was transferred from Mark's estate to a qualifying spousal trust created on his death. The property, which cost $224,000, had a UCC of $147,200 at the time of transfer. At the time of Mark's death, the property had a FMV of $262,400. Since then, the trust has claimed CCA of $15,400. At the end of the current year, the trust sold the property to an arm's length person for $243,200. Determine the income tax consequences of the transfer of the depreciable property to the qualifying spousal trust and of the disposition of the property by the trust. Determine the maximum amount of trust income that can be allocated to Mark's spouse from the sale. Answer: Transfer on Death - Because of the available rollover to a qualifying spousal trust, the trust will be deemed to have acquired the depreciable property at a capital cost of $224,000 and to have claimed CCA of $76,800 resulting in an initial UCC of $147,200. The FMV at the time of Mark's death is not relevant since the transfer occurs on a rollover basis which effectively transfers the tax attributes of the depreciable property from the settlor/testator to the trust. Sale by Trust - The income tax consequences of the sale by the trust would be as follows: POD Less: ACB Capital Gain Inclusion Rate Taxable Capital Gain

$243,200 ( 224,000) $ 19,200 1/2 $ 9,600

Capital Cost UCC at Sale ($147,200 - $15,400) Recapture of CCA

$224,000 ( 131,800) $ 92,200

All of the income from the sale can be allocated to Mark's spouse. This would be the taxable capital gain of $9,600 and the recaptured CCA of $92,200. As a result, the trust would have no net income or taxable income and therefore no federal income tax payable. Type: ES Topic: Trusts - spousal trusts & income allocation

79) Martine Flex died three years ago. At the time of her death, a depreciable property was transferred from her estate to a qualifying spousal trust that was created on her death. The property had a capital cost of $150,000 and it was the only property in its class. The balance in the class was $140,000. At the time of Martine's death, the property had a FMV of $180,000. Since that time, the trust has claimed CCA of $20,000. At the end of the current year, the property is sold to an arm's length person for $205,000. Determine the income tax consequences of the transfer of the property to the spousal trust and of the disposition of the property by the trust. Determine the maximum amount of trust income that can be allocated to Martine's spouse from the sale. Answer: Transfer on Death - Because of the available rollover to a qualifying spousal trust, the trust will be deemed to have acquired the depreciable property at a capital cost of $150,000, to have claimed CCA of $10,000 with the result that the UCC balance is $140,000. The FMV at Martine's death is not relevant since the transfer occurs on a rollover basis which effectively transfers the tax attributes of the depreciable property from the settlor/testator to the trust. Sale by Trust - The income tax consequences of the sale by the trust would be as follows: POD Less: ACB Capital Gain Inclusion Rate Taxable Capital Gain

$205,000 ( 150,000) $ 55,000 1/2 $ 27,500

Capital Cost UCC at ($140,000 - $20,000) Recapture of CCA

$150,000 ( 120,000) $ 30,000

All of the income from the sale can be allocated to Martine's spouse. This would be the taxable capital gain of $27,500 and the recaptured CCA of $30,000. As a result, the trust would have no net income and taxable income and therefore no federal income tax payable. Type: ES Topic: Trusts - spousal trusts & income allocation

80) During the 2022 taxation year ending December 31, the Renaud family trust received eligible dividends from publicly traded Canadian corporations in the amount of $367,000. In addition, it received non-eligible dividends from the family owned CCPC in the amount of $108,000. Its only other 2022 income was a capital gain of $47,000 on a disposition of investments in publicly traded shares. The only beneficiary of the trust is the family's 23 year old daughter, Francine Renaud. Francine is actively engaged in the CCPC on regular and continuous basis and, as a consequence, the TOSI is not applicable to the income that she receives from the trust. In 2022, $210,000 of the dividends from public companies, all of the dividends from the family's CCPC, and all of the $47,000 capital gain were distributed to Francine. Indicate the income tax consequences of these transactions on the 2022 net income for both the trust and for Francine. In addition, calculate the 2022 federal dividend tax credit available to both the trust and Francine. Answer: The income allocation would be as follows: Received by Trust $367,000 108,000 47,000 $522,000

Eligible Dividends Non-Eligible Dividends Capital Gain Totals

Paid to Francine $210,000 108,000 47,000 $365,000

Retained by Trust $157,000 Nil Nil $157,000

The 2022 net income of the trust would be calculated as follows: Eligible Dividends Gross Up at 38% 2022 Net Income - Trust

$157,000 59,660 $216,660

The 2022 net income for Francine would be as follows: Eligible Dividends Gross Up at 38% Non-Eligible Dividends Gross Up at 15% Taxable Capital Gains [(1/2)($47,000)] 2022 Net Income - Francine

$210,000 79,800 108,000 16,200 23,500 $437,500

The dividend tax credit that will be available to the trust is $32,542 [(6/11)($59,660)]. Francine's dividend tax credits will be $43,527 [(6/11)($79,800)] on the eligible dividends and $11,215 [(9/13)($16,200)] on the non-eligible amounts. Type: ES Topic: Trusts - comprehensive problem: trust allocations to beneficiaries

81) The Weryk family trust is an inter vivos trust with one beneficiary. The beneficiary is 25 year old Marcin Weryk, the son of the settlor. In 2022, the trust received eligible dividends of $50,000 from the shares of publicly traded Canadian corporations. In addition, the trust received $200,000 in non-eligible dividends from a family owned CCPC. Marcin is actively engaged in the CCPC on a regular and continuous basis and, as a consequence, the TOSI would not apply to the income that he receives from the trust. The trust sold shares in a public company, resulting in a capital gain of $30,000. 75% of both the trust's current year income and capital gains are distributed to Marcin. Determine the effect of these transactions on the 2022 net income for both the trust and for Marcin. Answer: The income allocation would be as follows: Received by Trust $ 50,000 200,000 30,000 $280,000

Eligible Dividends Non-Eligible Dividends Capital Gain Totals

Paid to Marcin $ 37,500 150,000 22,500 $210,000

The 2022 net income of Marcin and the trust would be calculated as follows:

Eligible Dividends Gross-Up at 38% Non-Eligible Dividends Gross-Up at 15% Taxable Capital Gain [(1/2)($30,000)] 2022 Net Income

Marcin $ 37,500 14,250 150,000 22,500 11,250 $235,500

Type: ES Topic: Trusts - comprehensive problem: trust allocations to beneficiaries

Trust $12,500 4,750 50,000 7,500 3,750 $78,500

Retained by Trust $12,500 50,000 7,500 $70,000

82) The sole income for 2022 of an inter vivos trust is $35,500 in non-eligible dividends received from a CCPC. The only beneficiary of the trust is the adult son of the settlor whose only income for 2022 is the dividends allocated from the trust. The son is actively engaged in the CCPC on a regular and continuous basis. He has no personal tax credits other than the BPA and any credits directly related to allocated trust income. Calculate the 2022 net income, taxable income and federal income tax payable for both the trust and the beneficiary assuming: A. The beneficiary was paid $24,500 of the dividend income. B. The beneficiary was paid all of the dividend income. Answer: 2022 net income, taxable income and federal income tax payable for the trust in Part A would be calculated as follows: Non-Eligible Dividends Deduction for distribution to Beneficiary Unallocated Dividend Income Dividend Gross Up (15%) Net Income & Taxable Income for the Trust Federal Income Tax Rate (Inter Vivos Trust) Federal Income Tax before Credits Federal Dividend Tax Credit [(9/13)($1,650)] 2022 Federal Income Tax Payable - Trust (Part A)

$35,500 ( 24,500) $11,000 1,650 $12,650 33% $ 4,175 ( 1,142) $ 3,033

Since in Part B, all of the dividends are paid to the beneficiary, the trust would have net income, taxable income, and federal income tax payable of nil. 2022 net income, taxable income, and federal income tax payable for the son would be calculated as follows: Part A $24,500 3,675 $28,175 15% $ 4,226 ( 2,160)

Part B $35,500 5,325 $40,825 15% $ 6,124 ( 2,160)

Non-Eligible Dividend Income allocated from the Trust Dividend Gross Up (15%) Net Income & Taxable Income for the Son Federal Tax Rate Federal Income Tax before Credits BPA [(15%)($14,398)] Federal Dividend Tax Credit [(9/13)(Gross Up)] ( 2,544) ( 3,687) 2022 Federal Income Tax Payable - Son Nil $ 277 By leaving $11,000 in dividends in the trust, $2,756 ($3,033 - $277) in avoidable federal income tax was paid. Type: ES Topic: Trusts - comprehensive problem: trust income & allocations to beneficiaries

83) The Fonda family trust is an inter vivos trust with one beneficiary, Liana, the 25 year old daughter of the settlor, Mr. Fonda. Liana has no income other than what she receives from the trust, and has no personal tax credits other than the BPA and any tax credits directly related to allocated trust income. The trust receives eligible dividend income of $100,000 in 2022 and does not distribute any of the dividends to Liana. Determine the 2022 federal income tax payable for the trust. Answer: The required calculations are as follows: Eligible Dividends Received Gross-Up on Eligible Dividends [($100,000)(38%)] Net & Taxable Income - Trust Flat Rate For Inter Vivos Trusts Income Tax before Credits Dividend Tax Credit [(6/11)($38,000)] 2022 Federal Income Tax Payable - Trust

Type: ES Topic: Trusts - basic federal income tax payable (inter-vivos)

$100,000 38,000 $138,000 33% $ 45,540 ( 20,727) $ 24,813

84) Martin Weryk died on January 1, 2022. While all of his estate will eventually be transferred to his spouse, Marta Weryk, on December 31, 2022, a significant portion of the estate is still under the administration of the executor. The executor files a T3 annual income tax return for the 2022 taxation year ending December 31, designating the estate as a Graduated Rate Estate (GRE). The estate's income during the period January 1, 2022 to December 31, 2022 consists of non-eligible dividends in the amount of $200,000. Martin's will stipulates that while the estate is being administered by the executor, 50% of its income is to be distributed to his spouse Marta, with the balance accumulating in the estate. As per these instructions, $100,000 of the non-eligible dividends received are paid to Marta in December of 2022. Marta's only tax credits are the BPA, the age credit and any credits directly related to income allocated from the GRE. Determine the 2022 federal income tax payable for both Marta and the GRE. Answer: As this is a GRE, the calculation of its federal income tax payable will be based on the same graduated income tax rates that apply to individuals. The 2022 net income iand taxable income for both Marta and the GRE would be the same as the dividends received are allocated 50:50 basis. The required calculations are as follows: Non-Eligible Dividends [(50%)($200,000)] Gross-Up On Non-Eligible Dividends [($100,000)(15%)] 2022 Net Income & Taxable Income

$100,000 15,000 $115,000

The 2022 federal income tax payable for Marta and the GRE would be calculated as follows:

Tax on first $100,392 26% of $14,608 ($115,000 - $100,392) Tax Payable Before Credits Basic Personal Credit [(15%)($14,398)] Age [(15%)($7,898) - (15%)($115,000 - $39,826)] Dividend Tax Credit [(9/13)($15,000)] 2022 Federal Income Tax Payable

Type: ES Topic: Trusts - basic federal income tax payable (GRE)

Marta $17,820

Trust $17,820

3,798 $21,618 ( 2,160) N/A ( 10,385) $ 9,356

3,798 $21,618 N/A N/A ( 10,385) $ 11,427

85) Last year, Martine Brown transferred to a family trust, for no consideration, bonds that pay annual interest of $108,000. The beneficiaries of the trust are Martine's spouse, Michael, and their two children, Rachel (16 years old) and Dirk (22 years old). The beneficiaries have no income other than income allocated from the trust. The trust income and capital gains are allocated equally, and are payable to each beneficiary during the year. The trust also realized a capital gain of $36,000 on the trust disposition of one of the bonds late in the year. Determine the net income and taxable income of each beneficiary and calculate any effect the trust income will have on Martine's income. Ignore the possibility that some of the income received by the beneficiaries may be subject to the TOSI. Answer: Interest Income on the bonds is property income and is therefore subject to the attribution rules to the extent that the income is allocated to Martine's spouse, Michael, or to their minor daughter, Rachel. This means that two-thirds of the interest will be attributed back to Martine. With respect to the capital gain, the attribution rules do not apply on transfers to minors. This means that only Michael's one-third share of the capital gain will be attributed back to Martine. The increase in net income and taxable income for Martine and the trust's beneficiaries are as follows: Attributed Michael Rachel Dirk To Martine Interest Income ($108,000 ÷ 3) $36,000 $36,000 $36,000 Nil Interest Attribution to Martine ( 36,000) ( 36,000) Nil $72,000 Taxable Capital Gain [(1/2)($36,000) ÷ 3] 6,000 6,000 6,000 Nil Taxable Capital Gain Attributed to Martine ( 6,000) Nil Nil 6,000 2022 Net Income & Taxable Income Nil $6,000 $42,000 $78,000 Type: ES Topic: Trusts - attribution of income & capital gains

86) In 2022, Devon Jenkins transferred to a family trust, for no consideration, publicly traded shares that paid eligible dividends of $72,900 to the trust in the 2022 taxation year ending December 31. The beneficiaries of the trust are Devon's spouse, Connie, and their two children, Marvin (16 years old) and Diane (22 years old). The beneficiaries have no income other than income allocated from the trust. In 2022, the trust income and capital gains are allocated equally, and are payable to each beneficiary during the year. In addition to the dividends, there was a 2022 disposition of shares by the trust that resulted in a capital gain of $16,200. Determine the 2022 net income and taxable income of each beneficiary and calculate any effect the trust income will have on the taxable income of Devon. Ignore the possibility that some of the income received by the beneficiaries may be subject to the TOSI. Answer: The dividend income is income from property and therefore subject to the attribution rules to the extent that the income is allocated to Devon's spouse, Connie, and to their minor son, Marvin. This means that two-thirds of the dividends will be attributed back to Devon. As well, Connie's share of the taxable capital gain is attributed back to Devon. The increase in the 2022 net income and taxable income for Devon and the trust's beneficiaries are as follows: Attributed Connie Marvin Diane To Devon Eligible Dividends ($72,900 ÷ 3) $24,300 $24,300 $24,300 Nil Dividend Attribution to Devon ( 24,300) ( 24,300) Nil $48,600 Net Dividends Nil Nil $24,300 $48,600 Dividend Gross Up at 38% Nil Nil 9,234 18,468 Taxable Capital Gain [(1/2)($16,200) ÷ 3] 2,700 2,700 2,700 Nil Taxable Capital Gain Attributed to Devon ( 2,700) Nil Nil 2,700 2022 Net Income & Taxable Income Nil $ 2,700 $36,234 $69,768 Type: ES Topic: Trusts - attribution of income & capital gains

87) The Barton family trust was established when Mrs. Barton transferred publicly traded shares with an ACB of $187,000 and a FMV of $312,000 to a trust for no consideration. The beneficiaries of the trust are Mrs. Barton's two daughters, Sarah, aged 25, and Mary, aged 27. They have an equal interest in the income and capital of the trust. At the beginning of the current year, Mary sells her capital interest in the trust to Sarah. There have been no capital distributions from the trust. At the time of the sale, the FMV of the shares in the trust is $409,000. Based on this, the transfer amount for the capital interest is $204,500 [(1/2)($409,000)]. Determine the income tax consequences of this transaction to each of the sisters. Answer: With respect to Sarah, she has acquired a capital interest for consideration of $204,500. This will be the ACB of the interest she has acquired. With respect to Mary, she has disposed of a capital interest for POD of $204,500. Since she did not purchase the interest in the trust, her ACB as usually determined would be nil. However, for this disposition, the ACB of the capital interest is the greater of nil and the cost amount as determined under ITA 108(1). The cost amount would be $156,000, one-half of the $312,000 tax cost of the trust property. The result would be a taxable capital gain of $24,250 [(1/2)($204,500 - $156,000)]. Type: ES Topic: Trusts - capital property distributions (ITA 107(2))

88) At the beginning of 2022, Connie McGuire transferred publicly traded shares to a family trust. Connie's ACB of the shares was $240,000 and they had a FMV at the time of transfer of $300,000. The trust's beneficiaries are Connie's two sons, Bart and Billy. They are both in their early 30s. During the remainder of 2022, the shares paid eligible dividends $38,000, all of which were distributed equally to the two beneficiaries during the year. There are to be no capital distributions from the trust for 5 years. In early 2022, Bart sells his capital interest to Billy. At that time, the shares have a FMV of $420,000. Based on this, Bart pays $210,000 to Billy for his interest. Determine the income tax consequences of this transaction to each of the brothers. Answer: Billy has acquired a capital interest for consideration of $210,000. This would be the ACB of his purchased capital interest. Correspondingly, Bart has disposed of his capital interest for consideration of $210,000. This would be his POD. His ACB as usually determined would be nil. However, for this disposition, the ACB of the capital interest is the greater of nil and the cost amount as determined under ITA 108(1). This cost amount would be $150,000 [(1/2)($300,000)]. Given this, Bart will have a taxable capital gain of $30,000 [(1/2)($210,000 $150,000)]. Type: ES Topic: Trusts - capital property distributions (ITA 107(2))

89) Fred Kemper owns investments which pay annual interest of $150,000. He has other income in excess of $300,000. He has three sons who are triplets. They are 25 years old and currently have no other income. Their only tax credit is the BPA. The trust will be required to distribute all of its income on an annual basis. Ignore the possibility that some of the income received by the beneficiaries may be subject to the TOSI. Determine the 2022 savings in federal income tax that could be achieved by transferring the investments to a family trust with the triplets as equal beneficiaries. Answer: As Fred's other income places him in the maximum federal income tax bracket of 33%, his federal income tax savings resulting from transferring ownership of the securities to the family trust would be $49,500 [($150,000)(33%)]. The federal income tax that would be payable on the additional $50,000 received by each of the triplets is as follows: Tax on $50,000 at 15% BPA [(15%)($14,398)] 2022 Federal Income Tax Payable

$7,500 ( 2,160) $5,340

The total federal income tax payable by the triplets would be $16,020 [($5,340)(3)]. This is $33,480 ($49,500 - $16,020) per year less in federal income tax than the amount that would be paid by Fred without the trust. Type: ES Topic: Trusts - income tax planning

90) Darlene Knight has annual employment income in excess of $250,000. In addition, she has a portfolio of investments that earn annual interest income of $120,000. The FMV of the investments is equal to their ACB. Darlene has two sons, both of whom are over 18 years of age. However, they have no income of their own and continue to live at home. Their only tax credit is the BPA. Darlene plans to create a trust by contributing the investments to an arm's length trustee with her two sons as the only two beneficiaries who will share all trust income equally. Ignore the possibility that some of the income allocated to the beneficiaries may be subject to the TOSI. Determine the 2022 income tax savings in federal income tax that could be achieved by transferring the ownership of the investments to a family trust. Answer: With her employment income in excess of $250,000, any additional income earned by Darlene will be subject to the maximum federal income tax rate of 33%. This means that, on $120,000 of interest income, she would pay federal income tax of $39,600 [(33%)($120,000)]. If she establishes the family trust, each of her sons will receive income of $60,000. The 2022 federal income tax payable on this amount would be calculated as follows: Tax on first $50,197 Tax on Additional $9,803 ($60,000 - $50,197) at 20.5% Tax Before Credit Personal Credit [(15%)($14,398)] 2022 Federal Income Tax Payable

$7,530 2,010 $9,540 ( 2,160) $7,380

The total federal income tax payable by her sons would be $14,760 [(2)($7,380)]. This is $24,840 ($39,600 $14,760) less than the federal income taxes that Darlene would have paid on the $120,000 of interest income without the use of a trust. Type: ES Topic: Trusts - income tax planning

91) Each of the following independent Cases involve transfers of property to trusts by a settlor for no consideration. Three of the Cases also involve capital distributions from trusts to capital beneficiaries. A. A non-depreciable capital property is transferred to an alter ego trust. The ACB of the property to the settlor was $75,400. On the date of the transfer, the estimated FMV is $62,000. At a later point in time, when the estimated FMV of the property has increased to $73,000, the property is transferred back to the settlor. B. A transfer of a non-depreciable capital property is made to a qualifying spousal testamentary trust. The ACB of the property to the deceased spouse was $32,600, and the FMV on the date of the transfer to the trust is $46,500. At the time of death, the deceased had a net capital loss balance in excess of $15,000. C. A gift of non-depreciable capital property is made to an inter vivos trust in favour of the settlor's adult children. The ACB of the property to the settlor was $13,400.and the FMV on the date of the gift is $15,800. At a later point in time, when the FMV of the property is $17,300, the property is distributed by the trust to the children. D. A gift of depreciable property is made to an inter vivos trust in favour of the settlor's adult children. The capital cost of the depreciable property to the settlor was $8,000. On the date of the gift, the UCC was $6,250 and the FMV $9,400. E. A gift of non-depreciable capital property is made to a qualifying spousal inter vivos trust. The ACB of the property to the settlor was $23,500. At the time of the transfer the FMV of the property is $27,600. At a later point in time, the property is distributed by the trust to the spouse. At that time the FMV of the property is $28,800. F. A depreciable property is transferred to an inter vivos trust in favour of the settlor's adult children. The capital cost of the property is $5,600 and its UCC is $4,200. It is the last property in its class. At the time of the transfer, the FMV of the property is $2,000. Required: For each Case indicate: 1. The income tax consequences to the settlor that result from the transfer of the property to the trust assuming, where possible, a transfer price is chosen to optimize the income tax consequences to the settlor. 2. The tax cost of the transferred property to the trust. 3. In those cases where property is transferred to a beneficiary (a capital distribution), the income tax consequences to the trust and the tax cost to the beneficiary.

Answer: Case A Rollover - While many transfers of property to a trust take place at FMV there are certain situations where the property transfer can occur on a rollover basis. Transfers to an alter-ego trust are one of a select few that are recognized on a rollover basis. An election is available to forego the rollover in which case a FMV default rule would apply. If no FMV election is made, the results are as follows: 1. The deemed POD for the settlor would be the ACB of $75,400, resulting in no capital gain or capital loss on the transfer. 2. The trust acquires the property at a deemed cost of $75,400. 3. The property will be transferred to the settlor at the $75,400 ACB of the trust. This will also be the tax cost to the settlor. Election For No Rollover - If the FMV election is made the results are as follows: 1. There is a loss of $13,400 ($75,400 - $62,000) on the transfer to the alter ego trust. However, the settlor and the trust are affiliated persons [ITA 251.1(1)] and, as a consequence the loss would be disallowed. 2. While the transfer is made at the FMV of $62,000, the settlor was an individual. Given this, the disallowed loss will be added to this ACB of the property to the alter ego trust which would be $75,400 ($62,000 + $13,400). 3. As the transfer is back to the settlor, it will be transferred at the $75,400 ACB of the trust. This will also be the ACB to the settlor. Case B 1. Under the general ITA 70(6) rollover, the deemed POD to the deceased would be the property's ACB of $32,600, resulting in no capital gain or capital loss on the transfer. As the deceased has a net capital loss balance, a better alternative could be to elect out of ITA 70(6) and transfer the property at its FMV of $46,500. This will result in a taxable capital gain of $6,950[(1/2)($46,500 - $32,600)] that would be offset in full with the use of the net capital loss. This would reduce the net capital loss to $8,050 ($15,000 - $6,950). Note that in the year of death, net capital loss balances can generally be deducted against any type of income (ITA 111(2)). If the deceased has other income against which the net capital loss can be deducted, it may not be advantageous to elect out of the rollover. More information on the spouse's current and future taxable income would be needed to optimize the use of any net capital loss balance. 2. Under the general ITA 70(6) rollover provision, the ACB to the trust would be $32,600. If the FMV election is made, the spousal trust will have acquired the property at a deemed cost of $46,500. This higher amount will serve to reduce any future gain on the property when sold by the trust. Case C 1. The settlor has deemed POD equal to the FMV of $15,800. This will result in the settlor realizing a taxable capital gain of $1,200 [(1/2)($15,800 - $13,400)]. There is no rollover available for this situation. 2. The deemed ACB to the trust will also be the FMV of $15,800. 3. The property will be transferred to the children at the trust's ACB of $15,800. There will be no income tax consequences for the trust as a result. The children will be deemed to have acquired the property for the trust's ACB of $15,800.

Case D 1. The settlor has deemed POD equal to the FMV of $9,400, resulting in a taxable capital gain of $700 [(1/2)($9,400 - $8,000)]. In addition, there will be recapture of CCA of $1,750 ($8,000 - $6,250). 2. The trust acquires the property at a cost of $9,400, however, for purposes of calculating CCA and recapture, the ITA 13(7)(e) rules for non-arm’s length transactions apply and the capital cost will be $8,700 [$8,000 + (1/2)($9,400 - $8,000)]. Since all of the CCA has been recaptured there is no deemed capital cost and deemed CCA to match the tax characteristics of the property to the settlor. Case E 1. Under the ITA 73(1) rollover provision, the deemed POD to the settlor would be the property’s ACB of $23,500, resulting in no capital gain or capital loss on the transfer. 2. Under the ITA 73(1) rollover, the ACB to the trust would be the same $23,500. 3. The transfer (ITA 107(2)) will be at the ACB of the property to the trust of $23,500. There will be no income tax consequences for the trust or the spouse. The deemed POD to the trust and ACB to the spouse will be $23,500. Any income or loss of the property or capital gain or loss on the sale of the property by the spouse will be attributed to the settlor. Case F 1. The settlor has deemed POD equal to the FMV of $2,000, resulting in a terminal loss of $2,200 (UCC of $4,200 minus the lesser of capital cost of $5,600 and POD of $2,000). In this case the settlor is not affiliated with the trust since the settlor is not a majority interest beneficiary nor is the settlor affiliated with a majority interest beneficiary since parents and children are not affiliated. As a result the loss denial rule of ITA 13(21.2) does not apply. 2. Since the settlor is non-arm's length with the trust because of the fact that the settlor is related to the beneficiaries of the trust then the rules of ITA 13(7)(e) apply to restrict the tax costs of the depreciable property to the trust. As a result the capital cost of the property is deemed to be equal to the capital cost of $5,600 to the settlor and there is also deemed CCA of $3,600 ($5,600 less the FMV at the time of transfer of $2,000) which results in a UCC of $2,000. This rule ensures that any subsequent increase in the FMV of the property will potentially ensure that the $3,600 difference is subject to recapture treatment rather than being treated as a capital gain. Type: ES Topic: Trusts - six mini-cases: property transfers to & from a trust

92) In the process of planning an estate freeze, Gerald Butler intends to establish a trust with his investments. The terms of this trust will require that, on an annual basis, 50% of the income of the trust be distributed to his spouse, Inara Dickson, with the remaining 50% going to their son, Barry. Barry is 25 years old and has annual employment income of $35,000. The trust's income will consist of interest, taxable dividends, and capital gains. The terms of the trust require that all of the property of the trust be distributed on the tenth anniversary of the trust. This distribution will use the same 50:50 annual income distributions. Required: A. Identify the type of trust that is being used. B. Indicate what the trust's taxation year end date will be. C. Indicate the persons who will be required to include the income of the trust in their income. D. Explain how your answer to Part C would change if Mr. Butler establishes the trust with a nominal amount of cash. Mr. Butler then lends money to the trust to purchase the investments from him at FMV. E. Explain how the taxation of the trust income will change if Mr. Butler and Mrs. Dickson were living separate and apart because of a breakdown in their marriage.

Answer: A. The trust is an inter vivos trust in that it was established by an individual during that individual's lifetime. In less technical terms, it could also be described as a family trust in that all of the beneficiaries are family members. In addition, it could be referred to as a non-discretionary trust since there is no latitude by the trustee in deciding how much income will be distributed to beneficiaries. B. As the trust is an inter vivos trust, the taxation year end must be December 31. C. All of the income that is allocated to Inara will be subject to the income attribution rules. As a consequence, it will be included in Mr. Butler's income. This includes interest and dividends earned by the trust and capital gains realized by the trust. As Barry is over the age of 17, the attribution rules will not apply to his share of the trust's income. This means that the income that is paid or payable to him will be included in his income. As all of the trust's income is either attributed back to Mr. Butler or paid or payable to a beneficiary, the net income of the trust will be nil. D. The answer here will depend on the terms of the loan to the trust as the attribution rules for non-arm's length loans must be considered. If it is an interest free loan, the results will be the same as in Part C. That is, the income allocated to Ms. Dickson will be attributed back to Mr. Butler, while the income allocated to Barry will be included in his own income. This would also be the result if the interest rate on the loan was less than the prescribed interest rate. Alternatively, if the loan bears interest at the prescribed interest rate or higher, the income attribution rules would not apply and the trust income allocated to Ms. Dickson would be included in her income. Note that the loan would have to have bona fide repayment terms and the annual interest for the year would have to be paid within 30 days of the end of each calendar year. E. The income attribution rules do not apply to any income, loss, capital gain or capital loss that relates to the period throughout which the individuals are living separate and apart because of a breakdown of their marriage or common-law partnership (ITa 74.5(3)). Type: ES Topic: Trusts - comprehensive problem: inter vivos trusts - income attribution

93) Genevieve Marcoux is a biochemist who earns annual employment income of $250,000. In addition, she has $40,000 in annual interest income from an $800,000 term deposit she inherited. Genevieve is a single mother with two children. Her daughter, Lisa, is 21 years old and attends university in the U.S. Lisa plans to become a medical doctor and expects to attend university for another seven years. Lisa's tuition and books cost $30,000 (Canadian) each year. Genevieve's son, Philip, is one year old, and is cared for by a nanny who is paid $14,500 a year. When Philip is five years old, Genevieve intends to send him to a private school, and the fees will be comparable to the cost of a nanny. In addition, Genevieve incurs $500 each month in direct expenses for each child, totaling $12,000 a year. Genevieve does not expect either Lisa or Philip to earn any income until they complete university. Genevieve would like to contribute the term deposit to a trust for her children as the sole beneficiaries, so the family can benefit from income splitting currently, and in the future. While she supports her children fully, she does not want them to receive any cash directly from the trust until they are each 35 years old. Until then, she wants the trust to pay for their care, education, and other direct expenses. Required: Outline how a trust might be used to split income among Genevieve's family members.

Answer: A trust can be used to split income in these circumstances. However, there are complications. First, as this is an inter vivos trust, any income that remains in the trust will be subject to a federal income tax rate of 33%. Since this is the same income tax rate that applies to Genevieve, there is little point in transferring property to a trust without distributing all of the income to lower income individuals. In other words the goal is to ensure that trust net income and taxable income are nil. There is no problem with allocating trust income to Genevieve's daughter, Lisa, as she is over 17 years old. As she has no other income, there would be significant income tax savings, even if the entire $40,000 was distributed to her. However, as Philip is under 18, any distributions of trust income to him will be attributed to Genevieve. This means that there is no immediate income tax advantage associated with allocations of trust income to Philip. Note, however, there is a long run advantage in that, when the attributed earnings are reinvested, there is no attribution with respect to the compound earnings resulting from the reinvestment. These considerations make it clear that, if a trust is going to be used, all of the income should be paid, or made payable, to Lisa, at least until Philip reaches 18 years of age. If the $40,000 exceeds the amount that Genevieve wishes Lisa to receive, the amount of property transferred to the trust could be reduced. With Lisa attending university in the U.S., it is likely that she will require at least the full $40,000 to cover tuition, books, and living expenses. Given this, there would be excellent tax benefits associated with allocating the full $40,000 of trust income to Lisa, at least for the period of time that she is in university. The allocated income could be used to pay for her university costs, with the related education tax credits and her BPA eliminating most, or all, of any income tax on the $40,000. Since Genevieve does not wish Lisa to receive cash from the trust, the trust could pay for her tuition and living costs directly. The amount of education costs paid by the trust would be treated as an allocation of trust income in that same amount. Given the fact that it is not currently tax efficient to allocate income to Philip, Genevieve may wish to establish a discretionary trust. This would allow her to change the pattern of distributions once Philip reaches 18 years of age. At that time, it might be possible to use the trust to support his university education. As the trust life is expected to extend beyond 21 years (until Philip turns 35), a deemed disposition of all trust property will occur in 21 years. If the trust continues to invest in term deposits or similar investments, the deemed disposition will not be onerous since the FMV of these investments generally equals their tax cost. However, if the trust invests in securities that could have unrealized capital gains, this rule would require recognition of these gains. Standard tax planning to avoid the 21 year dispositions are to make capital distributions of property immediately prior to the 21 year anniversary date. Type: ES Topic: Trusts - comprehensive problem: tax planning with family trusts

94) Several years ago, Victoria Firth contributed some of her investments to an inter vivos trust in favour of her two adult children who were the only beneficiaries. The taxation year of the trust is December 31. The terms of the trust specify that her son Mark is to receive 30% of all of the income of the trust, while her son Steven is to receive 40%. Mark is 22 years old and Steven is 28. Both children are single and have no income other than income allocated to them by the trust. The undistributed income is to accumulate within the trust, to be paid out to the children at the time of Ms. Firth's death. The trust income for the 2022 taxation year, are as follows: Interest income on GICs Non-Eligible Dividends Rental Income

$ 96,450 326,940 43,680

In 2022, the rental property was sold. The property consisted of an apartment building and the land on which it was located, all of which had been contributed to the trust when it was first established. The relevant information related to the disposition is as follows:

POD UCC Capital Cost/ACB

Building $1,500,000 1,253,000 1,400,000

Land $625,000 N/A 375,000

This is the first disposition of capital property by the trust. Required: A. Calculate the 2022 net income and taxable income of the trust, Mark Firth, and Steven Firth. B. Calculate the trust's 2022 federal income tax payable.

Answer: Part A - Calculation of 2022 Net Income & Taxable Income All amounts are allocated 30% to Mark, 40% to Steven, with the remaining 30% included in the income of the trust. The net income and taxable income of the two beneficiaries and the trust would be calculated as follows:

Interest on GICs ($96,450) Non-Eligible Dividends ($326,940) Gross Up 15% ($49,041) Taxable Capital Gain on Land [(1/2)($625,000 - $375,000)] Taxable Capital Gain on Building [(1/2)($1,500,000 - $1,400,000)] Rental Income (Note) 2022 Net Income & Taxable Income

Mark (30%) $ 28,935 98,082 14,712

Steven (40%) $ 38,580 130,776 19,616

Trust (30%) $ 28,935 98,082 14,712

37,500

50,000

37,500

15,000 57,204 $251,433

20,000 76,272 $335,244

15,000 57,204 $251,433

Note - The rental income, including the recapture of CCA, can be calculated as follows: Income from Rental Property Recapture of CCA: Capital Cost of The Building UCC Rental Income

$ 43,680 $1,400,000 ( 1,253,000)

147,000 $190,680

Part B - 2022 Federal income Tax Payable - Trust Federal income Tax before Credits [(33%)($251,433)] Federal Dividend Tax Credit [(9/13)($14,712)] 2022 Federal Income Tax Payable

$82,973 ( 10,185) $72,788

As this trust is an inter vivos trust, all of its income is subject to federal income tax rate of 33%. Type: ES Topic: Trusts - comprehensive problem: trust income & allocations to beneficiaries

95) Mr. Hyde died on January 1, 2022. His will specifies that the property in his estate is to be transferred to a testamentary trust. Mr. Hyde received all of his investment reporting online and, because no-one knew his passwords or where his investments were held, his executor experienced great difficulties in trying to locate them all. At December 31, 2022, the transfer has not yet been implemented. The executor will file a T3 income tax return for the 2022 taxation year period ending December 31 designating Mr. Hyde's estate as a Graduated Rate Estate (GRE). The beneficiaries of the GRE are Mrs. Hyde, an architect earning more than $250,000 per year, and her son, Ross, an unemployed actor with no reliable source of income. Ignore the fact that one or both of these beneficiaries could be subject to the TOSI. Mr. Hyde's will made a provision for income distributions to be made to beneficiaries while his estate is being administered by an executor. While the provision allows for distributions to either beneficiary, the amounts and timing are at the discretion of the executor. For the 2022 taxation year, the GRE had the following income: Interest income Eligible Dividends Total Income

$24,000 29,000 $53,000

Required: A. With a view to minimizing total federal income tax payable of the GRE and the beneficiaries, determine the amounts and type of income that should be distributed to each beneficiary for 2022. B. Using the allocations you determined in Part A, calculate the federal income tax payable for the GRE and Ross for the 2022 taxation year. In addition, indicate any additional income tax that would be paid by Mrs. Hyde for 2022 as the result of GRE distributions.

Answer: Part A - Amounts & Type of Income to be Distributed Relative Tax Status In attempting to minimize the federal income tax payable to the GRE and the beneficiaries, the relative tax status of the persons is relevant. Mrs. Hyde - As Mrs. Hyde has substantial amounts of other income, any income paid to her by the GRE will be subject to the maximum federal income tax rate of 33%. Ross Hyde - As Ross has no other income in 2022, any income paid to him is likely to be subject to federal income tax rates of 15%. GRE - As the GRE status is available for 2022, any income retained by the GRE will be subject to the same graduated federal income tax rates that apply to individuals starting at the lowest federal income tax rate of 15%. We would note that the GRE status will end on December 31, 2024, even if the estate has not been fully administered. When this occurs any trust income subsequent to that time will be subject to the maximum federal income tax rate of 33%. Dividend Income With respect to eligible dividends, the gross up and tax credit mechanism provide significantly reduced income tax rates for all individuals. The relevant information for the GRE and the two beneficiaries is as follows: GRE - As the trust has GRE status in 2022, it can receive up to approximately $35,000 of eligible dividends without paying any federal income tax. Ross - As Ross has a BPA of $2,160 [(15%)($14,398)], the amount of tax free eligible dividends that he can receive increases to almost $63,000. Mrs. Hyde - As Mrs. Hyde already has income in excess of $250,000, any eligible dividends that she receives will be subject to a federal income tax rate of 24.8% [(33%)(138%) - (6/11)(38%)]. Interest Income While Ross could receive up to $14,398 (the BPA amount) of interest income on a tax free basis, any additional amounts would be subject to a federal income tax rate of 15%. This 15% rate would also be available to the GRE on any unallocated trust income. This is well below the 33% federal income tax rate that would apply to interest income paid to Mrs. Hyde from the GRE. Conclusion For both interest and dividends, the income tax rate for Mrs. Hyde is much higher than that the rate that would apply to either Ross or the GRE. Given this, if income tax minimization is the objective, no distributions should be made to Mrs. Hyde. As her other income is likely more than sufficient to meet her needs, this decision should not cause a financial burden for her. With respect to Ross and the GRE, either person could receive all of the dividends without paying any federal income tax. However, because Ross has a BPA available, he could receive, in addition to the dividends, a larger amount of the interest while still not paying any federal income tax. This would suggest distributing all of the dividends to Ross, along with sufficient interest to reduce his federal income tax payable to nil. Any remaining interest would be left in the GRE subject to the minimum federal income tax rate of 15%. The after-tax funds in the GRE can be distributed tax free to either beneficiary.

Part B - Federal income Tax Payable Ross If Ross receives all of the dividends, his federal dividend tax credit would be $6,011 [(6/11)(38%)($29,000)]. When combined with his BPA of $2,160, he would have total credits of $8,171 ($6,011 + $2,160). For his federal income tax payable before credits to be equal to this amount, his taxable income would have to be $53,322. This amount is represented by X in the following calculation: $8,171 = $7,530 + [(20.5%)(X - $50,197)] $8,171 = $7,530 + [(20.5%)(X)] - $10,290 $10,931 = [(20.5%)(X)] X = $53,322 Subtracting the grossed up dividends of $40,020 [(138%)($29,000)] from this required taxable income amount leaves $13,302 ($53,322 - $40,020) to be distributed to Ross as interest. Ross' 2022 Federal income Tax Payable would be nil as shown in the following calculation. Tax on first $50,197 Tax on next $3,125 ($53,322 - $50,197)] at 20.5% Tax Before Credits BPA [(15%)($14,398)] Dividend Tax Credit [(6/11)(38%)($29,000)] 2022 Federal Income Tax Payable

$ 7,530 641 $8,171 ( 2,160) ( 6,011) Nil

Note that the Federal income Tax Payable is exactly nil, with no unused credits remaining. GRE With all of the taxable dividends and $13,302 of the interest income allocated to Ross, this would leave $10,698 ($24,000 - $13,302) of the interest to be subject to federal income tax to the GRE of $1,605 [(15%)($10,698)]. Mrs. Hyde As no distribution will be made to Mrs. Hyde, her 2022 Federal Income Tax Payable will be unchanged by the existence of the GRE. Type: ES Topic: Trusts - comprehensive problem: graduated rate estates (GRE)

96) Last year, Mr. Jerry Hall established an inter vivos trust for his 22 year old son, Mark Hall. The trust agreement leaves to the discretion of the trustees the portion of each type of the trust's income that will be distributed each year. During the 2022 taxation year ending December 31, the following amounts of income were earned by the trust: Interest from Canadian sources Capital Gains Eligible Dividends Rental Income 2022 Trust Income before Allocations

$ 18,500 43,000 32,000 19,500 $113,000

In 2022, the trustees allocated all of the interest income to Mark, as well as 80% of the capital gains, taxable dividends, and rental income. Ignore the possibility that amounts received by Mark could be subject to the TOSI. Mark is a full time student for 12 months of 2022 and his tuition for the year was $12,500. He has no other income for 2022. Required: Calculate 2022 net income, taxable income and federal income tax payable for both the trust and for Mark. In addition, comment on whether it was advantageous for the trustees to leave 20% of the capital gains, taxable dividends, and rental income in the trust.

Answer: Calculations Taxable Income for the trust and for Mark would be calculated as follows: Trust Nil

Interest Income Taxable Capital Gains: [($43,000)(1/2)(20%)] [($43,000)(1/2)(80%)] Eligible Dividends: [($32,000)(20%)] [($32,000)(80%)] Gross Up on Eligible Dividends: [($32,000)(38%)(20%)] [($32,000)(38%)(80%)] Rental Income: [($19,500)(20%)] [($19,500)(80%)] 2022 Net Income & Taxable Income

$ 4,300

6,400

Mark $18,500

17,200

25,600

2,432

3,900 $17,032

9,728

15,600 $86,628

The 2022 federal income tax payable for the trust would be calculated as follows: Taxable Income Federal Income Tax Rate Federal Income Tax Payable before Dividend Tax Credit Dividend Tax Credit [(6/11)($2,432)] 2022 Federal Income Tax Payable — Trust

$17,032 33% $ 5,621 ( 1,327) $ 4,294

The 2022 Federal income Tax Payable for Mark would be calculated as follows: Tax on first $50,197 Tax on next $36,431 ($86,628 - $50,197) at 20.5% Federal Income Tax Before Credits Tax Credits: Personal Tuition

$ 7,530 7,468 $14,998 ($14,398) ( 12,500) ($26,898) 15%

Rate Dividend Tax Credit [(6/11)($9,728)] 2022 Federal Income Tax Payable — Mark

( 4,035) ( 5,306) $ 5,657

Comment The $17,032 of income that was retained in the trust was subject to a federal income tax rate of 33%, before consideration of the dividend tax credit. If the income had been distributed to Mark, it would have been subject to a federal income tax rate of only 20.5%, before consideration of the dividend tax credit, resulting in a $2,129 [($17,032)(33% - 20.5%)] reduction in federal income tax payable. Based on income tax considerations only, retention of the income in the trust was not advantageous. Type: ES Topic: Trusts - comprehensive problem: trust income & allocations to beneficiaries

97) After a long illness, Marlene Scopal passed away on April 4, 2022. Her will requires that all of the property of her estate be transferred to a testamentary trust with her two children, Marilyn, her 32 year old daughter and Murphy, her 24 year old son as beneficiaries. However, because of complications in making the transfer to the trust, on December 31, 2022, the estate is still under the administration of the executor. The executor files a T3 income tax return, designating Marlene's estate as a Graduated Rate Estate (GRE) for the 2022 taxation year ending on December 31. While the executor could have chosen a non-calendar taxation year, it was decided to use December 31 for convenience. The information on the property owned by Marlene at the time of her death is as follows:

Public Company Shares Government of Canada Bonds Rental Property Land Building (Cost = $1,250,000)

Tax Cost ACB & UCC $1,856,000 562,000

FMV April 4, 2022 $2,342,000 562,000

865,000 932,000

989,000 1,560,000

The tax costs of all property except the building are the ACB. The UCC is shown for the building. As Marlene had anticipated difficulty in settling the estate her will directed that any income that accrues to her estate prior to the settlement of the estate should be distributed 35% to Marilyn and 45% to Murphy, with the remaining 20% subject to income tax by the GRE. Between April 4, 2022 and December 31, 2022, the GRE had the following income: Eligible Dividends Interest income on Bonds Rental Income: Rental Revenues Rental Expenses other than CCA CCA Claimed 2022 Total Estate Income

$123,670 22,490 $192,460 ( 49,450) ( 42,100)

100,910 $247,070

Required: A. Determine the increase in Marlene's 2022 net income as a result of her death. B. For the taxation year ending on December 31, 2022, determine the net income and taxable income for the GRE and for each beneficiary. C. Calculate the 2022 federal income tax payable for the GRE.

Answer: Part A - 2022 Increase in Net Income As a consequence of death, there would be a deemed disposition of capital property, resulting in the following increase in net income: Capital Gain on Public Company Shares ($2,342,000 - $1,856,000) Capital Gain on Government of Canada Bonds Capital Gain on Land ($989,000 - $865,000) Capital Gain on Building ($1,560,000 - $1,250,000) Total Capital Gains Inclusion Rate Taxable Capital Gains Recapture on Building ($1,250,000 - $932,000) 2022 Increase in Net Income

$486,000 Nil 124,000 310,000 $920,000 1/2 $460,000 318,000 $ 778,000

Note - The ITA 13(7)(e) provision which limits the capital cost of depreciable property for CCA purposes to the transferor's cost, plus one-half of any capital gain that results from the transfer, does not apply to non-arm's length transfers of depreciable property on death. Part B - 2022 Taxable Income - The GRE & Beneficiaries The allocations required by the will are as follows:

Eligible Dividends Received ($123,670) Gross Up of 38% ($46,995) Interest on Bonds ($22,490) Rental Income ($100,910) 2022 Net Income and Taxable Income

Marilyn (35%) Murphy (45%) $ 43,284 16,448 7,872 35,319 $102,923

$ 55,652 21,148 10,121 45,410 $132,331

GRE (20%) $24,734 9,399 4,498 20,182 $58,813

Part C - 2022 Federal Income Tax Payable - GRE Income that remains in a GRE is subject to the same graduated federal income tax rates that apply to individuals. However, the GRE would not be able to use personal tax credits under ITA 118 to reduce the amount of federal income tax payable. 2022 Federal Income Tax Payable for the GRE would be calculated as follows: Federal Income Tax Payable on first $50,197 Federal Income Tax Payable on next $8,616 ($58,813 - $50,197) at 20.5% Federal Tax Payable Before Credits Federal Dividend Tax Credit [(6/11)($9,399)] 2022 Federal Income Tax Payable - GRE

$7,530

Type: ES Topic: Trusts - comprehensive problem: graduated rate estates (GRE)

1,766 $9,296 ( 5,127) $4,169

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 20 International Issues in Taxation 20.1 Online Exercises 1) List two objectives that are served by income tax treaties. Answer: • Prevention of double taxation. • Facilitating cross-border trade. • Implementing a proper division of cross-border revenues. • Provision of an information-sharing mechanism. Type: ES Topic: International - income tax treaties

2) Indicate the types of income on which non-residents are subject to Part I tax. Answer: Non-residents are subject to Canadian Part I taxes on: • employment income earned in Canada; • income from a business carried on in Canada; and • gains resulting from dispositions of Taxable Canadian Property. Type: ES Topic: International - non-resident liability for Part I tax

3) In general, employment income earned in Canada by a non-resident is subject to Part I tax. However, the Canada/U.S. income tax treaty provides exceptions to this general rule. Describe these exceptions. Answer: $10,000 Rule - Under this rule if, during a calendar year, a U.S. resident earns employment income in Canada that is $10,000 or less in Canadian dollars, then the income is taxable only in the U.S. 183 Day Rule - This rule exempts Canadian source employment income from Canadian taxation, provided it is earned by a U.S. resident who was physically present in Canada for no more than 183 days during any twelve month period commencing or ending in the calendar year. This exemption is conditional on employment income not being paid by an employer with a permanent establishment in Canada who would be able to deduct the amount paid from their Canadian income. Stated alternatively, if the employment income exceeds $10,000 and is deductible in Canada, it will be subject to Canadian income tax under Part I, even if the employee is present in Canada for less than 183 days during the year. Type: ES Topic: International - non-resident employment in Canada (Canada/U.S. treaty)

4) The Canada/U.S. income tax treaty does not interfere with Canada's right to subject to Canadian income tax on business income earned in Canada by a U.S. resident through a "permanent establishment (PE)". The treaty defines a PE in an expansive manner adding that, in some situations, an individual can be considered to be a PE for the purposes of this rule. Describe these situations. Answer: • An individual who acts on behalf of a non-resident business and who is authorized to conclude contracts in the name of that business is considered a PE. • An individual who acts on behalf of a business and meets both a physical presence test (183 days or more in any 12 month period beginning or ending in the year) and a gross revenue test (that more than 50% of the gross active business revenues of the U.S. business are from services performed by that individual during the period the individual is in Canada), is considered a PE. Type: ES Topic: International - permanent establishments (PE)

5) Provide two examples of the type of income earned by a non-resident which would be potentially subject to Part XIII tax. Answer: Income from: • interest • royalties • rents • dividends • pension benefits Type: ES Topic: International - Part XIII tax on non-residents

6) A non-resident individual owns a rental property in Canada. While the rental income would be subject to Part XIII tax, as an alternative, the non-resident can elect to pay taxes under Part I instead, rather than Part XIII. Why might a non-resident make that election? Answer: If the non-resident pays income tax under Part XIII, the income tax will (subject to a treaty rate reduction) generally be charged at a flat rate of 25% on gross rents. Alternatively, if the non-resident elects to be subject to income tax under Part I the income tax will only be charged on a source basis meaning gross rents minus all relevant expenses. The election to apply Part I is a separate income tax return that applies graduated income tax rates, therefore in 2022 the first $50,197 of rental income will only be charged 15% plus 48% of that amount for a combined rate of 22.05% [(15%)(1.48)]. However the Part I election precludes the claiming of any taxable income deductions and the claiming of any personal tax credits in the determination of the ultimate Part I liability. Type: ES Topic: International - rental income to non-residents (ITA 216)

7) When an individual becomes a resident of Canada, there is a deemed disposition/reacquisition at FMV of most of their capital property. Briefly explain why this is an important provision for most individuals. Answer: An individual who becomes a resident of Canada may own capital property on which there are accrued but unrealized capital gains. If there was no deemed disposition/reacquisition at the time the individual becomes a resident of Canada, a subsequent sale of property could result in income tax being charged on on gains that accrued prior to the individual becoming a resident of Canada. The result could be that that same gain would be potentially subject to income tax in Canada as well as the individual's former resident country. Type: ES Topic: International - immigration & emigration

8) When a person ceases to be a resident of Canada, there is no deemed disposition/reacquisition of their Canadian real estate. However, ITA 128.1(4)(d) allows a taxpayer to elect to have a deemed disposition/reacquisition of real estate at the time of their departure. Why would an individual wish to make this election? Briefly explain your conclusion. Answer: The most common reason for making this election would be a situation in which the individual has capital losses. This could be either net capital loss balances, or current year losses including those resulting from the deemed dispositions on ceasing to be a resident of Canada. In this situation, the taxpayer may wish to realize a capital gain on the real estate that can be used to offset these other losses. Alternatively, if the FMV of the real estate is less than its cost, the individual could make the election in order to use the capital loss on the required deemed disposition against capital gains on other property dispositions. Type: ES Topic: International - immigration & emigration

9) An individual ceases to be a resident of Canada (e.g. emigrates ) at a time when the individual owns shares in a private corporation with a FMV of $500,000 and an ACB of $300,000. Two years later, the individual returns to Canada and becomes a resident once again. The individual still owns the shares. What are the income tax consequences of the emigration (ceasing to be resident) from Canada and the immigration (becoming a resident) back to Canada. Answer: There would be a deemed disposition of the shares at the time of emigration, resulting in a taxable capital gain of $100,000 [(1/2)($500,000 - $300,000)]. On immigration, if no election is made, the shares will have an ACB of $500,000. There is however an election available to reverse the original deemed disposition that resulted from ceasing to be a resident of Canada. If the individual makes the election, the taxable capital gain would be reversed and any income taxes paid would be refunded. The ACB would be changed to the original $300,000. Type: ES Topic: International - immigration & emigration

10) John Barth has $20,000 of foreign business income, from which the foreign country has withheld $2,000 in income tax. Briefly describe the treatment of the withholding amount in determining John Barth's Canadian income tax payable. Answer: John would include the $20,000 in foreign business income in his net income and taxable income. The $2,000 foreign income tax that was withheld is eligible for a foreign business tax credit to be applied to reduce his Canadian income tax liability. Type: ES Topic: International - foreign business income [of Canadian residents]

11) Explain why dividends received by individuals from non-resident corporations do not usually receive the same gross up and tax credit treatment that applies to taxable dividends received from taxable Canadian corporations. Answer: The answer lies in the integration system for corporate income tax in Canada. Integration requires that there be Canadian income tax paid by the corporation when income is earned by the corporation and that there also be income tax paid by Canadian resident individual shareholders of that corporation when taxable dividends are paid to them by the corporation. The individuals receive credit for the Canadian corporate income taxes paid which requires the workings of the integration system which function on the basis of a gross-up and dividend tax credit. These Canadian integration features are generally absent with respect to foreign corporations. Type: ES Topic: International - foreign dividends received by a Canadian resident individual

12) Summarize the taxation of the income of controlled foreign affiliates (CFA) and non-controlled foreign affiliates (FA). Answer: Controlled Foreign Affiliates (CFA) - Whether the resident Canadian shareholder is an individual or a corporation, certain investment income referred to as Foreign Accrual Property Income (FAPI) that is earned by a CFA of the resident Canadian shareholder must be included in income on an accrual basis rather than a received basis. When these FAPI amounts are subsequently paid out as dividends they will be included in the income of the Canadian shareholder but will be eligible for an offsetting deduction to recognize that the amounts have already been included in the income of the shareholder in a previous year. If the dividend is paid from non-FAPI sources of income, it will be included in income when received as a dividend, but, in the case of Canadian corporate shareholders, may be completely or partially offset by the ITA 113(1) taxable income deduction depending upon whether Canada has entered into an income tax treaty or Tax Exchange Information Agreement (TEIA) with the foreign country. Canadian individual shareholders would obtain partial relief through the foreign tax credit system only, since they are not entitled to the ITA 113(1) deduction. This generally encourages individuals to hold shares in foreign corporations through a resident Canadian corporation. Foreign Affiliates (FA) - The income of FAs that are not CFAs will not be accrued. Rather, it is included in income when dividends are received from the FA. If the dividend is paid from active business income earned in a country with which Canada has an income tax treaty or TEIA, it will be offset by the ITA 113(1) taxable income deduction. In addition, dividends paid out of the non-taxable portion of some types of capital gains, or the full amount of capital gains resulting from dispositions of property used in an active business in a country with which Canada has an income tax treaty or TEIA, are also deductible under ITA 113(1). When the ITA 113(1) deduction is available, no foreign tax credit can be claimed. Alternatively, i f the dividend is paid out of passive income, or earned in a non-treaty/non-TEIA country, it will be included in income and only be eligible for deductions under ITA 113 to the extent income taxes or dividend withholding taxes have been paid on the amounts distributed. In this latter case ITA 113(1) acts as a substitute for the foreign tax credit rules of ITA 126. Type: ES Topic: International - foreign affiliates (FA) & controlled foreign affiliates (CFA)

13) Clarkson Equipment Ltd. (the "Canadian company") is a manufacturer of construction equipment that is used throughout the world. The factory is located in Windsor, Ontario and the majority of its manufacturing operations take place at that location. In the current year, the Company negotiated a very significant contract with an African country with which Canada has an income tax treaty. The contract requires not only the provision of the Company's equipment, but instruction and training of the operators as well. Given the magnitude of this contract, Clarkson is considering establishing a subsidiary in the African country to carry out the terms of the agreement. Compare the Canadian income tax treatment of income earned if the contract was with the Canadian company or with a non-resident subsidiary of the Canadian company. Answer: If the Canadian company undertakes to deliver the goods and provide the services required in the contract, the business profits will be included in the income of the Canadian company subject to full Canadian corporate income tax rates. However, tax credits for any foreign income taxes paid on that income would be available to the Canadian company. If a separate subsidiary is incorporated in the African country, the subsidiary can purchase the required manufactured items from Clarkson and potentially resell them at a profit. Additional profits could arise as a result of providing training services. Any profits will be active business income and will not be deemed Foreign Accrual Property Income (FAPI). This means that there will be no Canadian taxation until such time as the earnings are repatriated into Canada (paid as dividends). If the corporate income tax rates in the African country are lower than Canadian rates, forming the subsidiary may be advantageous. Type: ES Topic: International - carrying on business through a foreign subsidiary (tax planning)

14) If there is a conflict between the ITA and the Canada/U.S. income tax treaty, the provisions of the income tax treaty must be used. Answer: TRUE Type: TF Topic: International - income tax treaties

15) If a non-resident individual has Part I income tax payable and is required to file a Canadian income tax return, the individual will not be eligible for any of the personal tax credits. Answer: FALSE Explanation: Regardless of the amount of Canadian income reported, some credits will be available to non-residents filing a Canadian income tax return. Examples include EI and CPP tax credits, and the charitable donations tax credit. Type: TF Topic: International - non-resident individuals & personal tax credits

16) The Canada/U.S. income tax treaty permits Canada to tax the business income of U.S. residents, provided that the business is operated in Canada through a permanent establishment (PE). Answer: TRUE Type: TF Topic: International - income tax treaties

17) If a U.S. resident earns less than $10,000 in Canadian employment income, the employment income will not be subject to Part I income tax even if the income is paid by a Canadian business that deducts the amounts. Answer: TRUE Type: TF Topic: International - income tax treaties

18) If a non-resident is required to pay Part XIII tax in Canada, they will have to file a Canadian income tax return. Answer: FALSE Explanation: Non-residents are not required to file a Canadian tax return for income that is subject to Part XIII tax. If excess amounts have been withheld form NR7-R will be filed to recover the excess. Form NR7-R is not an income tax return. Type: TF Topic: International - Canadian filing requirements for non-residents

19) If a U.S. resident individual receives Canadian interest on participating debt, the individual will be required to pay Part XIII tax on the amounts received. Answer: FALSE Explanation: The Canada/U.S. income tax treaty states that interest arising in a contracting state (Canada) and beneficially owned by a resident of the other contracting state (U.S.) may be taxed only in that other state (U.S.). Technically Part XIII would apply however the income tax treaty with the U.S. would override this result. Type: TF Topic: International - interest payments to non-residents

20) If a Canadian resident individual emigrates to the U.S. (ceases to be a resident of Canada), there will be a deemed disposition at FMV of any property in the individual's brokerage accounts and their RRSP. Answer: FALSE Explanation: While there will be a deemed disposition of the properties in brokerage accounts, as an "excluded right", RRSPs are exempt from the deemed disposition rule. Type: TF Topic: International - immigration & emigration

21) In general, if a non-resident individual earns employment income in Canada, the individual will be subject to Canadian income tax on that income. Answer: TRUE Explanation: However, the Canada/U.S. income tax treaty does provide two exceptions to that rule. Type: TF Topic: International - non-resident employment in Canada (Canada/U.S. treaty)

22) In general, if a non-resident earns business income from mining in Canada, the profits are not subject to Canadian income tax. Answer: FALSE Explanation: The income from a mine in Canada owned by a non-resident would be considered the carrying on of a business in Canada through a permanent establishment by that non-resident and, as a result, Part I income tax would apply. Type: TF Topic: International - non-resident carrying on business in Canada

23) Under the Canada/U.S. income tax treaty, if a Canadian resident earns employment income in the U.S. that is $10,000 or less in U.S. dollars, then the income is taxable only in Canada. Answer: TRUE Type: TF Topic: International - income tax treaties

24) If a U.S. corporation owns a storage facility in Canada, this will be considered a permanent establishment (PE) for purposes of determining which country has the right to subject the business income attributable to that PE to Canadian income tax. Answer: FALSE Explanation: Such facilities are not considered to be PEs under the Canada/U.S. income tax treaty. Type: TF Topic: International - permanent establishments (PE)

25) Under ITA 2(3), gains resulting from the disposition of any capital property in Canada by a nonresident will be subject to Part I income tax. Answer: FALSE Explanation: Only gains on dispositions of "Taxable Canadian Property" fall under ITA 2(3). Type: TF Topic: International - non-resident liability for Part I tax

26) A non-resident earning rental income on property in Canada can either pay Part XIII tax or, alternatively, elect to be subject to Part I instead. Answer: TRUE Type: TF Topic: International - rental income to non-residents (ITA 216)

27) All Canadian interest that is earned by non-residents is subject to Part XIII tax. Answer: FALSE Explanation: Only interest on participating debt and exempt interest paid to non-arms' length nonresidents is subject to Part XIII tax subject to any relevant income tax treaty. Type: TF Topic: International - interest payments to non-residents

28) While Canadian dividends paid to U.S. residents are subject to Part XIII tax, the Canada/U.S. income tax treaty serves to reduce this rate from the statutory rate of 25%. Answer: TRUE Explanation: The rate applicable to U.S. corporate residents is reduced to 5% when the U.S. corporations owns 10% or more of the voting shares, or to 15% in other situations. Type: TF Topic: International - dividends paid to non-residents (U.S. income tax treaty)

29) An entity would be a controlled foreign affiliate (CFA) of a Canadian taxpayer if it is a foreign affiliate (FA) of the Canadian taxpayer that would, at that time, be controlled by the taxpayer if the taxpayer owned all of the shares of the capital stock of the FA that are owned at that time by persons who do not deal at arm's length with the taxpayer. Answer: TRUE Type: TF Topic: International - foreign affiliates (FA) & controlled foreign affiliates (CFA)

30) Which of the following businesses will be subject to Part I tax in Canada? A) A U.S. company that receives dividends from its Canadian subsidiary. B) A U.S. company that stores its inventory in a Canadian warehouse. C) A multinational manufacturing business that has a factory in Canada. D) A U.S. company that has a temporary office in Canada while searching for a site for its planned Canadian manufacturing plant. Answer: C Explanation: C) A multinational manufacturing business that has a factory in Canada. Type: MC Topic: International - non-resident liability for Part I tax

31) Kenichi Takahawa is a resident of the United States, living in Detroit, Michigan. He works and earns income for the year as follows: Employment income in Canada (Windsor, Ontario) Business income in Canada Interest income on bank account in Canada Capital gain from disposition of vacant land in Detroit

$50,000 35,000 3,000 7,000

What is his net income for Part I purposes? A) $50,000 B) $85,000 C) $88,000 D) $91,500 Answer: B Explanation: A) $50,000 [employment income only] B) $85,000 [$50,000 + $35,000] C) $88,000 [$50,000 + $35,000 + $3,000] D) $91,500 [$50,000 + $35,000 + $3,000 + (1/2)($7,000)] Type: MC Topic: International - non-resident liability for Part I tax

32) Fahad Lodhi is a resident of the United States, living in Port Huron, Michigan. He works and earns income in Canada all year as follows: Employment income in Canada (Sarnia, Ontario) Business income in Canada Interest income on bank account in Canada Capital gain from disposition of vacant land in Canada

$ 9,500 30,000 500 10,000

What is his Canadian net income under Part I? A) $30,000 B) $35,000 C) $45,000 D) $44,500 Answer: B Explanation: A) $30,000 [business income only] B) $35,000 [$30,000 + (1/2)($10,000)]. The employment income is exempt from taxation in Canada as it is less than $10,000. C) $45,000 [ $9,500 + $30,000 + $500 + (1/2)($10,000)] D) $44,500 [ $9,500 + $30,000 + (1/2)($10,000)] Type: MC Topic: International - non-resident liability for Part I tax

33) Under ITA 115(2) certain non-resident individuals will be deemed to be employed in Canada even when they are not working in Canada. Which of the following non-resident individuals would be deemed to be employed in Canada? A) Marcel is employed by a Canadian resident company in a foreign country. The income tax treaty with the foreign country subjects his employment income to income tax in that country. B) Anita was previously a Canadian resident. She is currently employed by a non-resident company in a foreign country, but receives pension income from a Canadian resident company. C) Johann receives a signing bonus from a non-resident company. His services will be provided in Canada. D) Helen is employed by a Canadian resident company in a foreign country. The income tax treaty with the foreign country exempts her employment income from income tax. Answer: D Explanation: D) Helen is employed by a Canadian resident company in a foreign country. The income tax treaty with the foreign country exempts her employment income from income tax. Type: MC Topic: International - non-resident liability for Part I tax

34) Merivale is a U.S. corporation with operations throughout the United States. In addition to its U.S. operations, it has a sales office in Calgary. Canadian employees who work out of this sales office take orders for the company's products. The orders are filled from a warehouse in Montana. A) Merivale is not subject to Canadian income tax because it is not incorporated in Canada. B) Merivale is not subject to Canadian income tax because the orders are not filled from a Canadian warehouse. C) Merivale is not subject to Canadian income tax because the mind and management of the company is not in Canada. D) Merivale is subject to Canadian income tax on the income that is attributable to the Calgary office. Answer: D Explanation: D) Merivale is subject to Canadian income tax on the income that is attributable to the Calgary office. Type: MC Topic: International - non-resident liability for Part I tax

35) In which of the following cases, where a U.S. resident disposes of a property, is the gain taxable in Canada? A) Joelle Elfassy sells 100 shares in a widely held Canadian public company that has over 10 million shares issued. B) Ku Jung owns a rental property in downtown Vancouver. Ku has owned the property for 3 years and has never lived in it. The property is sold for a substantial gain. C) Danyal Sigindere incorporated a private company in Canada 10 years ago. The company rents space and operates a retail clothing store. Danyal sells the shares for a gain of $1,000. D) Ariella Incorporated sells its list of Canadian customers to a Canadian business. Answer: B Explanation: B) Ku Jung owns a rental property in downtown Vancouver. Ku has owned the property for 3 years and has never lived in it. The property is sold for a substantial gain. Type: MC Topic: International - taxable canadian property

36) In the Canada/U.S. income tax treaty, the definition of a permanent establishment does not include: A) an oil well. B) a storage facility. C) a factory. D) a mine. Answer: B Explanation: B) a storage facility Type: MC Topic: International - permanent establishments (PE)

37) Darren Brock, a non-resident, borrows $422,000 and invests it in a Canadian rental property which generates gross annual rents of $72,000. The interest expense on the loan is $6,000, and other expenses of operating the property, including maximum CCA, total $20,000. Which of the following sets of numbers represents first, the net income and taxable income to Mr. Brock if he reports his rental income under Part I, and second, the base upon which Part XIII would be calculated? A) $72,000; $46,000 B) $46,000; $52,000 C) $72,000; $66,000 D) $46,000; $72,000 Answer: D Explanation: D) $46,000 ($72,000 - $6,000 - $20,000); $72,000 Type: MC Topic: International - rental income to non-residents (ITA 216)

38) Mike O'Shea, a resident of Ireland, has owned a Canadian rental property for several years. The property is located in Alberta and, in the current year, it was sold for an amount that resulted in a significant capital gain. Which of the following statements is correct with respect to the capital gain? A) Mr. O'Shea is not a Canadian resident and, as a consequence, will not be taxed on the capital gain. B) Mr.O'Shea will be assessed for a withholding tax under Part XIII. C) Mr. O'Shea will be subject to Part I tax on the capital gain. D) Mr. O'Shea will be subject to both Part I tax as well as Part XIII tax. Answer: C Explanation: C) Mr. O'Shea will be subject to Part I tax on capital gains on the disposition of taxable Canadian property which would include real property situated in Canada. Type: MC Topic: International - non-resident liability for Part I tax

39) Many types of income are subject to withholding tax under Part XIII. Which of the following would NOT be subject to Part XIII tax when paid to a non-resident individual? Ignore any income tax treaty provisions that might be applicable. A) A withdrawal from a RRIF by a former resident of Canada. B) A capital dividend from a CCPC. C) Interest on Government of Canada bonds. D) A taxable dividend from a CCPC. Answer: C Explanation: C) Interest on Government of Canada bonds. Type: MC Topic: International - Part XIII tax on non-residents

40) Certain types of Canadian income earned by non-residents are not subject to Part I tax. Which of the following types of income would NOT be subject to Part I tax? Ignore any income tax treaty implications that might be applicable. A) Capital gains from the sale of Canadian real estate. B) Interest on a GIC issued by a Canadian bank. C) Income resulting from the exercise of employee stock options of a Canadian public company. D) Recapture resulting from the sale of a Canadian business property. Answer: B Explanation: B) Interest on a GIC issued by a Canadian bank. Type: MC Topic: International - non-resident liability for Part I tax

41) A non-resident individual owns a rental property in Canada. Which of the following statements is correct? A) The gross rents are subject to withholding under Part XIII however, the taxpayer can elect to file a Canadian income tax return and pay Part I income tax on the rental profits. B) The rental income is subject to withholding under Part XIII. However, the taxpayer can elect to file a Canadian income tax return and pay Part I tax on the gross rents. C) The taxpayer must file a Canadian income tax return which includes the rental profits. D) The rental profits are subject to withholding under Part XIII. Answer: A Explanation: A) The gross rents are subject to withholding under Part XIII however, the taxpayer can elect to file a Canadian income tax return and pay Part I income tax on the rental profits. Type: MC Topic: International - rental income to non-residents (ITA 216)

42) Which type of income is NOT subject to Canadian income tax to a non-resident under either Part I or Part XIII? A) Rental income from a property situated in Canada. B) Pension benefits from a Canadian employer. C) Dividend income from a Canadian corporation. D) Interest paid on a savings account at a Canadian bank branch located in Canada. Answer: D Explanation: D) Interest paid on a savings account at a Canadian bank branch located in Canada Type: MC Topic: International - Part I & Part XIII tax on non-residents

43) In which of the following cases would the interest payment made to a non-resident be subject to Part XIII withholding tax? A) Ling, a resident of a country that does not have an income tax treaty with Canada, earns interest of $5,000 from a Canadian term deposit. B) Jin, a resident of a country that does not have an income tax treaty with Canada, earns interest of $15,000 on a Canadian government bond. C) Dou, a U.S. resident, earns interest of $42,000 on a loan to Moon Limited, a CCPC. Dou owns 51% of the voting shares of the company. D) Ying, a resident of a country that does not have an income tax treaty with Canada, earns $25,000 on a loan to Sun Enterprises Limited, a CCPC. The interest is dependent upon the profits of the CCPC. Ying owns 40% of the shares in the company. Answer: D Explanation: D) Ying, a resident of a country that does not have an income tax treaty with Canada, earns $25,000 on a loan to Sun Enterprises Limited, a CCPC. The interest is dependent upon the profits of the CCPC. Ying owns 40% of the shares in the company. Since the loan is arm's length Part XIII only applies if the interest is from participating debt which is the case. Type: MC Topic: International - Part XIII tax on non-residents

44) Which of the following types of payment is NOT subject to Part XIII tax when paid to a non-resident? A) Dividends B) Pension benefits C) Interest paid under non-participating debt to an arm's length person D) RRSP payments Answer: C Explanation: C) Interest paid under non-participating debt to an arm's length person Type: MC Topic: International - Part XIII tax on non-residents

45) When an individual ceases to be a resident of Canada (e.g. emigrates), there is a deemed disposition of most types of capital property. However, there are certain exceptions. Which of the following would be among the exception? A) An extremely valuable coin collection. B) A 72 foot sea-going yacht. C) Shares of a CCPC that primarily provides nursing services. D) Shares of a CCPC that primarily owns rental properties for resale. Answer: D Explanation: D) Shares of a CCPC that primarily owns rental properties for resale. Type: MC Topic: International - immigration & emigration

46) Mr. Winsome is a Canadian citizen who nd has been resident in Canada for the past 35 years. His company has offered him a position with its Australian branch, which Mr. Winsome has accepted. The position is a transfer and Mr. Winsome plans to remain in Australia for the rest of his life. Given the temperate climate in Australia, he thinks it will be a good country in which to retire. Mr. Winsome has the following properties in Canada on December 15, 2022, the date that he ceases to be a resident of Canada (e.g. emigration): As At December 15, 2022 FMV ACB $10,000 $ 7,000 8,000 5,000 10,000 10,000 15,000 18,000

Shares in Bell Canada, a public company Shares in TNX Co., a private company Mutual Funds Sailboat (that he is shipping to Australia)

Which of the following is correct? A) Mr.Winsome will be deemed to have disposed of his mutual funds, sailboat, TNX Co. shares and Bell Canada shares for FMV on December 15, 2022. B) Mr.Winsome can elect to defer the gain on the Bell Canada shares until they are sold, only if security acceptable to the CRA is provided. C) Mr. Winsome can elect to have a deemed disposition of the Bell Canada shares on December 15, 2022, only if security acceptable to the CRA is provided. D) None of the above. Answer: A Explanation: A) Mr. Winsome will be deemed to have disposed of his mutual funds, sailboat, TNX Co. shares, and Bell Canada shares for FMV on December 15, 2022. Type: MC Topic: International - immigration & emigration

47) Because of his distaste for Canadian winters, Rob Johnston has emigrated (ceased to be a resident) from Canada to Florida. At the time of his departure, the FMV of property owned by the RRSP is $1,500,000. Which of the following statements is correct? A) There will be a deemed disposition of all of the property of the RRSP at the time Rob ceases to be a resident of Canada. B) There will be no income tax consequences at the time Rob ceases to be a resident of Canada. However, any withdrawals from the RRSP subsequent to ceasing to be a resident of Canada will be subject to Canadian Part I tax. C) There will be no income tax consequences at the time Rob ceases to be a resident of Canada. However, any withdrawals from the RRSP after ceasing to be a Canadian resident will be subject to Part XIII tax. D) Part XIII tax will have to be paid at the time Rob ceases to be a resident of Canada, but there will be no further income tax in Canada on subsequent withdrawals from the plan. Answer: C Explanation: C) There will be no income tax consequences at the time Rob ceases to be a resident of Canada. However, any withdrawals from the RRSP after ceasing to be a Canadian resident will be subject to Part XIII tax. Type: MC Topic: International - immigration & emigration

48) Joan Bias, a U.S. citizen, became a resident of Canada in 2020. At that time, she owned shares in a U.S. company that had an ACB of $150,000 and a FMV $210,000. In 2022, she sold the shares for $170,000. What are the income tax consequence of the sale? A) There would be a taxable capital gain of $20,000. B) There would be an allowable capital loss of $20,000. C) There would be a taxable capital gain of $10,000. D) There would be a business investment loss of $40,000. Answer: B Explanation: B) There would be an allowable capital loss of $20,000 [(1/2)(POD $170,000 - ACB $210,000)]. Type: MC Topic: International - immigration & emigration

49) In 2022, Barton Ferris is entitled to $50,000 in dividends from a publicly listed foreign corporation in which he owns shares. The foreign jurisdiction withholds $10,000 (20%), providing him with a net payment of $40,000. In addition to the dividend, Barton has Canadian rental income of $130,000. He has no personal tax credits other than the BPA and any credits related to foreign income tax withheld. He has no taxable income deductions. What is his 2022 net income and taxable income? All amounts are in Canadian dollars. A) $170,000. B) $177,500. C) $180,000. D) $199,000. Answer: B Explanation: A) $170,000 ($130,000 + $40,000) B) $177,500 ($130,000 + $50,000 - $2,500*) * [(20% - 15%)($50,000)] ITA 20(11) C) $180,000 ($130,000 + $50,000) D) $199,000 [$130,000 + ($50,000)(138%)] Type: MC Topic: International - foreign property income (of Canadian residents)

50) Which of the following conditions must be met in order for a resident Canadian corporation to be able to claim a taxable income deduction with respect to dividends received from a non-resident corporation? A) The dividend must be paid out of active business income. B) The active business income must be earned in a country with which Canada has an income tax treaty or has entered into a tax exchange information agreement (TIEA). C) The non-resident corporation must be a foreign affiliate of the resident Canadian corporate shareholder. D) All of the above. Answer: D Explanation: D) All of the above. Type: MC Topic: International - ITA 113(1) taxable income deduction

51) In each of the following Cases, determine whether Rawlings Inc., a non-resident U.S. corporation, is subject to Canadian income tax: Case 1 - Rawlings is the parent company of Delma Ltd., a company incorporated in British Columbia. Rawlings produces and sells small construction equipment, while Delma produces and sells hand tools. Rawlings sells pieces of equipment to Delma, who in turn sells them in Canada. Case 2 - Rawlings manufactures small construction equipment in the U.S. Rawlings ships pieces of equipment to a warehouse located in Winnipeg that is rented on a seven year lease. Rawlings has employed an individual in Winnipeg to sell the equipment throughout central Canada. The employee is not allowed to conclude contracts without approval by the U.S. office. Case 3 - Assume the same facts as in Case 2, except that the employee has the authority to conclude contracts on behalf of the employer. Answer: Case 1 - Rawlings is not carrying on business in Canada and would not be subject to Canadian income tax. Case 2 - The income tax treaty allows Canada to tax business income only if such income is attributable to a permanent establishment (PE) in Canada. The warehouse constitutes a fixed place of business regardless of whether it is owned or leased. However, since it appears to be used exclusively to maintain an inventory for delivery, it would be an excluded activity and would therefore not be considered to be a PE. A further consideration is the employee who sells the product. Since the employee is not allowed to conclude contracts without approval, the employee would not be considered to be a PE. Rawlings would not be taxable in Canada. Case 3 - In this Case, because the employee has authority to conclude contracts on behalf of a nonresident corporation, the employee is deemed to be a PE. This means that Rawlings is taxable in Canada under ITA 2(3) on its business profits attributable to the PE (i.e., the employee). Type: ES Topic: Carrying on business in Canada

52) Ms. Michelle Walker, a U.S. citizen and a U.S. resident, has Canadian employment income of $22,000 and U.S.employment income of $40,000 Canadian for the current year. The Canadian employment income is from a British Columbia company that can deduct the payments in determining its Canadian income. She lives in Seattle, Washington. Ms. Walker does not believe that she is subject to Canadian income tax. Is she correct? Explain your conclusion. Answer: She is not correct. Under ITA 2(3) she would be subject to Canadian income tax on her Canadian employment income. There would be an exception to this if: • the amount was less than $10,000 in Canadian dollars, or • if she was in Canada for less than 183 days in any 12 month period beginning or ending in the current year and the employer was not a Canadian resident in a position to deduct the payments. As neither of these exceptions apply, Michelle would be subject to Canadian income tax on her Canadian employment income. Type: ES Topic: International - non-resident liability for Part I tax

53) In each of the following Cases, determine whether the employment income is subject to Part I tax and is therefore taxable in Canada: Case 1 - Mary is a U.S. resident currently living in the state of Maine. She accepted temporary employment as a personal trainer with a Canadian company for clients in New Brunswick beginning August 1, 2022 and ending on December 31, 2022. The Canadian employer agreed to pay her $2,660 in Canadian dollars per month. Mary remained a non-resident of Canada throughout her Canadian employment. Case 2 - Assume the same facts as in Case 1, except the employer was resident in Maine and did not have a permanent establishment (PE) in Canada. Case 3 - Bill resides in Watertown, New York and has commuted daily to his full-time employment in Kingston, Ontario for the last five years. In 2022, he spent 217 days at his job in Canada. He works for the municipality of Kingston and earned $53,000 Canadian in employment income. Bill is a U.S. resident throughout the year. Answer: Case 1 - The Canadian employment income is subject to Part I tax and is therefore subject to Canadian income tax. The Canada/U.S. income tax treaty allows Canada to tax employment income earned in Canada unless either of the following two exceptions applies: • The first exception is the $10,000 rule. This exception however does not apply since Mary earned $13,300 in Canadian dollars in 2022 [($2,660)(5 months)]. • The second exception is the 183 day rule. Although Mary was in Canada for only 153 days of 2022 and therefore met the first part of the test, she failed the remaining part of the test since the employer was a Canadian resident and could deduct the payments in determining its Canadian income. Case 2 - The employment income is not subject to Part I tax and is therefore not taxable in Canada. The 183 day rule exempts the income because the employer was not resident in Canada, nor had a PE in Canada, and could not deduct the payments in determining its Canadian income. Case 3 - The employment income is subject to Part I tax and is therefore taxable in Canada. The Canada/U.S. income tax treaty would exempt the income from Canadian tax if the amount was less than $10,000 Canadian, or if Bill spent 183 days or less in Canada. As he earned $53,000 Canadian and spent 217 days at his job in Canada, neither of these exceptions would apply to exempt the employment income from Canadian income tax. Type: ES Topic: International - non-resident employment in Canada (Canada/U.S. treaty)

54) In each of the following Cases, determine whether the employment income is subject to Part I tax and is therefore taxable in Canada: Case 1 - John lives in Blaine, Washington and is a U.S. citizen and a U.S. resident. However, he is employed by a business in Chilliwack, British Columbia. His salary for 2022 is $72,000. As he is able to do some of his work in his home office in Blaine, he commutes to Chilliwack for 150 days during 2022. Case 2 - Martin is a U.S. citizen and a U.S. resident who lives in Vermont. He is employed by a U.S. business that does not have a permanent establishment (PE) in Canada. During the period March 1, 2022 to June 30, 2022, Martin is required to work in Montreal. His $5,000 per month salary is paid by his U.S. employer. Case 3 - Assume the same facts as in Case 2 except that his U.S. employer has a subsidiary in Montreal. During the period that he is working in Montreal, his salary is paid by the Montreal subsidiary. Answer: Case 1 - John would be subject to Part I tax and is therefore taxable in Canada. In general, employment income of non-residents is taxable in Canada under ITA 2(3). The Canada/U.S. income tax treaty provides two exceptions to this general rule as follows: • The first exception is for individuals with employment income of less than $10,000 in Canadian dollars. As John's salary is $72,000, this does not apply. • The second exception is when the individual is in Canada for 183 days or less and the amounts are paid by an employer who is not a Canadian resident and cannot deduct the salary payments for Canadian income tax purposes. While John is in Canada for 183 days or less, his employer is a Canadian business that can deduct the payments. Case 2 - The employment income is not subject to Part I tax and is therefore not taxable in Canada. While his earnings exceed $10,000, he is Canada for 183 days or less and his employment income is paid by a U.S. company that cannot deduct the payments for Canadian income tax purposes. This means that, under the Canada/U.S. income tax treaty, he is exempted from the general rule under ITA 2(3). Case 3 - In this case, the employment income would be subject to Part I tax and is therefore taxable in Canada. As noted, the 183 day or less exception is only available when the employment income is not paid by an employer that can deduct the amounts paid for Canadian income tax purposes. The Montreal subsidiary will be able to deduct the payments for Canadian income tax purposes. Type: ES Topic: International - non-resident employment in Canada (Canada/U.S. treaty)

55) In each of the following Cases, determine whether the U.S. resident who is disposing of property is taxable under Part I in Canada on any capital gain resulting from the disposition. Case 1 - In 2017, Anne Mason purchased a condo in Canmore, Alberta that she rented to Canadian residents. She sold the condo in 2022 at a considerable gain. Anne never lived in the condo. Case 2 - Assume the same facts as in Case 1, except that Anne incorporates a private corporation under Alberta legislation which purchases the condo. Anne sells the shares of the private company at a later point for a considerable gain. Case 3 - Assume the same facts as in Case 2, except the corporation is created under Oregon state legislation. Answer: Case 1 - Anne is taxable on the capital gain. The condo is "Taxable Canadian Property" since it is real property (e.g. land and buildings) situated in Canada. The Canada/U.S. income tax treaty gives Canada the right to tax such gains. The property is not exempt from Canadian income tax as a principal residence since Anne did not purchase the condo for her own habitation. Case 2 - Anne would be taxable on the capital gain on the shares. Shares of an unlisted Canadian corporation are "Taxable Canadian Property" where certain conditions are met including that more than 50% of the FMV of the shares is attributable to certain property such as Canadian real estate. In addition, the Canada/U.S. income tax treaty allows Canada to tax gains on the disposition of shares if the value of the shares is derived principally from real property situated in Canada. Case 3 - Anne would not be taxable on the capital gain on the shares. The shares are "Taxable Canadian Property" because they represent shares of an unlisted non-resident corporation that, at some time in the 60 months preceding the disposition, derived more than 50 % of their value from taxable Canadian property. However, the Canada/U.S. income tax treaty does not list this as one of the exceptions where Canada is allowed to tax the capital gain to U.S. residents. Type: ES Topic: International - taxable canadian property

56) In each of the following Cases, determine whether the interest payments made to non-residents are subject to Part XIII tax. Case 1 - Phillip, a U.S. resident, earned interest of $2,250 on Canada Savings Bonds in 2022. Case 2 - Marsha, a Canadian resident, acquired a vacation property in California for personal purposes. The property is mortgaged with a U.S. bank. Marsha paid $16,500 in interest to the U.S. bank in 2022. Case 3 - Assume the same facts as in Case 2, except that Marsha had acquired the California condo in 2016 for cash. In 2022, she mortgages the property with a U.S. bank and uses the money in support of a business she carries on in Halifax. Answer: The relevant part of the Canada/U.S. income tax treaty reads as follows: Article XI Interest arising in a Contracting State (Canada or the U.S.) and beneficially owned by a resident of the other Contracting State (U.S. or Canada) may be taxed only in that other State (U.S. or Canada). This means that, with respect to interest paid to U.S. residents, Canada does not have the right to withhold tax under Part XIII. As a result, there would be no Part XIII tax in any of the three Cases. Type: ES Topic: International - interest payments to non-residents

57) In each of the following Cases, determine how the rental payments made to non-residents will be taxed by Canada. Case 1 - Carco is a U.S. corporation with worldwide rental facilities dedicated to automobile rentals. Carco has offices in New Brunswick, where it rents out small and medium sized automobiles. Case 2 - In 2019, Danielle Clark, a U.S. resident, acquired several cottages in Manitoba that she rents out. In 2022, she rented the cottages to Canadian residents exclusively. Danielle received $46,000 in gross rents and estimates that expenses, including CCA, totaled $17,500. Case 3 - Assume the same facts as in Case 2, with one additional consideration. Danielle acquired four all terrain vehicles (ATVs) in 2020, which she rented to guests of the cottages for an additional cost. In 2022, she received $4,000 in gross rents and estimates ATV related expenses of $2,500. Answer: Case 1 - Carco appears to be carrying on business in Canada through a permanent establishment (PE). As a result, Part XIII tax does not apply. However, Carco would be subject to Part I tax on its income attributable to the PE in New Brunswick. Case 2 - As the Canada/U.S. income tax treaty does not reduce the rate for rentals of real property, Danielle would be subject to Part XIII tax of $11,500 [(25%)($46,000)]. Alternatively, Danielle could instead elect under ITA 216 to be subject to Part I tax on the rental income of $28,500 ($46,000 - $17,500). Based on her rental income, the Part XIII tax is at an effective rate of 40.4% ($11,500 ÷ $28,500). Unless she has a significant amount of other income in Canada, the Part I alternative will result in her being taxed at the lowest federal income tax rate or 15% plus 48% of that amount, making this the preferable choice. Case 3 - Danielle would be subject to Part XIII tax on the gross rents received for the ATVs unless she would be considered to be carrying on a business. However, the Canada/U.S. income tax treaty reduces the withholding tax to 10% of the gross rents received, or $400. Note that Danielle would not be eligible to elect under ITA 216 to be taxed under Part I, since the election is generally restricted to real property. Type: ES Topic: International - rental income to non-residents (ITA 216)

58) Mr. Ryan Marchand owns publicly traded shares with an ACB of $30,000 and an FMV of $56,000. During the current year, he emigrates from Canada (ceases to be a resident) still owning the shares. What are the income tax consequences of the emigration, if any, with respect to these shares? Answer: There would be a deemed disposition on his ceasing to be a Canadian resident, leaving him liable for income tax on a $13,000 [(1/2)($56,000 - $30,000)] taxable capital gain. In addition he is deemed to have reacquired the shares for their FMV of $56,000. Type: ES Topic: International - immigration & emigration

59) Mrs. Lorna Rand owns a rental property in Calgary, Alberta with a cost of $175,000 and a FMV of $315,000. The cost of the land is $52,000 and the FMV is $70,000. The capital cost of the building is $123,000, the FMV $245,000 and the UCC $91,400. During the current year, Mrs. Rand emigrates from Canada (ceased to be a resident of Canada). What are the current and possible future income tax consequences of the emigration with respect to the rental property? Answer: As real property is exempt from the deemed disposition rules of ITA 128.1(4)(b), there would be no immediate income tax consequences with respect to the rental property at the time of emigration. However, real property is "Taxable Canadian Property" and, as a consequence, she would be liable for Canadian income tax on both the recapture and capital gains resulting from a subsequent sale of the property, even though she would be a non-resident at that time. Type: ES Topic: International - immigration & emigration

60) Mr. Jordan Koch owns shares in a Canadian private company with an ACB of $115,000 and a FMV of $240,000. In addition, he owns a rental property with a FMV of $105,000 ($27,000 of this can be attributed to the land and $78,000 to the building) and a cost of $200,000 ($55,000 of this can be attributed to the land and $145,000 to the building). The UCC of the building is $121,000. During the current year, Mr. Koch emigrates from Canada (ceases to be a resident of Canada). Calculate the minimum and maximum net income that could result from the emigration. Answer: Maximum Net Income - With respect to the shares of the Canadian private company, there would be a automatic deemed disposition, resulting in a taxable capital gain of $62,500 [(1/2)($240,000 - $115,000)]. As the rental property is "Taxable Canadian Property", there would be no automatic deemed disposition at the time Mr. Koch's ceases to be a resident of Canada. Minimum Net Income - While there would be no automatic deemed disposition on the rental property, Mr. Koch could elect under ITA 128.1(4) to have a deemed disposition. The result would be a terminal loss on the building of $43,000 [$121,000 - $78,000] and an allowable capital loss on the land of $14,000 [(1/2)($55,000 - $27,000)]. These amounts can be used to offset all but $5,500 ($62,500 - $43,000 - $14,000) of the taxable capital gain on the shares. Type: ES Topic: International - immigration & emigration

61) For many years, Dakota Fox was a resident of Israel. However, in 2021, she concludes that she would like to move to an area with a cooler climate and was offered employment in Canada which she promptly accepted. She became a resident of Canada shortly after her acceptance of the Canadian employment offer. At that time, her capital properties consist of Canadian land which she purchased on a previous visit to research living in Canada, and shares in an Israeli utility company. The ACB of the land is $125,000 and its FMV $200,000. The ACB of the shares is $85,000 and the FMV $115,000. While she is in Canada, she purchases shares of a Canadian company, Grizzly Bare Inc. for $55,000. In 2023, after finding Canadian winters to be too severe, she decides to move back to Israel at ceased to be a resident of Canada re-establishing residence in Israel. At this time the FMV of her properties are as follows: Canadian Land Israeli Company Shares Grizzly Bare Inc. Shares

$250,000 135,000 70,000

What are the income tax consequences of Dakota's emigration from Canada in 2023? Answer: In the absence of ITA 128.1(4)(b)(iv)], there would be an automatic deemed disposition of both the Israeli shares and the Canadian shares at the time of Dakota's emigration from Canada. However, as she has been in Canada for less than 60 months in the last 10 years, there will be no deemed disposition of the Israeli shares that she owned prior to her immigration to Canada. There will however, be a deemed disposition of the Canadian shares acquired during her stay. This will result in a taxable capital gain of $7,500 [(1/2)($70,000 - $55,000)] There will be no deemed disposition of the Canadian land because real property is exempt from the automatic deemed disposition of ITA 128.1(4)(b). Note, however, that vacant land is "Taxable Canadian Property". This means that any gain resulting from its disposition will be subject to Canadian income tax, without regard to whether she is a Canadian resident or not. Type: ES Topic: International - immigration & emigration

62) Shelley Burns is a Canadian resident living in Sudbury, Ontario. In 2022, she earns $23,000 in business income through a permanent establishment (PE) located in a foreign country. Business income tax of $2,300 was charged on that income. All amounts are in Canadian dollars. Assume that her marginal combined federal/provincial/territorial income tax rate is 42% and that the foreign tax credit is equal to the foreign tax withheld. Determine her after tax retention and overall income tax rate on her foreign source business income. Answer: The gross amount of the foreign business income will be subject to income tax in Canada. Shelley's income tax liability would be calculated as follows: Gross Foreign Business Income Rate Canadian Income Tax Payable before Credit Foreign Tax Credit (Given) Net Canadian Income Tax Payable Foreign Tax Withheld Total Income Taxes Payable

$23,000 42% $ 9,660 ( 2,300) $ 7,360 2,300 $ 9,660

Based on these amounts, her after tax retention and overall income tax rate would be as follows: After Tax Retention ($23,000 - $9,660)

$13,340

Overall Income Tax Rate ($9,660 ÷ $23,000)

Type: ES Topic: International - foreign business income [of Canadian residents]

42%

63) Subco is a 100% owned foreign subsidiary of Parco, a resident Canadian company. In 2022, Subco earns $250,000 of investment income and pays 15% foreign income tax on this income. None of the after tax income is paid out as dividends in 2022. What is the effect of this on Parco's 2022 net income? Answer: Subco is a controlled foreign affiliate (CFA) of Parco. Given this, Parco is required to accrue its proportionate share (100%) of Subco's investment income. The required calculation is as follows: FAPI [ITA 91(1)] Deduct Lesser of: • FAPI = $250,000 • ITA 91(4) Deduction [(4)(15%)($250,000)] Addition to 2022 Net Income

$250,000

( 150,000) $100,000

Type: ES Topic: International - FAPI

64) Subco is a 100% owned foreign subsidiary of Parco, a resident Canadian company. In 2022, Subco earns $250,000 of investment income and pays foreign income taxes of 15% tax on this income. In 2023, Subco distributes its net after-tax FAPI of $212,500 [$250,000 - (15%)($250,000)] to Parco as a dividend. There are no withholding taxes on the dividend payment. What is the effect of the foreign dividend payment on Parco's 2023 net income? Answer: The required calculation is as follows: Foreign Source Dividend — ITA 90(1) Deduct Lesser of: • Previous FAPI after ITA 91(4) Deduction = $100,000 • Dividend Received = $212,500 2023 Addition to Net Income Type: ES Topic: International - FAPI

$212,500

( 100,000) $112,500

65) A U.S. gun cabinet manufacturer is considering entering the Canadian market. The company will use one of the following approaches to expand its market in Canada: A. Advertising in gun magazines. B. Selling cabinets to Canadian distributors. The distributors pay the shipping costs on the cabinets from the U.S. port or border crossing closest to them. C. Direct sales to wholesalers by non-exclusive agents. The agents will represent other suppliers. D. Direct sales to wholesalers by full-time salespeople in each of three regions of Canada. No sales offices will be opened, and the cabinets will be shipped from a warehouse in the U.S. Shipment will be made only after a customer's credit and contract are approved by the U.S. head office. E. Direct sales to wholesalers by full-time salespeople who report to a sales office in each of three regions of Canada. The sales offices will coordinate marketing and shipping of products from two warehouses located in Canada. However, formal approval of contracts will be administered by the U.S. head office. F. The sales offices described in Part E would be independent profit centres, with regional credit managers. The four warehouses from which orders are filled will be near the sales offices. Required: For each market expansion approach, determine whether or not the U.S. manufacturer will have a permanent establishment (PE) in Canada. Justify your assessment, and identify any other information required to support your position.

Answer: A. Advertising in gun magazines would not result in a PE as there is no fixed place of business in Canada. B. Selling cabinets to Canadian distributors would not result in a PE, as there is no fixed place of business in Canada. As well, the orders are filled from a U.S. warehouse and customers pay for shipping from a U.S. port or border. This would be proof that no fixed place of business exists in Canada. C. Direct sales to wholesalers by non-exclusive agents would not result in a PE as there is most likely no fixed place of business in Canada. The agents are independent, and do not work exclusively for the U.S. gun cabinet manufacturer. More information is needed on where orders are filled from and on where contracts are approved. If the orders are filled in the U.S., the manufacturer would not be deemed to have a PE in Canada. D. Direct sales to wholesalers by full-time salespeople would probably not result in a PE because contracts are approved in the U.S. As well, orders are filled from a warehouse in the U.S., again indicating that the business does not have a PE in Canada. While there are no sales offices, the full-time salespeople could be considered to provide permanence to the business arrangement. Questions to ask include: • Do the full-time salespeople work from their homes and vehicles? • Can a home or vehicle be considered a PE? • Is the business listed in telephone directories in Canada? A case could be made that there is a Canadian PE. However, the fact that contracts have to be approved in the U.S. would likely override this conclusion. E. Sales offices in each region lend permanence to the Canadian business. Also, filling of orders from Canadian warehouses would also indicate that there is a PE in Canada. But, as formal approval of contracts is controlled by the U.S. head office, a strong argument could be made that there is no PE. Also, because the fixed place of business appears to be used solely to either store or maintain goods for delivery, the Canada/U.S. income tax treaty would likely deem the fixed place of business not to be a PE. Questions should be asked about where goods are manufactured or purchased, and where the business is administered. For example, where are bank accounts located and books of account maintained? If virtually all business is administered in Canada, a Canadian PE is assured. F. Independent profit centres would likely be assessed as having a PE in Canada as this would be a natural extension of the U.S. business. Further, management and control appears to be in Canada. Orders are filled from Canadian warehouses, lending strong support to the Canadian PE position. Questions should be asked about where contracts are approved and where the business is administered (bank accounts, collections, and books of account). Type: ES Topic: International - comprehensive problem: permanent establishments (PE)

66) Each of the following independent cases involves a non-resident individual who has Canadian income in the current year. All amounts are in Canadian dollars. Case A Hebert Haman is a resident of a country that does not have an income tax treaty with Canada. He owns debt securities issued by a Canadian company that pay interest at a rate that is determined by the profits of the company. During the current year, he receives interest of $1,672 from this investment. Case B Kerri Kmetz is a resident of a country that does not have an income tax treaty with Canada. During the current year, Kerri receives $6,350 in dividends from a Canadian private company. Kerri owns 20% of the company's voting shares. Case C Eddy Beale is a resident of the United States. He owns debt securities that were issued by a Canadian public company. The interest rate on the securities is determined by the level of profits earned by the company. During the current year, he receives interest of $1,865. Case D Tyrell Rodi is a resident of a country that does not have an income tax treaty with Canada. During the current year he earns $1,562 of interest on a savings account in Canada. Case E Stephen Chow is a resident of a country that does not have an income tax treaty with Canada. He is the owner of a vacation property on Vancouver Island that he rents to Canadian residents. His gross rents for the current year are $56,000. Expenses related to the property, including maximum CCA, are $18,000. Required: For each of these situations, indicate how the Canadian income would be taxed under the ITA if at all. Explain your conclusion.

Answer: Case A Hebert is a resident of a country that does not have an income tax treaty with Canada. In addition, the interest is paid on participating debt. Given these facts, the interest would be subject to Part XIII tax at the 25% rate which would equal $418 [(25%)($1,672)]. Case B While the Canada/U.S. income tax treaty reduces the Part XIII rate on dividends, Kerri is a resident of a country that does not have an income tax treaty with Canada. Given this, the $6,350 in dividends would be taxed at the full 25% Part XIII rate resulting in tax of $1,587.50 [(25%)($6,350)]. Case C While the interest is being paid on participating debt, Eddy is a resident of the U.S. The Canada/U.S. income tax treaty exempts U.S. residents from Part XIII tax on all interest payments. Eddy would not be subject to Part XIII tax and no Canadian income tax would be payable. The analysis first requires looking to Part XIII which in this case would apply. The next step is to determine the impact of the income tax treaty which overrides Part XIII preventing its application to U.S. residents. Case D Part XIII tax only applies to interest if the interest is paid on participating debt or is paid to a non-arm's length non-resident. The debt is not participating and Tyrell is at arms' length with the Canadian bank. Given this, Part XIII tax would not apply and there would be no Canadian income tax. Case E As Stephen is not a resident of a country with which Canada has an income tax treaty, he would be subject to Part XIII tax at a rate of 25% on the gross rents. This would require a payment of $14,000 [(25%)($56,000)]. Alternatively, he could elect to be taxed under Part I on his rental income of $38,000 ($56,000 - $18,000). The Part XIII tax as a percent of his rental income is 36.8% ($14,000 ÷ $38,000). The 2022 federal income tax rate would be 22.2% [(15%)(1.48)] making the election to apply Part I instead of Part XIII preferable. Type: ES Topic: International - Part XIII tax on non-residents

67) Ms. Norah Houston is employed by a large, publicly-traded Canadian company. She is a Canadian citizen and resident and, for all of her life, she has been living and working in Canada. She does not have a spouse, common-law partner, or dependants. In 2022, her employer asks her if she would be willing to transfer to their Australian office. As she believes that she will have more challenging work in Australia, she agrees to the move. Both Ms. Houston and the company expect this move to be permanent. On July 31, 2022 she closes all of her Canadian bank accounts. This includes a savings account on which she has received interest of $3,500 in 2022 prior to her departure. On August 1, 2022, she opens bank accounts in Sydney. Interest on her Australian savings account during the rest of 2022 was earned at a rate of $500 per month. (All amounts given in this problem are in Canadian dollars.) On August 1, 2022 she departs from Canada. However, because she has taken no time off in several years, she spends the month of August visiting various cities in southeast Asia. She arrives in Australia and establishes residence on September 1, 2022. Ms. Houston's annual salary for 2022 is $144,000, with monthly payments of $12,000. Because she had accumulated vacation credits, her payments were not altered by the time she spent traveling in August. Ms. Houston lived in a rented condo and was able to cancel the lease prior to her departure on August 1, 2022. No cancellation payment was required. At the beginning of 2022, Ms. Houston owned shares in three Canadian public companies. All of these shares were sold prior to her departure, resulting in the following capital capital gains and capital losses: • The sale of Cando Ltd. resulted in a capital gain of $27,300. • The sale of Darcy Inc. resulted in a capital loss of $14,500. • The sale of Marganto Ltd. resulted in a capital loss of $6,800. Prior to her departure, Ms. Houston was carrying on a mail order business as a sole proprietor out of her condo. On July 31, 2022, she ceased to carry on the business. For the period January 1 through July 31, 2022, she realized a business loss of $27,000. In 2022, Ms. Houston made support payments to her former spouse of $2,000 on the first day of each month until the individual died in a mysterious boating accident on August 28, 2022. She made a deductible contribution to her Canadian RRSP in the amount of $8,800 on May 1, 2022. The RRSP was not collapsed on Ms. Houston's departure from Canada. Required: A. Determine Ms. Houston's residency status for 2022 and explain your conclusion. B. Calculate Ms. Houston's 2022 net income that will be included in her final income tax return as a result of her ceasing be a resident of Canada and any net capital loss or non-capital loss balances. Ignore any possible implications related to the Canada/Australia income tax treaty.

Answer: Part A As Ms. Houston appears to have severed all residential ties with Canada and she and her employer do not anticipate that she will return in the foreseeable future, it does not appear that she will be considered a Canadian resident after her move to Australia. Administratively the CRA will consider an individual to have ceased being a resident of Canada as of the latest of: • the date they leave Canada, • the date their spouse, common-law partner and/or other dependants leave Canada, and • the date they become a resident of the country to which they are immigrating. Assuming that Ms. Houston wishes to take advantage of the CRA administrative position then the latest of these dates of September 1, 2022 will be considered the day she became a resident of Australia meaning that the last day of Canadian residency would be August 31, 2022. This means that she will be considered to be a resident of Canada for the period January 1 through August 31, 2022. Part B Based on this analysis, the net income for the short taxation year ending August 31, 2022 would be as follows: Income Under ITA 3(a): Employment Income while Canadian Resident [($12,000)(8 Months)] Canadian Interest Income Australian Interest Income while Canadian Resident [($500)(1 Month)] Income Under ITA 3(b): Taxable Capital Gains [(1/2)($27,300)] Allowable Capital Losses [(1/2)($14,500 + $6,800)] ITA 3(a) + (b) Subdivision e Deductions [($2,000)(8) + $8,800] ITA 3(c) amount Deduction Under ITA 3(d): Business Loss 2022 Net Income

$96,000 3,500 500 $13,650 ( 10,650)

There would be no 2022 net capital loss or 2022 non-capital loss.

Type: ES Topic: International - comprehensive problem: emigration, part year & net income

$100,000

3,000 $103,000 ( 24,800) $ 78,200 ( 27,000) $ 51,200

68) Horace Richards, a resident of Nova Scotia, plans to emigrate from Canada on December 31, 2022 at which time he will cease to be a resident of Canada. On that date, he owns the following: Savings Account - The balance in this account is $85,600. Residence - This property was purchased for $130,000, including $45,000 for the land and $85,000 for the building. Its FMV on December 31, 2022 is $240,000, including $60,000 for the land and $180,000 for the building. Cottage - This property was purchased for $345,000, including $95,000 for the land and $250,000 for the building. Because a large nearby development has flooded the market with low price cottages, it has a FMV on December 31, 2022 of $300,000, including a value for the land of $50,000 and a value of $250,000 for the building. Horace has rented out this property since its purchase and reported a small amount of rental income every year. He has never claimed CCA on the property. SUV - Horace owns a Honda SUV that cost $35,000. Its FMV on December 31, 2022 is $18,000. RRSP - The December 31, 2022 balance in Horace's RRSP is $186,000. Shares of a CCPC - Horace is a minority shareholder of a CCPC. The CCPC owns and manages five apartment buildings. More than 80% of the FMV of the shares is derived from the value of these buildings. The ACB of the shares is $87,000 and they have a December 31, 2022 FMV of $123,000. Shares of Public Companies - Horace owns a portfolio of publicly traded shares which have an ACB of $120,000 and a FMV on December 31, 2022 of $135,000. Required: A. For each of the listed properties, indicate the income tax consequences, including any amounts of deferred income, that would result from Horace's ceasing to be a resident of Canada. Assume that he does not make any elections at the time of his move with respect to any of the property he owns on December 31, 2022. Ignore the capital gains deduction. B. Under ITA 128.1(4)(d), taxpayers can elect a deemed disposition on certain property that would otherwise be exempt from the deemed dispositions that automatically apply when an individual ceases to be a resident of Canada. Determine if Horace could use an election to minimize his income tax liability. If he can, calculate the amount of the reduction in his net income.

Answer: Part A Assuming no election is made, the result of Horace's ceasing to be a resident of Canada would have the following income tax consequences and/or deferred income for each of the listed properties: Savings Account - There would be no income tax consequences and no deferred income associated with this account. Residence - As the residence is "Taxable Canadian Property", there would be no deemed disposition on Horace's ceasing to be resident in Canada. Given this, there would be no immediate income tax consequences. However, there would be a deferred gain calculated as follows: Land $60,000 ( 45,000) $15,000 1/2 $ 7,500

FMV ACB Capital Gain Inclusion Rate Deferred Taxable Capital Gain

Building $180,000 ( 85,000) $ 95,000 1/2 $ 47,500

As this real property is Taxable Canadian Property, a future disposition would be subject to Part I tax even after Horace ceases to be a Canadian resident. Cottage - As the cottage is "Taxable Canadian Property", there would be no deemed disposition on ceasing to be a resident of Canada. Given this, there would be no immediate income tax consequences. However, there would be a deferred loss calculated as follows: Land $50,000 ( 95,000) ($45,000) 1/2 ($22,500)

FMV ACB Capital Loss/Terminal Loss Inclusion Rate Deferred Allowable Capital Loss

Building $250,000 ( 250,000) Nil Nil

As this real property is Taxable Canadian Property, a future disposition would be subject to Part I tax even after Horace is no longer a Canadian resident. If he continues to rent the cottage, a 25% Part XIII tax will apply to the gross rents received once he becomes a non-resident. Horace can also elect to have the rental income taxed separately under Part I. This may be preferable in that he can deduct expenses against the gross rents if he makes this election. SUV - As this SUV is personal use property, the loss arising from its deemed disposition would not be deductible. There would be no income tax consequences. RRSP - Unless Horace decides to collapse this plan prior to ceasing to be resident in Canada, there will be no income tax consequences. However, future withdrawals, subsequent to terminating his Canadian residency, would be subject to Part XIII tax. Shares - There would be a deemed disposition of the CCPC and public company shares resulting in the following taxable capital gains:

CCPC $123,000 ( 87,000) $ 36,000 1/2 $ 18,000

FMV ACB Capital Gain Inclusion Rate Taxable Capital Gain

Public Company $135,000 ( 120,000) $15,000 1/2 $ 7,500

Taxable Canadian Property includes a share of an unlisted corporation, if, at any time within the preceding 60 months, more than 50% of the FMV of the share or interest was derived from certain properties including Canadian real property. The CCPC shares are therefore Taxable Canadian Property. As a result, any additional gain on the disposition of these shares would be subject to Canadian income tax even though Horace is no longer a Canadian resident. The total inclusion in 2022 net income that results from Horace's emigration can be calculated as follows: CCPC Shares Public Company Shares Total 2022 Additional Net Income

$18,000 7,500 $25,500

Horace can pay the related income tax when he files his income tax return for the year of departure. However, he is not obliged to pay the income tax until he actually disposes of the shares [note that this deferral requires an election under ITA 220(4.5)]. Further, he is not required to post security for the estimated income tax payable as the total taxable capital gains of $25,500 are within the $50,000 exemption. Part B The ITA 128.1(4)(d) election could be used to trigger a deemed disposition on the principal residence and/or the cottage. Horace should elect to have a deemed disposition on both properties. With respect to the residence, the gain resulting from such a deemed disposition could be completely eliminated by designating it as his principal residence. With respect to the cottage, the loss resulting from the deemed disposition could be used to offset the gains on the CCPC and public company shares. The result would be as follows: Additional Income before Election Allowable Capital Loss on Cottage Revised Additional Net Income

$25,500 ( 22,500) $ 3,000

The use of the election would decrease net income by $22,500. With respect to future years, both the residence and the cottage are Taxable Canadian Property and, when they are sold, any gains would be subject to Part I tax. The deemed dispositions have resulted in an increase (principal residence) and reduction (cottage) in the ACB of the properties. The revised ACB would be used to determine the capital gain or capital loss on the subsequent actual dispositions. Type: ES Topic: International - comprehensive problem: emigration, part year & net income

69) The following foreign properties are owned by different Canadian taxpayers. All amounts are in Canadian dollars. For each property, determine whether the foreign property reporting rules apply. Explain your conclusions. A. Shares in a U.S. public company with a cost of $317,000 and a current FMV of $84,000. One-half of these shares were purchased in the taxpayer's Canadian brokerage trading account and the other half were purchased in the taxpayer's self-directed RRSP. B. A condo in Palm Beach, Florida, purchased for $425,000. The condo is rented to Canadians for 8 months of the year and used by the individual taxpayer the remaining 4 months. C. A yacht with a cost of $725,000 which was purchased and is docked in Seattle, Washington. The yacht is used by an individual taxpayer from Calgary for his legendary monthly parties. D. A cottage in Cape Hatteras, North Carolina, purchased for $100,000 cash down, and assumption of a $400,000 mortgage. The cottage is used by the individual taxpayer and his family throughout the year. E. A warehouse in Livonia, Michigan, with a cost of $1,250,000, owned by a Canadian corporation, and used to store its products for distribution as part of its active business in the U.S. F. A U.S. bank account and a mortgage resulting from the sale of a farm in North Dakota to a U.S. resident three years ago. The original amount of the mortgage was $120,000. However, the amount owing at the beginning of the current year is $55,000. The taxpayer's bank account in a U.S. bank has a balance of between $5,000 and $10,000 throughout the year.

Answer: A. Foreign property reporting is required for the shares held outside of the RRSP. The cost of one-half of the shares is greater than $100,000 [(1/2)($317,000) = $158,500]. The current FMV is not relevant. Specified foreign property held in an RRSP is excluded from foreign reporting requirements. B. Foreign property reporting is required. The condo is primarily a rental property and its cost is greater than $100,000. C. Foreign property reporting is not required since the yacht is personal use property. D. Foreign property reporting is not required. Since the cottage is personal use property, the fact that the total cost of the Cape Hatteras cottage is greater than $100,000 is not relevant. E. No foreign property reporting is required when property is used in an active business. F. Foreign property reporting is not required. The total of the amount owing on the mortgage for the current year ($55,000) and the highest balance in the U.S. bank account for the year ($10,000) do not exceed $100,000. Type: ES Topic: International - foreign property reporting rules - ITA 233.3 (T1135)

70) Amy Borody works and resides in Winnipeg, Manitoba. In 2022, Ms. Borody has diversified her investment portfolio by investing in shares of a German company through her Canadian registered securities dealer. The cost of her German company shares total €50,000. Ms. Borody owns a rental property in Munich, Germany which cost €400,000 in 2021. She has a bank account in a German bank. Its balance fluctuates from €500 to €25,000 during 2022. Its year end balance is €10,000. In 2022, she earned the following amounts of investment income: Dividends from German Public Corporations Net of 15% Withholding Interest on Bank Account Gross Rental Income from Munich Apartment Rental Expenses for Munich Apartment

€ 5,100 € 2,000 €30,000 €12,000

The dividends are net of German withholding taxes of 15%. Ms. Borody has left the interest in her German bank account and has not transferred it to Canada. As Ms. Borody does not claim CCA on the rental property, all of the rents and related expenses can be converted to Canadian dollars using the 2022 exchange rate. Assume that the exchange rate throughout 2022 was €1 = $1.45. Required: Indicate the amounts of investment income that would be included in Ms. Borody's 2022 net income, as well as any tax credits that would be available to her. Answer: As a Canadian resident, Ms. Borody would be subject to Canadian income tax on her worldwide income. This would include all of the German investment income. The amounts to be included in her net income for 2022 would be as follows: Dividends - Since 15% was withheld from the dividends, the gross dividend income totals €6,000 (€5,100 ÷ 85%). Converted to Canadian dollars, the amount to be included in Ms. Borody's net income would be $8,700 [($1.45)(€6,000)]. The German dividends will not be grossed up as would be eligible dividends received from public Canadian corporations. They would also not give rise to a dividend tax credit. The foreign income tax withheld would generate a foreign tax credit against income tax payable of $1,305 [($1.45)(€6,000 - €5,100)]. Since the withholding tax is not more than 15%, all of the withholding can be used in the foreign tax credit calculation. The problem does not provide Ms. Borody's Division B Income or her Income Tax Payable, therefore the full calculation for the foreign tax credit cannot be done. Interest - The interest income would be converted to Canadian dollars and the amount included in Ms. Borody's net income would be $2,900 [($1.45)(€2,000)]. The fact that it has not been paid from the German bank account is irrelevant as she is subject to Canadian income tax on her worldwide income. Rental Income - The amount to be included in Ms. Borody's net income would be based on the rental income of €18,000 (€30,000 - €12,000). Converted to Canadian dollars, this amount would be $26,100 [($1.45)(€18,000)]. As no German income taxes were withheld, there would be no foreign tax credit available with respect to this amount. Type: ES Topic: International - foreign property income (of Canadian residents)

71) Matt Farcus is a Canadian resident who is employed on a full time basis in Ottawa. He has the following additional income in 2022: Employment Income Taxable Capital Gains Eligible Dividends Dividends from Foreign Companies before Foreign Income Tax: Foreign Country 1 - GB Ltd. ($6,500 of foreign income tax) Foreign Country 2 - GR Ltd. ($1,350 of foreign income tax)

$83,600 6,850 17,460 26,000 13,500

He has the following potential taxable income deductions available for 2022: 2020 Net Capital Loss Balance 2020 Non-Capital Business Loss balance

$13,100 9,850

His only personal tax credits are the BPA, employment related credits, and any credits related to the dividends received. Required: Determine Matt's 2022 federal income tax payable. Answer: The GB Ltd. withholding equals 25%($6,500 ÷ $26,000) of the dividend paid. The GR Ltd. tax withholding equals 10% ($1,350 ÷ $13,500) of the dividend paid. As the foreign non-business tax credit is limited to 15%, the additional 10% (25% - 15%) withheld by Foreign Country 1 will have to be deducted in the determination of Matt's 2022 net income under ITA 20(11). Employment Income Taxable Capital Gains Eligible Canadian Dividends Gross Up [(38%)($17,460)] GB Ltd. Dividends (No Gross Up) GR Ltd. Dividends (No Gross Up) Excess CPP ($3,500 - $3,039) Excess Withholding [(25% - 15%)($26,000)] 2022 Net Income 2020 Net Capital Loss * 201 Non-Capital Loss 2022 Taxable Income

$ 83,600 6,850 17,460 6,635 26,000 13,500 ( 461) ( 2,600) $150,984 ( 6,850) ( 9,850) $134,284

* The net capital loss carry forward is limited to the $6,850 of taxable capital gains.

Using this result, Matt's 2022 Taxable Income would be calculated as follows: Tax on first $100,392 Tax on next $33,892 ($134,284 - $100,392) at 26% Income Tax Payable before Credits BPA EI CPP Canada Employment Total Credit Amount Applicable Rate Tax Otherwise Payable Eligible Dividend Tax Credit [(6/11)($6,635)] Foreign Tax Credits (See Note) GB Ltd. (See Note) GR Ltd. (See Note) 2022 Federal Income Tax Payable

($14,398) ( 953) ( 3,039) ( 1,287) ($19,677) 15%

$17,820 8,812 $26,632

( 2,952) $23,680 ( 3,619) ( 3,900) ( 1,350) $14,811

Note - The foreign non-business tax credits are calculated on a country by country basis (see Chapter 11). For use in the following formula, the Adjusted Division B Income that would be used in the foreign tax credit formula would be equal to $144,134 ($150,984 - $6,850). Note that the 2020 non-capital loss is not deducted in this calculation. The Tax Otherwise Payable that would be used in the foreign tax credit formula would be before the dividend tax credit. The tax credit on the GB Ltd. shares would be the lesser of: • Amount Withheld (Limited to 15%) = [(15%)($26,000)] = $3,900 • [(Foreign Non-Business Income ÷ Adjusted Division B Income)(Tax Otherwise Payable)] = ($26,000 ÷ $144,134)($23,680) = $4,272 The tax credit on the GR Ltd. shares would be the lesser of: • Amount Withheld (10%) = $1,350 • [(Foreign Non-Business Income ÷ Adjusted Division B Income)(Tax Otherwise Payable)] = ($13,500 ÷ $144,134)($23,680) = $2,218

Type: ES Topic: International - comprehensive problem: foreign dividends, foreign tax credits and net & taxable income of a Canadian resident individual

Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 21 GST/HST 21.1 Online Exercises 1) Briefly describe the advantages, from the point of view of a business, of an HST system as compared to a combined GST/PST system. Answer: The main advantages can be described as follows: • An HST system is less complex. With an HST system, the staff of the business only has to understand and deal with one set of rules. In contrast, under a GST/PST system, two separate sets of rules must be dealt with. • An HST system has lower compliance costs. GST/PST systems require the filing of two separate tax returns, as opposed to the one return that is required with an HST system. • With an HST system, business organizations receive ITCs for all of the taxes paid on their purchases. They receive ITCs for only the GST portion under a GST/PST system. Type: ES Topic: GST/HST - basic rules & general concepts

2) Describe two factors that have been influential in the increased use of transaction based taxes in various countries around the world. Answer: The required two factors can be selected from the following: • Simplicity - Transaction taxes are easy to administer and collect. No forms are required from individuals paying the tax and, if the individual wishes to purchase a particular good or service, it is difficult to evade payment. • Incentives to Work - An often cited disadvantage of income taxes is that they can discourage individual initiative to work and invest. Transaction taxes do not have this characteristic. • Consistency - Transaction taxes avoid the fluctuating income and family unit problems that are associated with progressive income tax systems. • Keeping the Tax Revenues in Canada - While some types of income can be moved out of Canada, resulting in the related taxes being paid in a different jurisdiction, taxes on Canadian transactions remain in Canada. Type: ES Topic: GST/HST - basic rules & general concepts

3) What is the basic problem with a multi-stage tax that is assessed on turnover at the various stages of the production/sale cycle? Answer: The problem is that there is pyramiding of taxes. When the tax is applied at each level using normal markups, there is a tax on taxes that have been previously paid. This can result in a very high overall rate being charged in the process of getting the product to the ultimate consumer. Type: ES Topic: GST/HST - basic rules & general concepts

4) Explain the difference between an accounts-based value added tax (VAT) and invoice-credit VAT. Answer: An accounts-based VAT system applies a specified rate to the value added at each stage in the production/distribution process. Such systems require an accounting based measurement of the amount of value added. An invoice-credit VAT applies a specified rate to the revenue generated at each stage in the production/distribution process. The remittance of this amount is offset by claiming ITCs for the tax that has been paid on all current purchases and on the full amount of capital expenditures used in producing these revenues. Its application involves no matching of costs and revenues, and no allocation of costs to periods other than the period in which property was purchased. Type: ES Topic: GST/HST - basic rules & general concepts

5) Describe the GST/HST consequences related to the sale of: • fully taxable goods and services; • zero-rated goods and services; and • exempt goods and services. Answer: The GST/HST consequences are as follows: Fully Taxable Goods and Services - The vendor would charge GST/HST on all such sales. The vendor would be eligible for ITCs for GST/HST paid on the costs associated with such sales. Zero-Rated Goods and Services - The vendor would not charge GST/HST on such sales. The vendor would be eligible for ITCs for GST/HST paid on the costs associated with such sales. Exempt Goods and Services - The vendor would not charge GST/HST on such sales. The vendor would not be eligible for ITCs for GST/HST paid on the costs associated with such sales. Type: ES Topic: GST/HST - basic rules & general concepts

6) Describe the "place of supply" rules as they apply to (1) tangible goods other than real property, and (2) services. Answer: With respect to tangible goods, GST/HST will be collected using the rules of the province where the goods are delivered. With respect to services, GST/HST will be collected using the rules of the province where the recipient of the services is located. Type: ES Topic: GST/HST - basic rules & general concepts

7) John is a resident of Ontario where a 13% HST rate is in effect. He is acquiring a new car from a car dealer and is being given a trade-in allowance for his old vehicle. Explain how the HST will apply to John's purchase. Answer: HST will only be charged on the net cost of the new car. The 13% rate will be applied to the cost of the new car, less the trade-in allowance provided. Type: ES Topic: GST/HST - calculations (regular method)

8) Give two examples of entities that would have to file a GST or HST return, but do not have to file an income tax return. Answer: Partnerships and non-profit organizations are most commonly mentioned in the text. Type: ES Topic: GST/HST - basic rules & general concepts

9) Explain how the GST/HST registration requirements apply to non-residents. Answer: In general, non-residents are not required to register for GST/HST. However, if a non-resident is carrying on business in Canada, registration would be required. In addition, a non-resident could voluntarily register. Type: ES Topic: GST/HST - registration

10) Describe the "last four calendar quarters" test that is used to determine eligibility for the small suppliers exemption. Answer: Under this test, an entity qualifies as a small supplier in the current quarter and the first month of the following quarter if, during the calendar four quarters preceding the current quarter, the entity together with associated persons did not have cumulative taxable supplies exceeding $30,000. Type: ES Topic: GST/HST - small supplier exemption

11) An individual with taxable sales of less than $30,000 in the previous calendar year has asked your advice as to whether the individual should register for GST/HST purposes. What questions should you ask about the business in order to give the appropriate advice? Answer: The basic questions that should be asked are as follows: • Do you have large amounts of fully taxable costs that would generate ITCs? • Do you expect to exceed $30,000 in annual taxable sales in the near future? • Would adding GST/HST to your sale price reduce your ability to compete? Type: ES Topic: GST/HST - registration

12) How are ITCs calculated when registrants make capital expenditures that are (1) real property and (2) furniture and fixtures? Answer: For capital expenditures on real property, the GST/HST paid is eligible for an ITC at the time of purchase. However, if the property is not used exclusively for commercial activity, only a portion of the GST/HST is eligible for the credit. The portion is based on the extent to which the property is used for commercial activity. This is subject to a minimum rule (there is no ITC if the property is used 10% or less for commercial activity) and a maximum rule (100% of the GST/HST paid is eligible for the credit if the property is used 90% or more for commercial activity). For most capital expenditures other than real property (personal capital property), the GST/HST paid is eligible for an ITC at the time of purchase. However, if the property is used 50% or less for commercial activity, no credit is available. Alternatively, if the property is used more than 50% for commercial activity, 100% of the GST/HST paid is eligible for an ITC. Type: ES Topic: GST/HST - input tax credits (ITC)

13) How are ITCs calculated on the current expenditures of a business? Answer: ITCs on current expenditures are available at the time the expenditure is made, without regard to matching with related revenues. If all, or substantially all (generally understood to mean 90% or more), of a current expenditure is related to commercial activity, then all of the GST/HST that was paid can be claimed as an ITC. In contrast, if 10% or less of an expenditure is related to commercial activity, no ITC can be claimed. If the percentage of the current expenditure used for commercial activity is between 10% and 90%, the ITC available is calculated by multiplying the total GST/HST paid by the percentage of commercial activity usage. Type: ES Topic: GST/HST - input tax credits (ITC)

14) Provide two examples of expenditures where available ITCs are restricted, even when the expenditures involved commercial activity. Answer: The required two examples can be selected from the following: Passenger Vehicles - No ITCs are available for GST/HST paid on the portion of the cost or lease payment of a passenger vehicle that is in excess of the prescribed limits. The prescribed limits for non-zero emission passenger vehicles purchased on or after January 1, 2022 are $34,000 (Class 10.1) and $59,000 for zero-emission vehicles (Class 56). Club Memberships - No ITC is allowed for GST/HST paid on membership fees or dues in any club whose main purpose is to provide dining, recreational, or sporting facilities. Provision of Recreational Facilities - No ITCs are available for the GST/HST costs of providing certain types of recreational facilities to employees, owners, or related persons. Business Meals & Entertainment - The recovery of GST/HST on meals and entertainment expenses is limited to 50% of the amounts paid. This reflects the portion of the amount of such expenditures that are deductible for income tax purposes. Personal or Living Expenses - ITCs cannot be claimed on costs associated with the personal or living expenses of any employee, owner, or related person. Reasonableness - Both the nature and value of a purchase must be reasonable in relation to the commercial activities of the registrant before an ITC can be claimed. Type: ES Topic: GST/HST - input tax credits (ITC)

15) Certain qualifying registrants can use the Quick Method of accounting for GST/HST. What are the advantages of using this method? Answer: The major advantages of using the Quick Method can be described as follows: • As the remittance rate is charged on GST/HST inclusive sales, there is no need for separate tracking of GST/HST collections. • There is no requirement to separately track purchases, other than those for capital expenditures, in order to determine the amount of ITCs. • While this is not always the case, the Quick Method may reduce the amount of GST/HST that would be paid by the registrant if the registrant were to use the regular method for determining his GST/HST liability. Note, however, the use of this method may also increase the amount to be paid or may reduce the amount of a refund. Type: ES Topic: GST/HST - quick method

16) Briefly describe the simplified method of accounting for ITCs. Answer: Under the simplified method of accounting for ITCs, detailed records are not kept of the GST/HST that is paid on all purchases other than real property. The total GST/HST and non-refundable PST inclusive amount of fully taxable costs incurred, including eligible costs incurred for capital property other than real property, is multiplied by a factor to identify the ITC amount. The factor used will depend on the GST/HST rate in the province or territory (e.g., 5/105 in Alberta and the three territories, 15/115 in New Brunswick; 13/113 in Ontario). As with the regular method of calculation, separate attention is given to the GST/HST paid on real property. This means that this amount will have to be prorated based on the extent to which it is used in commercial activity. Type: ES Topic: GST/HST - simplified input tax credit (ITC) method

17) Under what circumstances would an registrant choose to file a GST or HST return more frequently than required by the ETA? Answer: This would happen if the entity had ITCs in excess of GST/HST collections on a regular, ongoing basis. This type of situation would entitle the registrant to regular payments from the government. An example of this would be a business selling goods for export. Type: ES Topic: GST/HST - basic rules & general concepts

18) Indicate two situations where the fact that two corporations are associated would affect the GST/HST. Answer: The required two could be selected from the following: • Whether they qualify for the small supplier's exemption, • Whether they are eligible for the Quick Method of accounting, • Whether they are eligible for the simplified method of calculating ITCs, • Determining the required filing frequency of GST/HST returns (i.e., monthly, quarterly or annually). Type: ES Topic: GST/HST - associated persons

19) What is the objective of the employee/partner GST/HST rebate? Answer: Employees and individual partners are not GST/HST registrants and, in the absence of a special provision, would not be eligible to claim ITCs for their employment or partner business related expenditures. The Employee and Partner GST/HST Rebate allows employees and partners to recover the GST/HST paid on their employment or partnership related expenditures in a way that is similar to the ITCs that they would have received if they were GST/HST registrants. Type: ES Topic: GST/HST - employee/partner rebate including CCA

20) Briefly describe the GST/HST rebate that is available on purchases of new residential housing in those provinces and territories that do not participate in the HST program. Answer: For homes that cost $350,000 or less, the rebate is equal to 36% of the GST that is paid on the purchase. This provides a maximum rebate of $6,300 [(36%)(5%)($350,000)]. For homes that cost more than $450,000, no rebate is available. For homes costing between $350,000 and $450,000, the total rebate is reduced using the following formula: [A][($450,000 - B) ÷ $100,000] Where: A = The lesser of 36% of the GST paid and $6,300; and B = The greater of $350,000 and the cost of the home.

Type: ES Topic: GST/HST - residential property & new housing rebate

21) The sale of a business structured as a sale of business properties results in the making of a taxable supply for GST/HST purposes. However, there is an election that allows the vendor and purchaser to treat the supply as if it were zero-rated. What conditions are required to use this election? Answer: The major condition is that 90% or more of the business properties needed to carry on the business must be sold. In addition, the election is available if both the purchaser and vendor are GST/HST registrants, if both the purchaser and vendor are non-registrants, or if the purchaser is a registrant and the vendor is a non-registrant. It cannot be used if the vendor is a registrant and the purchaser is a nonregistrant. Type: ES Topic: GST/HST - rollover on the sale of a business as a sale of assets

22) In general, transaction taxes are easy to administer and collect. Answer: TRUE Type: TF Topic: GST/HST - basic rules & general concepts

23) One reason for using a single stage transaction tax as opposed to a multi-stage transaction tax is that it allows the government to accrue revenues at a faster pace. Answer: FALSE Explanation: A multi-stage tax allows for a quicker accrual of revenues. Type: TF Topic: GST/HST - basic rules & general concepts

24) Those provinces that participate in the Harmonized Sales Tax program do not have a provincial sales tax. Answer: TRUE Type: TF Topic: GST/HST - basic rules & general concepts

25) An advantage of transaction taxes is they keep tax revenues in the country in which they are assessed. Answer: TRUE Type: TF Topic: GST/HST - basic rules & general concepts

26) Providers of zero-rated goods are not allowed to claim ITCs. Answer: FALSE Explanation: While they do not charge GST/HST on sales, they are still eligible to claim ITCs. Type: TF Topic: GST/HST - input tax credits (ITC)

27) Providers of health care services and providers of financial services to Canadian residents do not charge GST on their sales or services. Answer: TRUE Type: TF Topic: GST/HST - basic rules & general concepts

28) Zero-rated supplies are not considered to be taxable supplies. Answer: FALSE Explanation: Zero-rated supplies are taxed at a zero rate, thereby allowing the supplier to claim ITCs. Type: TF Topic: GST/HST - basic rules & general concepts

29) A new car is purchased with a credit against the price for a trade-in vehicle. GST is charged on the full purchase price, before the credit for the trade-in. Answer: FALSE Explanation: GST is charged on the net amount of the purchase price, less the trade-in amount. Type: TF Topic: GST/HST - calculations (regular method)

30) If a non-registrant has taxable supplies in excess of $30,000 in a calendar quarter, The individual becomes a deemed registrant as of the first sale in that quarter that pushes the total over $30,000. Answer: TRUE Type: TF Topic: GST/HST - registration

31) If a newly acquired capital real property is used more than 50% for the provision of taxable supplies, the acquirer can claim 100% of the GST/HST paid as an ITC. Answer: FALSE Explanation: ITCs on real property are based on a pro rata amount determined by the percentage of usage for the production of taxable supplies. Type: TF Topic: GST/HST - input tax credits (ITC)

32) If a newly acquired capital personal property is used more than 50% for the provision of taxable supplies, the registrant can claim 100% of the GST/HST paid as an ITC. Answer: TRUE Type: TF Topic: GST/HST - input tax credits (ITC)

33) When the quick method is used, ITCs on capital expenditures are tracked and dealt with in the same manner as when the regular method is used. Answer: TRUE Type: TF Topic: GST/HST - quick method

34) Employees in a province that does not participate in the HST are entitled to a GST rebate equal to 5% of the expenses on which GST was charged that they claimed for income tax purposes. Answer: FALSE Explanation: The GST rebate is equal to 5/105 of the deductible expenses. Type: TF Topic: GST/HST - employee/partner rebate including CCA

35) The GST/HST rebate on the purchase of a new home with a purchase price less than $350,000, is equal to 36% of the GST/HST paid. Answer: TRUE Type: TF Topic: GST/HST - residential property & new housing rebate

36) Which of the following is NOT correct? A) All persons engaged in a business must register with the CRA for GST/HST purposes. B) In a province or territory, there can be a provincial or territorial sales tax or the HST, but not both. C) Long-term residential rents are exempt from GST/HST. D) Manitoba and Saskatchewan charge GST at the same rate. Answer: A Explanation: A) All persons engaged in a business must register with the CRA for GST/HST purposes. Type: MC Topic: GST/HST - basic rules & general concepts

37) Which of the following is NOT a transaction tax? A) The federal GST that is assessed in Alberta. B) The provincial sales tax that is assessed in Manitoba. C) The tax charged for spending a day in Banff National Park. D) The toll assessed for driving on Highway 407 in Toronto. Answer: C Explanation: C) The tax charged for spending a day in Banff National Park. This charge represents a fee rather than a tax Type: MC Topic: GST/HST - transaction tax concepts

38) Despite several advantages of transaction taxes, such as their simplicity, they are not the only source of revenue for the federal government. Why are income taxes still used as a significant source of revenue for the government? A) Income taxes can be applied with greater consistency than transaction taxes. B) Income taxes encourage individual initiative to work and invest, while transaction taxes discourage these activities. C) Income taxes are less regressive than transaction taxes. D) Income taxes result in lower income individuals paying a higher proportion of their income in taxes. Answer: C Explanation: C) Income taxes are less regressive than transaction taxes. Type: MC Topic: GST/HST - transaction tax concepts

39) How does the Canadian government compensate for the regressive nature of the GST/HST? A) By allowing an exemption from the tax for lower income individuals. B) By ensuring that items purchased more frequently by lower income individuals are not subject to the tax. C) By providing lower income individuals with GST/HST refunds. D) By providing a refundable GST/HST tax credit that is available to lower income individuals. Answer: D Explanation: D) By providing a refundable GST tax credit that is available to low income individuals. Type: MC Topic: GST/HST - basic rules & general concepts

40) The term taxable supply, as it is used in the ETA, would include all of the following except: A) the sale of a new television by a business carried on as a sole proprietorship. B) the provision of electrical installation services by an electrician. C) the sale of a life insurance policy by an insurance agency. D) a cash free exchange of merchandise between two retail businesses. Answer: C Explanation: C) The sale of a life insurance policy by an insurance agency which is an exempt supply. Type: MC Topic: GST/HST - liability for GST/HST

41) Which of the following is NOT a fully taxable supply? A) A bus ride from home to school. B) The purchase of a litre of milk at the grocery store. C) The purchase of a meal in a restaurant. D) The completion of an income tax return by an accounting firm. Answer: B Explanation: B) The purchase of milk at the grocery store. Type: MC Topic: GST/HST - taxable, zero-rated & exempt supplies

42) Which of the following statements related to fully taxable and zero-rated supplies in a participating province is correct? A) Fully taxable supplies are taxed at the HST rate and zero-rated supplies are taxed at zero percent. Expenditures related to both types of supplies are eligible for ITCs. B) Fully taxable supplies are taxed at the HST rate and zero-rated supplies are taxed at zero percent. ITCs are available on only expenditures related to fully taxable supplies. C) Both types of supplies are taxed at the HST rate. ITCs are available on only expenditures related to fully taxable supplies. D) Fully taxable supplies are taxed at the HST rate and zero-rated supplies are taxed at zero percent. ITCs are available on all expenditures related to fully taxable supplies and on only capital expenditures related to zero-related supplies. Answer: A Explanation: A) Fully taxable supplies are taxed at the HST rate and zero-rated supplies are taxed at zero percent. Expenditures related to both types of supplies are eligible for ITCs. Type: MC Topic: GST/HST - taxable, zero-rated & exempt supplies

43) Which of the following statements related to exempt and zero-rated supplies is correct? A) Both zero-rated and exempt supplies are taxable at zero percent. Expenditures related to zero-rated supplies are eligible for ITCs and those related to exempt supplies are not. B) Zero-rated supplies are taxable at zero percent, while exempt supplies are not taxable. Expenditures related to both zero-rated and exempt supplies are eligible for ITCs. C) Zero-rated supplies are taxable at zero percent, while exempt supplies are not taxable. Expenditures related to zero-rated supplies are eligible for ITCs and those related to exempt supplies are not. D) Both zero-rated and exempt supplies are taxable at zero percent. Neither expenditures related to zerorated supplies nor those related to exempt supplies are eligible for ITCs. Answer: C Explanation: C) Zero-rated supplies are taxable at zero percent, while exempt supplies are not taxable. Expenditures related to zero-rated supplies are eligible for ITCs and those related to exempt supplies are not. Type: MC Topic: GST/HST - taxable, zero-rated & exempt supplies

44) George Black lives in Manitoba, a non-participating province that has an 7% provincial sales tax. During the current year, he purchases a new Lexus for $82,000. He receives a trade in allowance of $36,000 for his old vehicle. The GST/HST charged on his new vehicle would be equal to: A) $4,100. B) $2,300. C) $5,980. D) $10,660. Answer: B Explanation: A) $4,100 [(5%)($82,000)] B) $2,300 [(5%)($82,000 - $36,000) C) $5,980 [(13%)($82,000 - $36,000)] D) $10,660 [(13%)($82,000)] Type: MC Topic: GST/HST - calculations (regular method)

45) In Ontario, the HST rate is 13%, in Alberta there is only GST of 5%. For which of the following transactions will the rate charged be 5%? A) A writer located in Alberta produces a book for a publisher located in Ontario and receives payment from the Ontario office. B) An Ontario registrant sells a product to a resident of Alberta who is visiting Ontario. C) An Alberta registrant ships a product to a recipient in Ontario. D) An Ontario registrant ships a product to a recipient in Alberta. Answer: D Explanation: D) An Ontario registrant ships a product to a recipient in Alberta. Type: MC Topic: GST/HST - calculations (regular method)

46) Jasper Appliances is an Ontario HST registrant. Ontario has a 13% HST rate. As part of its Black Friday promotion, the store is advertising that, on that day, products can be purchased with no HST charged. On that day, a stove is sold for $2,800, its list price with no HST added to the amount owed by the customer. How much HST would Jasper Appliances owe the government as a result of this sale? A) $322.12 B) Nil C) $364.00 D) $133.33 Answer: A Explanation: A) $322.12 [(13/113)($2,800)] B) Nil C) $364 [(13%)($2,800)] D) $133.33 [(5/105)($2,800)] Type: MC Topic: GST/HST - collection & remittance

47) Marvin's Rooms is a new business which commenced January 1, 2022. Its sales during its first four quarters of operation were as follows: Quarter 1 2 3 4

Sales $13,000 18,000 24,000 27,000

On what date will Marvin's Rooms have to begin collecting GST? A) The date in the second quarter on which cumulative sales total $30,000. B) July 1, 2022. C) August 1, 2022. D) September 1, 2022. Answer: C Explanation: C) August 1, 2022. Type: MC Topic: GST/HST - registration

48) Elfassy Art Dealers is a new business which commenced January 1 of the current year. It had four sales on the following dates during its first year of operation: Quarter - Date 1 - February 1 2 - May 1 3 - August 1 4 - November 1

Sales $13,000 5,000 35,000 27,000

On what date will Elfassy Art Dealers have to begin collecting GST/HST? A) July 1. B) August 1. C) September 1. D) November 1. Answer: B Explanation: B) August 1. Type: MC Topic: GST/HST - registration

49) John Barker owns a repair shop in Ontario, a province that has a 13% HST rate. He has asked you to calculate the HST payable or refund for the first reporting period. Given the following information, what should the repair shop's HST payable or refund be? Amount Before HST $150,000 96,000 83,000 19,000 17,000

Sales Equipment purchased Supplies purchased Wages paid Rent paid

A) A refund of $8,450. B) A payment of $6,500. C) A refund of $3,770. D) A refund of $5,980. Answer: D Explanation: D) [13%][$150,000 - ($96,000 + $83,000 + $17,000)] = ($5,980) Type: MC Topic: GST/HST - calculations (regular method)

50) For vendors of taxable supplies who purchase goods for resale and make capital expenditures to be used in commercial activities, ITCs can be claimed for GST/HST billed or paid on: A) all capital expenditures made during the period and goods sold during the period. B) a portion of capital expenditures based on their estimated service life and goods purchased for resale during the period. C) a portion of capital expenditures based on their estimated service life and goods sold during the period. D) all capital expenditures made during the period and goods purchased for resale during the period. E) goods purchased for resale during the period, but not capital expenditures. Answer: D Explanation: D) All capital expenditures made during the period and goods purchased for resale during the period. Type: MC Topic: GST/HST - input tax credits (ITC)

51) Underwater World Ltd., is both incorporated and situated in Alberta. Alberta does not participate in the HST and does not have a provincial sales tax. Among the purchases Underwater World Ltd. made in December of 2022 were the following items: Item Price before GST New motor for Dinghy #1 $7,000 New snorkeling equipment (for charter trips) 400 Water ski club membership fee (for the president) 700 Membership to Waterways Ltd. 500 Waterways Ltd. carries supplies for charter boat operators and requires the payment of a membership to use their services. The ITC that Underwater World Ltd. can claim for December 2022 are: A) $350. B) $370. C) $395. D) $430. E) None of the above. Answer: C Explanation: C) [($7,000 + $400 + $500)(5%)] = $395. An ITC is not permitted for the club fee as the fee is not deductible for income tax purposes. Type: MC Topic: GST/HST - input tax credits (ITC)

52) Joel Knight, a lawyer, is a sole proprietor/practitioner in the province of Ontario. The HST rate in Ontario is 13%. Joel has requested that you advise him on what his HST remittance should be for the October to December 2022 quarter. Details of transactions, excluding HST, between October and December of 2022 are: Revenues Expenses: Salaries Proprietor's drawings Office supplies Rent

$30,000 $ 7,000 11,000 500 3,000

The HST that is to be remitted for the October to December 2022 quarter is: A) $1,105. B) $2,535. C) $3,445. D) $3,835. E) None of the above. Answer: C Explanation: C) Revenues $30,000 Office supplies ( 500) Rent ( 3,000) Total $26,500 Rate 13% HST Payable $ 3,445 Type: MC Topic: GST/HST - calculations (regular method)

53) Paddy's Cycle Shop carries on business in Ontario where the HST rate is 13%. A summary of the shop's transactions for the month of January 2022 is as follows: Account Revenues Purchase of bicycles Purchase of tires and other parts Salaries Premises rental

Amount before HST $300,000 150,000 18,500 8,000 3,000

The HST that is to be remitted in respect of the above transactions is: A) $15,665. B) $16,055. C) $16,705. D) $17,095. E) None of the above. Answer: C Explanation: C) Revenues $300,000 Purchase of bicycles ( 150,000) Purchase of tires and other parts ( 18,500) Premises rental ( 3,000) Total $128,500 Rate 13% HST Payable $ 16,705 Type: MC Topic: GST/HST - calculations (regular method)

54) You are performing a review of a lawyer's books and records. The lawyer's office is in Ontario where the HST rate is 13%. While you are in the lawyer's office, you are asked to calculate the HST remittance. You are given the following amounts which exclude HST. Revenues Expenses: Salaries Stationery and supplies Utilities - telephone and hydro Rent

$325,000 $135,000 5,000 2,500 15,000

Based on the above transactions, the HST payable is: A) $21,775. B) $39,325. C) $39,975. D) $41,275. E) None of the above. Answer: B Explanation: B) Revenues Stationery and supplies Utilities Rent Total Rate HST Payable Type: MC Topic: GST/HST - calculations (regular method)

$325,000 ( 5,000) ( 2,500) ( 15,000) $302,500 13% $ 39,325

55) With respect to the quick method of accounting for GST/HST, which of the following statements is NOT correct? A) The rates used to determine the GST/HST liability under the quick method depend on whether the registrant is a business that purchases goods for resale or a business that provides services. B) Capital expenditures are tracked separately for purposes of determining ITCs. C) Any business can elect to use the quick method as long as annual GST/HST included taxable sales total $400,000 or less. D) Current expenditures are not tracked separately for purposes of determining ITCs. Answer: C Explanation: C) A business involved in legal, accounting and financial consulting services, cannot use the quick method. Type: MC Topic: GST/HST - quick method

56) With respect to the simplified method of accounting for ITCs in a province that does not participate in the HST program, which of the following statements is NOT correct? A) Total fully taxable inputs, with the exclusion of capital expenditures on real property, are multiplied by 5/105 to arrive at the ITC for the GST return. B) Capital expenditures are not tracked separately for purposes of determining ITCs. C) Registrants using this method charge GST at the usual 5% rate on fully taxable sales. D) Registrants using this method who provide both taxable and exempt goods and services must pro-rate the ITC claim so that only the portion that applies to taxable goods and services is claimed. Answer: B Explanation: B) Capital expenditures are not tracked separately for purposes of determining ITCs. Real property purchases are tracked separately. Type: MC Topic: GST/HST - simplified input tax credit (ITC) method

57) Kenichi Tajima carries on a retail clothing business as a sole proprietor in Saskatchewan, a nonparticipating province. The provincial sales tax is 6%. This store uses the simplified method of accounting for ITCs. The store had fully taxable purchases of $180,000 and purchased capital property (not including real property) with a cost of $5,000. Both amounts include PST and GST. What amount of ITC is Mr. Tajima able to claim? A) $0 B) $8,333 C) $8,810 D) $9,250 Answer: C Explanation: A) $0 B) $8,333 [(5/111)($180,000 + $5,000)] C) $8,810 [(5/105)($180,000 + $5,000)] D) $9,250 [(5%)($180,000 + $5,000)] Type: MC Topic: GST/HST - simplified input tax credit (ITC) method

58) Associated persons file separate GST/HST returns, but they must combine their total taxable sales of goods and services in certain situations. A Ltd. sells 100% fully taxable supplies, and B Ltd. sells 100% zero-rated supplies. In which of the following situations would the associated persons A Ltd. and B Ltd. NOT need to combine their taxable sales? A) A Ltd. and B Ltd. would like to claim the full ITC on the purchase of a building for A Ltd. B) A Ltd. and B Ltd. would like to use the small supplier's exemption. C) A Ltd. and B Ltd. would like to use the quick method of accounting. D) A Ltd. and B Ltd. would like to use the simplified method for calculating input tax credits. Answer: A Explanation: A) A Ltd. sells 100% fully taxable supplies, and B Ltd. sells 100% zero rated supplies. They would like to claim the full ITC on the purchase of a building for A Ltd. Type: MC Topic: GST/HST - associated persons

59) A GST rebate is available to employees of a GST registrant located in a province that does not participate in the HST program. The calculation is based on a factor of 5/105 of: A) all taxable benefits received from their employer. B) all employment expenses deducted in the calculation of employment income. C) all taxable benefits received from their employer and all employment expenses deducted in the calculation of employment income. D) all eligible expenses for fully taxable supplies deducted in the calculation of employment income, except for CCA. E) all eligible expenses for fully taxable supplies deducted in the calculation of employment income, including CCA. Answer: E Explanation: E) all eligible expenses for fully taxable supplies deducted in the calculation of employment income, including CCA. Type: MC Topic: GST/HST - employee/partner rebate including CCA

60) Tamara Soccorro is a real estate agent. She lives in a province that participates in the HST program at 13%. She earns commission income, and claims employment expenses. Tamara has claimed the following expenses on her T777 — Statement of Employment Expenses: Office Supplies (100%) Automobile gas and maintenance (87%) Automobile insurance (87%) CCA on car (87%)

$1,100 4,176 3,132 5,791

Where applicable, the amounts include the HST. What is Tamara's Employee HST Rebate? A) $ 607 B) $1,273 C) $1,439 D) $1,634 Answer: B Explanation: A) $607 [(13/113)($1,100 + $4,176)] B) $1,273 [(13/113)($1,100 + $4,176 + $5,791)] C) $1,439 [(13%)($1,100 + $4,176 + $5,791)] D) $1,634 [(13/113)($1,100 + $4,176 + $3,132 + $5,791)] Type: MC Topic: GST/HST - employee/partner rebate including CCA

61) In April of the current year, Bryan Lord purchases a new home at a cost of $610,000, plus GST of $30,500. Bryan is a resident of Manitoba, a province that does not participate in the HST program. Bryan will be eligible for a new housing GST rebate of: A) Nil. B) $6,300. C) $10,980. D) $17,500. Answer: A Explanation: A) Nil. [$6,300][($450,000 - $610,000) + $100,000] B) $6,300 [(5%)(36%)($350,000)] C) $10,980 [$30,500][36%] D) $17,500 [the full amount of GST payable on a $350,000 home] Type: MC Topic: GST/HST - residential property & new housing rebate

62) In which of the following situations will the vendor and purchaser be able to file a joint election to treat the supply as if it were zero-rated? A) The vendor is selling substantially all of the properties used in a business. The vendor is a GST/HST registrant but the purchaser is not. B) The vendor is selling the majority (60%) of the properties used in a business. Both the vendor and the purchaser are GST/HST registrants. C) The vendor is selling the shares of the business. Both the vendor and the purchaser are GST/HST registrants. D) The vendor is selling substantially all of the properties used in a business. Neither the vendor nor the purchaser are GST/HST registrants. Answer: D Explanation: D) The vendor is selling substantially all of the properties used in a business. Neither the vendor nor the purchaser are GST/HST registrants. Type: MC Topic: GST/HST - rollover on the sale of a business as a sale of assets

63) A registered charity in a non-participating province has a used clothing store. Revenues from the store for the year total $40,000. Which of the following statements is correct? A) The charity will have to collect GST on all of their clothing sales. B) The charity will not have to collect any GST on their clothing sales. C) The charity will have to collect GST on their clothing sales on revenues greater than a $30,000 small supplier exemption. D) The charity cannot claim ITCs. Answer: B Explanation: B) The charity will not have to collect any GST on their clothing sales. (There is a $50,000 small supplier exemption for charities.) Type: MC Topic: GST/HST - collection & remittance

64) A partnership carries on an engineering business, providing fully taxable services. Which of the following statements is correct? A) The partners are required to register for the GST/HST with respect to the commercial activities. B) The partnership is required to collect the GST/HST on taxable supplies and is eligible for ITCs. C) Partners are not individually liable for the GST/HST of the partnership. D) Costs incurred by partners that are reimbursed by the partnership are eligible for the Employee and Partner GST/HST Rebate. Answer: B Explanation: B) The partnership is required to collect the GST/HST on taxable supplies and is eligible for ITCs. Type: MC Topic: GST/HST - partnerships

65) Which of the following transactions related to the carrying on of a business by a trust are subject to GST/HST? A) A distribution of taxable supplies by the trust to the beneficiaries. B) A distribution of family jewelry by a trust to a beneficiary in the process of settling an estate. C) A distribution of shares held as investments. D) The sale of an interest in a trust by a beneficiary. Answer: A Explanation: A) A distribution of taxable supplies by the trust to the beneficiaries. Type: MC Topic: GST/HST - trusts

66) During the current taxation period, Mackin Enterprises purchased merchandise for $371,000. Merchandise sales during this period totalled $476,000 and the cost of the merchandise sold was $302,000. Ignoring all other costs incurred by Mackin and assuming a rate of 5%, how much tax would be paid by Mackin under an accounts-based VAT system and under an invoice-credit VAT system? Answer: The amount of tax to be paid under the two systems would be calculated as follows: Accounts Based System $174,000 N/A N/A $174,000 5% $ 8,700

Value Added ($476,000 - $302,000)] Taxable Revenues Base for Credits Subtotal Rate Total

Invoice Credit System N/A $476,000 ( 371,000) $105,000 5% $ 5,250

The fact that the tax is less under the invoice-credit system reflects the fact that the purchases of goods exceeded the cost of goods sold. Type: ES Topic: GST/HST - alternative VAT approaches

67) Brad Inc. had sales of merchandise during the current period of $825,000. The cost of the merchandise sold was $562,000. During the period, inventories of merchandise increased by $150,000. Without consideration of other costs incurred by Brad Inc., and using a rate of 8%, determine how much tax would be paid by the Company under an accounts-based VAT system and under an invoice-credit VAT system. Answer: The amount of tax to be paid under the two systems would be calculated as follows: Accounts Based System $263,000 N/A N/A $263,000 8% $ 21,040

Value Added ($825,000 - $562,000)] Taxable Revenues Base For Credits ($562,000 + $150,000) Subtotal Rate Total

Invoice Credit System N/A $825,000 ( 712,000) $113,000 8% $ 9,040

The fact that the tax is less under the invoice-credit system reflects the fact that the purchases of goods exceeded the cost of goods sold. Type: ES Topic: GST/HST - alternative VAT approaches

68) Mr. Marcus Leblanc commences business on January 1 of the current year. His quarterly sales of taxable supplies are as follows: Calendar Quarter January, February, March April, May, June July, August, September October, November, December

Taxable Sales $14,000 6,000 33,000 50,000

At what point in time will Mr. Leblanc have to begin collecting GST? At what point will he be required to register? Answer: As his sales exceed $30,000 in the third quarter, he will be required to begin collecting GST on the first sale in that quarter that exceeds the $30,000 threshold. This means he will have to begin collecting GST sometime between July 1 and September 30. He will be required to register within 29 days of that date. Type: ES Topic: GST/HST - requirement to register (the calendar quarter tests)

69) Sheila Hammer commences business on January 1 of the current year. Her quarterly sales of taxable supplies are as follows: Calendar Quarter January, February, March April, May, June July, August, September October, November, December

Taxable Sales $28,000 32,000 21,000 48,000

At what point in time will Ms. Hammer have to begin collecting GST? At what point will she be required to register? Answer: Ms. Hammer's sales exceed $30,000 in the second quarter. This means that she will be required to begin collecting GST on the first sale in that quarter that exceeds the $30,000 threshold. This will be sometime between April 1 and June 30. Registration will be required within 29 days of that date. Type: ES Topic: GST/HST - requirement to register (the calendar quarter tests)

70) Ms. Jesse Holt commences business on January 1 of the current year. Her quarterly sales of fully taxable supplies are as follows: Calendar Quarter January, February, March April, May, June July, August, September October, November, December*

Taxable Sales $20,000 2,000 19,000 42,000

*Consists of a sale of $28,000 on October 15 and a sale of $14,000 on November 27. At what point in time will Ms. Holt have to begin collecting GST? At what point will she be required to register? Answer: As Ms. Holt's sales accumulate to more than $30,000 by the end of the third quarter, she will have to begin collecting GST on November 1, one month after the end of the quarter. (The fourth quarter sales are not relevant.) She will be required to register by December 26, within 29 days of the November 27 sale. Type: ES Topic: GST/HST - requirement to register (the calendar quarter tests)

71) Marvin Gardens commences business on January 1 of the current year. During the first year of operations, quarterly sales were as follows: Calendar Quarter January, February, March April, May, June July, August, September* October, November, December

Taxable Sales $18,000 14,000 35,000 37,000

*Consists of a sale of $15,000 on July 15, and a sale of $20,000 on September 27. At what point in time will Mr. Gardens have to begin collecting GST? At what point will he be required to register? Answer: Mr. Gardens' sales accumulate to $32,000 ($18,000 + $14,000) by the end of the April to June quarter. This means that he will begin collecting GST on August 1, one month after the end of the quarter. He will be required to register within 29 days of that date. Type: ES Topic: GST/HST - requirement to register (the calendar quarter tests)

72) Edleson Inc. is located in a province that does not participate in the HST program. During the current period, Edleson Inc. purchases an office building for $1,450,000 (excluding GST), including a payment for the land of $320,000. It spends an additional $347,400 (excluding GST) for equipment to be used in the building. The building will be used 35% to produce fully taxable supplies and 65% for exempt supplies. The equipment will be used 42% for taxable supplies and 58% for exempt supplies. For accounting purposes, the building will be amortized over 30 years, while the equipment will be amortized over 12 years. Determine the ITCs that Edleson Inc. can claim as a result of these capital expenditures. Answer: As the building is real property, an ITC would be available on a pro rata basis. This means that the credit would be $25,375 [($1,450,000)(5%)(35%)]. No ITC would be available on the equipment as it is used less than 50% in the provision of taxable supplies. Type: ES Topic: GST/HST - input tax credits (ITC)

73) Logan Inc. is located in Ontario where a 13% HST rate applies. During the current year, the Company purchases the following capital property: Office Building (Including HST) Equipment (Including HST)

$2,825,000 904,000

The building will be used 40% to produce fully taxable supplies and 60% for zero-rated supplies. The equipment will be used 35% for fully taxable supplies, 25% for zero-rated supplies, and 40% for exempt supplies. Determine the ITCs that Logan Inc. can claim as a result of these capital expenditures. Answer: The available ITCs would be calculated as follows: Building [(13/113)(100%)($2,825,000)] Equipment [(13/113)(100%)($904,000)] Total Available ITCs

$325,000 104,000 $429,000

While there is a pro rata calculation on real property, the building is used 100% for taxable (fully and zero-rated) supplies. With respect to the equipment, it is used 60% (35% + 25%) for taxable supplies. This allows Logan to claim the ITC on 100% of the cost. Type: ES Topic: GST/HST - input tax credits (ITC)

74) Mr. Jack Morton works in the province of Alberta, a non-participating province. He is a management consultant who delivers services that are billed at a GST inclusive amount of $286,650 during the current year. Before the inclusion of any applicable GST, his expenses for the year are $18,000 for rent, $23,500 for clerical salaries, $5,000 for interest on a loan, and $3,000 for office supplies (purchases of these supplies totaled $4,500 for the year). In addition, he acquired office furniture at the beginning of the year for $32,000, plus GST of $1,600. The cost of this furniture is being amortized for accounting purposes over 10 years at a rate of $3,200 per year. Determine the GST payable or GST refund for the year. Answer: The GST payable would be calculated as follows: GST on Sales [(5/105)($286,650)] ITCs: Rent [(5%)($18,000)] Salaries Interest Purchases of Supplies [(5%)($4,500)] Capital Expenditure [(5%)($32,000)] GST Payable for the Current Year

$13,650 ( 900) N/A N/A ( 225) ( 1,600) $10,925

Type: ES Topic: GST/HST - calculations (regular method)

75) May Poplar lives in Alberta, a non-participating province. During the current year she has service revenue of $326,000. Her current expenses for the year are as follows (all amounts are before GST): Rent Salaries to Employees Interest on Business Loan Supplies CCA

$36,000 72,000 5,000 23,000 12,000

Her inventory of Supplies increased by $4,000 during the year. In addition to these current expenditures, she acquired additional furniture and fixtures in the amount of $18,000, before GST. She files her GST return on an annual basis and does not use the Quick Method. Determine the GST payable or GST refund for the year. Answer: The GST payable would be calculated as follows: GST on Sales [(5%)($326,000)] ITCs: Rent [(5%)($36,000)] Salaries Interest Purchases of Supplies [(5%)($23,000 + $4,000)] CCA Capital Expenditure [(5%)($18,000)] GST Payable for the Current Year

$16,300 ( 1,800) N/A N/A ( 1,350) N/A ( 900) $12,250

Type: ES Topic: GST/HST - calculations (regular method)

76) Ms. Mary Rivers works in the province of Ontario where the HST rate is 13%. She is a photographer and, during the current year she earns service revenue of $136,000. Rent for this period on her office and darkroom totals $29,450 and she pays an office assistant an annual salary of $21,300. Her capital expenditures during the period are for photographic equipment with a cost of $43,700 and computer hardware and software for $18,000. All amounts are before HST. She files her HST return on an annual basis and does not use the Quick Method. Determine the HST payable or HST refund for the year. Answer: The HST payable would be calculated as follows: HST on Sales [(13%)($136,000)] ITCs: Rent [(13%)($29,450)] Assistant's Salary Capital Expenditures [(13%)($43,700 + $18,000)] HST Payable for the Current Year Type: ES Topic: GST/HST - calculations (regular method)

$17,680 ( 3,829) N/A ( 8,021) $ 5,830

77) Alvin Creek carries on a business in Nova Scotia where the HST rate is 15%. He is a management consultant whose business had HST included revenues of $517,500 during the current year. His current expenses for the year are as follows (all amounts are before HST): Rent Salaries to Employees Interest on Business Loan Office Supplies CCA

$48,000 23,000 5,000 14,000 18,000

During the 2022 year, his inventory of office supplies decreased by $3,000. In addition to these current expenditures, he purchased a new Class 10.1 passenger vehicle to be used in his business at a cost of $45,000, before the inclusion of HST. The vehicle is used 95% for business purposes. Determine the HST payable or HST refund for the year. Answer: As the passenger vehicle is owned by an individual and used more than 90% for business purposes, the ITC is based on 100% of the cost for GST/HST purposes. However, in calculating the ITC, the cost of the car is limited to the 2022 Class 10.1 maximum of $34,000. HST on Sales [(15/115)($517,500)] ITCs: Rent [(15%)($48,000)] Salaries to Employees Interest on Business Loan Office Supplies [(15%)($14,000 - $3,000)] CCA Vehicle [(15%)(100%)($34,000)] HST Payable for the Current Year

$67,500 ( 7,200) N/A N/A ( 1,650) N/A ( 5,100) $53,550

Type: ES Topic: GST/HST - calculations (regular method)

78) Felicia's Frocks carries on a retail business as a sole proprietor in Nova Scotia where the HST rate is 15%. The Quick Method remittance rates are 5% for businesses that purchase goods for resale and 10% for service providers. During the first quarter of the year, the business has sales of fully taxable supplies of $42,300. Current expenses on which HST was paid amount to $37,800. In addition, capital expenditures during this period totaled $72,000. All of these amounts are before the HST. The business has no activities other than the delivery of fully taxable supplies (e.g. merchandise). Compare the HST payable (receivable) using the regular method applicable to GST/HST calculations with the amount that would be payable (receivable) using the Quick Method. Answer: The HST refund under the regular method would be calculated as follows: HST on Sales [(15%)($42,300)] ITCs: Current Expenses [(15%)($37,800)] Capital Expenditures [(15%)($72,000)] HST Refund - Regular Method

$ 6,345 ( 5,670) ( 10,800) ($10,125)

Alternatively, under the Quick Method, the calculation would be as follows: Basic Tax [(5%)(115%)($42,300)] Credit on first $30,000 [(1%)($30,000)] Subtotal ITC on Capital Expenditures [(15%)($72,000)] HST Refund - Quick Method

$ 2,432 ( 300) $ 2,132 ( 10,800) ($ 8,668)

As the Regular Method produces a larger refund, it would be the preferable method. Note that ITCs on capital expenditures are available, even when the Quick Method is used. Type: ES Topic: GST/HST - regular method vs the quick method

79) Click Cameras carries on a retail business as a sole proprietor in Alberta which is a non-participating province. The Quick Method remittance rates are 1.8% for businesses that purchase goods for resale and 3.6% for service providers. During the first quarter of the year, the business has taxable sales of $63,400. Current expenses on which the GST was paid total $26,275. Due to numerous burglaries, Click Cameras spends $44,900 on a sophisticated security system. All of these amounts are before the addition of GST. The system is being amortized over five years on a straight line basis for accounting purposes. The store is used exclusively for the sale of taxable supplies (e.g. merchandise). Compare the GST payable or the GST refund using the regular method with the amount that would be payable or refundable using the Quick Method. Answer: If the Quick Method is not used, the GST payable (refund) would be calculated as follows: GST on Sales [(5%)($63,400)] ITCs: Current expenses [(5%)($26,275)] Capital Expenditures [(5%)($44,900)] GST Refund - Regular Method

$3,170 ( 1,314) ( 2,245) ($ 389)

Alternatively, under the Quick Method, the calculation would be as follows: Basic Tax [(1.8%)(105%)($63,400)] Credit on first $30,000 [(1%)($30,000)] Subtotal ITC on Capital Expenditures [(5%)($44,900)] GST Refund - Quick Method

$1,198 ( 300) $ 898 ( 2,245) ($1,347)

As the Quick Method produces a larger refund, it would be the preferable method. Note that ITCs on capital expenditures are available, even when the Quick Method is used. Type: ES Topic: GST/HST - regular method vs the quick method

80) Narston Ltd. carries on business in Alberta which is a non-participating province that has no provincial sales tax. For the current year, Narston Ltd. has GST inclusive sales of $472,500. It has purchases of merchandise and other current expenditures of $320,000 before the addition of GST. Capital expenditures consisted of real property in the amount of $85,000 and capital personal property in the amount of $23,000. These amounts are before the addition of GST. Using the simplified method of accounting for ITCs, calculate Narston's GST payable or GST refund for the current year. Answer: Using the simplified method of accounting for ITCs, the GST payable or GST refund would be calculated as follows: GST on Sales [(5/105)($472,500)] ITCs on Purchases and Capital Personal Property {[5/105][($320,000)(105%) + ($23,000)(105%)]} ITCs on Real Property [(5%)($85,000)] GST Payable for the Current Year

$22,500

Type: ES Topic: GST/HST - simplified input tax credit (ITC) method

( 17,150) ( 4,250) $ 1,100

81) Parkway Ltd. operates in Ontario where the HST rate is 13%. For the current year, the Company has HST inclusive sales of $395,500. Its various current expenses on which HST was paid totaled an HST inclusive amount of $254,250. Also during the year, it acquired real property for an HST inclusive amount of $113,000, and capital personal property for an HST inclusive amount of $56,500. Using the simplified method of accounting for ITCs, calculate Parkway's HST payable or HST refund for the current year. Answer: Using the simplified method of accounting for ITCs, the HST refund would be calculated as follows: HST on Sales [(13/113)($395,500 )] ITCs on Purchases & Capital Personal Property [(13/113)($254,250 + $56,500)] ITCs on Real Property [(13/113)($113,000)] HST Refund for the Current Year

$45,500

Type: ES Topic: GST/HST - simplified input tax credit (ITC) method

( 35,750) ( 13,000) ($ 3,250)

82) The government is considering introducing a pure turnover tax, so that businesses will only have to account for and remit tax collected on transactions. Assume goods normally move from the raw materials supplier, to the manufacturer, to the wholesaler, to the distributor, to the retailer, and finally to the consumer. Assume a sale price of $500, plus tax, by the raw materials supplier to the manufacturer. There is a mark-up of 50% of the before tax cost at each subsequent turnover and the tax applies to the selling price at each turnover. Required: Calculate the transaction tax rate required to raise the same amount of tax revenue as a 5% single stage tax at the consumer level. Answer: Single Stage Consumer Tax The ultimate price to the consumer would be calculated as follows:

Vendor Raw Materials Supplier Manufacturer Wholesaler Distributor Retailer

Cost $ 500.00 750.00 1,125.00 1,687.50

Selling Price $ 500.00 750.00 1,125.00 1,687.50 2,531.25

Applying the tax rate of 5% to the $2,531.25 selling price results in a tax of $126.56. Turnover Tax Calculation The turnover tax would be applied on each transfer of the product. Given this, the tax rate that would result in a total tax of $126.56 would be calculated as follows: [($500)(X%)] + [($750)(X%)] + [($1,125)(X%)] + [($1,687.50)(X%)] + [($2,531.25)(X%)] =$126.56 [($500 + $750 + $1,125 + $1,687.50 + $2,531.25)(X%)] = $126.56 [($6,593.75)(X%)] = $126.56 X% = $126.56 ÷ $6,593.75 X% = 1.92% As would be anticipated, because this tax is applied at each stage in the production/sale process, the required rate is lower than the 5% that would be applied at only the consumer level. Type: ES Topic: GST/HST - turnover tax vs. single stage consumer tax

83) Joan Kraft has always had a great love of flowers. After many years of working tirelessly for other unappreciative florists, she has worked up the courage to start her own business. It will be called Joan's Own Flowers and will have a December 31 fiscal period. Her store opens for business on July 1, 2021 and, during the first 18 months of operations has the following quarterly revenues: July To September, 2021 October To December, 2021 January To March, 2022 April To June, 2022 July To September, 2022 October To December, 2022 Total for 18 Months

$6,000 5,000 8,000 10,000 16,000 20,000 $65,000

Required: A. Advise Joan as to when she must start collecting GST/HST. Also advise her by what date GST registration must be completed. B. How would your answer differ if the revenues for the April to June, 2022 quarter had been $32,000 instead of $10,000?

Answer: Part A - Calendar Quarter Test Under this test, persons are required to register for the GST/HST if taxable revenues exceed $30,000 in any single quarter. Under this test, Joan is not required to register during the first 18 months of operating her business. Part A - Last Four Calendar Quarters Test (Cumulative) Under this test, persons are required to register for the GST/HST if their taxable revenues accumulate to more than $30,000 in any four consecutive calendar quarters. The relevant calculations are as follows:

July To September, 2021 October To December, 2021 January To March, 2022 April To June, 2022 July To September, 2022 ($29,000 - $6,000 + $16,000) October To December, 2022 ($39,000 - $5,000 + $20,000)

Individual Quarter $6,000 5,000 8,000 10,000 16,000 20,000

Cumulative Four Quarters $ 6,000 11,000 19,000 29,000 39,000 54,000

As shown, the cumulative total exceeds $30,000 in the July to September, 2022 quarter. As a result, Joan is required to start collecting GST/HST on the first sale on or after November 1, 2022, one month after the quarter in which the $30,000 threshold is reached. Registration is required within 29 days of the first sale on which GST is collected. Part B - Calendar Quarter Test Under this altered revenue assumption, revenues exceed $30,000 in the April to June, 2022 quarter. Given this, Joan will have to start collecting GST/HST on the first sale that causes her cumulative total for four quarters to exceed $30,000. While Joan would be considered a deemed registrant at that point in time, she has to formally register within 29 days of the first sale on which GST/HST is collected. Part B - Last Four Calendar Quarters Test (Cumulative) As the calendar quarter test requires collection of GST/HST prior to the end of the April to June, 2022 quarter, the cumulative four quarters test is not relevant. Type: ES Topic: GST/HST - requirement to register (the calendar quarter tests)

84) A new building is purchased in London, Ontario for $5,000,000, before HST. The purchaser, Total Health Inc., provides all types of health care services and products, and is a GST/HST registrant. 60% of the building will be used by Total Health Inc. employees as medical and dental offices with the remaining 40% will be used to house a pharmacy run and managed by Total Health Inc. staff. The HST rate in Ontario is 13%. Required: Calculate how much HST Total Health Inc. will pay on the purchase and the ITC that can be claimed. Answer: As sales of commercial property are taxable, HST of $650,000 [(13%)($5,000,000)] will be payable on the purchase. An ITC can be claimed as Total Health Inc. is a registrant and commercial use of the building exceeds 10%. The ITC will be based on the expected use of 40% for zero-rated supplies (the pharmacy), resulting in an ITC of $260,000 [(13%)(40%)($5,000,000)]. Medical and dental services are exempt supplies. As a result, no ITC is available for 60% of the HST paid on the building. Type: ES Topic: GST/HST - input tax credits (ITC)

85) Mrs. Archer carries on a consulting business in Ontario and is an HST registrant. The HST rate is 13%. Her annual revenues have been increasing and will be over $200,000 for the current year. She has elected to file quarterly HST returns. During the October to December, 2022 quarter, Mrs. Archer made the following expenditures:

Meals with Clients Country Club Membership Laptop (Estimated 70% Business Use) Passenger Vehicle (100% Business Use)

Cost (Before HST) $ 1,600 1,200 2,500 42,000

HST $ 208 156 325 5,460

HST was charged on all of the expenditures. The laptop was invoiced in December, but was not picked up or paid for until January, 2023. Required: Determine the ITC that Mrs. Archer can claim in her quarterly October to December, 2022 GST/HST return. Answer: Mrs. Archer's ITCs would be calculated as follows: Meals with Clients [(50%)($208)] Country Club Membership Laptop (100%) Automobile [(13%)($34,000)] Total ITCs

$ 104 N/A 325 4,420 $4,849

The deductibility of certain types of business expenses are restricted for income tax purposes. For many of these amounts, there is a corresponding restriction on the ability of the business to claim ITCs for HST purposes. In this problem, the applicable restrictions are as follows: • The recovery of HST on meals and entertainment expenses is limited to 50%. • No ITC is allowed for HST paid on membership fees or dues in any club whose main purpose is to provide dining, recreational, or sporting facilities. • No ITCs are available for HST paid on the portion of the cost or lease payment of a passenger vehicle that is in excess of the deduction limits. For passenger vehicles purchased on or after January 1, 2022 the prescribed limit is $34,000. As a further note, since the laptop is used more than 50% for commercial activity, 100% of the ITC can be claimed. The fact that it was invoiced in December means that the ITC can be claimed despite the fact it was not paid for until the following quarter. Type: ES Topic: GST/HST - input tax credits (ITC)

86) Bestomer's Best Balloons is the registered name of a business carried on in Alberta as a sole proprietorship, The business files GST returns on an annual basis. Alberta is a non-participating province that has no provincial sales tax. The following is a summary of the financial statement information for the current year. All amounts are presented without the inclusion of applicable GST. Sales Less Expenses: Cost of Goods Sold Salaries & Wages Other expenses Interest on Demand Loan Interest on Mortgage Amortization Expense Income Tax Accounting Net Income - Current Year

$69,000 ($12,000) ( 19,000) ( 14,500) ( 600) ( 1,100) ( 10,000) ( 2,000)

( 59,200) $ 9,800

GST was paid on purchases of balloons and all "other expenses". The inventory of balloons at the end of the year was $4,000 and the year end inventory is $3,000. Required: Calculate the GST payable or GST refund for Bestomer's Best Balloons for the current year. Answer: The sales are fully taxable. GST paid on the cost of balloons purchased and other expenses can be claimed as an ITC. All other items are GST exempt. The GST payable for the year is calculated as follows: GST on Sales [(5%)($69,000)] ITCs: Balloons Purchased [(5%)($12,000 - $3,000 + $4,000)] Salaries & Wages Other Expenses [(5%)($14,500)] Interest on Demand Loan Interest on Mortgage Amortization Expense Income Tax GST Payable Type: ES Topic: GST/HST - calculations (regular method)

$3,450 ( 650) N/A ( 725) N/A N/A N/A N/A $2,075

87) Saul's Sports Sales and Service is the name of a registered business carried on as a sole proprietorship in Alberta by Saul Bernstein. However, the business features several unique products that are shipped to various other provinces. In addition to selling various sports oriented products, the business also includes a small (but growing) medical clinic specializing in sports injuries. These services are only provided in Alberta. Saul's Sports Sales and Service is an annual filer for GST purposes. Alberta is a non-participating province that does not have a provincial sales tax. The following is a summary of the financial statement information for 2022. All amounts shown are without the GST. Revenues (Note 1) Less Expenses: Cost of Goods Sold (Note 2) Amortization Expense Salaries & Wages (Note 3 Interest Expense Other Expenses (Note 4) Net Income before Income Tax

$836,339 ($427,386) ( 36,348) ( 123,746) ( 6,783) ( 62,477)

( 656,740) $179,599

Note 1 - The various components of the total revenues of the business were as follows: Sales in the Alberta Store Goods Shipped to Ontario Goods Shipped to Manitoba Goods Shipped to Saskatchewan Medical Clinic Revenues Total Revenues

$563,420 163,450 62,341 34,782 12,346 $836,339

Note 2 - Purchases of goods during the year were as follows: Purchases from Alberta Suppliers Purchases from Ontario Suppliers Purchases from British Columbia Suppliers Total Purchases

$382,946 32,468 46,982 $462,396

Note 3 - Of the total Salaries & Wages, 5% relate to the medical clinic. Note 4 - Other Expenses include the following: Business Meals & Entertainment Gym Membership Fee for Saul Property Insurance for Building Drugs for Medical Clinic (Zero-Rated Supplies)

$12,466 456 4,683 4,000

All of the remaining "other expenses" relate to the costs of operating the retail business (ex., office supplies, telephone, packaging etc.). Capital expenditures for the current year were as follows: • $872,000 for a building. Of the total space 35% is used for the medical clinic with the remainder used for the retail operations. • $48,300 for a new Class 10.1 automobile that is used 100% in the retail business. • $32,345 for office equipment. This equipment is used 15% in the provision of medical services and 85% in the retail business. Required: Calculate the GST payable or GST refund for Saul's Sports Sales and Service for 2022. Answer: The GST Refund for Saul's Sports Sales and Service for 2022 would be calculated as follows: GST/HST Collected (Note 1) Alberta Sales [(5%)($563,420)] Ontario Sales [(13%)($163,450)] Manitoba Sales [(5%)($62,341)] Saskatchewan Sales [(5%)(34,782)] Medical Clinic Revenues (GST Exempt) Total GST Collections ITCs: Purchases (Note 2) Amortization Expense Salaries & Wages Interest Expense Other Expenses (Note 3) Building [(5%)(65%)($872,000)] Automobile [(5%)(100%)($34,000 Class 10.1 Maximum)] Other Capital Expenditures [(5%)(100%)($32,345)] 2022 GST Refund

$ 28,171 21,249 3,117 1,739 Nil $54,276 ( 23,120) N/A N/A N/A ( 2,355) ( 28,340) ( 1,700) ( 1,617) ($ 2,856)

Note 1 - When goods are shipped to a participating province, the HST rate must be charged. Otherwise, only the 5% GST rate will be used in the calculation of the GST Payable/Refund. Note 2 - Only the GST rate is applicable to purchases shipped to Alberta. The province of origin is not relevant. This results in an ITC of $23,120 [(5%)($462,396)]. Note 3 - The ITC here is calculated as follows: Total Other Expenses Ineligible for ITCs: Non-Deductible One-Half of Business Meals & Entertainment [(1/2)($12,466)] Non-Deductible Gym Membership Property Insurance for Building (GST Exempt) Drugs for Medical Clinic (Zero-Rated) Eligible Other Expenses GST Rate ITC - Other Expenses

$62,477

( 6,233) ( 456) ( 4,683) ( 4,000) $47,105 5% $ 2,355

Other Notes: • Amortization expense does not affect the GST calculation. • No GST is paid on salaries and wages, or interest. As a result, no ITCs are available. • The recovery of GST on meals & entertainment expenses is limited to 50%. • No ITC is available for GST paid on gym memberships as these are not deductible for income tax purposes. • No GST is paid on insurance premiums as they are a financial service and GST exempt. • No ITC is available on zero-rated supplies as no GST is paid on them. • ITCs on real property are available based on the proportion of their use in providing taxable supplies. • ITCs are available on capital expenditures other than real property if more than 50% of their use is in providing taxable supplies. Type: ES Topic: GST/HST - comprehensive problem: regular method calculations

88) Billy Bob, Bubba, Nancy Sue and Sally Ann Cody are siblings. Each of them runs a separate business as sole proprietors. The businesses are all carried on in Ontario where the HST rate is 13%. If the Quick Method is used in that province, the Ontario quick method remittance rate is 4.4% for a retail business and 8.8% for a service provider. The siblings provide you with the following annual information for their businesses. All amounts shown include HST. None of the sales or purchases were zero-rated or exempt, and none of the businesses made any capital expenditures during the year.

Billy Bob Bubba Nancy Sue Sally Ann

Type of Business Guided Fishing Trips Fishing Equipment Sales Cooking Equipment Sales Individualized Cooking Courses

Sales $ 90,400 197,750 158,200 107,350

Purchases $ 24,860 135,600 45,200 67,800

Required: Recommend whether any of the businesses should use the Quick Method to calculate HST remittances. Show your calculations. Answer: The following recommendations are based solely on the minimization of the HST payment. No consideration is given to the reduction in accounting costs available through the use of the Quick Method. Billy Bob - Guided Fishing Services (Service Business) The Regular Method would be preferable in this case. Regular Method [13/113][($90,400 - $24,860)]

$7,540

Quick Method Basic Tax [(8.8%)($90,400)] Credit on first $30,000 [(1%)($30,000)] Net HST

$7,955 ( 300) $7,655

Bubba - Fishing Equipment Sales (Retailer) The Regular Method would be preferable in this case. Regular Method [13/113][($197,750 - $135,600)]

$7,150

Quick Method Basic Tax [(4.4%)($197,750)] Credit on first $30,000 [(1%)($30,000)] HST Payable

$8,701 ( 300) $8,401

Nancy Sue - Cooking Equipment Sales (Retailer) The Regular Method results for Nancy Sue are as follows: Regular Method [13/113][($158,200 - $45,200)]

$13,000

While Nancy Sue is in a retail business, her costs for the current year are well below the 40% that is required for use of the favourable quick method rates that are applicable to retail operations. However, this test is based on sales and purchases in the previous year, information that is not available in this problem. If we assume that this 40% test was met in the previous year, the quick method gives a more favourable result as follows: Quick Method - Rate for Retailers Basic Tax [(4.4%)($158,200)] Credit on First $30,000 [(1%)($30,000)] HST Payable

$6,961 ( 300) $6,661

Alternatively, if the 40% test is not met, the quick method results are less favourable than the results under the Regular Method. Quick Method - Rate for Service Providers Basic Tax [(8.8%)($158,200)] Credit on first $30,000 [(1%)($30,000)] HST Payable

$13,922 ( 300) $13,622

Sally Ann - Individualized Cooking Courses (Service Business) The Regular Method would be preferable in this case. Regular Method [13/113][($107,350- $67,800)]

$4,550

Quick Method Basic Tax [(8.8%)($107,350)] Credit on First $30,000 [(1%)($30,000)] HST Payable

$9,447 ( 300) $9,147

Type: ES Topic: GST/HST - regular method vs the quick method

89) For the year ending December 31, 2022, the Income Statement of Dorknell Ltd. is as follows (all amounts are without the addition of the GST and PST): Revenues: Sales of Fully Taxable Goods Provision of Exempt Services Less Expenses: Cost of Goods Sold Amortization Expense Salaries & Wages Rent Interest Expense Other Expenses Income before Taxes Less: Federal & Provincial Income Tax Accounting Net Income

$216,000 78,000 ($123,000) ( 56,000) ( 12,000) ( 42,000) ( 9,000) ( 27,000)

$294,000

( 269,000) $ 25,000 ( 8,000) $ 17,000

Other Information: 1. Dorknell Ltd. carries on a retail business in Saskatchewan where all of the Company's revenues and expenses are incurred. In addition to the 5% federal GST, Saskatchewan has a provincial sales tax of 6%. The quick method rates applicable to the province are 1.8% for businesses that purchase goods for resale, and 3.6% for service providers. 2. For the previous taxation year ending December 31, 2021, Dorknell's cost of goods purchased for resale totalled $110,000 and the revenue from sales of taxable supplies totalled $302,000. Both amounts are before GST and PST. 3. Inventories of taxable goods decreased by $8,000 during the year. 4. All of the "other expenses" relate to fully taxable supplies. 5. Of the Salaries & Wages, 46% were paid to employees involved in providing exempt services. 6. A capital expenditure was made during the year at a GST and PST inclusive cost of $62,160. The expenditure was for equipment that will be used 60% for the provision of fully taxable goods. GST and PST was paid on the purchase of all properties on which amortization is being deducted for the year. Required: For the taxation year ending December 31, 2022: A. Determine if Dorknell is eligible to use the Quick Method and the Quick Method remittance rate that would apply. B. Calculate the 2022 GST payable or GST refund. C. Assume that Dorknell is eligible to use the Quick Method. Calculate the 2022 GST payable or GST refund for Dorknell Ltd. using the Quick Method. Answer: Part A As Dorknell's GST included taxable sales of $226,800 [(105%)($216,000)] are less than $400,000 and it is not engaged in an ineligible business such as accounting, Dorknell can use the Quick Method. In order to determine the Quick Method remittance rate, the following amounts from the preceding year are required: 2021 GST Inclusive Purchases of Goods for Resale [($110,000)(105%)] 2021 GST Inclusive Sales of Taxable Supplies [($302,000)(105%)]

$115,500 $317,100

Since $115,500 ÷ $317,100 equals 36% and this is less than 40%, Dorknell Ltd. cannot use the reseller's remittance rate of 1.8% and must use the 3.6% rate. Although this would not be a common situation, it could occur if a large quantity of the inventory that was sold was purchased in a prior year. Part B Using the regular calculations, the GST refund for Dorknell Ltd. for 2022 would be calculated as follows: GST Collected [(5%)($216,000)] ITCs on Current Expenditures: Purchases [(5%)($123,000 - $8,000)] Amortization Expense Salaries & Wages Rent [(5%)($42,000)] Interest Expense Other Expenses [(5%)($27,000)] ITCs on Capital Expenditures [(5%)(100%)($62,160 ÷ 1.11)] 2022 GST Refund

$10,800 ( 5,750) N/A N/A ( 2,100) N/A ( 1,350) ( 2,800) ($ 1,200)

Notes: • Amortization expense does not affect the GST calculation. • No GST is paid on salaries and wages, or interest. As a result, no ITCs are available. • Full ITCs are available on capital expenditures other than real property if more than 50% of their usage is to provide fully taxable supplies. Part C The Quick Method calculations would be as follows: Basic Tax [(3.6%)(105%)($216,000)] Credit on first $30,000 [(1%)($30,000)] Total before Capital Expenditures ITC On Capital Expenditures [(5%)(100%)($62,160 ÷ 1.11)] GST Payable

$8,165 ( 300) $7,865 ( 2,800) $5,065

In this case, the regular GST calculation is preferable as it produces a refund rather than a payable. This would be the case even if the Quick Method remittance rate had been 1.8% rather than 3.6%. Type: ES Topic: GST/HST - comprehensive problem: regular method vs quick method

90) Martin Halo is employed by a large public company with all of its business carried on in Ontario. His employer is an HST registrant. Martin resides in Ontario. Other Information: 1. Ontario is a participating province using an HST rate of 13%. 2. Martin is required to travel as part of his employment. For this travel, he uses his own car and pays for all expenses out of his own pocket. He does not receive any reimbursement or allowance from his employer. 3. The car that Martin uses was purchased in January, 2021 at an HST inclusive price of $32,770 [(113%)($29,000)]. He uses the vehicle exclusively for employment related travel. In 2021, Martin claimed $14,747 of CCA [(30%)(1.5)($32,770)] and an HST rebate on the CCA of $1,697 [($14,747)(13/113)]. His 2021 return was accepted as filed. Martin intends to take maximum CCA on the car for 2022. 4. In his 2022 income tax return, Martin claims the following employment expenses: Accommodation (Includes HST of $910) Deductible Portion of Meals & Entertainment (Includes HST of $780) Automobile Expenses: Gas & Maintenance (Includes HST of $1,040) Interest on Automobile Loan Insurance Total 2022 Employment Expenses excluding CCA

$ 7,910 6,780 9,040 2,200 1,400 $27,330

Required: Calculate the maximum CCA that Martin can claim on his car for 2022. In addition, calculate the 2022 HST rebate that Martin will claim as a result of his deductible employment expenses. Answer: The car cost $29,000 before HST. Since this is less than the 2021 prescribed limit of $30,000 for Class 10.1, the total amount paid, including HST, is included in Class 10. The maximum CCA that Martin can claim for 2022 is as follows: Opening UCC ($32,770 - $14,747) HST Rebate Claimed on Car CCA in preceding Year Adjusted UCC Class 10 Rate Maximum CCA

$18,023 ( 1,697) $16,326 30% $ 4,898

The employee HST rebate for Martin would be calculated as follows: Total Expenses other than CCA HST Exempt Purchases: Interest Insurance Eligible Expenses other than CCA Rate

$27,330

Eligible CCA Rate 2022 Employee HST Rebate

$4,898 13/113

( 2,200) ( 1,400) $23,730 13/113

Type: ES Topic: GST/HST - employee/partner rebate including CCA

$2,730

563 $3,293

91) Rhapsody Music Supplies is the registered name of a business carried on in Manitoba as a sole proprietorship. The business is registered for the GST. Manitoba is a non-participating province that charges a provincial sales tax of 8%. During the current calendar quarter, the following sales and expenditures were made. All sales were cash sales, and all expenditures were invoiced for and paid in the quarter.

Sales Expenditures Capital Equipment Interest Purchases of Inventory Rent (GST, but no PST) Salaries Supplies Total Expenditures

Amount $24,000

GST $1,200

PST $1,920

Total $27,120

$14,000 1,000 6,000 4,000 4,000 2,000 $31,000

$ 700 Nil 300 200 Nil 100 $1,300

$1,120 Nil 480 Nil Nil 160 $1,760

$15,820 1,000 6,780 4,200 4,000 2,260 $34,060

Required: Using the simplified ITC method, determine the total ITC that can be claimed for the quarter and the required GST remittance. Answer: The total ITC that can be claimed is calculated as follows: Total Expenditures Ineligible Items Salaries Interest

$34,060 ($4,000) ( 1,000)

ITC Factor ITC that can be Claimed

( 5,000) $29,060 5/105 $ 1,384

Note that the $1,384 ITC is greater than the GST paid of $1,300. The reason for the $84 ($1,384 - $1,300) discrepancy is due to the inclusion of the non-refundable provincial sales tax of $1,760 in the tax base for purposes of calculating the ITC [($1,760)(5/105) = $84]. This difference benefits registrants who use the simplified ITC method. The GST refund is $184 ($1,200 - $1,384).

Type: ES Topic: GST/HST - simplified input tax credit (ITC) method

92) Nikkee Sports is the registered name of a retail business carried on as a sole proprietorship in Ontario. All of its revenues and expenses take place in Ontario. There are no associated persons and the business files its GST return on an annual basis. Ontario has a 13% HST rate. Nikkee's Income Statement for the current year is as follows (all amounts are shown without HST): Revenues: Fully Taxable Goods Exempt Services Less Expenses: Cost of Goods Sold (All Taxable) Amortization Expense Salaries & Wages Rent Interest Expense Other Expenses Income before Taxes Less: Federal and Provincial Income Tax Accounting Net Income

$265,000 73,000 ($140,000) ( 23,000) ( 17,000) ( 18,000) ( 50,000) ( 21,000)

$338,000

( 269,000) $ 69,000 ( 14,000) $ 55,000

Other Information: 1. Inventories of taxable goods increased by $13,000 during the year. 2. A capital expenditure was made during the year at an HST inclusive cost of $62,150. The expenditure was for equipment that will be used 60% for the provision of fully taxable goods. HST was paid on the purchase of all capital property on which amortization is being claimed in the year. 3. All of the "other expenses" are related to fully taxable supplies. 4. The rent was not subject to HST as it was paid to a non-registrant. The proportion of the leased property that is used for the provision of exempt services is 20%. 5. Of the Salaries & Wages, 40% were paid to employees involved in providing exempt services. Required: A. Calculate the HST payable or HST refund for Nikkee Sports for the current year using regular GST/HST calculations. B. Calculate the HST payable or HST refund for Nikkee Sports for the current year using the Simplified ITC Method.

Answer: Part A Using the regular calculations, the HST payable for Nikkee Sports for the current year would be calculated as follows: HST Collected [(13%)($265,000)] ITCs on Current Expenditures: Purchases [(13%)($140,000 + $13,000)] Amortization Expense Salaries & Wages Rent (Paid to Non-Registrant) Interest Expense Other Expenses [(13%)($21,000)] ITCs on Capital Expenditures [(13%)(100%)($62,150 ÷ 1.13)] HST Payable - Regular Method

$34,450 ($19,890) N/A N/A N/A N/A ( 2,730)

( 22,620) ( 7,150) $ 4,680

Notes: • Amortization expense does not affect the HST calculation. • No HST is paid on salaries & wages, or interest. As a result, no ITCs are available. • Full ITCs are available on capital expenditures other than real property if more than 50% of their usage is to provide fully taxable supplies. Part B The Simplified ITC Method calculations would be as follows: HST Collected [(13%)($265,000)] ITCs: Purchases [(113%)($140,000 + $13,000)] Other Expenses [(113%)($21,000)] Subtotal Simplified ITC Method Factor ITC on Taxable Current Expenditures ITCs on Capital Expenditures [(13%)(100%)($62,150 ÷ 1.13)] HST Payable - Simplified ITC Method

$34,450 ($172,890) ( 23,730) ($196,620) 13/113 ($ 22,620) ( 7,150)

( 29,770) $ 4,680

The HST Payable is the same under both methods. This is because all of Nikkee Sports' transactions took place in Ontario. Type: ES Topic: GST/HST - comprehensive problem: regular & simplified HST returns

93) Rebecca Forma lives in Alberta and is planning to buy a home outside of Edmonton. Alberta is a nonparticipating province that does not have a provincial sales tax. The three properties that are under consideration can be described as follows: Property A - is a 10 year old property that was built several years ago at a cost of $285,000. It will not require any renovations and is being offered to Rebecca for $423,000. Property B - is an old house that is being offered in "as is" condition for $225,000. In order to be livable, it will require major renovations involving over 90% of the interior floor space. The estimated cost of these renovations is $180,000. The vendor has agreed to make these renovations and will charge Rebecca $405,000 for the improved property. Property C - is a new house that is under construction. The basic price at this point is $325,000. To meet Rebecca's requirements, it will need significant upgrades. The builder will complete $60,000 of these improvements prior to the sale. Additional improvements will be carried out by Rebecca using materials that will cost $25,000. Required: Before making any offer to purchase, Rebecca has asked you to determine what the GST and total out-of-pocket costs of each purchase would be.

Answer: The GST and total cost of each purchase would be calculated as follows. Property A As this property is a used residential property, no GST will be payable. This means that no GST will be required and the total cost will be $423,000. Property B As the renovations involve more than 90% of the interior, they will be considered substantial. Since the renovations would be done by the vendor prior to the sale, the purchase would be deemed to be that of a "new" home. As a result, the total purchase price would be subject to GST and a new housing rebate could be claimed on the total, as follows: GST Payable [($405,000)(5%)] Less: New Housing Rebate [$6,300][($450,000 - $405,000) ÷ $100,000] Net GST Payable Purchase Price Total Cost

$ 20,250 ( 2,835) $ 17,415 405,000 $422,415

Property C GST will be paid on the purchase price of $325,000, plus all of the improvements, a total of $410,000. However, the new housing rebate is only available on $385,000, the pre-improvement price of $325,000, plus the $60,000 in improvements carried out by the builder. It is not available on the additional $25,000 of costs incurred by Rebecca. GST Payable [($410,000)(5%)] Less: New Housing Rebate [$6,300][($450,000 - $385,000) ÷ $100,000] Net GST Payable Total Pre-Tax Cost Total Cost

$ 20,500

Type: ES Topic: GST/HST - residential property & new housing rebate

( 4,095) $ 16,405 410,000 $426,405